Tax fraud involves deliberately underpaying taxes owed through dishonest means such as underreporting income, overstating deductions, or providing false information. Common methods of tax fraud include suppressing personal expenses, deliberately omitting income from business transactions, making false entries in books to hide unreported income or inflate expenses, and concealing receipt of income by not recording transactions. Large corporations may also commit tax fraud through practices like improper transfer pricing or window dressing financial reports. Individual tax fraud usually stems from rationalizations of high taxes and opportunities created by complex tax systems.

1. Tax Fraud
The American Heritage Dictionary defines Fraud as “a deception
deliberately practiced in order to secure unfair or unlawful gain”.
Fraud always requires a perpetrator, an act of deception by
perpetrator with objective to enrich himself, a victim who suffers
loss due to the targeted deception by the perpetrator.
But what is the fertile ground for a fraud to happen? The
existence of the three conditions“Opportunity”, “Pressure”, and
“Rationalization/ Justification” prepares perfect ground for fraud
to take place. This is also described as “The Fraud Triangle”.
Every country in the world serves the nation with the help of
taxes collected from the society in order to provide the right
economic and social infrastructure for the nation to develop and
prosper. By paying taxes the “Haves” contribute towards the
welfare of the “Have-nots” in any society.
Tax fraud is when someone pays too little tax or wrongly claims a
tax repayment by acting dishonestly.(such as declaring less
income, profits or gains than actually earned; or overstating
deductions) and results in loss to the exchequer.
Tax fraud is an activity commonly associated with an objective to
create parallel economy by not paying due taxes and has direct
relationship to loss to the Exchequer in its act of collecting due
taxes by an entity chargeable to tax in a country.
Tax fraud is a world wide phenomenon and is practised by
persons and entities who “HAVE”and not by those who
are“HAVENOTS” . Fraud perpetrators are usually very educated,
intelligent and persons of great means . Tax fraud by individuals
are normally driven by mass rationalisation , pressure of high
taxes and living costs and opportunity craeted by
maladministration and complex tax mechanism in any country.
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2. Falsification of medical bills for claiming 15000/- a year as
deduction by employees from his gross income in many cases is
an example of a fraud by individual in India.
Tax fraud can be committed against any governmental or other
organization that collects taxes, including the federal
government, state governments, local governments or other
taxing authorities.
Common Tax Fraud Methodology
1.Suppression/understating of personal Expenses: An
example
The assessee was a member of an HUF of which his father was
the Karta. He was married in December 1969 and was employed
from 1-1-1970 at a salary of Rs. 4,500 per month. For the
assessment year 1970-71, the assessee filed a return showing an
income of Rs. 1,40,427. The ITO found that for assessee's
marriage an amount of only Rs. 11,500 had been withdrawn from
the HUF fund and that for domestic expenses the assessee had
withdrawn Rs. 2,850 from his own books. The ITO noted (i) that
the assessee had returned substantial income varying from Rs.
1.02 lakhs to Rs. 1.78 lakhs each year; (ii) that the total wealth
of the assessee and his wife amounted Rs. 20.61 lakhs besides
jewellery and other exempted assets; and that (iii) they were
heavily insured and that the assessee was living in a grand style
in a palatial bungalow with a number of domestic servants.
Keeping in view these factors, the ITO concluded that the
disclosed expenditure on account of household expenses and
assessee's marriage was insufficient and added a sum of Rs.
21,150 as income from undisclosed sources to cover the shortfall
in domestic and marriage expenses. Delhi High Court finally
upheld an addition of Rs10, 000/- under section 69C of the
Income Tax Act, 1961.
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3. Yadu hari Dalmia v.CIT, [1980] 4 Taxman 525 (Delhi),HIGH COURT
OF DELHI
2.Deliberately underreporting or omitting income
a. The assessee-company H carried on business in gur
and shakkar and also had income from commission agency.
During the assessment proceedings, the ITO discovered that
the assessee had been doing business outside the books of
account and in that secret business the assessee had invested
certain amount. The explanation furnished by the assessee was
not accepted and under section 69, the impugned amount was
added to the assessee’s income. The assessee did not deny
before the Tribunal that it did indulge in business activities
outside the books of account and that during the accounting
year under consideration purchases had been made from a
party M in the assessee’s own name as well as in a fictitious
name. The Tribunal rejected the assessee’s contention that in
view of the special course of dealings with the party M, no
investment could be said to have been made from its own
resources.
