Interplay Between The Income-tax Act, The Benami Transactions Act, The Money Laundering Act And Allied Laws

Justice (Retd) Harsha N. Devani, the former Judge of the Gujarat High Court, delivered a talk recently under the auspices of the AIFTP, in which she explained in detail the interplay between the Income-tax Act, 1961, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, the Prevention of Money Laundering Act, 2002, The Prohibition of Benami Property Transactions Act, 1988 and other allied laws. A transcript of the presentation together with the recording of the video is available

1. While the Income -tax Act is primarily an Act to consolidate and amend law relating to income tax, a common thread running between the Black Money Act, Benami Transactions Act and the Money Laundering Act is black money. These three Acts have been enacted to curb the generation of black money and to recover the benefits of the ill-gotten gains from the persons possessing black money.

2. To understand the interplay between the Income -Tax Act, and the Black Money Act, the Benami Transactions Act and the Money Laundering Act and the background in which the latter three Acts have been enacted and operate, it would be necessary to understand the concept of black money and how it is generated and laundered to untainted money.

3. There is no uniform or accepted definition of ‘black’ money. Several terms are in use – such as ‘black money’, ‘black income’, ‘dirty money’, ‘black wealth’, ‘underground wealth’, ‘black economy’, ‘parallel economy’, ‘shadow economy’, ‘underground’ or ‘unofficial’ economy. If money breaks laws in its origin, movement or use, and is not reported for tax purposes, then it would fall within the meaning of black money. The broader meaning would encompass and include money derived from corruption and other illegal ways – to include drug trafficking, counterfeiting currency, smuggling, arms trafficking, etc. It would also include all market based legal production of goods and services that are concealed from public authorities for the following reasons – (i) to evade payment of taxes (income tax, excise duty, sales tax, stamp duty, etc); (ii) to evade payment of other statutory contributions; (iii) to evade minimum wages, working hours and safety standards, etc.; and (iv) to evade complying with laws and administrative procedures.

4. There are three sources of black money – crime, corruption and business. The ‘criminal’ component of black money would normally include proceeds from a range of activities including racketeering, trafficking in counterfeit and contraband goods, forgery, securities fraud, embezzlement, sexual exploitation and prostitution, drug money, bank frauds and illegal trade in arms. The ‘corrupt’ component of such money would stem from bribery and theft by those holding public office – such as by grant of business, bribes to alter land use or to regularize unauthorized construction, leakages from government social spending programmes, speed money to circumvent or fast-track procedures, black marketing of price controlled services, etc.

5. The ‘commercial’ limb of black money usually results from tax evasion by attempting to hide transactions and any audit trail relating thereto, leading to evasion of one or more taxes. The main reason for such black economy is underreporting revenues / receipts / production, inflating expenses, not correctly reporting workers employed to avoid statutory obligations for their welfare. Opening of the economy permits contracts of all kinds – particularly for allocation of scarce resources such as mineral and spectrum– which, in the absence of transparent rules and procedures for licenses and non compliance of contractual obligations of the persons concerned, leads to increased generation of black money. In all the three forms of black money – ‘criminal’, ‘corrupt’ and ‘commercial’ – subterfuges are created which include false documentation, sham transactions, benami entities, mispricing and collusion. This is often done by layering transactions to hide their origin.

6. 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 like the Central Excise Act, the State Sales Tax Laws, GST laws, Entertainment Tax Acts, Luxury Tax Acts, etc. to regulate sale receipts, actual production, charging amount in excess of statutory amounts, etc. The primary and fundamental reason for suppression of receipts or values is to lower the incidence of tax. Therefore, the Income Tax Act becomes a ‘secondary’ Act. What is hidden from state authorities cannot be shown for the purpose of income tax; as such hidden element is already a part of the ‘black’ economy.

7. However, 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. 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. Land and real estate are possibly the most important class of assets used for investment of ‘black’ money. As immovable properties are not usually comparable, valuations are different. This imparts flexibility to the valuation process, and makes it an ideal investment for ‘black’ money. As an asset class both ‘black’ and ‘white’ savings are utilized for investment in land and real estate, which provides hedge against inflation apart from a profitable alternative for investment for black savings. The cancerous growth of corruption at every stage of interface of the public with officials by way of commissions on mega-projects, kick-backs on mega purchases abroad, leakages in public spending, were all a matter of serious concern.

8. Financial Action Task Force (FATF) defines Trade Based Money Laundering (TBML) as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins. In simpler terms, Trade Based Money Laundering is the process of transferring / moving money through trade transactions. In practice, this can be achieved through the misrepresentation of the price, quantity or quality of imports or exports.

9. The basic techniques of trade-based money laundering include, over-invoicing and under invoicing of goods and services; multiple invoicing of goods and services; over-shipment and under-shipment of goods and services or even phantom shipment, where no goods are shipped at all, but the exporter colludes with an importer to ensure that all shipping and customs documents associated therewith are routinely processed; falsely described goods and services; misuse of export promotion schemes also lead to generation and flow of black money. Fake Indian Currency Notes, drug trafficking, arms deal and other illegal activities thrive on black money. These activities by their very nature are clandestine and can only operate through use of black money. Evasion of service tax, misuse of cenvat etc. also generate black money.

10. India is a member of the Financial Action Task Force (FATF), an intergovernmental body which develops and promotes policies to protect the global financial system against money laundering and financing of terrorism.

11. As the sources of generation of black money, and the forms it takes, vary, there can be no single or omnibus law to deal with the menace. The legal framework against black money generation and its control is, accordingly, dispersed in penal laws, economic laws, tax laws and various regulatory mechanisms, and the concomitant administrative machinery to enforce these laws and regulations.

12. Insofar as the Income -tax Act is concerned various safeguards and other provisions have been made to ensure that no taxable income escapes the tax net. Section 139 thereof casts an obligation on the persons specified thereunder to furnish a return of his total income in the prescribed manner and setting forth such other particulars as may be prescribed. For income tax purposes, all such income which has been concealed and on which tax has been evaded, irrespective of the source of such income or the motive for earning such income, acquires the character of black money. Thus, all income which is not reported to the tax authorities becomes black income even though there may have been no illegality involved in earning such income.

13. By Finance Act 2012, the fourth proviso came to be inserted in sub-section (1) of section 139 with effect from 1st April, 2012 whereby it was made mandatory for residents, other than not ordinarily resident in India within the meaning of clause (6) of section 6, who are not required to furnish a return under that sub-section and who during the previous year has any asset (including any financial interest in any entity) located outside India or signing authority in any account located outside India to furnish, on or before the due date, a return in respect of his income or loss for the previous year in such form and verified in such manner and setting forth such particulars as may be prescribed. Thus with effect from 1st April, 2012 an obligation was cast upon a resident other than not ordinarily resident in India to disclose any asset held by him in any location outside India.

14. The Income Tax Act also contains various provisions for detecting undisclosed income and assets. Section 131 thereof bears the heading power regarding discovery, production of evidence, etc. and vests in the income tax authorities specified therein the same powers as are vested in a court under the Code of Civil Procedure, 1908, when trying a suit in respect of the following matters, namely:—

(a) discovery and inspection;

(b) enforcing the attendance of any person, including any officer of a banking company and examining him on oath;

(c) compelling the production of books of account and other documents; and

(d) issuing commissions.

