ORDER
Gowri Shankar, Member (T)
1. By order passed on 22-4-2002, the Tribunal ordered deposit of a sum of Rs. 85 lakhs by Baron International Ltd. (BIL) towards duty demanded from it of Rs. 2.19 crores approx and a penalty imposed on it of Rs. 1 crore and Rs. 65 lakhs by J.R. Consumer Electronics Pvt. Ltd. (JRCE) towards the duty demanded of Rs. 2.86 crores and a penalty of Rs. 1.5 crores.
2. The Tribunal did not find a prima facie case for these applicants on merits. The Tribunal passed its order, after considering the merits of the issue and claim of financial hardship that were made by both these applicants. It noted that the balance-sheet of BIL for the year ended 2001, while showing post tax loss for the year of around Rs. 7 crores, showed reserves of Rs. 101 crores, the net current assets stated to be Rs. 87 crores. It noted that the auditor had certified that it was not a BIFR company. The balance sheet of JRCE showed a profit of around Rs. 20.23 lakhs for the year ended 31-3-2001. It was seen to have cash and bank balances totalling Rs. 10.69 lakhs and it earned interest on fixed deposit Rs. 40 lakhs. Its fixed deposit with the Overseas Body Corporates (OBC) was stated to be around Rs. 81 lakhs.
3. These applications now seek modifications of the Tribunal’s order on the ground of financial hardships.
4. We shall first consider the case of JRCE. The applicant contends that “The facts of the matter however is that the applicant company presently has no business or income of any kind whatsoever” and says The certificate issued by the Chartered Accountants M/s. Nidhi & Associates to show the actual financial position of the company”.
5. When this certificate was first produced, we had asked the advocate for the applicant to furnish an affidavit by the chartered accountants in support of the claim. This, the counsel refused to furnish saying that what he was tendering was an opinion of a professional and that the affidavit was not required. However, affidavit filed by Zaffar Rizvi, a director of this applicant says that “he confirms, reiterates and repeats all the statements of the submissions made in this application which he craves leave to refer to and rely upon without prejudice and that what is stated in the miscellaneous application is true to the best of his knowledge and belief”. We have taken due note of the refusal by the chartered accountant to furnish an affidavit.
6. As we have noted, the application by JRCE does not question the finding of fact as to its financial states based on the documents, which were produced. There is, for example, no allegation that the Tribunal read the figures wrongly or that the state of affairs as reflected in the balance sheet was not correctly understood. The basis for the modification is that the current position of the company is not what the Tribunal found it to be. Thus, in effect, what is contended is that the balance sheet does not reflect the current position.
The photocopy of the balance sheet of JRCE as on 31-3-2002 produced before us does not indicate the date on which it was signed by the director. The balance sheet was audited by Bharat Parikh & Associates, Vadodara and was certified on 11-4-2002 by Bharat Parikh, its partner. The certificate now relied upon is issued not by Bharat Parikh & Associates, Chartered Accountants, Vadodara but by Nidhi & Associates, Chartered Accountants, New Delhi.
7. The Tribunal, in its order, had noted the profit made by this company of Rs. 20 lakhs. The positive balance in the profit and loss account is of Rs. 20.24 lakhs approx. The contention that the company made these losses is bewildering. The figure is not shown in either in bracket or with a (-) sign before it, which is the normal method of indicating losses. This contention is therefore entirely unacceptable.
8. Apart from this, the contention that “the inventories reflected in the balance sheet are as carried cost and do not reflect the current realisable value” is totally unacceptable. The Accounting Standard issued by the Institute of Chartered Accountants of India which is binding in matters relating to valuation of inventory in Schedule A prescribed that inventories are required to be valued either at carried cost or the realisable value whichever is lower. The balance sheet indicates that the inventories have been valued and certified by the management, and that the raw materials are at cost and net realisable value whichever is lower. The contention in the current certificate given therefore is entirely baseless. It is clear that the valuation of inventories is shown in the balance sheet was not in fact done by the auditor but by the applicant and that such valuation has been the lower of the carried cost or net realisable value. The statement now made by the applicant flies in the fast of it the declaration made in a document prescribed by law. There is not even a word of explanation as to the contradiction. We therefore do not see why we should prefer the statement of this chartered accountant who has not even audited the books of account of the applicant and does not indicate any basis over the statement of an auditor who has carried out the audit as required by law.
