‘Bereft of merit’: Delhi court dismisses income tax complaint against Newslaundry

Calling the charges “bereft of merit”, a Delhi court has dismissed a complaint by the income tax department against Newslaundry, its CEO Abhinandan Sekhri, and others. 

The department had accused Newslaundry and the other accused of wilfully attempting to evade tax, and preparing a bogus valuation report. “No criminal conspiracy of any kind was hatched by the accused persons,” additional chief metropolitan magistrate Anurag Thakur concluded in his order dated November 24. 

The department alleged that despite the company “incurring losses” from assessment year 2016-17 to 2020-21, “the independent valuer in collusion with the company and its directors prepared a bogus valuation report showing the fair value of each share as Rs 1,185.07” whereas the net worth of the company “was in the negative”. 

The complaint stated that Newslaundry had issued 22,994 shares to co-founder Madhu Trehan in assessment year 2019-2020 at Rs 1,185.07 per share and received Rs 2,72,49,499 as share application money. Similarly, 2,110 shares were issued to one Vikram Lal at the same rate in return for Rs 25,00,497. The complaint claimed that the amount received from the sale of these shares was “to be treated as income or revenue” and “not as capital”.

Alleging a conspiracy, the department filed a complaint under sections 276C (wilful attempt to evade tax), 277 (false statement in verification, etc.), 277A (falsification of books of account or document, etc.), 278 (abetment of false return, etc.) and 278B (offences by companies) of the Income Tax Act, 1961, and section 120B (punishment of criminal conspiracy) of the Indian Penal Code.

The complaint was filed by Amitabh Mishra, a deputy director in the income tax department. 

No tax evasion without intent, says court

However, the court said, “There may be different points of view on what is to be treated as an item of revenue and what is to be treated as capital receipt but it does not amount to wilful attempt to evade tax.”

To successfully argue that an accused has wilfully attempted to evade tax, “a positive action or movement towards the intended crime by the accused has to be pleaded and proved”, the court observed.

It cited a 1995 Supreme Court judgement to argue that evasion of tax “is not mere failure to pay duty” but that “it must be something more” wherein “the assessee must be aware that the duty was leviable and it must deliberately avoid paying it”. It cited another apex court judgement from 2006 to hold that the intent to evade tax in such a case is important to establish. 

The court concluded that there was no attempt to evade tax as no action – such as not disclosing the allotment of shares at premium in the accounts or financial statements or “wrong entry” in the accounts, balance sheet and income tax return” – was taken by the company. The court also held that all the information in the complaint was already disclosed in Newslaundry’s account books.

The court also dismissed the claim that Newslaundry could not have a positive share value when its net worth was in the negative. It cited the company’s cash flow statement which the department had filed to conclude that the company reduced its loss from Rs 2.7 crore in FY 2017-2018 to Rs 36 lakh in FY 2019-2020, and made a pre-tax profit of Rs 42.69 lakh in FY 2020-2021. Similarly, the operating cash flow went from a negative in FY 2018-2019 to a positive Rs 1.14 crore in FY 2020-2021. The court stood by the valuation of the company via the discounted cash flow method and cited it as the industry standard for startups.

The court also took note of the company’s submission that it does not accept advertisements and instead relies upon subscription amounts.

“It is not out of place to mention that the most famed internet based platforms like Amazon India, Flipkart, Zomato, Big Bazaar and Byjuʼs etc. are all incurring massive losses year after year and yet their shares are being subscribed to by all private equity investors valuing these platforms at tens of thousands of crores.”