INCOME TAX

INSTRUCTION NO. 1963/1999

 Dated: March 1, 1999

Subject: Disinvestment of holding in companies by their promoters at high premium where the companies themselves are defaulting in their liability to pay Government dues - regarding.

The Board has observed recently that the promoters of a number of Telecom companies have disinvested their holding in such companies at a hefty premium. The companies themselves are however defaulting in the dues to the Government on various accounts such as licence fees etc. It is interesting to note that the shares of these companies fetch a higher price only on account of the fact that they hold such licences. It thus appears that while the promoters have made personal profits, revenue due to the Government has not been realised.

2. In this background, it is hereby directed that all transactions resulting in disinvestment by promoters of their holdings in Telecom companies be properly examined and action taken as per law for bringing the income to tax.

For instance:

(i) Any sale of holdings by promoters would attract capital gains. It may be ensured that tax is paid by them on the correct amount of capital gains in all such cases.

(ii) Any deduction on account of licence fees is admissible in the hands of the telecom company u/s. 35 ABB of the Income-tax Act, 1961. However, claim on this account may be thoroughly examined as the same is admissible under that section only if payment is actually made. The possibility of disallowances of licence fees, whether capital or revenue u/s. 43B may also be explored, depending on facts of the case/contract terms.

3. The above instruction may be brought to the notice of all Assessing Officers in your region.

F. No. 225/58/99-ITA-II

(MALATHI R. SRIDHARAN)
Under Secretary to the Government of India.