9. The further statement that, “The sum reflected in cash and bank balances are subject to pending bank reconciliation” is again totally unacceptable. If this were the case, the balance sheet would have carried a statement rider that the bank balances were subject to reconciliation with the bank. The report of Bharat Parikh & Associates does not contain any such qualification. This statement also therefore is not acceptable. The contention that the “sum reflected under claims receivable on account of insurance claim is doubtful as the same is outstanding for several years” again is unacceptable. There is in fact no such entry in the balance sheet. Schedule E, which contains an entry with regard to “claim receivable” does not say on whose account it is. The contention that fixed deposit with “OBC” (which the Tribunal interpreted as Overseas Body Corporates) are stated to be “on account of margin money given to the bank for issue of a bank guarantee in an excise matter, which is subjudice. The same is not available with the company for utilisation for any other purpose. “If this is the case, it is in the nature of contingent liability. It is contingent upon the bank guarantee being enforced or not”. This therefore would have been shown in a footnote to the balance sheet. This has not been done. There is, as we have noted, not the slightest explanation as to the basis on which Nidhi & Associates has made these various statements.
10. In our estimation, thus the so-called certificate by Nidhi & Associates is nothing other than a desperate attempt to show the applicant’s finances in a poor light. It is to be noted that the certificate is dated 26-6-2002 roughly 2 1/2 months after the balance sheet was audited. The unexplained wide deviation between the balance sheet and the certificate, the glaring contradiction which is not even sought to be explained did not impel us to place any credence upon this certificate and it is difficult to resist the conclusion that it has been furnished at the instance of the applicant. We therefore dismiss this application.
11. We now turn to the case of the other applicant. Here again the emphasis in the application is upon the fact that the actual financial position of the applicant as shown in the certificate of the chartered accountant is very different from what is reflected in the balance sheet. The certificate which is relied upon is issued by M.V. Damania & Co., Chartered Accountant, Mumbai and is dated 25-6-2002. This is the same auditor who audited the balance sheet as on 30-6-2001 and certified it as required by law on 16-4-2002. The interval between the certification of the balance sheet and the auditor’s certificate is a little over two months. In this case too, it is not possible to accept most of the statements that have been made in support of the contention. It is stated that out of the sums due to the applicant of Rs. 21.45 crores, a substantial amount is unrealizable because of the applicant’s, inability to provide sale support and service to its dealers because the contract for marketing the applicant’s product is in dispute in an arbitration court in London. Now, the balance sheet does not contain any such indication. On the contrary, after making provision for doubtful debts, schedule 8 shows that unsecured loan considered good to be at of order of Rs. 5.10 crores. The basis for the auditor’s conclusion, the arbitration proceedings was known even at the time of the finalisation of the balance sheet; it is referred to in the notes forming part of the balance sheet as on 30-6-2001. There is nothing in the report to indicate that the debts, which were otherwise considered good, became bad between the date on which the auditor certified the accounts and the date on which he issued the certificate. As we have noted, no affidavit showing as the date on which the auditor acquired this knowledge had been produced. The counsel for the applicant declined to file such an affidavit. The affidavit filed by Shakun J. Mulchandani, its director stated that whatsoever stated in the certificate of the accountant is correct. Thus the accountant attributes reasons to the applicant who in turn reflects it back to the accountant. We need hardly furnish any reason as to the unacceptability of the claim based on such assertions. This also holds true with regard to stock and inventories. These were shown in the balance sheet to be Rs. 12.46 crores approx. There is a claim that substantial amount has been realised subsequent to 30-6-2001 to repay the creditors and other current liabilities outstanding is not again unacceptable. The balance sheet shows, it is to be the position noted, as 30-6-2001 and the auditors certificate is issued in April, 2002. We must refer in this connection to the Accounting Standard AS 4 issued by the Institute of Chartered Accountants of India relating to the contingencies and events occurring after the balance sheet date. These standards are binding on all chartered accountants. Paragraph 15 of the Standards provides that “disclosures should be made in the report of the approving authority of those events occurring after the balance sheet date that represents material changes and commitments affecting the financial position of the enterprise”. The stock and inventory is certainly an event that represents the material changes affecting the financial position. The report of the auditor therefore should have indicated this if there were a material change. As we have noted, there is no material to show that the value of stock and inventories changed after the date of approval of the balance sheet. This claim is therefore unacceptable. Again the claim that the stocks and debts are hypothecated to the bank against cash credit and therefore any balance has to be appropriated by the bank is unsupported by any evidence. It also does not find mention in the auditor’s report.
