TaxTMI 
TaxTMI 
2012 (10) TMI 855
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.... construction, was selected for scrutiny with the service of a notice u/s 143(2) of the Income-tax Act, 1961 (hereinafter referred to as the Act) issued on 25.06.2008. During the course of assessment proceedings, the Assessing Officer (A.O. in short), noticed that the assessee was awarded a contract by the National Thermal Power Corporation Ltd. (NTPC in short), for civil works for dam, spillway and power intake package in respect of Koldam Hydro-Electric Power Project in the State of Himachal Pradesh with the letter of acceptance dated 12.12.2003. . In addition, the assessee was also awarded contract by National Highway Authority of India on 20.04.2006 for civil works for widening and strengthening of National Highway from 2-lane to 4-lane on the Assam Border in West Bengal. On perusal of the auditor's report dated 27th October, 2007, the AO noticed a number of observations regarding books of account and financial statement of the assessee in respect of NTPC, Koldam project:. The relevant observations/submissions of the assessee and comments of the AO extracted from assessment order are as under:- "(i) Observation (Para b) The account balances with respect to the Koldam Proj....
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....ategorically mentioned as opening balance as on 1 April 2008. In regard to receivable from ITD-ITD Cementation JV (Rs.24,63,855/-), we would like to submit that the aforementioned balance was carried forward as opening balance on 01 April 2008. Your good-self may observe that the balance as on 31 March 2009 was confirmed by ITD-ITD Cementation JV vide their letter dated 17 April 2009. Copy of the confirmation as well as the ledger copy is attached as 'Annexure .6' to this letter. Comments: The auditors' have stated that several advances and balances have not been confirmed and reconciled and have stated that the impact of such non-reconciliation is not ascertainable. The assessee's explanation is not tenable as discussed below: a. Employee Advances (Rs.4,249,983)- The assessee has submitted a copy of Board Resolution dated 28.12.2008 with respect to write off of two amounts i.e imprest paid to Late Mr. Diti Hengchaovanich (Rs.30,55,874/-) and imprest paid to Methanee Sangmas (Rs.5,43,909j-). The reasons for writing off the advances in the resolution is given as- 'That due to untimely demise of Late Mr. Diti Hengchaovanich, it has become extremely complicated for t....
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....fore only relate to the balances as on 31.3.2009 which are part of the body of the letters itself. These confirmations have no relevance for the proceedings of the current financial year. (ii) Observation (Para c) The project office at Koldam has not recorded any accrual for reimbursement of expenses claimed by ITD Cementation India Ltd. aggregating to Rs.46,90,019/-. Submission The auditors have observed the ITD Cementation India Ltd. has put forward it's claims for different expenses. It is pertinent to mention here that such expenses could be recorded only when the company recognizes its liability towards those subcontractors/vendors against such expenses. Comments: The assessee's explanation is not tenable as it is not clear whether the principle of recognition of liability was correctly followed in terms of relevant accounting standard followed by the company. The nature of expenses and why these were not recognized as a liability specially when the auditors seem to believe that they should have been recognized is also not clear. The accounts in this regard cannot be said to be reliable. (iii) Observation (Para d) As at March 31, 2007 the project office....
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....ets are recognized only upon the completion of capital work-in-progress and settlement of capital advances. Hence the same has no implication on depreciation and profitability of the project. Comments: The auditors have clearly stated that there is no reconciliation of capital advances and capital work-in-progress aggregating to Rs.6,34,46,836/- and Rs.46,73,243/- respectively with respect to the Koldam Project. They have also stated that they are unable to comment on the appropriateness of deprecation aggregating to Rs.17,54,03,721/-. As per normal practices, the comments made by thethe auditors are discussed with the management and the management is given an opportunity to rebut the observations before the audit report is finalized. The fact that the auditors have incorporated these comments in their report clearly indicates that they were not satisfied with the explanation of the management and have cast a doubt on key items of financial statements such as depreciation. (v) Observation (Para f) We have not been provided adequate and satisfactory documentation to support expenses aggregating to Rs.3,20,656/- as recognized in the Profit and Loss Account. Submissi....
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....onal transaction entered with the associated enterprise. The same was examined by the Transfer Pricing Officer ('TPO') while passing the TP Order. It is pertinent to mention here that the TPO has not found any inconformity of the above transaction. Comments: The examination of the TPO is with regard to value of transaction and not with regard to the balance of fixed assets and payables and its resultant effect on the financials of the assessee'. (viii) Observation (Para J) The project office at Koldam maintains records of inventories which are not updated on a regular basis. In the absence of a proper reconciliation of the stock records, we are unable to comment if the closing stock of inventories at Koldam aggregating to Rs.8,82,39,243/-is properly stated. Submission The auditors have pointed out that project office has not maintained the records of inventory on regular basis. The auditors have certified the purchase of raw material and components and stores and spares for the project during the year. It is once again submitted that the assessee company has recognized the revenue duly certified by the auditors in proportion to the stock charged off to the account....