15. Section 132 makes provision for search and seizure and the powers thereunder include the power to seize books, documents, cash, jewellery, other valuables etc and retention of the same for a certain period of time. Section 133 vests in the authorities the power to requisition information from third parties. Section 133A makes provision for survey at business premises for inspecting books of accounts, tallying stock, verification of cash, etc. Section 133B provides for collection of information from tax-payers.

16. There are penal provisions for non disclosure of taxable income to deter assessee’s from suppressing their income. Chapter XXI of the Income Tax Act provides for monetary penalties at different rates for various defaults such as concealment of income; failure to comply with statutory notices, file tax returns/sign statements, maintain/retain books of account or documents, deduct/collect taxes at source; etc. The maximum penalty prescribed is 300% for the tax sought to be evaded.

17. Chapter XXII of the Income -tax Act provides for prosecutions against various offences such as willful evasion of tax; failure to furnish tax returns or produce accounts / documents, falsification of accounts / false statement in affidavit; failure to deduct and deposit taxes; etc. The maximum sentence is for 7 years rigorous imprisonment with fine.

18. There are provisions under which undisclosed or unexplained income can be added to the total income of an assessee. Clause (x) has been introduced in sub-section 2 of section 56 of the Income Tax Act, 1961 which provides that:

(x) where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,—

(a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum;

(b) any immovable property,—

(A) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;

(B) for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely:—

(i) the amount of fifty thousand rupees; and

(ii) the amount equal to five per cent. of the consideration:

(c) any property, other than immovable property,—

(A) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;

(B) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration:

shall be shall be chargeable to income tax under the head “Income from other sources”. The proviso thereto carves out exceptions where such sum of money or any property has been received from any relative, or on the occasion of the marriage of the individual etc.

Thus, where any amount of more than Rs.50,000/- is received by any person, or any property valued at more that Rs.50,000/- is received without consideration, or received with consideration but the difference between the consideration so paid and the value of the property is more than Rs.50,000, such difference is considered to be the income from other sources of such person.

19. Section 68 of the Income -tax Act provides for charging unexplained cash credit to income tax as the income of the assessee, section 69 provides that the value of unexplained investments may be deemed to be the income of the assessee for the financial year preceding the assessment year in which the investment is made; under section 69A, if an assessee is found to be owner of any money, bullion, jewellery or other valuable article which is not recorded in the books of account and which is not explained by him to be deemed to be the income of the assessee; if the assessee does not fully disclose the amount of investments in the books of account, the excess amount may be deemed to be his income if he cannot explain the same; where the assessee incurs any expenditure or part thereof and is not able to explain the source thereof, to the extent the expenditure is unexplained the same may be deemed to be his income.

20. There is a common modus operandi adopted by many private companies for introduction of black money, i.e. by way of share application money, share capital or unsecured loan. The idle share application money is just like unsecured loan but without interest. Accordingly amendment to the Income Tax Act came be introduced vide Finance Act, 2012 whereby a proviso came to be introduced in section 68 which provides that where the assessee is a company, (not being a company in which the public are substantially interested) and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—

(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and

(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:

21. It appears that the provisions of the Income Tax Act had limitations and the Central Government was strongly committed to the task of tracking down and bringing back undisclosed foreign assets and income and accordingly, a new legislation came to be introduced to deal with undisclosed assets and income stashed away abroad namely the Black Money (Undisclosed Foreign Income and Assets) Act, 2015 (commonly known as the Black Money Act) to make provisions to deal with the problem of Black money that is undisclosed foreign income and assets, the procedure for dealing with such income and assets and to provide for imposition of tax on any undisclosed foreign income and asset held outside India and for matters connected therewith or incidental thereto.

22. The Black Money Act came to be brought into force with effect from 1st April, 2015. Simultaneously, the above fourth

proviso as well as the fifth proviso to sub-section (1) of section 139 of the Income Tax Act, came to be substituted by the Finance Act, 2015 with effect from 1.4.2016 making it obligatory for a resident other than not ordinarily resident in India within the meaning of clause (6) of section 6, who is not required to furnish a return under that sub-section and who at any time during the previous year, –

(a) holds, as a beneficial owner or otherwise, any asset (including any financial interest in any entity) located outside India or has signing authority in any account located outside India; or

(b) is a beneficiary of any asset (including any financial interest in any entity) located outside India,

to furnish, on or before the due date, a return in respect of his income or loss for the previous year in such form and verified in such manner and setting forth such other particulars as may be prescribed:

23. The fifth proviso provided that nothing contained in the fourth proviso shall apply to an individual, being a beneficiary of any asset (including any financial interest in any entity) located outside India where, income, if any, arising from such asset is includible in the income of the person referred to in clause (a) of that proviso in accordance with the provisions of this Act:

24. Sub-section (6) of section 139 came to be amended with effect from 1st April 2016 by substitution of the words “assets of the prescribed nature, value and belonging to him” by “assets of the prescribed nature and value, held by him as beneficial owner or otherwise or in which he is a beneficiary” so that it shall be mandatory for persons covered by the sub-section to declare in their return, the assets held by them in beneficial capacity also.

25. Thus, income earned from a source located outside India or asset acquired or made located outside India including assets held by a person as beneficial owner or otherwise or in which he is a beneficiary, are required to be disclosed in the return filed under sub-section (1) of section 139 of the Income Tax Act. In case of failure to do so, the assessee shall be chargeable to tax under section 3 of the Black Money Act for every assessment year commencing on or after 1st April, 2016.

26. Under section 4 of the Black Money Act, the undisclosed foreign asset of any previous year of an assessee is chargeable to tax as provided therein. However, section 59 of the Act gives an opportunity to an assessee to disclose the undisclosed income and asset within the window provided therein. If any assessee (except a person specified in section 71) avails of the benefit of section 59, the other provisions of Chapter VI relating to tax compliance of foreign income and assets are attracted and such person would be liable to pay tax under section 60 of the Act at thirty per cent of the value of such undisclosed asset and penalty at the rate of one hundred percent of such tax, viz. 30% of the value of such undisclosed asset. The assessee is also entitled to the benefit of the provisions of section 64 of the Black Money Act namely the undisclosed foreign asset declared shall not be included in the total income under the Income Tax Act, and section 67 which provides that the declaration made under section 59 shall not be admissible as evidence against the declarant as provided thereunder.

27. However, if a person does not take the benefit of section 59 of the Black Money Act, the Assessing Officer, upon receipt of information from an income-tax authority under the Income Tax Act, or any other authority issue a notice to the assessee under section 10 of that Act and make assessment or reassessment of such undisclosed foreign income or asset for the relevant financial year or years.

28. Section 5 of the Black Money Act provides for computation of total undisclosed foreign income and asset and lays down that in computing the total undisclosed foreign income and asset of any previous year of an assessee,-

(i) No deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee, whether or not it is allowable in accordance with the provisions of the Income Tax Act.

