Jama kharchi is all about converting black money to white. Jama kharchi companies ‘accommodate’ accounting entries that help both the companies and give 2-4% commission to the go-between.

Following news flash appeared in economic times on 6 August 2015.

KOLKATA: Jama kharchi trades and capital formation activities in Kolkata have come to a naught beginning August 1, 2015. This follows the recent order by the Income Tax Appellate Tribunal (ITAT), which dismissed the appeals of city firms challenging reopening of cases for assessment years 2008-09 and 2009-10.

More than 700-odd small to midsized Kolkata-based companies engaged in jama kharchi trades and capital formation activities had moved the tribunal, opposing income-tax (I-T) commissioner(Appeals).

Of the 700 appeals filed, the Kolkata bench of the ITAT, in a 164 page order dated July 30, 2015, dismissed 19 of them. “Since the appeals were based on similar facts and common grounds, the tribunal disposed of the cases by a consolidated order for the sake of convenience,” the order said.

Jama kharchi is all about converting black money to white. Jama kharchi companies “accommodate” accounting entries that help both the companies and give 2-4% commission to the go-between.

Liquidity and fund flow is expected to get chocked by the tribunal order. Small and mid-sized entrepreneurs have decided to go slow on their jama kharchi trades and capital formation activities till the issue gets settled. City businessmen as well as income tax practitioners apprehend that the ITAT order along with the assessment orders of the ITOs (income tax officers’) pronounced in March 2015 for assessment year 2013-14 may soon give rise to income tax demand of more than Rs 1 lakh crore.

The city’s accounting fraternity alleged that I-T commissioner’s direction to reopen cases under Section 263 of the I-T Act which allows him to revise orders prejudicial to the interest of the country’s revenue, has been done with malafide intention. Reopening six-year-old cases and passing a judgment on the same does not seem to be in line with the Narendra Modi government’s initiative to curb creation of black money in future, they claim.

“Prima facie, the ITAT mind appears to be prejudiced against Kolkata traders and their way of operation. Otherwise, they would not have ordered opened old cases or clubbed the cases though the legal issues are different for different cases,” the consultant said.

Read More at Source- http://economictimes.indiatimes.com/small-biz/sme-policy-trends/income-tax-appellate-tribunal-order-about-jama-kharchi-leaves-traders-in-a-limbo/articleshow/48386028.cmsa

Audience-:

1. Those practicing in income tax law including the officials of the entities whose income tax matters are pending.

2. Those interested in understanding the happenings relating to black money.

Details of the case-:

3. Income Tax Appellate Tribunal, B Bench, Kolkata in the case of (M/s Subhalakshmi Vanijya Pvt. Ltd.) & 18 other appeals of different assessees with ITA No.1104/Kol/2014 dated 30 July 2015 Corum-: Before Shri. R.S. Syal, AM & Shri. N.V. Vasudevan, JM

4. One can refer the full text of the judgement at http://www.salcoca.com/black-money-law/itat-black-money-conversion-shell-companies.pdf?0bdbe6

5. The ITAT heavily relied upon the judgement of Calcutta High Court in the case of CIT Vs. Maithan International (2015) 277 CTR 65 (Cal)which has elaborately dealt with the judgement of Supreme Court in the case of Lovely Exports (2008) 216 CTR 195(SC) which is in favour of assessee.

Why this article-:

6. To equip the audience to read and understand one of the methodologies as to how black money is being converted into white.

Whole thing in very brief-:

7. There was a mechanism of converting black money through share premium into white without paying taxes.

8. The plea taken by the assessee(s) were technical and almost none proved the bonafides / credentials i.e. nature and source of money, payee etc.

9. The ITAT demolished the whole structure by answering all above aspects in favour of revenue and against assessee.

The Case-:

10. The ITAT has taken a sample case and have made a process study of all the facts.

Particulars Rs.
Return of income filed with very meagre income i.e. of Rs. 1,478
Intimation u/s 143(1) was received
Assessee approached Dept disclosing some income not offered for tax 18,449
AO issued notice u/s 148
Assessment u/s 147 completed and the revised income is 29,530
Other relevant facts
Issued fresh share capital of equity shares 14,71,800
Share premium amount 7,21,18,200
Notice u/s 133(6) was issued by AO to subscribers of share capital at the time of scrutiny
Total subscribers to whom notice was sent 21
Response received 8
No cross examination by AO of any subscribers
The said money is invested in another company again at much higher price than the worth of that company.

11. A person intending to convert his black money into white initially purchases the said equity shares at high premium value.

