Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

Study Material

Diploma in Criminology & Criminal Administration

Socio-Economic Crimes

Unit 3

Adulteration of Food Stuffs, Drugs and Cosmetics.

Food Stuffs:

Food adulteration rate in India has almost doubled over the last 5 years according to data

sourced from FSSAI annual reports. Food adulteration rate in India stood at 13% in 2011-12

which increased to 23% in 2016-17. Adulteration is a legal term meaning that a food product

fails to meet the legal standards. One form of adulteration is an addition of another substance

to a food item in order to increase the quantity of the food item in raw form or prepared form,

which may result in the loss of actual quality of food item. It is the process in which the quality

of food is lowered either by the addition of inferior quality material or by extraction of valuable

ingredient. It not only includes the intentional addition or substitution of the substances but

biological and chemical contamination during the period of growth, storage, processing,

transport and distribution of the food products, is also responsible for the lowering or

degradation of the quality of food products.

Laws in force

Now coming to the laws that governs food adulteration in India we have:

Indian Penal Code

Food Safety and Standards Act, 2006

Food Safety and Standards (Licensing and Registration of Food Businesses)

Regulation, 2011.

Food Safety and Standards (Packaging and Labelling) Regulation, 2011.

Food Safety and Standards (Laboratory and Sampling Analysis) Regulation, 2011.

Food Safety and Standards (Food Product Standards and Food Additives) Regulation,

2011.

Recent rulings of court

Make milk adulteration punishable with life imprisonment: SC

The observation by an apex court bench of Justice K.S. Radhakrishnan and Justice A.K. Sikri

came after taking note of Uttar Pradesh, West Bengal and Odisha having made the sale of

adulterated milk, contaminated with synthetic material, an offence punishable with life

imprisonment.

Delhi Kirana Shop Owner imprisoned under the Prevention of Food Adulteration Act

The accused was running a small kirana shop in Delhi. Officials from the Food Adulteration

Department, in 1993, detected salt as an adulterant in 450 gram of red chilli powder sample

taken from his shop. A second test by the Central Forensic Science Laboratory also showed

ash content and pointed towards adulteration

Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

He has been sentenced to 3 months imprisonment under Prevention of Food Adulteration Act,

1954 by a Supreme Court bench comprising of Justice A.K. Sikri and Justice B.S. Chauhan

FOOD SAFTY AND STANDARD AUTHORITY OF INDIA

Food Safety and Standards Authority of India (FSSAI) is an autonomous body established

under the Ministry of Health & Family Welfare, Government of India the FSSAI has been

established under the Food Safety and Standards Act, 2006 which is a consolidating statute

related to food safety and regulation in India. FSSAI is responsible for protecting and

promoting public health through the regulation and supervision of food safety

FSSAI was established by Former Union Health Minister Dr Anbumani Ramadoss,

Government of India on 5 September 2008 under Food Safety and Standards Act, 2006. The

FSSAI consists of a chairperson & 22 members. The FSSAI is responsible for setting standards

for food so that there is one body to deal with and no confusion in the minds of consumers,

traders, manufacturers, and investors. Ministry of Health & Family Welfare, Government of

India is the Administrative Ministry of Food Safety and Standards Authority of India. The

following are the statutory powers that the FSS Act, 2006 gives to the Food Safety and

Standards Authority of India (FSSAI).

1. Framing of regulations to lay down food safety standards

2. Laying down guidelines for accreditation of laboratories for food testing

3. Providing scientific advice and technical support to the Central Government

4. Contributing to the development of international technical standards in food

5. Collecting and collating data regarding food consumption, contamination, emerging

risks etc.

6. Disseminating information and promoting awareness about food safety and nutrition in

India

Consumers can connect to FSSAI through various channels or call Toll free Number

1800112100. Recently an online platform called ‘Food Safety Voice’ has been launched which

helps consumers to register their complaints and feedbacks about food safety issues related to

adulterated food, unsafe food, substandard food, labelling defects in food and misleading

claims & advertisements related to various food products. A GAMA portal for concerns

regarding misleading claims and advertisements too is operated.

Punishments for food adulteration

Under section 272 of Indian Penal Code which says as under: -

“Whoever adulterates any article of food or drink, so as to make such article noxious as food

or drink, intending to sell such article as food or drink, or knowing it to be likely that the same

will be sold as food or drink, shall be punished with imprisonment of either description for a

term which may extend to six months, or with fine which may extend to one thousand rupees,

or with both.”

But for the State of Uttar Pradesh and State of West Bengal it is punishable with life

imprisonment

Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

Under Food Safety and Standards Act, 2006 the penalty for selling misbranded or sub-standard

food right now is between Rs 3 – 5 lakhs. The punishment for unsafe food that has resulted in

death is life imprisonment and a fine of Rs 10 lakh and that for unsafe food resulting in grievous

injury or death-like situation is an imprisonment of 6 years and a fine of Rs 5 lakh.

The FSSAI regulations provide for various punishments to persons who do adulteration of food

or food products as under:

Import, manufacture, storage, sale or distribution of any food article which is

adulterated by allowing its quality or purity to fall below the prescribed standard, or is

misbranded, or in contravention of any provision of the Act or Rules. The penalty for

this offense is a minimum imprisonment of six months that may extend up to 3 years

and a minimum fine of Rs 1000.

Import, manufacture, storage, sale or distribution of any adulterant not injurious to

health. Penalty is minimum imprisonment of six months that may extend up to 3 years

and minimum fine of Rs 1000.

Preventing a Food Inspector from taking a sample or exercising his Penalty is minimum

imprisonment of six months that may extend up to 3 years and minimum fine of Rs

1000.

