Strict punishment in offing for 3.38 lakh shell company owners: Centre to deploy DRI, FIU, CBDT, CBI for probe; ED to verify how funds are managed, laundered

New Delhi: From chawls in Mumbai to Kolkata’s Lal Bazar to nondescript residential colonies of Ghaziabad, shell companies are being increasingly deployed for benami deals, hiding real source of funds, evading taxes and assisting in making genuine ownership information obscure. After getting reports from the Income Tax department and the Enforcement Directorate (ED), along with a stack of documents as evidence, the government has decided to unleash Directorate of Revenue Intelligence (DRI), Financial Intelligence Unit (FIU), Central Board of Direct Taxes (CBDT), Central Bureau of Investigation (CBI) and Ministry of Corporate Affairs to carry out discreet enquiries into financial affairs of suspected shell companies in a nationwide crackdown. The Enforcement Directorate has been told to verify how the funds of these companies are managed, laundered and what could be best way to expedite their prosecution. Firstpost reviewed a confessional statement of Kolkata based shell company operator, who had started Salona Barter, Appeal Agencies and about two dozen others, revealing that he incorporated and ran several entities to provide accommodation entries to various beneficiaries. This simply goes on to show that these companies had no genuine business activity and were being used as conduit to route back anonymous funds of real beneficiaries. The similar modus operandi has been used for 25 other such companies which are operating from one room office at the 14, Hare Street in Kolkata. [caption id=“attachment_3111798” align=“alignleft” width=“380”] Representational image. PTI[/caption] Reports related to 17 such companies in Mumbai and 13 companies, which operate from a single room in Surya Nagar in Ghaziabad, have also raised alarm over the fact that these companies are showing zero or low turnover, as well as, zero return of income. However, at the same time they also have large credits in bank accounts (for several months in a year) which is immediately followed by the entire amount being debited. The government documents said there is no specific law that debars companies from having the same address, however, law enforcement and intelligence agencies should be informed about such entities in order to examine whether they were established for some dubious purpose.

So far, 3.38 lakh shell companies has been identified and de-registered by the Ministry of Corporate Affairs. A maximum of 75,000 companies in Delhi, 73,000 in Mumbai, 46,000 in Andhra Pradesh and Telangana together, and 16,000 in Kolkata were identified as shell entities which were used for tax evasion, obscuring real ownership, money laundering and purchase of benami properties. Last month alone thousands of companies have been ordered shut.

Since there is no official definition of a “shell company” under the existing laws, government feels that culprits involved in abnormal transaction should be penalised immediately once ED and intelligence agencies submit their reports before taking the long route of filing legal cases in the courts. Efforts are also being made to ensure that pending cases with Registrar of Companies (RoCs) are disposed of in time-bound manner. Such action will be based on red flag indicators which have been finalised by the Task Force on Shell Companies, which is co-chaired by Revenue Secretary, and Secretary, Ministry of Corporate Affairs. Case of the Lilac Suppliers Private Limited An investigation in the alleged shell company M/S Lilac Suppliers Private Limited unravels the interesting methods adopted by these operators. The company on the paper is housed at P-25, Princep Street in Kolkata. The probe revealed that building has three floors. A shop, styled as Bharat Auto Agency, is on the ground floor while the entire third floor is used for residential purpose. None of the neighbours were able to shed any light on M/S Lilac Suppliers or owners of the company. The person who was occupying the third floor did not know about existence of such a company in that building. “In course of inquiry, local people were examined and sources were engaged to trace out the said company M/S Lilac Suppliers and its owners and directors. It was revealed that many such companies including M/S Lilac Suppliers have neither any office nor any proper business activities. It was further revealed during enquiry that owner of M/S Lilac Suppliers and others such companies actually float these type of bogus and non-existing companies for running various kinds of financial activities including fictitious investment, property trading, real estate business and the owners of M/S Lilac Suppliers along with their unknown associates might have formed an active organized racket which usually float apparently bogus companies to carry out illegal investments,” the investigation report said. The actual motive, investigation further revealed, is to run illegal financial activities to hide their illegitimate income and to cheat the government. In order to deal with such cases, government will also put in place Artificial Intelligence mechanism for early warning system which will act as a repository of information on companies under the scanner of enforcement agencies. A total 16 alerts will be used for identification and action against dubious companies including those reporting zero turnover, defaulting in filling of statutory returns, showing high reserves and surpluses, showing share as premium but realizing insignificant turnover, huge investment in shares or mutual funds disproportionate to the business of the company, showing disproportionate cash, non-maintenance of registered office of the company, companies having same registered office address and majority of share capital of company held by Private Limited Companies. “These red flag indicators would be able to generate a more accurate list of Shell firms. Companies registered at the same address coupled with association of same professionals in the incorporation or common directors indicates strong attributes of a Shell company. Appropriate action should be taken against all such persons who have been violating the law,” the government documents said. Another important challenge for the enforcement agencies is to identify the shell companies which were incorporated as subsidiary firm to carry out certain business transactions but were closed down without disposing off the liability. The government documents said lifting the corporate veil is crucial in the crackdown against shell entities. “Shell companies are incorporated as subsidiary companies for carrying out some business such as, contractual work and if there is any loss, such companies would not be in a position to repay the loss. In such cases, defense is always taken that holding company is not liable to pay any amount,” the documents said further recommending that there should be a specific provision that holding company would be liable for the loss incurred by the subsidiary company, in case subsidiary company is not in a position to pay its liability.