(ii) Any income,-

(a) which has been assessed to tax for any assessment year under the Income Tax Act prior to the assessment year to which this Act applies; or

(b) which is assessable or has been assessed to tax for any assessment year under this Act,

shall be reduced from the value of the undisclosed asset located outside India, if, the assessee furnishes evidence to the satisfaction of the Assessing Officer that the asset has been acquired from the income which has been assessed or is assessable, as the case may be, to tax.

[Thus, if an assessee discloses his foreign income or asset in his income tax return, he would be entitled to deduction of any expenditure or allowance or set off of any loss, however, if he is assessed for the very same income or asset under the Black Money Act, he is not entitled to any such deduction. However, any amount of tax paid income used for purchase of any undisclosed asset located outside India shall not attract charge of tax under the Black Money Act.]

29. Thus, when an assessee is assessed under the Black Money Act, he is not entitled to deduction of any expenditure or allowance or set off of any loss or other benefits otherwise available under the Income Tax Act.

30. Moreover, where tax has been computed under section 10, the assessee shall also be liable to penalty under Chapter IV of the Act. Under section 41, the Assessing Officer may direct the assessee to pay by way of penalty, in addition to tax, if any, payable by him, a sum equal to three times the tax computed under that section. Also under section 42 of the Act, the assessee may be directed to pay a sum of ten lakh rupees for failure to furnish return of income under sub-section (1) of section 139 of the Income -tax Act, in respect of any asset held by him located outside India as beneficial owner or otherwise, where he was a beneficiary of any asset located outside India or had any income from any source located outside India. In case where any inaccurate particulars about an asset located outside India have been furnished in the income tax return, the assessee may be liable to pay a sum of ten lakh rupees.

31. Under section 44, a person who is an assessee in default or deemed to be assessee in default in making payment of tax, and in case of continuing default by such assessee, he shall be liable to penalty of any amount, equal to the amount of tax arrear. Further penalty has been provided for in case of other defaults as contemplated under section 45 of the Black Money Act.

32. Thus a person who does not avail the benefit of Chapter VI of the Act is exposed to much more stringent provisions under the Act.

33. The Black Money Act also provides for penalty for not furnishing return of income in respect of undisclosed foreign income and asset under sub-section (1) of section 139 of the Income Tax Act and for furnishing inaccurate particulars in respect of foreign income or assets in the return of income filed under sub-section (1) of section 139.

34. Section 3 of the Black Money Act which is the charging section provides that there shall be charged on every assessee for every assessment year commencing from 1st April 2016 a tax in respect of his total undisclosed foreign income and asset of the previous year at the rate of 30% of such undisclosed income and asset, which is subject to the provisions of the Act. Thus the charge under the Black Money Act is on undisclosed foreign income and asset.

35. The proviso to section 3 provides that an undisclosed asset located outside India shall be charged to tax on its value in the previous year in which such asset comes to the notice of the Assessing Officer. Thus, while in case of undisclosed foreign income of an assessee, the same would be subject to tax under the provisions of the Black Money Act only for every assessment year commencing on or after the 1st day of April 2016, namely assessment year 2016-17 onwards, insofar as undisclosed foreign asset located outside India is concerned, the previous year in which such asset is acquired is not relevant. In other words an undisclosed foreign asset would be subject to tax under the Black Money Act notwithstanding the date of its acquisition, which may even be a previous year prior to the assessment year commencing on 1st April 2016; and shall be charged to tax under this provision on the value of such asset in the previous year in which such asset comes to the notice of the Assessing Officer.

36. While undisclosed foreign income or asset become chargeable to tax under the Black Money Act from assessment year 2016-17; insofar as undisclosed foreign asset is concerned, while it becomes chargeable to tax from assessment year 2016-17 onwards, the date of acquisition of such asset may relate to any assessment year prior to assessment year 2016-17. Therefore, even after the coming into force of the Black Money Act, insofar as assessment years prior to assessment year 2016-17 are concerned, the undisclosed foreign income would be chargeable to tax under the relevant provisions of the Income -tax Act.

37. Under section 4 of the Income Tax Act, which is the charging section, there is a charge on the total income of the previous year of every person. Thus the total income of a person is chargeable to tax under section 4 of the Income Tax Act, which would include foreign income and assets also. But if a person does not disclose his foreign income or assets in the return of income and is consequently not taxed under that Act, he exposes himself to the rigours of the Black Money Act and is chargeable to tax under section 3 of that Act and also become amenable to the other stringent provisions of that Act. Therefore if a person does not want to fall within the clutches of the Black Money Act, he is required to disclose his income and assets under the IT Act and pay the tax chargeable thereunder.

38. The second proviso to section 147 of the Income Tax Act provides that nothing contained in the first proviso to section 147 shall apply in a case where any income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year. The first proviso provides that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment by reason of failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year. Thus, the second proviso does away with the limitation of four years as provided in the first proviso to section 147 in case of undisclosed foreign income.

39. Section 149(1)(c) of the Income Tax Act provides that no notice under section 148 shall be issued for the relevant assessment year if four years, but not more than sixteen years, have elapsed from the end of the relevant assessment year unless the income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment. Clause (c) of sub-section (1) of section 149 of the IT Act came to be inserted vide Finance Bill 2012 with effect from 1st July, 2012. Thus by virtue of clause (c) of sub-section (1) of section 149, the time limit for reopening of assessment has been extended to sixteen years in respect of any asset including financial interest in any entity located outside India, so that the bar applies for periods beyond sixteen years in such cases. Thus, undisclosed foreign income of a person prior to the assessment year commencing on or after 1st April, 2016 would continue to be assessed under the Income Tax Act.

40. Under the Black Money Act, "Assessee” is defined under section 2(2) to mean a person – ‘

(a) Being a resident in India within the meaning of section 6 of the Income Tax Act, 1961 in the previous year, or

(b) Being a non-resident or not ordinarily resident in India within the meaning of clause (6) of section 6 of the Income Tax Act, 1961 in the previous year, who was a resident in India either in the previous year to which the income referred to in section 4 relates; or in the previous year in which the undisclosed asset located outside India was acquired.

Provided that the previous year, in case of acquisition of undisclosed asset outside India, shall be determined without giving effect to the provisions of clause (c) of section 72.

Clause (c) of section 72 provides that where any asset has been acquired or made prior to commencement of this Act, and no declaration in respect of such asset is made under this Chapter, such asset shall be deemed to have been acquired or made in the year in which a notice under section 10 is issued by the

Assessing Officer and the provisions of this Act shall apply accordingly.

Thus, in case where no declaration as contemplated in Chapter VI, namely tax compliance for undisclosed foreign income and assets, by virtue of a deeming fiction contained in clause (c) of section 72, such asset is deemed to be acquired or made in the year in which a notice under section 10 of the Act is issued.

41. Thus, a person who is a resident of India; or is a non-resident or not ordinarily resident in India who in the previous year in which he was a resident of India had foreign income or acquired any assets located outside India and had failed to disclose them under the Income Tax Act, is an assessee under the Black Money Act.

42. Thus, the provisions of the Black Money Act and the Income Tax Act appear to be inextricably linked with each other. Moreover, the authorities under both the Acts are also the same.