Himmatram Laxminarain v.CIT [1986] 24 TAXMAN 768 (PUNJ &
HAR) HIGH COURT OF PUNJAB AND HARYANA
b. The assessee was engaged in the business of a commission
agent and derived income by way of commission from the sale of
vegetables and fruits on behalf of the farmers and traders. During
the course of survey under section 133A carried out at the
business premises of one 'J', certain documents were seized
which transpired that the assessee had made sales of apples of
certain amount to 'J'. Since the sale was not verifiable, the
Assessing Officer had made addition of amount of sale holding
that the assessee had made sales to J and invested his own
unexplained money in the purchase of apples. The High Court
ruled in favor of the revenue.
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4. CIT, Chandigarh-II v. Sanjay Chhabra [2012] 21 taxmann.com 221
(Punj. & Har.)
c. The assessee was a wholesale dealer in liquor. The opening
balance as on 1-4-1980 with regard to the two shops of the
assessee was shown as Rs. 18,962. No purchases were made for
the year before 6-4-1980. In spite of this situation, the accounted
sales for the first five days of the year came to Rs. 2, 00,361. The
ITO deducted profit at the rate of 5 per cent and called upon the
assessee to explain in regard to Rs. 1, 72,761 as was necessary
under the provisions of section 69 on the basis of inevitable
inference that the amount would have to be understood as
concealed income. The High Court Held that what was clear was
that there were sales during the period from 1-4-1980 to 5-4-
1980, without there being a stock sufficient enough for
purchasing the quantity which was admittedly sold. The situation
got more than affixed when there was material that the first
consignment was received thereafter on the next day on 6-4-
1980.
CIT v. G. Anandarajan [1997] 228 ITR 664 (KER.) HIGH COURT OF
KERALA
3. Making false entries in books and records (Bogus
Purchases)
The assessee’s originally returned income was of Rs. 2, 10,460. It
filed revised returns twice returning income at Rs. 3, 76,920 and
Rs. 4, 21,920 before completion of assessment at the higher
figure. The Assessing Officer also imposed penalty under section
271(1) (c) having found certain purchases made by the assessee
through brokers as bogus, in view of the fact that the assessee
had failed to produce the relevant records or whereabouts of the
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5. said brokers, as also, on the successive revision of its total
income, the assessee having known that the department had
discovered the bogus purchases, impliedly accepted the fact of
concealment during assessment proceedings. The assessee’s
appeal against the order of penalty was dismissed by the
Commissioner (Appeals) and the Tribunal and the High Court.
Beena Metals v.Commissioner of Income-tax [2000] 111 TAXMAN 46
(KER.)
4.Concealment by Large enterprises (manipulation
of the result with transfer price, cost increases
such as provisions, optimization); Medium-sized
companies (often hidden in presumptive
regimes, simple evasion methods such as false
invoices):
Corporate fraud in India rose 45% last two years:
PTI Jan 14, 2015, 09.00PM IST the Economic Times
NEW DELHI: Corporate frauds rose by over 45 per cent in India in
the last two years and the lurking risk has been dissuading global
companies from investing in India, said a study.
Corporate frauds arose out of corruption, money laundering, tax
evasion, window dressing, financial reporting fraud and bribery
due to weaknesses in internal controls, scarcity of resources and
over-riding powers of senior management, it added.
5.Providing false information to the I-T department
about business income or expenses.
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6. In the famous Satyam Computer Company case the Serious
Fraud Investigation Unit concluded that the promoters overstated
income and paid taxes on inflated income and interest to fool the
investors and shareholders.
6.Deliberately underpaying taxes owed
On 22-5-1967, the assessee-firm received insurance
compensation. The assessee deposited this amount with his
bankers. This amount was later on withdrawn by the partners in
the ratio of their shares. However, this withdrawal was not
entered in the books of account.
