TMI Blog2012 (5) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... see whether it be accounted in the regular books or not. What is clear from the clandestine records seized from the assessee is that both the film producer and the film directors were engaged in collections and payments outside the regular books of accounts and that is the only reason why there is no written agreement between them in regard to profit sharing and the payments are consciously not made through cheques or demand drafts. - The mere fact that film directors have not confirmed receipt of payment in cash from the assessee also is not a ground for treating the payments as bogus or not genuine. - Decided in favor of the assessee. Accounting expenditure - section 69C - held that:- unaccounted expenditure in a proper business can be treated as an expenditure prohibited by law to attract explanation to Section 37(1). So far as the proviso to Section 69C is concerned, in the first place the proviso introduced with effect from 01/04/1999 does not apply to the block assessment for the period covered herein and secondly we do not think excess expenditure over accounted expenditure in business is covered by Section 69C itself. - Decided in favor of assessee. Regarding delet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SC, FOR INCOME TAX For Respondent: SRI.DALE P.KURIEN, SRI.P.PARAMESWARAN NAIR,ASG OF INDIA J U D G M E N T Ramachandran Nair, J. The above two appeals filed by the Revenue and the Cross Objection filed by the assessee arise from the block assessment and penalty orders issued against the assessee for the block period 1988-89 to 1997-98 (relevant for the period from 01/04/1987 to 24/07/1997) under Sections 158BC and 158BFA(2) respectively of the Income Tax Act, 1961 (hereinafter referred to as the Act for short). These proceedings were completely based on search made in the residential and business premises of the assessee on 24/07/1997 under Section 132 of the Act. 2. We have heard Shri.P.K.R.Menon, learned Senior Standing Counsel, appearing for the Revenue, and Shri.Dale P.Kurian, learned counsel appearing for the assessee. We have also gone through the argument notes filed by assessee's counsel and the several decisions cited by him. The facts leading to the block assessments made under Chapter XIV B are briefly stated hereunder. 3. The assessee is a leading producer and distributor of motion pictures in Kerala. A search was made by the Intelligence W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed the above Cross Objection challenging the findings of the Tribunal with regard to 3 items of additions sustained by it. While the Revenue's appeal is to restore the deletions made by the Tribunal, the assessee's Cross Objection is for the purpose of further reduction of the addition of three items of undisclosed income sustained by the Tribunal. 4. So far as the penalty appeal i.e. ITA No.177/2008 is concerned, what is seen is that penalty under Section 158BFA (2) of the Act is levied not with reference to the original undisclosed income assessed which is sought to be sustained in this appeal, but only with reference to the addition of Rs.67,48,250/- sustained by the Tribunal. Penalty levied is minimum as provided under Section 158BFA(2) i.e. Rs.40,48,950/-. Even though first appellate authority sustained the penalty, the Tribunal on 2nd appeal filed by the assessee cancelled the penalty completely. Revenue's appeal is for restoring the penalty that was sustained in first appeal. 5. We first proceed to consider the assessment appeal (ITA No.323/2002) filed by the Revenue and Cross Objection filed by the assessee. 6. Before proceeding to consider the various questions r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue is that when assessment of undisclosed income is based on concrete evidence received from the documents and accounts seized from the residence of assessee and the film director above referred, the Tribunal's refusal to uphold the assessment without any basis or material is a perverse finding which gives rise to a question of law. We find force in this contention because when block assessment of any item is made based on evidence collected in the course of search, the assessment under Section 158BC read with Section 158BD is supported by statutory provision namely, Section 158BB of the Act. The Tribunal cannot cancel the assessment of undisclosed income if the same is based on tenable and acceptable evidence recovered in the course of search and which is not disproved by the assessee. Keeping this in mind we proceed to consider the appeal on the various grounds raised and the questions raised with reference to specific additions. 