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A virtual blackhole
March, 17th 2007
IT raids

Statistically, a tax offender has a greater chance of being injured in a traffic accident than being convicted for the most brazen tax violation. If caught, there are enough escape routes.

Last week, the nation was stunned at the magnitude of Hasan Ali's unaccounted funds. The tax evasion was estimated at Rs 35,000 crore. Hasan Ali, a race-horse owner, was reportedly involved in money-laundering of huge funds traceable to top politicians. This single case involves more unaccounted funds than has been cumulatively reported in income-tax raids over the last decade.

Every month there is some newspaper report or other about unearthing of huge unaccounted funds and disproportionate assets found with bureaucrats. After some time, nothing further is heard about them. Similarly, income-tax raids on industrial houses or film producers are reported periodically but nothing is known about these cases.

Tough on evaders

In 1975, the Wanchoo Committee recommended stringent punishment for tax evaders. It pointed out that deterrent penal provision would be effective for curbing the menace of black-money. To implement this recommendation, several sections were introduced in the Income-Tax Act, 1961 stipulating mandatory imprisonment. Under Section 276C, even if the tax evaded is Rs 1 lakh only, the assessee can be imprisoned for a term which may extend up to seven years but which shall not be less than six months. Similar provisions have been introduced in other fiscal statutes.

Apart from mandatory imprisonment, there are several departures from basic principles of criminal law. It is well known maxim that every man is innocent till proved guilty. The burden is on the prosecution to prove the guilt of the accused. But in all fiscal statutes, if a company is found to have evaded tax or duty, every director or officer who is in charge of the conduct of the business is "deemed" to be guilty. The burden is on the individual director to establish his innocence; and this must be established beyond reasonable doubt.

No Mens Rea relief

Another principle of criminal law is that there must be deliberate intent to violate the law. This is technically called the "culpable mental state" or mens rea. But for tax evaders, there is no such relief. The law presumes that every tax evader has a guilty mind. The accused-assessee has to prove that he did not have any intention to violate the law. In practice, these draconian provisions are seldom implemented. In a country where tax evasion is the rule rather than the exception, the Department files very few prosecutions.

In the last three decades, not a single large company or its directors have been prosecuted for tax evasion. The few reported cases invariably concern small firms and unknown companies. How many film producers or contractors have been convicted and imprisoned for tax evasion? Thus, though the statutory provisions have been amended to make prosecution and conviction of tax evaders relatively easy, the Department has consistently refused to take advantage of the legal infrastructure.

The prosecution machinery lies virtually unused. In the case of civil servants as well, not even half-a-dozen senior IAS or IRS officers have been sentenced for possessing unaccounted wealth. It is also common knowledge that corruption is widespread in most government departments and the rot is very deep.

The amounts that are reported in the press are staggering and there is no information of what happens to these cases. Is any prosecution launched either under the Income-Tax Act or the Prevention of Corruption Act? Indeed, there have been instances where the most brazen acts of corruption have been swept under the carpet and the officer has even been reinstated.

The Prevention of Corruption Act has been amended to make it easier to prosecute and convict officers found with ill-gotten wealth. The amendments are again rarely used against senior bureaucrats. Given the political will, it will not be difficult to prosecute and punish officers found with disproportionate wealth.

Contempt for Law

The lack of prompt prosecution creates contempt for the law. Repeated voluntary disclosure schemes make a mockery of stringent statutory provisions. Statistically, a tax offender has a greater chance of being injured in a traffic accident than being convicted for the most brazen tax violation. If he is caught, there are enough escape routes including large-scale corruption within the Revenue Departments. Recently, the Chairman of the Korean giant Hyundai was sentenced to three years imprisonment for embezzlement of funds. This would be unheard of in India. It is impossible to imagine a Chairman or a director of any major company even being prosecuted for income-tax or excise duty evasion.

In the end, Hasan Ali will soon become just another statistic. It is the same story: Income-tax raid - huge cash recovery media blitz case hushed up. The blackhole of tax raids will ensure that important evidence mysteriously disappears.

Arvind P. Datar
(The author is a Senior Advocate of the Madras High Court.)

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