GAJULAPALLI SHOBAN BABU ,HYDERABAD vs. DY. COMMISSIONER OF INCOME TAX, CENTRAL CIRLCE , TIRUPATI

At the outset, it is seen that there is a delay of 21 days in filing of these appeals by the assessee. The learned Counsel for the assessee explained the reasons for such delay. After hearing the learned DR, the delay of 21 days in filing these appeals are hereby condoned and admitted for adjudication.

The assessee has more or less raised common grounds of appeal

in all the three appeals. Therefore, for the sake of brevity, grounds of appeal filed for A.Y 2010-11 are hereby reproduced are as under: “1. The order of the learned CIT (A) is against the law, weight of evidence and probabilities of case.

The learned Assessing Officer made a part of addition in respect of unaccounted investments in film financing business, without mentioning page no. Of the seized material. The learned Addl. Commissioner also approved the same without making any enquiries. As the order is approved u/s 153D, routinely without application of mind, therefore, the order is to held as invalid.

The appellant craves leave to add to, amend or modify the above grounds of appeal either before or at the time of hearing of the appeal, if it is considered necessary”.

Aggrieved by the order of the learned CIT (A), the assessee is in appeal before the Tribunal.

The first issue that came up for our consideration from Ground of assessee’s appeal for A.Y 2010-11 to 2012-13 is the addition towards unaccounted investment in film financing. During the course of search & operation u/s 132 of the I.T. Act, 1961, bundle of loose sheets serially numbered from 1 to 95 were found and seized vide Annexure A/GSB/Res/03 which contains dated promissory note as well as blank promissory note signed by the borrowers without the name of the lenders and the details of each are reproduced in Para 3 on page 2 & 3 of the assessment order. The Assessing Officer made addition towards the loan given to various film producers as unexplained investment on the ground that the assessee could not explain the source for the loans and also not able to file necessary evidences to prove that, he has received loans from associates/lenders. It was the argument of the learned Counsel for the assessee before the Assessing Officer that he is into film financing business and in the process receives loan from various associates/lenders and given loan to film producers. Since the assessee act as a middlemen between lenders and film producers, film producers execute blank promissory note in favour of the lenders before the loan is arranged and the reason for executing blank promissory note is that at the time of discussion with the film producers, the name of the lender is not known. Therefore, he submitted that the entire amount of unaccounted loans cannot be added as his income and only the income earned from the business can be assessed. The Page 5 of 22 Assessing Officer after considering the relevant submissions of the assessee and also taken note of relevant material found in the residential premise of the assessee observed that, as per provisions of section 132(4A)(ii) of the I.T. Act, 1961 the presumption is on the assessee that the said material belongs to the appellant and contents recorded therein are true and correct. Therefore, rejected the explanation of the assessee and made addition towards loan given to various film producers as unexplained investment in film financing. The details of year-wise addition made by the Assessing Officer are as follows: A.Y 2010-11 S.No Particulars Amount 1 Unaccounted Investment in 25,00,000 film financing business 2 Unaccounted Investment in 3,47,75,000 film financing business A.Y 2011-12 S.No Particulars Amount 1 Unaccounted Investment in 64,00,000 film financing business 2 Unaccounted Investment in 10,76,83,000 film financing business 3 Unaccounted Investment in 76,00,000 film financing business A.Y 2013-13 S.No Particulars Amount 1 Unaccounted Investment in 1,20,00,000 film financing business 2 Unaccounted Investment in 85,00,000 film financing business 3 Unaccounted Investment in 1,55,00,000 film financing business

The learned Counsel for the assessee, referring to the document found during the course of search submitted that a promissory note can be enforced under law, if it is complete in all respects. If it is not complete in all respects, it cannot be enforced under law. In the present case, the promissory notes are not signed by the appellant and only signed by the film producers. Further, the name of the lenders and rate of interest in few cases is blank. Therefore, these promissory notes cannot be treated as valid document for the purpose of addition. The learned Counsel for the assessee further submitted that the assessee explained the contents of loose papers and stated that the left side of the document denotes loans and advances given to various film producers and right side of the document denotes loans and advances received from associates/lenders. The assessee receives loans from various associates in small amount, aggregate the amount and lend to film financiers in lumpsum amount. The assessee pays interest ranging from 18% to 24% to associates/ lenders and receives interest from film producers ranging from 24% to 30%. This fact has been explained to the Assessing Officer, but the Assessing Officer ignored the explanation furnished by the assessee only on the ground that few associates/lenders denied having paid any amount to the assessee without appreciating the fact that those statements of the associates/lenders were not confronted to the assessee and the opportunity of cross examination was not provided. Therefore, he submitted that a reasonable amount of income may be estimated from film financing business.

