BY TIOL News Service

KOLKATA, JUNE 25, 2018: THE ISSUE BEFORE THE COURT is - Whether the Revenue can make additions when any CA has prepared the balance sheet of a taxpayer by utterly bogus figures were furnished only for the purpose of availing credit facilities from the bank. YES is the answer.

Facts of the case:

The assessee, an individual, had returned income for the relevant AY. During the assessment proceeding, the AO noted that the assessee had obtained credit facilities from a bank and had a balance-sheet prepared by a firm of Chartered Accountants (CAs) namely, Roy Ghosh and Associates. The balance-sheet indicated figures which were not commensurate with what was reflected in the assessee's books of accounts. Nonetheless, a certificate was issued by the CAs in Form 3CB under Rule 6G(1)(b). The figures in the balance-sheet of July 18, 2005 prepared by Roy Ghosh and Associates were at variance with the figures indicated in the balance-sheet presented by the assessee as prepared by another firm of CAs namely, Naredi and Co. Accordingly, the AO made additions due to difference in two audited balance sheet and thereon, completed the assessment.

On appeal, the CIT(A) has deleted the addition. However, the ITAT sustained the addition made by the AO.

On appeal, the High Court held that,

++ form 3CB is relatable to Rule 6G(1)(b) that pertains to the report of audit in the case of a person who carries on any business or profession other than a person covered by Rule 6G(1)(a). It is inconceivable that a person may approach a bank by inflating the value of his assets and a few months down the line he can deflate the value of the assets, so to say, while queuing up to pay tax. There is no doubt that the certificate issued on July 18, 2005 by Roy Ghosh and Associates purported to give an impression that it was in exercise of an audit as required u/s 44AB. It was also presented in a statutory form with the fine print in paragraph 2(A) of the certificate thereunder indicating that it was only an estimate. It is scarcely expected of a banker to question the veracity of any accounts certified by a firm of CAs or to look into the fine print and comprehend therefrom that utterly bogus figures had been furnished only for the purpose of availing of the credit facilities from the bank;

++ a rosy picture as to the financial position of the applicant seeking credit facilities from a bank would be presented before the bank for the bank to assess the creditworthiness of the applicant and the desirability of extending credit facilities to such applicant; but later another balance-sheet and P&L a/c would be slipped into the file, possibly indicating a less robust financial position of the constituent. If such was the object on the exercise, to which Roy Ghosh and Associates appear to have been a willing accomplice, the assessee has been appropriately dealt with by the fora. The balance-sheet and P&L accounts of an assessee accompanied by a certificate as to its fairness, notwithstanding the caveat as noticed in paragraph 2(A) of the certificate thereof, cannot be tailor-made to suit a particular purpose or window-dressed to make it attractive for bankers to rely thereupon and all the gloss and sheen removed thereafter when it was the time to pay tax. The doctrine of pari delicto would apply and preclude the assessee herein from detracting from the figures contained in the balance-sheet and P&L a/c certified on July 18, 2005 at any subsequent stage;

++ when the assessee presented its financial position as in the balance-sheet of July 18, 2005, the assessee could no longer resile from such position. It was then open to the AO and the Revenue Authorities to pin the assessee down on the basis of the assessee's representation contained in the earlier balance-sheet and the reasoning indicated by the Appellate Tribunal does not call for any interference. Indeed, the Appellate Tribunal may only be faulted for not reporting Roy Ghosh and Associates to the Institute of Chartered Accountants of India for having apparently abetted in the commission of a colossal act of misrepresentation which the assessee undertook before his bankers for the purpose of obtaining credit facilities by indicating a financial position that was not warranted by the books of the assessee. The appeal was dismissed with costs assessed at Rs.10,000/- to be paid to the Department.

(See 2018-TIOL-1174-HC-KOL-IT)