43. In an effort to further check generation and use of black money, around the same time as the enactment of the Black Money Act, certain amendments came to be made in the Benami Transactions Act, which is an Act to prohibit benami transactions and the right to recover property held benami and for matters connected therewith and incidental thereto.

44. When purchases are made in the false name of another person who does not pay consideration while the real title rests in another person who purchased the property and who is the beneficial owner, such transactions are called benami transactions. These transactions are entered into to defraud creditors as well as public revenues. Such transactions were prevalent in India from time immemorial but they came to light when the British established their rule in India. When the British found benami transactions as a custom of the country, it was decided to recognise all such transactions till otherwise ordered by law. The India Trusts Act vide sections 81 and 82 gave recognition to the practice of benami transactions.

45. In the implementation of the Income Tax Act, it was found that many persons entered into benami transactions to distance themselves from the real transactions. Therefore, in 1976, the Parliament introduced section 281A of the Income Tax Act, which bears the heading “Effect of failure to furnish information in respect of property held benami’ and provided that : (1) No suit to enforce any right in respect of any property held benami, whether against the person in whose name the property is held or against any person, shall be instituted in any court by or on behalf of a person (hereafter in this section referred to as the claimant) claiming to be the real owner of such property unless notice in the prescribed form and containing the prescribed particulars in respect of the property has been given by the claimant within a period of one year from the date of acquisition of the property to the Chief Commissioner or Commissioner.

46. The object of the insertion was to curb the widespread practice of benami holding of property with a view to tax evasion by debarring the real owner from enforcing his claim to such property in a court of law unless he had declared the income from that property, or the property itself, for the purposes of income-tax and wealth-tax or had given notice of his claim to the property to the income-tax authorities.

47. But since section 281A of the Income -tax Act did not stop benami transactions and the resultant repercussions, Parliament enacted the Benami Transactions (Prohibition) Act, 1988.

48. The Benami Transactions (Prohibition) Act, 1988 was enacted to prohibit benami transactions and the right to recover property held benami. The said Act, inter alia, provided that – (a) all the properties held benami shall be subject to acquisition by such authority in such manner and after following such procedure as may be prescribed; (b) no amount shall be payable for acquisition of any property held benami; (c) the purchase of property by any person in the name of his wife or unmarried daughter for their benefit would not be benami transaction; (d) securities held by a depository as registered owner under the Depositories Act, 1996 or participant as an agent of a depository would not be benami transactions.

49. But it was found that the provisions of the aforesaid Act were inadequate to deal with benami transactions as the Act did not – (i) contain any specific provision for vesting of confiscated property with the Central Government; (ii) have any provision for an appellate mechanism against an action taken by the authorities under the Act, while barring jurisdiction of a civil court; (iii) confer the powers of the civil court upon the authorities for its implementation; and (iv) provide for adequate enabling rule making powers.

50. With a view to remove these inadequacies, the Benami Transactions (Prohibition) Amendment Act, 2016 came to be enacted, which prohibits benami transactions and provides for confiscating benami properties; amends the definition of benami transactions, provides for establishment of adjudicating authorities and an Appellate Tribunal to deal with benami transactions; and specifies the penalty for entering into benami transactions.

51. As per the amended definition, a benami transaction is a transaction or arrangement (i) where a property is held by or transferred to a person, but the consideration for such property has been provided, or paid by, another person and the property is held for the immediate or future benefit, direct or indirect of the person who has provided the consideration, which is subject to the exceptions provided therein; (ii) the transaction is made in a fictitious name; (iii) the owner of the property is not aware of or denies knowledge or such ownership; or (iv) the person providing the consideration is not traceable or is fictitious.

52. Benamidar is a person or a fictitious person in whose name the benami property is transferred or held and includes a person who lends his name.

53. Clause (26) of section 2 of the Benami Transactions Act defines property to mean assets of any kind, whether movable or immovable, tangible or intangible, corporeal or incorporeal and includes any right or interest or legal documents or instruments evidencing title to or interest in the property and where the

property is capable of conversion into some other form, then the property in the converted form and also includes the proceeds from the property. Thus the definition of property is expansive and is very wide in its amplitude.

54. While section 281A of the Income -tax Act, barred suits in respect of property held benami it was subject to an exception, namely if notice in the prescribed form in respect of the property was given by the claimant to the Commissioner within one year from the date of acquisition, section 4 of the Benami Transactions Act totally bars suits in respect of benami property.

55. Section 3 of the Benami Transactions Act prohibits any person from entering into a benami transaction; provides that anyone who enters into any benami transaction shall be punishable with imprisonment as provided therein; and anyone who enters into a benami transaction on or after the date of commencement of the amendment act shall notwithstanding anything contained in sub-section (2) be punishable in accordance with the provisions contained in Chapter VII.

56. Section 4 of the Benami Transactions Act prohibits the right to recover property held benami and provides that no suit, claim or action to enforce any right in respect of any property held benami shall lie against any other person by or on behalf of a person claiming to be the real owner of the property. Section 5 provides that property held benami shall be liable to confiscation. Section 6 prohibits the benamidar from re-transferring the property to the beneficial holder or any person acting on his behalf. It further provides that the consequence of such retransfer is that the transaction of such property shall be deemed null and void.

57. Under section 20 of the Benami Transactions Act certain officers are required to assist the authorities in the enforcement of the Act which includes income-tax authorities appointed under sub-section (1) of section 117 of the Income Tax Act.

58. Section 23 of the Benami Transactions Act empowers the initiating officer after obtaining prior approval of the Approving Authority to conduct or cause to be conducted any inquiry or investigation in respect of any person, place, property, assets, documents, books of account or other documents in respect of any other relevant matters under the Act. Chapter IV of the Act makes provision for attachment, adjudication and confiscation. Chapter VI makes provision for Special Courts for trial of offence punishable under the Act.

59. Sub-section (1) of section 53 of the Benami Transactions Act which falls under Chapter VII namely offences and prosecution – provides for penalty for benami transaction and lays down that where any person enters into a benami transaction in order to defeat the provisions of any law or to avoid payment of statutory dues or to avoid payment to creditors, the beneficial owner, benamidar and any other person who abets or induces any person to enter into the benami transaction, shall be guilty of the offence of benami transaction. Sub-section (2) thereof provides for the punishment for the offence and lays down that whoever is found guilty of the offence of benami transaction referred to in sub-section (1) shall be punishable with rigorous imprisonment for a term which shall not be less than one year, but which may extend to seven years and shall also be liable to fine which may extend to twenty-five per cent of the fair market value of the property.

60. Section 55 prohibits institution of prosecution against any person in respect of any offence under section 3, 53 or 54 of the Act without the prior sanction of the competent authority. The Explanation thereto defines competent authority to mean a Commissioner, Director, a Principal Commissioner of Income-tax or a Principal Director of Income-tax as defined in clause (16), clause (21), clause (34B) and clause (34C) respectively, of section 2 of the Income Tax Act. Thus, it is the income tax authorities who are competent authorities to grant sanction to prosecute for an offence under the Benami Transactions Act.

61. Section 56 of the Act repeals section 281A of the Income Tax Act, 1961.

62. Section 60 provides that the provisions of the Act shall be in addition to, and not, save as hereinafter expressly provided, in derogation of any other law for the time being in force.