12. Later, after holding it for one year, he sales the said equity shares after holding for one year and the said capital gain was exempt u/s 10(38) being a long term capital gain.

13. Factually, the credentials of person buying the shares at such a high value could not be established by the company.

14. As informed by Dept, there are hundreds and thousands of such cases being subjected to re-opening u/s 263 and consequently being challenged before ITAT Kolkatta.

Particulars Page numbers
From To
Facts and scheme of conversion of black money 08 19
Following primary questions framed 19 19
A) Whether the provisions of section 68 can be attracted if share capital with premium is not properly explained by the assessee company?; and
B) Whether the failure of the AO to give a logical conclusion to the enquiry conducted by him gives power to the CIT to revise such assessment order?
Question A Answered
This has been buttressed taking assistance from the judgment of the Hon’ble Supreme Court in Lovely Exports (supra). It is no doubt true that Hon’ble Supreme Court has held that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the AO, then, the Department is free to proceed to reopen their individual assessments in accordance with the law, but, it cannot be regarded as undisclosed income of the assessee. 26 26
`In the case of a public issue, the Company concerned cannot be expected to know every detail pertaining to the identity as well as financial worth of each of its subscribers….In the case of private placement the legal regime would not be the same. A delicate balance must be maintained while walking the tightrope of Section 68 and 69 of the Income Tax Act.’ 29 29
13.t. On an overview of the legal position flowing from the above discussion it becomes evident that in case of a closely held company where the shares are issued to the family members or close friends/relatives, the burden of proof rests on the company to properly

explain the identity and capacity of shareholders along with the genuineness of the transactions. Ex consequenti, the argument of the ld. AR that the assessee was not obliged to explain the genuineness of share capital after having furnished preliminary details about the shareholders etc., is not capable of acceptance and hence rejected. We hold that in all cases, where the assessee fails to cumulatively prove to the satisfaction of the AO, the identity and capacity of the shareholders along with the genuineness of the transactions there can be no escape from section 68.

37 37

13.ae. The about discussed judgments from the Hon’ble Summit Court holding a clarificatory substantive provision as retrospective, despite the same being made applicable from a particular year, fully govern the position under consideration. It is interesting to note that the judgment of the Hon’ble jurisdictional High Court in Maithan International (supra) holding that the burden of proving the credit of share capital etc. is on a closely held company and failure to do so attracts the rigor of section 68, has been delivered on 21.1.2015, much after the amendment carried out by the Finance Act, 2012. This case pertains to pre amendment era as the order of the tribunal assailed in this case is dated 24.6.2011. It shows that the Hon’ble High Court has also impliedly approved the proposition that the position anterior to the A.Y. 2013-14 was the same inasmuch as the onus to prove the share capital by a closely held company was on it. We, therefore, hold that the amendment to section 68 by insertion of proviso is clarificatory and hence retrospective. The contrary arguments advanced by the ld. AR, being devoid of any merit, are hereby jettisoned.

51 51

The amendment has simply made express which was earlier implied. We, therefore, hold that though amendment to section 56(2)(viib) is prospective, but to section 68 is prospective. If that is the position, then the assessee is always obliged to prove the receipt of share capital with premium etc. to the satisfaction of the AO, failure of which calls for addition u/s 68.

56 56

13.ak. To sum up, we hold that the contention of the ld. AR that since the AO of the assessee-company is not empowered to examine or make any addition on account of receipt of share capital with or without premium before amendment by the Finance Act, 2012 w.e.f. A.Y. 2013-14 and hence the CIT by means of impugned order u/s 263 could not have directed the AO to do so, is unsustainable.

For answering question B, the ITAT observed as follows

The larger question of the validity of the orders passed u/s 263 can be decided by examining the following aspects, which have been argued by the ld. AR : –

Whether the enquiry conducted by the AO in such cases can be construed as a proper enquiry?

62 74

In our considered opinion, the highly inadequate enquiry conducted by the AO resulting in drawing incorrect assumption of facts, makes the orders erroneous and prejudicial to the interests of the revenue.

Whether CIT can set aside the assessment order and direct the AO to conduct a thorough enquiry, thereby interfering with the jurisdiction of the AO conferred on him in terms of section 142(1) and 143(2) of the Act?

74 78

Rather, the assessment already stands finalized and now the CIT is examining whether the AO properly examined the facts of the case. In such circumstances, it is impermissible to have a recourse to the provisions of section 142(1) and 143(2) for demolishing the order u/s 263 of the Act. We, therefore, refuse to uphold this contention as a reason for setting aside the order passed u/s 263 of the Act.

