NEW DELHI: At a public function on July 1, Prime Minister Narendra Modi revealed that 37,000 shell companies have come under the scanner since his government launched demonetisation drive in November last year. He did not disclose any further details. But the PM finished his speech with a warning that the culprits would not be spared.
In the shadows, his trusted lieutenants have been working closely with multiple probe agencies to unearth shady dealings and benami companies that have been floated to disguise the nature of business activities, evade taxes by making cash transactions since 2005.
The cash-through-mailbox companies are, however, hard to track.
The cash-through-mailbox companies are hard to track. The most ingenious scheme for the richer ones is to hire mules—peon, drivers and other low-key employees—to move around thousands of crores of unaccounted money within and outside of the country.
The sophisticated rackets, in connivance with government authorities, work like an organised crime syndicate where bogus trading of goods and capital assets is shown with the sole purpose of avoiding tax scrutiny. These trade-based cartels use circuitous routes to defraud the government of crores of tax money. A senior official illustrated the pattern of such syndicates that work at five levels and money invariably comes back to the originating party after travelling through the benami entities. At the first level, funds from ‘J Investment’ (a short name for a company that is being probed) moved to ‘S investment’ which is disclosed and known in tax records.
Then, funds from ‘S investment’ are routed into three benami entities. Further, the money is broken into four parts by the three conduit shell companies to finally send it back to ‘J investment’ through new entities involved in mere paper transactions. No goods is traded. In one case, the Income Tax Department has suggested that the Central Bureau of Investigation (CBI) should be roped in after sleuths found signed blank letterheads of banks with signature of officials from the premise of a suspicious firm in Mumbai.
The parent company, which deals in export-import, figures in the list of top ten defaulters of bank loans in India and linked to as many as 70 offshore companies that were allegedly incorporated in British Virgin Islands (BVI), Liechtenstein, Seychelles, Dubai and China. Tax sleuths went digging little deeper and stumbled upon entries showing Hawala operations that were used to deliver funds in the US, UK and the UAE, and vice-versa.
Then, there is a case of benami companies that figure in the list of 37,000 companies as mentioned by PM Narendra Modi early this month. Documents reviewed by The Sunday Standard reveal that a peon is director of two such companies—Celerity Trading and Prolific Mercantile—that is now being investigated. According to tax sleuths, the two companies are basically mailbox entities with no actual business and involved in booking bogus purchase and sale transactions to manipulate the turnover and profitability on behalf of another company that is being used to re-route the money. They refused to disclose the name of other firms as the probe is in its final stages.
In another case, an office assistant is shareholder and director in 11 shell companies, including Venue Infra, Gatsby, Fame and Sarovar. The investigation in these cases so far revealed that the “funds credited in these companies are then found withdrawn in cash using third party bearer cheques and diverted to other personal purposes like purchase of jewellery, properties, expensive
gifts to relatives and political personalities.”
When confronted by Income Tax officials, the chartered accountant of the group admitted that purchases and sales are manipulated through these companies to inflate the turnover and depreciation is claimed on fictitious assets.Similarly, another peon runs two companies from his residence on behalf of a businessman. He admitted that he doesn’t know anything about the business activities but only signs the cheques whenever the real owner asks him to do so. The investigators have found details of payment towards rentals for the premises being used for the benami companies and a monthly fee to the name lending person.
“Only a comprehensive analysis and investigations into the affairs in India and abroad could unravel these suspicious financial transactions,” the documents said.
Looking into Offshore Accounts
In a case, which is likely to be transferred to the Enforcement Directorate and the CBI, the investigators have found some Indian entities operating in Nigeria maintaining links with offshore groups that have been registered in tax havens.
The investigators have alleged that offshore firms are involved in round-tripping and funds have also been used to buy properties abroad.“The government had set the deadline to complete the probe related to benami companies by August 2017 but the increased volume of cases indicates the probe could only be completed by March 2018. The challenge is also to resolve the litigation. There are more than 1,300 cases pending involving `4.26 lakh crore. If we add other cases pending since 2015, the total amount would be close to over `6 lakh crore,” a senior official said.