Chennai firm, directors convicted in ‘rarest of rare’ tax evasion case

In a ruling hailed by legal experts as a “benchmark”, a Chennai court has convicted a city-based firm and its two directors of deliberate tax evasion and filing false income tax returns for the assessment year 2002-03.

The case (EOCC.No.110/2015) has been described as “rarest of rare” due to the scale of concealment and the meticulous evidence presented.

Justice P Vidhya of the Additional Chief Metropolitan Magistrate, Egmore, convicted Sharma Alloys (India) Ltd (now BLS Power Solution Ltd) and its directors Bhanwarlal Sharma and Chandan Sharma on Monday (June 9).

‘Sophisticated scheme’

The prosecution accused the company and its directors of orchestrating a sophisticated scheme to evade taxes by concealing Rs 6.77 crore invested in shares, which generated Rs 4.04 lakh in dividend income, alongside unsecured loans of Rs 6.67 crore and a secured loan of Rs 29.88 lakh from SFCIL.

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The company’s income tax returns, filed on October 31, 2002, declared a mere Rs 2.68 lakh as income, falsely claiming deductions for depreciation and discounting charges.

A survey conducted under Section 133A of the Income Tax Act on March 4, 2003, exposed these discrepancies, leading to a reassessment that fixed the company’s true income at Rs 24.84 lakh, with a tax liability of Rs 8.86 lakh.

The evidence

The court’s judgement highlighted misrepresentation by the accused, including unsupported claims of Rs 5.45 lakh for depreciation, as no machinery was found within the premises, and Rs 2.71 lakh for exempted dividend income.

The prosecution, represented by Special Public Prosecutor Sheela, produced evidence that included assessment orders, demand notices, and signed returns, proving that Bhanwarlal and Chandan Sharma, as directors, knowingly filed false documents.

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The court rejected the defence’s argument that the accused were mere employees of the Surana Group who resigned in 2014. Evidence, including Form-1B and MCA portal records, confirmed their directorship during the relevant period.

Benchmark ruling

Convicting the accused under Sections 276C (1) and 277 of the Income Tax Act, 1961, for wilful tax evasion and false statements, the court imposed a fine of Rs 20,000 on the company (Rs 10,000 per offence), to be paid by the directors.

Bhanwarlal and Chandan Sharma were each sentenced to four months of rigorous imprisonment and fined Rs 10,000 per offence, totalling a fine of Rs 60,000, with an additional month of simple imprisonment in default. The sentences will run concurrently.

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Legal experts have termed the ruling as a benchmark for holding corporate entities and their officers accountable, reinforced by precedents like Assistant Commissioner vs. Velliappa Textiles Ltd. (2003), which upheld prosecution without prior notice for administrative sanctions.