Karnataka: Ahead of polls, I-T Dept detects Rs 1,000-cr fraud by cooperative banks

The Income Tax Department has detected bogus expenditures of about Rs 1,000 crore after raids on some cooperative banks in poll-bound Karnataka. The tax department carried out search operations on some cooperative banks in the state on 31 March 2023. "These cooperative Banks have been found to be engaged in the routing of funds of various business entities of their customers, in a manner, so as to abet them to evade their tax liabilities," the Finance Ministry said on Tuesday.

A total of 16 premises were covered in the search action, which came just a month before the assembly polls in the southern state. During the raids, the department seized a large number of evidence in the form of hard-copy documents and soft-copy data. 

This evidence, the statement said, revealed that the raided cooperative banks "were involved in rampantly discounting bearer cheques issued by various business entities, in the name of various fictitious non-existing entities".

These business entities included contractors, real estate companies, etc. No KYC norms were followed while discounting such bearer cheques and the amounts after discounting were credited to the bank accounts of certain cooperative societies maintained with these cooperative banks.

The department also found that some cooperative societies subsequently withdrew funds in cash from their accounts and returned the cash to business entities. "The purpose of such discounting of a large number of cheques was to mask the real source of the cash withdrawal, and to enable the business entities to book bogus expenses," the statement said. "In this modus operandi, cooperative societies have been used as a conduit."

These business entities, the statement said, were also circumventing the provisions of the Income Tax Act-1961, which limits the allowable business expenditure incurred other than by account payee cheque. "Bogus expenditure booked in this way by these beneficiary business entities could be to the tune of about Rs 1,000 crore," the ministry said.

During the search, it was also found that these cooperative banks allowed opening FDRs by using cash deposits without adequate due diligence, and subsequently sanctioned loans using the same as collateral. Documents seized during the search revealed that unaccounted cash loans of over Rs 15 crore had been given to certain persons/customers.

"The management of these Cooperative banks have indulged in generating unaccounted money through their real estate & other businesses," the ministry said, adding that this unaccounted money had been brought back in the books of account by multiple layering through these banks.

The tax sleuths also found that the bank funds were routed, without following due diligence, through various firms and entities owned by the management persons for their personal use. "The search action has resulted in the seizure of unaccounted cash of over Rs 3.3 crore and unaccounted gold jewellery worth over Rs 2 crore," the statement said.