Whether inadequate inquiry conducted by the AO empowers the CIT to revise the assessment order?

78 83

19.e. Testing the facts of the present case on the touchstone of the ratio decidendi of the Hon’ble jurisdictional High Court in Maithan International (supra), we have no hesitation in holding that the present case is a glaring example of not making relevant enquiry, which amounts to `no enquiry’ and hence it becomes a case of non-application of mind by the AO. This argument, therefore, fails.

Whether the order of the CIT is based on irrelevant consideration and further was he not supposed to point out specifically where the AO went wrong in not properly examining the issue of share capital?

83 92

Under such circumstances, we cannot cast an impossible burden on the CIT to show the positive leakage of income in concrete terms, when he has simply set aside the assessment order and restored this aspect of the assessment to the file of AO for making a proper enquiry and then deciding. This argument of the ld. AR, being devoid of any merits, is rejected.

If the AO has taken a possible view, can still the revision be ordered? 92 100

In such circumstances, it is not further required on the part of the CIT to expressly show where the assessment order went wrong. The very fact that no enquiry was conducted or no proper enquiry was conducted in the required circumstances, is sufficient in itself to invoke the provisions of section 263.

Question B is answered in favour of revenue as “24. We, therefore, sum up our conclusion that the ld. CIT was justified in setting aside all the assessment orders in question, on merits.”

100 104

25. We have noticed above that apart from merits of the cases, some of the ld. ARs have taken up and argued other legal grounds challenging the jurisdiction, limitation, non-service or improper service of notice u/s 263 etc., which we will take up consideration hereinafter.

105 106
C. Issue of Non-service of show cause notice u/s. 263 : 106 127

26.s. Coming back to the language of section 263(1) requiring the passing of order `after giving the assessee an opportunity of being heard’, it transpires that it refers to giving opportunity of hearing. If despite genuinely giving opportunity of hearing by the CIT, the assessee tries to hoodwink by evading the service of notice as has been done in the cases before us, then the requirement of giving `opportunity of hearing’ gets fully satisfied with. As such, we do not find any lack of opportunity of hearing by the ld. CIT in all such cases. This argument fails.

D. Whether order u/s 263 is barred by limitation? 127 137

27.f. We have given a very careful consideration to the rival submissions. The period of limitation for passing an order u/s.263 of the Act in terms of sec. 263(2) of the Act is : `two years from the end of the financial year in which the order sought to be revised was passed’. The orders sought to be revised by the ld. CIT in the present set of cases are the orders u/s 147. Now, if we go by the dates of Intimations, then the orders u/s 263 are barred by limitation, but if we go by the dates of the orders u/s 147, then all the orders passed u/s. 263 of the Act are admittedly within the limitation period.

27.g. The larger question, thus, is whether the issue of share capital by the assessee during the previous year was subject matter of reassessment proceedings? It is no doubt true that in the reasons recorded for initiating proceedings u/s.147 of the Act, the issue of examination of share capital raised by the assessee during the previous year was not the reason for re-opening of the assessment. It was restricted only to share issue expenses whether capital or revenue expenditure or some other minor disallowances in other cases. Nevertheless in the reassessment proceedings in all the cases, the AOs ventured to issue notices u/s. 133(6) of the Act to some of the shareholders for examining as to whether the ingredients of sec. 68 were satisfied. As to whether such enquiry was adequate or not, is a different issue. The fact remains that by issuing notices u/s. 133(6) of the Act, the AOs tried to examine the question of genuineness of share capital in proceedings u/s 147. It thus follows that by holding that the issue of share capital at premium was

27.j. In view of the aforesaid statutory amendment, it is clear that the scope of reassessment is no more confined to the issues referred to in notice u/s 148, but also extends to other issues which come to the notice of the AO during the course of reassessment proceedings indicating the escapement of income. No doubt the issue of share capital at premium was not subject matter of notice u/s 148, nevertheless the AO proceeded to examine this aspect, thereby bringing it within the ambit of the order u/s 147.

27.k. Now we take up the next aspect of this issue, as to whether Intimation u/s 143(1) can at all the characterized as `order’ eligible for revision u/s 263.

27.l. Viewed from any angle, it is clear that the subject matter of revision in all the cases under consideration were the orders passed u/s 147 of the Act. Going by the admission of the ld. ARs, if limitation is counted from the date of orders u/s 147, then the orders u/s 263 are within the limitation period. This contention of the ld. ARs, therefore, fails.

