TMI Blog2012 (10) TMI 855X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee, the assessee having provided detailed explanations against each of the observations of the auditors along with the supporting documents - as decided in CIT Vs. Amitbhai Gunwantbhai [1980 (6) TMI 10 - GUJARAT HIGH COURT] if there is no challenge to the transactions represented in the books then it is not open to Revenue to contend that what is shown by the entries is not the real state of affairs. Secondly, even if for some reason, the books are rejected it is not open to the AO to make any addition on estimate basis or on pure guess work. As there being no explanation in respect of claim of expenditure of Rs.3,20,656/- mentioned in observation (f) the amount is required to be added back. As assessee did not raise any objection if the said amount is added back. To that extent impugned order is modified and AO is directed to disallow the claim of these expenses - As regards other observations of the auditors, since there is no challenge to the transactions represented in the books in the light of these observations, then it is not open to Revenue to contend that what is shown by the entries is not the real state of affairs - partly in favour of assessee. - ITA No.2587/Del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances to vendors aggregating to RS.7,04,651/- are subject to confirmation and reconciliation. The impact of such non-reconciliation on the profit for the year is currently not ascertainable. Submission of assessee The auditors have commented on the non availability of reconciliation confirmations from the employees, head office, ITD Cementation, ITD- ITD Cementation JV and vendors at time of audit. They have not qualified the expenses incurred or have not commented on the genuineness of the expenses. These accounts are regular in nature and accordingly the payments are made or recovered as the case may be in the subsequent years. As on the date of balance sheet, no balances were in dispute. All the payments are made through banking channels. Since the genuineness of the parties as well as the expenses incurred are not doubted by the auditors, non-availability of reconciliation/ confirmation statements does not impact the reliability of the accounts. It is important to mention here that advance to employees namely Late Mr. Diti Hengchaovanich (Rs.30,55,874/-) and Methanee Sangmas (Rs.5,43,909/-) were written off because of inevitable circumstances. In this regard, the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st account of Ms. Methanee Sangmas with the company account.' The reasons for writing off the accounts of the above two employees do not conform to accounting practices generally followed by businesses. It also indicates that the imprest accounts of employees have not been properly maintained and reconciled even at the time when the employee leaves the company. It is also not clear when Mr. Diti passed away or when Ms. Methanee left the company and whether these facts were communicated to the auditors and whether any effort was made at the time of finalization of accounts to reconcile the figures of advances. b. Payables to Head Office(Rs.8,00,II,412), payables to ITD Cementation(Rs.l,79,99,801/-) receivable from ITD Cementation JV (Rs.(Rs.24,63,B55)- The assessee has filed copies of confirmation letters dated 17.4.2009 sent to these parties for their counter confirmation. These letters have been sent to the parties in connection with the financial statements of year ending 31.3.2009 i.e. more than two years after closure of books of accounts for Financial Year 2006-2007. In said confirmation letters, the assessee has specifically requested the parties for confirmatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to Rs.3,461 millio,n resulting in the contract revenue being overstated by Rs.501 minion. Submission The auditors have observed on the lower estimation of the cost of the complete project. It is pertinent to mention here that the auditors have certified the projection of the company in respect to the estimated revenue from the project as well as estimated cost related thereto in relation to other elements of cost viz. materials, equipments, tools, power, oil lubricants, spares, salaries wages, transportation, service charges, rental, interest cost other administrative cost etc. Their observation is limited to the sub-contractual expenses, which would result in increase in the total estimated loss of the project as well as loss computed for the year. Comments: The explanation of the assessee does not address the merit of the issue which is that the accounts are not reliable. Rather it seems to indicate that accuracy of accounts is important only if it affects the expense and discrepancies can be ignored if they relate to revenue. Even if this discrepancy regarding subcontractual expenses results in increase in the total estimated loss of the project yet it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same would not affect the authenticity of the accounts. Comments: Even though the quantum of expenses is not substantial, yet the fact remains that there is a discrepancy and reflects the inaccuracy of the accounts. (vi) Observation (Para g) During the year the project office at Koldam had debited a sub-contractor (MCM) for an amount aggregating to Rs.49,34,067/- in respect of deductions against RA Bills at 10%. In absence of any agreement and confirmation by the subcontractor, we are unable to comment if the amount billed is appropriate. Submission The assessee had given advance to M/s MCM Services Pvt. Ltd. MCM") is one of the major sub-contractor for execution of the work sub-contracted. It was agreed between the assessee and MCM that the assessee will recover the advance alongwith an overhead charges from the RA Bill raised by MCM. Therefore, at the assessee has deducted 10% from RA Bills of MCM and recognized the same as 'miscellaneous income' during the year. Hence, the observation of Auditors has no impact upon the computation of income. Comments: The assessee's has stated that the amount of 10% deducted has been separately shown as inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. Comments: The assessee's submissions are not tenable. The raw materials and components and stores and spares charged to the profit and loss account vide Schedule I is arrived at by reducing the purchases by the closing stock. Hence without an accurate closing stock figure, it is not possible to arrive at the correct figure for stocks consumed during the year. Further the Schedule does not show any amount as opening stock of raw material and spares. It is pertinent to mention that the company's auditors have made several adverse observations regarding the assessee's accounts for financial year 2005-2006 as well including specific