Ita/323/2002 Of Commissioner Of Income Tax v. P.d.abraham

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN FRIDAY, THE 10TH DAY OF FEBRUARY 2012/21ST MAGHA 1933 ITA.No. 323 of 2002 ( ) ----------------------- (AGAINST ORDER IN IT(S&S) A NO.1/COCH/2000 DATED 21/05/2002 APPELLANT(S)/APPELLANT::----------------------- THE COMMISSIONER OF INCOME TAX (CENTRAL) COCHIN. BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S)/RESPONDENT:: -------------------------- 1.SHRI P.D.ABRAHM ALIAS APPACHAN, M/S. SWARGACHITRA, JAIL ROAD, CALICUT. *ADDL.R2FINANCE SECRETARY, GOVERNMENT OF INDIA. *(ADDITIONAL 2ND RESPONDENT IS IMPLEADED AS PER ORDER DATED15/12/2008 IN ITA NO.323/02 & C.O.NO.112/2008 IN ITANO.323/2002.) BY ADV. SRI.DALE P.KURIEN FOR R1 SRI.P.PARAMESWARAN NAIR,ASG OF INDIA THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 10-02-2012, ALONG WITH CO. 112/2008 & ITA. 177/2008, THE COURT ONTHE SAME DAY DELIVERED THE FOLLOWING: APPENDIX APPELLANT'S EXHIBITS FIRST RESPONDENT'S EXHIBITS PA TO JUDGE. C.R. C.N.RAMACHANDRAN NAIR & K.VINOD CHANDRAN, JJ. .................................................................... ITA Nos.323 of 2002, 177 of 2008 & Cross Objection No.112 of 2008 in ITA No.323 of 2002 .................................................................... Dated this the 10[th] day of February, 2012. 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 blockassessment and penalty orders issued against the assessee forthe block period 1988-89 to 1997-98 (relevant for the periodfrom 01/04/1987 to 24/07/1997) under Sections 158BC and158BFA(2) respectively of the Income Tax Act, 1961(hereinafter referred to as the Act for short). Theseproceedings were completely based on search made in theresidential and business premises of the assessee on24/07/1997 under Section 132 of the Act. 2.We have heard Shri.P.K.R.Menon, learned SeniorStanding Counsel, appearing for the Revenue, and Shri.DaleP.Kurian, learned counsel appearing for the assessee. We have ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -2- also gone through the argument notes filed by assessee'scounsel and the several decisions cited by him. The factsleading to the block assessments made under Chapter XIV Bare briefly stated hereunder. 3.The assessee is a leading producer and distributorof motion pictures in Kerala. A search was made by theIntelligence Wing of the Income Tax Department under Section132 of the Act in the residential and business premises of theassessee on 24/07/1997, which led to recovery of variousincriminating documents and books of accounts and details ofinvestments made by the assessee in acquisition ofagricultural lands, construction of residential house etc.Pursuant to search, notice was issued to the assessee underSection 158BC of the Act requesting to file return ofundisclosed income. The assessee filed return in Form No.2Bon 27/02/1998 declaring an undisclosed income of Rs.43lakhs for the entire block period. However, dissatisfied withthe quantum of undisclosed income declared by the assessee,the Assessing Officer issued notice proposing assessment. ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -3- ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -3- Since accounts and documents seized revealed unaccountedbusiness, massive investments and expenditure as well, theassessee was required to furnish cash flow and wealthstatements. Sworn statement was also recorded from theassessee on the date of search i.e. on 24/07/1997 and on29/07/1997. In the detailed statement given by the assessee,the assessee clearly stated that assessee and his familymembers have no other loan other than a bank loan of Rs.10lakhs taken by him along with his wife and son for meeting theexpenditure for publicity of films. However, in the course ofassessment, along with other claims made, the assessee alsocontended that he has other debts particularly a loan of Rs.20lakhs taken from his sister-in-law and Rs.5 lakhs borrowedfrom a priest and around Rs.15 lakhs towards balanceoutstanding due to theatre owners. After analyzing the cashflow and wealth statements furnished by the assessee withreference to the evidence collected during search and swornstatements recorded, the Assessing Officer completed theassessment on a total undisclosed income of ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -4- Rs.2,87,82,320/-. Even though in the first appeal, the CIT(Appeal) granted substantial reduction to the assessee, on 2[nd]appeal, the Tribunal refixed the total undisclosed income forthe block period at Rs.1,09,16,440/- i.e. by making anaddition of Rs.67,48,250/- over the undisclosed income ofRs.43 lakhs declared by the assessee. Even though theassessee initially accepted the Tribunal’s order sustaining anaddition of Rs.67 lakhs over the undisclosed income declaredby the assessee, the assessee after six years of filing of appealby the Revenue filed the above Cross Objection challengingthe findings of the Tribunal with regard to 3 items of additionssustained by it. While the Revenue’s appeal is to restore thedeletions made by the Tribunal, the assessee’s CrossObjection is for the purpose of further reduction of theaddition of three items of undisclosed income sustained by theTribunal. 