The main legal point established in the judgment is that the Tribunal cannot cancel the assessment of undisclosed income if it is based on tenable and acceptable evidence recovered in the course of search and which is not disproved by the assessee.

RamachandranNair, J.

1. The above two appeals filed by the Revenue and the Cross Objection filed by the assessee arise from the block assessment and penalty orders issued against the assessee for the block period 1988-89 to 1997-98 (relevant for the period from 01/04/1987 to 24/07/1997) under Sections 158BC and 158BFA(2) respectively of the Income Tax Act, 1961 (hereinafter referred to as the Act for short). These proceedings were completely based on search made in the residential and business premises of the assessee on 24/07/1997 under Section 132 of the Act.

2. We have heard Shri.P.K.R.Menon, learned Senior Standing Counsel, appearing for the Revenue, and Shri.Dale P.Kurian, learned counsel appearing for the assessee. We have also gone through the argument notes filed by assessee's counsel and the several decisions cited by him. The facts leading to the block assessments made under Chapter XIV B are briefly stated hereunder.

3. The assessee is a leading producer and distributor of motion pictures in Kerala. A search was made by the Intelligence Wing of the Income Tax Department under Section 132 of the Act in the residential and business premises of the assessee on 24/07/1997, which led to recovery of various incriminating documents and books of accounts and details of investments made by the assessee in acquisition of agricultural lands, construction of residential house etc. Pursuant to search, notice was issued to the assessee under Section 158BC of the Act requesting to file return of undisclosed income. The assessee filed return in Form No.2B on 27/02/1998 declaring an undisclosed income of Rs.43 lakhs for the entire block period. However, dissatisfied with the quantum of undisclosed income declared by the assessee, the Assessing Officer issued notice proposing assessment.

Since accounts and documents seized revealed unaccounted business, massive investments and expenditure as well, the assessee was required to furnish cash flow and wealth statements. Sworn statement was also recorded from the assessee on the date of search i.e. on 24/07/1997 and on 29/07/1997. In the detailed statement given by the assessee, the assessee clearly stated that assessee and his family members have no other loan other than a bank loan of Rs.10 lakhs taken by him along with his wife and son for meeting the expenditure for publicity of films. However, in the course of assessment, along with other claims made, the assessee also contended that he has other debts particularly a loan of Rs.20 lakhs taken from his sister-in-law and Rs.5 lakhs borrowed from a priest and around Rs.15 lakhs towards balance outstanding due to theatre owners. After analyzing the cash flow and wealth statements furnished by the assessee with reference to the evidence collected during search and sworn statements recorded, the Assessing Officer completed the assessment on a total undisclosed income of Rs.2,87,82,320/-. Even though in the first appeal, the CIT (Appeal) granted substantial reduction to the assessee, on 2nd appeal, the Tribunal refixed the total undisclosed income for the block period at Rs.1,09,16,440/-i.e. by making an addition of Rs.67,48,250/- over the undisclosed income of Rs.43 lakhs declared by the assessee. Even though the assessee initially accepted the Tribunal's order sustaining an addition of Rs.67 lakhs over the undisclosed income declared by the assessee, the assessee after six years of filing of appeal by the Revenue filed the above Cross Objection challenging the findings of the Tribunal with regard to 3 items of additions sustained by it. While the Revenue's appeal is to restore the deletions made by the Tribunal, the assessee's Cross Objection is for the purpose of further reduction of the addition of three items of undisclosed income sustained by the Tribunal.

4. So far as the penalty appeal i.e. ITA No.177/2008 is concerned, what is seen is that penalty under Section 158BFA (2) of the Act is levied not with reference to the