As a result, the ITO, while assessing the assessee's income for
the assessment year 1968-69 could not know of this income and
bring it to assessment. On getting information, the ITO issued a
notice under section 148 on 31-12-1969. The assessee then filed
his return disclosing the factum of receipt of amount from
insurance company.
In the course of hearing under section 143, the assessee agreed
to the inclusion of Rs. 19,257. However, the ITO brought the
entire amount of Rs. 28,680 to tax. Thereafter, the assessee was
subjected to penalty under section 271(1). The AAC upheld the
penalty order. On further appeal, the Tribunal observed that, the
conduct of the assessee was contumacious with the sole intention
to conceal the income or furnish inaccurate particulars thereof.
The Tribunal was, therefore, of the view that the penalty was
exigible. The fact that he had been assessed under section 41(1),
which was a deeming provision, could not help the assessee
because his conduct had been such that it displayed a concerted
effort which was well planned to conceal the income or to furnish
the inaccurate particulars thereof.
Hindustan Tools Mfg. Co. v. Commissioner of Income-tax [1976] 102
ITR 174 (PUNJ. & HAR.)
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7. 7.Concealing and Transferring Assets
In 1965 search and seizure operations had taken place which
detected bogus hundi notes. The assessee agreed to surrender
Rs. 2, 15,500, Rs. 23, 74,100 and Rs. 28, 46,200 in respect of
the assessment years 1960-61, 1963-64 and 1964-65,
respectively. Although an opportunity was provided to the
assessee pursuant to a notice intending to impose penalty, the
assessee did not avail of the opportunity and failed to show that
the said amounts did not represent concealed income. Therefore,
the Assessing Officer levied penalty under section 271(1) (c). The
assessee did not file any appeal against the order imposing
penalty. On the assessee's revision petition, the first appellate
authority found that the penalties levied by the Assessing Officer
were reasonable. However, on the facts and circumstances of the
case he reduced the penalty amount to Rs. 1 lakh and, thus,
partly allowed the revision petition.
Krishna Kumari Chamanlal v.Commissioner of Income-tax [1995] 82
TAXMAN 323 (BOM.)
8.Overstating tax deductions:
In India , tax exemptions and deductions mechanisms are
provided in the tax laws and a major area of tax fraud relates to
deliberately manipulating and fabricating claims in respect
exemptions and deductions. Since, these are detected only on
physical examination of evidence, the same can be only reduced
today with the help of intelligent, honest and diligent exercise of
power by the tax administration authorities.
9.Keeping two sets of books –
Rajesh Kumar & Others v. CIT, 287 ITR 91 (SC) :
7

8. In this case two sets of books of accounts were seized which
revealed deliberate fabrication of income and expense items.
Few examples of Ways in which assets or income may be
fraudulently concealed:
Cash may be diverted to another entity
Inventory may be shipped to an off-site location
Assets or income may be shifted to another entity controlled by the debtor
Sales may not be reported properly
Payment may be made to fictitious persons
Claiming personal expenses as business expenses
Claiming false deductions
Hiding or transferring assets or income
Illegal money laundering schemes
Concealing and Transferring Assets
Some indicators of concealment include:
Transfers of property or large payments to related parties or individuals,
such as insiders, shareholders, or relatives.
Frequent and unusual transfers between bank accounts, particularly between
business and personal accounts.
Numerous transactions made in cash that normally are made on account
(sales, purchases, etc.)
Unusually large and unexplainable payments to vendors.
Concealing and Transferring Assets
Unusual or rapid reductions in assets.
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9. Increases in operating losses that are not explained by economic factors.
Inconsistencies between financial statements or tax returns and the official
forms filed for the bankruptcy or records filed in divorce cases.
Travel to offshore tax havens or locations that allow secret bank accounts.
Missing, inaccurate, or damaged records.
Money Laundering Process
AN EYE OPENER FACT:
India loses 14 trillion rupees ($314 billion) from tax
evasion annually and 800 billion rupees a year because of
corporate tax incentives ( eg. Tax holiday)
Areas of Tax frauds in India
In India, Department of Revenue, Ministry of Finance,
government of India regulates the direct tax and indirect tax
regime in respect of Union taxes such as Income Tax, Service
Tax, Excise and Customs, Stamp Duty. In addition the States also
impose and regulate taxes like VAT, stamp duty, entry tax etc.
and Tax fraud can occur in connection with all these taxes.
