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Facts
A search was conducted on the assessee firm, a partnership firm engaged in cine production, leading to the identification of certain transactions and potential undisclosed income related to their first movie, "PULI". The Assessing Officer (AO) made additions based on seized materials and partner statements, which were later challenged before the CIT(A).
Held
The Tribunal held that additions made by the AO solely on the basis of statements recorded during a search, without corroborative evidence and without rejecting the books of accounts, are not sustainable. The CIT(A)'s decision to delete most of the additions was upheld.
Key Issues
Whether additions made by the AO based solely on search statements, without corroborative evidence and without rejecting books of accounts, are sustainable. Whether the deletion of additions by the CIT(A) was justified.
Sections Cited
143(3), 142(1), 132(4), 145(3), 250
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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: HON’BLE SHRI MANU KUMAR GIRI & HON’BLE SHRI S. R. RAGHUNATHA
Assessment Year: 2016-17 Assistant Commissioner of Vs. S K T Studios, Income Tax, No.69, Kanakadhara Nagar, Central Circle-2(2), Sri Devi Kuppam Road, Chennai. Valasaravakkam, Chennai-600 087 [PAN:ACMFS1227M] (अपीलार्थी/Appellant) (प्रत्यर्थी/Respondent) अपीलार्थी की ओर से/ Assessee by : Ms.N.V.Lakshmi, Advocate प्रत्यर्थी की ओर से /Respondent by : Mr.R.Clement Ramesh Kumar, CIT सुनवाई की तारीख/Date of Hearing : 07.04.2025 घोषणा की तारीख /Date of : 04.07.2025 Pronouncement आदेश / O R D E R PER MANU KUMAR GIRI (Judicial Member) This appeal by the revenue is arising out of the order of the Commissioner of Income Tax (appeal) [‘CIT(A)’ in short], Chennai-19 u/s. 250 of the Income Tax Act, 1961 (hereinafter the ‘Act’) in order No.ITBA/APL/S/250/2024- 25/1067780469(1) dated 20.08.2024.
2. The revenue has raised the following grounds of appeal:
1. The order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law. 2 The Ld.CIT(A) erred in deleting the addition of Rs.18.76 crores received by the assessee on account of advances from distribution rights and estimated net profit of the assessee which was arrived at on basis of seized material found during the course of the search in the case of the assessee and the sworn statements recorded under oath from the partners. 2.1 The Ld.CIT(A) erred in not observing that the assessee themselves have acceded Rs.13.08 crores against distribution advances out of the total quantum of Rs.18.76 crores and accordingly disclosed Rs.9,24,59,000/- against distribution rights in the revised statement of income filed & the assessee further agreed to offer Rs.3,83,41,000/- vide their letter dated 06.06.2022 as the distribution advances could not be tagged to specific parties alongwith net profit of Rs.5.08 crores as submitted in their sworn statements and as evident from the seized material ANN/RR/SKT/LS/S-1 & ANN/KVK/SKT/LS/S found during the course of search. 2.2 The Ld.CIT(A) erred in deleting the addition of Rs.19,11,15,000/-on the ground that it was part of the total estimated income of Rs.95,67,20,000/- under the Minimum Guarantee Agreements (MGA) entered by the assesse without making any specific finding for the same or tagging of such MGA receipt vis-à-vis the total receipts either by the assesse or in the findings of the Ld.CIT(A). 2.3 The Ld.CIT(A) erred in deleting the addition on account of expenditure claimed of Rs.8,42,86,529/-, being 10% of the total expenditure of Rs.84,28,65,290/-, by not observing that the AO in his remand report has acceded to the transactions made through banking channels to the tune of Rs.59,78,85,870/- but objected to transactions amounting to Rs.24,49,79,424/- which were not evidenced with supporting documents, on the ground that they were based on an estimate.
3. For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the order of learned CIT(Appeals) may be set aside and that of the Assessing Officer be restored.
Brief facts of the case are as under: The assessee is a Partnership Firm, engaged in the business of cine production. The first movie produced by the Appellant Firm is named as "PULI". A search u/s 132 of the Act was carried out at the residential premises of the partners of the assessee firm on 30.09.2015, accordingly the appellant firm was also subjected to search u/s 132 of the Act on 30.09.2015. During the course of search certain incriminating materials in the form of loose sheets, books & documents were found and seized. The Authorised officer confronted about the loose sheets, books & documents with Shri. Shibu.K who is one of the partner of the assessee firm and recorded a statement u/s 132(4) of the Act. In the statement recorded Shri. Shibu.K admitted that the seized materials consist of various transactions related to the making of movie "PULI" which is the first film produced by the assessee firm. Further he also admitted an amount of Rs. 13.08 crores and Rs. 5.68 Crores (totalling to Rs. 18.76 crores) as undisclosed income in the hands of the assessee firm in the FY 2015-16. During the course of search, the Authorised Officer also recorded a statement u/s 132(4) of the Act from another of the partner of the assessee firm named Shri. P.T. Selva Kumar, wherein he admitted in response to question no. 10 put forth to him that the total cost incurred in the production of the movie is Rs. 65,70 Crores. He also confirmed with regard to the undisclosed income of Rs. 18.76 Crores in the statement recorded from him on 14.11.2015. The assessee firm filed return of income by admitting a total income of Rs. 6,48,94,840/- on 16.10.2017 for the AY 2016-17. The AO observed in the return of income the following:- (i) In the balance sheet enclosed to the return of income, the assessee firm has claimed an amount of Rs. 4,46,73,873/-as current liabilities. (ii) In the Profit and loss account the assessee firm has claimed a total amount of Rs. 108,75,40,293/- as expenditure and a sum of Rs. 19,11,15,000/- as expenditure under the head unrealised income. (iii) The production expenses claimed in the return of income was at Rs. 84,28,65,293/- as against Rs. 65.70 Crores as admitted by Shri. P.T. Selvakumar in the statement recorded.
