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TMI Blog2013 (6) TMI 778X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowance of ₹ 4,77,58,412 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counter the comments 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 ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case and keeping in mind the logical consideration and probabilities of human behavior 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 Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. Coming to the merits of the expenditure claimed, it was submitted that as a marketing strategy, assessee 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 bil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven by Shri Subhash Gujar before Addl.DIT Pune and also made submissions on the affidavit now filed 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, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33 also does not establish the credential of the claim except that there is a godown in Bhiwandi 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 - 28,14,650 Discount 39,94,866 - 39,94,866 Sales incentive 43,47,581 - 43,47,581 9,53,21,476 7,72,35,055 1,80,86,421 Reimbursement from Sagem SA CMB ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 every 10,000 pieces purchased dispatched with: - At least 8,500 mix ENTRY LEVEL products - At least 1,500 mix MID AND HIGH LEVEL products This budget shall proportionately increase in same ratio according to the quantities effectively delivered This indicates that for each 10,000 pieces, assessee's budget was provided 50,000 USD i.e. $ 5 per piece on the basis of which assessee has accounted for the income during the year on the basis of the orders placed with SAGEM as under: Month Order of mobiles place with SEGAM Marketing budget as per agreement (In $ per handset order) Amount receivable (US $) Exchange Rate Amounts booked (Receivable from SEGAM) Amount received during the year 2005- 06 Apr 05 27,350 5.00 1,36,750 44.00 60,17,000 2,99,814 May05 28,750 5.00 1,43,750 44.00 63,25,000 1,08,37,891 Jun 05 28,620 5.00 1,43 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the gold coin scheme, It was the contention that assessee undertook the scheme 'jeeto india GOLD' and inserted 20 gms of gold coin in random sets so as to increase the sales by benefitting the customers. The evidence in support is the photo copy of brochure, the three invoices issued by M/s Opal Industries, Pune towards purchase of 3400 gold coins of 20 gms each. During course of proceedings before CIT(A), assessee also submitted the three invoices of purchase of gold from M/S Riddhi Siddhi Bullions Ltd, Mumbai by M/S Opal industries. Assessee also supported the claim by evidencing payments and increase in sales. This contention of assessee was examined in the course of remand reports before AO by CIT(A). The reports of AO and reasons given by CIT(A) need not be extracted again here. The AO and CIT(A) did not agree with assessee claim as they are of the opinion that assessee claim was not substantiated so as to allow as an expenditure u/s 37(1). The lack of experience in dealing gold coins by M/S Opal Industries, sale of gold coins before purchase of Gold Bars, supply on same day, no evidence of conversion, no evidence of transportation or delivery, no evidence of scheme of gif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee code is AAAF03409MST001. 4. In the financial year ending 31st March 2006, we had purchased gold bars from RIDDHI SIDDHI BULLIONS LTD (RSBL) of ₹ 4,77,05,330/ - for trading. 5. That we have converted the entire stock of such gold bars into gold coins and sold it to CENZER INDUSTRIES LIMITED (CIL) of 20-B Sugra Building, 2nd Floor, 16 Tribhuvan Road, Mumbai 400004 6. That the process of conversion of gold bars into gold coins was conducted at our premises at GAT NO 1194/1195, Wadki Village, Pune Saswad Road, Tal. Haveli, Pune, Maharashtra. 7. That for conversion process, we received gold bars from RSBL and loaded on a boiling vessel (Sangdi) which liquefied the gold bars. This liquefied gold was then poured into round moulds. Almost instantly gold coins were formed. 8. That we had not paid any charges to anyone for conversion of gold bars into gold coin. 9. That it is impractical and impossible to remember as to how the delivery of gold bars was taken or gold coins were given. 10. That our transactions and documentation with our supplier and customer are as per market practice. 11. That we have disclosed and declared our transaction with RSBL and CIL in our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g is on 05.07.2005. The third lot of 1500 gold coins weighing 30kgs is on 31.01.2006. To prepare so many coins on the so called moulds in the factory premises on Sangdi on a single day is nothing but impossible considering the fact that they are manufactured on the same day and delivered to the Bhiwandi godown without any license, wherewithal and also expertise or evidencing similar activity to any other party. d) The affidavit is also vide Para 14 contends that they have received gold bars from the suppliers before receiving invoice. This practice of documentation and physical delivery of gold is stated to be an accepted market practice. This is nothing but camaflouging the discrepancy found out by the Department on inquiry. On 14.06.2005 when assessee supposed to have converted 19kgs of gold bar into 950 gold coins, there is no purchase of gold by Opal Industries where as the relevant bill from Riddhi Siddhi Bullions Ltd was dated 16.06.2005. It is not a small quantity of gold to consider that they have delivered without an invoice. Keeping in mind the fact that M/s Riddhi Siddhi Bullions operated in Mumbai and Mr. Gujar's factory is in Pune, how the gold of 19kgs can be transp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advertisements which are placed on record which shows celebrities for propagating the schemes, but nowhere in those advertisements the gold scheme was specified or announced. If assessee were to really launch the gold coin scheme in order to propagate, there would be certainly advertisements, press reports etc., to support the contention. Nothing was placed on record except a photocopy of the so called brochure, the genuineness of which is not established. f) Another aspect which is also surprising is that the scheme is valid from 15.06.2005 according to assessee till the stock lasts. If the scheme was to start from 15th June, how the stocks are dispatched only on 15th June in the first lot of goods was not explained. Moreover as seen from the above, on the basis of reimbursement of USD 5 per piece, assessee has not even placed any order for purchase of goods after December 05, whereas they were supposed to have inserted 1500 gold coins after 31.01.2006 for the scheme available upto March, 2006 as submitted. There are inconsistencies in the entire scheme which is not explained properly. g) Now coming to the argument that they have inserted the gold coins in the handsets, even h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the so called affidavit by one of the Managers which can not be accepted without any corresponding evidence by the party. h) Another contention which also looks obvious on the face of it as unbelievable is that the cost of the gold coin given as gift. In order to explain that the mobile set has a 20gm gold coin the Ld Counsel tried to demonstrate before us by bringing a set and gold coin of similar size. What is not acceptable as human probability is the weight and cost of each gold coin. As far as the insertion of 20 g of gold coin in a handset packet which may weigh 100g or so will easily give out that a particular handset contain an extra weight. Any prudent businessman or dealer will immediately identify the set. This will not be put up for sale at all. The handset itself is very light and 20gm of gold coin, in our view, can not be inserted in the handset box. Had it been a scratch card or random number 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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