TMI Blog2013 (6) TMI 778X X X X Extracts X X X X X X X X Extracts X X X X ..... 58,412 made in respect of expense incurred on free distribution of Gold Coins be deleted. b) Steps may be directed against the learned AO 2. In the course of the present proceedings Ground No.2 was not pressed. 3. Briefly stated, the assessee company was engaged in the financial year relevant to the AY 2006-07 in the business of manufacturing of watches and calculators and also engaged in trading of mobiles. It furnished return of income for the AY 2006-07 on 30.11.06 declaring total income of Rs.Nil by claiming deduction under section 80IC of the Act at ₹ 1,65,30,520 and disclosed book profit under section 115JB of the Act at ₹ 1,61,30,608. During the course of the assessment proceedings, AO noticed from the audit report that assessee had debited gross selling and distribution expenses of ₹ 9,53,21,476. AO vide office letter dated 24.12.08 asked assessee to furnish full details of gross expenses incurred, expenses reimbursed and net expenses booked under selling and distribution expenses and also allowability of the same. Assessee vide letter dated 30.12.2008 explained that it incurred various selling and distribution expenses of ₹ 9,53,21,476. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and after considering all the documents, reports, objections, the learned CIT (A) ultimately concluded that the claim of expenditure of the above amount of ₹ 4,77,58,412 was not incurred wholly and exclusively for the purpose of business and to the extent of same, the CIT (A) confirmed the disallowance by observing as under: 5.4.4 I have carefully and dispassionately considered the facts and circumstances and after going through the remand reports of the LAO and the counter comments given by the appellant, the following points emerge for consideration: Purchase of Gold from Opal Industries who is into manufacturing of wall clocks. Opal Industries did not have any knowledge of dealing in gold Cenzer carried out transactions in gold worth ₹ 4.77 crores with Shri Subhash Gujar of Opal Industries without ascertaining his creditworthiness. It was a one time transaction of gold for Opal Industries. Cenzer chose to pay advance of more than a crore of rupees to Opal Industries who did not have requisite knowledge and ability to execute transaction in Gold. The Proprietor of Opal Industries does not even remember the party from whom the gold was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as propounded by the Supreme Court in the case of Sumati Dayal vs. CIT 214 ITR 801 (SC), the appellant s claim of expenses of 68 kg of gold valued at that time at ₹ 4,77,58,412 has not been fully established. There is no doubt that to claim an item of expenditure under section 37(1) of the Act, the burden lies on assessee. In the present case, there are prima facie facts and surrounding circumstances and the material evidences against the free distribution of 68 kgs of gold to general public. The appellant has failed to identify even a single consumer who won gold coins under the free gold coin scheme of the appellant. The transaction about purchase of gold coins vs. gold bars from a wall clock manufacturer and trader have been questioned by the LAO. He has also doubted the free distribution of 68 kgs of gold coins to unknown consumers. The appellant has failed to furnish the necessary evidences in support of such expenses having been exclusively and wholly incurred for the purpose of appellant s business. As laid down by the Hon'ble Supreme Court in the case of Sumati Dayal vs. CIT (supra), apparent must be considered real until it is shown that there are reason to bel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee decided to insert 20g of gold coin in some of the sets being traded by assessee so that the customer get the gift and assessee will have large turnover so as to increase the sales and profit. He referred to the agreement with the supplier (Sagem France) and also the reason why large amount was reimbursed by the principal company M/s Sagem. He also referred to the additional evidence filed afresh on 15.04.2013 in support that assessee has a godown in Bhiwandi and the goods were supplied in three sets and the dispatch reports/ invoices of various sets transferred were placed in the sets. He further referred to the affidavit given by Shri Subhash Gujar that he has undertaken conversion of gold bars into gold coins and how the transaction was was implemented. The learned Counsel also referred to the computer/ web site print of Opal Industries Ltd to submit that the said company is a very famous company in the marketing of watches etc. He then referred to the payment details for the gold coins and the invoices of gold bar obtained by assessee to prove its credentials and the bills raised by the Opal Industries for supply of gold coins. He then referred to the incentives receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the said Sri Gujar to submit that assessee s earlier statements were contradictory to each other. He submitted that the entire transaction is a make belief transaction so as to conceal the income. 