ORDER
G. Santhanam, Accountant Member
1. These appeals are by the assessee.
2. The appellant is a State Government undertaking and for the assessment years 1979-80 and 1980-81 substantial losses were returned by it in its return of income for the above assessment years. The Income-tax Officer noticed that the statutory auditors of the company had qualified their report on the final accounts and certified them to be not true and fair. Hence, he held that the books of account were unreliable and estimated the income at Rs. 15,00,000 for each of the two assessment years. On appeal, the CIT (Appeals) noticed that the adverse comments of the statutory auditors were in the region of non-certification of outstanding balances and deposits with bank, non-statement of certain contingent liabilities, non-provision for certain interests that had accrued on loans granted to the company by the Government, non-accounting of interest on due basis on hire purchase sales, misclassification of items in the profit and loss account and balance-sheet, shortages deducted during the physical verification not being provided in the account, absence of adequate system of internal control, etc. He also noticed that the appellant as a Government company was audited under the provisions of Section 619 of the Companies Act by the Comptroller and Auditor General of India and on a perusal of the accounts, the report of the statutory auditors and the observations of the directors on such report, the Accountant General of Kerala had concluded that the net loss for the year ended 31-3-1979 was understated by Rs. 6,19,526 and for the next year by Rs. 3,71,919. The CIT (Appeals) further noticed that part of the records which were stored in Ernakulam where the registered office of the appellant company was once situated was lost due to floods and as result it could not produce the records before the statutory auditors or before the Income-tax Officer. In the circumstances, the CIT (Appeals) felt that the estimate of income at Rs. 15,00,000 for each of the assessment years was rather high as it totally ignored the losses reported in the accounts. As a result, he held that the results of both the assessment years should be treated as resulting in no profit or no loss. In this view of the matter, he deleted the addition of Rs. 15,00,000 for each of the assessment years and allowed the appeals of the assessec in part. The assessee is not satisfied with the relief obtained by it in the hands of the first appellate authority.
3. Sri Pankaj C. Govind, the learned Chartered Accountant submitted that the assessee was called upon to undertake enormous responsibilities by the Government without providing even the minimal infra-structure for it to discharge the multi-farious activities. Its accounts were handled by trainees. The undertaking had multi-faced activities in a sprawling area spread over the length and breadth of the State of Kerala. Part of its records was lost in the floods. Therefore it was unable to satisfy the statutory auditors on their queries because of loss of records. Similar situation was faced by the appellant in the assessment proceedings also. The CIT (Appeals) had recognised the difficulties of the assessee, but then he had determined the income of the assessee at ‘nil’ overlooking the losses sustained by it in each of these years. He submitted that at least depreciation and investment allowance must be allowed.
4. Sri C. Abraham, the learned senior departmental representative took us through the reports of the statutory auditors and submitted that no interference is called for.
5. Having regard to rival submissions and perused the records we see no reason to interfere with the order of the learned CIT (Appeals). That the accounts of the assessee are not reliable is evident from the adverse remarks passed by the statutory auditors which have been summarised by the CIT (Appeals) in his order. May be the assessee was not in a position to convince the statutory auditors either because part of the records was lost or because the records were not traceable. It is rather shocking to notice that a Government undertaking entrusted with enormous funds of the public had kept its account’s in a deplorable condition as to warrant scathing criticism from the statutory auditors. Be it that may, Sri Pankaj C. Govind pleaded for leniency bearing in mind that the appellant is a Government concern. In our considered opinion in cases where public funds are involved there can be no appeal to sentiments, more so, in judicial forums. There is no place for argumentum ad verecundiam. The law has to take its own course.
6. For the assessment year 1979-80, the computation of income has resulted in a deficit of Rs. 3,87,776. (The assessee has furnished a copy of the same). In arriving at this deficit, the assessee had claimed depreciation as per rules to the extent of Rs. 6,74,393, gratuity in a sum of Rs. 17,352, amortisation of preliminary expenses in a sumof Rs. 11,666 and 100 per cent depreciation on tools in a sum of Rs. 2,40,896. The CIT (Appeals) had not disallowed any of these claims made by the assessee. What he had done was only to reduce the deficit of Rs. 3,87,776 to nil. That would mean that the book loss of Rs. 5,16,672 as per accounts was reduced by an amount of Rs. 3,87,776 in view of the several defects noticed in the accounts. In our opinion this is only a modest disallowance. Revenue is not on appeal and we have no power of enhancement. Therefore, we do not find any substance in the appeal of the assessee for the assessment year 1979-80. The same is dismissed.
7. For the assessment year 1980-81, the assessee had difled the computation of its income starting with a loss of Rs. 29,80,850 and resulting in a loss for the year in a sum of Rs. 29,90,252. This was reduced to nil by the CIT (Appeals). In arriving at the loss in the computation sheet, the assessee had claimed depreciation in a sum of Rs. 12,93,647, gratuity in a sum of Rs. 22,590 amortisation of preliminary expenses in a sum of Rs. 11,666 and 100 per cent depreciation on tools and drawings in a sum of Rs. 2,40,144. Thus the total claim against these heads came to Rs. 15,68,056. After making adjustments for these, the computation resulted in a loss of Rs. 29,90,252 which was reduced to nil. By such process an addition of Rs. 29,90,252 has in effect been made. Is this addition justified ? On going through the report of the statutory auditors we notice that there are several adverse comments affecting the revenue accounts which make painful reading. By way of illustration we would like to deal with one such comment found at page 23 of the published accounts for 1979-80 (4th annual report). That deals with raw materials division at Ernakulam. One such item, therein is sales. We reproduce below the comments of the statutory auditors and the reply of the Board of Directors thereto:
(a) Sales of cement amounting to (a and b) All the sales in the Raw Rs. 50,31,760.40 effected material section have been properly during the year, incidental accounted. Sales effected on agency charges collected Rs. 33,12,10 basis of IPCL products was also and goods in transit amounting registered in the sales register sepa- t.o Rs. 19,61,629.20 were rately. Agency sales amounting to accounted for in the books for Rs. 33,75,642.35 was separated the year only in July 1985. The from sale account during the year. above omissions were forced to Detailed quantltywlse and value of be found out by the Corporation commission sales statement had only on our pointing out that been furnished to the auditors. the profit and loss account of the Cement section prepared by itoriginally disclosed an incredible gross loss of Rs. 54.84 lakhs on a sale turnover of Rs. 12.74 crores. Further in view of the fact that monthly and quarterly quantitative and value statements regarding cement and raw materials, were not evailable, it was not possible to ascertain whether there are any other omissions. The closing stock quantities and valuation are not verifiable in the absence of proper records. The veracity of these accounts cannot be vouched and calls for a proper investigation.
Sri Pankaj C. Govind, the learned Chartered Accountant except submitting that the company had properly accounted for the sales on receipt basis and that there were no omissions on that account did not furnish any material to the effect that the adverse remarks of the statutory auditors were either unsupported or biased or otherwise incorrect. This one instance of sale of Rs. 50,31,760 made during the year ending 31-3-1980 but accounted for in the books only in 1985 would be enough to justify the addition of Rs. 29,90,252 or, in other words, to sustain the order of the CIT (Appeals) in the determination of the income at ‘nil’. We, therefore, decline to interfere.
8. In the result, the appeals are dismissed.