7. The first item of addition is of Rs.1.09 crores, which is the sum total of unaccounted payments made by the assessee to film directors Shri. Siddique Lal and Shri. Fazil and also to the film producer, M/s.Kumudavally Pictures. The reason for the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing unaccounted receipts and unaccounted expenditure. The assessee himself has voluntarily declared undisclosed income of Rs.43 lakhs over the income returned for the block period. So much so, there is no justification for doubting the entries found in the seized records pertaining to expenditure while accepting the income found recorded therein. When the Department relies on the seized records for estimating undisclosed income, we see no reason why the expenditure stated therein should be disbelieved merely because there is no written agreement and that payments were not made through cheques or demand drafts. Even when unaccounted income is determined from business carried on clandestinely or not, the statute does not authorize assessment of anything other than "undisclosed income" which has to be arrived at after allowing expenditure incurred by the assessee whether it be accounted in the regular books or not. What is clear from the clandestine records seized from the assessee is that both the film producer and the film directors were engaged in collections and payments outside the regular books of accounts and that is the only reason why there is no written agreement between th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d counsel for the assessee contended that film production is not an illegal business and therefore payments made though without accounting cannot be said to be illegal payments attracting explanation to Section 37(1) of the Act. We do not think unaccounted expenditure in a proper business can be treated as an expenditure prohibited by law to attract explanation to Section 37(1). So far as the proviso to Section 69C is concerned, in the first place the proviso introduced with effect from 01/04/1999 does not apply to the block assessment for the period covered herein and secondly we do not think excess expenditure over accounted expenditure in business is covered by Section 69C itself. We therefore do not think there is any application of these two Sections to the case in hand. We, therefore, do not find any ground to interfere with the orders of the Tribunal with regard to the deletion of total addition of Rs.1.09 crores and odd to three film directors and one film producing Company towards unaccounted payments made by the assessee to them. The first question raised in Revenue's appeal is therefore answered against the Revenue and in favour of the assessee. 11. Second and third qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat if it is a practice in the film industry for producers to take advances from theatre owners, as stated by the Tribunal, then the assessee has no explanation why payments could not be accounted or could not be taken through cheques or demand drafts. Learned Senior Standing Counsel for the Revenue also placed reliance on Section 269SS and 269T of the Act in regard to acceptance of deposits and repayments of the same other than through account payee cheques or demand drafts. Learned counsel for the assessee submitted that in the course of estimating undisclosed income based on documents seized for the purpose of assessment under Section 158BC of the Act, the assessee is entitled to establish through cash flow statement as to how he sourced the funds for the business and for the investments seen made by the assessee. 12. On going through the Tribunal's order, we notice that the Tribunal's findings do not justify the ultimate conclusion arrived at by them. The assessee in the sworn statement stated that advances from theatre owners were received for exhibiting just two films, Aniyathipravu and Chandralekha. However, admittedly, these films were produced and released in the year 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause assessee was progressively making profits and investing in agricultural land and house property. In the normal course, an assessee who was surplus of fund and is not short of cash flow as is seen from the seized records should not go for any borrowals from theatre owners. Though the Tribunal accepted the reasoning of the Assessing Officer and the probabilities drawn by him to reject the explanation offered by the assessee, they completely believed the confirmation letters. Both sides produced copies of the confirmation letters before us and on verifying it, we notice that these are undated letters without giving dates or months in which amounts were advanced to assessee or the dates on which the amounts were repaid and all what is sated is the consolidated amount as having been advanced to the assessee and taken back by the theatre owners. In our view, the confirmation letters on the face of it are not genuine and no reasonable man can accept it as proof of cash transactions running into lakhs of rupees. Going by the assessee's financial position and investments revealed by seized records, it is difficult to accept the theory of advance from theatre owners put forward by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CCB as required under Section 80-IA of the Act and in the absence of such audit report to be filed along with regular return, the claim cannot be entertained. However, before the first appellate authority, the assessee pleaded that production of motion pictures, as per circular No.24 dated 23/07/1969 issued by the Board of Direct Taxes, is production of goods eligible for deduction under Section 80-IA. Going by this circular, the CIT (Appeals) allowed assessee's claim. However, in second Appeal, the Tribunal remanded the matter back to the Assessing Officer for considering the claim only with reference to film production made by the assessee that too for two years. It is against this order of the Tribunal, the Revenue has come up in appeal. While the Revenue's counsel heavily relied on the findings of the Assessing Officer particularly with