63. Thus, while proceedings under the Benami Transactions Act may be taken against the person in respect of any benami transaction or arrangement and the benami property may be attached and confiscated and he may be prosecuted under the penal provisions of that Act, he can still be proceeded against under the provisions of the Income Tax Act, in respect of the undisclosed income employed to purchase any benami property.

64. To deal with the menace of benami transactions and to ensure that an assessee also discloses properties in which he has a beneficial interest, sub-section (6) of section 139 of the Income Tax Act, has been amended vide Finance Act, 2015. The amended sub-section (6) lays down that the prescribed form of the returns referred to in sub-sections (1) and (3) of this section and in clause (i) of sub-section (1) of section 142 shall, in such cases as may be prescribed, shall, in such cases as may be prescribed, require the assessee to furnish the particulars of income exempt from tax, assets of the prescribed nature and value, held by him as a beneficial owner or otherwise or in which he is a beneficiary, his bank account and credit card held by him, expenditure exceeding the prescribed limits incurred by him under prescribed heads and such other outgoings as may be prescribed.

64.1 Furthermore, significant beneficial owner disclosure under Companies Act, 2013 also helps in uncovering benami holdings. Section 89 of the Companies Act provides for declaration in respect of beneficial interest in any share. Sub-section (1) thereof provides that where the name of a person is entered in the register of members of a company as the holder of shares in that company but who does not hold the beneficial interest in such shares, such person shall make a declaration within such time and in such form as may be prescribed to the company specifying the name and other particulars of the person who holds the beneficial interest in such shares. Sub-section (2) thereof provides that every person who holds or acquires a beneficial interest in share of a company shall make a declaration to the company specifying the nature of his interest, particulars of the person in whose name the shares stand registered in the books of the company and such other particulars as may be prescribed. Sub-section (6) of section 89 provides that where any declaration under this section is made to a company, the company shall make a note of such declaration in the register concerned and shall file, within thirty days from the date of receipt of declaration by it, a return in the prescribed form with the Registrar in respect of such declaration with such fees or additional fees as may be prescribed. Thus, section 89 of the Companies Act casts an obligation on both the benamidar as well as the person who holds beneficial interest to file declarations in respect of beneficial interest in any share and a further obligation upon the company to file a return with the Registrar in respect of such declaration.

64.2 Section 90 of the Companies Act provides for Register of significant beneficial owners in a company. Sub-section (1) thereof provides that every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests, of not less than twenty-five per cent or such other percentage as may be prescribed, in shares of a company or the right to exercise, or the actual exercising of significant influence or control as defined in clause (27) of section 2, over the company (referred to as “significant beneficial owner”), shall make a declaration to the company, specifying the nature of his interest and other particulars, in such manner and within such period of acquisition of the beneficial interest or rights and any change thereof, as may be prescribed. Sub-section (2) provides that every company shall maintain a register of the interest declared by individuals under sub-section (1) and changes therein which shall include the name of individual, his date of birth, address, details of ownership in the company and such other details as may be prescribed. Sub-section (4) of section 90 casts an obligation on every company to file a return of significant beneficial owners of the company and changes therein with the Registrar containing names, addresses and other details as may be prescribed within such time, in such form and manner as may be prescribed. Sub-section (10) provides that if any person fails to make a declaration as required under sub-section (1), he shall be punishable with fine which shall not be less than one lakh rupees but which may extend to ten lakh rupees and where the failure is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the failure continues. Sub-section (12) provides that if any person wilfully furnishes any false or incorrect information or suppresses any material information of which he is aware in the declaration made under this section, he shall be liable to action under section 447.

65. The Prevention of Money-Laundering Act, 2002 seeks to prevent money-laundering which in plain terms means the preventing legitimising of the money earned through illegal and criminal activities by investments in movable and immoveable properties. The need for a law on the subject has been the focus of the Governments world over in recent times and that of the United Nations also because the scourge of money-laundering has threatened to wreck the foundations of the States and even undermine their sovereignty. The terrorist outfits and smuggling gangs have been depending on money laundering to finance their operations and it is known that moneys for such operations are arranged through laundering. Many such illegal outfits have set up ostensibly legal front organisations. The money generated through illegal activities is ultimately inducted and integrated with legitimate money and its species like movable and immovable property. Thus certain economic offences, commercial frauds, crimes like murder, extortion have contributed to money laundering in a significant manner. The perpetrators of such heinous crimes should not be allowed to enjoy the fruits of the money that passed such activity and therefore the object of the enactment is to deprive the property which is related to the proceeds of specific crimes listed in the Schedule to the Act.

66. The Money Laundering Act is a criminal law which came into force from 1.7.2005. Under the scheme of the Act, money laundering linked to the predicate scheduled offences is liable for punishment. A large number offences in about 30 different statutes are Scheduled Offences under the Money Laundering Act. Section 3 of the Money Laundering Act defines the offence of money laundering. Once the agency concerned with a predicate scheduled offence registers a case, Enforcement Directorate takes up investigations under the Money Laundering Act to ascertain the proceeds of crime generated from the predicate offence booked by the Law Enforcement Agency. In case, a prima-facie case of generation of proceeds of crime and laundering thereof is made out, section 17 of the Money Laundering Act provides for seizure and section 5 thereof provides for attachment of properties involved in money laundering. The action of seizure and attachment is required to be adjudged by the Adjudicating Authority under section 10 of the Money Laundering Act. The persons, both natural and legal entities, who are accused of the offence of money laundering linked to the scheduled offence, can be prosecuted in Special Courts as per section 44 of the Money Laundering Act. Section 4 of the Money Laundering Act provides for rigorous imprisonment of minimum three years which can extend up to seven years and a fine of up to Rs.5 lakhs on conviction by the Court of persons who have been accused of the offence of money laundering. The conviction can extend up to 10 years if the offence of money laundering is linked to narcotic trafficking. The property attached under the Money Laundering Act can be confiscated by the Adjudicating Authority under section 8 thereof after the conviction by the Court of the accused in the trial for scheduled offence. Chapter IX of the Money Laundering Act provides for reciprocal arrangements for processes and assistance for transfer of accused persons with Contracting States and the procedure for seizure, attachment and confiscation of assets found lying overseas. India has signed Mutual Legal Assistance Treaties (MLAT) with 42 countries for cooperation in criminal matters and the home ministry is the designated ‘central authority’ for the country for it. The home ministry has also taken steps to enhance and streamline the process of international mutual legal assistance in criminal matters.

67. Section 12 of the Money Laundering Act requires financial sector entities (banking companies, financial institutions and intermediaries) to verify the identity of their clients, maintain records and report suspicious transactions / cash transactions (STR / CTR) to the Financial Intelligence Unit – India. The Director, Financial Intelligence Unit – India is empowered to conduct inquiry and impose sanctions against financial sector entities for non-compliance with section 12. Financial Intelligence Unit – India conducts analysis of information received under the Money Laundering Act and in appropriate cases disseminates information to relevant intelligence / enforcement agencies, which include Central Board of Direct Taxes, Central Board of Excise & Customs, Enforcement Directorate, Narcotics Control Bureau, Central Bureau of Investigation, Intelligence agencies and regulators of financial sector.