The AO on the basis of the findings of the search initiated assessment proceedings by issuing a notice u/s 143(2) of the Act on 06.11.2017. The AO called for details by issuing a notice u/s 142(1) of the Act. The assessee firm, responded vide submission dated 28.12.2017 by stating the movie " PULI" was scheduled to be released on 01.10.2015, but one day before the date of release search operation were taken place in the office of the assessee and in the residential premises of the partners consequent to which the first day first show has not been screened in theatres and submitted the details called for. The AO after considering the submissions of the assessee firm observed that "there is no sufficient time to examine the details submitted by the assessee. Hence the submission were not considered and on the basis of the seized materials and profit and loss account and balance sheet available in record the assessment is completed". The AO, noted in the statements recorded from Shri. Shibu. K during the course of search and during the post search proceedings on 14.11.2015 wherein he had admitted that "we are unable to identify the distributors who have given these money of Rs. 13.08Crores, we are admitting this amount as undisclosed income in the hands of the M/s. SKT Studios in FY 2015-16 and "the total expenses till the date of search has been worked out to be Rs. 91.01 Crores based on seized records. However Rs. 6.04 Crores, which is wrongly mentioned as interest in the seized material was included as finance charges in the expenses account, which is not correct. Hence this 6.04 crores has to be reduced from the cost of production. After reducing this cost, the total cost of production comes to Rs. 84.97 Crores and the net profit is arrived at Rs.5.68Crores, we admit an amount of Rs. 13.08 Crores and Rs. 5.68 Crores as undisclosed income (totalling to Rs. 18.76Crores)in the hands of M/s. SKT Studios in FY 2015-16. Accordingly, the AO inferred that the net profit of the assessee firm is Rs.18,76,00,000/- and added the same to the returned income of the assessee firm for the AY 2016-17. Further as the assessee firm did not submit proper reply along with documentary evidence, the AO presumed that the assessee has no explanation / evidence / proof in support of its claim of unrealised income in the Profit & Loss account and accordingly added the sum of Rs. 19,11,15,000/- to the returned income of the assessee firm for the AY 2016-17. The AO on verification of Profit & Loss account noted that the assessee firm has claimed an amount of Rs. 1,50,00,000/- as loss on acquisition of movie rights. As the assessee firm has failed to produce any documentary evidence/ evidence / proof in support of the loss on acquisition of movie rights presumed that the assessee has no evidence/proof in support of the loss on acquisition of movie rights added the same to the returned income of the assessee firm for the AY 2016-17. The AO on verification of Profit & Loss account noted that the assessee firm has claimed expenditure amounting Rs.84,28,65,293/- under the head "PULI production expenses". As the assessee firm has failed to produce any documentary evidence / evidence /proof in support of this expenditure claim, the AO disallowed 10% of the expenditure claimed under the head "PULI production expenses amounting Rs. 8,42,86,529/- and added the same to the returned income of the assessee firm for the AY 2016-17 and completed the assessment proceedings by passing order u/s 143(3) of the Act on 30.12.2017. Aggrieved by the order of the AO the assessee preferred an appeal before the ld.CIT(A), Chennai.
4. Before the ld.CIT(A) the assessee filed detailed submissions issue wise that can be discernible from the order of the ld.CIT(A) in page No.5 to 14. The ld.CIT(A) in the course of appellate proceedings called for the remand report from the AO based on the additional documents / evidence furnished by the assessee. Further, the AO furnished the remand report dated 01.04.2024 and pursuant to the remand report, the assessee filed a detailed rejoinder. The remand report proceeding has been discussed in page 14 to 18 of the ld.CIT(A) order, whereas the rejoinder to the remand report has been discussed at page 19 to 35 of the ld.CIT(A) order.
