CASE LAWS

GTC INDUSTRIES LTD Vs ACIT: MUMBAI ITAT (Dated: March 7, 2017)

Whether once the burden of advertisement expenses placed upon the wholesale buyers are proved in statements of key witnesses before the DRI, then it cannot be subsequently shifted to the manufacturer - YES: ITAT

Whether when such manufacturer was undertaking a centralized advertising & sales promotion campaign and has shifted the burden of AMP expenditure to the wholesale buyers, then he cannot be treated as a benami owner of the bank accounts if the expenses have been incurred through fictitious bank accounts - YES: ITAT

++ the core issue is, whether the amount of premium generated through alleged twin branding mechanism has flown back to the assessee or not; or is there any material to show that the assessee was the sole beneficiary of the entire amount or part of the amount. During the searches conducted by DRI, it was found that as many as 24 bank accounts were operational, where drafts were remitted by the wholesale buyers from all across the country. Some of the bank accounts had been taken note of by the AO on sample basis, based on which he has carried out his own set of enquiries. The various statements and the evidences which has been relied upon by the Revenue to make the addition in the hands of the assessee company as well as the rebuttal made by the assessee qua those statements / evidences. The two bank accounts were picked up for scrutiny, that is, Account of Mr. H.K. Patel, C/A.No.1391; and Shri S.K. Mehta, S/B. No.8953. These bank accounts were found to be standing in the name of fictitious persons because at the given addresses no such persons were found and even there was discrepancy in account opening forms, signatures etc. In these bank accounts various drafts were deposited which were coming from all across the country and from these bank accounts there were certain outgoings also. Though AO admitted that 100% verification was not feasible to link all the drafts but he came to the conclusion that these drafts were originated from the places where the assessee had wholesale buyers, based on material brought on record by DRI and through his own set of enquiries. Further, during the course of survey at the office premise of M/s. Fog Fag (WB of GTC) statement of Sales Manager, Shri Kaushal Kumar Srivastava has been recorded wherein he admitted that he had purchased drafts in cash in the name of H.K. Patel / S.K. Mehta on the instruction of his employer who provided the cash. Moreover, in the survey conducted on the wholesale buyer, M/s. Sagar India, statement of employee, Shri Shiv Kumar and Shri Vinod Kumar Kedia in their statement admitted that premium was collected, however, he was unable to confirm about the final destination of the drafts or that it was sent at behest of GTC. A follow-up survey was also conducted at Darbhanga in one of the Banks account where it was found out that wholesale buyer at Darbhanga, M/s. Royal distributors had also purchased drafts in the name of same Calcutta parties to whom Muzaffarpur wholesale buyers had sent the same draft. However, how the remittance to Kolkata parties can be linked to GTC has not been brought on record or any material indicating the same was found;

++ one of the debit entries in the alleged bogus bank accounts was the payment of donation by way of bank drafts to Methodist Church of India. When contacted with the Church, it was informed that donations were received on the recommendation of Ms. Niramala Sundaram, an Officer in Bank of America with which GTC had an account. He had also stated that these drafts were handed over to them from time to time by Ms. Nirmala Sundaram. In her initial statement she has confirmed that she has arranged for the donations and drafts were given by the GTC on her request made to one, Mr. Deepak Poddar, an executive of the company capable of taking such decision. Based on this statement, it was inferred that assessee had control on bank accounts for making the payment and therefore, there is a linkage between the assessee and the alleged bogus bank accounts. Another important aspect pointed out by the counsel before is that, collection of premium is based on certain statements taken by the DRI and later on it is also a matter of record that more than 40 witnesses had controverted or denied their statements before DRI. That is why CESTAT had held that these statements are not trustworthy. One of the statements of wholesale buyer, Mr. B.K.Sitani, Managing Director of M/s Sitani Trading Company Pvt. Ltd., a Wholesale Buyer denied charging any premium on sale of cigarettes and this fact has been noted by the AO in the Assessment order for the AY 1985-86. AO had rejected the said statement on the ground that no Wholesale buyer being privy to charging of premium would speak truth. Further none of the bank accounts had any evidence to link with GTC, which fact has been admitted by CIT (A) in the original order. In the case of assessee at the most it can be inferred that there was a concept of centralized publicity and the expenses were borne by the wholesale buyers. This plea of the assessee had been rejected on the ground that GTC had failed to produce any documentary evidence which is contrary to the material found and accepted in the assessment orders for the AYs 1982-83 and 1983-84, wherein it has been stated that "From documents seized from the office premises of GTC in Bombay & Delhi, it has been found that GTC was undertaking a centralized advertising and sales promotion campaign and only the burden of expenditure towards Advertisement & Promotion was being shifted to the wholesale buyers". Once the burden of expenses was upon the wholesale buyers which have been confirmed in various statements of key witnesses before the DRI, then burden cannot be shifted to the assessee. Thus, even if the advertising expenses have been incurred through bogus/fictitious bank accounts, assessee cannot be held to be beneficiary or benami owner of such bank accounts;

Whether it can be presumed that advertising expenses have been incurred by the manufacturer from fictitious bank accounts, merely because the money deposited in the Benami accounts were used post manufacturing expenses including advertisement of the brands & products of the manufacturer - NO: ITAT

