Rakesh Jhunjhunwala, bitten by the Film bug
It is well known that Rakesh Jhunjhunwala, the Badshah of Dalal Street, has a fascination for Bollywood.
In fact, he has invested several hundreds of crore in producing several blockbuster movies like English Vinglish, Shamitabh and Ki & Ka.
The Badshah’s fascination for movies arose when he met the ultra-charming Deepika Padukone.
While Rakesh Jhunjhunwala tutored Deepika Padukone about the techniques for finding multibagger stocks, she regaled him with tales of Bollywood.
At the end of the interaction, the Badshah was well and truly hooked.
“I am also thinking of making a film. I love films ..,” the Badshah mumbled, gazing at Deepika with stars in his eyes.
Later, Rakesh Jhunjhunwala had the pleasure of hobnobbing with Priyanka Chopra, Sonam Kapoor and other reigning queens of Bollywood, where he was tutored on the fine art of film-making.
Rakesh Jhunjhunwala pays heavy premium to invest in Cinestaan Entertainment
An unknown company named Cinestaan Entertainment persuaded three Billionaires, Anand Mahindra, Rakesh Jhunjhunwala and Radhakishan Damani, to invest a fortune of Rs. 91 crore in its equity capital.
The money was to be used to make movies, etc.
While Rakesh Jhunjhunwala and Radhakishan Damani paid a nose-bleed premium of Rs. 2602 per share, Anand Mahindra was able to wrest a better deal.
He paid a premium of only Rs. 1949 per share on the basis that he is an “anchor investor” and has provided a “comfort letter” to banks.
To persuade the three legends to part with their hard-earned money, Cinestaan Entertainment made fanciful projections about how it would engage famous film personalities like Rakesh Om Prakash Mehra (the director of ‘Bhaag Milkha Bhaag’ & ‘Rang De Basanti’), Gulzar, Shankar Ehsaan Loy and produce blockbuster films itself which would generate multibagger gains.
Films bomb, relations sour
Unfortunately, Cinestaan’s projections remained on paper.
It produced a movie named ‘Mirzya’ which flopped badly on the Box Office.
The ensuing strain with the director of the film meant that other three movies named ‘Fannney Khan’, ‘Guitar Guru’ and ‘Kaalakaandi’ had to be scrapped, leading to mega losses.
Why did you pay so much premium for such a junk stock?
The hefty premium paid by Rakesh Jhunjhunwala and the others to invest in Cinestaan aroused the ire of the income-tax department.
The Assessing Officer suspected that the Company is up to no good and that it is someone’s unaccounted black money which has found its way back into the company in the form of “share premium”.
He also pointed out that all the fancy projections as to revenues and profits had remained on paper and never seen the light of day.
So, after relentlessly grilling the top brass of the Company, and issuing summons to the three legends, he treated the entire share premium as the income of the Company and taxed it.
How can anyone question the wisdom of Rakesh Jhunjhunwala?
Cinestaan has to thank its lucky stars that its investors were Rakesh Jhunjhunwala and Radhakishan Damani and not some unknown investors.
The judges of the Tribunal were clearly impressed by the impeccable credentials of the duo.
“It cannot be the unaccounted or black money of investors as it is their tax paid money invested, duly disclosed and confirmed by them; and nothing has been brought on record that it is unaccounted money of assessee company routed through circuitous channel or any other dubious manner through these accredited investors,” the Hon’ble judges observed, giving a clean chit.
They also noted that the practice of making rosy projections is necessary to “lure” deep-pocketed investors.
“If such a strict view is adopted on such investment as have been done by the Assessing Officer and by ld. CIT(A), then no investor in the country will invest in a ‘start-up company’, because investment can only be lured with the future prospects and projection of these companies,” it was held.
The Court also came down heavily on the temerity of the income-tax department of questioning the wisdom of legendary investors.
It was pointed out that Bureaucrats have no understanding about the concepts of “strategic investment” and “risk and reward“.
“What is seen here is that, both the authorities have questioned the assessee’s commercial wisdom for making the investment of funds … They are trying to suggest that assessee should have made investment in some instrument which could have yielded return/ profit in the revenue projection made at the time of issuance of shares, without understanding that strategic investments and risks are undertaken for appreciation of capital and larger returns and not simply dividend and interest. Any businessman or entrepreneur, visualise the business based on certain future projection and undertakes all kind of risks. It is the risk factor alone which gives a higher return to a businessman and the income tax department or revenue official cannot guide a businessman in which manner risk has to be undertaken,” the epoch-making judgement held.
It was noted that “another very important angle” was the fact that the shares had not been subscribed by random people but by “investors like, Anand Mahindra, Rakesh Jhunjhunwala, and Radhakishan Damania, who are one of the top investors and businessman of the country“.
“If they have seen certain potential and accepted this valuation, then how AO or Ld. CIT(A) can question their wisdom,” the judges pondered in an incredulous tone.
“The investors like these persons will not make any investment merely to give dole or carry out any charity to a startup company, albeit their decision is guided by business and commercial prudence to evaluate a start-up company like assessee, what they can achieve in future,” it was added, stating the elementary.
“In a way Revenue is trying to question even the commercial prudence of such big investors like,” the Court said in an irate tone.
“We do not approve the approach,” the judges firmly held, bringing smiles to the faces of the beleaguered faces of the executives of Cinestaan, which is now spared of a hefty tax bill on Rs. 91 crore.
Relief to Angel investors from “jungle raj” harassment by income-tax department
It is well known that angel investors have been relentlessly harassed by the tax officials as to why they paid heavy premium while making the investment.
Matters reached a head when some prominent investors threatened to stop all funding.
This is a sad outcome.
— Chandra R. Srikanth (@chandrarsrikant) February 8, 2019
Draconian Angel tax torturing startups: It’s killing genuine innovation
@PMOIndia @narendramodi @arunjaitley @sureshpprabhu @sanjeevsanyal Sir this has started again in big https://t.co/hwFttS1aZi intervene urgent https://t.co/a63XKp4sIa
— Mohandas Pai (@TVMohandasPai) December 18, 2018
Why is the Modi Govt blundering on the Start-up economy by recklessly introducing a tax on angel investments? This will only drive away investments overseas n starve Indian start ups. @NITIAayog n MoF r failing young entrepreneurs n even killing jobs. @PMOIndia @TVMohandasPai
— Kiran Mazumdar Shaw (@kiranshaw) December 21, 2018
Some frustrated investors described the fiasco as “jungle raj“.
But as of yesterday 4 of those exemptions were thrown to dustbin by AO's. Another 8-10 #startups pending TDS refunds were adjusted against angeltax. Delhi is giving right direction, but #babus down the line are running jungleraj. https://t.co/xPOVxGEyju via @inc42
— Sreejith Moolayil (@sreejithmoolayl) June 27, 2019
— Rajiv Mukherjee (@rajivinbangalor) June 27, 2019
Hopefully, Cinestaan’s judgement will bail out all angel investors and provide them with succor!