The ld.CIT(A) having considered all the submissions, material / evidence, remand report and rejoinder to remand report had adjudicated the appeal in respect of following issues in favour of the assessee by holding as under:
Addition of Rs.18,76,00,000/- of net profit – Deleted:
8.3 Issue No. 1-Addition made by determining the net profit of the assessee firm at Rs.18,76,00,000/-. 8.3.1 The grounds raised by the appellant upon this issue are that the AO has made the addition of Rs. 18.76 Crores on the basis of the statement recorded during the course of search without considering whether the appellant firm has actually made such profits in the FY 2015-16 relating to the year under consideration or not. The main contention of the appellant is that the appellant's partners namely Shri. Shibu. K and PT. Selvakumar were under stress while recording the statement u/s 132(4) of the Act as their, first film was scheduled to be released on 01.10.2015 i.e. one day after the date of search. The contention of the Appellant firm is that the partners have admitted a sum of Rs. 18.76 Crores without verifying / appreciating the books of accounts prior to finalization. Obviously, on the date of search, the accounts maintained by the Appellant were not updated and not subjected to audit, thus in the raw form. The Appellant during the course of the appellate proceedings has made a detailed submission upon this issue and the same is reproduced as under:- "This ground is related to an addition of Rs.18,76,00,000/- agreed to be admitted as income for the above stated assessment year in the return of income to be filed for the firm SKT studios by the partners during the investigation proceedings (which was admitted under severe stress and strain in the midst of the search operations and also to facilitate the release of the film)." c. Basis of addition made by the Learned Assessing Officer:
2. The Assessing Officer has stated that one of the partners of M/s S.K.T Studios during the course of investigation proceedings has given a statement on 14/11/2015 stating that they are willing to admit Rs.18.76 crores as undisclosed income in the hands of the Appellant Firm's as the partners were unable to identify the distributors who have given money to the tune of Rs.13.08 crores out of the total distribution advance received amounting to Rs.22.12 crores and also towards the estimated net profit of Rs.5.68 crores totalling to Rs. 18.76 crores. d. Appellant's submissions before the Hon'ble CIT Appeals: 6. The above statement referred by the assessing officer was recorded during the search proceedings, just one day before the date of release of the film and the books of accounts available on the date of search has been seized by the investigation authorities. The seized books of accounts are not finalized one. Mrs. Anlin, the administrative assistant who has written the books of accounts is also not a regular, experienced, qualified accountant. She is only an assistant responsible and involved in issue of cheques and collection of bills and vouchers from the production managers and the partners. Therefore the statement given during the course of investigation proceedings is based on incomplete accounts only.
The movie is an utter flop movie. Your appellant subsequent to the release of the film faced lot of problems on account of the failure of the movie. On the date of release of the movie the Partners of the Appellant Firm were unable to reconcile who are all the distributors who have honored the commitment towards the purchase of the distribution rights because they used to receive funds directly from distributors and also from the financiers of the distributors.
The total amount agreed to be offered as income by your appellant is Rs. 18.76 crores during the course of search proceedings which is inclusive of net profit and not over and above the net profit. Therefore it is not correct on the part of the Learned Assessing officer to add Rs. 18.76 crores over and above the net profit declared by your Appellant.
Generally, distributors who will acquire the distribution rights for various areas in film industry will pay a portion of the total amount payable as per the agreement entered into with the producer from their own funds. The balance amounts will be paid only through financiers by way of taking loan from them who are regular financiers for the film trade. Sometimes financiers will pay the amount directly to the producers on behalf of distributors. In view of the above certain amounts received on behalf of distributors from financiers your appellant was unable to identify at the time search proceedings, hence agreed to offer the same as income.
The total amount of Rs. 18.76 crores consist of two amounts ie. 13.08 crores and Rs. 5.68crores. 10.1 With regard to Rs 13.08 crores, the Appellant Firm's Partners during the course of search proceedings agreed to offer this amount as additional income in view of the fact that they could not identify the distributors on whose behalf this amount of Rs. 13.08 crores were received from the financiers. Out of this Rs. 13.08 crores, the Appellant firm offered Rs.9,24,59,000 crores as Additional Income while computing the Total Income stating that Distributors Suspense Income offered as income. The remaining amount out of Rs. 13.08 crores is only Rs.3,83,41,000 crores (Rs. 13.08 crores minus Rs. 9,24,59,000 crores). 10.2 This amount of Rs.5.68 crores mentioned in Para 5 of the submission is the estimated profit determined during the search proceedings. The search was conducted just a day before the date of release of the film. The entries
were not fully made in the account books as the entire team was preoccupied with the release of film and also with the sudden search and seizure action. The figure of Rs.5.68 Crore is an adhoc figure and it cannot be taken as sacrosanct. Subsequently the appellant firm completed the books of account and prepared Profit and Loss account and computed the total Income of Rs.6,48,94,840 and filled the return of income accordingly. Hence the Assessing Officer addition of Rs.5.68 Crores (part of Rs. 18.76 crores) is not correct and it will amount to double addition. The Hon'ble CIT (A) is requested to kindly direct the Assessing Officer to delete the addition of Rs. 5.68 crores. 5.3. In view of the above submissions out of the addition made of Rs. 18.76 crores, the amount which could not be properly explained is only Rs.3.834 crores. 5.4. The Hon'ble CIT (A) is requested to kindly direct the AO to delete the addition of Rs. 14,92,59,000(Rs.9,24,59,000 crores Rs.5.68 crores) out of the addition made of Rs. 18.76 crores and we are also in the process of tracing and obtaining confirmation letter for the remaining Rs.3.834 crores from relevant party(ies). 