4.So far as the penalty appeal i.e. ITA No.177/2008 isconcerned, what is seen is that penalty under Section 158BFA(2) of the Act is levied not with reference to the original ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -5- undisclosed income assessed which is sought to be sustained in this appeal, but only with reference to the addition ofRs.67,48,250/- sustained by the Tribunal. Penalty levied isminimum as provided under Section 158BFA(2) i.e.Rs.40,48,950/-. Even though first appellate authoritysustained the penalty, the Tribunal on 2[nd] appeal filed by theassessee cancelled the penalty completely. Revenue’s appealis 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 Objectionfiled by the assessee. 6.Before proceeding to consider the various questionsraised in the appeal, we have to consider the preliminaryobjection raised by the learned counsel for the respondentthat no substantial question of law arises for consideration bythis court with regard to the concurrent findings on factrecorded by the first appellate authority and confirmed by theTribunal. Senior counsel appearing for the Revenue on theother hand contended that the appeal has to be considered by ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -6- 5.We first proceed to consider the assessment appeal(ITA No.323/2002) filed by the Revenue and Cross Objectionfiled by the assessee. 6.Before proceeding to consider the various questionsraised in the appeal, we have to consider the preliminaryobjection raised by the learned counsel for the respondentthat no substantial question of law arises for consideration bythis court with regard to the concurrent findings on factrecorded by the first appellate authority and confirmed by theTribunal. Senior counsel appearing for the Revenue on theother hand contended that the appeal has to be considered by ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -6- keeping in mind the special provisions of the Act contained inChapter XIVB of the Act which specifically provide in Section158BB that a block assessment has to be completed on thebasis of evidence found as a result of search or requisition ofbooks of account or other documents and such other materialsor information as are available with the Assessing Officer andrelatable to such evidence. We have to certainly consider thesalient features of block assessment contemplated underChapter XIVB which provides for block assessment for amaximum period of 10 years ending with the date of search.While Section 158BC provides for block assessment of theassessees searched under Section 132 of the Act or whosebooks of accounts are called under Section 132A of the Act,Section 158BD provides for block assessment of assesseesother than searched assessees based on evidence or materialsreceived in the course of search. The peculiar feature of thiscase is that the respondent-assessee is mainly a filmdistributor and is also a film producer, while the otherassessee simultaneously searched namely, Sri.A.M.Fazil, is a ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -7- film director and producer as well and both these personshave so much of extensive business connections and,therefore, the records seized from both the assessees and thestatements recorded from both of them relate to sametransactions that is the income and expenditure from filmmaking, direction and distribution. We are very conscious ofthe fact that the appellate jurisdiction of this court underSection 260A is limited to substantial questions of law arisingfrom orders of the Tribunal. The contention raised by counselfor the assessee that concurrent findings on appreciation ofevidence recorded by two appellate authorities normallyshould not be interfered by this court to reach a differentconclusion again by reappraising the evidence is quite a soundprinciple of law. However, the contention raised by Seniorcounsel for the Revenue is that when assessment ofundisclosed income is based on concrete evidence receivedfrom the documents and accounts seized from the residenceof assessee and the film director above referred, the Tribunal'srefusal to uphold the assessment without any basis or material ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -8- is a perverse finding which gives rise to a question of law. We find force in this contention because when block assessmentof any item is made based on evidence collected in the courseof search, the assessment under Section 158BC read withSection 158BD is supported by statutory provision namely,Section 158BB of the Act. The Tribunal cannot cancel theassessment of undisclosed income if the same is based ontenable and acceptable evidence recovered in the course ofsearch and which is not disproved by the assessee. Keepingthis in mind we proceed to consider the appeal on the variousgrounds raised and the questions raised with reference tospecific additions. ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -8- is a perverse finding which gives rise to a question of law. We find force in this contention because when block assessmentof any item is made based on evidence collected in the courseof search, the assessment under Section 158BC read withSection 158BD is supported by statutory provision namely,Section 158BB of the Act. The Tribunal cannot cancel theassessment of undisclosed income if the same is based ontenable and acceptable evidence recovered in the course ofsearch and which is not disproved by the assessee. Keepingthis in mind we proceed to consider the appeal on the variousgrounds raised and the questions raised with reference tospecific additions. 