AI Insights
The case involves the Assistant Commissioner of Income Tax, Central Circle-2(2), Chennai as the appellant and S K T Studios as the respondent. The dispute arose from the assessment year 2016-17, where the AO made several additions to the income of S K T Studios based on undisclosed income and unrealized income from distribution rights, as well as estimated profits from the film 'PULI'. The CIT(A) deleted these additions, leading to the revenue's appeal to the Tribunal. The Tribunal's decision focused on the lack of concrete evidence supporting the AO's additions and the procedural lapses in rejecting the books of accounts.
Appeal Details
Counselvise Citation
[2025] 140 COUNSELVISE.COM (IT) 705210 (ITAT-CHENNAI)
Assessee PAN
Bench
Appeal Number
CRN Number
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
04-07-2025
Appeal Filed By
Department
Order Result
Dismissed
Assessment Year
2016-2017
Judgement Text
" आयकर अपीलीय अधिकरण ’सी’ न्यायपीठ चेन्नई में। IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, CHENNAI माननीय श्री मनु क ुमार गिरि, न्यागयक सदस्य एवं माननीय श्री एस.आर.रघुनाथा ,लेखा सदस्य क े समक्ष । BEFORE HON’BLE SHRI MANU KUMAR GIRI, JUDICIAL MEMBER AND HON’BLE SHRI S. R. RAGHUNATHA, ACCOUNTANT MEMBER आयकरअपील सं./ITA Nos.2658/Chny/2024 Assessment Year: 2016-17 Assistant Commissioner of Income Tax, Central Circle-2(2), Chennai. Vs. S K T Studios, No.69, Kanakadhara Nagar, Sri Devi Kuppam Road, 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 Pronouncement : 04.07.2025 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 2 ITA No.2658/Chny/2024 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. 3. 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 3 ITA No.2658/Chny/2024 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. 4 ITA No.2658/Chny/2024 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 5 ITA No.2658/Chny/2024 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. 6 ITA No.2658/Chny/2024 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 7 ITA No.2658/Chny/2024 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. 7. 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. 8. 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. 9. 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. 10. 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 8 ITA No.2658/Chny/2024 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 9 ITA No.2658/Chny/2024 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 10 ITA No.2658/Chny/2024 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 11 ITA No.2658/Chny/2024 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 12 ITA No.2658/Chny/2024 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. 13 ITA No.2658/Chny/2024 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: 14 ITA No.2658/Chny/2024 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:- S.No Distributor Unrealized amount (in Rs) Amount on which tax was paid by 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 of confirmation letter 23,56,000/- NIL 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. 15 ITA No.2658/Chny/2024 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 ITA No.2658/Chny/2024 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. 6. 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 1. SVR Media Pvt. Ltd. Rs 3,20,00,000 Confirmation Letter submitted already. 2. PTS Film International Rs 2.68,00,000 Confirmation Letter submitted already. 3. Thameens Films Rs. 3,75,00,000 Confirmation Letter submitted already. Rs. 1,95,24,576 offered as income in individual books. 4. Confirmation Letter not available for an amount unrealized Rs. 23,56,000 Not realized income as this income was also derived only based on the MG Agreements Table 1 17 ITA No.2658/Chny/2024 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, 18 ITA No.2658/Chny/2024 “…..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........” 12. 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. 13. 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. 14. 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. 15. 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:- 19 ITA No.2658/Chny/2024 \"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 20 ITA No.2658/Chny/2024 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 21 ITA No.2658/Chny/2024 Place Thiruvananthapuram Sd/- Date 27-12-2017 Shibu K. 8.4.7 On examination of the above confirmation letter(s) from the distributors, it can be seen that the distributors in unequivocal terms have admitted about the non-payment of the amounts as agreed in MGA on account of the failure of the movie. It is brought on record that the AO in the Remand Report has confirmed about the furnishing of confirmation to the tune of Rs. 9,63,00,000/- from the parties and has further reported that the assessee was not able to trace confirmation to the extent of Rs. 23,56,000/-. 