The legal history of National Herald Case, charges against Gandhis

India's Enforcement Directorate (ED) has summoned interim Congress president Sonia Gandhi and her parliamentarian son Rahul Gandhi for questioning in a money laundering case linked to the National Herald newspaper.

While Sonia Gandhi has been asked to appear before ED on June 8, Rahul Gandhi was asked to appear on Thursday, according to a summons received on May 30. Congress leaders Randeep Surjewala and Abhishek Singhvi announced on Wednesday afternoon that Sonia will go to the ED office on the scheduled date but indicated that the party would seek time for Rahul after June 5 since he is out of the country.

Indian opposition's Gandhis summoned in money laundering probe

The controversy surrounding the National Herald newspaper arises out of an Income Tax investigation, initiated following a criminal complaint filed by former BJP MP Subramanian Swamy before Delhi court. The complaint questioned the takeover of Associated Journals Limited (AJL), the erstwhile publisher of National Herald, and its assets by a company called Young Indian (YI) Limited.

While the summons have set off an intense war of words between the opposition party and the ruling Bharatiya Janata Party (BJP), with the former alleging a political ploy and the latter questioning the role of the Gandhis, the controversy that has its basis in a decade-old tax reassessment needs to be elucidated.

The background

The ED summons are premised on the IT investigations launched against YI over charges of taking over the properties of AJL (National Herald) worth at least R2,000 crore at a paltry sum of R50 lakh. By 2008, the AJL had stopped printing and publishing business and it was primarily into the real estate business of leasing out AJL properties in Delhi, Mumbai, Patna, Panchkula and Lucknow.

YI was incorporated on November 23, 2010 as a non-profit making company under Section 25 of the Companies Act with its stated objective as: "Youth commitment to the ideal of democratic and secular society".

While Sonia and Rahul held 76% shares in YI, Congress leaders (the late) Motilal Vora and Sam Pitroda, perceived as trusted aides of Nehru-Gandhi family, figured as other directors in YI controlling the remaining shares. The company had just R5 lakh in share capital when it was incorporated.

On 18 December 2010, by a deed of assignment, R90 crore loan standing in Indian National Congress's books as payable to it from AJL from 2002 to 2011, was transferred to YI.

On 24 December 2010, YI obtained a loan of R1 crore from Kolkata-based M/s Dotex Merchandise Pvt Ltd, which IT suspects to be a laundering of own money of YI which was received so as to eventually buy the properties of AJL through an alleged sham transaction.

Four days later, the formal stamped deed of assignment of R90 crore in favour of YI was executed by AICC by reportedly making a payment of only R50 lakh. This was followed by a general meeting of AJL on November 21, 2011 approving fresh issue of 9.021 crore shares to YI, which accounted for 99% of the share capital of AJL.

YI further obtained on 9 May 2011 the registration under Section 12A of the Act, which entitled it to exemption from its income. In October 2017, the exemption granted to YI under Section 12A was cancelled with retrospective affect.

Many office bearers of the INC, directors of YI and AJL, including the Gandhis, Vora and Pitroda, were the common people involved in the transactions, alleged the IT department. All the events took place less than a month after YI's incorporation.

The IT proceedings

The inquiry into the allegations were commenced by the IT department in 2015. The summons were first issued to YI and AJL in February 2015, seeking details of the company's transactions, especially those pertaining to buying the interest free loan from the Congress party. The summons were followed by notices from the additional director (investigation) seeking the details of the transactions with a deadline of July 22, 2015. By a letter dated July 21, 2015, YI replied stating that information could be sought by the IT department only if there were pending proceedings against an assessee.

IT wrote another letter on 27 July 2015 pointing out pendency of the proceedings was not a pre-requisite for seeking information under the pertinent provision of the IT Act, adding there was a SC ruling in 2013 clearly holding that information could be sought pursuant to any inquiry. YI and AJL were then asked to furnish information by 31 July 2015.

YI responded on 27 July 2015 reiterating its previous stand that no proceedings are pending against them. Through another letter dated 31 July 2015, YI demanded to see the letter of approval by the Commissioner of Income Tax (CIT) for initiating an inquiry. The department wrote back saying that prior approval of the CIT concerned was duly served upon by the IT officer on 14 July 2015 and then the inquiry began.