7.The first item of addition is of Rs.1.09 crores, whichis the sum total of unaccounted payments made by theassessee to film directors Shri. Siddique & Lal and Shri. Faziland also to the film producer, M/s.Kumudavally Pictures. Thereason for the addition is that all the three film directorsdenied receipt of payments from the assessee, andM/s.Kumudavally Pictures did not confirm receipt of the ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008-9- amount from the assessee, to the Department. Consequentupon non confirmation of payments as claimed by theassessee, an amount of Rs.1.09 crores and odd was assessedas undisclosed income of the assessee. The first appellateauthority as well as the Tribunal accepted the explanation ofthe assessee that the details of unaccounted payments alongwith unaccounted receipts were available in the seized recordsand when entries in the seized books pertaining tounaccounted receipts are accepted by the Assessing Officer,he has no justification to reject unaccounted expenditure alsoseen recorded in the books of accounts. Learned SeniorStanding Counsel appearing for the Revenue contended thatwhen an expenditure is claimed by the assessee, it is for theassessee to prove the same by identifying the payees and byproving that the payments were genuine and were in factmade to the payees. However, the contention raised by theassessee’s counsel which found acceptance with the firstappellate authority as well as the Tribunal is that details ofunaccounted income and details of unaccounted payments ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -10- were collected from the seized records and if evidencecollected during search is believed there is no justification forthe Department to believe partly as regards income and todisbelieve as regards expenditure.8.After hearing both sides and after going through theorders, what we notice is that the Assessing Officer hasconsidered the claim of the assessee that film directors werepaid profit share of various films directed by them for theassessee. Moreover, details of payments were also available inthe seized records. However, the Assessing Officer declined tobelieve assessee’s claim for the reason that there is no writtenagreement between the assessee and the film directors forprofit sharing over and above the agreed consideration paid tothem and the cost reimbursed for the production of the film.Further the Assessing Officer has heavily relied on the denialmade by the film directors against receipt of payments. Weare unable to uphold the Revenue’s claim for many reasons.In the first place, admittedly assessee was engaged inunaccounted business and accounts seized pertain to ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -11- ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -11- clandestine transactions showing unaccounted receipts andunaccounted expenditure. The assessee himself hasvoluntarily declared undisclosed income of Rs.43 lakhs overthe income returned for the block period. So much so, there isno justification for doubting the entries found in the seizedrecords pertaining to expenditure while accepting the incomefound recorded therein. When the Department relies on theseized records for estimating undisclosed income, we see noreason why the expenditure stated therein should bedisbelieved merely because there is no written agreement andthat payments were not made through cheques or demanddrafts. Even when unaccounted income is determined frombusiness carried on clandestinely or not, the statute does notauthorize assessment of anything other than “undisclosedincome” which has to be arrived at after allowing expenditureincurred by the assessee whether it be accounted in theregular books or not. What is clear from the clandestinerecords seized from the assessee is that both the filmproducer and the film directors were engaged in collections ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -12- and payments outside the regular books of accounts and thatis the only reason why there is no written agreement betweenthem in regard to profit sharing and the payments areconsciously not made through cheques or demand drafts. TheAssessing Officer has also stated that the purpose ofpayments is not seen recorded in the seized records. We donot think this unrealistic stand is justified in the context of thebusiness carried on by the assessee because between the filmproducer and the film directors income seen recorded andpayments seen made should be taken as relating to businessand nothing else. The mere fact that film directors have notconfirmed receipt of payment in cash from the assessee also isnot a ground for treating the payments as bogus or notgenuine. In our view, there is nothing to doubt thegenuineness of the payments because assessee himselfexplained that the film directors are entitled to share profits inrespect of successful movies, and the Department has notestablished that such practice is not there in the film industry.Since, in principle, we uphold the order of the Tribunal that ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -13- entries relating to payments to film directors found in theseized records should be accepted, we do not think there isany need for us to go to the details of the films produced andvarious amounts paid periodically by the assessee. Therefore,we do not find any justification to interfere with the findings ofthe Tribunal with regard to the payments made to theDirectors though not recorded by the assessee or the payeesin the regular books of accounts. 