Giving a false warranty in writing in respect of any food article. Penalty is minimum

imprisonment of six months that may extend up to 3 years and minimum fine of Rs

1000

Import, manufacture, storage, sale or distribution of any food article which is

adulterated or any adulterant which is injurious to health is being used is punishable

under Law. Penalty is minimum imprisonment of one year that may extend up to 6

years and minimum fine of Rs 2000

Sale or distribution of any food article containing any poisonous or other ingredients

injurious to health, which is likely to cause death or grievous bodily harm. Penalty is

minimum imprisonment of three years that may extend up to life and minimum fine of

Rs 5000.

Food Adulteration laws in India has become more and more stronger by passage of time we

have seen a drastic change of position of India from where it was once a minor offence

punishable with imprisonment for 3 month or fine only to life imprisonment as it affect society

at large so it should be punished accordingly.

Laws on Food Adulteration

Food adulteration is the process by which the value of the food or its produces is abridged

through the accumulation of an alien or inferior substance or the elimination of a vital element.

Food adulteration is of 3 types:

Intentional adulteration

Incidental adulteration

Natural adulteration

Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

Intentional adulteration means expressively adding some unwanted substances to the food or

removing/replacing some of the items and making it of poor quality. This is done for making

additional profits by decreasing the cost of production or by increasing the quantity. Intentional

adulterants comprise sand, marble chips, stones, mud, chalk powder, water, foreign seeds, and

leaves, etc. Many of these can easily be detected.

Incidental adulteration Sometimes food gets incidentally or unintentionally polluted in fields

(e.g. crops) during growth and harvesting, storage, processing, transportation and handling by

the producers as well as by the consumer. Pesticides and insect residues, metals, droppings of

rodents, larvae of insects, the microorganism may enter the food at any stage.

Natural adulteration occurs due to the presence of certain chemicals or harmful substances

naturally occurring in foods e.g. lead from water pipes joints mixes into the water. Pesticides

seep into the soil with water which is taken up by the plants grown on such soil. Some types of

fish, some ranges of pulses, mushrooms, etc. are poisonous for human consumption.

Laws governing the food industry

The Indian food processing industry is controlled by several laws that govern the aspects of

sanitation, licensing and other authorizations that are required to start-up and run a food

business. The legislation that dealt with food safety in India was the Prevention of Food

Adulteration Act, 1954 (hereinafter referred to as “PFA”. The PFA had been in place for over

50 years and there was a necessity for change due to varied reasons which include the changing

requirements of our food industry.

The act brought into force in place of the PFA is the Food Safety and Standards Act, 2006

(FSSA) that dominates all other food-related laws. It specifically repealed eight laws which

were in operation prior to the enforcement of FSSA:

The Prevention of Food Adulteration Act, 1954

The Fruit Products Order, 1955

The Meat Food Products Order, 1973

The Vegetable Oil Products (Control) Order, 1947

The Edible Oils Packaging (Regulation) Order, 1998

The Solvent Extracted Oil, De oiled Meal, and Edible Flour (Control) Order, 1967

The Milk and Milk Products Order, 1992

Essential Commodities Act, 1955

Need for the new act:

FSSA recruits the synchronization of India’s food regulations as per universal ethics. It

inaugurates a new national regulatory body, the Food Safety and Standards Authority of India

(FSSAI), to develop science-based principles for food and to regulate and monitor the

manufacture, processing, storage, distribution, sale and import of food so as to guarantee the

accessibility of safe and wholesome food for human feeding. All food imports will, therefore,

be subject to the provisions of the FSSA and rules and regulations which as notified by the

Government on the 5th of August 2011 will be applicable.

Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

Background

The adulteration of food is a subject in the Concurrent List of the Constitution Prior to 1954,

there were quite a few state laws to control the quality of the food. However, there was a change

in the provisions of different states and this posed problems in trade between different

provinces. The need for Central legislation was felt. Thus, the Prevention of Food Adulteration

Act, 1954 was enacted by the Union legislature to wrestle the problem of food adulteration

which was extensive in the country. This Act was in action until it was abolished in 2006 by

the Food Safety and Standard Act, 2006.

Laws at present: -

CENTRAL LEGISLATION

There were many defects in the Prevention of Food Adulteration Act, 1954. Thus, to eliminate

those flaws and unite the laws relating to food safety and standards, the Parliament enacted the

Food Safety and Standards Act, 2006 (hereafter referred to as ‘FSSA’). Section 91 of the Act

authorizes the Central Government to make rules under the Act. Some of these rules enacted

by the Government which controls the standard of food products are:

Food Safety and Standards (Licensing and Registration of Food Businesses)

Regulation, 2011.

Food Safety and Standards (Packaging and Labelling) Regulation, 2011.

Food Safety and Standards (Laboratory and Sampling Analysis) Regulation, 2011.

Food Safety and Standards (Food Product Standards and Food Additives) Regulation,

2011.

Provision under food safety and standard act, 2006

The Food Safety and Standard Act, 2006 is an inclusive legislation dealing with several aspects

with respect to the regulation of food safety. The provisions under the Act can be divided into

various heads.

Establishment of various authorities and their responsibilities

The FSSA establishes various authorities for the effective implementation of the provisions of

the Act.

Food Safety and Standard Authority of India (FSSAI) is established under Section 4 of

the Act. It is the most important authority which supervises and regulates food safety

and standards.

The Act provides that it’s head office shall be in Delhi.

Moreover, it can also establish offices in any other place.

FSSAI is a body corporate having perpetual succession, common seal and the

right to own and dispose of the property in its own name. Like any other body

corporate, it can sue and be sued in its own name.

It consists of a chairperson and 22 members selected by a Selection Committee

constituted by the Central Government.

Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

The Act also provides for the appointment of Chief Executive Officer by the

Central Government. He is the legal representative of the Food Authority.

The Act provides that the Food Authority shall establish various other authorities.

A Central Advisory Committee for ensuring cooperation between the Food

Authority and the enforcement agencies.

Scientific Panels in order to deliberate on certain matters in consultation with

representatives of the concerned industry along with consumer representatives.

Scientific Committee to advice the Food Authority on various issues by giving

their scientific opinion.

The Act empowers the State Government to appoint a Commissioner of Food Safety

for the State for effective implementation of the provisions at the State level.

The Commissioner of Food Safety is given the authority to appoint a Designated

Officer for each district.

The Commissioner is also empowered to appoint Food Safety Officers.

Offences and penalties

Section 48 lays down the offences. It provides the conditions where a person shall be liable for

interpreting any food item hazardous by a number of means such as adding to it an article or

substance or removing certain essentials from the food which results in a weakening of its

quality.

FSSA provides for penalties and punishments for contravening the provisions of the Act.

The Act consists of a comprehensive list of offences in which the penalties shall be imposed.

1. A penalty for selling of food which is not of the quality as per the regulations under the

Act. The penalty, in this case, shall not exceed five lakh rupees.

2. A penalty for manufacturing for sale, storing, selling, distributing, importing food of

sub-standard quality which may extend to five lakh rupees.

3. A penalty for manufacturing for sale storing, selling, distributing or importing

misbranded food products which may extend to three lakh rupees.

4. The Act prohibits misleading or deceptive advertisements and there is a penalty for the

same which may extend to ten lakh rupees.

5. A penalty is also prescribed for manufacturing, storing, selling, distributing or

importing a food product containing extraneous material and such penalty may extend

to one lakh rupees.

6. The Act imposes a penalty on the food business operator or importer who fails to

comply with the provisions of the Act which may extend to two lakh rupees.

7. There is a penalty which may extend to one lakh rupees for manufacturing or processing

food in unhygienic or unhealthy conditions.

8. The Act also imposes a penalty for the possession of adulterant.

Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

9. Further, the Act also lays down that if no separate penalty is provided and an act is in

contravention to the provisions or regulations of the Act, then a penalty shall be

imposed which may extend to two lakh rupees.

According to section 2(a) of the prevention of food adulteration act, 1954, an article of

food is said to be adulterated if:

It contains any other substance which disturbs or is so processed as to affect injuriously

nature, substance or quality;

Any low-grade or inexpensive substance that has been replaced wholly or partly in the

article so as to affect injuriously nature, substance or quality;

Any essential component of the article that has been wholly or partly distracted so as to

affect injuriously nature, substance or quality.

Procedure to complain

Whenever any person comes to know or sees that any person is committing food adulteration,

the consumer can file his complaint at;

Tier 1: Manufacturer/ shopkeeper

Tier 2: Local Health Authority of India or district commissioner of the food safety authority of

the state/ union territory

Tier 3: Consumer Forum

The consumer forum is existent at three levels, namely at the district level, state level, and the

national level. The grievances have the original jurisdiction at the district level and appellate

jurisdiction at the state and the national level.

Consumers can also connect to FSSAI (The Food Safety and Standards Authority of India)

which is a legislative body to control the rules and regulations which are specified in the Food

Safety and Standards Act. Recently launched an online platform called the ‘Food Safety Voice’

where consumers can register their complaints and food safety issues about adulterated food.

I as a consumer can definitely approach the Manufacturer or the shopkeeper or Local Health

Authority of India or district commissioner of the Food Safety Authority of the state/ union

territory or Consumer Forum. It is the duty of the manufacturer/producer/wholesaler to hear

my grievances and shall provide compensation for the same before the expiry of the period of

six months.

Compensatory remedies that the victim of food adulteration can avail

1. As per the Food Safety and Standards Act, 2006, the following remedies can be availed

to the victims under section 65 of the act stated above;

2. Any person who by himself or any other person manufactures a food article which may

be harmful to the consumer or his death shall be made liable to pay the victim a fine

which may be exceeded to

i) Not less than five lakh rupees in case of death;

ii) Not exceeding three lakh rupees in case of grievous injury;

Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

iii) Not exceeding one lakh rupees in all other cases of injury.

Provided that the compensation needs to be paid before six months and in case of death, an

interim relief should be sent to the victim’s family within a period of thirty days.

The food adulteration laws have been growing with the changing needs of the time. Earlier

there were different laws for different provinces that were revoked and combined by the

Prevention of Food Adulteration Act, 1954. However, even this Act could not stand the test of

time and had to be revoked due to numerous defects. The Food Safety and Standards Act, 2006

and the regulations made under the Act broadly deal with the issue. However, it is important

for the authorities under the Act to be cautious so that actual results are achieved.

Effects:

Leads to chronic health problems: There are many mineral oils which when added to the

food items can result in paralysis, cancer etc. If pregnant women eat such food items it might

lead to abortion or even damage the brain of the baby. Sometimes zinc substances result in

vomiting or in severe cases it can result in diarrhoea. Food colours that are added to the items

can be the reason of liver damage, allergies and lots more. Thus, you can say that adulteration

can bring down your health and affect the quality of life.

Increases the impurity in the food: As adulteration alters the composition of the food item,

it increases the impurities thus making them imperfect for the consumption. If you consume

such impure stuff you are bound to have side effects which can either be short-term or a long-

term one.

Lack of nutritional value: Ready-made food is made using poor quality ingredients which not

only brings down the nutritional content but can have a change in taste as well if kept for a long

time. So, you compromise with the taste as well as your health.

