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Tax evaders to face music for demonetisation adventures

posted 6 years ago

Due to demonetisation operation
launched by the Indian government last year, many individuals and corporates
were caught unaware. They had plenty of unexplained cash and 50 days to deposit
it all in the banking system.

Most of these persons and entities
‘outsourced’ the deposit mechanism and deposited unexplained and unsecured cash
running into millions and billions of Rupees with the banks through others. The
underlying master plan was to convert unexplained / ill gotten / illegitimate
cash into legal currency and to get away with a tax of around 30% on
unexplained deposits and other related consequences.

This was considered to be the smartest
way to manage and survive from the surveillance and raids of Income Tax (IT) department
and avoid penalization under the laws for possessing illegitimate cash.

However, tax evaders propose and
government disposes.

The government is in no mood to oblige
or ignore the unexplained deposits made into banks. It has issued orders to IT
department to conduct strict verification of all revised IT filings post
demonetisation and reject the filings containing unexplained cash deposits.
This development has comes as a shocker to many persons / entities involved in
covering up and using proxies for deposits.

Many revised filings have been
rejected by IT department for the reason of inclusion of unexplained cash
deposits in the filings. Further deepening the woes of such taxpayers, IT
department is considering to invoke Benami Act (Act) against certain taxpayers
for possessing unexplained credits in the books of accounts (Corporates) and
bank accounts (individuals).

Going forward, a taxpayer (not being
the true owner) possessing cash or properties of another person with the idea
of evading the tax will be prosecuted under the provisions of Act and punished
according to the Act.

As of now, a tax payer will only be
penalized for possessing unexplained credits up to 80% of such credits, but
with the application of the Act, any tax payer who committed any default under
the Act will be criminally prosecuted.

Act is applicable only to the
unexplained deposits (if off the record owned by another person) but possessed
by a corporate and individuals and officially maintained under the name of such
corporate and individual with the intent of evading tax.

For example, if ‘X’ deposited
unexplained cash into his bank account and that cash originally belonged to
‘Y’. ‘Y’ only used ‘X’ as a conduit or a benami for officially possessing cash
actually owned by ‘Y’ – the underlying intent being evading tax payment, then
such transaction will come under scanner of Act.

Accordingly, in the above
illustration, if the unexplained cash can be proved to be actually and
absolutely owned by ‘X’, then the Act is not applicable.

Government is taking right measures to
clean up all the mess created post demonetisation and punish culprits who
misused the tax laws and schemes for their own benefit. 

High time for honest tax payers to
stand up and not be used by others as proxies. All should maintain true and
correct records of the cash and properties owned by them to avoid embarrassment
from getting punished for breach of laws or else they have to pay a hefty price
for all the fraudulent acts committed – else exposure to penalty or even jail
are very much on radar.  

Research and inputs by Paruchuri Baswanth Mohan

****************************************

Bhumesh Verma is a lawyer with over 2 decades of experience in advising domestic and international clients on corporate transactions (M&A, Venture Capital, Private Equity, Startups, corporate advisory, etc.) and features in “The A-List – India’s Top 100 Lawyers” by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters and is a guest faculty as well. He can be reached at [email protected].

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