6 Additional Claim made now before the Hon'ble CIT(A) 6.1 Apart from the above, many distributors represented before the Distributors Association that they have incurred huge losses because the film was an utter flop. After various meetings and negotiations, the appellant firm has agreed to return back Rs.2.17Crores towards the settlement of the dispute between the distributors and appellant firm. (This is apart from the amount which could not be collected from the distributors amounting toRs. 19,11,15,000/-and claimed as expense in the profit and loss account). In this regard copies of the agreement entered between the association and the appellant firm's partners is attached vide Annexure 2.1A 2.1B So this expenditure also needs to be deducted from the total income to be determined by the Learned Assessing Officer (this expenditure was not claimed while filing the return of the income and also during the course of Assessment proceedings). 6.2 The Appellant firm gave the distribution rights of Kamataka Area (except Mulabagilu and Bellary Area to M/S Vajra Maheswari Cinemas Bengaluru). There was delay in releasing the film in Kamataka. In view of this it is claimed by the distributor that heavy losses were incurred by them. The dispute could not be amicably settled between the Appellant and the Distributor. The Distributor took up the matter with Karnataka Film Chamber of Commerce and Industry for redressal of their grievance on 27/10/2015. The dispute could not be amicably settled between the parties and ultimately it was referred to Dispute Resolution Board of the chamber. The Chamber has passed an order on 24/2/2020 fixing the compensation of Rs.3,00,00,000 and interest at the rate of 9% per annum starting from 22/9/2020 to till the date of payment. The order passed by the Disputes Resolution Board (DRB) is enclosed as Annexure 2.2A-2.2Y filed along with this submission. Since this liability has arisen with regard to the film PULI and incurred in the course of carrying on the business it has to be allowed as deduction while computing the Total Income. This expenditure was not claimed while filing the Return of income and also during the course of Assessment proceedings. Your Honour may kindly consider and allow this claim and direct the Leamed AO to allow this deduction while computing the Total Income consequent to your Appellate Order. 6.3 M/s ATMUS Entertainment was given distribution rights for North America. But the film could not be released on time in Canada and it caused lot of inconvenience to the viewers, disturbances to the distributors and also additional expenditure to the Distributor. The distributor had to return back the money paid by the viewers and the viewers were also given free passes for the subsequent shows. In addition to this expenditure, the assembled viewers waited for the show that was cancelled were given refreshment. All such costs claimed by the Distributor amounts to Rs.80 Lakhs as additional expenses and the Distributor has claimed the said amount as reimbursement vide e-Mail dt.02.10.2015(Copy of the e-Mail is enclosed in the Annexure 2.3A). But this expense was not provided by the Appellant Firm in the Books of Accounts and this needs to allowed as deduction now. In view of this, the Hon'ble CIT(Appeals) is requested to kindly consider the evidences and allow Rs.80 lakhs as deduction from the Total Income to be determined by the Assessing officer while computing the Total Income consequent to your Appellate Order. 6.4 In view of the above submissions in Paras 6.1.6.2 and 6.3 the Hon'ble CIT(A) is kindly requested to direct the Assessing Officer to grant a deduction of Rs. 5.97 crores (Rs2.17 crores plus Rs. 3 Crores plus Rs. 0.80 crores) while computing the Total Income while giving effect to your Appellate Order. 8.3.2 From the above submission it can be seen that the admission made by the partners during the course of search in their statement recorded is Rs. 18.76 Crores. This amount constitutes an amount of Rs. 13.08Crores which was received as an advance form the distributors for the film "PULI" and Rs. 5.68Crores the estimated profit from the production of the movie for the FY 2015-16. 8.3.3 in respect of the amount of Rs. 13.08 Crores, the AR has contended that the appellant firm had received an advance of Rs. 22.12 Crores from various distributors prior to the release of the movie. At the time of search they were able to identify distributors to the extent of (22.12 13.08) Rs. 9.04 Crores only and accordingly admitted in the statement recorded during the course of search to declare the balance of Rs. 13.08Crores as undisclosed income for the FY 2015-16. 8.3.4 During the course of Appellate proceedings the AR contended that the entire movie was produced based on the distribution advances received and at times, the distributors were requested to settle the production expenses on behalf of appellant firm directly at the shooting site. Further, the day expenses were recorded as such by the M/s. SKT Studio's accountant, in the name of the distributors, or at times in the name of the distributor's financier who sent the advance on behalf of the distributor accordingly, certain amounts received on behalf of distributors from financiers were recorded and maintained by the accountant and some not. The partners were unable to recollect and identify the advances received to the tune of Rs. 13.08 Crores during the course of search proceedings, and agreed and admit the same as undisclosed income for the AY 2016-17. 8.3.5 The AR further submitted that the appellant while finalising the books has duly identified the loans taken from the distributors and has accounted the same in the finalised books of accounts and this was reported before the AO during the course of remand proceedings. The undersigned upon verification of records maintained by the AO was able to peruse the said details duly substantiated with bank statements, furnished by the AR before the AO during course of remand proceedings. On examination of the details it can be seen that the appellant firm was able to repay the loans to the extent of Rs. 22.55 Crores which is more than the amount of Rs. 22.12 Crores which has been claimed during the course of search. As the appellant has identified the entire amount of Rs. 22.12 Crores which is inclusive of Rs. 13.08 Crores, the question of making the addition on the basis of the statement recorded from the partners during the course of search is not sustainable. 8.3.6 In respect of the amount of Rs.5.68 crores which was admitted as the estimated profit during the search proceedings, it has been claimed that the search was conducted just a day before the date of release of the film and the entries were not fully updated in the account books as the entire team was pre-occupied with the release of film. 8.3.7 It has been claimed that the amount of Rs.5.68 Crore is an adhoc figure and cannot be taken as sacrosanct. Subsequent to the search action, the appellant firm was able to complete the books of account, prepared Profit and Loss account and computed the total income and filed the return of income by declaring a to be at Rs.6,48,94,840/- for the AY 2017-18. 