The learned DR, on the other hand, supporting the orders of the learned CIT (A) submitted that the documents found during the course of search, including the signed and blank pro notes clearly proves finance extended to various film producers. Although, the name of the lenders is not available in the pro notes, but fact remains that those pro notes were found in the premise of the assessee and as per provisions of section132(4A)(ii) r.w.s. 292C of the I.T. Act, 1961, the presumption is on the assessee and further the said document belongs to the appellant and contends recorded therein are true and correct. Further, the assessee himself has admitted that loans has been given through account and also in cash. The loans given in cash is unaccounted. The assessee also claims to have explained the other part of the seized material and claimed that, he has received loans from associates/lenders, but all the associates have denied having given any loan to the assessee which is confirmed during the post search investigation where all of them have deposed before the Assessing Officer and denied transactions. The Assessing Officer and the learned CIT (A) after considering relevant facts has rightly made addition towards unaccounted investment in film financing business and their orders should be upheld.

We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. During the course of search, bundle of loose sheets containing signed and blank promissory notes along with a diary was found and seized. Promissory note indicates loans given to various film producers. Further, the said promissory notes

We have given our thoughtful consideration to the reasons given by the Assessing Officer to make additions towards unaccounted investment in film financing business on the basis of seized document in light of various averments made by the assessee and we ourselves do not subscribe to the reasons given by the Assessing Officer for the simple reason, first of all the promissory notes relied upon by the Assessing Officer is not enforceable under the law, because those promissory notes are blank without any details as to the name of the lenders, rate of interest etc. Although in few cases of promissory notes, the amount of loan and rate of interest is mentioned, but name of the lenders is conspicuously absent. Once the document is not complete in all respects, then it cannot be enforced under law. Therefore, based on the said document, no additions can be sustained. Further, in respect of other documents relied upon by the Assessing Officer including the entries in the diary, we find that the assessee has recorded the date of loan, period of loan, due date of repayment, number of days, interest, etc., against each borrowers. Further, in the same diary, in the right side, the appellant has recorded the name of the associates and the amount received from them. The Assessing Officer took entries

We further note that the Assessing Officer and the learned CIT (A) rejected the explanation of the assessee on the presumption that no borrower would execute pro-note in advance without mentioning any details. However, fact remains that in many cases, business is carried out on the basis of mutual trust and respect. Further, especially in the field of financing, more particularly in the field of film financing, it is mostly unorganized sector and transaction happens through mutual trust and belief and going by the place of business where the appellant operates, it is very famous for film financing and thus, in our considered view, the arguments advanced by the learned Counsel for the assessee in light of various evidences including the statement recorded from the assessee during the course of search that the assessee is only a middlemen and arrange finance to film producers through associates/lenders is bonafide and needs to be accepted.

Having said so, let’s come back, how to quantify the income of the appellant. Admittedly, the Assessing Officer made addition towards unexplained investment in film financing business by considering only one part of seized document which relates to loans given to various film producers. The Assessing Officer ignored other part of the very same seized material (right side) which contain details of names of associates/lenders and amount received from them. The assessee right from the beginning claimed that he received amount from various associates/lenders in small amount, aggregate the amount and lend to different film producers and production houses. We find that the seized material A/GSB/Res/02, Page No.1 to 16 contain details of loans given to film producers on the left side and the loans received by the assessee from various associates/lenders on the right side. The same has been tabulated by the assessee and given to the Assessing Officer during the course of search and assessement proceedings. The Assessing Officer assessed sum of Rs.3,47,75,000/- for A.Y 2010-11, Rs.10,76,83,000/- for A.Y 2011-12 and Rs.85,00,000/- for the A.Y 2012-13 based on seized material A/GSB/Res/03. The learned Counsel for the assessee explained that the assessee received loan from various persons by paying interest @ 18 to 24% per annum. The assessee given loans to various film producers/production houses by charging interest ranging from 24 to 30%. Going by the admission of the learned Counsel for the assessee, the assessee earns 6% margin from his business activity of arranging loans to film producers. The assessee also claims it has incurred certain expenditure for this Page 13 of 22 business. In any case, business cannot be done without incurring any expenditure. Although, the assessee is not able to file any evidences for incurring the expenditure, but possibility of incurring day-to-day expenditure like travelling expenses, telephone charges and other general administrative expenses cannot be ruled out. Therefore, considering the nature of the business of the assessee and also amount of business carried out by the assessee for all these years, in our considered view, a reasonable amount of expenditure needs to be estimated. The assessee has earned 6% margin on total loans given to film producers. Against this for various expenditure, the assessee must have incurred 1% income generated from his finance business. Therefore, considering the totality of the facts and circumstances of the case and also the nature of the business, we are of the considered view that out of 6% margin claimed to have been earned by the assessee, a deduction of 1% towards expenditure needs to be allowed. If we deduct 1% towards the expenditure, then the net income earned by the assessee from the film finance business is 5% on total loans given to film producers and production houses. Therefore, we are of the considered view that 5% net profit on total amount of loans given by the appellant as quantified by the Assessing Officer appears to be reasonable. Therefore, we direct the Assessing Officer to estimate 5% net income on total loans quantified by the Assessing Officer towards unaccounted investment in film financing for all the 3 A.Ys. In other words, out of additions made by the Assessing Officer for the A.Y 2010-11 amounting to Rs.3,72,75,000/-, the Assessing Officer is directed to restrict addition to the extent of 5% of net

