Very Important Judgement dated 21/06/2018 of Calcutta High Court for AUDITORS

Bogus Balance Sheet prepared to avail Bank Loan can be a basis for Addition, Calcutta HC asks to proceed against CA Firm for Inflating Value of Assets to avail bank loan

“The matter is typical of how business is conducted in this country and why loans obtained from banks remain unpaid.” The Calcutta High Court held that the addition to income can be made on the basis of balance sheet and profit & loss accounts certified to have been prepared on estimate basis to avail bank loan and having no relation with the actual. While upholding the addition, Justices Sanjib Banerjee and Abhijit Gangopadhyay have asked to proceed against the Chartered Accountant firm for inflating the value of assets of the assessee to avail the credit facilities from the bank.

Coming to the facts of the case, the assessee, with an object to avail credit facilities from the bank, submitted a balance-sheet prepared by a firm of chartered accountants by the name of Roy Ghosh and Associates. The balance-sheet indicated figures which may not have been commensurate with what was reflected in the books of accounts of the assessee. Nonetheless, a certificate was issued by the Chartered Accountants in Form 3CB under Rule 6G(1)(b) of the Income Tax Rules, 1962. The income tax department, while completing assessment proceedings, relied on these figures to determine the income of the assessee. On the second appeal, the Tribunal upheld the said addition. Before the High Court, the assessee contended that under Rule 6G(2) of the Income Tax Rules, 1962, the particulars which are required to be furnished under Section 44AB of the Income Tax Act, 1961 are to be in Form No. 3CD. According to them, the certificate issued by the Chartered Accountant Firm was not in Form No.3CD and the Tribunal fell into error in making observations as to the veracity of the particulars under Section 44AB as contained in the quoted passage. It was further contended that it is usual practice for a balance-sheet and profit and loss accounts to be prepared on the basis of estimates for the presentation thereof to a bank at a time prior to when the assessee is statutorily required to complete the assessee’s annual accounts.

Overruling the contentions of the assessee, the bench observed that “The substance of the appellant’s submission is that to suit a person’s purposes before one authority or the other, different pictures as to the financial position of such person or any entity under the control of such person may be presented. This is a question larger than any legal issue under the Income Tax Act and is a matter of public policy. 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.” “The balance-sheet and profit and loss accounts of an assessee accompanied by a certificate as to its fairness, notwithstanding the caveat as noticed in paragraph 2(A) 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 bench said. It was also held that when the assessee presented the financial position of the assessee as in the balance-sheet of July 18, 2005, the assessee could no longer resile from such position. “It was then open to the Assessing Officer and the income tax authorities to pin the assessee down on the basis of the assessee’s representation contained in the earlier balance-sheet and the reasoning indicated in the quoted paragraph 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 for having apparently abetted in the commission of a colossal act of misrepresentation which the appellant-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 bench added.