It was income tax department that was cue behind the nailing of Jagan Mohan Reddy, says CBI. Though Jagan has been arrested yesterday by the CBI, but it was income tax department that first smelt a rat in Jagan dealings way back in 2010. The I-T department nailed Jagan for the first time at the end of 2010 in its tax assessment order. And this order seems to have been the starting point of CBI's investigations.

Examining the returns filed by Jagati Publications that publishes Sakshi newspaper, the tax department realised that something was not squaring up. Precisely what caught the attention of the tax officials was that 90% of the equity in the company was held by Jagan and his close associates but they had only contributed 20% of the share capital. On the other hand, a few outside shareholders held 10% of the equity although they had contributed 80% of the share capital. This anomaly happened, as per the tax men, because Jagan had been allotted shares at the par value whereas the outside shareholders had been allotted equity at a premium of Rs 350 per share.

Taxmen studied the newspaper business in Andhra Pradesh and realized that there was cut throat competition in the market. Most of the newspapers were in losses and relied greatly on advertisements that were chary in coming. This led to the conclusion that the investors had not put their money in the hope that Jagati would perform excellently in the market. This was in line with books of accounts of Sakshi that showed that by March end 2010, Jagati had totted up losses of Rs 319.84 crore. Many of the investors were big companies whose track records showed that they had great business acumen. So they would not be foolish enough to invest in a difficult business and in a company that was in losses.

So what led these companies to invest in Jagati? Taxmen issued notices to these companies which had picked up equity in Jagati and realized (from their replies) that all of them had been allotted huge tracts of land and projects in Special Economic Zones (SEZs) by the Y S Rajasekhara Reddy government. The taxmen came to the conclusion that it was in lieu of these projects that these companies had invested in Jagati Publications. In the end the taxmen came to the conclusion and this was noted in the tax assessment report: “the amount paid to Jagati (the assesee company) cannot be justified as share premium but as income to Jagati.” And therefore a demand of Rs 122 crore was slapped on Jagati Publications.