DCIT Vs T. S. Kumarasamy (ITAT Chennai)
ITAT Chennai held that rejection of special audit report of the special auditor appointed in terms of section 142(2A) of the Income Tax Act on flimsy grounds without any finding as to how observation of the special auditor is incorrect.
Facts- The assessee Mr. T.S. Kumarasamy, Prop: M/s Christy Fried Gram Industry (CFI) is engaged in the business of production and supply of weaning food/nutrient supplements to government schemes and mainly to ICDS program of Government of India and Civil Supplies Department of Government of Tamil Nadu, besides, supplying edible oil, dal, rice, eggs to the Midday meal Scheme of the Government of Tamil Nadu.
During the course of assessment proceedings, the Assessing Officer, considering the voluminous data found during the course of search and complexity involved in the accounts of the assessee, directed the assessee to get his accounts audited as required u/s. 142(2A) of the Act.
The special auditor appointed in terms of section 142(2A) of the Act, has submitted their audit report for all assessment years vide their audit report dated 0312-2020. A further reference was made to special auditor to look into voluminous data found during the course of search including Erandam Thall. The special auditor vide their audit report dated 15-04-2021 has submitted supplementary audit report and commented upon the correctness and authenticity of documents found during the course of search and has also verified entries recorded in Erandam Thall and quantified unidentified entries.
AO rejected Special audit report submitted by the auditor and completed the assessment on the basis of various incriminating documents found during the course of search coupled with statements recorded form the assessee and his employees and made various additions.
On appeal, the CIT(A) accepted the special audit report and financial statement prepared for relevant assessment year on the ground that the financial statements prepared by the special auditor and reports submitted on correctness of financial statement by the special auditor was based on systematic and scientific method followed for preparation of financial statements and further, the assumptions employed by the special auditor were in accordance with Auditing Standards issued by the Institute of Chartered Accountants of India.
Being aggrieved by the CIT(A), the revenue is in appeal before the tribunal.
Conclusion- Held that the special auditor has sought necessary confirmations from various persons with whom the appellant had transactions of purchases, sales, expenses etc., in accordance with the Standards on Auditing (SA)-505 prescribed by the Institute of Chartered Accountants of India (ICAI). Such confirmations were sought in the normal course of the auditing process in accordance with auditing standards, as the terms of reference of the special audit included preparation of audit report in form 3CD and notes to accounts apart from preparation of final accounts.
Held that the said reason cited by the AO for rejection of the report of the special auditor is not based on proper appreciation of the auditing process. In any case, the confirmations obtained by the special auditor and the conclusions drawn by him based on the same with regard to the transactions recorded in the books of accounts, do not place any restriction on the powers of the AO to make enquiries and gather any adverse evidences in respect of the said transactions for drawing different conclusions. However, the AO has not conducted a single enquiry with the suppliers of the alleged bogus purchases or the buyers of the alleged bogus sales and has merely sought to rely on the statements of the employees recorded during the search. Having not exercised his powers to make such enquiries, it is not correct on the part of the AO to discredit the report of the special auditor on the ground that he has made independent enquiries beyond the mandate of the special audit.
In this case, if we go through the reasons given by the Assessing Officer to reject special audit report for all assessment years, we find that the Assessing Officer has rejected said audit report on flimsy grounds without any finding as to how observation of the special auditor is incorrect.
