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Last Updated : Feb 19, 2019 02:50 PM IST | Source: Moneycontrol.com

Harshad Mehta scam: Family free of over Rs 2,000cr income tax demand after 27 years

The tax refunds following favourable court orders would eventually pave the way for the custodian to release the assets of the Mehtas

Moneycontrol News @moneycontrolcom

An income tax demand on the late Harshad Mehta and family, accused in the 1992 securities scam, has come to an end after 27 years as the income tax tribunal has scrapped almost the entire tax demand, according to a report by The Economic Times.

The scam had shook the country and changed the rules of the game on Dalal Street.

The Income Tax Appellate Tribunal (ITAT) has scrapped over Rs 2,000 crore of tax additions made by the Income Tax Department on members of the Mehta family -- late Harshad Mehta, his wife Jyoti, and brother Ashwin -- for assessment year 1992-93.

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ITAT's decision was based on an analysis of various transactions relating to trades in money and stock markets for the said period. The tribunal also looked into the facts in questioning the assessment order of February 1995 when the I-T Department pegged the untaxed income of the Mehtas at over Rs 2,014 crore.

"The tribunal has reiterated the cardinal principle of taxation that in spite of the probes and observations by a Joint Parliamentary Committee (JPC), the Reserve Bank of India (RBI), and the Central Bureau of Investigation (CBI), and seizure of volumes of documents, the I-T department has to compute the correct taxable income embedded in the transactions. Every receipt by an assessee cannot be termed as taxable income. The tribunal has done a commendable job of analysing each transaction and commuting taxable income. The volume and value were no deterrent in deciding this pending litigation by the last fact-finding authority," a senior chartered accountant Dilip Lakhani told the paper.

Listen: Podcast | A to Z of scams in India: From Harshad Mehta to PNB-Nirav Modi case

What is the Harshad Mehta scam?

Harshad Mehta, a registered broker, and his partners were accused of manipulating the Bombay Stock Exchange in 1992 by taking advantage of loopholes in the banking system. Mehta used the ready forward (RF) deal to insert money into the market. RF deals were short-term loans from one bank to another. The deals were generally made with the help of brokers, who were paid commissions.

Mehta allegedly colluded with bank employees to get fake bank receipts (BRs) issued. He used these BRs to get other banks to lend him money under the false impression that they were lending against government securities (G-Secs). This amount was then put into the stock market to enhance share prices up to a staggering 4400 percent. Harshad Mehta then sold these shares at a significant profit and the principal amount was then returned to the banks.

In this manner, Mehta defrauded banks of nearly Rs 4,000 crore. Once his mode of operation in the stock market was discovered and exposed, banks realised that they were in possession of fake BRs holding no value.

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The case caused a furore in the Parliament, leading to his arrest and sweeping changes in the stock market and tighter norms. He was convicted by both the Bombay High Court and the Supreme Court and charged with 74 criminal offences, which dragged on until 2001 when he passed away at the age of 47.

What happened next?

After the scam came into the light, the tax department conducted a raid on the Mehtas on February 28, 1992, when several documents and share certificates were seized. On June 4, 1992, CBI carried out a search operation on the Mehtas, and subsequently, the tax return filed by Harshad Mehta for the assessment year 1992-93 was rejected by the department.

According to the report, the assessment order by the department issued in February 1995 was built on fresh additions and disallowances such as ‘money market oversold position’ (Rs 1,080.58 crore), ‘money market unexplained stock’ (Rs 291.05 crore), ‘profit on sale of shares in shortage’ (Rs 253.16 crore), ‘unexplained money’ (Rs 251.8 crore), ‘interest on securities in money market’ (Rs 58.27 crore), ‘money market difference received’ (Rs 35.55 crore), ‘share market trading profit’ (Rs 16 crore).

What’s in store next?

The I-T Department may have little ground to move the Bombay High Court to challenge the order as ITAT’s verdict is based on facts and on the principle of tax law, as per the report.

Refund amounts from the tax department would go to the custodian that was created under a special law for impounding assets of the scam accused. This would eventually pave the way for the custodian to release the assets of the Mehtas.

While the tortuous battle between the tax office and Mehtas could continue on smaller issues, ITAT’s 297-page order, released a fortnight ago, puts an end to a large chunk of tax disputes relating to the Harshad Mehta scam.

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First Published on Feb 19, 2019 10:40 am
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