2012 (5) TMI 72 - HC - Income Tax

Block assessment and penalty u/s 158BC Search and seizure Undisclosed income - held that - 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. Regarding addition is of Rs. 1.09 crores which is the sum total of unaccounted payments made by the assessee to film directors . The reason for the addition is that all the three film directors denied receipt of payments from the assessee - Held that - 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 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 deletion of Rs. 44.62 lakhs by the Tribunal - advances received from theatre owners. - Held that - 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 1996-97 whereas the advances were stated to have been received during the period 1991-92 to 1993-94. 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 assessee later. Decided in favor of the revenue. Regarding deduction under Section 80-IA - Held that - the assessee has not made any claim in the regular returns filed up to the assessment year 1998-99. - The requirement of an audit report in form 10CCB is for the Department to verify the factual position with reference to the data contained therein which has contemporary relevance. A claim of deduction under Section 80-IA is admissible only in regular assessment that too if it is claimed along with the return accompanied by audit report in form 10CCB. - Dedction can be claimed for the first time in the computation of undisclosed income in the assessment under Section 158BC of the Act. Decided in favor of the revenue. Regarding penalty - Held that - the additions of undisclosed income are essentially estimate of profits from film industry and the assessment is based on accounts seized during search and statements recorded from the assessee which are admissible under Section 132(4) of the Act. Going by the strict provisions of law as explained by us above penalty is leviable on the differential amount assessed and sustained in appeal which is exactly what the Assessing Officer has done. However we feel for the first time such a strict interpretation on penalty need not be applied to the assessee at this distance of time after the relevant years. - Partly decided in favor of assessee and partly in favor of revenue.

Summary

Issues Involved:
1. Block assessment and penalty orders for the block period 1988-89 to 1997-98.
2. Addition of Rs.1.09 crores as unaccounted payments.
3. Deletion of Rs.44.62 lakhs as advances from theatre owners.
4. Deduction under Section 80-IA.
5. Addition of Rs.20 lakhs as a loan from sister-in-law.
6. Penalty under Section 158BFA(2).

Detailed Analysis:

1. Block Assessment and Penalty Orders:
The appeals and cross objections arise from block assessment and penalty orders issued for the block period 1988-89 to 1997-98 under Sections 158BC and 158BFA(2) of the Income Tax Act, 1961. These proceedings were based on a search conducted on 24/07/1997 in the residential and business premises of the assessee under Section 132 of the Act. The assessee filed a return declaring an undisclosed income of Rs.43 lakhs for the entire block period. The Assessing Officer, dissatisfied with the declared income, completed the assessment on a total undisclosed income of Rs.2,87,82,320/-. The CIT (Appeal) granted a substantial reduction, and the Tribunal refixed the total undisclosed income at Rs.1,09,16,440/-. The Revenue's appeal aims to restore the deletions made by the Tribunal, while the assessee's Cross Objection seeks further reduction of the sustained additions.

2. Addition of Rs.1.09 Crores as Unaccounted Payments:
The first item of addition was Rs.1.09 crores, representing unaccounted payments to film directors and a film producer. The Tribunal accepted the assessee's explanation that unaccounted payments were recorded in the seized records and should be accepted if unaccounted receipts are accepted. The Tribunal found no justification to reject the unaccounted expenditure recorded in the seized books. The court upheld the Tribunal's decision, stating that the Department cannot disbelieve the expenditure if it relies on the seized records for estimating undisclosed income. The court found no reason to interfere with the Tribunal's findings regarding payments to film directors and the film producing company.

3. Deletion of Rs.44.62 Lakhs as Advances from Theatre Owners:
The Tribunal deleted Rs.44.62 lakhs by accepting the assessee's explanation that the amount represented advances from theatre owners. The court found the confirmation letters produced by the assessee to be vague and lacking particulars. The court concluded that the confirmation letters were not genuine and restored the addition of Rs.44.62 lakhs towards undisclosed income. The court found the Tribunal's decision to rely on the confirmation letters without credible evidence unsustainable.

4. Deduction under Section 80-IA:
The assessee claimed deduction under Section 80-IA for industries engaged in manufacturing and production of goods. The Tribunal remanded the matter to the Assessing Officer for considering the claim only for two years. The court held that a statutory audit report in Form No.10CCB is mandatory for claiming deduction under Section 80-IA. The court found no justification for the Tribunal to remand the matter and answered the question in favor of the Revenue, stating that the deduction cannot be claimed for the first time in the computation of undisclosed income in the assessment under Section 158BC.

5. Addition of Rs.20 Lakhs as a Loan from Sister-in-Law:
The assessee claimed to have borrowed Rs.20 lakhs from his sister-in-law, Dr. Mary Singh. The Tribunal found inconsistencies in the assessee's statements and the confirmation letter from his sister-in-law. The court upheld the Tribunal's findings that the borrowal from the sister-in-law was a bogus claim and dismissed the Cross Objection on this issue.

6. Penalty under Section 158BFA(2):
The Tribunal canceled the penalty imposed under Section 158BFA(2). The court examined the scope of Section 158BFA(2) and found that penalty is mandatory for undisclosed income assessed over and above the income returned by the assessee. The court sustained the minimum penalty on the differential amount assessed and sustained in appeal. The court allowed the appeal in part, sustaining the penalty on two items of undisclosed income totaling Rs.30 lakhs.

Conclusion:
The appeals filed by the Revenue were allowed in part, and the Cross Objection filed by the assessee was dismissed. The court expressed its concern over the Central Government's lack of action to prevent the generation and circulation of black money and urged for measures to control cash dealings in major transactions.