8.3.8 In respect of the addition of Rs.5.68 Crores, the AR during the Appellate proceedings has strongly contended that the addition of Rs.5.68 Crores on the basis of the statement recorded during the course of search is not correct and it will amount to double taxation of same income. The partners of the appellant firm during the course of search have admitted an amount of Rs. 5.68 Crores as estimated profit. Shri. Shibu. K in the statement record during the course of the post search proceedings has clarified the amount of Rs. 5.68 crores as under :- "the total expenses till the date of search has been worked out to be Rs. 91.01Crores based on seized records. However Rs. 6.04 Crores, which is wrongly mentioned as interest in the seized material was included as finance charges in the expenses account, which is not correct. Hence this 6,04 crores has to be reduced from the cost of production, After reducing this cost, the total cost of production comes to Rs. 84.97 Crores and the net profit is arrived at Rs.5.68Crores, we admit an amount of Rs. 13.08Crores and Rs. 5.68 Crores as undisclosed income (totalling to Rs. 18.76Crores)in the hands of M/s SKT Studios in FY 2015-16" 8.3.9 It is brought on record that the amount of Rs. 5.68 Crores admitted by the partner of the appellant firm is based upon the estimated figures. In the case of the appellant the search u/s 132 of the Act was conducted on 30.09.2015. Obviously the search has taken place in the middle of the financial year 2015-16. At this point of time, determination of income can only be an estimate, as the appellant could not have any occasion to incorporate all the expenditures and corresponding revenues on or before the date of search. 8.3.10 Further, the books of accounts can be concluded only on 31.03.2016 and the concluded books maintained by the accountant cannot be termed as final unless the same is subjected to audit. The Appellant's books are subjected to audit as per the provisions of section 44AB of the Act. The Appellant firm was able to file the return of income for the AY 2016-17 on the basis of audited financials on 16.10.2017. 8.3.11 Now the issue before the undersigned is that whether the action of the AO is right in treating the undisclosed income admitted by the appellant in the statement recorded without any basis or not. The partners of the appellant firm during the course of search conducted on 30.09.2015 have admitted the undisclosed income of Rs. 5.68 Crores on the basis of the seized records. As discussed supra the appellant in no way can determine the profit element in the mid of the year that before completing the books of accounts. Any determination of income during the middle of the financial year can only be an estimate. On the basis of the estimated figure, liability to pay tax cannot be foisted upon the assessee. Further the appellant has filed his return of income of the basis of the audited financials. As evident in the assessment order, the AO had no occasion to reject the books of accounts u/s 145(3) of the Act. Without rejection of books of accounts, making addition on the basis of the statement recorded during the course of search more particularly, when the appellant has admitted the estimated profit is not appropriate. On one hand, the AO has accepted the financials, which was subjected to audit and on the other hand, attempted to make addition which was disclosed during the search on estimation basis. The undersigned is of the considered view that the action of the AO without rejecting the books of accounts u/s 145(3) of the Act, making addition based on the statement recorded during the course of search is not sustainable. 8.3.12 As evident in the assessment order, it can be seen that the AO has contemplated the addition of Rs. 18.78 Crores (Rs. 13.08 Crores + Rs. 5.68 Crores ) on the basis of the statement recorded during the course of search. It is appropriate to being on record that during the course of search, no evidences were unearthed by the search team that the appellant firm has actually suppressed income of Rs. 18.78 Crores. Further the AO while making the addition of Rs. 18.78 Crores has not brought on record any cogent and corroborative to substantiate the findings made during the course of search. The following decisions will support that additions cannot be made in search assessment merely on the basis of statements recorded during the course of search. 8.3.13 In the case of CIT v. Radhe Developers India Ltd 341 ITR 403 (Guj.) (2017) the Hon'ble Gujarat High Court held that a statement recorded under Section 132(4) can be used as evidence, but it should not be the sole basis for additions unless it is corroborated by other evidence. The court emphasized that the credibility of the statement must be evaluated in the context of other supporting documents. 8.3.14 In the case of PCIT v. Nishit Construction Co. 117 taxmann.com 335 (Gujarat) (2020): the Hon'ble Gujarat High Court reiterated that while a statement recorded during the course of a search is an important piece of evidence, it cannot be used as the sole basis for an addition. The court ruled that without corroborative evidence, the addition based on such a statement would be unwarranted. 8.3.15 The Hon'ble Chennal Tribunal in the case of ACIT v. Saveeta Institute of Medical and Technical Sciences [2012] 25 taxmann.com 138 (Chennai - Trib) has held that addition made on the basis of the sworn statement recorded u/s 132(4) of the Act cannot be sustainable and further held that the admission made u/s 132(4) by the Special Officer of the College could not even be treated as a valid piece of evidence. 8.3.16 In the case of Shri. Ganesh Trading Company v. CIT [2013] 30taxmann.com170/214 Taxmann 262 (Jharkhand), the Hon'ble High Court has held that a statement made u/s 132(4) of the Act is a piece of evidence but the same is not conclusive particularly because it is self-incriminating. Accordingly it was concluded that no liability could be fastened solely on the basis of sworn statement. In arriving at this decision, the Hon'ble High Court followed the judgement in the case of Kailashben Manharlal Choski v. CIT [2010] 174 Taxmann 466(Guj). 8.3.17 The Hon'ble Apex Court in the case of Pullangode Rubber Produce Co Ltd v State of Kerala [1973] ITR 18 (SC) has held that an admission is an extremely important piece of evidence but it cannot be said that it is conclusive and further observed that it is open to the person who makes the admission to show that it is incorrect. At the outset it can be stated that where the admission is tied up with incriminating evidence found in the course of search, the principle laid down by the Apex Court will no longer hold good. Obviously, in the absence of evidence an admission can no longer be an evidence to support any addition.