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....nventories and fixed assets are inadequate and requires strengthening and there has been continued failure to completely correct weaknesses in such controls. Submission Auditor's observation in this regard is towards the weakness in the internal control systems of the company and the accounting of inventories and fixed assets. It is pertinent to mention here that the auditors have not doubted the authenticity of the purchase made during the year. They have only commented on the requirement to strengthen the internal control of the company. The said observation is made only in compliance with the specific requirement of CARO to comment on the internal control system towards the inventory and fixed assets. The same would not affect the authenticity of the accounts or of the purchases so made. The auditors have commented on the non-availability of reconciliations/confirmations from the subcontractors, vendors, suppliers, as the case may be 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 th....
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....ejected the book results, having recourse to provisions of section 145(3) of the Act and proceeded to complete the assessment in the manner provided in the sec. 144 of the Act. Accordingly, the AO determined income @10% of the total receipts from NTPC, Koldam project and completed the assessment. 3. On appeal, the assessee relied upon a number of decisions in Brij Mohan Bansal Vs. Income-tax Officer (2009) 311 ITR 317 (P&H); Sriram and Co. Vs. ACIT, 316 ITR 139 (Raj.); Awadhesh Pratap Singh Abdul Rehman and Brothers Vs. CIT, 210 ITR 406 (All); S.N. Namasivayam Chettiar Vs. CIT (1960) 38 ITR 579 (SC); & Kachwala Gems Vs. CIT, (2007) 158 ITR 71 (SC) besides Pandit Bros. vs. CIT, 26 ITR 159 (Punjab);CITvs. Paradise Holidays,195 Taxman 291(Del.); Ashoke Refractories (P) Ltd. vs. CIT,279 ITr 457(Cal.);CIT vs. Vijay Construction, (All.); Dhakeshwari Cotton Mills Ltd. vs. CIT,26 ITR 775(SC);S.VeeriahReddiar vs. CIT, 38 ITR 152 while reiterating their submissions before the AO.The assessee also pleaded that they maintained their books of accounts as per Accounting Standard-7 and proper records of purchases and expenses were kept. Since all the details requisitioned by the AO were submit....
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....ooks of accounts in respect of Koldam Project as per provisions of section 145(3) and assessment is being completed in the manner provided in section 144 of the Act." 6.2 I have gone through the audit report and various observations made by the auditors. These observations are essentially similar to those made in audit report for A Y 2006-07. In Form No. 3CD, in point no. 8(b), it has been mentioned that there is no change in the nature of business or profession as undertaken in the immediately preceding year. Against point no. 11(b), it has been mentioned that there is no change in the method of accounting employed vis-a-vis method of accounting employed in the immediately preceding previous year. Against point no. 11 (d), it has been mentioned 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. Therefore, I from observations made by the AO and from audit report, it is apparent that the material facts in the year consideration are the same as those in the A Y 2006-07. 6.3 The appellant had explained how the auditor's observations do not affect the taxable income of the appellan....
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....ht of reply furnished by the assessee. To a query by the Bench, the ld. DR did not reply as to how the observations of the auditors affect the profitability of the assessee in the year under consideration. On the other hand, the ld. AR on behalf of the assessee argued that observations of the auditors did not have effect on the correctness, accuracy or completeness of the accounts. The auditors nowhere mentioned that the assessee did not properly maintain the books of account. While reiterating their submissions before the ld. CIT(A), the ld. AR supported the findings in the impugned order, similar addition having been deleted in the preceding assessment year by the ld. CIT(A)and his order having been upheld by the ITAT. 5. We have heard both the parties and gone through the facts of the case. The provisions of sec. 145(3) of the Act, invoked by the AO, lay down that if the AO is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the AO may make an assessment in the manner prov....
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....nd pleadings, and he is entitled to act on material which are not acceptable in evidence in a court of law, but while making the assessment under the principles of best judgment, the Income-tax Officer is not entitled to make a pure guess without reference to any evidence or material. There must be something more than a mere suspicion to support the assessment. The Hon'ble Gujarat High Court in the case of CIT Vs. Amitbhai Gunwantbhai, 129 ITR 573 held that 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. In the instant case, even in the preceding year ,book results were rejected on the basis of similar observations of the auditors & estimated addition was made. However on appeal, a co-ordinate Bench found that none of the remarks had any bearing on the correctness of the books of account and, therefore, remarks could not form the basis for rejection of books of account. In past also, the books were maintained ....