2013 (6) TMI 778 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of expenses for free distribution of gold coins.
2. Alleged inhumane, illegal actions by the AO (not pressed).

Summary:

1. Disallowance of Expenses for Free Distribution of Gold Coins:
The assessee, engaged in manufacturing watches and calculators and trading mobiles, claimed expenses of Rs. 4,77,58,412 for free distribution of gold coins. The AO disallowed these expenses due to lack of evidence supporting the claim. The CIT(A) upheld the disallowance, noting several inconsistencies and lack of concrete evidence.

The CIT(A) observed:
- Purchase of gold from Opal Industries, a wall clock manufacturer with no expertise in gold.
- Transactions were not credible, including advance payments without creditworthiness verification.
- No evidence of transportation or conversion of gold bars to coins.
- No advertisements or customer identification for the gold coin scheme.

The CIT(A) concluded that the expenses were not incurred wholly and exclusively for business purposes, applying the test of human probabilities as per Sumati Dayal vs. CIT 214 ITR 801 (SC).

2. Alleged Inhumane, Illegal Actions by the AO:
This ground was not pressed during the proceedings.

Detailed Judgment:

Additional Evidence and Relevance:
The additional evidence provided by the assessee, including invoices and affidavits, was deemed irrelevant as it did not establish the insertion of gold coins in mobile sets. The evidence only supported the existence of a godown and the business of trading in mobile sets.

Contention of Disallowance of Entire Amount:
The assessee claimed only Rs. 1,80,86,421 as net expenses after reimbursement from foreign companies. However, the AO examined the entire expenditure, as the reimbursement was not directly correlated with specific advertisement expenses. The AO's approach was upheld, rejecting the contention of only net amount being claimed.

Claim of Expenditure on Gold Coin Scheme:
The assessee's claim of distributing 68 kgs of gold coins was found inconsistent and unsubstantiated:
- Lack of credible evidence of the gold coin scheme and advertisements.
- Inconsistencies in the purchase and conversion of gold.
- Improbability of inserting 20g gold coins in mobile sets without detection.
- Unbelievable cost ratio of gold coins to mobile sets.

The affidavit from Shri Subhash Gujar, who claimed to have converted gold bars to coins, was deemed unreliable due to inconsistencies and lack of supporting evidence. The entire scheme was considered improbable and not credible.

Conclusion:
The appeal was dismissed, upholding the disallowance of Rs. 4,77,58,412 for the free distribution of gold coins. The assessee failed to establish the genuineness of the expenditure as wholly and exclusively for business purposes.