In 10 August 2015, YI wrote to IT seeking complete inspection of the file and sought copies of the relevant records regarding the approval to begin the inquiry.

Finally, on 10 January 2017, the IT department issued notices to YI, the Gandhis and other directors of the company under Section 148 of the IT Act, claiming it has reasons to believe that income chargeable to tax has escaped assessment. The notices sought to reassess YI's income for the financial year 2010-11, when most of the transactions relating to incorporation of the company, its loan from the Kolkata-based firm and the assignment of loan from Congress to YI took place.

The modus operandi as per the IT department

The I-T notice of 2010, reviewed by HT, alleged that there were eight steps that constituted "the scheme to take over immovable properties of AJL without paying any taxes on benefits accrued to YI and its majority shareholders":

1) Registered office of AJL was shifted from Lucknow to Delhi and a new company YI was incorporated by some important persons such as Sonia, Rahul and the late Oscar Fernandes and Vora, who were connected with AICC as well as AJL.

2) YI had no assets of its own except those transferred by AICC as loan of R90.21 crore, which was camouflaged as sale of loan for a consideration of R50 lakh. The amount was fixed at R90.21 crore in order to ensure that the amount is just sufficient to allot 99 per cent of share of AJL to YI. R1 crore was suspiciously obtained as a loan from a dubious company.

3) YI did not carry out any activity consonant with its stated objective but took over real estate business of AJL to its benefit.

4) Alleged sale of loan of R90.21 crore by AICC to YI have not been proved through documents because assignment of loan was not acknowledged and confirmed by AJL.

5) Takeover of AJL was complete within 3 months from the date of incorporation of YI, which subsequently shifted to Herald House in Delhi, one of the prime properties of AJL without paying any compensation for use of space.

6) YI obtained registration under Section 12A of the Act, which entitled it to exemption on its income on May 9, 2011 so that value of all benefits from real estate business of AJL get tax exemption.

7) In order to hold 100 per cent shares of AJL by YI, Priyanka Gandhi Vadra also purchased additional shares through Rattan Deep Trust and Janhit Nidhi Trust.

8) YI concealed purchase of loan of R90 crore for R50 lakh in its Profit and Loss Account and the same was camouflaged as expenditure on object of YI. It was not disclosed on the ground of being an insignificant investment whereas the reason was to hide real transaction.

"The takeover of AJL by YI has resulted in the acquisition of all the immovable properties of AJL along with the right to enjoy a huge rental income of several crores from some of the properties. Since more than 75 percent shares of YI are held by Sonia Gandhi and Rahul Gandhi, they were the real beneficiary of the transaction," stated the I-T notice.

Role of Priyanka Gandhi

The January 2010 notice also alleged complicity of Priyanka Gandhi in the case. The notice claims that Priyanka played a crucial role in ensuring that YI, which has Sonia and Rahul as its majority shareholders, comes in control of 100% shares of the company.

The IT notice claimed: "In order to achieve the object of taking over 100 percent shares of AJL by YI, Sonia, Rahul and Priyanka Gandhi Vadhera also purchased additional 47,513 and 26,244 shares of AJL through Rattan Deep Trust and Janhit Nidhi Trust respectively."

The court battles and the Gandhis' defence

Subramanian Swamy, in 2012, filed the complaint before a Delhi court alleging the Gandhis and other Congress leaders were involved in cheating and breach of trust in the acquisition of AJL by YI, which was completed in March 2011. Swami alleged that YI had taken over the assets of the National Herald in a "malicious" way, breaching various legal provisions and attracting the penal charges of cheating and criminal breach of trust.

While the criminal prosecution against the Gandhis began in June 2014 with the Delhi court issuing summons to them along with other YI directors, Swamy's complaint also became the basis for the IT department to commence its inquiry in 2015.

The criminal case: Stating that Swamy's complaint established a prima facie case of cheating, misappropriation of funds and criminal breach of trust against the accused, the Delhi court in June 2014 demanded appearance of the Gandhis and five others, including Vora, Fernandes, Pitroda and Dubey.

"From the complaint and the evidence led so far, it appears that YI was in fact created as a sham or a cloak to convert public money to personal use or as a special purpose vehicle for acquiring control over ₹2000 crore worth of assets of the AJL...Since all the accused have allegedly acted in consortium with each other to achieve the said nefarious design, there are sufficient grounds for proceeding against all of them," the Delhi court said in its 2014 order.

