2017 (4) TMI 344 - AT - Income Tax

Twin branding pricing mechanism - whether this amount of premium generated through alleged twin branding mechanism has flown back to the assessee or not? - proof of assessee being a sole beneficiary of the entire amount or part of the amount? - bogus bank accounts - survey proceedings - Held that - 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. Ultimately, the entire case of the revenue hinges upon the presumption that assessee is bound to have some large share in so called secret money in the form of premium and its circulation. However, this presumption or suspicion how strong it may appear to be true, but needs to be corroborated by some evidence to establish a link that GTC actually had some kind of a share in such secret money. It is quite a trite law that suspicion how so ever strong may be but cannot be the basis of addition except for some material evidence on record. The theory of preponderance of probability is applied to weigh the evidences of either side and draw a conclusion in favour of a party which has more favourable factors in his side. The conclusions have to be drawn on the basis of certain admitted facts and materials and not on the basis of presumption of facts that might go against assessee. Once nothing has been proved against the assessee with aid of any direct material especially when various rounds of investigation have been carried out, then nothing can be implicated against the assessee. The entire basis of the Revenue to draw adverse inference in fact originated from the investigation and surveys carried out in the case of wholesale buyers and the statement given by the wholesale buyers about generation of premium money; and whence, finally the said allegation of the excise department has not been found be acceptable then the entire substratum on which the revenue s case hinges. It would be difficult to appreciate the stand of the revenue that the assessee was beneficiary of the premium money or relate back the flow back of the money to the assessee. It appears that the charging of premium amount over and above the MRP by the retailers and wholesale buyers may be keeping the assessee in loop to coordinate for meeting out certain expenses which also included advertisement and sales promotional expenses. The entire scheme was so designed that the liability of sales and promotion expenses or advertisement lies with the wholesale buyers and not on the assessee and assessee merely acts as a coordinating/managing central agency. But such a managing and coordinating of advertisement does not implicate the assessee that it is the sole beneficiary or owner of the entire premium money generated as held by the Hon ble Apex Court in the case of the ITC 2004 (9) TMI 103 - SUPREME COURT OF INDIA that there could not be any presumption that manufacturer is getting the money over and above the MRP. Thus, on this account also the revenue s case fails.- Decided in favour of assessee Rejection of books of accounts - 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 - Held that - 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 the Ld. 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. As stated several times herein above, there is no finding or any cogent material to establish that extra amount collected in cash by shopkeepers/retailers have been passed on further from wholesale buyers/ super buyers to the manufacturer, i.e., assessee; and once that is so, the presumption of indirect flow back cannot be made the basis for such addition or estimation of income. Various case laws have been referred by the learned counsel before us on this point; however, we are not referring to these decisions because, we have arrived at our conclusion on the basis of material facts brought on record and as referred to before us. Best judgment does not entail wild guess work or huge additions should be resorted to, albeit it lays down the determination of income based on fair and reasonable analysis based on some tangible material. The framing of the best judgment though entails some kind of fair and honest estimation but at the same time it should be based on material and information on record. 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 Ld. CIT (A) and accordingly, we direct the AO to delete the entire addition. - Decided in favour of assessee

Issues Involved:
1. Legitimacy of the addition of premium on the sale of cigarettes.
2. Rejection of the assessee's books of accounts under Section 145(2) of the Income Tax Act.
3. Validity of the estimation of income based on the alleged premium.
4. Alleged violation of natural justice and denial of cross-examination of witnesses.
5. Relevance and implications of statements and materials gathered by the Directorate of Revenue Intelligence (DRI) and Income Tax Department.
6. Application of the Supreme Court's judgment in similar cases to the present case.

Detailed Analysis:

1. Legitimacy of the Addition of Premium on the Sale of Cigarettes:
The core issue was whether the premium generated through the alleged "Twin Branding Mechanism" had flown back to the assessee. The Revenue alleged that the assessee sold cigarettes at a higher price than the declared/printed MRP, generating cash premiums. These premiums were allegedly collected through a chain of salesmen, retailers, and wholesale buyers, and then remitted to fictitious bank accounts. However, the Tribunal found no direct or indirect evidence linking the flow of drafts from wholesale buyers to these bank accounts and subsequently to the assessee. Statements from employees of wholesale buyers did not implicate the assessee, and no material indicated that the assessee had control over these bank accounts.

2. Rejection of the Assessee's Books of Accounts under Section 145(2):
The Assessing Officer (AO) rejected the assessee's books of accounts, alleging that the assessee maintained bank accounts in fictitious names outside the books and incurred expenses not reflected in the books. The Tribunal found no material evidence to support that these bank accounts belonged to the assessee or were under its control. The Tribunal held that the rejection of the books of accounts was not justified, as the allegations were based on suspicion and surmises without direct evidence.

3. Validity of the Estimation of Income Based on the Alleged Premium:
The AO estimated the income by multiplying the volume of sales of lower-priced brands with the differential price of higher-priced brands, giving an ad-hoc reduction of 10% for the wholesale buyers' share. The Tribunal found this estimation faulty and based on high degrees of presumption and hypothesis. The Tribunal emphasized that best judgment assessments should not resort to wild speculation but should be based on fair and reasonable analysis of tangible material. The Tribunal directed the deletion of the entire addition, finding the estimation method implausible and far-fetched.

4. Alleged Violation of Natural Justice and Denial of Cross-Examination:
The Tribunal addressed the issue of natural justice, noting that cross-examination of certain witnesses was allowed per earlier directions. The Tribunal rejected the contention of the assessee regarding the violation of natural justice, stating that the issue had already been settled in previous rounds of litigation. The Tribunal proceeded to decide the appeal on merits based on available material and evidence.

5. Relevance and Implications of Statements and Materials Gathered by DRI and Income Tax Department:
The Revenue's case relied heavily on statements and materials gathered by the DRI and subsequent enquiries by the Income Tax Department. The Tribunal found that these materials and statements did not conclusively prove that the assessee had control over the fictitious bank accounts or that the premium money had flown back to the assessee. The Tribunal noted that many statements were retracted, and the credibility of these statements was substantially eroded. The Tribunal emphasized the lack of direct evidence linking the assessee to the alleged premium collections.

6. Application of the Supreme Court's Judgment in Similar Cases:
The Tribunal referred to the Supreme Court's judgment in the case of ITC Ltd. vs. CCE, which dealt with similar allegations of premium collection over the printed MRP. The Supreme Court had held that the manufacturer could not be held responsible for the actions of retailers charging higher prices than the printed MRP. The Tribunal found this judgment applicable to the present case, noting that the Revenue's case lacked corroborative material to establish that the assessee was the beneficiary of the premium money.

Conclusion:
The Tribunal concluded that the addition of premium on the sale of cigarettes was not justified due to the lack of direct evidence linking the premium collections to the assessee. The rejection of the assessee's books of accounts under Section 145(2) was also found to be unjustified. The method of income estimation based on the alleged premium was deemed faulty and far-fetched. The Tribunal directed the deletion of the entire addition and allowed the appeals for the assessment years 1984-85, 1985-86, and 1986-87. The Tribunal emphasized the importance of direct evidence and material facts in drawing conclusions and making assessments.

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