E. Territorial jurisdiction of the CIT 137 147

The power to do a particular act also includes a power to restrict the exercise of power partly. It cannot be said that the power should be exercised either as a whole or not at all. Such an argument is fallacious and defeats the very purpose of conferring a larger power. As the actual transfer of the files from the incumbent AO to the new AO had taken place only on 29.7.2013 and further the order sought to be revised by the ld. CIT u/s 263 was passed much prior to the even making of request for transfer of jurisdiction in respect of search matters, we have absolutely no doubt in our mind that only the CIT Kolkata II, Kolkata had the jurisdiction to revise the assessment order passed u/s 147 as has been done in this case. The contention of the learned AR in this regard is held to be without substance and not unacceptable.

28.h. In our view this objection is frivolous. In the absence of any actual transfer of jurisdiction, the argument is without any force. The jurisdiction as per PAN data in public domain may inadvertently show a wrong feature, but that would not amount to transferring the jurisdiction, which is there in reality. The objection is rejected.

F. Whether an addition in the hands of a company can be made u/s 68 in its first year of incorporation ?

147 149

Similar view has been reiterated in Third ITO Vs Arunagiri Chettiar (1996) 220 ITR 232 (SC) in which it has been held that tax arrears of firm can be recovered from a person who was a partner thereof in the relevant accounting year under s. 25 of the Partnership Act. In view of the above precedents, it becomes manifest that the ratio laid down in Bharat Engineering (supra) cannot be applied to the facts of the present case, which is a company. The contention is rejected.

G. Effect of order passed u/s 263 in the case of amalgamating company after amalgamation,

149 151

30.b. We do not dispute the general proposition that once a company gets amalgamated with another, it loses its original identity and no proceedings can be taken in its earlier name. Such proceedings have to continue in the name of the amalgamated company and order can also be passed in the new name. However, this general position can have no application, where the Revenue is kept in dark and is not informed about such amalgamation. The position becomes more critical where, even after such amalgamation, the amalgamating company launches proceedings in its old name. In such circumstances, it cannot be allowed on turn around later and claim that though it wrongly initiated the proceedings in wrong name, but the court should have taken cognizance of the reality of amalgamation. No assessee can be allowed to derive benefit from its own fraudulent practices.

30.c. It is observed in the instant case despite its amalgamation, the assessee chose to file its return of income after the date of on turn around later and claim that though it wrongly initiated the proceedings in wrong name, but the court should have taken cognizance of the reality of amalgamation. No assessee can be allowed to derive benefit from its own fraudulent practices.

H. Whether order u/s 263 becomes invalid for being passed on a closed day? 151 154

In contrast, we are confronted with a situation in which the proceedings were fixed for last hearing on 28.3.2013, which was working day. It is only that the ld. CIT, after concluding the proceedings, passed the impugned order on a holiday. The bar in not working on the holidays extends only qua the taking up of the proceedings involving participation from outsiders. It cannot be said that the Government servants, having completed the hearing of the proceedings on a working day, cannot work on holidays to clear their work without the involvement of public at large. It is a common knowledge that the Officers of the Income-tax Department work around the clock close to various limitation periods, so as to facilitate the completion of their work in time. It is a cause to appreciate and not to deprecate. The situation would have been different if the ld. CIT had fixed the hearing of the case on a holiday and also passed the order on such holiday.

I. Whether the order u/s 263 can be declared as a nullity for the notice having not been signed by the CIT ? 154 155

32.a. The ld. AR in Paramani Commercial Pvt. Ltd. brought to our notice that the show cause notice u/s 263 was not signed. According to him, the order u/s 263 flowing from such unsigned notice be declared as void.

32.b. In our considered opinion this objection is again unsustainable. We have noticed above that there is no requirement under the law for giving a notice for the proceedings u/s 263 in conformity with the provisions of section 282 of the Act. It has been noticed that the assessee should be given an opportunity of hearing and once this is done, the proceedings cannot be challenged on this score. When an assessee is made aware of the proceedings u/s 263, no such objection can be allowed to be taken. As the assessee in the instant case was afforded opportunity of hearing that would suffice compliance with the requirements of “audi alterm partem” contemplated by the provisions of sec. 263 of the Act. The objection raised by the assessee in this regard, to say the least, is frivolous.

J. Consequences of refusal by the Revenue to accept the written submissions of the assessee 155 157

33.a. The ld. ARs in Radha Krishna Tradcom Pvt. Ltd. and some other cases have brought to our notice that the replies sent by the assessees to the show cause notice u/s 263 of the Act were returned as ‘Refused’ by the ld. CIT. It was submitted that since the objections of the assessee have not been considered as contained in those letters, the impugned orders be held as void because of lack of adequate opportunity to the assessee.

