The Comptroller and Auditor-General (CAG) has pulled up the Income Tax Department for not putting to use the tools at its disposal for effective action against shell companies that conceal unaccounted-for income and generate black money, specifically with respect to Maharashtra Sales Tax Department findings.
In its latest report, the CAG said the State department’s website had a list of 2,059 suspicious dealers who had issued invoices involving tax evasion of over ₹10,640 crore.
The auditor had sought details from the I-T Department in Mumbai on the assessees and the ultimate beneficiaries, but despite reminders, the data were not provided.
In 2008-09, the MSTD had informed the Bombay High Court that it had investigated 1,555 hawala operators involving 39,488 beneficiary dealers who had passed on an input tax credit of ₹1,333 crore in three years.
The accused claimed and got input tax credit against the declaration of fake tax invoices without actual transactions involving the sale and purchase of goods. To evade detection, payments were made against the invoices by cheque or bank transfers and the amounts were later withdrawn from the accounts of hawala operators.
The CAG relied upon the MSTD data for analysis and found that the Income Tax Department had not even scrutinised all the assessees featuring on the list.
“The information regarding bogus purchases was not passed on to assessing officers … the current provisions have not acted as a deterrent as there are no disincentive for giving and receiving accommodation entries. Established companies have also resorted to the practice of obtaining bogus purchases, which shows that the present system of gathering evidence and acting thereon is ineffective,” the report said.
The shell companies are used to generating bogus bills showing inflated expenses on various counts. They receive payments through the banking channel to project the transactions as genuine, and then return the rest to the ultimate beneficiaries after charging a commission. Unscrupulous tax consultants and chartered accounts are also involved in the setting up of such entities.
In 35 cases with PAN records, the auditor found that assessees had either not filed their returns, or had disclosed meagre or no income, or had stopped filing the returns. “The Income Tax Department did not take any action to examine the veracity of the facts reported therein, nor did they fully follow the information provided by their own investigation wing,” the report said.
The CAG report recommended that in cases of false disclosure, the department should have moved the Settlement Commission for withdrawal of immunity to the applicants.
Interestingly, the Finance Ministry — under which the I-T Department functions — told the CAG that there was no loss of revenue as each bogus purchase involved bogus sales also.