Thus you can say that adulteration is definitely not good. There can be a number of reasons of

adulteration like the wrong packaging, use of insecticides or pesticides on the food, use of

preservatives and lots more. One can do nothing about it but just take measures and try to use

quality products only for cooking. This will ensure healthy cooking and you will be able to stay

away from various kinds of health problems. So, avoid ready-made food but healthy food

prepared at home.

DRUGS & COSMETICS:

DRUGS AND COSMETICS ACT, 1940

This act was passed to regulate the import, manufacture, distribution and sale of drugs and

cosmetics. The Drugs Enquiry Committee had recommended that such &law be made and

accordingly the Central Legislative Assembly in 1937 after obtaining the requisite resolutions

from the Provincial legislatures empowering the Central Legislature to pass an Act for

regulating the control of drugs had enacted this Act. The object was also to have a

comprehensive measure to provide for the uniform control of the manufacture and distribution

of. drugs as well as of its import. The Act was later extended to regulate cosmetics also. It was

thereafter made applicable to medicines and substances used or prepared in accordance with

Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

the Ayurvedic or Unani systems of medicines as it was found that these preparations had, been

commercialised and proper components were not being used or imitations were being used.

Chapter I of the Act deals with application of the Act and definitions of terms used. Chapter I1

deals with the establishment of a Board of Technical Experts to advise the Central and State

Governments on technical matters. The Central Drugs Laboratory and the Drugs consultation

Committee have been set up. Chapter III provides for the control of the import of drugs with

executive power in the Central Government. Chapter IV deals with the ', regulation and control

of the manufacture, sale and distribution of drugs and cosmetics. Chapter IV-A deals with

provisions relating to Ayurvedic, Siddha or Unani drugs. Chapter VI deals with the

miscellaneous provisions.

The Drug Technical Advisory Board

The Board has been set up by the Central Government to advise it and the State Governments

of technical matters arising out of the administration of this Act and for carrying out other

functions assigned to it by this Act. It consists of Director-General of Health Services as

Chairman, the Drugs Controller, Directors of Central Drugs Laboratory, Central Research

Institute, NRI, Medical Council of India, Pharmacy Council of India, Nominees of the Central

Government, Pharmacy teachers, representatives of pharmaceutical industry, etc. The Board

may make Bye-laws for its own regulation and function through Sub-committee.

Central Drugs Laboratory

This is established bv the Central Government under the Control of a Director to carry out

functions laid down under the Act. Rules provide for the procedure tor admission of samples

of drugs or cosmetics for analysis or test, forms of reports, fees to be paid, etc.

The Drugs Consultative Committee

This has been constituted by the Central Government as an advisory committee to advise the

Central, State Governments and the Board on any matter pending to secure uniformity in the

administration of this Act. It has representatives of the Central and State Governments.

Import of Drugs and Cosmetics

All drugs have to conform to the standard prescribed in the Second Schedule to the Act and

then qualify to be described as of standard quality. The Central Government has the power to

add to or amend the Second Schedule.

A drug will be deemed to be misbranded if:

1. it is so occurred, coated, powdered or polished that damage is concealed or'if it is made

to appear of better or greater therapeutic value than it really is, or

2. it is not labelled in the prescribed manner

3. its label or container or anything accompanying the drug bears any statement, design or

device which makes any false claim for the drug or which is false or misleading.

A drug shall be deemed to be adulterated if:

1. if it consists, in whole or in part, of any filthy, putrid or decomposed substance; or

Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

2. if it has been prepared, packed or stored under insanitary conditions whereby it-may

have been contaminated with filth or whereby it may have been rendered injurious to

health; or

3. if its container is composed in whole or in part, of any poisonous or deleterious

substance which may render the contents injurious to health; or

4. if it bears or contains, for purposes of colouring only, a colour other than one which is

prescribed; or

5. if it contains any harmful or toxic substance which may render it injurious to health; or

6. if any substance has been mixed therewith so as to reduce its quality or strength.

A Cosmetic shall be deemed to be misbranded-

if it contains a colour of label which is not prescribed or bears\a false or misleading statement.

The Central Government has power to prohibit import of drugs or cosmetics not of standard

quality, or which are misbranded, adulterated or spurious or which are imported in violation of

the terms of licence, or in which the contents are not disclosed or which has harmful

ingredients. Small quantities can be imported for test, analysis or personal use. The Central

Government may impose such prohibition against import in public interest and make Rules to

that effect. Customs officials can detain and seize any drug or cosmetics which was prohibited

from being imported. Any person who imports any drug or cosmetic which is prohibited shall

be punishable with imprisonment up to three years and with a fine of Rs 5000. The

consignments of drugs and cosmetics in such cases will be liable to confiscation.

RACKETEERING

When you think about the term racketeering, you might immediately think about the mob or

Mafia. However, it can really be applied to any activity run in an organized way. Law

enforcement tries to stop the activities by cutting off the money supply.

Basically, it's a structured criminal organization doing illegal activities in multiple states and

often countries.

Definitions of racketeering

a. Common definition of Racketeering:

Racketeering, often associated with organized crime, is the act of offering of a dishonest service

(a "racket") to solve a problem that wouldn't otherwise exist without the enterprise offering the

service. Racketeering as defined by the RICO act includes a list of 35 crimes. Racketeering

describes a pattern of engaging in illegal business activities, or extorting money from people.

This is most commonly associated with organized crime, in which mob families, gang leaders,

and others, who own and control the illegal activities.

b. Legal Definition of Racketeering:

Traditionally, obtaining or extorting money illegally or carrying on illegal business activities,

usually by Organized Crime. A pattern of illegal activity carried out as part of an enterprise

that is owned or controlled by those who are engaged in the illegal activity. The latter definition

derives from the federal Racketeer Influenced and Corruption Organizations Act (RICO), a set

Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

of laws (18 U.S.C.A. § 1961 et seq. [1970]) specifically designed to punish racketeering by

business enterprises. According to the federal Racketeer Influenced and Corruption

Organizations Act (RICO), a pattern of racketeering activity requires a minimum of two acts

of racketeering activities. Racketeering, as it is commonly understood, has always coexisted

with business. In the United States, the term racketeer was synonymous with members of

organized-crime operations.

c. Who is a Racketeer?