Gandhis moved the Delhi high court against the summons but to no avail. Observing that the conduct of Congress office-bearers named in the National Herald case "smacks of criminality", the Delhi high court dismissed their appeals.

The high court, in its judgment, noted that YI was a special purpose vehicle created by the Congress leaders and the "questionable conduct of the petitioners needs to be properly examined… to find out the truth". It questioned the need for shifting the interest-free loan of R90.25 crore extended to AJL to YI for R50 lakh. The court observed that the modus operandi depicted "criminal intent".

After the Delhi high court order, Gandhis and other Congress leaders appeared before the Delhi trial court on December 19, 2015 and obtained bail.

In the first week of February 2016, Gandhis moved the Supreme Court against the high court's judgment. They denied the allegations of cheating and criminal breach of trust, and claimed that they have neither appropriated nor converted any property for their own use or benefit. Sonia and Rahul said they were only the shareholders of the properties that belonged to AJL and thus, cannot be treated as owners.

The petitions added that the charge of criminal breach of trust can be invoked only when there is entrustment of property and when the person who has entrusted the property continues to have control over such property. According to their petitions, Gandhis were never entrusted AJL properties and held no control over them.

"Giving of loans to AJL by the Congress party is an action which is in consonance with the objectives of the party...There is no restriction in constitution of the party for giving such loans," stated Sonia's petition in the top court," said the petitions, justifying the grant of R90 crore loan to AJL by the political party.

Questioning the locus standi of Swamy, the Gandhis contended that the complaint in the case was filed with the objective of defaming them. The two added they have deep roots in society and were at the helm of national politics for years. If the complaint and summons were not quashed, it would cause irreparable damage to their reputation, said the Gandhis.

But there was no reprieve in store for the Gandhis before the top court. On February 12, 2016, the Supreme Court asked them to face the trial, holding the court finds "no justification" in quashing their criminal prosecution.

At the same time, the apex court clarified that certain "firm conclusions" recorded by the high court in its December 2015 judgment regarding the conduct and criminality of the accused be expunged. On a request from the Congress leaders, the Supreme Court allowed a plea for their exemption from personal appearance before the magistrate on future dates, but clarified that they can be summoned by the trial court as and when required.

This case before the trial court is currently in abeyance after Swamy sought to adduce certain additional evidence. After the BJP leader's plea was rejected by the trial court, he moved the Delhi high court, which on February 22, 2021 stayed further proceedings.

The tax case: The IT notice of January 2017 was challenged by YI before the Delhi high court, complaining that the notice was issued to reopen assessment of six years despite no pending income tax proceedings. The writ petition before the high court contended that that the IT department has no jurisdiction to reopen proceedings. YI asked for staying the IT proceedings and quashing the reassessment notices.

But in May 2017, the high court refused to entertain YI's petition and asked it to approach the IT assessing officer. The court noted that the company has not even approached the assessing officer, adding it should submit all relevant documents before the IT department. YI withdrew its petition from the high court with the liberty to approach it at an appropriate stage.

In 2018, the Gandhis approached the high court again in the wake of the reassessment notices issues to them. The two sought annulments of the IT proceedings, claiming no income escaped assessment and that all queries were addressed adequately in the scrutiny assessment. They further argued that the reassessment was initiated on factually incorrect premise and that the proceedings have been initiated with a premeditated mindset and a mala fide intention.

But the high court, by an order in September 2018, dismissed Gandhis' petition, pointing out that they had failed in disclosing the allotment of YI's shares to them for the relevant assessment period. "At least disclosure of this was warranted, whatever the explanations with respect to liability or otherwise of the assessees might have been," held the high court, finding justification in the reassessment proceedings.

This order was again challenged by the Gandhis before the Supreme Court, which took up the case on December 4, 2018. On that day, the top court allowed the IT department to go ahead with the estimation of incomes for Gandhis for the assessment year 2011-12 and even pass the final order but restrained it from enforcing the assessment order.

Subsequently, the assessment orders were passed and demand notices were served upon the Gandhis but the orders were not implemented owing to the Supreme Court's restraint. The case is presently pending before the Supreme Court.