reference to the requirement of audit report in Form 10CCB, the assessee's counsel contended that at any time the assessee is entitled to claim deduction under Section 80-IA of the Act. 14. After hearing both sides, we are of the view that in order to consider claim of deduction under Section 80-IA a statutory audit report in form No.10CCB is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the year 1997. However, when the Departmental Officer questioned her, she took a stand that the loan is given by her late husband, which is from his own income. The Tribunal noticed that there is inconsistency in the sworn statements of the assessee and the subsequent evidence produced by him through confirmation letter from his sister-in-law. The Tribunal further noticed that assessee's sister-in-law herself took inconsistent stand because what she has stated in the confirmation letter is not what she has stated before the Assessing Officer when her statements were recorded on 09/07/1999 and on 13/07/1999. The Tribunal therefore found that the borrowal from his sister-in-law is a bogus case, and the assessee and his sister in law have not explained as to why the amount was not paid or repaid through cheque or demand draft. We do not find any question of law arising from the findings of the Tribunal in this behalf. In our view, the Tribunal's findings and conclusions are well founded. We, therefore, dismiss the Cross Objection on this issue which is an after thought as is filed after 8 years of filing of appeal by the Department. The disallowance of the other two items raised i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n; Provided further that the provisions of the preceding proviso shall not apply where the undisclosed income determined by the Assessing Officer is in excess of the income shown in the return and in such cases the penalty shall be imposed on that portion of undisclosed income determined which is in excess of the amount of undisclosed income shown in the return." It may be noticed that penalty under the above provision is the general Rule in the event of assessment of undisclosed income under Section 158BC and exclusion from penalty is an exception covered by the first proviso to the main Section, which is subject to the second proviso thereto. What is clear from the first proviso is that if, pursuant to the notice issued under Section 158BC(a) assessee files return, remits tax and does not proceed to contest the undisclosed income returned based on which assessment is made, there is no scope for any penalty. However, the second proviso is an exception to the first proviso which makes it clear that if any undisclosed income is assessed over and above the undisclosed income returned by the assessee in the return filed pursuant to notice issued under Section 158BC(a), penalty is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the carry forward of loss claimed by the assessee amounting to Rs.33,74,884/- to offset the undisclosed income details of which were obtained in the course of search. We notice that there is statutory prohibition against allowing set off of carried forward losses from the previous years against undisclosed income under Section 158BB(4) of the Act, and in spite of the prohibition, the assessee ventured to claim carry forward loss against undisclosed income, which was rightly declined. Still we feel this amount need not be considered for penalty under Section 158BFA(2) of the Act as it was only a folly to make the claim. However, we feel penalty should be considered if the assessee has consciously suppressed undisclosed income from the return filed pursuant to notice issued under Section 158BC(a) of the Act even after recovery of details of undisclosed income during the search by the Department. Here we feel two items deserve to be considered, one the claim of borrowal claimed by the assessee from his sister-in-law, Dr.Mary Singh to off-set undisclosed income found in search, and the other is income from real estate business, which was found to be at Rs.10 lakhs. 19. So far as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut the business transaction pertaining to the cheque, he clearly admitted that he was engaged in real estate business and the cheque was issued by one Mr.Aboobacker. The assessee conceded that 5 to 6 property transactions in the course of time fetched him a profit of Rs.10 lakhs. Even after admitting the income from real estate business at Rs.10 lakhs, which is the only amount assessed by the Assessing Officer without any addition, still, the assessee contested the liability in appeal, but the Tribunal sustained it. We are unable to appreciate the conduct of the assessee because recovery of cheque is an evidence based on which assessment of undisclosed income could be made. Instead the Assessing Officer was very considerate, who recorded sworn statement of the assessee and based on assessee's sworn statement income conceded by him at Rs.10 lakhs from real estate business was assessed as undisclosed income. There is no justification for the assessee to suppress the same in return and to contest it in appeal up to the Tribunal. Assessee's sworn statement is an admissible evidence under Section 132(4) of the Act and the document received, namely the cheque, is admissible evidence unde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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