Sucheta Dalal :Vijay Mallya’s Tax Claim Saga: Kingfisher UB’s slow crumble
Sucheta Dalal

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Vijay Mallya’s Tax Claim Saga: Kingfisher, UB’s slow crumble  

May 2, 2012

Kingfisher Airlines has defaulted on all commitments (including rent, salaries and taxes). This is a fit case for holding the entire board of the UB Group accountable

Sucheta Dalal

While Vijay Mallya chases the good times at the IPL, cheering his Royal Challengers, Kingfisher Airlines faces eviction notices for failing to pay rent for its posh head office since November 2011. Sources say that the owners are dead serious and have no intention of suffering losses since, in a couple of weeks, the rent dues will exceed the deposit they have collected. If the liquor baron fails to scrounge together the money, a winding-up notice may follow. This could trigger a series of repayment clauses and guarantees provided to other lenders (over Rs7,000 crore) and could be a far bigger problem for the entire group.

Interestingly, “Mr Mallya has been contributing richly to the body of litigation – he has been filing and contesting cases all over the country,” says tax expert Vinod Kothari. There are hundreds of cases pertaining to him in various forums and a few have led to landmark judgements. One of these is the very commonly cited ‘colourable devices or sham ruling’ in the case of McDowell & Co which changed the course of tax rulings in the country. In this case, an arrangement by McDowell such that the excise duty on liquor was to be paid by the buyer and, therefore, did not form part of the selling price, was rejected as being ‘a colourable device to avoid taxes’. Mr Kothari cites a 1998 case, where the income-tax appellate tribunal disallowed payment of commission to one of Mr Mallya’s former wives (1998 67 ITD 107 Chd, 2000 245 ITR 49 Chandigarh). It was argued that Mrs Mallya was an airhostess and socialite who helped the company’s business with her presence in social circles. It was rejected.

Recently (17 April 2012), the Punjab & Haryana High Court  delivered another such verdict in the Punjab Breweries case (ITA 217 of 2002). It rejected clearing & forwarding charges paid to Blue Chip & Co as well as another UB group entity on the grounds that there was no evidence of any service rendered. Worse, the case showed that a substantial part of the payment to Blue Chip & Co was passed on as an interest-free personal loan to Vijay Mallya and his wife Samira Mallya. The high court disallowed it as a ‘sham’ transaction to reduce taxes and create ‘liquidity’ in the hands of Mr Mallya and his wife.

Similarly, Mr Mallya had contested and won the right to pay himself a hefty guarantee fee (over Rs50 crore at the last count) on the personal guarantee of over Rs250 crore that he has extended to his beleaguered Kingfisher Airlines (UB Holdings provided another guarantee of over Rs1,600 crore). Now that it is time to pay up on the guarantees, there is no sign of banks forcing him to do so. Instead, his airline has defaulted on all commitments (including rent, salaries and taxes). This is a fit case for holding the entire board of the UB group accountable. Maybe when the new Companies Bill is passed, shareholders of all listed UB group companies will have a case to question Mr Mallya and the board through class-action suits. The Kingfisher Airline board boasts such names as tennis star Vijay Amritraj, former Union secretary Piyush G Mankad, former SEBI chairman GN Bajpai as well as Shrikant Ruparel, Anil Kumar Ganguly, Manmohan Singh, top lawyer Lalit Bhasin and former Air India chairman Subhash Gupte.

 


-- Sucheta Dalal



 



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