8.4.8 When the distributors have not paid the committed amount, naturally these distributors will not be able to claim the same as expenditure in their books and correspondingly the appellant cannot claim the same as income being unrealised. It is the basic accounting principle that the income claimed by one is the expenditure for the other. In the case of the appellant, the distributors have not claimed the un-paid portion as expenditure and therefore the appellant is unable to claim the same as income even though the appellant has already recognised the same as income. In such a scenario, the appellant has claimed the same as expenditure. When the AO has disallowed the expenditure parallelly should have reduced the income also which is not the present case. 8.4.9 When the appellant has produced the confirmation from the distributors, and in their confirmation letters have reported their PAN, it is not fair on the part of the AO to make disallowance on the ground that the distributors have not admitted in their return of income. The findings of the AO is not consistent with the principles of accounting. The payment by the distributors to the appellant is in the nature of expenditure in their hands and only the corresponding receipts are in the nature of income in the hands of the appellant, (if realised). When the AO in principle has accepted the confirmation letters from the distributors, the undersigned does not find any logic in remand report of the AO suggesting to sustain the amount of Rs.7,91,31,424/- as unrealised income in the hands of the appellant. 8.4.10 Secondly, the AO in the Remand report has categorically stated that the appellant was not able to file confirmatory letter for the amount of Rs 23,56,000/-. The Appellant firm during the course of the appellate proceedings also was not be able to substantiate this amount claimed as unrealised income. When an amount is claimed as an expenditure, the burden is upon the assessee to prove the same. It is not for the revenue to substantiate and allow the expenditure. Accordingly the amount of Rs. 23,56,000/- is sustained. Accordingly the grounds raised by the appellant upon this issue are hereby treated as partly allowed and the AO is hereby 22 ITA No.2658/Chny/2024 directed to delete the addition of Rs. 18,87,59,000/-. Thus out of the addition of Rs. 19,11,15,000/- a sum of Rs. 23,56,000/- is sustained for the AY 2016- 17. Addition of Rs.1,50,00,000/- claimed as loss on acquisition of movie rights – Deleted : 8.5 Issue No.3 – Addition of Rs.1,50,00,000/- claimed as loss on acquisition of movie rights. 8.5.1 The AO during the course of assessment proceedings has noticed in the profit and loss account 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 appellant firm during the course of appellate proceedings has submitted evidence along with a detailed submission which was forwarded to the AO and a remand report was called for. The AO in the remand report after examination of the additional evidences has submitted the following upon this issue as under:- \"(iv) Agreement entered with Ms Super Good Films P. Ltd. on advance paid of Rs 1,50 Cr which was forfeited and claimed as business loss: The assessee has submitted that as per the terms agreement entered with M/s. Super Good Films, the assessee could not honor its commitments, and hence initial advance of Rs. 1,50,00,000/- paid was forfeited and the same was claimed as loss on acquisition of movie rights. The assessee has submitted supporting documents which was not produced during assessment proceedings and has requested to delete the addition. It is seen that the assessee has submitted documents in support of its claim which was not produced during assessment proceedings. On examination of the assessee's submission, it is leamt that the production company namely M/s Super Good Films Private Limited had offered Rs.1.5 Cr on account of cessation of liability as per forfeiture clause of agreement The CIT(A) may decide this issue on ments\" 8.5.2 As the AO has examined the evidence and has reported that \"M/s Super Good Films Private Limited had offered Rs.1.5 Cr on account of cessation of 23 ITA No.2658/Chny/2024 liability as per forfeiture clause of agreement there can be no case to treat the same as income of the appellant. In view of this the addition of Rs. 1.50 Crores in the hands of the appellant firm is not sustainable and requires to be deleted. Accordingly all the grounds raised upon this issue are hereby treated as allowed and the AO is directed to delete the addition of Rs. 1,50,00,000/- for the AY 2016-17. Addition of Rs.8,42,86,529/- 10% of expenditure claimed under the head “Puli” production expenses – Deleted: 8.6 Issue No. 4 - Disallowance of 10% of the expenditure claimed under the head \"PULI production expenses amounting Rs. 8,42,86,529/-. 