Delhi Magistrate dismisses complaint against Newslaundry alleging tax evasion, criminal conspiracy

A Metropolitan Magistrate in Delhi recently dismissed as meritless a complaint lodged by the Income Tax Department against Newslaundry, it's directors, valuers, and shareholders. [Income Tax Department v. Newslaundry Media Pvt Ltd and Ors].The complaint by an Income Tax officer alleged that the company's CEO and Managing Director Abhinandan Sekhri, partnership Chartered Accountancy firm and others had criminally conspired to evade tax by issuing shares based on a bogus valuation report that failed to take into account the company's losses in the previous assessment years.Additional Chief Metropolitan Magistrate at the Tis Hazari Court Anurag Thakur determined that the method used by Newslaundry for valuation of the shares was legitimate. Citing the examples Amazon India, Flipkart, Zomato, Byju's etc, and noting that the media company had started making profit, he concluded that the valuation was not lofty and could not be termed bogus. "It is not out of place to mention that the most famed internet based platforms like Amazon India, Flipkart, Zomato, Big Bazaar and Byju's etc. are all incurring massive loses 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. Seen in this context coupled with the fact that the accused company has started making profit and is generating cash from operations, the valuation of equity shares given by the valuer as per DCF method does not seem to be lofty at all and it certainly can not be termed as bogus," the Court said..As per the complainant, the accused wilfully evaded tax and the entire aggregate amount received in the Assessment Year 2019-20 from sale of the shares was to be treated as revenue of the company, and not as capital.The Court said that Section 276C (1) of the Income Tax Act, which was invoked in the complaint against Newslaundry, talks of a wilful attempt to evade tax. In this light, it stated,"Firstly, there was no attempt to evade tax, it is not the case of the complainant that accused no.1 did not disclose the factum of allotment of shares at premium in its accounts or financial statements. It is also not the case of the complainant that there was any wrong entry in the books of accounts, balance sheet and income tax return."The Court underlined that the information relied on by the Tax Department was wilfully supplied by the accused, and said that although there may be different points of view on what is to be treated as capital or revenue, it could not be said that the accused had wilfully evaded tax."All the information that the complainant is relying upon is supplied by the accused. All the information was disclosed in the books of accounts. 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. Even a tax exemption wrongly claimed under a bona fide belief would not make section 276C of the Act applicable to assessee," the Court said.It added that if the Department wanted to treat the capital receipts as revenue receipts, it was free to do so and may pass an assessment order making additions to the income of the company for the relevant financial year and issue a notice of demand..Further, noting that the company's cash flow statements were impressive, the Court stated that Discounted Cash Flow (DCF) method of valuation, adopted by the company was one of the best methods to value startups as other methods are bound to assign negative value to startups."...one of the best methods to value a startup is DCF method as other methods which take income, assets or net worth as basis for valuation of a business are bound to give negative value of business as none of these methods are forward looking and initially most start ups incur loses because most businesses have a gestation period," the Court said..Resultantly, the Court held that the valuation report was genuine and compliant with guidelines, without any material irregularities. Hence, it determined that there was no commission of an offence or conspiracy and dismissed the complaint terming it bereft of merit..Special Public Prosecutor Anish Dhingra appeared for the Income Tax Department..[Read Order]