8.3.18 The Hon'ble Apex Court in the case of Kasmira Singh v. State of Madhya Pradesh AIR 1952 SC 159, has observed that the correct way to approach a case of confession is to marshal evidence against the accused excluding the confession altogether from consideration. Where the case can be decided independent of confession, then, it is not necessary to take help of confession. 8.3.19 In view of the above discussions and judicial precedence, the undersigned is of the considered view that the addition of Rs. 18.78Crores made by the AO solely on the basis of the statement recorded during the course of search is not sustainable since the AO failed to bring on record any cogent and corroborative evidence to support the claim that the appellant firm has suppressed the income of Rs. 18.78 Crores. Accordingly, all the grounds raised by the appellant upon this issue are hereby treated as allowed and the AO is directed to delete the addition of Rs.18,78,00,000/- made for the AY-2016-17.
Addition of Rs.19,11,50,000/- claimed as unrealised income – Deleted: 8.4 Issue No. 2-Addition of Rs. 19,11,15,000/- claimed as unrealised income in the Profit & Loss. 8.4.1 The AO during the course of assessment proceedings, upon analysing the profit and Loss account has found that the appellant has claimed an amount of Rs. 19,11,15,000/- as expenditure under the head unrealised income". The AO in the show cause notice issued u/s 142(1) of the Act dated 06.01.2017 has called upon the assessee to submit a detailed note along with sufficient documentary evidence to support this claim of expenditure. As no explanation / evidence/proof in support of its claim of unrealised income in the Profit & Loss account and accordingly added the sum of Rs. 19,11,15,000/- to the returned income of the assessee firm for the AY 2016- 17. 8.4.2 The Appellant during the course of appellate proceedings, has submitted a detailed submission along with evidences to support the claim of unrealised income claimed in the Profit and Loss account. The details were forwarded to the AO and a Remand Report was called for. The AO in his remand report has made the following observation upon the evidences filed by the appellant. The relevant extract is reproduced as under- (1) Evidences in support of unrealized amount of Rs 19,11,15,000/- from certain distributors:
The assessee stated that as per the Minimal Guarantee Agreements, a total of Rs 95,67,00,000/- was supposed to be received from the distributors, however the total unrealized income initially was Rs 19,11,15,000/-, Later on, the assessee was able to identify the payments received and associate them with its distributors by producing a confirmation letter to the tune of Rs 9,24,59,000/-, it is seen that the assessee has offered an amount of Rs 9,24,59,000/-in its Income adjusted statement on 16.10.2017. Therefore, the addition of Rs.9,24,59,000/- may be decided on the merits. For the remaining amount ie. Rs.9,86,56,000/- (Rs. 19,11,15,000-Rs. 9,24,59,000), the assessee vide its submission has stated that the following distributors are responsible for the unrealized amount:-
Amount on which Unrealized S.No Distributor tax was paid by amount (in Rs) distributor (in Rs.)
1. SVR Media Pvt. Ltd 3,20,00,000/- NIL
2. PTS Film International 2,68,00,000/- NIL
3. Thameens Films 3,75,00,000/- 1,95.24,576/-
4. Untraceable due to unavailability 23,56,000/- NIL of confirmation letter It is pertinent to mention that, Thameens Films has offered in his books of accounts an income of Rs. 1,95,24,576 for which the taxes were computed and was paid during the FY 2015-16. However, the other parties failed to show income from distribution in their books of accounts. In nutshell, except for Rs. 1,95,24,576/- neither the producer nor the distributor have paid taxes on the remaining amount i.e. Rs. 7,91,31,424/- (Rs. 9,86,56,000-Rs. 1,95,24,576). Therefore, for the issue of disallowance of expenditure under the head "unrealized income addition amounting to Rs.7,91,31,424/-made by the AO may be sustained. 8.4.3 The appellant was called upon to submit his re-joinder upon the Remand Report of the AO with regard to addition of Rs. 19,11,15,000/- Accordingly the appellant has filed a rejoinder upon this issue and the same is reproduced as under.