8.6.1 During the course of assessment proceedings, the AO upon verification of the 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. 8.6.2 At the outset, as evident in the assessment order, the AO has proceeded to disallow the expenses claimed towards production of the movie \"PULI\" by estimating 10% of total expenditure amounting Rs. 84,28,65,293/-. During the course of appellate proceedings, the undersigned called for a remand report on the basis of the additional evidences in the form of bills voucher as proof for the expenditure amounting Rs. 84,28,65,293/-. The remand report from the AO in this regard is reproduced her as under. \"The assessee has submitted that out of expenditure of Rs. 84,24,65,293/- claimed, payment to the tune of Rs.59,78,85,870/- was incurred through bank transfers/cheques, which need not require proof like vouchers, bills. For the remaining amount of Rs 24,49,79,424/-, the assesse submitted vouchers, bills etc. The assessee's submission in this regard is considered and it is seen that the assessee has incurred expenses to the tune of Rs 59,78,95,870/- through bank transfers and cheques. It is noticed that the assessee has paid remunerations to various big artists of the film industry. It is seen from the ITRs of various artists related to this movie that they have offered the income while filing ITR and paid the tax accordingly. 24 ITA No.2658/Chny/2024 For the remaining expense of Rs 24,49,79,424/-, the assessee was asked to produce bills, vouchers etc, The assessee has complied with the letter issued by this office. On physical verification, it is found to be in order to a greater extent. However it is seen that some of them were self-made. Therefore, a disallowance of 5% on the balance amount of (Rs.84,24,65,923 -Rs.59,78,95,870 Rs 24,49,79,424) may be made, which comes to Rs. 1,22,48,971/. 8.6.3 On examination of the Remand Report of the AO, it can be seen that the AO has now suggested a disallowance of 5% as against 10% made in the assessment order. It is also brought on record that the AO has observed that the assessee has produced the relevant bills and vouchers to a greater extent which are in order. The AR during the course of appellate proceedings contended that in a production of movie certain expenditures are inevitable at the shooting site and the accounts for such expenditures can be booked by way of self-made vouchers only. 8.6.4 Now the issue before the undersigned is whether the AO is correct in disallowing the expenditure claimed on estimation basis without there being any evidences, more particularly when the books of accounts are subjected to audit under section 44AB of the Act. As evident in the assessment order, the AO has not rejected the books of accounts in terms of section 145(3) of the Act. It can be seen that the appellant firm has filed its return of income on the basis of the audited financials on 16.10.2017 and has admitted a total income of Rs. 6,48,94,840/- for the AY 2016-17. 8.6.5 As evident in the assessment order, the AO has not chosen to reject the books of accounts u/s 145(3) of the Act. The AO without rejecting the books of accounts, proceeded to disallow an estimated expenditure for the year under consideration. The following judicial precedence will support that without rejecting the books of accounts, the action of estimating is not sustainable in the eyes of the law. 8.6.6 The Hon'ble Delhi High Court in the case of PCIT v. Tanishq Overseas (2022) [2022] 441 ITR 223 (Delhi) has held that the AO could not disallow expenditure without first rejecting the books of accounts under Section 145(3). The court emphasized that such disallowance should be based on credible evidence and the unreliability of the books 8.6.7 The Hon'ble Gujarat High Court in the case of DCIT v. Sun Pharma Laboratories Ltd. (2021) Citation: [2021] 434 ITR 145 (Guj) ruled that the AO'S disallowance of expenses claimed by the assessee was improper since the books of accounts were not rejected under Section 145(3). The court 25 ITA No.2658/Chny/2024 noted that the AO must provide a valid reason for rejecting the books before making any disallowances. 