2017 (7) TMI 909 - AT - Income Tax

Benefit of audit report before determining taxable income of the assessee - Held that - No doubt, assessee is a company wholly owned by the Govt. of Uttrakhand. Its accounts are to be audited by CA appointed by CAG of India on year to year. It appears that auditor has not been appointed for year under consideration, who could have audited accounts of assessee and, therefore, assessee filed its income-tax return on estimate basis. The assessee has loss of ₹ 15,43,175/-, as per tentative profit and loss and account. In this background, we deem it appropriate that Assessing Officer should have the benefit of audit report before determining taxable income of the assessee.

Summary

Issues Involved:
1. Deletion of additions due to variation in Gross Profit (GP) across different units.
2. Deletion of addition due to undervaluation of stock.
3. Deletion of addition due to interest earned on earmarked funds.
4. Deletion of addition due to expenses debited to interest received account.
5. Deletion of addition due to disallowance under section 14A.
6. Deletion of addition due to delay in payment of employees' contribution under section 36(1)(va).
7. Deletion of addition due to disallowance under section 32 (depreciation).
8. Deletion of addition due to expenses under construction division.
9. Assessee's appeal on various grounds including GP variation, disallowance of expenses under section 40A(3), statutory liability of Group Gratuity, interest paid to government, and treatment of security deposit as income.

Detailed Analysis:

1. Deletion of Additions due to Variation in Gross Profit (GP):
The revenue contested the deletion of additions made on account of GP variations in multiple units (FL2 unit, Tourism division, Parvat Plastic, and Parvat Wires). The contention was based on the company's failure to maintain proper books of accounts and the special auditor's inability to express an opinion on the true and fairness of the profit. The Tribunal noted that the Assessing Officer should have the benefit of the audit report before determining the taxable income of the assessee. Therefore, the grounds raised by the revenue were allowed for statistical purposes.

2. Deletion of Addition due to Undervaluation of Stock:
The revenue challenged the deletion of addition made due to undervaluation of stock in the RTF Champawat Unit, citing the company's failure to produce supporting documents for stock valuation. The Tribunal emphasized the necessity of audited accounts to determine the true income and allowed the grounds for statistical purposes.

3. Deletion of Addition due to Interest Earned on Earmarked Funds:
The revenue argued that the interest earned on earmarked funds should be treated as income from other sources, given the corporation's financial disarray and absence of a balance sheet to prove the interest as a liability. The Tribunal upheld the CIT(A)'s deletion of the addition, noting the need for audited accounts to ascertain the true income.

4. Deletion of Addition due to Expenses Debited to Interest Received Account:
The revenue contested the deletion of the addition made due to expenses debited to the interest received account, based on the special auditor's observations. The Tribunal upheld the CIT(A)'s decision, allowing the grounds for statistical purposes.

5. Deletion of Addition due to Disallowance under Section 14A:
The revenue challenged the deletion of the addition made under section 14A, which was calculated exclusively for income not forming part of the total income under the Act. The Tribunal upheld the CIT(A)'s decision, allowing the grounds for statistical purposes.

6. Deletion of Addition due to Delay in Payment of Employees' Contribution under Section 36(1)(va):
The revenue argued against the deletion of the addition made due to delayed payment of employees' contribution. The Tribunal noted that the CIT(A) had relied on precedents and upheld the deletion, dismissing the grounds raised by the revenue.

7. Deletion of Addition due to Disallowance under Section 32 (Depreciation):
The revenue contested the deletion of the addition made due to unexplained depreciation claims. The Tribunal observed that the CIT(A) had directed the Assessing Officer to consider the detailed working of depreciation provided by the assessee and allow it as per law. The Tribunal upheld the CIT(A)'s decision, dismissing the grounds raised by the revenue.

8. Deletion of Addition due to Expenses under Construction Division:
The revenue challenged the deletion of the addition made due to expenses under the construction division. The Tribunal noted that the CIT(A) had followed his predecessor's decision and upheld the deletion, dismissing the grounds raised by the revenue.

9. Assessee's Appeal on Various Grounds:
The assessee appealed against several additions sustained by the CIT(A), including GP variation, disallowance of expenses under section 40A(3), statutory liability of Group Gratuity, interest paid to government, and treatment of security deposit as income. The Tribunal emphasized the need for the Assessing Officer to have the benefit of the audit report before determining the taxable income. Accordingly, the grounds raised by the assessee were allowed for statistical purposes.

Conclusion:
The Tribunal decided to allow the grounds raised by both the revenue and the assessee for statistical purposes, emphasizing the necessity of audited accounts to determine the true income. The appeals were decided ex parte due to the prolonged pendency and non-appearance of the assessee. The Tribunal upheld the decisions of the CIT(A) where appropriate and directed the Assessing Officer to consider the audit report before finalizing the taxable income.