Racketeer is a person who engages in dishonest and fraudulent business dealings, a person who

makes money through illegal activities, a person(s) who obtains money by an illegal enterprise

usually involving intimidation or a a person who gets money or advantages by using force or

threats. The legal definition of a racketeer is; a person that engages in racketeering d. Breaking

down 'Racketeering' A common example of a racket would be if a group of people cut the tires

of cars on a specific street, and then that same group, or one in concert with the one cutting

tires offered "protection" to the owners of the cars for a price. This fits the definition of a racket

because without the organization’s slashing of tires in the first place, the demand for

"protection" would be low or non-existent. Other examples of racketeering activity include

extortion, money laundering, loan sharking, obstruction of justice and bribery.

Forms of Racketeering

A racket can have several forms. It may involve an illegal business. Or a legal business in

which the organization breaks the law to help it succeed. Many crimes support a racketeering

charge. A racketeering activity is any act, or threat to act involving:

Murder, Kidnapping, prohibited chemical Dealing in manufacture or distribution of a

controlled Bribery, Loan Sharking, Extortion, Arson, Robbery, Counterfeiting Embezzlement,

Fraud, Theft, Drug Trafficking, Dealing in Obscene Matter.

A lawful business may cover the racket's illegal acts. Everything appears lawful.

Types of Racketeering

Protection Racketeering

Protection racketeering is when a criminal organization coerces someone to pay money for

protection. Often the organization's members provide the protection from harm coming from

not paying the protection fee. Extortion is unlawfully obtaining money by coercion.

Labour Racketeering

Labour racketeering is illegally using unions or employee benefit plans for personal profit.

Organizations may bribe and coerce union officials for control of workers' benefit plan funds.

Labour costs go up, and consumers and workers’ pay in the end.

Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

BLACK- MARKETING & HOARDING:

The meaning of term “Black Marketing” is an illegal transaction of distribution and

production of the goods and services, which are prohibited by law such as – drug trade,

prostitution, illegal currency transactions, human trafficking etc. The purpose behind these

transactions is generally to evade the tax levied by government of country. These kinds of

transactions usually done through cash only so that they can hide from the eyes of government.

These kinds of transactions also lead to money laundering. The people find this way easy to

earn more money within less time period. The “Black Market” can be identified by four kinds

of economy –

1. The illegal economy

The meaning of illegal economy means when the people indulged in such activities which are

related to production and distribution of the goods and services, prohibited by law to evade the

taxes and earn money through simpler way. The purpose behind to prohibit such transaction is

to protect the society against wrong but some people for their personal benefit harm the society

as a whole.

2. The unreported economy

These are the activities consists of those transactions which should be reported to the

government of country but actually are not so reported. These kind of transactions takes places

without the interference of the government of country so this is called as unreported economy.

The purpose behind these illegal transactions is also to evade the tax.

3. The unrecorded economy

This is in regards with the unrecorded income of people. According to the National income and

product account (account managed by government of nation to identify the income of whole

economy), some amount is to be expected as the income of economy must be recorded in such

account every year, but actually are not so recorded because of black marketing through

evading tax.

4. The informal economy

The informal economy includes that part of economy which is not taxed. This is called as

informal economy. I t doesn’t cover the benefits and authority as rights provided by the

government to the society in some transactions, such as – Property relationships, commercial

licensing, labour contracts, financial credit, Social security system etc.

Meaning of “Hoarding”

The term of meaning “Hoarding” is the purchase of large quantity of commodity with the

intention to sell it in future when it is understock or not available in the market at a higher price.

We can say this as a kind of monopoly over market, when people do not have any option to

purchase the same commodity with other buyer due to shortage of the same. This way the

concept of hoarding is somehow related to black market as this kind of transactions are also

prohibited by law. The same way as black marketing, people indulged in the hoarding business

to maximize their profit by the unfair means of business. This commodity is generally a basic

goods used in commerce by large number of people. The term hoarding is different from

cartelization as in cartelization there are number of suppliers or manufacturer who come

Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

together and try to limit the supply of goods for some time so that at the event of shortage of

such commodity they all can monopoly over the market and maximize their profits through

raising the prices of the goods. On the other hand, in the process of Hoarding, there is individual

participant who try to capture the market but the hoardings can easily be converted in to process

of cartelization by come to an agreement by number of suppliers or sellers to limit the supply

of any particular commodity used by public at large.

This is what the all about the concept of Hoarding and its direct relation with the Black

marketing. Further we will discuss below the laws made by the government to prohibit

such kind of illegal activities.

The prevention of Black Marketing and maintenance of supplies of Essential Commodities

Act, 1980 –

The prevention of black marketing and maintenance of supplies of essential commodities Act,

1980 was enacted on 12th February, 1980 and came into force on 5th October 1979. This Act

prohibit the participants to get indulge into black marketing or hoarding transactions by its

provisions under which there are provisions for punishment against such persons who commits

the same.

This Act empowers the state government or central government or an officer of rank not below

the Joint secretary representing centre or state govt. in case has a reason to believe that a person

is committing an against provisions of the Act shall make an order for detaining such person.

This Act also gives the similar power of district magistrates and commissioner of police to take

any action against such participants.

Section 3 (2) – Any order taken by an officer under this Act shall be brought into the notice of

government along with relevant details.

