Dodging I-T, Bollywood style

VLS, a non-banking finance company, first made the headlines in 1994, when it managed to raise Rs 120 crore by selling its share that had a face value of Rs 10 at a premium of Rs 390.

VLS, according to the investigators, was buying films from producers at an exorbitant price, and in many cases, thefilms were never even delivered to it. G. Jayachandra of Aarthi films, for instance, has confessed to selling six films worth Rs 2.15 lakh for a price of Rs 1.56 crore. And Sudhakar K. Bokade of Divya Films has confessed that he leased films worth Rs 1.9 crore on paper 8212; Sauda, Dhanwan, Saajan and Anyaya but the negatives were never delivered.

VLS would pay the producers, and this money would, through a series of intermediaries, be routed back to VLS, making the money again available for carrying out a fresh set of 8220;purchases8221;.

In Jayachandra8217;s case, for instance, VLS paid him Rs 1.56 crore on August 16, 1995. The same day, Aarthi paid R K Enterprises, an intermediary for VLS, Rs 1.41 crore. This was then paid to Dove Finance, and Dove paid VLS Rs 1.40 crore the difference between receipts and payments, is presumably the commission for each player.

S.C. Parija, Director General Investigations said while their case against VLS began with searches carried out on the firm in September last year,declarations under the VDIS amnesty scheme had also given them an indication of false depriciations on cinematographic films.

It is understood that among others former Minister Ghani Khan Choudhury had made written complaints about the scam to Finance Minister Yashwant Sinha last year and IT officials in New Delhi and Chennai told The Indian Express that they now have a documented case against the firm.

The I-T Department has also taken the view that if the films had genuinely been sold to VLS for the amount they claim to have bought them for, the firms who sold the films such as the Mumbai-based Divya Films, Thirai Films, Aarthi Films and Shri Hari Movies would have had to pay capital gains of Rs 90.54 crore.

VLS Finance company officers deny these allegations and claim all their transactions were legal and all income declared in tax returns. Says M.P. Mehrotra, company vice-president, 8220;We deny allegations of bogus depreciation. The depreciation has earlier been allowed by the I-T officials whonever questioned this in our tax returns. If at all, the fault is theirs. If Income Tax officials are talking about capital gains, they are admitting to the value of the films. They should make up their mind what they want to do.8221;

I-T sources, however, say they have detected an ingenious route of tax evasion for which the firm may now face a heavy tax penalty. Officials contacted in Chennai also described this as a 8220;large-scale8221; tax evasion operation and said once statements of film producers had been recorded by them, smaller companies stopped claiming 100 per cent depriciation for cinematographic films.

While a major part of the appraisal report deals with the siphoning off public funds and loss to shareholders of VLS Finnace, the portion on the film scam reportedly revolves around the following:

The bogus depreciation, for cinematographic films worth Rs 96.32 crore, was availed of by the company between 1995-1997 while there was a total depriciation of Rs 133.27 crore for other items like gas cylinders, boilers and shuttering.

The case of the I-T Department is that the company has misrepresented the category of 100 per cent depreciation allowed by the I-T rules under the category 8220;machinery andplants8221;. Under this, only bulbs of studio lights are allowed this much depreciation and not entire cinematographic films as such.

After the VLS scam was unearthed, the I-T Department has advised that clarifications be issued to the CBDT saying that cinematographic films are not eligible for 100 per cent depreciation and that such instructions would go a long way in checking this mode of tax evasion.

How the money was rotated

The I-T Department clinched its case against VLS Finance with the discovery of four accounts in the Punjab National Bank, opened by the firm exclusively for transactions for cinematographic films. Some 16 8220;circular8221; transactions have been traced which show the flow of funds.

For instance on 16 August, 1995, the Rs 1.56 crore which G Jayachandran, proprietor of Aarthi Films, was paid on paper was routed and re-routed in the bank. VLS Finance first paid Rs 1.5 crore to Aarthi Films. The same day, Rs 1.41 crore was paid by Aarthi Films to R K Enterprises, an intermediarycompany and then Rs 1.41 crore paid by R K Enterprises to Dove Finance.

Dove8217;s proprietor, Vijai Vasudevan, several film producers have said was the middle-man for VLS Finance. A fourth payment of Rs 1.40 crore was then made by Dove Finance to VLS Finance. The cycle of laundering was complete 8212; save the commissions received by Aarthi Films and Dove. The I-T Department has concluded there was no real sale or lease-back transaction and that the entire transaction was designed at the behest of VLS Finance to look like a lease transaction.

Insight

The I-T authorities have obtained admissions from the following film producers based in Chennai and Mumbai.

Suresh Kanth, proprietor of Hari Movies has confessed to selling films worth Rs 90,000 to VLS Finance for an inflated price of Rs 72.17 lakh. He said he had been paid a commission of Rs 2.6 lakh for the deals.P L Palaniuppam, Proprietor of Durnekela Productions, said he sold as many as 22 old films.

Thefilms had a commercial value of Rs 3.5 lakh and were sold, at least in the books, for Rs 6 crore.G S Madhu, proprietor of Aanandhi Films, Mylapore admitted to selling 12 films for Rs 2.8 crore to VLS finance. He has said the purchase and sale were 8220;not real8221; and that there was no trading profit in the transactions except the commission of Rs seven lakh he got.