THE DCIT, CIRCLE-1(1),, VADODARA vs. GUJARAT STATE ELECTRICITY CORPORATION LTD., VADODARA

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ITA 1254/AHD/2012Status: DisposedITAT Ahmedabad29 June 2026AY 2003-0410 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the deletion of additions related to repair and maintenance, water charges, gratuity, leave encashment, and capital expenditure was not correct due to discrepancies in verification and debit notes. However, the estimated addition for non-maintenance of inventory records was not sustainable as it was not quantified and was tax-neutral in the long run.

What were the facts?

The Revenue appealed against the CIT(A)'s order concerning the assessment year 2003-04. The assessee, Gujarat State Electricity Corporation Ltd., had its case reopened based on discrepancies pointed out by the statutory auditor. The AO made additions based on these comments, which were partly deleted by the CIT(A).

What were the issues?

Whether the deletion of additions made by the AO based on the statutory auditor's adverse comments regarding expenses and inventory records was justified.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 147,Section 148

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD

Before: MS SUCHITRA KAMBLE & SHRI NARENDRA PRASAD SINHA

For Appellant: Shri M K Patel, Advocate
For Respondent: Shri Sher Singh, CIT-DR
Hearing: 12.05.2026Pronounced: 29.06.2026

PER NARENDRA PRASAD SINHA, ACCOUNTANT MEMBER:

This appeal is filed by the Revenue against the order of Commissioner of Income Tax (Appeals)-I, Baroda [hereinafter referred to as “CIT(A)”] dated 23.03.2012 for the Assessment Year (A.Y.) 2003-04 in the proceeding u/s 143(3) r.w.s. 147 of the Income Tax Act [hereinafter referred as “the Act”].

2.

The brief facts of the case are that the assessee had filed its return of income for A.Y. 2003-04 on 28.11.2003 declaring income of Rs.30,83,44,248/- u/s. 115JB of the Act. The original assessment was

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completed u/s. 143(3) of the Act on 28.03.2006 determining total income at Rs. Nil and income of Rs.31,25,56,283/- u/s. 115JB of the Act. Subsequently, the case was reopened by issue of notice u/s. 148 of the Act on 15.05.2007. The reopening was done on the basis of comments of the Accountant General/Statutory Auditor about certain discrepancies and wrong accounting as pointed out in the audit report. The reassessment was completed u/s. 143(3) r.w.s. 147 of the Act on 12.12.2008 at total income of Rs Nil and book profit of Rs. 31,25,56,283/-.

3.

Aggrieved with the reassessment order of the AO, the assessee had filed an appeal before the first appellate authority, which was decided by the learned CIT(A) vide the impugned order and the appeal of the assessee was partly allowed. Th

4.

Now the Revenue is in appeal before us. The following grounds have been taken in this appeal:

1.

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition amounting to Rs. 5,72.00 lacs on account of disallowance of repair and maintenance expenses, water charges, gratuity & leave encashment expenses and capital expenditure on the basis of the observation of the statutory auditor that these expenses have been incorporated on the basis of claims from GEB only and not susceptible to independent verification'. 2. On the facts and in the circumstances of the case and in law, the Ld.CIT(Appeals) erred in deleting the addition of ₹ 394.00 lacs on account of delayed payment charges which were recoverable under the power purchase agreement from GEB, which was accrued, but not recognized as income of the year, as pointed out and quantified by the statutory auditor the amount of interest.

3.

On the facts and in the circumstances of the case and in law, the Id.CIT(Appeals) erred in deleting the addition of 170.03 lacs, being the estimated addition 0.05% on the total turnover on the basis of the observation

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of the statutory auditor that 'certain transactions represented by book entries were prejudicial to the interest of the assessee, cost records were not maintained, financial statements did not disclosed particulars of material deviation from accounting standards and reasons for such deviations. 4. The appellant craves leave to add to amend or alter the above grounds as may be deemed necessary.

5.

Ground No. 1 pertains to deleting the addition of Rs. 5.72 crores in respect of repairs and maintenance expense, water charge, gratuity and leave expense and capital expenditure. Shri Sher Singh, the Ld. CIT-DR pointed out that the AO had made this addition on the basis of adverse comment of the statutory auditor. He explained that this expenditure was incurred by GEB, the promoter of the assessee, and claimed as deduction by the assessee on the basis of debit note raised by GEB. However, the exact basis of claiming this expenditure and the copy of debit note raised by the GEB was never brought on record by the assessee. There was no independent verification of the expenditure as claimed by the assessee. Therefore, the Ld. CIT(A) was not correct in deleting the addition.

6.

Per contra, Sri M K Patel, the Ld. AR, submitted that GEB is the promoter of the assessee company and all these expenses were incurred by GEB. The assessee had claimed deduction for the same on the basis of debit note raised by GEB as per agreement. He, therefore, strongly supported the order of the Ld.CIT(A).

7.