8.6.8 The Hon'ble Gujarat High Court in the case of CIT v. Sanjay Oilcake Industries (2020) [2020] 429 ITR 460 (Guj) has held that an AO must reject the books under Section 145(3) if they find them unreliable before disallowing any claimed expenses. Disallowance without rejecting the books was deemed unjustified 8.6.9 The Hon'ble jurisdictional High Court has held in the case of CIT v. Marg Ltd. (2020)[2020] 119 taxmann.com 173 (Madras) has held that the AO's disallowance of expenses was not justified without rejecting the books of accounts under Section 145(3). The court emphasized that the AO must provide a concrete reason for rejecting the books before making any disallowances 8.6.10 The Hon'ble Bombay High Court in the case of PCIT v. Vodafone Idea Ltd. (2021) [2021] 433 ITR 1 (Bombay) ruled that the AO could not disallow the expenses claimed by the assessee without first rejecting the books of accounts under Section 145(3). The court reiterated that any disallowance should be based on substantial evidence proving the unreliability of the books. 8.6.11 The Hon'ble Gujarat High Court in the case of PCIT v. Ajanta Pharma Ltd. (2022) [2022] 448 ITR 548 (Gujarat) has held that disallowance of expenditure by the AO without rejecting the books of accounts was not permissible. The court ruled that the AO must provide valid reasons for such disallowance, supported by the rejection of books under Section 145(3). 8.6.12 The Hon'ble jurisdictional High Court in the case of Principal Commissioner of Income Tax 4 vs M/S. Marg Limited, 2017 (7) TMI 1150 Madras High Court noted that under Section 145(3) of the Income Tax Act, the AO can reject the books of accounts if the AO is not satisfied with the correctness or completeness, emphasized that without rejecting the books of accounts, the AO could not proceed to estimate. 8.6.13 Thus, the action of the AO in estimating the disallowance of expenditure claimed without rejecting the books of accounts in accordance to the provisions of section 145(3) of the Act in not appropriate and not sustainable in the eyes of law. In view of the judicial precedence cited supra the undersigned is of the considered view that the AO without rejecting the books of accounts under section 145(3) of the Act cannot proceed to disallow the expenditure by estimating. Accordingly all the grounds raised by the appellant upon this issue of making disallowance are treated as allowed and 26 ITA No.2658/Chny/2024 the AO is hereby directed to delete the addition of Rs. 8,42,86,529/-made for the AY 2016-17. Aggrieved by the order of ld.CIT(A) the revenue is in appeal before us. 5. The ld.DR reiterated the grounds of appeal in his argument by supporting the order of AO. Further the ld.DR submitted that the Ld.CIT(A) grossly 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. He further contended that 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. He further more submitted that the Ld.CIT(A) is not justified 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). He further pleaded that the Ld.CIT(A) is not justified 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. 27 ITA No.2658/Chny/2024 6. Per contra the ld.AR of the assessee asserted the action of the ld.CIT(A) and submitted that the ld.CIT(A) has considered the entire submissions, remand report of AO and other materials placed on record and rejoinder to the remand report, has deleted the additions made by the AO. Hence the ld.AR submitted that there is no reason to interfere in the order of the ld.CIT(A) for the following reasons: (A) Ground 2 & 2.1 - Addition to the tune of Rs. 18.76 Crores in the order passed u/s.143(3) of the Act: The ld.AR submitted that as discussed in para 5 of the Assessment Order passed u/s.143(3) of the Act, for the addition to the tune of Rs.18,76,00,000/-, the AO has stated that one of the partners of M/s.S.K.T.Studios, during the investigation proceedings has given a statement on 14.11.2015 stating they are willing to admit Rs.18.76 crores as undisclosed income in the hands of the assessee firm as the partners were unable to identify the distributors who had given money to the tune of Rs.13.08 crores out of the total distribution advance received, plus the estimated profit of Rs.5.68 Crores on the date of search conducted, totaling Rs.18.76 Crores. Further the ld.AR stated that, in the film industry, the distributors who acquire the distribution rights for various territories will only pay a portion of the total amount payable as advance per the agreement entered with the producer. This amount is generally given directly from the distributors or at times, via the distributor's financiers who finance such distributors. Therefore, the balance payment will be paid after the release and are generally repaid to the producers directly by the distributors or via the financiers based on the agreements made between the distributors and their financiers. He further submits that there are situations in