12. The balance sheet shows cash and bank balance of Rs. 11690787/-. This presumably was the position as on 16-4-2002. If it were not so, the auditor’s report, it would no doubt have mentioned that this cash and bank balance were not available. The fact that there is no such qualification and that the auditor had certified that the cash and bank balance shows that they were actually present as on that date. If that is so, evidence is required to show that they were reduced after 16-4-2002 and before 30-6-2002. This has not been produced. Similarly, the claim that loan of Rs. 50.82 crores out of the total loan and advances of Rs. 11.58 crores is to a subsidiary company Baron Electronics Pvt. Ltd. which is not recoverable. The certificate shows ”we are being informed that the said sum is not recoverable as Viacom Electronics Pvt. Ltd. has incurred huge losses”. Not a single scrap of material is produced in support of this contention.
13. It is clear from this report that this is also nothing but an attempt to blacken otherwise the rosy picture that is given in the balance sheet. As we have said with regard to JRCE, it is obviously preferable to go by the report of an auditor furnished in accordance with the requirement of the Companies Act and not in accordance with some vague statement made thereafter which the auditor is reluctant to put on oath which is in any case entirely unsubstantiated in material evidence, and containing significant contradictions to the balance sheet. We therefore find ourselves unable to accept the application for modification.
14. If the amounts in question are not deposited within 15 days from the receipt of this order, and compliance reported on 18-10-2002, the appeals will be dismissed in terms of Section 129E of the Act.
15. We have noted earlier in our order what appears, to us to be statements made by the chartered accountant which are not consistent with, or in complete contradiction to, to what the balance sheet states. This is more so in the case of Nidhi & Company which has held forth on various aspects of the balance sheet which is not even audited by it and makes statements which, in our opinion, contradicts the basic accounting norms. Although this is somewhat less so in Damania & Company, it still exists in substantial manner. We are of the view that these aspects, and indeed the larger question as to whether it is appropriate for a chartered accountant to venture opinion as to a particular state of affairs of a company as reflected in the balance sheet especially by making comments which contradicts the balance sheet requires examination. After all, we must keep in mind that this Tribunal, various courts and other bodies routinely rely upon statements made by chartered accountants in their professional capacity without subjecting them to further verification. The basis for such a conduct is that these are professionals whose credentials are certified by their Institution to which they belong and they are expected to act without fear or favour and present the true picture. In the case of these two matters before us, there is considerable reason to believe that this is not the case. We would therefore be failing in our duty, if we did not refer these two cases to the Institute of Chartered Accountants with expectation that this body will examine and decide whether the conduct of these accountants is in accordance with the norms prescribed by it, and if found not to be so, and take appropriate action against the chartered accountants. Registry to issue a copy of this order to this body.