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September 7, 2020

Government likely to put cap on number of accounts on persons have multiple bank accounts

by CA Shivam Jaiswal in Income Tax, RBI

Government likely to put cap on number of accounts on persons have multiple bank accounts

The goal of a large number of criminal acts is to generate a profit for the individual or group that commits the act. Money laundering is the processing of these criminal proceeds to disguise their illegal origin. This process enables the criminal to enjoy profits without jeopardizing their source.

Such frauds can occur in a number of ways. For instance, fraudulent documentation involves altering, changing or modifying a document to deceive another person. It can also involve approving incorrect information provided in documents knowingly.

A person can obtain a loan using a fictitious name and there is a lack of a strong framework pertaining to spot verifications of address, due diligence of directors/promoters, pre-sanction surveys and identification of faulty/incomplete applications and negative/criminal records in client history.

A person may forge export documents such as airway bills, bills of lading, Export Credit Guarantee Cover and customs purged numbers/orders issued by the customs authority.

Siphoning of funds takes place when funds borrowed from financial institutions are utilized for purposes unrelated to the operations of the borrower, to the detriment of the financial health of the entity or of the lender. Diversion of funds, on the other hand, can include any one of the following situations:

  • Use of short-term working capital funds for long-term commitments not in conformity with the terms of sanction
  • Using borrowed funds for creation of assets other than those for which the loan was sanctioned
  • Transferring funds to group companies
  • Investment in other companies by acquiring shares without the approval of lenders
  • Shortage in the usage of funds as compared to the amounts disbursed/ drawn, with the difference not being accounted for

In 2015, The Central Board of Direct Taxes (CBDT) has issued guidelines for compounding of offences under Income Tax Act, 1961/Wealth Tax Act, 1957, in cases of persons holding undisclosed foreign bank accounts/assets. 

Now, service providers having multiple undisclosed accounts in different banks are under the scrutiny of tax authorities as the government thinks that it is being used as a tool for evading tax in certain cases. Although there is no law which restricts a person to open multiple bank accounts, the government plans to find out shell company operatives, who are reportedly using dummy current accounts to launder money.

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This move was initiated keeping in mind the recent case in Uttar Pradesh where a person was found to have 87 accounts

  • Multiple banks accounts come in handy not only to duck TDS. They are handier for businessmen including professionals and service providers.
  • Not all their current accounts are disclosed to the tax authorities including GST. Vexed with this tendency, the government was considering a proposal to limit the number of current accounts a professional or service provider can have to start with.
  • The discussion within the government to this effect was triggered by a recent case in Ghaziabad in Uttar Pradesh, where a person was found to have 87 accounts with Oriental Bank of Commerce and Axis Bank.
  • He was suspected to have laundered more than Rs 380 crore using these accounts. Incidentally, this corrected the innocent notion that was place in some minds that all bank deposits are legit.

The preliminary discussion within the government indicated that:-

  • It may exempt businessmen in manufacturing, processing and other industrial operations since they are carrying out several transactions daily.
  • However, for professionals, a simple rule prescribing a specific number and nature of accounts is likely to be put in place soon.
  • It has been argued that since the financial operations of professionals are limited, regulating the numbers like a cap on maximum bank accounts could be introduced through legislation.
  • The official notes suggested that multiple bank accounts opened in the same city or different parts of the country are being used by some unscrupulous elements to spread out revenue receipts and also opening accounts under fake names for illegal activities.
  • The legislation covering all businessmen and professionals defined as service providers will bring about greater accountability of transactions as it will be mandatory to disclose all the bank accounts through which receipts and payments are made.
  • The businessmen will be asked to disclose all the accounts if the money is borrowed from a particular bank and collections are deposited in another bank.
  • It is expected that every branch of a bank will be providing details of accounts with the tax authorities including Goods and Services Tax (GST) officials so that database of accounts opened in different parts of the country by any particular person can be verified.
  • If there are any discrepancies, further probe can be initiated by the authorities concerned.
  • Sources said that during the exercise to ascertain the legitimate owners, if some accounts are found to be unidentified, it can be frozen by the bank, preventing any financial transaction until the identity of the account holder is verified.
  • The notes said for the effective implementation of a new set of rules, there has to be proper coordination between the Income Tax Department and banks.
  • The inconsistencies related to suspicious accounts will be resolved by the respective bank’s officials.

Directive by RBI

  • Reserve Bank of India (RBI) has recognized the fact that a large number of frauds are perpetrated in banks mainly through opening of accounts in fictitious names, irregular payment of cheques, manipulation of accounts and unauthorized operations in accounts.
  • Considering the fact that opening of an account is the first entry point for any person to become a customer of the bank, utmost vigilance in opening of accounts and operations in the accounts is called for.
  • Even the legal protection under the Negotiable Instruments Act, 1881 which governs payment and collection of negotiable instruments and provides certain rights, liabilities (obligations) and protections to the issuers/drawers, payees, endorsees, drawees, collecting banks and paying/drawee banks, will be available, only if the bank makes the payment or receives payment of a cheque/draft payable to order in duecourse.
  • Any payment or collection of a negotiable instrument is deemed in due courseonly when the bank acts in good faithand without negligenceand does so for a customer.
  • RBI in a directive to the banks had cautioned about the opening of fresh current accounts to check non-performing assets (NPAs).
  • The RBI said banks should, at the time of opening current accounts, insist on a declaration to the effect that the account holder is not enjoying any credit facility with any other bank.
  • Besides this, the officer concerned should ensure that their branches do not open current accounts of entities which enjoy credit facilities from the banking system without specifically obtaining a no-objection certificate (NOC) from the lending banks.

The age of multiple bank accounts as a way to hide from the tax authorities is long over and therefore, it will make no sense to have so many of them.

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