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IRRATIONAL AND ILLOGICAL

The normal situation in India is that, in response to a crime or violation that may have been committed by a miniscule few, heavy-handed measures are initiated, that end up harassing the majority, who did nothing wrong and it is they who end up suffering the most. The saga of shell companies and bogus capital as the government alleges is one such instance, where due to a miniscule number of shell companies, the entire corporate world has suffered. Almost 3 lakh entities have been closed down in this manner. To detect and close down alleged shell companies and to tax share capital, on sheer suspicion, the most irrational and illogical measures have been initiated. To start with, if a company did not file its ROC returns for three years or more, it was deemed to be a bogus shell entity, whose name was struck off and it simply ceased to exist. Due to this rough and ready measure, very often, running entities, with bank loans to repay, tax dues, pending court cases and other proceedings, have been struck off and closed, to the utter dismay of the government itself, which is now itself seeking to revive such entities, to pursue pending tax recovery and other government dues.

Yet another such summary dismissal measure, has been where a company has directors, who are not its shareholders too (which is the key distinctive feature of the corporate structure and law), and do not hold commensurate educational qualifications as the government thinks appropriate. Such companies too, despite running legitimate businesses, have been held to be bogus and benami and have been closed down.

Such laws have been enforced even in the matter of receipt of share capital by a company, under the suspicion that all share capital received is bogus. So even if a company receives share capital from its existing promoter shareholders, who may own 100% of its shareholding, yet if such shares are not at a valuation as prescribed by one Rule 11UA of the Income Tax Rules, it will be deemed bogus, even if its source etc. is totally genuine. In such cases, it is the shareholders who have promoted, managed the company, they know what is in the best interests of the company and they are investing their own funds, but if it is at a premium etc. that is not valued as per this Rule 11UA, then the share capital is deemed bogus and is subject to tax penalty and perhaps prosecution too. So the genuineness of a transaction of receipt of share capital by a company from its own promoters, and their wisdom and experience is replaced by the theoretical academic presumption of the tax law and even a bonafide and legal transaction becomes illegal and malafide. The section even overrules genuine market dynamics, where share valuations are done by private negotiation, between private parties and are totally bonafide and genuine, but are held bogus, because they differ from the valuation under the said Rule 11UA.

In many cases, the courts have held such deemed income taxed by the Income Tax Department to be wrong, but yet there is no end to such harassment inflicted on companies and their entrepreneurs. Merely because one bureaucrat is found to be corrupt, that does not mean that all others are. But this logic is sadly not applied to companies and entrepreneurs in India, and they are all deemed to be tax violators.

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