this industry where a part or complete payment is defaulted by the distributors / theatre by means of non-payments or compensation collected via judicial, governing bodies, or out of court settlements when the movie underperformed, resulting huge losses for the distributors. In such situations, the producer can only claim these defaults as unrealized incomes against the agreements made as the income and unfortunately, these defaults would never be recovered in full by the producer. In contrast, there 28 ITA No.2658/Chny/2024 are also situations of an utter flop movies, the producers would be forced to refund or compensate distributors/theatre owners on the losses incurred due to the movie's flop. Further, the ld.AR stated that the estimated profit of Rs.5.68 Crores does not have any solid base as during the search, the total income from ‘PULI’ movie production and release was estimated by the Income Tax Authorities only from minimal guaranteed distribution agreements seized during the search, that were signed between assessee and various distributors. However, in reality, these amounts agreed as per the agreement were not settled in full by the distributors as on the date of search. Subsequently, there was a huge unrealized income that was supposed to be settled by the distributors to the assessee. Hence, this cannot be considered as total income received in the hands of M/s.SKT Studios on the date of search and additions be made on assumptions. In addition, with unfinalized books of accounts on expenses and deductions to be made, it is not valid on the part of the AO to conclude the overall expenses of the movie and derive the profit which is totally misleading figures. Therefore, it is not correct on the part of the AO to consider this assumed profit and make an addition for the same without getting hold on the actuals. As mentioned above, the entire movie was produced based on the distribution advances received and therefore, at times, the distributors were requested to settle the production expenses on behalf of the assessee directly at the shooting spot. The day expenses were recorded as such by the M/s.SKT Studio's accountant, sometimes 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. Therefore, the firm's accountant was the only person who maintains these records and she was an amateur accountant who is also new to such film production activity. In view of the above, the ld.AR submitted that certain amounts received on behalf of distributors from financiers were recorded and maintained by the accountant, and in a stressful situation like this, the assessee were unable to recollect and identify at the time of search proceedings, the advances received to the tune of Rs.13.08 Crores, and hence were forced to agree and offer the same as undisclosed income. However, all these income and loans taken were duly 29 ITA No.2658/Chny/2024 identified, books were finalized and reported as part of the remand report preparation to the AO and the same has been duly verified and accepted while verifying the income and expenses claimed during the remand report preparation, against all the bank statements submitted to the AO. Therefore, it may not be valid on the part of the AO to add additions without corroborative evidence and justify them to the seized materials, and impose such additions only based on unfinalized books of accounts. Hence, making an addition arbitrarily based on the sworn statement given during immense pressure/stress and seized material i.e., unfinished books of accounts, loose sheets or Excel maintained by the accountant on account of handling funds of external parties, may not be correct on the part of the AO as the finalized books of accounts may only provide a clarity on the actuals. This addition to the tune of Rs.18.76 Crores, i.e., Rs.5.68 Crores of estimated profits on the date of search and Rs.13.08 Crores towards unidentified distributors income treated as undisclosed income on the date of search was duly identified during the course of post search assessment always within the income offered already in the books of account and the same cannot be added back to the income and the same is substantiated by the AO while verifying the income received as part of the post film release and the realization payment confirmation letters issued by various distributors. Likewise, the AO has also verified the 'Unrealized Income' claimed as an expenditure and confirmed the same on the Remand Report passed on 01.02.2024. Further the ld.AR submitted that the CIT(A) after considering the documents on record has observed that the assessee firm had repaid loans amounting to Rs.22.55 crores, which is more than Rs.22.12 crores claimed by the assessee. The ld.CIT(A) deleted the addition made by the AO since the assessee had substantiated the entire sum. The order of the ld.CIT(A) hence requires to be upheld. The appeal of the revenue is merely on the ground that the assesse has accepted certain sums. All additions were substantiated before ld.CIT(A) and hence considering the entire conspectus of the issues he deleted the additions. 