Reasons & Methods
Weak Surveillance System
Rampant corruption in Tax Department
Complicated tax law and filing mechanism
 Overbilling of purchase of raw material
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10.  Dummy salary entries created
 False petty expense entries ( person expenses as business
expenses)
 Lobbying to government
 Bribery of tax officials
Economics of tax evasion
In 1968, economist Gary Becker first theorized the economics of
crime. It deals with the evasion of income tax. According to them,
the level of evasion of income tax depends on the level of
punishment provided by law.
 Income tax evasion appears to be positively influenced by
the tax rate, the unemployment rate, the level of income
and dissatisfaction with government.
 Other forms of tax evasion (e.g. VAT) Major falsifications
(increase of VAT credits, sales without invoices)
 Indian black money
 From Wikipedia, the free encyclopedia
 In India, Black money refers to funds earned on the black
market, on which income and other taxes have not been
paid. The total amount of black money deposited in foreign
banks by Indians is unknown. Some reports claim a total
exceeding US$12.4 trillion are stashed in Switzerland.
[1]
Other reports, including those reported by Swiss Bankers
Association and the Government of Switzerland, claim that
10

11. these reports are false and fabricated, and the total amount
held in all Swiss banks by citizens of India is about US$2
billion.[2][3]
 In February 2012, the director of the Central Bureau of
Investigation said that Indians have $500 billion of illegal
funds in foreign tax havens, more than any other country.[4]
[5]
In March 2012, the Government of India clarified in its
parliament that the CBI Director's statement on $500 billion
of illegal money was an estimate based on a statement
made to India's Supreme Court in July 2011.[6]

Government response
 The level of evasion depends on a number of factors, one of
them being fiscal equation. People's tendency to evade
income tax declines when the return for due payment of
taxes is not obvious.(Invisible)
 Evasion also depends on the efficiency of the tax
administration.
 Corruption by the tax officials often makes control of evasion
difficult. Tax administrations try to decrease these
corruptions. These include, privatization of tax
enforcement, tax farming, and institution of Pre-Shipment
Inspection (PSI) agencies.
Efforts in Reducing and Controlling Frauds:
Through creation and simplification of Laws like Prevention of
Money Laundering Act, Black Money Bill, FEMA, etc
Through Regulators like SEBI, CBDT, CBEC, and Investigators like
CBI, Financial Intelligence Unit, NIA, Enforcement Directorate
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12. Pre-shipment Agencies like SGS, Cotecna etc. are employed to
prevent evasion of customs duty through under-invoicing and
misdeclaration.
 Black money: Sebi bars 260 entities; suspects money
laundering, tax evasion

 In its biggest ever crackdown for suspected tax evasion and
laundering of black money through stock trading platforms...
By: PTI | New Delhi | December 19, 2014 10:34 pm THE
Financial Express
 In its orders, Sebi said that the modus operandi of the
barred entities typically involved stock market dealings
aimed at evading long-term capital gains tax and showing
the source of income as legitimate from stock markets.
 “… the schemes, plan, device and artifice employed in this
case, apart from being a possible case of money laundering
or tax evasion which could be seen by the concerned law
enforcement agencies separately, is prima facie also a fraud
in the securities market in as much as it involves
manipulative transactions in securities and misuse of the
securities market,” the regulator said.
 Sebi bars 129 entities; suspects money
laundering, tax evasion
 PTI Apr 18, 2015, 02.30AM IST The Economic Times

 MUMBAI: In a fresh crackdown on suspected evasion and
laundering of black money through stock markets,
regulator Sebi today barred Mishka Finance and Trading Ltd
and 128 other entities from the securities market.
 While the total amount involved could not be ascertained,
these entities are estimated to have shown fictitious capital
gains to the tune of Rs 254 crore and just 29 of them made
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13. unlawful gains to the tune of Rs 92 crore on an investment
of just Rs 2 crore.

 Rs 19k cr service tax, central excise duty frauds
in 2008-11: CAG
 PTI Mar 30, 2012, 09.07PM IST The Economic Times

NEW DELHI: Comptroller and Auditor General of India (CAG)
today said that there over 10,300 cases of fraud involving over Rs
19,159 crore in service tax and central excise duty during 2008-
11.
