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What are the recommendations of SIT on curbing black money in India? Part 2

This is in continuation to my previous article ‘what are the recommendations of SIT on curbing black money? Part 1

Misuse of exemption of Long Term Capital Gains

Again, there is nothing new in the SIT report here. The rigging in stock market is not a new revelation. It’s been happening over the last 2 decades. The report says –

Investments are made in the secondary share markets with a view to capturing gains. In this market, out of nearly 8,000 listed companies, several stocks are not traded regularly. With the collusion of promoters, some brokers arrange for price(s) with purchase of such stocks at nominal costs, and sales at exorbitant prices, with a view to receiving money on sale as ‘capital gain’ when the long term gain is subjected to a ‘nil’ or nominal rate of tax. The advantage for manipulative taxpayer is that he can launder such sale receipts through payment of no tax”

SEBI has recently barred more than 250 entities, including individuals and companies, from the securities market for suspected tax evasion and laundering of black money through stock market platforms. In one such instance price of a scrip rose from Rs. 10.20 to Rs. 489 in 150 trading days – a rise of 4694%.The SIT obtained the background details of these cases and studied them.


A typical pattern is observed to be followed in such cases.

  • A company with very poor financial fundaments in terms of past income or turnover is able to raise huge capital by allotment of preferential allotment of shares made to various entities.
  • There is a sharp rise in price of stocks once the preferential allotment is done. This is normally achieved through circular trading of shares among a select group of companies. These groups of companies often have common promoters/directors.
  • The stocks with thus artificially inflated price are offloaded through companies whose funding is provided by the same set of people who want to convert black money into white.

SIT has recommended certain measures to curb stock market rigging, namely,

  • SEBI needs to have an effective monitoring mechanism to study such unusual rise of stock prices of Companies while such a rise is taking place. We understand that SEBI has a strong IT infrastructure which can generate red flags for such instances. Such red flags could be built upon trading volumes, entities which contribute to trading volume, financial background of firms through their annual returns and any other indicators SEBI may develop. We believe that with effective and timely monitoring by SEBI a significant number of such instances can be checked in time.
  • Once such instances are detected, SEBI should invariably share this information with CBDT and FIU.
  • Barring such entities from securities market would not be of strong deterrence in itself. In case it is established, that stock platforms have been misused for taking LTCG benefits, prosecution should invariably be launched under relevant sections of SEBI Act. Section 12A read with section 24 of the Securities and Exchange Board of India Act 1992 are predicate offences.
  • Enforcement Directorate should then be informed to take action under Prevention of Money Laundering Act for the predicate offences


Shell Companies and beneficial ownership

The report says “The primary method of generation of black money remains suppression of receipts and inflation of expenditure. The suppression could be over a range of businesses and industrial activities which are covered by what may be called ‘primary’ enactments to regulate sale receipts, actual production, charging amount in excess of statutory amounts, etc.”

Have you read of Bill masters and entry operators?  The SIT report mentions these terms! As manipulation of income is not always possible by suppression of receipts, tax-payers may try to inflate expenses by obtaining bogus or inflated invoices from ‘bill masters’, who make bogus vouchers and charge nominal commission. As these persons are of very modest means, upon investigation, they tend to leave the business and migrate from the city where they operate. This is one of the reasons for a proportion of income tax arrears attributed to ‘assessee not traceable’.

Similarly, there are other categories of small ‘entry operators’, who provide accommodation entries by accepting cash in lieu of cheque/demand draft given as loans/advances /share capital, etc. and thereby launder large sums of money at miniscule commissions. Due to frequent migration, such entry operators escape prosecution under the Income Tax Act. The appellate tax bodies also tend to tax their income at nominal rates. There is no effective deterrence, except for taxing commission on such bogus receipts and tax in the hands of beneficiaries. Providing fake bills and entries need to be dealt with strongly and as criminal offence under the tax laws.


The following recommendations are made in this regard

  • Proactive detection of creation of shell companies: Serious Frauds investigation office (SFIO) under Ministry of Company needs to actively and regularly mine the MCA 21 database for certain red flag indicators. These red flag indicators could be based on common DIN numbers in multiple companies, companies with same address, same contact numbers, use of only mobile numbers, sudden and unexpected change in turnover declared in returns etc. These indicators are illustrative in nature and the SFIO office can prepare a set of indicators based on its own experience and consultation with other law enforcement agencies like CBDT, ED and FIU.
  • Sharing of information on such high risk companies with law enforcement agencies: Once certain companies are identified through data mining above, the list of such high risk companies’ should be shared with CBDT and FIU for closer surveillance.
  • In case after investigation/assessment by CBDT, a case of creating accommodation entries is clearly established, the matter should be referred to SFIO to proceed under relevant sections of IPC for fraud. SFIO should also refer the matter to Enforcement Directorate for taking action under PMLA for all such cases of money laundering.
  • It has also been observed that in many cases of creation of shell companies the shareholders or directors of such Companies are persons of limited financial means like drivers, cooks or other employees of main persons who intend to launder black money. Section 89(1) and 89(2) of the Companies Act, 2013 provides for persons to declare if they have “beneficial interest” in the shares of the Company or not. Section 89(4) enjoins the Central Government to make rules to provide for the manner of holding and disclosing beneficial interest and beneficial ownership under this section. The Ministry of Company Affairs may frame such rules at the earliest.

I will cover other aspects in the next post.


Thought for the day

Nothing in life is permanent, be humble.


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About CA Prasad Chartered Accountant

CA Prasad Chartered Accountant
CA Prasad is a practicing Chartered Accountant and partner in Bangalore -based CA Firm. For further information or query, please email it to [email protected]