observations relating to closing stock. he auditors' observations, which also have bearing on the reliability of books of accounts for the current year are reproduced at Para 4. One of the important observations of the auditors for accounts of F.Y. 2005-06 relating to inventories is extracted below: "The project office has not maintained proper records of its inventories. In the absence of proper records, raw materials and components and stores spares purchased during the year aggregating to Rs.234,317,819 have all been recognized as an ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -availability of reconciliation/ confirmation statements does not impact the reliability of the accounts. Detail of name and addresses of each vendor may be provided, if your good-self desires. Under the above circumstances, we wish to submit here that the above qualifications of the auditors are restricted to the appropriateness of the cost allocated have no impact as well as interplay with the correctness of the books of accounts. Comments: The assessee has not countered the observation of the auditors regarding weakness in the internal control systems of the company and the accounting of inventories and fixed assets and thereby admitted that its accounts are not based on sound and strong internal control systems which is essential for proper account keeping of any business. CONCLUSION: The assessee's explanations with regard to various observations of the auditor's are not acceptable as discussed above. The assessee has merely tried to minimize the impact of the observations on its profits for the year under consideration. However as discussed above, key components of computation of profits of the assessee such as depreciation, closing stock, various items of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the assessing officer in the assessment order and the material placed on record. The crux of the matter revolves around rejection of appellant's books of account u/s 145(3) by the assessing officer. In para 3 of his order, the AO has stated as under:- "During the course of scrutiny proceedings for AY 2006-07, the assessing officer found several defects in the books of a/cs of the assessee and the accounts of the assessee were rejected due to various flaws such as adverse observations of auditors on crucial components of financial statements, doubt over genuiness of purchases and inability of assessing officer to verify certain expenses. Assessment was completed in that AY by estimating the profits @ 10% of amount billed to NTPC. The issue raised by auditors in the audit report for FY 2005-06 have implication on the veracity of books of a/cs for current FYs well. The closing balances of various act on which doubt is cast form the opening balances for this year. Over/understatement of revenue and expenses of AY 2006-07 affect the income and expenditure shown in accounts of cuurent year as well." The AO has raised queries to the appellant during assessment proceedings regardi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t because of various factors/reasons. In order to recover the loss, the appellant had filed an arbitration suit against NTPC Ltd. At present, the arbitration proceeding is under process. In addition to dealing with observations of the auditors, the AO has not pointed out any other defect in the books of ales. It was also submitted by the appellant that the Hon'ble ITAT New Delhi has adjudicated this issue in favour of the appellant for the assessment year 2006-07 wherein it was held as under:- The ld counsel referred to the remarks of the auditor, These were dealt with para-wise. The case of the ld counsel is that none of the remarks has any bearing on the correctness of the books of account and, therefore, remarks cannot form the basis for rejection of books of account. In past, the books were maintained in the same manner which had been accepted (para 8.1) Before parting, we may also mention that although the auditors have made a number of notes to the accounts, the case of the ld Counsel is that none of the notes has any reflection on authenticity of books or the system of accounting. This submission has not been controverted by the ld DR in any manner. Therefore, we are of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and despite that he proceeded to invoking the principles of best judgment. The ld. CIT(A),on the other hand, observed that there is no deviation in the method of accounting employed by the assessee in the previous year from the accounting standards prescribed u/s 145 of the Act while the auditor's observations did not affect the taxable income of the assessee, the assessee having provided detailed explanations against each of the observations of the auditors along with the supporting documents. The ld. DR, in response to a specific query by the Bench ,did not explain as to how the observations of the auditors affect the profitability of the assessee in the year under consideration. The only observation ,which the assessee failed to provide justification before the auditors and even before the lower authorities is in relation to expenses of Rs.3,20,656/- mentioned in observation (f) above. Even no basis is apparent for estimating the profitability @10% nor any comparable instance has been given.. Accordingly, the ld. CIT(A) concluded that the action of the AO without pointing out any defects in the books of accounts, is totally unjustifiable and therefore, deleted the addition. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stified in rejecting the book results and add an estimated amount of claim of expenses of .However, there being no explanation in respect of claim of expenditure of Rs.3,20,656/- mentioned in observation(f) above, the amount is required to be added back.Theld. AR did not raise any objection if the said amount is added back. Accordingly, to that extent impugned order is modified and AO is directed to disallow the claim of these expenses. As regards other observations of the auditors, since there is no challenge to the transactions represented in the books in the light of these observations, then it is not open to Revenue to contend that what is shown by the entries is not the real state of affairs. In the light of aforesaid observations of the Hon ble Gujrat High Court, the view taken by a co-ordinate Bench in the preceding year on similar observations of the auditors considering the totality of facts and circumstances in the instant case, we do not find any infirmity in the findings of the ld. CIT(A) except in relation to expenses of Rs.3,20,626/-.Accordingly, ground no 1 in the appeal of the Revenue is disposed of. 6. No additional ground having been raised before us in term ..... X X X X Extracts X X X X X X X X Extracts X X X X
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