Whether entire premium collected over the sale of cigarettes under twin branding mechanism and deposited in a bank account, can be attributed to a specific manufacturer, in absence of evidence to show that the bank account was operated by such manufacturer - NO: ITAT

++ after perusal of the statements and materials, it is found that some kind of premium was generated under alleged 'twin branding mechanism', that is, price higher than the declared/printed MRP on the sale of various brands of cigarettes was collected by small retailers from customers who were unknowingly paying extra money for lower brand cigarette presuming to be higher brand due to deceptive packet designs. From the WBs cash premium collected through the said chain is then converted into drafts which has been sent to fictitious bank accounts in Mumbai and elsewhere. These bank accounts are in the benami names where this alleged money so collected is deposited. However, to draw inference that universally all the wholesale buyers who collected the premium amount had sent the entire collection of premium to these bank accounts which was wholly and exclusively under the control of the GTC is not proved conclusively. Thirdly, it can be seen that, nowhere it has been brought on record that any wholesale buyer was confronted or has admitted that either the GTC or its officials were in the helm of such collection of premium; or these benami bank accounts were either under direct or indirect control of GTC; or they were depositing the DDs on the direction or behest of GTC; or GTC was operating these bank accounts. No concrete material has been brought on record to suggest that Assessee Company or its employees were operating said bank accounts or the account holders were introduced by anyone from the assessee company. Nowhere has it been ascertained by the AO that the GTC or its employees had the actual control of the said benami bank accounts or the amount deposited in said bank accounts has gone to the coffers of the assessee. Fourthly, the material and evidences gathered by the Revenue does show that the money deposited in the Benami accounts were used in post manufacturing expenses including advertisement of the brands and products of GTC. Transaction of some few lakhs of rupees have also been found to be undertaken from these bank accounts from where payment to certain advertising agencies has been made. On this information it can be presumed that advertising expenses do have been incurred from these bank accounts. However, merely because the advertisement expenses have been incurred from Benami bank accounts, can it be held that the said bank accounts belong to the assessee and therefore, can lead to an inference that entire premium collected all over the country is the undisclosed income of the assessee. Lastly, the statements and materials relating to payment of advertisement expenses only goes to show that the GTC acted more like a central/coordinating agency which guided the nature and content of the advertisement and burden/liability of such expenses were borne out by the wholesale buyers. Though the AO has very diligently carried out enquiries all across the country in various assessment years however, he could not collect any information or material that advertisement expenses were directly borne by the assessee or the assessee had full control of the bank accounts or these bank accounts are benami of assessee;

Whether best judgment assessment can be initiated to penalize an assessee by resorting to wild estimations and without establishing any nexus between concealment and intention - NO: ITAT

++ in case of certain donations given to a Church, originating through these benami bank accounts on the behest of one of the employees of the assessee company, does not implicate that GTC as a corporate entity was having the control of these bank accounts completely. Without going into the authenticity and veracity of the statements of the witnesses Smt. Nirmala Sundaram, we are of the opinion that this one incident of donation through bank accounts at the direction of one of the employee of the Company does not implicate that the entire premium collected all throughout the country and deposited in Benami bank accounts actually belongs to the assessee company or the assessee company had direct control on these bank accounts. Now coming to the issue of rejection of books of accounts as well as the estimation of income by multiplying the volume of sales of lower price brand with the differential price of higher price brand on account of theory of 'twin branding mechanism' and thereby giving an adhoc reduction of 10% on the ground that some of the share in premium money belonged to the wholesale buyers. First of all, it is noticed that, the basis of rejection of books of accounts by the AO u/s 145(2) is that, firstly, assessee has maintained bank accounts in fictitious names outside the books and has otherwise incurred expenses which are not inflected in books of accounts; and secondly, assessee has been maintaining cash in bank accounts outside the books. CIT (A) has further added one more ground that, bank accounts appearing to be channel for circulating such premium or assessee is bound to have a large share in such secret money and its circulation. First of all the first allegation of the AO that it is proved beyond doubt that assessee has maintained bank accounts in fictitious names outside the books, the same is not tenable because it has not been proved through any direct or indirect material or evidence that bank accounts belong to the assessee company. Once we hold that there is no material to implicate the assessee then the presumption that assessee is maintaining cash in bank account outside the books also fails because this allegation too is not flowing from the first premise of the AO. The additional reason cited by CIT (A) falls within the realm of suspicion and surmises and based on such suspicion and surmise sans any direct material, the same cannot be upheld. However, even though we have held that AO & CIT(A) were not correct in law and on facts to reject the books of account, however for the sake of completeness, we deem fit to deal with issue of estimation as has been made by AO in brief. The estimation made by the AO for assessing the income is very faulty because, it is based on high degree of presumption and hypothesis that on each and every sale of lower brand cigarette all across the country made to millions of consumers through millions of retailers, there has been collection of extra money equivalent to the price of high brand value cigarettes and then such collection of money has cent percent flown back to the assessee directly; and out of that premium money some minor share pertains to the wholesale buyers. The best judgment is not a provision to penalize the assessee and resort to wild estimate but it is a machinery provision which is to be based on assessing the correct income and that too based on material and evidence having live link nexus with the income which is to be assessed. Thus, on this count also, we are unable to uphold the kind of estimation or addition which has been made by the AO and sustained by the CIT(A) and accordingly, we direct the AO to delete the entire addition.

Assessee's appeal allowed