Several sectors that transact in cash were left holding large sums when Rs 1,000 and Rs 500 currency notes were rendered invalid in November 2016. Several companies deposited the cash they were holding in bank accounts. Some allegedly faked entries in their financial statements to justify cash holdings and subsequently came to the attention of the tax department.
In most cases, the income tax department issued notices to the companies and questioned the source of funds under Section 68 of the Income Tax Act dealing with unexplained cash credits in bank accounts or company books.
“Many promoters of companies that had received notices under Section 68 during the demonetisation are now looking to settle the litigation under the Vivaad se Vishwas scheme,” said Girish Vanvari, the founder of tax advisory firm Transaction Square. “This would mean that they can just pay up the taxes and there could be no more questioning around the unexplained credits in their bank accounts or the entries in their books.”
For example, a Mumbai-based real estate company with a substantial presence in the western suburbs had about Rs 20 crore that it showed as cash on hand at the time of demonetisation. The taxman questioned the company later and found that the buyers mentioned by it were fictitious.
Experts said the largest chunk of people taking advantage of the scheme are not those who had faced raids and searches but were served with notices during demonetisation.
The settlement scheme was formulated as an estimated 480,000 cases have been pending in the courts and quasi-judicial forums for years and it could take a long while before the tax department sees any of the money, assuming it eventually wins. The total value of these disputes is pegged at Rs 9.32 lakh crore.
The revenue department has issued notices to about 10,000 people seeking details on the source of income as it analyses data on deposits of cancelled notes. It also went after certain “entry operators” that helped several companies generate fake invoices as part of the exercise.
All these companies are opting for the settlement scheme under which there will be no interest or penalties levied if all the taxes are paid up.
“The biggest relief for the taxpayer is that there would be no future investigation or prosecution if they had deposited unaccounted money in bank accounts,” said Jeenendra Bhandari, partner, MGB and Co, a tax advisory firm.
“This would be a huge relief for several small companies that were holding onto cash during demonetisation and had to deposit that amount in their bank accounts.
In another case, a New Delhi-based commodities company used invoices to show that money had come in from certain customers. An investigation revealed these to be fake entries.
The modus operandi of these firms was to get registered as suppliers on the books of companies. They would then issue fake invoices for supplying goods or providing services, receive payment by cheque and return the amount in cash after deducting a 2% commission.
Experts said demonetisation brought several suspicious transactions under the tax department’s scrutiny through cross-referencing with older data on cash deposits. The government had also used advanced big data tools for both structured and unstructured data and analysed and established relationships among different entities or people up to 16 levels deep, based on different sets of information such as addresses, phone calls, social media interactions, travel trends and income tax returns.
“Many companies have moved away from doing the business the old way and their cash transactions have gone down tremendously. These companies now want a clean slate for the earlier tax notices and this scheme could be a huge boon,” said the head of a major tax advisory firm.