The order shall remain into force for not more than twelve days after making it within which

the State govt. shall approve the order.

The State government shall within seven days’ report to central government along with the

grounds of order where after detention order under Section 3(2) shall be carried.

Even if the order of detention was carried out outside the territorial jurisdiction of the

government making order, it shall not be invalid merely on this ground.

Section 4 – According to this Section if a person is found to avoid order of detention or is

absconding, the Government or officer shall draft a report in writing to Metropolitan Magistrate

or Judicial magistrate first Class who shall order against such person under section 82, 83, 84

and 85 of Code of Criminal Procedure which shall apply against the person and his property.

Provisions of section 4 are also applicable once the authorities have an apprehension of

absconding of person against whom orders of detention have been made.

In case of failure to make an appearance before the court such person shall be imprisonment

extending one year and with fine or both. These offences fall within the category of cognizable

offences. The detained person should be aware of the grounds of detention and shall be given

an opportunity of fair representation.

Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

Section 9 – This Section deals with the appointment of an advisory board consisting of three

persons who is, are qualified or had been judge of a High Court, along with one another member

who is, or has been Judge of High Court. This is the duty of the State government to refer the

detained person before advisory board along with the representation of grounds of detention,

where after the advisory board shall look into all aspects of the matter brought in front of it.

The advisory board shall draft a report after giving an opportunity to detained person, which

shall be acted upon by the government. The report can either ask the government to revoke the

detention orders or shall further continue the detention. The maximum period of detention shall

be of six months from the date of detention. The order of detention may be revoked under

provisions of section 21 of the General Clauses Act, 1897 only after confirmation from State

or Central Government. Person detained may be temporarily released after imposing necessary

conditions on release of such person one such condition may be filing of bond along with

sureties. In case a person breaches conditions of release his bond shall be forfeited. The Act

protects all acts and actions taken in good faith under the provisions of the Act.

Thus, the Act is an effort to bring into hold of law person who in order to suffice their greed

keep essential commodities out of the reach for other people.

This is all about the laws made by the government of country to prevent the participants from

indulging into such kind of illegal activities as black marketing and hoardings, which is harmful

for the economy of the nation. These kind of activities only provides the benefit to the

participant in monetary terms but except the participants the whole society suffers a lot and

also it has an adverse effect on the economy of the country because the money and the tax hide

by the participants are actually the public money which can be use fairly by the government

for the benefit of society.

There are some transactions such as Monopoly, Cartelization, Black marketing, Hoarding are

directly or indirectly interrelated. These offences fall under the category of illegal and

cognizable offences. These transactions lead to money laundering, which is the current issue

in the country.

Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

Evasion and Avoidance of Lawfully Imposed Taxes

Remember the last time you purchased something without asking for a bill from the

shopkeeper? While it seems trivial, it is one of the most elementary of the steps for tax evasion.

It allows the shopkeeper to not show the amount as part of the income with tax authorities and

in turn avoid paying taxes on this much amount. Now think about the whole lot of people who

do not care or purposefully doesn’t demand a bill from shopkeeper and do the math; voila; too

much money for the shopkeepers without paying any taxes, isn’t it?

The loss however is to the Government and in turn the people of the state as the money so

collected through the taxes would have been utilized for development activities to make our

life better

Tax Avoidance vs. Tax Evasion

Whether you are an individual (be it Sole Proprietor or a Salaried profession) or an entity (be

it Company, Partnership or an LLP), taxes are one of the major components which decide the

bottom line of your financial performance

The Income Tax Act in India allows for multiple opportunities to reduce the tax liabilities in

accordance with the law. For individual, it might mean for e.g. income tax saving on Home

Loan, House Rent Allowance etc. For a Business, it could be allowing for the depreciation of

the plants and machinery or amortizing the investments on new Software. Utilizing such

avenues allowed by the law to reduce the tax liability is termed as Tax Avoidance.

In contrast to Tax Avoidance, Tax Evasion is an illegal activity where the intent is primarily to

hide income and avoid paying the true tax liability.

Tax evasion and tax avoidance are sometimes misunderstood considerably. While a

Government allows various avenues in its tax structure through which an individual or an entity

can save on their tax liability, purposefully trying to show income lower than actual in order to

reduce the tax liability is a crime to the state and their people. Tax evasion is a crime as per

every state law, including India and can attract severe penalties.

Known methods of Tax Evasion

As the laws are advanced to control the menace of tax evasion, the tax evaders are devising

new methods to cut corners with the loopholes they are still able to find in the tax laws. Some

of the most common methods in practice with the tax evaders are:

Non-payment of the dues – willingly or unwillingly not paying the due taxes to the

Government is a form of tax evasion. In India, this is one of the most common scenarios

in rural and suburban areas

Inaccurate financial statements, fake documents, false returns – a rather more

sophisticated way of tax evasion is by forging documents, submitting

inaccurate/incomplete information to the authorities to showing lower tax liability than

the true payable

Smuggling – this form of tax evasion is in use when the goods are moving from one

place to another across state or country borders. For e.g. Gold.

Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

Bribery – Corruption within the Government system is one of the subtle reasons for

tax evasion so rampant in the society. Some tax evaders use this method to make their

income disappear and thus prevent being taxed upon

Tax Havens/ Offshore Wealth – Recent news on Panama papers leak is a classic

example here. Tax evaders tend to utilize the tax havens, countries which have lower

taxes and which do not disclose the account holder’s whereabouts to the home country.

This way the home country is deprived of collecting the actual tax dues from the

taxpayer.