68. Thus information received under the Money Laundering Act is also used by the income tax authorities to unearth undisclosed income.

69. To strengthen the provisions of the Money Laundering Act, amendments were carried out in 2009. These amendments have introduced new definitions to clarify and strengthen the Act and strengthened provisions related to attachment of property involved in money laundering and its seizure and confiscation. More offences have been added in Parts A and B of the Schedule to the Act, including those pertaining to insider trading and market manipulation as well as smuggling of antiques, terrorism funding, human trafficking other than prostitution, and a wider range of environmental crimes. A new category of offences with cross-border implications has been introduced as Part C. Part C has been amended vide Act 22 of 2015 with effect from 1.7.2015 whereby the offences of wilful attempt to evade any tax, penalty or interest referred to in section 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition Act, 2015 has been inserted. Thus, an assessee who has not disclosed his foreign income in his return of income for any assessment year commencing from 1st April, 2016 or any undisclosed asset located outside India acquired at any point of time, is liable to be assessed to tax under the provisions of the Black Money Act and in case of any wilful attempt in any manner to evade any tax, penalty and interest chargeable under the Act is liable to punishment under section 51 of the Act, which is also a scheduled offence under the Money Laundering Act. As noticed earlier, sub-section (12) of section 90 of the Companies Act provides that if any person wilfully furnishes any false or incorrect information or suppresses any material information of which he is aware in the declaration made under this section, he shall be liable to action under section 447. Section 447 of the Companies Act makes provision for punishment of fraud and is a scheduled offence under Part A of the schedule to the PMLA. Thus, stringent provisions have been made to ensure due compliance with the provisions of section 90 of the Companies Act by making section 447 thereof a scheduled offence.

70. Money laundering has been defined under section 3 of the Money Laundering Act to have the meaning assigned to it in section 3.

71. Section 3 of the Money Laundering Act bears the heading Offence of money-laundering and provides that whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering. The Explanation thereto which came to be inserted with effect from 1.8.2019 clarifies that (i) a person shall be guilty of offence of money laundering if such person is found to have directly or indirectly attempted to indulge or knowingly assisted or knowingly is a party or is actually involved in one or more of the following processes or activities connected with proceeds of crime namely –

(a) Concealment; or

(b) Possession; or

(c) Acquisition ; or

(d) Use; or

(e) Projecting as untainted property; or

(f) Claiming as untainted property;

in any manner whatsoever.

It is further clarified that the process or activity connected with proceeds of crime is a continuing activity and it continues till such time a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or acquisition or use or projecting it as untainted property or claiming it as untainted property.

72. Thus, any person who in any manner whatsoever is connected with proceeds of crime is guilty of the offence of money laundering.

73. The expression “proceeds of crime” has been defined under clause (u) of section 2 of the Act to mean any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property or where such property is taken or held outside the country; then the property equivalent in value held within the country or abroad. The Explanation thereto clarifies that proceeds of crime include property not only derived or obtained from the scheduled offence but also any property which may directly or indirectly be derived or obtained as a result of any criminal activity relatable to the scheduled offence.

74. Property is defined under clause (v) of section 2 of the Act to mean any property or assets of every description, whether corporeal or incorporeal, movable or immovable, tangible or intangible and includes deeds and instruments evidencing title to, or interest in, such property or assets, wherever located. The Explanation thereto clarifies that the term property includes property of any kind used in the commission of an offence under the Act or any of the scheduled offences.

75. Thus, any property connected with a scheduled offence falls within the ambit of the expression proceeds of crime and any person involved in any process connected therewith is guilty of the offence of money laundering. Accordingly, a person who is in any manner connected with the proceeds of crime derived by committing the offence under section 51 of the Black Money Act also commits the offence of money laundering and is amenable to the other provisions of the Money Laundering Act.

76. Section 4 of the Money Laundering Act provides for the punishment for money-laundering. Section 5 provides for attachment of property involved in money laundering. Sub-section (1) thereof provides for provisional attachment of such property which the authority specified therein has reason to believe on the basis of material in his possession that any person is in possession of any proceeds of crime; and such proceeds of crime are likely to be concealed, transferred or dealt with in any manner which may result in frustrating any proceedings relating to confiscation of such proceeds of crime under Chapter III of the Act. The proviso thereto provides that no such attachment shall be made unless a report has been forwarded to the Magistrate under section 173 of the Criminal Procedure Code, 1973 in relation to the scheduled offence or a complaint has been filed before a Magistrate or court taking cognizance of the scheduled offence.

77. While the authorities under the Money Laundering Act have the powers of attachment, summoning, production of documents and evidence etc., access to information, to impose fine, power of survey, search and seizure and freezing of property, search of persons, to arrest, retention of property, retention of records, and adjudication for the purpose of attachment; the offence under section 4 of the Money Laundering Act and any scheduled offence connected to the offence are required to be tried by Special Courts constituted under section 43 of the Act in the manner provided under section 44 thereof. Sub-section (5) of section 8 of the Money Laundering Act provides that where on conclusion of a trial of an offence under the Act, the Special Court finds that the offence of money-laundering has been committed, it shall order that such property involved in the money-laundering or which has been used for commission of the offence of money-laundering shall stand confiscated to the Central Government.

78. Thus, any property involved in the money laundering or which has been used for commission of the offence of money-laundering would be confiscated to the Central Government. Therefore, apart from punishment for commission of the scheduled offence and the offence of money laundering, the property involved in money laundering or used in the commission of such offence would also be confiscated.

79. Thus, by way of money laundering there is an attempt or actual involvement in converting proceeds of crime which would be in the nature of income which is not disclosed under the Income Tax Act, to untainted property, namely property which ostensibly appears to have been disclosed under the Income Tax Act.

80. As discussed earlier black money is also generated by suppressing profits, stocks, over-invoicing, under-invoicing, evasion of tax under the commercial tax statutes like the sales tax Acts, the Stamp Act, service tax act, GST etc. To curb such evasion of taxes, various safeguards have been provided under the CGST Act.

81. Section 22 of the CGST Act provides that every supplier shall be liable to be registered under the Act in the State or Union Territory, other than special category of States, from where he makes a taxable supply of goods or services or both, if his aggregate turnover in a financial year exceeds twenty lakhs.

82. Section 51 of the CGST makes provision for tax deduction at source whereby a department of the Central Government or State Government, or local authority or Governmental agencies or such persons or categories of persons as may be notified who are referred to as deductors to deduct tax at the rate of one per cent from the payment made or credited to the supplier who is called the deductee of taxable services or both, where the total value of such supply under a contract, exceeds two lakh and fifty thousand rupees.

81. At this juncture, before proceeding further with the relevant provisions of the CGST Act, it would be necessary to refer to section 139AA of the Income Tax Act, which provides for quoting of Aadhaar number in the application for allotment of Permanent Account Number as well as in the return of income. It further provides that every person who has been allotted Permanent Account Number as on the 1st day of July, 2017, and who is eligible to obtain Aadhaar number, shall intimate his Aadhaar number to such authority in such form and manner as may be prescribed, on or before a date to be notified by the Central Government in the Official Gazette. The proviso thereto provides that in case of failure to intimate the Aadhaar number, the Permanent Account Number allotted to the person shall be deemed to be invalid and the other provisions of this Act shall apply, as if the person had not applied for allotment of Permanent Account Number.

