CA Varun Gupta
Quick Summary
Introduction In recent years, many taxpayers have faced serious issues under both Income Tax and GST law due to direct or indirect transactions with shell companies, paper entities, accommodation-entry providers, non-existent suppliers and fake-invoice operators. In many cases, the taxpayer may hav
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FAQ :
Under Income Tax law, engaging with shell companies can lead to amounts being treated as unexplained credit, unexplained investment, unexplained expenditure, or false entries, resulting in tax, penalties, and reassessment proceedings. Specific sections like 68 (unexplained credits) and 69-69D (unexplained investment/asset/expenditure) of the Income-tax Act, 1961, and their counterparts in the Income-tax Act, 2025, are often invoked.
Under GST law, dealing with fake invoices or shell suppliers can result in denial of input tax credit (ITC), demands for tax, interest, and penalties. It can also lead to summons, search proceedings, suspension or cancellation of registration, and in severe cases, prosecution.
No, there are generally no separate statutory notices specifically titled 'shell company notice'. Tax authorities typically issue notices under regular statutory provisions using terms like 'bogus share capital', 'accommodation entry', 'fake invoice', or 'non-existent supplier'.
When facing scrutiny over credits from shell companies under Income Tax, a taxpayer is generally required to establish the identity of the investor or creditor, their creditworthiness, and the genuineness of the transaction. For closely held companies, the inquiry may extend to the source of funds for the investor or creditor.
GST law addresses fake invoices and ITC issues primarily through Section 16 (eligibility for ITC), Section 61 (scrutiny of returns), Section 67 (inspection, search, and seizure), and demand proceedings under Sections 73, 74, or 74A. Taxpayers must prove actual receipt of goods/services, the supplier's existence, and proper tax payment chains.
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