The Income-Tax (I-T) department suspects that several corporates have made bogus claims of tax exemption on units set up in backward areas.

The Income-Tax Act Section 80 IB gives a five-year tax holiday to units in these regions. The provision is aimed at attracting investments in these pockets. However, there is a distinct feeling among authorities that this is being widely misused.

Rao Ranvijay Singh, director general, investigation, Income-Tax, Mumbai, said, We are keeping a close watch and it would be difficult for anybody to get away with such unethical practices.

A recent survey on a pharmaceutical company with operations across the country revealed that it has been routing most of its profits through an associate company set up in Jammu, a backward region. The survey revealed that the company sold raw materials to its associate firm in Jammu at a much lower price to facilitate diversion of profits from these operations elsewhere to the associate company in Jammu.

Simultaneously, the company had booked all marketing and administrative expenses of the associate company, helping in propping up profits of the Jammu Company. Even the reimbursement of Rs 33 crore expenses made by the Jammu entity was wrongly classified for claiming tax deduction. Such transactions can be done either by an associate firm or a division of the company. The investigation wing of the

I-T department has put out an alert, asking tax offices to keep a watch on advance tax payments and returns filed by pharma firms, especially those having units in backward areas like Himachal Pradesh, Uttaranchal and Jammu. I-T is also homing in on corporate using the bogus billing system to book artificial expenses and cut margins to lower the tax outgo.