82. To understand the significance of linking the Permanent Account Number with Aadhaar number, it may be germane to refer to the following extract from the decision of the Supreme Court in Binoy Viswam v. Union of India, (2017) 7 SCC 59, wherein the court in the context of section 139AA of the Income Tax Act, has observed thus:

“53. Even a cursory look at the aforesaid provision makes it clear that in the application forms for allotment of Permanent Account Number (for short “PAN”) as well as in the income tax returns, the assessee is obliged to quote Aadhaar number. This is necessitated on any such applications for PAN or return of income on or after 1-7-2017, which means from that date quoting of Aadhaar number for the aforesaid purposes becomes essential. Proviso to sub-section (1) gives relaxation from quoting Aadhaar number to those persons who do not possess Aadhaar number but have already applied for issuance of Aadhaar card. In their cases, the Enrolment ID of Aadhaar application form is to be quoted. It would mean that those who would not be possessing Aadhaar card as on 1-7-2017 may have to necessarily apply for enrolment of Aadhaar before 1-7-2017.

54. The effect of this provision, thus, is that every person who desires to obtain PAN card or who is an assessee has to necessarily enrol for Aadhaar. It makes obtaining of Aadhaar card compulsory for those persons who are income tax assessees. Proviso to sub-section (2) of Section 139-AA of the Act stipulates the consequences of failure to intimate the Aadhaar number. In those cases, PAN allotted to such persons would become invalid not only from 1-7-2017, but from its inception as the deeming provision in this proviso mentions that PAN would be invalid as if the person had not applied for allotment of PAN i.e. from the very beginning. Sub-section (3), however, gives discretion to the Central Government to exempt such person or class or classes of persons or any State or part of any State from the requirement of quoting Aadhaar number in the application form for PAN or in the return of income.

59. Mr Rohatgi thereafter read extensively from the counter-affidavit filed on behalf of the Union of India detailing the rational and objective behind introduction of Section 139-AA of the Act. He submitted that the provision aims to achieve, inter alia, the following objectives:

59.1. This provision was introduced to tackle the problem of multiple PAN cards to same individuals and PAN cards in the name of fictitious individuals are common medium of money laundering, tax evasion, creation and channelling of black money. PAN numbers in name of firm or fictitious persons as directors or shareholders are used to create layers of shell companies through which the aforesaid activities are done. A de-duplication exercise was done in the year 2006 and a large number of PAN numbers were found to be duplicate. The problem of some persons fraudulently obtaining multiple PANs and using them for making illegal transactions still exists. Overall 11.35 lakh cases of duplicate PAN/fraudulent PAN have been detected and accordingly such PANs have been deleted/deactivated. Out of this, around 10.52 lakh cases pertain to individual assessees. Total number of Aadhaar for individuals exceeds 113 crores whereas total number of PAN for individuals is around 29 crores. Therefore, whereas the Aadhaar Act applies to the entire population, the Income Tax Act applies to a much smaller subset of the population i.e. the taxpayers. In order to ensure One PAN to One Person, Aadhaar can be the sole criterion for allotment of PAN to individuals only after all existing PAN are seeded with Aadhaar and quoting of Aadhaar is mandated for new PAN applications. The counter-affidavit filed by the Union of India also gives the following instances of misuse of PAN:

(a) In NSDL scam of 2006, about one lakh bogus bank and demat accounts were opened through use of PANs. The real PAN owners were not aware of these accounts.

(b) As banks progressively started insisting on PANs for opening of bank accounts, unscrupulous operators managed multiple PANs for providing entries and operating undisclosed accounts for making financial transactions.

(c) Entry operators manage a large number of shell companies using duplicate PANs or PANs issued in the name of dummy directors and name lenders. As the persons involved as bogus directors are usually the same set of persons, linkage with Aadhaar would prevent such misuse. Further, it will also be expedient for the enforcement agencies to identify and red flag such misuses in future.

(d) Cases have also been found where multiple PANs are acquired by a single entity by dubious means and used for raising loans from different banks. In one such case at Ludhiana, multiple PANs were found acquired by a person in his individual name as well as in the name of his firms by dubious means. During investigation, he admitted to have acquired multiple PANs for raising multiple loans from banks and to avoid adverse CIBIL information. Prosecution has been launched by the Income Tax Department in this case under Sections 277-A, 278, 278-B of the Act in addition.

59.2. To tackle the problem of black money, Mr Rohatgi pointed out that the Second Report of the Special Investigation Team (SIT) on black money, headed by Justice M.B. Shah (Retd.), after observing the menace of corruption and black money, recommended as follows:

“At present, for entering into financial/business transactions, persons have option to quote their PAN or UID or passport number or driving licence or any other proof of identity. However, there is no mechanism/system at present to connect the data available with each of these independent proofs of ID. It is suggested that these databases be interconnected. This would assist in identifying multiple transactions by one person with different IDs.”

The SIT in its Third Report has recommended the establishment of a Central KYC Registry. The rational for the SIT recommendations was to prove a verifiable and authenticable identity for all individuals and Aadhaar provides a mechanism to serve that purpose in a federated architecture without aggregating all the information at one place. The Committee headed by the Chairman, CBDT on “Measures to tackle black money in India and abroad” reveals that various authorities are dealing with the menace of money laundering being done to evade taxes under the garb of shell companies by the persons who hold multiple bogus PAN numbers under different names or variations of their names, providing accommodation entries to various companies and persons to evade taxes and introduce undisclosed and unaccounted income of those persons into their companies as share applications or loans and advances or booking fake expenses. These are tax frauds and devices which are causing loss to the revenue to the tune of thousands of crores.

59.3. Another objective is to curb the menace of shell companies. It is submitted in this regard that PAN is a basis of all the requirements in the process of incorporation of a company. Even an artificial juridical person like a company is granted PAN. It is required as an ID proof for incorporation of a company, applying for DIN, digital signature, etc. PAN is also required for opening a bank account in the name of a company or individuals. Basic documents required for obtaining a PAN are ID proof and address proof. It has been observed that these documents which are a basis of issuance of PAN could easily be forged and, therefore, PAN cards issued on the basis of such forged documents cannot be genuine and it can be used for various financial frauds/crime. Aadhaar will ensure that there is no duplication of identity as biometric will not allow that. If at the time of opening of bank accounts itself, the more robust identity proof like Aadhaar had been used in place of PAN, the menace of mushrooming of non-descript/shell/jamakharchi/bogus companies would have been prevented. There is involvement of natural person in the complex web of shell companies only at the initial stage when the shareholders subscribe to the share capital of the shell company. After that many layers are created because there is company-to-company transaction and much more complex structure of shell company compromising the financial integration of nation is formed which makes it almost impossible to identify the real beneficiary (natural person) involved in these shell companies. These shell companies have been used for purpose of money laundering at a large scale. The fake PAN cards have facilitated the enormous growth of shell companies which were being used for layering of funds and illegal transfer of such funds to some other companies/persons or parked abroad in the guise of remittances against import. The share capital of these shell companies are subscribed by fake shareholders through numerous bank accounts opened with the use of fake PAN cards at the initial stage.

