Hasan Ali Khan in court for $8 bln tax fraud

Stud farm owner Hasan Ali Khan is escorted by police as he is produced in sessions court by the Enforcement Directorate (ED) in Mumbai March 8, 2011.

NEW DELHI (Reuters) - Hasan Ali Khan, a high-rolling stud farm owner accused of illegally stashing billions of dollars in overseas accounts appeared in a Mumbai court on Tuesday in a case seen as symbolising the government's struggle against rampant tax evasion

Khan, who says he earns a modest salary as a scrap metal merchant and denies any wrongdoing, was arrested late on Monday on charges of money laundering, the Enforcement Directorate told Reuters.

His arrest, spearheaded by an assertive Supreme Court, comes as the government is under increased pressure to clamp down on graft, with the accusations against Khan underscoring a failure to curb an estimated $16 billion a year in tax evasion.

The Supreme Court last week rebuked authorities for spending too long investigating Khan without results.

"What the hell is going on in this country?" asked one of the two Supreme Court judges hearing the case on Thursday.

"We are deeply disturbed by the ongoing investigation. This is not a normal investigation. Is it like a friendly chat?"

That promptly lead to Khan's arrest by tax authorities after six hours of questioning and property raids across the country.

The arrest took place hours before the Supreme Court's Tuesday deadline for progress in the case elapsed.

The court's criticism of previous lax treatment of Khan is the latest attack on Prime Minister Manmohan Singh's government's efforts to tame corruption by a bench growing in clout and confidence.

The 53-year-old Khan was well-known across the racecourses of Mumbai and Pune in his well-cut pin-stripe suits and wrap-around sunglasses. He faces charges of hiding $8 billion from tax agencies in overseas bank accounts.

"I am innocent. I haven't done anything wrong," a wheelchair-bound Khan flanked by assistants told reporters on Tuesday while being sent for a routine medical examination.

Supreme Court Justice Sudershan Reddy on Tuesday called on investigators to consider pressing terror charges against Khan due to his alleged links with arms dealers.

A report by U.S.-based research group Global Financial Integrity in November estimated India had lost $462 billion in illegal transfers over the past six decades, with $16 billion illicitly moved overseas each year between 2002 and 2006.

(Additional reporting by Venkat Raman; Editing by Alistair Scrutton)