We have considered the rival submissions. It is found that the statutory auditor had given a comment that the expenditures debited to the account of the assessee on the basis of the debit notes raised by GEB were not independently verified. The assessee had merely accepted the debit note of GEB and claimed deduction thereof in its accounts. The

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observation of the statutory auditor as reproduced in the assessment order is found to be as under:

“Without prejudice to observations in paragraph IV-8 and IV-9 above, pursuant to formal and information arrangements with GEB, the power stations owned by the company are operated and maintained by GEB. All generation related fixed assets are in custody and possession of GEB. As informed, physical verification of Fixed Assets is carried out by GEB according to their procedures The management has not carried out separate physical verification exercise

The capital spares, if any of the company lying with GEB and/or in common pool, are not identifiable and verifiable. We are unable to express and option on the carrying value of capital spares, depreciation and other expenses charges in the Fixed Assets.

Further to the above, for the financial year under reference -

-Repairs and maintenance (including stores and spares) of Rs. 70 lacs. -Water charges of Rs. 301 lacs (excluding Rs 1021 lacs for earlier years) -Gratuity and leave encashment liability of Rs.41 lacs provided for in respect of GEB employees on deputation to the company, and -Capital expenditure of Rs. 160 lacs. Have been incorporated on the basis of claims from GEB and which have not been susceptible to independent verification. Efforts, if any, on the financial statements of this year and earlier years is not ascertainable.

In addition, inventory of defective, obsolete and scrap items as also income from disposal scrap obsolete/unserviceable stores and spares (amount not ascertainable) belonging the company since inception of generation activities are also to be accounted for.”

8.

The contention of the assessee is that the debit notes from GEB was accepted by the previous auditor and CAG auditor and no such adverse comment was made in the past. Merely because the claim made on the basis of debit note of GEB was accepted in the past, that cannot be held as a valid ground to allow the relief in the current year, particularly

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in view of the adverse comment of the auditor. It is a settled position that principle of res-judicata is not applicable to income-tax proceedings. The Ld. CIT(A) was not correct in deleting the addition by observing that AO did not bring any evidence or material on record to doubt the correctness of the expenditure. When the auditor had categorically mentioned that the expenditures claimed on the basis of debit note of the GEB were not independently verified, the onus was on the assessee to submit evidence to justify the correctness of the expenditures. Even the debit notes raised by GEB was not brought on record by the assessee either before the AO or before the Ld. CIT(A). On our direction, the assessee has brought on record a copy of the debit note raised by GEB in the course of hearing, which is found to be as under:

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9.

It is noted from the above chart that the debit note raised by GEB was accepted by the assessee for most of the heads/expenses. However, there were substantial difference under the head Water charges-pre years, Capital Spares (purchased) and Capital Spares (consumed) in the figures as per GEB and as per GSECL. Further, it is also not evident as to on what basis the figure of repairs and maintenance, water charges and capital expenses were worked out and claimed as deduction by the assessee. In view of these discrepancies, the Ld. CIT(A) was not correct in deleting the addition. We, therefore, deem it proper to set aside this issue to the file of the JAO with a direction to verify the claim of the

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assessee vis-à-vis the debit notes raised by GEB in respect of these expenses. The AO is directed to allow the deduction for the expenses on the basis of the debit notes, to the extent it was accepted by the assessee. Further, as per the copy of ledger account brought on record, the assessee had made a provision of Rs. 41,76,037/-, which was in the nature of provision for gratuity. The admissibility of this claim should also be examined by the AO in accordance with provisions of the Act. The ground taken by the Revenue is allowed for the statistical purpose.

10.

Ground No. 2 pertains to addition of Rs. 394.00 lakhs on account of accrued interest. The AO had observed that due to untimely payment from GEB, the assessee had availed working capital loan, on which it was paying interest. However, the assessee had waived recovery of delayed payment charge of Rs 3.94 crores from GEB, which was a departure of Accounting Standard-9 (AS-9). The AO had worked out the waived delayed payment charges of Rs 3.94 crores which was added by the AO as accrued interest income. The Ld. CIT(A) had held that the assessee did not incur any interest expenditure during the year in respect of working capital borrowings, as it availed working capital finance by discounting energy bills of GEB. In view of this fact, the assessee was justified in not recognizing any revenue on account of delayed payment charges.

11.

We have heard the Ld. CIT-DR and the Ld. AR on this issue. It was explained that as power purchase agreement, the delayed charges can be claimed to recover interest paid on working capital borrowed by the assessee. During the year, no interest on any working capital borrowing was borne by the assessee. Under the circumstances, no delayed payment charges was recoverable from GEB. In fact, working capital of

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the assessee was financed by discounting energy bills of GEB and this fact has not been controverted by the Revenue. Under the circumstances, the Ld. CIT(A) had rightly deleted the addition of Rs.3.94 crores on account of deemed income. The order of the Ld. CIT(A) on this issue is upheld and the ground taken by the Revenue is dismissed.

12.

