Income Tax Department Search and Seizure Operation in Karnataka

The Income Tax Department began a Search and Seizure operation against several Cooperative Banks in the state of Karnataka on March 31, 2023. These cooperative banks have been revealed to be involved in the channelling of monies from various business entities of their customers in order to assist them in evading their tax duties. The search operation included 16 different locations.

During the search, a huge number of incriminating evidences in the form of hard copy papers and soft copy data were discovered and seized. The evidence recovered demonstrated that these Cooperative Banks were actively discounting bearer cheques issued by various business companies in the name of numerous fraudulent non-existent entities. Contractors, real estate businesses, and other business entities were among those listed. When such bearer cheques were discounted, no KYC procedures were conducted. After discounting, the monies were credited to select Cooperative Societies’ bank accounts with these Cooperative Banks. It was also discovered that several Cooperative Societies took cash funds from their accounts and returned the cash to corporate firms.

The goal of such large-scale cheque discounting was to conceal the true source of the cash withdrawal and allow commercial entities to book fictitious expenses. Cooperative Societies have been employed as a conduit in this kind of operation. Furthermore, by employing this strategy, these businesses were skirting the rules of the Income-tax Act of 1961, which limit the permitted business expenditure incurred other than via account payee cheque. The bogus expenditure registered in this manner by these beneficiary business organisations could amount to almost Rs 1,000 crore.

During the investigation, it was discovered that these cooperative banks permitted the opening of FDRs with cash deposits without appropriate due diligence, and then sanctioned loans with the same as collateral. Evidence obtained during the investigation revealed that specific individuals/ customers had received unaccounted cash loans totaling more than Rs.15 crore.

During the search, it was also discovered that the management of these cooperative banks had been involved in the generation of unaccounted money through their real estate and other companies. This unexplained money has been brought back into the books of account through numerous layers of banking. Furthermore, without proper diligence, the bank monies were routed through several corporations and entities held by the management personnel for their own use.

The search led in the recovery of over Rs 3.3 crore in unlawful cash and over Rs.2 crore in unauthorised gold jewellery.

Additional research is being conducted.