9. In reply, the learned Counsel countered that the affidavit explains the possibility of conversion of gold into coins and Pune is not very far off place and in Bhiwandi there was enough space for the company so as to receive the gold coins and insert in the sets. He also submitted that the decision of the Hon'ble Supreme Court in the case of Sumati Dayal vs. CIT, relied upon by the Revenue does not apply to the facts of the case. He then submitted that there are contradictions in the statement recorded whereas M/s Opal Industries is a firm, the statement recorded by the Addl. DIT indicate proprietary concern and a highly inconsistent statement cannot be relied upon. He referred to the affidavit and the fact that assessee in order to cooperate with the Department produced the bills of Opal Industries purchase of gold and the onus stands discharged. 10. On a query by the bench, it was informed that the price of each handset vary from ₹ 2500 to ₹ 6500 and gold c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iwandi which was used for the purpose of stocking the goods and by placing these agreements on record, nothing else is established other than that assessee has a godown. The additional evidence now placed on record cannot be considered as relevant as these do not have any bearing on the issue under consideration. Therefore, the additional evidence from Page Nos.28 to 228 are not taken on record. Contention whether the entire amount can be disallowed: 12. It was the contention of assessee that assessee did claim only an amount of ₹ 1,80,86,421 in the Profit Loss A/c and AO disallowed the entire gross expenditure. The details of the claim as extracted by the learned CIT (A) in Page 5 of his order is as under: Accounting Head Gross (Rs.) Reimbursement (Rs.) Net (DR. to Profit Loss A/c (Rs.) Advertisement 8,38,54,961 7,71,04,074 67,50,887 Sales promotion 2,82,418 1,30,981 1,51,437 Commission 28,41,650 - 28,1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm normally used by SAGEM SA in its own marketing efforts. DISTRIBUTOR shall be responsible for providing translation of product documentation, under its own liability and at its costs. The copyright in any translation shall vest in SAGEM SA. - The event that DISTRIBUTOR shall be assigned responsibility for maintenance, to receive such qualified personnel as DISTRIBUTOR may designate in its premises, in accordance with such program and under such conditions as may be jointly determined by the parties hereto. In such cases, Distributor shall pay for all travel and accommodation expenses of its personnel. - To provide a Marketing budget to the Distributor, based on the orders, for Promotion of the products in THE TERRITORY. The amount will be calculated according to the number of pieces effectively delivered (See Appendix 3) . Further, Appendix-3 specially mentions the following conditions: Appendix 3: Minimum quantities per order Minimum annual quantities for each models till September, 04. Entry level: Total 1,02,000 pieces MID and HIGH LEVEL: Total: 18,000 pieces Co-marketing budget: Advertising and promotion budget of 50,000 USD shall be provided for e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,86,600 Mar06 Difference in currency TOTAL 2,20,363 67,48,690 14. $ 5 per set reimbursed to assessee as advertisement cost is a sort of discount given on the quantity of purchase order and assessee should have accounted for the receipts separately based on the orders placed. As seen from the terms and conditions of the agreement, it is to be noted that there is a fixed advertisement budget of USD 5 per handset which was given to assessee on the basis of minimum order of entry level, mid and high level products as per appendix-3 and there is no correlation with reference to the particular advertisement or promotion budget undertaken by assessee. The amount of ₹ 7,68,96,811 received from SAGEM is nothing but USD 5 per handset provided to assessee for the purpose of advertisement which should have been shown as a separate receipts in the books of account as the advertisement expenditure was on the assessee company only. The amount of USD 5 cannot be considered as reimbursement of the advertisement expenditure incurred by assessee as there is no correlation bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent proceedings placed documents of Opal Industries to substantiate that the said company was in the business of watch making and distribution, but as seen from the bills and the affidavit filed, Opal Industries Ltd has no connection with the Opal Industries. DDIT, Pune inquired from Mr. Subhash Gujar who stated that it is a proprietary concern and assessee filed an affidavit from Shri Gujar stating it is a firm. As seen from the sequence of events, assessee did not furnish any evidence at the time of the assessment proceedings may be due to shortage of time, but could furnish only in the course of appellate proceedings before the CIT (A). As seen from the record of the CIT (A) the letter sent originally was returned un-served and