By TIOL News Service

MUMBAI, APR 01, 2017: THE issue before the Bench is - Whether premium collected over sale of cigarettes under twin branding mechanism & deposited in a bank a/c can be attributed to specific manufacturer, even in absence of evidence to show that bank a/c was operated by such manufacturer. No is the answer.

Facts of the case

The assessee is engaged in manufacturing of cigarettes and for this purpose it had two tobacco processing units, one at Guntur and the other at Hyderabad; and the two factories were situated at Mumbai and Baroda. In addition, assessee also got cigarettes manufactured through number of job working units across the country. For the A.Y 1984-85, the assessee had filed its return declaring total income of Rs.3,20,61,410/-. While framing the assessment the AO made two types of additions - premium on sale of cigarettes which was estimated at Rs.23,74,16,750/- and after allowing deduction of 10% on account of wholesale buyers commission and out of books expenses of Rs.1 crore, the net addition on account of premium was made at Rs.20,36,75,075/-; and the second addition was of Rs.10 crores which was made on account of suppression of production which finally stood deleted by the CIT(A) and the Tribunal in the first round.

The entire premise of the addition made by the AO rested upon the allegation of the Department that the assessee was causing cigarettes to be sold in the market at a higher than the printed price, by evolving a modus operandi which in the trade circle of cigarettes was termed as "Twin Branding Mechanism". This Twin Branding Mechanism had led to generation of unaccounted money through sale of cigarettes every year which was in the form of premium over and above the printed MRP price. The Revenue further accredited the assessee that it had directly or indirectly benefited itself from the generation of this money. This entire premise was based on searches conducted by DRI (Central Excise) during September 1982 and again in 1986 in the offices of the assessee company and several wholesale buyers. From these searches, the AO deduced that the assessee through deceptive packet designs, i.e. "Twin Branding Mechanism" was causing 'premium' to be generated on certain sought after brands in the market and the WBs all across the country were remitting such 'premium' by demand drafts purchased in cash in fictitious names and were being deposited in several bank accounts. Accordingly, the AO opined that the collection of premium through twin branding actually belongs to the assessee. The AO also rejected the book results of the assessee and proceeded to make the assessment in the manner provided u/s. 144 and estimated the income of assessee.

On appeal, the Special Bench held that,

++ 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.

(See 2017-TIOL-401-ITAT-MUM-SB)