Delhi High Court on Thursday asked Cairn India how it would secure the Rs20,495 crore demand slapped by the Income Tax department for its alleged failure to pay tax on gains made by its former parent company, Cairn Energy Plc, in a share transfer transaction eight years ago.
Cairn India told a bench of justices Badar Durrez Ahmed and Sanjeev Sachdeva, that of the principal tax demand of Rs10,248 crore, Rs4,200 crore was already secured and it would inform about the rest and what kind of security or guarantee it can give on the next date of hearing.
The court was hearing Cairn India ltd’s (CIl) plea challenging the IT department’s demand on the ground there has been ‘unreasonable and atrocious” delay on part of the authorities who exercised their power “unreasonably” while making the demand.
Cairn, represented by senior advocate Harish Salve, has sought quashing of the IT department’s demand order saying the proceedings were initiated after a lapse of more than six years from the end of the relevant financial year of 2006-07. It said the courts have held that such proceedings should be initiated within a reasonable period of four years. It also said it had in 2006 carried out an internal group reorganisation through 100 per cent share swaps, to facilitate initial public offer of CIl, and in such a process there would be no capital gains.
The bench on the other hand was of the view there would be capital gains which had to be computed based on the change in market value of the shares during each swap till the final transaction. It also said that the entire sale price cannot be capital gains. Cairn agreed with the court’s view, but said in the instant case, the exercise was not carried out.
Attorney General (AG) Mukul Rohatgi opposed Cairn’s submissions saying issue of computation of tax as well as delay cannot be debated before the High Court. The court said it was only saying the correct principle should be applied while computing tax and listed the matter for further hearing on April 22. During the hearing, the company initially said it can give a corporate guarantee for the remainder amount of the principal tax, but the AG refused to accept the suggestion and said half should be paid in cash and the rest through bank guarantee. The AG also said right now he was focussing only on the principal tax amount and not on the interest of Rs10,247 crore that has been claimed by the tax department.
Apart from Rs10,248 crore principal tax demand, the department has also imposed an interest of Rs10,247 crore on the company. The AG said the total sale price of transferring Cairn Energy’s assets here -- around 26 companies which have production sharing agreements with the government to extract hydrocarbons -- to CIl was Rs26,681 crore which was paid for half in cash and half through shares of that much value.
He said the cost of acquisition of these companies came to around Rs2,178 crore based on face value of the shares. After deducting this from the total sale price.