9.The remaining part of the addition is onlydisallowance of payments stated to have been made by theassessee to M/s.Kumudavally Pictures for purchase of a Tamilfilm. It is seen that while the total payments were Rs.37 lakhs,only Rs.22 lakhs was accounted and balance Rs.15 lakhs wasunaccounted payments, which is also seen recorded in theseized records. We do not think there is anything to doubt thegenuineness of the transaction because generally what isfound by the Department from the seized records is that thebusiness is done partly with black money and partly with whitemoney though accounting of income and expenditure are of ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -14- insignificant amounts. ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -14- insignificant amounts. 10.Learned Senior Standing Counsel for the Revenuehas also made reference to the explanation to Section 37(1) ofthe Act and also to the scope of the proviso inserted to Section69C of the Act by the Finance (No.2) Act, 1998 with effectfrom 01/04/1999. Learned counsel for the assesseecontended that film production is not an illegal business andtherefore payments made though without accounting cannotbe said to be illegal payments attracting explanation to Section37(1) of the Act. We do not think unaccounted expenditure ina proper business can be treated as an expenditure prohibitedby law to attract explanation to Section 37(1). So far as theproviso to Section 69C is concerned, in the first place theproviso introduced with effect from 01/04/1999 does notapply to the block assessment for the period covered hereinand secondly we do not think excess expenditure overaccounted expenditure in business is covered by Section 69Citself. We therefore do not think there is any application ofthese two Sections to the case in hand. We, therefore, do not ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -15- find any ground to interfere with the orders of the Tribunalwith regard to the deletion of total addition of Rs.1.09 croresand odd to three film directors and one film producingCompany towards unaccounted payments made by theassessee to them. The first question raised in Revenue’sappeal is therefore answered against the Revenue and infavour of the assessee.11.Second and third questions in the Revenue’s appealpertain to the deletion of Rs.44.62 lakhs by the Tribunal byaccepting the explanation from the assessee that the saidamount represents advances received from theatre owners. Infact in the cash flow statement, the assessee tried to explainthe source for the investments by stating that Rs.50 lakhs wasreceived from theatre owners during the years 1991-92,1992-93 and 1993-1994 towards advances for productionand making available two films for distribution. On the facts itis seen that the two films for which advances were taken wereproduced only in the year 1996-97 whereas the advances werestated to have been taken by the assessee during the period ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -16- 1991-92 to 1993-94 i.e. 3 to 6 years prior to the productionof the movies. Even though sworn statements were recordedon two occasions on the date of search (24/07/1997) andsubsequently on 29/07/1997, the assessee did not furnishany details about the advances taken from theatre owners tofund his business. Further, even in the seized records, there isno mention about advances taken by the assessee from thetheatre owners. It is only at the stage of filing the cash flowstatement, the assessee claimed to have received unaccountedadvances taken in cash from various theatre owners totalingRs.50 lakhs. The assessee could not establish with any detailsthe dates of taking the loan, the dates of repayment exceptstating various amounts as received in each of the three years.The assessee, however, tried to prove the claim by producingconfirmation letters from theatre owners, which do not containdates of issuance of confirmation letters or the dates of givingthe advances or the dates of repayments. Even though theAssessing Officer found these confirmation letters only as anafter thought and evidence created by the assessee, the ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -17- ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -17- Tribunal just believed the confirmation letters and solelybased on the same, deleted the entire additions covered by theletters and sustained only the balance addition of Rs.5.38lakhs for which there was no confirmation letter. LearnedSenior Standing Counsel for the Revenue contended that thereis no justification for the Tribunal to rely on fabricateddocuments which were intrinsically vague and lack anyparticulars including dates of issue, dates of giving advancesto the assessee and dates of repayment. The Revenue’scounsel further submitted that if it is a practice in the filmindustry for producers to take advances from theatre owners,as stated by the Tribunal, then the assessee has noexplanation why payments could not be accounted or couldnot be taken through cheques or demand drafts. LearnedSenior Standing Counsel for the Revenue also placed relianceon Section 269SS and 269T of the Act in regard to acceptanceof deposits and repayments of the same other than throughaccount payee cheques or demand drafts. Learned counsel forthe assessee submitted that in the course of estimating ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008-18- undisclosed income based on documents seized for thepurpose of assessment under Section 158BC of the Act, theassessee is entitled to establish through cash flow statementas to how he sourced the funds for the business and for theinvestments seen made by the assessee. 