Over time, as the laws have changed, the tax evasion has also evolved to become more

sophisticated. This along with the current tax setup (although some of this is going to change

with the rollout of the Goods and Services Tax, GST, in the near future) in India, which includes

taxation at multiple junctures in form of indirect taxes, provides multiple avenues for possible

tax evaders to devise ways to reduce their actual tax liabilities

Penalties for tax evasion in India

The Income Tax Act, in India, identifies penalties for the taxpayers for various acts of omission,

wilful neglect and purposeful evasion of taxes due in any financial year. For corporate, it also

identifies penalties for lapses in maintaining the right documentation and compliance

requirements in a financial year. Below are some of the examples and relevant sections of the

identified penalties

1. Section 270A of the act makes the taxpayer liable for penalty if the taxpayer tries to

reduce the tax liability by reducing the reportable income (under reporting the income).

The penalty can be up to 200% of the tax payable on the unreported income

2. Section 271A imposes a penalty of Rs. 25000 to a taxpayer in case of failure to maintain

the book of accounts as per the requirements in section 44AA

3. Penalty can be imposed by an assessing officer for default in payment of taxes from a

taxpayer, as per section 220 (1), 221 (1) of the income tax act

Legal cases

The Hasan Ali case

Hasan Ali Khan , born c. 1954, is an alleged money launderer and Hawala trader; accused of

stashing multibillion USD into Swiss accounts (tax haven), thereby evading taxes from Indian

Tax authorities to the tune of c. 910 billion USD.

Hasan was arrested in March 2011, after Supreme Court intervened and asked the then

Government and Enforcement Directorate on the reasons for not acting against Hasan despite

sufficient evidence against him on allegations under Hawala transactions from 2007 onwards.

ED charged Hasan under the Prevention of Money Laundering Act, 2002, with allegations of

helping an arm dealer to launder USD 300m generated through arms dealing, through his UBS

account.

Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

Hasan denied all the charges on him and a legal battle with the Government of India and ED

ensued. The ED has cited Rs. 34000 Crores as the taxes due from Hasan for his income in

2007-08.

Vodafone

In 2007, Vodafone International Holdings B.V. based in Netherlands, purchased Hutch Essar

in India through a complex tax avoidance strategy. The idea of this strategy was to avoid paying

capital gains tax in India through non-resident companies in the deal. The non-resident

companies were their own subsidiaries operating outside India. Vodafone International

Holding B.V. purchased 67% controlling shares of CGP International based in Cayman Islands,

which was a subsidiary company of Hutchison Telecommunication International Limited

(HTIL). CGP already had a controlling share in Hutch Essar in India before the deal and by the

transfer of 67% controlling share of CGP, Vodafone International Holdings B.V., acquired the

controlling stake in Hutch Essar India.

Following this deal, Income tax authorities issued show cause notice to Vodafone International

Holdings B.V. and in turn VIH filed a writ in High court challenging the same, which was

dismissed by high court with a view that Vodafone International Holdings B.V. must pay

capital gains tax, as the sale of shares from CGP to VIH B.V. qualifies as capital transfer and

attracts capital gains tax of nearly Rs.12000 crores. Pursuant to High Court’s dismissal, VIH

filed a Special Leave Petition in Supreme Court of India challenging the High Court’s order.

In 2012, Supreme Court of India held that the High Court’s view lacked authority of law and

was quashed, as the transaction took place between two non-resident Companies of

India. Hence, Vodafone acquired Hutch Essar India without paying capital gains tax.

Reliance India Limited

Before 1995, Reliance was infamously known as zero tax company in India, as it used to pay

zero or close to zero tax each year.

A zero-tax company is “a business that shows a book profit and pays dividends to investors

but does not pay taxes.”

It continued to exploit the loopholes in taxation system in India in order to avoid tax through

subsidiaries, which used to make raw materials and other components in countries with low

tax rates and Indian parent company purchased these raw materials at prices more than the

tangible cost thereby reducing their net income and subsidiaries escaped from paying taxes in

India.

Reliance enjoyed its successful strategies of Tax Avoidance only till 1996-1997, when in order

to combat the menace of “Zero Tax Companies”, “Minimum Alternative Tax” was introduced

in India and concept of Corporate Income Tax was added. However, that did not deter the

Reliance India Limited in their ventures of Tax Avoidance. In order to check the efficiency of

Income Tax department in assessing big business houses, in March, 2018, Central Auditor

General of India conducted an integrated audit of Reliance India Limited along with its other

group entities.

According to the news report, during audit it was found that RIL used many methods to avoid

taxation including “the merger and demerger of group entities, transactions with related parties,

layering of transactions with subsidiary companies”, in order to lower the tax burden.

Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

Google India

Google is the world’s favourite search engine and has plethora of companies functioning under

it. There is one extremely clever and elaborate tax avoidance strategy, which is used by many

large corporations including Google, which is called the “Double Irish with a Dutch

Sandwich”.

It is a dubious trick used by Google to avoid taxes through subsidiaries in Netherland and

Ireland. In this technique large corporations use a combination of Irish and Dutch subsidiary

companies to shift profits to low or no tax jurisdictions. It further involves sending profits first

through one Irish company, then to a Dutch company and finally to second Irish company,

headquartered in a tax haven. This particular technique allows many corporations to reduce

their overall corporate tax rates dramatically. Using this technique, Google has successfully

saved billions of dollars.

Similarly, Google India which is a subsidiary of Google International LLC and is an authorised

distributor of Google Ireland’s ‘AdWords’ programme to Indian advertisers. Google AdWords

is Google’s advertising system in which advertisers bid on certain keywords in order for their

clickable ads to appear in Google’s search results. Google Ireland owns the ‘AdWords’

technology and as it merely authorized Google India to use it, the revenue will come back to

Google Ireland, where google has to pay tax way less than India.

