Sanjay Arora, Accountant Member - This is an Appeal by the Assessee agitating the Order by the Commissioner of Income Tax (Appeals)-3, Mumbai ('CIT(A)' for short) dated 25.11.2011, confirming the levy of penalty u/s.271(1)(c) of the Income Tax Act, 1961 ('the Act' hereinafter) by the Assessing Officer (A.O.), vide order dated 23.03.2004 in respect of the assessment year (A.Y.) 2001-02.

2. At the very outset, it was observed by the Bench that the assessee's appeal is delayed by a period of nine (9) days. The same stands however suitably explained per an Affidavit dated 13/2/2012 accompanying the assessee's condonation petition dated 14/2/2012. We, accordingly, were of the opinion that the said delay is liable to be condoned, and the hearing in the matter was proceeded with. The only issue arising in the instant case, thus, is the sustainable of the penalty levied u/s. 271(1)(c) in the sum of Rs. 9,98,500/- in the facts and circumstances of the case.

The background facts

3.1 The relevant facts are that the assessee, an individual, claimed a loss of Rs. 102.36 lakhs on the distribution of a Bengali film 'Haar Jeet' per his return of income filed on 31.10.2001 at an income of Rs. 62.67 lakhs, including business income at Rs. 46.95 lakhs. The said loss was found by the Assessing Officer (A.O.) to be primarily on account of the acquisition cost of the distribution rights of the said film at Rs. 111 lakhs on minimum guarantee (MG) basis from a sister concern, M/s. Aftab Pictures Pvt. Ltd. (APPL). The assessee, thereafter, entered into an agreement for exhibition of the said film with M/s. Aftab Group (AG), again a firm in which the assessee was interested in terms of section 40A(2)(b) of the Act. The two agreements were dated 05.12.2000 and 11.12.2000. The entire receipt for the approximately 100 days over which the said film was exhibited during the relevant previous year (22.12.2000 to 31.03.2001) was only at Rs. 20.88 lakhs. The assessee had apart from acquiring the exhibition rights also incurred publicity expenditure. The total expenditure, at Rs. 123.24 lakhs, on the set off against such receipt, led to the claimed loss of Rs. 102.36 lakhs. The assessee had also earned Rs. 166.44 lakhs on the sale of non-theatrical rights, i.e., TV, video, cable, internet, etc. of a Hindi film 'Baadal' produced by him, vide an agreement dated 03.04.2000 (for a consideration of Rs. 160 lakhs), which stood received by him up to June, 2000. The assessee was, thus, only well aware of his profits from that film and the concomitant tax liability. The Assessing Officer (AO), therefore, inferred that the assessee had, by design, interposed himself between his two other related concerns, APPL and AG, i.e., by the purchase of distribution rights (for the eastern circuit) on MG basis from the former, and then entering into a sub-distribution agreement with the latter on a commission basis of 15% of the net realization. This according to him was done to set off the loss against the confirmed profit from the production business (Rs. 166.44 lakhs). He, therefore, restricted the claimed loss to Rs. 12.24 lakhs (i.e., the expenses other than on the cost of the distribution rights), disallowing the balance (loss of) Rs. 90.12 lakhs. This was done by him by restricting the claim of expenditure of Rs. 111 lakhs to Rs. 20.88 lakhs, i.e., the receipt during the year on the exhibition of the said film, u/s. 40A(2)(a) of the Act.

3.2 The assessee was successful in first appeal. The Revenue carried the matter to the tribunal, which, while confirming the disallowance, restricted it by treating the purchase cost at 75% of the cost of production of the film ('Har Jeet') - claimed to be at Rs. 1,07,65,654/- - as reasonable. The disallowance was, thus, restricted to 25% of the cost of acquisition, which amount, i.e., Rs. 30,25,760/- (Rs. 111 lakhs - Rs. 80.74 lakhs), was confirmed for disallowance u/s.40A(2)(a) of the Act. The present penalty proceedings are in respect of