12.On going through the Tribunal’s order, we noticethat the Tribunal’s findings do not justify the ultimateconclusion arrived at by them. The assessee in the swornstatement stated that advances from theatre owners werereceived for exhibiting just two films, Aniyathipravu andChandralekha. However, admittedly, these films wereproduced and released in the year 1996-97, whereas theadvances were stated to have been received during the period1991-92 to 1993-94. The assessee has no explanation as towhy advance payments received, which were stated to beaccounted by theatre owners, were not accounted by theassessee. There is also no explanation as to why thepayments were not received in cheques or demand drafts.Further, the assessee has a specific case that Rs.35 lakhs were ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -19- returned to the theatre owners during 1995-96 and 1996-97.Normally, advances received from theatre owners only getadjusted against payments due to the Distributor and theassessee does not explain as to why and when repaymentswere made in cash by him. Neither the assessee nor thetheatre owners in their confirmation letters gave the dates oreven the months in which advances were taken by theassessee and the dates on which the amounts were repaid.The assessee’s case is that during the years 1991-92, 1992-93 and 1993-94, Rs.8.60 lakhs, Rs.18.30 lakhs and Rs.17.72lakhs respectively were received. Even in the confirmationletters issued by the theatre owners, only a statement is giventhat so much are the amount that were advanced and takenback by the theatre owners. We do not know how parties whowaited for 3 to 6 years remembering these cash transactionswithout any account whatsoever. When the theatre ownersissued confirmation letters, obviously they would haveaccounted the advances made to the assessee. Why then theycould not furnish the details, at least the dates of payments & ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -20- ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -20- repayments is the question which remains unanswered. Wefeel these bogus advances were claimed of earlier yearsbeyond period of limitation for reassessments becauseotherwise the theatre owners who helped the assessee withthe confirmation letters would have faced income tax re-openings. The most important evidence against the assesseeis a negative one because the assessee who is in the habit ofmaintaining detailed clandestine accounts which were seizedhas not accounted these advances or repayments in suchaccounts. The whole story anybody can guess is cooked upand is unbelievable. It is also put forward by the assessee at alater stage, in the course of adjudication, to explainunexplained investment in house and several properties,details of which were found by the Department from theseized materials. We cannot also forget the back groundherein because assessee was progressively making profits andinvesting in agricultural land and house property. In thenormal course, an assessee who was surplus of fund and isnot short of cash flow as is seen from the seized records ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -21- should not go for any borrowals from theatre owners. Thoughthe Tribunal accepted the reasoning of the Assessing Officerand the probabilities drawn by him to reject the explanationoffered by the assessee, they completely believed theconfirmation letters. Both sides produced copies of theconfirmation letters before us and on verifying it, we noticethat these are undated letters without giving dates or monthsin which amounts were advanced to assessee or the dates onwhich the amounts were repaid and all what is sated is theconsolidated amount as having been advanced to the assesseeand taken back by the theatre owners. In our view, theconfirmation letters on the face of it are not genuine and noreasonable man can accept it as proof of cash transactionsrunning into lakhs of rupees. Going by the assessee's financialposition and investments revealed by seized records, it isdifficult to accept the theory of advance from theatre ownersput forward by the assessee later. The Tribunal has withoutany material assumed that in the film industry there is apractice of taking advances by film producers from theatre ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -22- owners which may or may not be true, and may be true withsome producers or a set of theatre owners but is certainly nota presumption available to be acted upon without acceptableevidence. Further it is difficult to believe that theatre ownersadvanced funds and waited for 3 to 6 years for films to beproduced and supplied. It is also to be noticed that theTribunal itself disallowed Rs.5.38 lakhs as the assessee couldnot prove any such advance having been taken by him fromtheatre owners. The only reasoning for the Tribunal to allowthe balance amount of Rs.44.62 lakhs is confirmation letters,which we find lack any credibility or trustworthiness and in ourview, no reasonable man can even accept it as genuine. TheTribunal in our view allowed the claim without any crediblematerial or evidence and therefore it's order is unsustainable.We therefore, allow the appeal on this issue by restoring theaddition of Rs.44.62 lakhs towards undisclosed income.Question Nos.2 & 3 are accordingly answered in favour of theRevenue and against the assessee. 