1. It may be seen from the remand report that an amount of Rs. 19,11,15,000/- was claimed as an expense under the head of "Unrealized Income that was filed in the income tax returns filed against the notice served u/s. 153 of the Income Tax Act., on 16.10.2017 for the assessment year under consideration. The concept of unrealized income being an expenses was considered in this situation was due to the fact, during the search conducted at your appellant' premises, just the day before the release of the movie "PULI", the total income and profits were arrived by the Income Tax Department, on an estimation basis, i.e., only based on the Minimal Guarantee Agreements (MGA) entered into between your appellant, and the distributors from various areas. However, in reality the estimation made during the search (i.e., prior to even the release of the movie) was not even close to the real collection from the exploitation of the movie. This was due to the last-minute search conducted by the department just one day before the release of the film, creating delays in release activities, thereby leading to negative feedback that spread among the audience; and eventually pushed the film to be an utter flop. Due to this, the majority of the distributors defaulted to honor the payments even to the extent that was agreed in the MGA 2. There are numerous articles published in various papers, detailing the performance of the movie and the commotions it created before release of the film due to audience disappointment on late release and more are attached as part of Annexure 1 to substantiate this claim. 3. Therefore, your appellant has claimed this unrealized Income as an expenditure, due to the fact the Income Tax Department has considered the unrealized income to be part of the overall income and arrived the profits during the search, only based on the MGA, but not realized in reality. This is substantiated by the confirmation letters provided from each of the distributors, confirming the payments honored against the MGA signed. 4. During the search and post search proceedings, your appellant was unable to identify all the payments received from all the distributors due to various reasons, most importantly, your appellant was receiving threats and demands to cover the losses incurred by the theaters and distributors due to poor performance of the film. Therefore, your appellant and their staff were not available until the commotions subsided in this regard and by then the assessment was completed. OME TAX DEPAR 5. Subsequently, your appellant has identified and reported the distributors and their payments realized to the tune of Rs. 9,24,59,000/- in the income adjusted statement, in the ITR filed on 16.10.2017. To substantiate the same, the confirmation letters to the tune of which payments were realized and the remaining amount being actually unrealized from distributors for various reasons were duly provided from the distributors, that was reviewed, agreed and accepted by the Ld. Assessing Officer while completing the remand report.
However, the remaining unrealized income to the tune of Rs. 9,86,56,000/- was from the below distributors and importantly, it is brought to the attention of the Hon'ble CIT(A)-19 that, the confirmation letter from the below distributors, similar to the above distributors were duly submitted during the assessment proceedings as well as during the information called for during the remand report preparation by the Ld. Assessing Officer. A copy of such confirmation letters from each of the distributors is attached.
# Distributors Unrealized Remarks
SVR Media Rs 3,20,00,000 Confirmation Letter submitted Pvt. Ltd. already.
PTS Film Rs 2.68,00,000 Confirmation Letter submitted International already.
3. Thameens Rs. 3,75,00,000 Confirmation Letter submitted Films already. Rs. 1,95,24,576 offered as income in individual books.
Confirmation Rs. 23,56,000 Not realized income as this income Letter not was also derived only based on the available for MG Agreements an amount unrealized
Table 1
7. It may be seen from the remand report that, the Ld. Assessing Officer has taken a stand where except for the amount offered as income in the individual books of M/s. Thameens Films to the tune of Rs. 1,95,24,576/-, the remaining amount to the tune of Rs. 7,91,31,424/- may be sustained. “…..In nutshell, except for Rs. 1,95,24,576/- neither the producer nor the distributor has paid taxes on the remaining amount i.e. Rs. 7,91,31,424/- (Rs. 9,86,56,000-Rs. 1,95,24,576). Therefore, for the issue of disallowance of expenditure under the head "unrealized income addition amounting to Rs. 7,91,31,424/- made by the AO may be sustained......”
8. Firstly, your appellant would like to insist on the fact that, the Ld. Assessing Officer has duly agreed and accepted the unrealized income from various distributors from whom the payments were unrealized based on the confirmation letters issued by the distributors 9. However, for the above-mentioned distributors in Table 1, the Ld. Assessing Officer has taken a different stand that income was neither offered in the individual books nor offered in the hands of your appellant, disallowing the expenditure to be claimed under the head of 'Unrealized Income' to the tune of Rs. 7,91,31,424/- for an income that had once again just arrived based on MGA on an estimation basis. 10. Most importantly, similar confirmation letters from each of the above-mentioned distributors were duly submitted earlier and the Ld. Assessing Officer has neither rejected the confirmation letters nor pointed any deficiencies in such confirmation letters, nor reached out to the above-mentioned distributors, officially calling for confirmations on the payments realized and unrealized, which can substantiate the genuineness of the claim. In this situation, your appellant has provided every possible evidence available to the Hon'ble Income Tax Department to further substantiate the claims, and now the burden of proving otherwise, if any, shifts to the side of the Ld. Assessing Officer. While completing the remand report as well, Ld. Assessing Office neither provided any deficiencies in the evidence produced, nor reached out to the distributors directly to get any clarifications required. 11. Your appellant would like to bring a recent ITAT judgement in support of the above in the case of M/s. CMG Steels Pvt. Ltd Vs. ACIT Central Circle - 3(2), Chennai 34, where it quotes, “…..Once, the assessee discharges its burden by filing necessary documents then the burden shifts to the AO to prove otherwise. In this case, the AO has made additions only on the basis of statement recorded from third party ignoring various evidence filed by the assessee to prove unsecured loans taken from said parties........”
In the absence of the above, it may not be valid on the part of the Ld. Assessing Officer to disallow the expenditure claimed under the head of "Unrealized Income" on an ad-hoc manner when confirmation letters on realized payments i.e., the actual income from each distributor were duly proved and established via the confirmation letters provided by ever distributor.