33.b. We do not approve the way in which the office of the CIT has refused to accept the written submissions made on behalf of various assessees. It is impermissible for any Government office to refuse to accept any letter or communication. It is only after receiving the letter or communication, that the authority can decide about taking or not taking its cognizance.

33.c. Coming to the facts of the instant cases, the fact remains that such replies were sent by these assesses when the ld. CIT had given last opportunities and such opportunities were not availed by them. That apart, not giving a proper opportunity of hearing can be no reason for declaring the order void ab initio. The Hon’ble Supreme Court in several judgments including Guduthur Brothers Vs. ITO (1960) 40 ITR 298 (SC), CIT Vs. Jai Prakash Singh (1996) 219 ITR 737 (SC) and Kapurchand Shreemal Vs. CIT (1981) 131 ITR 451 (SC) has held that lack of opportunity is simply an irregularity which does not render the order passed a nullity. In our considered opinion, it is at best an irregularity which will not affect the jurisdiction of the CIT u/s. 263 of the Act. We hold accordingly and dismiss the plea raised by the assessees on this issue.

K. Search proceedings and revision of abated order u/s 263 157 163

The crux of his argument was that there can be no revision of an abated assessment order. In support of his stand, the learned AR relied on Canara Housing Development Compnay Vs. DCIT (2014) 114 DTR 162 (Karn). The submission of the learned DR on the other hand was that such an assessment can be validly revised in exercise of powers u/s. 263 of the Act, even after the initiation of search u/s.132 of the Act.

34.d. In the light of the above ruling of the Special Bench [Allcargo Global Logistics Ltd. (2012) 16 ITR (Trib.) 380 (Mum)(SB)], it is clear that if an assessment is completed prior to initiation of search u/s.132 of the Act and if no incriminating material is found regarding a particular item of income during the course of search, then no addition can be made in the assessment of such year u/s. 153A of the Act. If we accept the contention of the ld. AR, then the Revenue would be left without any remedy if such an order passed by the AO is found to be erroneous and prejudicial to the interest of the revenue. In our considered view, in such cases it would be open to the Revenue to explore remedies open to it in law u/s. 263 of the Act, subject to satisfaction of the conditions precedent for exercise of jurisdiction under that provision, even after the initiation of search u/s.132 of the Act. In such circumstances, we are of the view that the plea put forth by the assessee cannot be accepted. The question of the assessee having to face multiple proceedings, in the present case, cannot be the basis to hold that jurisdiction u/s.263 of the Act cannot be invoked. The argument raised by the assessee on this count is not acceptable.

34.e. It is no doubt true that the Hon’ble Karnataka High Court in the case of Canara Housing (supra) has not accepted the ruling of the Special Bench in the case of Allcargo logistics (supra). However, the Hon’ble Bombay High Court in the case of CIT Vs. Continental Warehousing Corporation ITA No.523/2013 vide its judgment dated 21.4.2015, after referring to the decision of the Hon’ble Delhi High Court in the case of Anil Kumar Bhatia (supra) and that of the Hon’ble Karnataka High Court in Canara Housing (supra) has taken a view that the decision rendered by the Special Bench is to be followed. No decision of the Hon’ble Calcutta High Court on the point has been brought to our notice. We are of the opinion that the view expressed by the Hon’ble Bombay High Court, which is in tune with the decision rendered by the Special Bench in the case of Allcargo Logistics (supra), should to be followed. It is, therefore, held that the proceedings u/s. 263 of the Act to revise the order dated 21.2.2013 passed by the AO u/s. 147 of the Act, are valid and cannot held to be without jurisdiction. Accordingly, this issue is also decided against the assessee.      

( Author CA. Yogesh S. Limaye can be reached at yogesh@salcoca.com)

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0 responses to “Jama kharchi, structure of converting black money – demolished by ITAT”

  1. rkd says:

    VERY INFORMATIVE,FACTS ARE KNOWN TO EVERYONE,BECAUSE OF NO DEVELOPMENT AND LACK OF PROFESSIONAL OPPORTUNITIES KOLKATA PROFESSIONALS INDULGE IN SUCH JAMA KHARCHI ENTRIES AND KNOW HAVE TO PAY THE PRICE.

  2. husain says:

    excellent article…..however similar instances of laundering methods are not curbed everywhere in states

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