Thus, the purpose behind introducing section 139AA of the Income -tax Act is to check the menace of black money as well as money laundering and also to widen the income tax net so as to cover those persons who are evading payment of tax. This provision was required to tackle the problem of multiple PAN cards to same individuals and PAN cards in the name of fictitious individuals are common medium of money laundering, tax evasion, creation and channelling of black money since PAN numbers in name of firm or fictitious persons as directors or shareholders are used to create layers of shell companies through which the aforesaid activities are done.

83. Section 203A of the Income -tax Act, makes provision for tax deduction and collection account number and provides that (1) Every person, deducting tax or collecting tax in accordance with the provisions of this chapter, who has not been allotted a tax deduction account number or, as the case may be, a tax collection account number, shall, within such time as may be prescribed, apply to the Assessing Officer for the allotment of a “tax deduction and collection account number”.

84. This requirement of having a Permanent Account Number or tax deduction and collection account number under the Income Tax Act is also introduced in the CGST Act.

85. Section 25 of the CGST Act provides for procedure for registration. Sub-section (6) thereof provides that every person shall have a Permanent Account Number issued under the Income Tax Act, 1961 in order to be eligible for grant of registration. The proviso thereto provides that a person required to deduct tax under section 51, may have in lieu of a Permanent Account Number, a Tax Deduction and Collection Account

Number issued under the said Act in order to be eligible for grant of registration.

86. Sub-section (6A), (6B), (6C) and (6D) have been inserted in section 25 of the CGST Act by Finance Act, 2019.

Sub-section (6A) provides that every registered person shall undergo authentication, or furnish proof of possession of Aadhaar number, in such form and manner and within such time as may be prescribed. The first proviso thereto postulates that if an Aadhaar number is not assigned to the registered person, such person shall be offered alternate and viable means of identification in such manner as the Government may, on the recommendations of the Council prescribe. The second proviso ordains that in case of failure to undergo authentication or furnish proof of possession of Aadhaar number or furnish alternate and viable means of identification, registration allotted to such person shall be deemed to be invalid and the other provisions of the Act shall apply as if such person does not have a registration.

87. Sub-section (6B) of section 25 provides that on and from the date of notification, every individual shall, in order to be eligible for grant of registration, undergo authentication, or furnish proof of possession of Aadhaar number, in such manner as the Government may, on recommendations of the Council specify in the said notification. The proviso thereto postulates that if an Aadhaar number is not assigned to the registered person, such person shall be offered alternate and viable means of identification in such manner as the Government may, on the recommendations of the Council prescribe.

88. Sub-section (6C) of section 25 which is extremely significant provides that on and from the date of notification, every person, other than an individual, shall in order to be eligible for grant of registration, undergo authentication or furnish proof of possession of Aadhaar number of the Karta, Managing Director, whole-time Director, such number of partners, Members of Managing Committee of Association, Board of Trustees authorised representative, authorised signatory and such other class of persons, in such manner, as the Government may, on the recommendations of the Council specify in the said notification. There is similar proviso as contained in sub-section (6A) and (6B).

89. Thus, to be eligible for registration under the CGST Act, a person should have a Permanent Account Number issued under the Income Tax Act, 1961 and a person required to deduct tax under section 51, may have in lieu of a Permanent Account Number, a Tax Deduction and Collection Account Number issued under the said Act in order to be eligible for grant of registration.

90. The registered person is also required to undergo authentication or produce proof of Aadhaar number. In case of HUF, companies, trusts, association of persons etc. the karta, managing director, member of committee, partner etc. as the case may be, is required to undergo authentication or produce proof of Aadhaar number.

91. Section 16 of the CGST Act provides the eligibility conditions for taking input tax credit and provides that (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person. Sub-section (3) thereof provides that where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, the input tax credit on the said tax component shall not be allowed. Thus, a person is not entitled to avail the benefit of both depreciation on the tax component of capital goods and plant and machinery under the Income Tax Act as well as input tax credit on such tax component.

92. Under Section 150 of the CGST Act, 2017, the government mandates the filing of Information Returns under GST for certain class of persons. Information returns are not tax returns. They are rather tax documents which are used to report certain business transactions. The Information returns under GST are required to be filed by only a certain class of people as defined in the Act

If any person (out of the ones stated below) is responsible for maintaining any of the following, he would be required to file an Information Return under GST:

1. Registration records

2. Statement of accounts

3. Periodic Returns

4. Details of tax payment

5. Other details of the transaction of goods or services

6. Transactions relating to bank account

7. Transactions relating to consumption of electricity

8. Transactions of purchases

9. Transactions of sales

10. Exchange of goods or property

11. Right or interest in a property

Any income tax authority also falls within the class of persons obligated to file Information Returns.

93. After implementation of GST, the GST officers now have a database of Income Tax assessees and Income Tax officers have the benefit of the facts and figures reported under the GST law. Information sharing is made quite easy. The Government has launched GST with a dedicated digital system, called GST Network (GSTN), to manage all GST related things online from a single portal. This also makes it simple for businesses to maintain proper tax records and calculate their tax liability correctly. Income tax department can also easily figure out the tax liability of a particular person or business by comparing their returns for the details of total turnover to find out any discrepancy and catch tax evaders.

94. In view of the fact that PAN based registration has been made mandatory, the value of total turnover reported in all the returns under GST, whether it is CGST or SGST will be reported to the Income tax department by the GSTN.

95. After implementation of GST law it is likely that there will be a huge fall in the tax evasion. Quite often businesses report a different value of stock in their annual VAT return as compared to their Income Tax return. This valuation is sometimes inflated to show higher profits to maintain the credit score against the loans taken from the bank, while on the other hand, many entities deflate the value of stock to attract less tax liability. Under the GST law, every movement of taxable goods having invoice value above Rs 50,000/- is subject to generation of E-way bill. Further every sale invoice will also get uploaded on the GST portal. These invoices will, in turn, be referred to the buyer. Insofar as returns filed under the VAT law or CST laws are concerned, they do not require validation from the buyer. A major implication of this information sharing between Income tax and GST departments would be that the tax evaders who window dress their books at the year end to lessen their tax liability will find it harder to do so. Such actions or window dressing were possible before as the Income Tax Department did not have any access to the data which is filed under the state VAT laws. However, under the new regime, GSTN will be the single repository to all these transactions and the Income Tax Department will have a clear picture of the total sales and purchases, and eventually the overall profitability, of every business. So it is clear that an upward assessment under one law is going to impact the liability of the assessee under the other law as well.

96. Thus, while the Black Money Act, the Benami Transactions Act and the Money Laundering Act, though they operate in different fields, have all been enacted with the object of dealing with the menace of black money, namely money that is unaccounted for, wherein taxes have not been paid on that money, the taxing statutes like the Income Tax Act and the CGST Act contain provisions to curb evasion of tax. Moreover, both these taxing statutes as well as the Companies Act contain provisions for detection of Benami properties and for checking generation of black money.

The information regarding the methods of generation of black money is gathered from the Black Money Committee Report, 2012.

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