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Corruption– Mr. Blackappa, an officer in government service, demands Rs.1 lakh from Mr.Shortcut for doing a favour (say to approve the building sanction plan). Mr. Shortcut hands over Rs.1 Lakh to the officer in cash (no one takes a bribe in cheque/demand draft!). This money will not be accounted in the books of Blackappa and he won’t pay any taxes on it (it may be good to legalize bribe and collect taxes on it) Count # 1 – Rs.1,00,000 black money is generated.
Sale of property – Mr. Greedy buys a property from Mr. Cheat for a total sale value of Rs.50 Lakhs. He takes Rs.35 Lakhs in cheque/DD and the balance in cash. He pays stamp duty on Rs.35 Lakhs, and the seller pays capital gain tax considering the value as Rs.35 Lakhs. Count # 2 – Rs.15,00,000 black money is generated.
Sale of goods/services without invoice – You buy a sofa set from a furniture dealer. What is the price? The shopkeeper will tell “the price is Rs.60000 plus taxes at 14.5%”. Any discount? The answer from him will be “Yes madam, I can offer it at Rs.58,000 without the bill. If you want, I can write on a piece of paper or on a quotation” Count # 3 – Rs.58,000 black money is generated
Accounting for fictitious expenses – A businessman tells his accountant “I can’t pay so much tax. Do something, reduce the taxes” The accountant accommodates by booking fictitious expenses. If the businessman declares a profit of Rs.15 Lakhs against the actual profit of Rs.25 Lakhs, black money of Rs.10 lakhs is created. Count # 4 – Rs.10 Lakhs black money is generated.
How to convert Black money into White money?
The difficult part is converting the black money into white money without any taxes. In all the above examples, the people who have earned money in cash (black money) can’t deposit it in the bank. Right? So, they have to hoard the cash somewhere, say in a bank locker, suitcase, etc. Or they can also spend this amount in cash towards the purchase of property, white goods, etc. Let’s understand the ways of converting black money.
Showing fictitious sales – There was a movie casted by the son of a powerful politician. This movie was an utter flop. But, it ran ‘houseful’ (fictitious) in Kalpana Theatre of K G Road for a year! During those days, people were talking that the black money earned by the father is converted into white by showing the income from the movie!
The money earned through illicit means or corruption is converted with the help of businessmen by booking fictitious sales in the books of the company.
Increase the sale
price of an asset – One of my clients decided to buy a property from a senior government officer for a price of Rs.42 Lakhs. But the Officer wanted him to pay Rs.60 lakhs in cheque! In turn, he wanted to return the difference amount of Rs.18 Lakhs and additional stamp duty/registration charges in cash to the buyer. Thereby the Officer converted Rs.18 Lakhs of black money to white without paying any taxes. (He reinvested the sale proceeds in another property and got the long term tax exemption!)
Hawala Route – Have you heard about hawala transactions? If not, I will tell you in simple words. Assume Mr.ABC, a politician or government officer in Bangalore has Rs.25 Lakhs in cash. Since it is black money, he can’t deposit the same in the bank. So, he identifies a hawala agent (don’t searchin google, you won’t get one!). The Hawala operator takes the cash in Bangalore and through his counterpart, hands over Rs.25 Lakhs worth in dollars/pounds/dirhams in a foreign country to his/to his representative. Mr.ABC gets this money back to India as Foreign Direct Investment (FDI) or seed fund in a private company, etc. Or he may choose to invest abroad in properties / shares. Thus, he converts black money to white without paying any taxes.
Depositing in banks less than Rs.50000 – This route is taken by small time operators. They open multiple bank accounts and deposit cash upto Rs.50000 at a time. Remember, if you have to deposit over Rs.50000, you have to give PAN details to the banker. Mostly, these kind of petty transactions goes unnoticed by the income tax department and thus, black money is converted
white without paying any taxes.
Agricultural Income – Agricultural Income is exempt from Income Tax. This means the money earned from the sale of paddy, pepper or wheat is exempt from tax. So, the people who earn black money will obtain a fictitious receipt from traders in agricultural commodities as if they have sold the products. For the sake of records, these people will acquire or show the proof of ancestral property in villages!
Gifts from relatives and friends on occasions – Any amount of money received from relatives (gift) is exempt from Income Tax. Is it not an easy way to convert black money to white? Simple, show the cash received in your son’s or daughter’s birthday as gifts from relatives!
Gifts from non-relatives and friends attract income tax. But those who have huge black money can show gift and pay taxes. Still the money earned through corrupt practices can be converted into white (after paying taxes). One of the classic examples is the amount of gift declared by a former Chief Minister who paid huge taxes during that year. She declared around Rs.200 Crores as gift received from her well-wishers and paid taxes on it!
Sale of Gold and Diamonds– Well-known professionals suggest this route. Suppose, Mr.XYZ has Rs.25 Lakhs cash and gives this amount to a Jewellery shop (not all shops will do this kind of dirty job). The Jewellery shop will issue a receipt for having bought Gold/Diamond worth Rs.25 Lakhs and make payment in a cheque to Mr.XYZ.
facilitating this transaction, he will charge a fee. Thus Mr.XYZ converts his black money into white, without paying any income tax.