Ground No. 3 pertains to deletion of addition of Rs 170.03 lakhs being estimated addition at the rate of 0.05% on the total turnover. This addition was made on the basis of adverse comment of the auditor in respect of non-maintenance of records of inventory etc.

13.

We have heard the Ld. CIT-DR and the Ld. AR on this issue. It is found that this addition was made on mere estimate and no specific defect was pointed out by the auditor. The Ld. CIT(A) after carefully analysing the facts of the case has deleted the addition. The finding of the LD. CIT(A) on this issue is found to be as under:

“7.2. I have considered facts of the case and appellant's submissions. Appellant's detailed submissions in respect of statutory auditor's remarks are as per para 3.1 of this order. Further, in the annual report for the year 2002-03, Board of Directors gave detailed comments on statutory auditors' report. It was stated that the auditors' report did not reflect the factual position and the auditors did not seem to have understood and appreciated facts relating to operations of the company, role of GEB in management of these operations, sanctity of decisions of directors of the company, legal framework in which operations were carried on and sanctity of arrangements executed by appellant company with the approval of authorities. The Board of Directors stated that company's financial statements were prepared in accordance with Generally Accepted Accounting Principle (GAAP) standards and norms prescribed under appropriate regulations and company continued to maintain, as in the past, necessary books of account and other documents for recording and accounting all the transactions. It was stated that company instituted necessary internal controls including an internal audit system by a firm of Chartered Accountants commensurate with the nature of its business. It was stated in the director's report that despite providing of all the information and explaining matters relating to internal control and other financial and accounting issues to the statutory auditors by appellant company's audit committee, statutory auditors continued to show

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inadequate appreciation and understanding of the evolving nature of company's business and chose to maintain, despite extensive explanations and clarifications, the audit comments and financial reporting perspectives in respect of certain transactions with which the company did not agree. It was further stated in the comments of Board of Directors that several of observations in the audit report were unprecedented and incompatible with audit reports of the previous years arising from audit of statutory auditors and by the office of Comptroller and Auditor General of India. Regarding specific observations of the statutory auditors based on which AO has made addition in question, Board of Directors stated that the items in question were wrongly referred to as "book entries", which were actual transactions in no way prejudicial to appellant company's interest. It was stated that cost record rules became applicable to appellant company w.e.f. FY 2002-03 as per order/notification of Government of India dt. 21.12.2001 and appellant company had taken necessary steps for designing systems to maintain cost records which was in progress. The Board of Directors was of the opinion that annual accounts together with notes gave information required by law in the manner so required and also of the profit/cash flows in a fair manner. The Board of Directors found auditors' reference to alleged weaknesses in internal control structure to be general in nature and not specific. The Board of Directors also made specific comments on each of observations of statutory auditors refuting the same. The AR also drew attention to C&AG's comments u/s 619(4) read with section 619(B) of the Companies Act, 1956 on appellant company's accounts having no comments on statutory auditors' report. Moreover, effect of statutory auditor's observations on income, if any was not quantified by the AO and no defects in the books of accounts were found by the AO independently. I am of the view that the estimated addition to appellant's income made by the AO cannot be sustained merely on the basis of observations of statutory auditors, which were not accepted by appellant company. Addition of Rs. 1,70,03,000/- is deleted.

14.

The Revenue has been unable to controvert the findings of the Ld. CIT(A). The addition was made by the AO on mere estimate and no specific defect was pointed out in the books of accounts. Merely because the record of the inventory was not properly maintained, the addition as made by the AO was not called for. The auditor did not quantify the effect of non-maintenance of the inventory record on the profit of the assessee. Further, any addition due to mismatch of stock is ultimately a tax neutral exercise, as the closing stock for the current year becomes the opening

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stock for the next year. Considering this fact, no estimated addition was called for in respect of non-maintenance of proper record of inventory. The decision of the Ld. CIT(A) on this issue is upheld and the ground taken by the Revenue is dismissed.

15.

In the result, the appeal of the Revenue is partly allowed for statistical purpose.

Order pronounced in the Court on 29/06/2026 at Ahmedabad.

Sd/- Sd (SUCHITRA KAMBLE) (NARENDRA PRASAD SINHA) Judicial Member Accountant Member Dated – 29th June, 2026 Neelesh, Sr. PS (True Copy) आदेश आदेश क� आदेश आदेश क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : अ�ेिषत 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबंिधत आयकर आयु� / Concerned CIT 4. आयकर आयु�(अपील) / The CIT(A) 5. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण / DR, ITAT, 6. गाड� फाईल /Guard file. आदेशानुसार/BY ORDER, आदेशानुसार आदेशानुसार आदेशानुसार पंजीकार (Dy./Asstt.Registrar) उप उप/सहायक उप उप सहायक सहायक पंजीकार सहायक पंजीकार पंजीकार आयकर आयकर अपीलीय आयकर आयकर अपीलीय अपीलीय अिधकरण अपीलीय अिधकरण अिधकरण, अहमदाबाद अिधकरण अहमदाबाद अहमदाबाद / ITAT, Ahmedabad अहमदाबाद

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