30 ITA No.2658/Chny/2024 (B) Ground No.2.2 - Addition of unrealized amount of Rs.19,11,15,000/- from certain distributors: The ld.AR stated that, 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 Return (ITR) filed against the notice served u/s.153 of the Act on 16.10.2017 for the impugned A.Y.. The concept of unrealized income being an expense was considered in this situation was due to the fact, during the search conducted at the assessee's 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 assessee 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 honour the payments even to the extent that was agreed in the MGA. Therefore, the ld.AR submitted that the assessee 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 honoured against the MGA signed. During the search and post search proceedings, the assessee was unable to identify all the payments received from all the distributors due to various reasons, most importantly, the assessee was receiving threats and demands to cover the losses incurred by the theatres and distributors due to poor performance of the film. Therefore, the assessee and their staff were not available until the commotions 31 ITA No.2658/Chny/2024 subsided in this regard and by then the assessment was completed. Subsequently, the assessee 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 AO 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 ld.CIT(A) 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 AO. The ld.AR drew our attention to such confirmation letters from each of the distributors which is attached as part of paper book. Since the parties confirm that the amounts are not paid to the assessee, the ld.AR submitted that the order of the ld.CIT(A) passed after verification of such confirmations is to be upheld. (C) Ground No.3 - Business Expenditure claimed: The AO has confirmed in the remand report that, the bills, vouchers and other supporting documents to confirm the genuineness of the expenditures claimed were in good order as follows: “...... For the remaining expense of Rs. 24,49,79,424/-, the appellant was asked to produce bills, vouchers etc. The appellant has complied with the letter issued by this office. On physical verification, it is found to be in order to a greater extent..... However, it may be seen from the remand report that, the AO has stated that certain bills were seen to be self-made and hence 5% of the balance amount of Rs.24,49,79,424/- was disallowed, which is Rs.1,22,48,971/-. However, it is seen that some of them were self-made. Therefore, a disallowance of 5% on the balance amount of (Rs. 84,24,65,923 - 32 ITA No.2658/Chny/2024 Rs.59,78,95,870 Rs.24,49,79,424) may be made, which comes to Rs.1,22,48,971/…..” From the above, it may be clear that the AO has also agreed and recorded the fact that the information called for was furnished during the course of proceedings itself. In fact, the assessee has submitted all the bills, vouchers and other details to substantiate the expenses incurred during the course of production of the film and it has been duly verified physically by the department and agreed to be in order to a greater extent. The AO has not rejected the books of accounts and hence the CIT(A) was right in deleting the addition made by the AO, in view of the finding in remand report that the vouchers were correct to a greater extent. The ld.AR therefore prayed that order of the Ld. CIT(A) please be upheld and dismiss the appeal filed by the revenue. 7. We have heard the rival submissions, perused the orders of the authorities below, the remand report dated 01.04.2024 from the AO based on the additional documents / evidence furnished by the assessee and the assessee’s detailed rejoinder to remand report. The issue herein is of whether the Assessing Officer (AO) is justified in treating undisclosed income admitted by the assessee without any basis. The assessee firm had admitted an undisclosed income of Rs.5.68 crores during a search conducted on September 30, 2015, based on seized records. However, the assessee argued that determining profit mid-year is challenging and any estimation would be unreliable. In fact, the AO accepted the assessee's audited financials but attempted to make additions based on statements recorded during the search. We are of the considered view that this action