The next issue that came up for our consideration for A.Y 2010-11 is addition of Rs.5 lakhs towards gift received from brother-in-law. The Assessing Officer made addition of Rs.5 lakhs towards gift claimed to have been received from brother-in-law on the ground that the assessee could not establish relationship with donor and also creditworthiness of the donor. It was the argument of the assessee that, he has filed confirmation letter from the donor along with the ledger extracts. The assessee further contended that the gift has been received through proper banking channels.

We have heard both parties and considered the relevant reasons given by the Assessing Officer to make addition towards the gift of Rs.5 lakhs received from brother-in-law. Although, the assessee claims to have received gift through cheque, but the Assessing Officer recorded clear findings that the assessee has received gift in cash. Further, except confirmation letter and ledger account, no other details has been filed including

The next issue that came up for our consideration for the A.Y 2011-12 is the gift received by the assessee for Rs.48,17,730/-. The Assessing Officer made addition of Rs.48,17,730/- towards gift claims to have been received from brother-in-law on the ground that except filing confirmation letter and ledger account, the assessee could not furnish any other evidence and also failed to establish relationship of the said person with the assessee and the creditworthiness of the donor. It was the argument of the assessee that the amount has been received from Shri B Girish and Smt. B Soumya in the financial years 2007-08 and 2008-09 and the same has been treated as loans in the books of account of the assessee. During the financial year relevant to A.Y 2011-12, the same has been treated loans as gift received from brother-in-law and sister. The assessee has filed all evidences including confirmation from the donor, their PAN details and bank account.

We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. The fact with regard to the impugned dispute are that on Page 16 of 22 20/04/2007, the assessee received Rs.4 lakhs and Rs.16 lakhs from Smt. B. Sangeeta and out of this amount, Rs.10.00 lakhs has been treated as gift for the subject A.Y. with the consent of donor who is the sister of the assessee. Similarly, the appellant has received Rs.11,98,660/- in the financial year 2007-08 and Rs.20.00 lakhs in the financial year 2008-09 from Shri B Girish who is brother in law of the assessee i.e. husband of Smt. B. Sangeeta. The aggregate amount received is Rs.31,98,660/- up to the year ending 31/03/2009. This amount was considered as loan from Shri B Girish and therefore, an interest amounting to Rs.4,97,374/- was credited for the year ending 31/03/2010 and further interest of Rs.1,21,723/- for the year ending 31/03/2011. The aggregate amount outstanding in the name of Shri B Girish as on 31/03/2011 was at Rs.38,13,730/- and the same has been treated as gift to the assessee with the consent of Shri B Girish for the subject A.Y. The assessee has furnished all evidences including confirmation and relevant bank account statement of the donor and the assessee. The Assessing Officer ignored the evidences filed by the assessee and made addition u/s 56(2)(vii) of the Act, as income from other sources. We do not subscribe to the reasons given by the Assessing Officer for the simple reason that first of all, the assessee is able to establish identity of the donor and also proved genuineness of the transaction by filing confirmation letter from the donor. Secondly, assuming for a moment, the assessee is not able to prove the gift with relevant evidences, but the amount received from Shri B Girish cannot be treated as unexplained credit or income from other sources u/s 56(2)(vii) for the subject A.Y for the simple reason that the amount

