Out of 11 lakh companies suspected of being shell companies that exist for the purpose of laundering money or otherwise undermining the income tax system in India, 4 lakh companies have been sent notices to file their IT return within 30 days, or face de-registration.
The government started the process of sending out notices to over four lakh companies last month which had no history of filing income tax returns for FY 2013-14 and 2014-15 – the filing date for which has long since passed. Despite this, the IT department has given the companies in question an extended window of 30 days in which to file their IT return, failing which, the department will take the step to de-register the companies.
The Companies Act includes a provision through which companies which have legally suspended business operations can apply for a “dormant” tag, which exempts them from conducting business operations and from having to file IT returns. Through this facility, businesses that have legitimately suspended their profit-making activities could ensure that they aren’t brought under the IT department scanner for suspected money laundering activities. However, only 214 companies opted for the dormant tag at the end of 2015.
The department will be investigating charges of money laundering in these companies, having outlined their Modus Operandi as follows. These businesses have little or no turnover, but issue shares at high premiums. Entry operators accept cash-issue shares at the high premium, and then filter the funds through many such companies in order to eventually turn as much of the initial investment from “black” cash to “white” money in the eyes of the government.
The Ministry of Corporate Affairs (MCA) has been tasked with ensuring that the companies under the scanner do not perform any transactions until the IT department’s scrutiny of the latter is complete. The MCA will also publicize the names of the defunct, de-registered companies and the names of their directors and will also share the same with the RBI and other banks to ensure no future fraud takes place in the names of these flagged companies.
Once identified after necessary investigative procedures, the names of the companies will be referred to the Serious Fraud Investigations Office (SIFO) who will then collaborate with the IT department and Enforcement Directorate to explore further action.
Many of these 4 lakh-plus companies have been in existence for many years now, and have recently had targets painted on their backs after high levels of cash infusion was recorded post-demonetization.