assessee has furnished revised address and AO had to refer to ADIT Pune for necessary examination. Even though assessee contends that Mr. Gujar is acting on behalf of the firm and has filed an affidavit in this regard, whether the return of income was filed before the inquiries started or after the inquiries was also not on record. Therefore, since assessee also relied on the affidavit of Mr. Gujar, the undisputed fact is that Mr.Gujar has accepted the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerned, I would like to mention that we are manufacturer and traders in wall clocks which contain plates, such plates are of many types, some plates contains gold, silver and other raw material, So I possess sufficient knowledge for dealing in gold. 13. That we have built up strong goodwill in market such that prudent businessman are aware of our credit worthiness. We may trade in a particular product again and again if we find the activity profitable. Frequency of trading in a particular product is entirely a commercial decision. 14. That on certain occasions, we had received delivery of gold bars from our suppliers, before receiving invoice. This practice of documentation and physical delivery of gold is accepted market practice. There are two types of dealings (sauda) in gold business one where rate is fixed at the time of delivery and other where rate is fixed after the delivery and invoice is prepared after the rate is fixed. Even many banks deals in such type of gold saudas. 15. That as the delivery of gold and its corresponding invoice do not always go together, mere signature on invoice does not mean that the signatory has taken delivery of gold. Verified th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ullions, one can discount assessee s story, but transporting 19 kgs of gold from Mumbai to Pune, getting converted bars into coins without any prior experience and without any license or without any necessary infrastructure other than the so called sangdi/mould as explained in the affidavit is not believable. Likewise the conversion of other gold bars in second and third lots on the same date is not believable. More over there are no conversion charges and how many persons worked in this was not explained. The affidavit, a self serving one, do skip the point of transportation from Mumbai to Pune and to Bhiwandi stating That it is impractical and impossible to remember as to how the delivery of gold bars was taken or gold coins were given . There are more inconsistencies in the affidavit than what it explained. No reliance can be placed on this affidavit to accept the assertions/ averments made there in. Since assessee filed so called affidavit from Shri Gujar with out explaining the reason for his statements before authorities and contradictions now to the earlier statements, the same also can not be relied on. The affidavit being filed by assessee also goes against the argument t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as such, as can be seen from the Branch transfer details placed on record as a part of additional evidence. The next inconsistency in assessee s explanation was with reference to the number of handsets available at the time of the so called insertion of gold coins. Assessee has furnished the following statements as part of the written submissions in the paper book at Page No.226: 5. Statement of purchase and distribution of gold coins: Date of receipt of gold coins No. of coins received Stock of mobile on that date No. of boxes No. of boxes in which gold coins inserted Sales Branch transfer Sales 14/06/05 950 1500 approx. 1500 950 12194 pcs Approx from 17.06.05 to 30.06.05 236 pcs Approx from 17.6.05 to 30.06.05 05/07/05 950 35000 (Approx.) 3500 950 26396 from 9.7.05 to 31.07.05 1147 pcs from 11.7.05 to 31.07.05 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umber or even a sticker in side to be redeemed with company, there can be some justification in assessee contention. We are not advising how to run a scheme but in the absence of any credible evidence, the above observations are to the extent of examining whether the contentions are acceptable or not. i) Another aspect which also not credit worthy is that the hand set itself is costing ₹ 2500 to ₹ 6500 as admitted by assessee, whereas the 20g gold coin itself cost more than ₹ 12,000. It is little unbelievable that a handset cost less than ₹ 6500 will contain a gold coin of more than ₹ 12,000 as a gift. If the gold coin is of 1gm or 2gm, there may be some genuineness in assessee s contention. By providing 20g gold coin in each handset as a lottery as seen from the above table in a very unscientific randomization is not believable on the given facts as explained before us. 16. Even though assessee tried to explain that they had a gold coin scheme for which they spent ₹ 4,77,58,412 by purchasing 68 kgs of gold and converting them into 3400 gold coins of 20g each for insertion in handsets, the events as explained lack credibility. Coupled with ..... X X X X Extracts X X X X X X X X Extracts X X X X
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