13.The last question raised in the Revenue's appeal is ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -23- 13.The last question raised in the Revenue's appeal is ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -23- with regard to the assessee's entitlement for deduction underSection 80-IA which provides for deduction for industriesengaged in manufacturing and production of goods. TheAssessing Officer noticed that the assessee has been filingreturns regularly and up to the assessment year 1998-99 theassessee has not made any claim for deduction under Section80-IA for any of the assessment years. Further finding of theAssessing Officer is that the assessee is mainly engaged infilm distribution which is not an industrial undertakingengaged in the business of production of any article or thingeligible for deduction under the said Section. So far as filmproduction is concerned, the findings of the Assessing Officeris that the assessee was engaged in production of two filmsi.e. in 1991-1992 and 1992-1993 and in remaining years theassessee has done only film distribution. The main ground onwhich the Assessing Officer disallowed the claim is that theclaim for deduction under Section 80-IA should be made alongwith regular return that too accompanied by audit report in amandatory form, i.e. in Form No.10CCB as required under ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -24- Section 80-IA of the Act and in the absence of such auditreport to be filed along with regular return, the claim cannotbe entertained. However, before the first appellate authority,the assessee pleaded that production of motion pictures, asper circular No.24 dated 23/07/1969 issued by the Board ofDirect Taxes, is production of goods eligible for deductionunder Section 80-IA. Going by this circular, the CIT (Appeals)allowed assessee’s claim. However, in second Appeal, theTribunal remanded the matter back to the Assessing Officerfor considering the claim only with reference to filmproduction made by the assessee that too for two years. It isagainst this order of the Tribunal, the Revenue has come up inappeal. While the Revenue's counsel heavily relied on thefindings of the Assessing Officer particularly with reference tothe requirement of audit report in Form 10CCB, the assessee'scounsel contended that at any time the assessee is entitled toclaim deduction under Section 80-IA of the Act. 14.After hearing both sides, we are of the view that inorder to consider claim of deduction under Section 80-IA a ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -25- statutory audit report in form No.10CCB is mandatory asrequired under the above provision of the Act. Admittedly, theassessee has not made any claim in the regular returns filedup to the assessment year 1998-99. The requirement of anaudit report in form 10CCB is for the Department to verify thefactual position with reference to the data contained therein,which has contemporary relevance. The block assessmenthappened to be completed 6 to 7 years after the relevant yearsto which the assessee's claim for deduction under Section 80-IA relates. Standing Counsel submitted that the Departmentcannot verify the genuineness of the claim with reference toForm 10CCB, if the same is furnished for the years 1991-92 &1992-93, 10 years after the closure of those years, pursuantto remand order issued by the Tribunal. In our view, a claimof deduction under Section 80-IA is admissible only in regularassessment that too if it is claimed along with the returnaccompanied by audit report in form 10CCB. In fact, if theassessee has not furnished audit report along with the return,the Assessing Officer is not required to consider the claim. We ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -26- ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -26- do not think the deduction can be claimed for the first time inthe computation of undisclosed income in the assessmentunder Section 158BC of the Act. We, therefore, do not find anyjustification for the Tribunal to remand the matter at thisdistance of time. We therefore answer the last question infavour of the Revenue and against the assessee. 15.The main dispute raised in the cross objection filedby the assessee is with regard to the addition of Rs.20 lakhssustained by the Tribunal as undisclosed income. Theassessee's case is that he borrowed Rs.20 lakhs from hissister-in-law, Dr.Mary Singh. The Department recorded thestatement of assessee's sister-in-law, namely Dr.Mary Singhand later she has issued confirmation letters. However, theAssessing Officer disbelieved the assessee's claim for severalreasons. In the first place in the two sworn statementsrecorded the assessee clearly stated that he has no other debtother than Rs.10 lakhs borrowed from the Bank by himself, hiswife and son together for meeting cost for publicity of films.However, later, he produced a letter from his sister-in-law, ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -27- Dr.Mary Singh, wherein she has stated that she had given aloan for Rs.20 lakhs and the same was from