Is the return of 99% notes crucial in raising black money? What is the lesson of Karuvannur Bank?

One of the defining events in India’s modern economic history was demonetisation, announced on 8 November 2016. In a completely unexpected move, Prime Minister Narendra Modi in his address to the nation announced the demonetisation of the Rs 500 and Rs 1000 notes in circulation till then. At a time when digital transactions were dry, the first Modi government’s decision to withdraw 86% of the currency in circulation in the country was bold.

The government termed the action as a fight against black money. But when the deadline for demonetisation expired and 99% of the demonetised notes were returned to the banks, there was criticism that demonetisation had failed. But the return of 99% of the notes, was it becoming a real catch for the government in its hunt for black money? What is the lesson of the Karuvannur Bank, AR Nagar Cooperative Bank scams? Let’s check in detail.

Source of Black Money: Two types

Simply put, black money is any income, asset or savings that should be subject to income tax but is kept unaccounted for. There are mainly two types of sources of black money. Through legal activities and illegal activities. The first category of sources of black money includes untaxed legal earnings or tax evasion. An example is trade without bill. The second source of black money is income from anti-social activities like forgery, bribery, blackmailing and theft.

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Returned 99% note?

It is clear from the above that it is a fake note and not a fake note. Therefore, black money cannot be identified unless the source of income is sought from the money that has reached the banks after demonetisation. That is, the money returned to the account falls under the definition of black money only if it is a large amount above 2.5 lakhs which is within the income tax net, and the exact and legal source of income cannot be shown.

During the demonetization period, it was found that more than 18 lakh individuals, more than 2.5 lakh had deposited Rs 500 and Rs 1000 notes in their bank accounts. In 2017, CBDT chairman Sushil Chandra had stated that 1.16 lakh people had been issued show cause notices for suspicious transactions, over 25 lakhs of which had been invested through banned notes and had not filed income tax returns in the subsequent assessment year.

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Similarly, Union Finance Minister Nirmala Sitharaman had informed the Lok Sabha in December 2019 that income tax notices worth Rs 12,600 crore had been issued in 422 cases under the Prevention of Black Money Act. Also, the Finance Minister stated that undisclosed assets of Rs 8,460 crore have been brought before the law and a penalty of Rs 1,290 crore has been imposed. Nirmala Sitharaman also informed the Lok Sabha that during the period from 2016-17 to 2018-19, assets worth Rs 4,046.25 crore were confiscated.

Karuvannur Bank Fraud

The relevance of the controversies related to the Karuvannur Cooperative Bank in Kerala, which is being investigated by the national agency ED (Enforcement Directorate) in connection with money laundering, is increasing in the context of demonetisation. In the first charge sheet filed by the ED in the court last week, it is stated that black money transactions of Rs 90 crore have been found. 88.45 crores worth of property has been confiscated from 39 accused in the case, the ED’s chargesheet also states.

The ED’s chargesheet says that the bank was cheated in 90 benami names and 343 crore rupees were taken through fake loans. The National Financial Crimes Investigation Agency also stated that it has already received evidence of laundering 150 crores out of the 343 crores lost by the bank. Similarly, it is noteworthy that the charge sheet related to the Karuvannur bank fraud case has included five entities. This is an indication that the money stolen from Karuvannur Bank has also gone to the real estate sector.

Similarly, in Karuvannur Bank, it is clear from the bank’s own records that there was a sudden increase of Rs.100 crore in deposits during 2016-17. The total investment has increased from Rs 400 crore to Rs 500 crore. It is difficult to get such amount suddenly in a bank where there are many ordinary depositors. And this Rs 100 crore was withdrawn in several installments after the demonetisation period. ED observes that this is also a factor raising suspicion. In short, if ED can find the source of this 100 crores, the seriousness of the Karuvannur bank fraud case will increase further.