"In central excise, a total 3,690 cases of fraud or presumptive
fraud were found during 2008-11 by the department involving
duty of Rs 8,497.06 crore. In service tax, 6,655 cases involving
tax of Rs 10,662.24 crore were detected during the same
period," CAG said in two separate reports.
Black money: ED freezes properties worth Rs 9,003
crore
PTI | Apr 29, 2015, 06.40 PM IST The Times of India.
NEW DELHI: In a major action against black money hoarders
and money launderers, the Enforcement Directorate (ED) has
attached assets to the tune of Rs 9,003 crore and filed 173
charge sheets in the financial year 2014-15.
The agency, as part of its efforts to crack down on illicit funds
in India and abroad, in the last year registered a mammoth
400 per cent rise in the numbers of assets attached, over 500
per cent increase in the number of criminal FIRs lodged, over
600 per cent more numbers of arrests made of people
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14. suspected to be involved in laundering crimes and more than
200 per cent jump in the filing of prosecution complaints or
charge sheets as compared to the 2013-14 fiscal.
Rs 4,733 Crore Collected in Taxes via Non-Filer
Monitoring System: Jayant Sinha
Press Trust of India | Updated On: May 08, 2015
21:40 (IST)
New Delhi: Government has collected Rs 4733.61 crore in
taxes since 2013 through the non-filer monitoring system that
tracks large value financial transactions, including those via
credit cards.
"30,68,662 new returns have been filed and additional tax of
Rs 4,733.61 crore has been collected from persons identified
as non-filers by the Income Tax Department through its NMS in
the year 2013, 2014 and up to March 31, 2015 in the year
2015," Minister of State for Finance Jayant Sinha said in
written reply in the Lok Sabha.
The non-filer monitoring system (NMS) analyses all databases
of in-house and third-party information available with the
department to identify persons who have not filed returns even
though they have carried out large-value financial transactions.
During 2013, 2014 and 2015 (up to March 31), NMS has
identified 12.9 lakh, 22.09 lakh and 44.09 lakh cases,
respectively, as non-filers having potential tax liabilities.
WHY of TAX FRAUD
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15. What factors do provide the three elements of tax fraud;
i.e. Opportunity, pressure and rationalization also known
as the Fraud Triangle, in the Indian taxation context:
Are We Responsible For It?
YOUR PURCHASE ---VAT = WE DO NOT ASK FOR A BILL
INCOME TAX- are you truly faithful in paying income tax?
Tax evasion VS Tax Avoidance – Greedy are making hay till
sunshines, that is taking advantage of the thin line that separates
tax evasion and tax avoidance
In USA, tax evasion is a crime --shall be fined not more than
$100,000 ($500,000 in the case of a corporation), or imprisoned
not more than 5 years, or both
In INDIA, - shall be charged up to 3 times the amount of income
concealed.
In India --Only 2 to 3 percent of Indians pay any income tax.
(Around 36 million people)
U.S., about 45 percent of the population pays taxes
Efforts by Government in the direction of reducing tax frauds,
corruption and economic extortion:
a. Tweaking the Income Tax Act, 1961 to plug the loopholes
facilitating tax evasion, for example recent modification of
meaning of “advance in cash for purchase and sale of immovable
property”.
B.GAAR though postponed is expected to be made effective to
curb the menace of black money
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16. c. In India, Economic Extortion and Bribery are the major
contributors to tax fraud. With simplification and online
compliance, the impact is expected to reduce substantially
d. Adoption of technology in tax administration and Simplification
of laws with rational tax structure is the goal for substantially
reducing tax frauds in India
e. A detailed study in improving the administration of tax
regulation in India has been carried out by the Tax Administration
Reforms Committee which has submitted its detailed study and
recommendations in its first report in 598 pages on 30th
May
2014 covering the reasons which facilitate the continuous
presence of the three ingredients of Fraud Triangle in Indian Tax
Administration and provide space for large scale tax fraud in
India.
f. The Undisclosed Foreign Income and Assets (Imposition
of Tax) Bill, 2015, popularly known as black money bill
was passed in Lok Sabha on Monday the 11th
May 2015
g. The government of India is also moving a bill on benami
tansactions as The Benami Transactions Prohibition Law to
further check the menace of black money and reduce tax
fraud in India.
h. Introduction of GST is expected to rationalize the tax impact
on Indian public and entities and reduce the involvement of multi
layers and complexity in taxation so that administration becomes
simpler and allows less space for discretionary corruption.