The next issue that came up for our consideration for the A.Y 2012-13 is addition of Rs.29,43,250/- towards unexplained cash found during the course of search. During the course of search on 2/5/2011, at the residential-cum-business premises of the assessee, cash of Rs.29,43,253/- was found and seized. During the course of search, a statement was recorded from the assessee and called upon the assessee to explain the source of cash found at the time of search and in response, the assessee submitted that he has updated his cash book up to 30/04/2011 and as per cash book, closing balance was at Rs.2,79,338/-. Further, one more statement was recorded on 2/1/2012 and in response to specific question, the appellant submitted that the cash balance as on 30/04/2011 was about Rs.5 lakhs. The balance amount of Rs.24,43,000/-, the assessee expressed his inability to explain the source. The Assessing Officer made addition of Rs.29,43,250/- towards cash found during the course of search on the ground that the appellant

We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. There is no dispute with regard to the cash found and seized during the course of search at Rs.29,43,250/-. It is also an admitted fact that the cash book maintained by the assessee was not updated as on the date of search. Since the date of search was in between the financial year and there is a time for appellant to update the cash book, the explanation offered by the assessee with regard to the availability of cash balance as on 30/04/2011 as per updated cash book amounting to Rs.5 lakhs needs to be accepted. If we accept the source of cash found during the course of search to the extent of Rs.5 lakhs, but still there is unexplained cash found at the time of search at Rs.24,43,250/- and the assessee could not explain the source for the same. Therefore, we are of the considered view that out of total cash found during the course of Rs.29,43,250/-, the appellant is able to explain the cash in hand available as on the date of search for Rs.5lakhs only. The remaining amount of cash of Rs.24,43,250/- is still unexplained. Therefore, we are of the considered view that the addition made by the Assessing Officer towards cash found during the course of search needs to be sustained to the extent of Rs.24,43,250/-. Thus, we direct the Assessing Officer to restrict the addition to the extent of Rs.24,43,250/- towards cash found and seized during the course of search.

The next issue that came up for our consideration for the A.Y 2012-13 is addition towards unexplained investment in jewellery. During the course of search, jewellery amounting to Rs.12,15,500/- was found in the residence and locker of the assessee. The aforesaid jewellery was not seized. During the course of assessement proceedings, the Assessing Officer called upon the assessee to explain the source of investment in jewellery along with documentary proof. Since the assessee has not filed any explanation, the Assessing Officer made addition towards gold jewellery and silver article found worth Rs.12,15,500/- as undisclosed investment in the hands of the assessee.

The learned Counsel for the assessee referring to the CBDT Instruction No.1916, dated 4.5.1994 submitted that the CBDT has very clearly directed the Field Officers to not to seize jewellery up to 500g in the case of married women and 200g in the case of unmarried women and 100g in the case of men. If we go by the quantity of jewellery found and seized during the course of search, the quantity is less than 500g. The assessee explained that the said jewellery belongs to his wife and his unmarried children and himself. Although the assessee has explained the source and nature of the investment in jewellery, the Assessing Officer made addition as unexplained investment. Therefore, he submitted that the addition made by the Assessing Officer towards jewellery should be deleted.

The learned DR, on the other hand, supporting the order of the learned CIT (A) submitted that the assessee could not explain the investment in jewellery along with the documentary

We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that the value of the jewellery found during the course of search is at Rs.12,15,500/- and if we convert into weight, it is less than 500g of jewellery. The assessee during the course of search and during the course of assessement proceedings, explained that the said jewellery belongs to his wife, children and himself. As per the CBDT Instruction 1916, dated11/05/1994. jewellery found during the course of search up to an extent of 500g in the case of married women cannot be seized. Similarly, in the case of unmarried women up to 200g of jewellery cannot be seized. Likewise, in the case of men up to 100g jewellery, there cannot be any seizure. In the present case, going by the amount of jewellery found during the course of search, it is well within the parameters prescribed by the CBDT for seizure of jewellery. No doubt, the Department has not seized jewellery. However, when it comes to explanation of the source for the said jewellery, it is a customary in India that every household will have certain quantity of jewellery in family and the same has been acquired out of their savings and known source of income. Since going by the quantity of jewellery found in the present case, in our considered view, the same is within the parameters prescribed by the CBDT for not seizure of the jewellery and also the assessee is able to explain the Page 21 of 22 source out of his known source of income. Therefore, we are of the considered view that the Assessing Officer is erred in making addition towards jewellery found during the course of search as unexplained investment. The learned CIT (A) without appreciating the relevant facts simply sustained the addition made by the Assessing Officer. Thus, we set aside the findings by the learned CIT (A) and direct the Assessing Officer to delete the addition made towards the jewellery found during the course of search.

In the result, appeals filed by the assessee for the A.Ys 2010-11, 2011-12 and 2012-13 are partly allowed.