Taxman invokes benami law to get data from payment gateways

The Income-Tax (I-T) Department has invoked the benami law to fish out information from a few payment gateway (PG) companies.

At least two firms have been told to disclose the identities of persons linked to a string of United Payment Interface (UPI) IDs, the entities who received money, and details like transaction date, amounts, and bank account numbers.

Gateways offer a network for customers to send money to businesses and merchants. Shell companies posing as merchants sometimes register themselves with PGs to move money.

The tax office, probably based on feedback it has received, would verify whether some merchants are holding money on behalf of others; or, if sham merchants are helping fund remitters book bogus expenses to evade tax. Here, the receiver later returns the funds in cash to the sender.

The notices were issued under Section 23 of the Benami Transactions (Prohibition) Act, 1988.

"Tax authorities appear to be using the wider powers under Section 23. Unlike the I-T Act, seeking information under this needs not be linked to any open or pending proceeding. The data can be used to conduct any investigation though with prior approval of the additional or joint commissioner. So, receivers of such notices should comply without fail," said Rahul Garg, managing partner of Asire Consulting, which advises MNCs on tax and regulatory matters.

If the I-T returns of recipients do not reflect the amounts, the department could probe whether they are fronts for others. A benami deal is a transaction or an arrangement where a property or assets like stocks or funds is "transferred" to or is "held" by a person but the consideration of such property has been provided or paid by another person. In other words, the holder of the asset (the front) is not its true beneficial owner.

Since it's mandatory for PGs, regulated by RBI, to do know-your-customer (KYC) formalities before registering merchants, they could be asked to explain if there are KYC lapses.

"Section 23 enquiry can be initiated based on any material or information that may arise from various sources, including tax departments, RBI, the Enforcement Directorate or other government agencies. If the evaluation suggests the likelihood of a benami transaction, the IO may issue a notice under Section 24 seeking an explanation," said Ashish Karundia, founder of CA firm Ashish Karundia & Co.

According to advocate and former ITAT member Ashwani Taneja, "In regard to payments made through PGs, if there is a proper, open, and well-documented agreement between the two entities-where one officially receives payments on behalf of the other and acts only as a payment aggregator/payment gateway, and this arrangement is declared to relevant government departments, it would be legally wrong to call it a benami transaction. However, if the setup is informal and tacit, especially where the real people behind the businesses are hidden, then a benami arrangement could be suspected. Also, when the people running the business are different from those whose names and KYC documents are officially recorded." He said it would not be fair to hold PGs responsible for transactions done by unknown third parties which are not under their control.