The proposed levy will be a single tax that will cover all levies
at the Centre and state level, including entry tax. It is a value-
added tax, which means a levy at each stage of production, sale
or consumption will be set off against taxes paid in the previous
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17. stage. Through a system of tax credits, those who are in the
intermediate stages of a chain of production will get credits or
refunds for whatever levies they have paid. This avoids cascading
of taxes for the end consumer. Unlike the existing VAT, which is
levied only on manufactured goods, GST will also include
services.
When the system was first discussed, there was great
enthusiasm. But, slowly states started raising objections. One
reason is that finance ministers would lose control over the
taxation system and be unable to give discretionary concessions.
The other area of concern is potential loss of revenue from cash
cows such as petroleum, which makes up for almost half the
revenue for some states. There was also an element of
bargaining in the states' objections.
Ultimately, it should result in a lower burden on consumers as
the levy will be at the point of sale and central and the state
taxes will be merged into one levy.
The incidence of tax in sectors such as real estate is expected
to come down by 25% since companies will be able to claim
credits or set-offs for taxes they pay on goods and services. In
addition, the refund mechanism for taxes paid across the country
is expected to be more efficient, thanks to the proposed IT
backbone. Currently, industry complains that refunds and credits
are tough to claim and even more difficult to get.
The tax system is expected to become more efficient, which
should help boost the economy and hence revenue collections.
Some estimates say the impact on the GDP growth rate could be
between 0.9 and 1.7 percentage points. This will lead majorly in
the direction of reducing tax fraud by reducing multiple handlers
of multiple layer of discretionary taxation and by reducing
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18. incentive for tax evasion by rationalization of the cost of goods
and services.
i. The world wide phenomenon is that the maximum frauds
are detected by the tips and complaints received of some
wrongdoing. This is evidenced by the report to the nations
by ACFE. In India recognizing this fact a bill was
introduced and an Act was enacted. The Whistleblower
Protection Bill, 2011 is a novel legislation that provides for
the public interest disclosure and protection to whistle
blowers. Whistle blowing is the act of disclosing
information by an employee or any stakeholder about an
illegal or unethical conduct within an organization. Oxford
dictionary defines a whistleblower as a person who
informs about a person or organization engaged in an
illicit activity. The Whistleblower Protection Bill is a bill
that seeks to establish a mechanism to receive complaints
relating to disclosure on any allegation of corruption or
willful misuse of power or willful misuse of discretion
against any public servant and to inquire or cause an
inquiry into such disclosure and to provide adequate
safeguards against victimization of the person making
such complaint and for matters connected therewith and
incidental thereto.
The Law Commission of India in 2001 had recommended
that in order to eliminate corruption, a law to protect
whistleblowers was essential. It had drafted a Bill too on
this issue. In 2004, in response to a petition filed after the
infamous murder of NHAI Official Satyendra Dubey, the
Supreme Court directed that machinery be put in place
for acting on complaints from whistleblowers till a law is
enacted. The government notified a resolution in 2004
that gave the Central Vigilance Commission (CVC) the
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19. power to act on complaints from whistleblowers. Since
2004, CVC has received 1,354 complaints from
whistleblowers. In 2007, the report of the Second
Administrative Reforms Commission also recommended
that a specific law be enacted to protect whistleblowers.
India is also a signatory (not ratified) to the UN
Convention against Corruption since 2005, which enjoins
states to facilitate reporting of corruption by public
officials and provide protection against retaliation for
witnesses and experts. The Bill replaces the 2004
government resolution and sets up a mechanism to
receive complaints of corruption or willful misuse of power
by a public servant. It also provides safeguards against
victimization of the person making the complaint.
Thus, the fight goes on against the tax fraud and the
objective of substantial reduction of tax fraud is the goal
of the nation.
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