her income andshe had in fact made a voluntary disclosure in the year 1997.However, when the Departmental Officer questioned her, shetook a stand that the loan is given by her late husband, whichis from his own income. The Tribunal noticed that there isinconsistency in the sworn statements of the assessee and thesubsequent evidence produced by him through confirmationletter from his sister-in-law. The Tribunal further noticed thatassessee's sister-in-law herself took inconsistent standbecause what she has stated in the confirmation letter is notwhat she has stated before the Assessing Officer when herstatements were recorded on 09/07/1999 and on13/07/1999. The Tribunal therefore found that the borrowalfrom his sister-in-law is a bogus case, and the assessee andhis sister in law have not explained as to why the amount wasnot paid or repaid through cheque or demand draft. We donot find any question of law arising from the findings of theTribunal in this behalf. In our view, the Tribunal's findings and ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -28- conclusions are well founded. We, therefore, dismiss theCross Objection on this issue which is an after thought as isfiled after 8 years of filing of appeal by the Department. Thedisallowance of the other two items raised in the CrossObjection are also based on evidence and no question of lawarises from the findings of the Tribunal for consideration byus.16.In so far as the penalty appeal, i.e. ITA No.177/2008is concerned, it may be noticed that there was difference ofopinion between the Accountant Member and the JudicialMember of the Tribunal who had heard the penalty appeal.While the Accountant Member cancelled the penalty in toto,the Judicial Member through a detailed order examined thescope of the provisions of Section 158BFA(2) and consideredpenalty with reference to each and every item of undisclosedincome sustained by the first appellate authority. The judicialmember held that penalty was rightly levied in respect of fouritems specifically considered by him. On reference, the 3[rd]member agreed with the Accountant Member and hence by ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -29- majority, the Tribunal cancelled the penalty by reversing the order in first appeal by the CIT(Appeal). It is against thisorder, the Revenue has come up with this appeal. ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -29- majority, the Tribunal cancelled the penalty by reversing the order in first appeal by the CIT(Appeal). It is against thisorder, the Revenue has come up with this appeal. 17.We feel before proceeding to consider the specificgrounds raised by the Revenue for sustaining penalty onseveral items of undisclosed income assessed, we have toconsider the scope of the statutory provisions, which isdifferent from Section 271(1)(c) of the Act, the generalprovisions on penalty for concealment of income. Section158BFA(2) is therefore extracted hereunder. “Levy of interest and penalty in certain cases 158BFA(1) xxx xxx xxx (2)The Assessing Officer or the Commissioner(Appeals) in the course of any proceedings underthis Chapter, may direct that a person shall pay byway of penalty a sum which shall not be less thanthe amount of tax leviable but which shall notexceed three times the amount of tax so leviable inrespect of the undisclosed income determined bythe Assessing Officer under clause (c) of section158BC: Provided that no order imposing penalty shall bemade in respect of a person if- (i)such person has furnished a return underclause (a) of Section 158BC; ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -30- (ii)the tax payable on the basis of such return hasbeen paid or if the assets seized consist of money,the assessee offers the money so seized to beadjusted against the tax payable; (iii)evidence of tax paid is furnished along with thereturn; and (iv)an appeal is not filed against the assessment ofthat part of income which is shown in the return; Provided further that the provisions of the precedingproviso shall not apply where the undisclosedincome determined by the Assessing Officer is inexcess of the income shown in the return and insuch cases the penalty shall be imposed on thatportion of undisclosed income determined which isin excess of the amount of undisclosed incomeshown in the return.” It may be noticed that penalty under the above provision is the general Rule in the event of assessment of undisclosed incomeunder Section 158BC and exclusion from penalty is anexception covered by the first proviso to the main Section,which is subject to the second proviso thereto. What is clearfrom the first proviso is that if, pursuant to the notice issuedunder Section 158BC(a) assessee files return, remits tax anddoes not proceed to contest the undisclosed income returnedbased on which assessment is made, there is no scope for any ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -31- penalty. However, the second proviso is an exception to thefirst proviso which makes it clear that if any undisclosedincome is assessed over and above the undisclosed incomereturned by the assessee in the return filed pursuant to noticeissued under Section 158BC(a), penalty is to be levied on suchexcess income assessed. The main provision gives a limiteddiscretion to the Assessing Officer to levy penalty rangingfrom a minimum amount, which is equal to the amount of taxpayable in respect of undisclosed income and the maximum isthree times of such tax. In other words, unlike under Section271(1)(c), which provides for penalty for concealment ofincome, Section 158BFA(2) provides for mandatory penalty inrespect of tax assessed on undisclosed income other thanundisclosed income admitted without further contest and onwhich tax is paid based on return filed by the assessee againstnotice issued under Section 158BC(a) of the Act. Applying theabove provision, what we notice is that in this case, theassessee returned the undisclosed income of only Rs.43 lakhspursuant to notice issued under Section 158BC(a) of the Act. ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -32- ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -32- However, the Tribunal sustained an addition ofRs.67,48,250/- to the declared income, which is not seriouslycontested by the assessee except by filing a belated crossobjection in the appeal filed by the Revenue challenging someamount of addition, which was considered and dismissed byus above. Going by the scope of the Section as explained byus, penalty is payable on the differential amount, which isexactly what the Assessing Officer has done and he hasexercised his discretion in favour of the assessee by limitingthe penalty to the minimum i.e. the amount of tax payable. Itis this order, that is cancelled by the Tribunal by a majorityjudgment when the Judicial Member through a detailed ordersustained penalty on four items of additions.18.After hearing both sides what we notice is that mostof the additions of undisclosed income are essentially estimateof profits from film industry and the assessment is based onaccounts seized during search and statements recorded fromthe assessee, which are admissible under Section 132(4) of theAct. Going by the strict provisions of law as explained by us ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -33- above, penalty is leviable on the differential amount assessedand sustained in appeal which is exactly what the AssessingOfficer has done. However, we feel for the first time such astrict interpretation on penalty need not be applied to theassessee at this distance of time after the relevant years. Wetherefore proceed to consider penalty appeal item-wise. Thefirst question raised by the Revenue pertains to the carryforward of loss claimed by the assessee amounting toRs.33,74,884/- to offset the undisclosed income details ofwhich were obtained in the course of search. We notice thatthere is statutory prohibition against allowing set off ofcarried forward losses from the previous years againstundisclosed income under Section 158BB(4) of the Act, and inspite of the prohibition, the assessee ventured to claim carryforward loss against undisclosed income, which was rightlydeclined. Still we feel this amount need not be considered forpenalty under Section 158BFA(2) of the Act as it was only afolly to make the claim. However, we feel penalty should beconsidered if the assessee has consciously suppressed ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -34- undisclosed income from the return filed pursuant to noticeissued under Section 158BC(a) of the Act even after recovery ofdetails of undisclosed income during the search by theDepartment. Here we feel two items deserve to be considered,one the claim of borrowal claimed by the assessee from hissister-in-law, Dr.Mary Singh to off-set undisclosed incomefound in search, and the other is income from real estatebusiness, which was found to be at Rs.10 lakhs. 19.So far as the borrowal claimed by the assessee fromhis sister-in-law is concerned, it is seen from the order thatthe assessee on the date of search gave sworn statementdeclaring that the only loan he had was Rs.10 lakhs availedfrom the Bank by himself, his wife and son. However, later inthe course of assessment, the assessee gave a confirmationletter from his sister-in-law, Dr.Mary Singh stating that shehas given an advance of Rs.20 lakhs and later another Rs.5lakhs to the assessee. The case advanced by the assessee'ssister-in-law was that she is a medical practitioner and shegave the loan to the assessee from her own savings, which was ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -35- ITA Nos.323/2002, 177/2008 & Cross Objection No.112/2008 -35- disclosed under the VDIS, 1997. However, when theDepartmental Officials questioned her, she stated that theamount was given to the assessee by her late husband fromhis own income. So much so, all the authorities concurrentlyfound that the assessee himself made an inconsistent stand bygiving a sworn statement that he has no borrowals, but laterhe changed his stand and claimed that he has borrowals fromhis sister-in-law, by producing a confirmation letter.Unfortunately, assessee's sister-in-law gave sworn statementcontrary to her own confirmation letter, and so much so, thewhole story became unbelievable and rejected by all theauthorities including the Tribunal. There can be no doubt thatthis is a conscious effort made by the assessee to accountsource for Rs.20 lakhs by brining a bogus claim of borrowalfrom his sister-in-law, which the assesse and his sister-in-lawfailed to prove. We feel penalty is rightly levied on thisundisclosed income. In fact going by the conduct of theassessee, maximum penalty could be levied. However, we donot think, we should change the yardstick applied by the ITA Nos.323/2002, 177/2008 & Cross Objection