However, for the same transaction, Income Tax Appellate Tribunal, India, ordered Google

India to pay tax close to Rs.1457 crores which were avoided in tax by Google India for the

assessment years 2007-2006 to 2012-2013.

After losing six years long battle, Google India spokesperson in an interview said that Google

India complies with all tax laws in India and pays all applicable taxes and they will file an

appeal, as the ITAT ruling, according to Google, “is a clear departure from previous judgments

on the issue and is not in line with India’s double taxation avoidance agreements”.

Tata Industries

Tata Industries sold their shareholding in Idea cellular in 2007 to Birla TMT Holdings through

its subsidiary called Apex situated in Mauritius and through this, avoided to pay tax in India.

Income Tax officials flagged this deal and determined the capital gains tax in this deal to the

tune of INR 1,00,000 crore under Section 93 of Income Tax Act. However, Income Tax

Appellate Tribunal held that as there was no transfer of assets by a tax resident of India to a

non-resident, and they cannot be taxed on the capital gains that arose on sale of Idea shares by

its Mauritius subsidiary.

Tata Industries under its umbrella, has several charitable trusts formed for charitable purposes

called Tata Trusts. These charitable trusts such as, Jamshedji Tata Trust and Navajbhai Ratan

Tata Trust, enjoy tax exemptions under the Income Tax Act. According to Controller and

Auditor General’s report of 2013, Tata trust was earning huge profits instead of utilizing it for

charitable purposes and accumulating surplus funds. These surplus funds were then used for

creating fixed assets for earning more profits or were transferred to other trusts, rather than for

charitable purposes in order to avoid tax.

Proactive steps by Indian Government in order to curb tax avoidance

Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

Tax avoidance strategies used by big business houses around the world cause a great deal of

loss to the revenue of many governments around the world, including India. In India, many

cases of tax avoidances arose in the last two decades, some of which have been discussed in

detail above, which forced the government to work out its laws and treaties with foreign

countries in order to curb tax avoidance. Indian Government framed certain rules and

guidelines in order to regulate and restrain tax avoidance through Income Tax Act, 1961 and

Finance Act, 2015.

General Anti-Avoidance Rule (GAAR) was included in Chapter X-A of Income Tax Act, 1961.

GAAR was introduced in Income Tax Act, by the Finance Act, 2012, yet came into effect from

1st day of April, 2017. The sole purpose of introducing GAAR was to curb tax avoidance

strategies through a provision “Section 96. Impermissible avoidance arrangement”, which was

imbedded in Income Tax Act. According to the provision, arrangements or deals made in order

to obtain a tax benefit were impermissible.

Amendment of section 6(3) of Finance Act, 2015 was done in order to replace a new test of

corporate residence, which provided that if place of effective management (POEM) is found to

be situated in India, then a foreign company will be a tax resident of India. Before this

amendment, for tax purposes, a company that was not a resident of India was only considered

resident, if it was controlled and managed in India.

Indian government in 2017 took various steps in order to align the rules and guidelines as per

the Base erosion and profit shifting (BEPS) suggested by The Organisation for Economic Co-

operation and Development (OECD), which could curb the menace of tax avoidance, which

includes BEPS action plan 13, 1 and 5.

Latest developments in the case

In February 2016, the Income Tax Appellate Tribunal (ITAT) has brought down the tax liability

for Hasan from Rs. 34000 Crores to c. 3 Crores now. The IT department has failed to

substantiate its claim on Hasan’s income and thus the tax liabilities. The reassessment notice

has been sent to the assessing officer.

Following this, Hasan have been granted bail (upon 14th attempt), while ED continues to

struggle to prove the allegations levied against Hasan in the charge sheet. Hasan’s lawyer has

thus claimed that he has been false implicated into the case and had suffered due to this.

Inferences

Money Laundering is something which needs to be prevented. It is very hard to be cured. As it

is defined, the laundered money is so very well integrated within the economy that it is very

hard to detect, let alone prove the origins. As with the above case, though it remains to be

proven that ED’s allegations are true or not, however, proving anything of such a scale was

always a challenge. As quite evident, ED seems to be quite helpless on proving their point and

thus may be proved wrong in the end

Impact of GST on Tax Evasion

Goods and Services Tax (GST) is a major indirect tax reform in India which is under

implementation currently. Upon implementation, it would mean a single tax on the supply of

goods and services, right from the manufacturer to the end user. It would reduce the number of

Prof. Javaid Talib

Dept. of Law

AMU

TM SFA

indirect taxes being paid at multiple points and thus make the tax system more transparent and

streamlined

One of the many advantages of GST would be avoidance of tax leakage. The GST is designed

in a way to incentivize the traders to be tax compliant to seek benefit on the tax credits in the

supply chain. This along with the comprehensive IT systems enabling GST compliance would

certainly put a check on tax leakage, tax evasion and under reporting. GST also proposes a dual

monitoring mechanism led by the Central and the State Government. So, even if one set of tax

authorities overlooks or fails to detect evasion, there is the possibility that the other overseeing

authority may not. GST also mandates a paper trail for the tax compliance which would

certainly improve the overall tax compliance within the country.

The other important aspect on the rollout of the GST would be the overall reduction of the tax

rates and thus liabilities due to systematic efficiency gains and prevention of leakages. This

would further encourage the increase in tax base for the country

It remains to be seen in the near future on how GST would help in increasing the overall tax

base in India, reducing tax evasion in the tax system and put India on a progressive path.

Suggestive Readings:

Concerned Statutes (IPC, CRPC, IEA etc.)

JPS Sirohi, Socio Economic Offences

UDHR, 1948

NCRB Report

Convention against corruption, 2003

BK Sharma and Vijay Nagpal, A Treasure on Economic and Social Offences