It may be evident that the unrealized income amount was never realized in the hands of your appellant and hence it has been claimed under the head of "Unrealized Income as they have formed a part of income by the department, and the way the books were reported in this manner is due to the fact that, as part of the proceedings the income and profits were already finalized by the department during the search only based the minimal guarantee agreements before the release of the film. Hence, the Ld. Assessing Officer sustaining the disallowance stating that the unrealized income was never offered in the hands of your appellant, nor the distributors may not be valid and may not be correct in the eyes of neutral justice.
Therefore, it may be not correct on the part of the Ld. Assessing Officer to take multiple stands in disallowing the expenditure under the head of "Unrealized Income. ie, accepting the confirmation letters and allowing certain unrealized income and disallowing certain unrealized incomes when similar confirmation letters were obtained and submitted for verification that were no different from the confirmation letters from other distributors.
Hence, it is prayed to the Hon'ble CIT(A)-19 that, the amount sustained to the tune of Rs. 7,91,31,424/- towards disallowance of expenditures under the head of "Unrealized Income deserves to be deleted and justice be served in this regard. 8.4.4 The undersigned has carefully examined the issue under cornsideration. The AO in his remand report has suggested the undersigned to sustain the amount of (Rs.9,86,56,000 Rs. 1,95,24,576) Rs. 7.91,31,424/- by observing the following in the remand report:-
"In nutshell, except for Rs. 1,95,24,576/- neither the producer nor the distributor have paid taxes on the remaining amount ie. Rs. 7,91.31.424/- (Rs. 9,66,56,000-Rs. 1,95,24,576) Therefore, for the issue of disallowance of expenditure under the head "unrealized income" addition amounting to Rs.7.91,31,424/- made by the AO may be sustained." 8.4.5 The AR during the course of appellate proceedings has pleaded that the amount of Rs. 9,86,56,000/- does not partake the character of income as the same is unrealised. The sum of Rs. 19,11,15,000/- was considered as unrealised income during the course of search. The appellant in their financials has admitted the same as income and the portion of amount that is unrealised has been treated as expenditure. This adjustment was carried out at the time of finalization of the books of accounts prior to filing of return of income. The undersigned is of the view that the appreciation of facts by the AO is not appropriate. The appellant in the profit and loss account has admitted the income Rs. 95,67,20,000/-. This is based upon the Minimum Guarantee Agreement (MGA) found and seized during the course of search. By way of the MGA, the distributors agreed to pay a sum of Rs. 95,67,20,000/-. It is significant to note that the sum of Rs. 19,11,15,000/- already forms a part of the total estimated income of Rs. 95,67,20,000/- as per the MGA. 8.4.6 While finalising the books, the appellant has found certain distributors have not paid the amount as agreed in the MGA on account of the fact that the movie produced by the appellant Firm did not fetch the expected collection from the theatres, being a flop movie. Thereafter the appellant could not realise the amounts agreed to be collected as per the MGA. The amounts that were not realised from various distributors were treated as the unrealised income of the appellant and had to claim the same as expenditure as the corresponding income was already recognised as income in the financials. The appellant to support the claim of unrealised income was able to produce confirmation letters from the distributors, on a sample basis two of the confirmatory letters are appended here under.
(i) Confirmatory letter from SVR Media Pvt Ltd.
Confirmation Letter We M/s SVR Media (P) Ltd, having our office at Hyderabad do hereby confirm and state that we have acquired the exploitation rights and other rights of the movie "PULI” for the Andhra Pradesh Area from M/s SKT Studios Chennai (Producer) for a consideration of 5,00,00,000/- as per the terms and conditions of the agreement dated 17 Aug 2017 and subsequent discussion made between both of us. The total amount paid by us till the date of release was Rs. 1,80,00,000/- (Rupees One crore Eighty Lakhs Only) and have handover the satellite rights to the producer. Generally in the film trade the balance amount and settlement is done one day before the date of release out because of search operation in Chennai the balance amount was not paid as on that date of release due to delay in handing over the prints/digital content not delivered in time resulting in loss of 4 shows on 1st day and 2 shows on the second day which were totally cancelled which is very important from the collection point of view for any big Artist movies. Further the movie was also a utter flop movie, hence we have not paid any further amount to the producer which is due from us as we also faced very heavy loss in the exploitation of the movie and whole industry knows about this. We requested the Producer to waive out the balance amount payable by us and also hand over the Telugu satellite rights and Producers were kind enough to waive out the same. We are assessed to income tax in PAN No.AAMCS6609Q Place: Hyderabad Date 11.12.2017 For SV Media (PLA Authorised Signatory
(ii) Confirmatory letter from Thameen films. THAMEENS FILMS Confirmation Letter We M/s. Thameens Release, having our office at TC 42/691,Opp Hotel Amritha, Thycaud P.O, Thiruvananthapuram, 695014, do hereby confirm and state that we have acquired the expoitation rights of the moview “PULI” for the Kerale territory as known in the film trade for a consideration of Rs.3,75,00,000/- (Rupees three crores seventy five lakhs only) as per the terms and conditions of the agreement dated 22nd Day of June 2015. BU due to the IT raids happened at the production house and also at all our office premises before one day of the film’s release, we were unable to hour the said agreement. The film’s fate at the box office was a disaster and we were not able to pay the amount even after the exploitation of the film in our areas. We are assessed to income tax in PAN No. AFWPK8745D in Trivandrum, Kerala