unsustainable as the AO did not reject the books of accounts under section 145(3) of the Act. The AO accepted the appellant's audited financials. Furthermore, the AO contemplated an addition of Rs.18.78 crores (Rs.13.08 crores + Rs.5.68 crores) based on statements recorded during the search. However, there is no evidence to support the claim that the appellant firm suppressed income of Rs.18.78 crores. It is settled by the Hon’ble courts that 33 ITA No.2658/Chny/2024 additions cannot be made in search assessments solely based on statements recorded during the course of search. Hence, no interference is required in the order of the ld.CIT(A), therefore we affirm the order of the ld.CIT(A) and dismissed the grounds of the revenue. Regarding addition on account of unrealized income claimed in the Profit and Loss, the AO in the Remand Report has confirmed about the furnishing of confirmation to the tune of Rs.9,63,00,000/- from the parties and has further reported that the assessee was not able to trace confirmation to the extent of Rs. 23,56,000/-. It is the basic accounting principle that the income claimed by one is the expenditure for the other. In the case of the appellant, the distributors have not claimed the un- paid portion as expenditure and therefore the appellant is unable to claim the same as income even though the assessee has already recognised the same as income. Therefore, when the AO has disallowed the expenditure parallelly should have reduced the income also which is not the present case. Hence, in the light of the entire conspectus of the matter/ground and the arguments presented by the ld. counsel (supra), we affirm the following findings of the ld. CIT(A): 8.4.9 When the appellant has produced the confirmation from the distributors, and in their confirmation letters have reported their PAN, it is not fair on the part of the AO to make disallowance on the ground that the distributors have not admitted in their return of income. The findings of the AO is not consistent with the principles of accounting. The payment by the distributors to the appellant is in the nature of expenditure in their hands and only the corresponding receipts are in the nature of income in the hands of the appellant, (if realised). When the AO in principle has accepted the confirmation letters from the distributors, the undersigned does not find any logic in remand report of the AO suggesting to sustain the amount of Rs.7,91,31,424/- as unrealised income in the hands of the appellant. 8.4.10 Secondly, the AO in the Remand report has categorically stated that the appellant was not able to file confirmatory letter for the amount of Rs 23,56,000/-. The Appellant firm during the course of the appellate proceedings also was not be able to substantiate this amount claimed as unrealised income. When an amount is claimed as an expenditure, the burden is upon the assessee to prove the same. It is not for the revenue to substantiate and allow the expenditure. Accordingly the amount of Rs. 23,56,000/- is sustained. Accordingly the grounds raised by the appellant upon this issue are hereby treated as partly allowed and the AO is hereby 34 ITA No.2658/Chny/2024 directed to delete the addition of Rs. 18,87,59,000/-. Thus out of the addition of Rs. 19,11,15,000/- a sum of Rs. 23,56,000/- is sustained for the AY 2016-17. Therefore, we dismiss the grounds of the revenue on this issue. Regarding disallowance of 10% of the expenditure claimed under head ‘PULI production expenses’, the AO has also agreed and recorded the fact that the information called for was furnished during the course of proceedings itself. We find that in remand report, the AO has accepted most of the bills, vouchers and other supportive documents, however about certain bills he has noted that those are self- made. On appeal, the ld.CIT(A) deleted the addition for the reason that the AO without rejecting the books of account cannot estimate the disallowance of expenditure claimed. Therefore, we are of the considered view that the ld.CIT(A) has rightly deleted the addition of Rs.8,42,86,529/-. Therefore, we affirm the order of the ld.CIT(A) and dismissed the ground of the revenue. 8. In result, appeal of the revenue is dismissed. Order pronounced in the open court on 04th day of July 2025 at Chennai. Sd/- sd/- (एस.आर.रघुनाथा) (मनु क ुमार गिरि) (S. R. RAGHUNATHA) लेखा सदस्य / ACCOUNTANT MEMBER (MANU KUMAR GIRI) न्यागयक सदस्य / JUDICIAL MEMBER चेन्नई Chennai: दिन ांक Dated : 04-07-2025 KB/- आदेश की प्रतिलिपि अग्रेपिि /Copy to : 1. अपील र्थी/Assessee 2. प्रत्यर्थी/Respondent 3. आयकरआयुक्त/CIT, Chennai/Coimbatore/Madurai/Salem. 4. दिभ गीयप्रदिदनदि/DR 5. ग र्डफ ईल/GF "
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