Avenues for spending black money in black
Investing in property – The middle-class black money earners spend/invest them in black. For example, Mr.GHK sells a house for Rs.90 Lakhs (of which, he takes Rs.30 Lakhs in Cash – black) and reinvests/buys another flat/plot by giving Rs.30 lakhs apart from white money. So, the rule is Black for Black and white for white
Spend on weddings and functions – I needn’t explain it. If you attend the weddings at Palace Grounds in Bangalore and hi-fi wedding halls, you will get to see the ‘real color’ of black money. As I understand there are people who spend 2-5 Crores for a wedding! A large sum of corrupt money is spent on social events and functions.
Buying goods/services where the identification is not mandatory – For example, white goods, building houses and its interiors, etc., are done using black money earned in cash.
School Fee and donations – You may be aware of donations! For the medical seat, over a crore of rupees to be paid as a donation in cash!
Buying gold / precious metals – Instead of accumulating cash, people will buy gold, diamond and other precious metals. People buy gold in small quantities, from different shops, in the name of all members of the family.
Elections – As per the Election Commission of India, a maximum of Rs.70 lakhs can be spent by a candidate per Lok Sabha Constituency. Do you believe that they spend only Rs.70 lakhs? I understand that each candidate spends over Rs.30 Crores per Lok Sabha Seat! From where is this kind of money available? Corrupt money is spent in elections.
Now the big question – Is this not known to the Government? What actions have they taken to curb the black money? Honestly, so far, nothing much is done, except ‘lip service’ by a few politicians and a few ‘cosmetic’ changes in the law.
Recently, Special Investigation Team (SIT), appointed by the Supreme Court has come out with its findings and suggestions to curb black money.
Black Money Conversion Case Studies
CASE 1: Go to a Jeweler. Give him the amount you want to convert into white as cash. he would give you a cheque back for the same amount less 4%. He would give you a purchase bill to show that you have sold silver utensils to him. On the amount of the cheque when you file your return you will have to pay no capital gain tax as Silver utensils are Personal effects and capital gain does not arise on sale of personal effects. There you go , the money is white now!!!
CASE 2: Conversion of Black Money to White Money with the application of Sec 51 of the Income tax act, 1961.
Mr. X : A Business man who wants to convert his black money to white.
Property: Cost of Acquisition: Rs. 10 Lacs.
Mr. Y: A Salaried person who wants to convert his white money to black may be because he has to make payment in black for the property purchased by him.
Mr. X enters into an agreement with Mr. Y for the sale of property for Rs. 150 lacs with a condition that advance money of Rs. 30 lacs shall be given by Mr. Y and balance shall be paid within 3 months else advance money shall be forfeited.
Modus Operandi: Mr. Y makes payment of Rs. 30 lacs to Mr. X by way of a cheque as the advance money and Mr. X in turns gives the black money to Mr. Y of the same amount. Now, Mr. Y intentionally fails to make balance payment within the due time and the amount is forfeited by Mr. X. In this manner black money of Mr. X is converted to white money.The money is white now!!!
CASE 3: Another popular way of converting black into white money is by getting a gift from a relative. For this modus operandi, the relative must possess white money. For example, you have some black money (say Rs. 10 lacs) which you want to convert into white. You can ask your relative to gift you Rs.10 lacs by way of cheque and you will in turn transfer your black money to him/her. Here 56(2)(vii) is not attracted as gift is received from a relative.
CASE 4:- Converting black to white by way of cheque
People also give the black money to a person (say a family member or a friend) and take a cheque from them. They show that as a loan receipt and thus they can temporarily convert their black money into white.
Then they again give them a check as a repayment of loan and receive cash which converts white to black again, but during the time the loan is outstanding, they convert their black into white, but people who do this are not aware that Section 68 on loans is applicable and you will have to prove the creditworthiness as well as the genuineness of transactions to the IT Department or else the loan receipt will be treated as income from undisclosed sources.
CASE 5: Another popular way of converting black into white money is showing income in cash like tuition income or any other professional fees.Just pay the tax at normal rate and your money is white now!!!!
Also people make investment where it is allowed to invest in cash and where the maturity is tax free for example buying an insurance policy where you are not required to show all your premiums and the maturity is tax free. For example your insurance premium is 25000/- per annum and you can pay 6000 in check (shown in books) and remaining in cash, people increasing the proportion of premium paid in cash increasing as and pay entire premium in white for last two years before maturity. No ITO is going to check premium of more then last two years and it is a small example. People are paying huge cash premiums everyday. In case of this small premium, the cost of investigation exceeds the benefit to the exchequer so the ITO will give a test check for at the max last two years.
This article is penned by HIMANSHU PUROHIT, neither him nor CA GYAN GURU Encourage black to white conversion. They are all for informative purpose.
I don’t recommend readers to follow any of these steps. I just want them to be aware regarding these false practices.
I encourage open discussion regarding this article but advices, opinions, suggestions which may land the opinion seekers into trouble later on are not encouraged.
I trust that a tax planning should be done in such a way that it can stand the test of the legal battle of course subject to debates