CMA Arif Farooqui

Finance Act, 1984 introduced Section 44AB under Income-tax Act, 1961 w.e.f Assessment Year 1985-86. Under this section, if the total sales / turnover or gross receipts for previous year exceed the prescribed limits then assessee is required to get his accounts audited by an “Accountant”. This audit is popularly known as Tax Audit.

Applicability of Tax Audit:Section 44AB of Income-tax Act provides for compulsory audit of accounts of certain persons carrying on business or profession.

Assessee Applicability
Business Every assessee, whose total sales or gross receipts in any previous year exceed Rs. 1 Crore, has to get his accounts audited.
Professional Every assessee, whose gross receipts in any previous year exceed Rs.25 Lakhs has to get his accounts audited.
Special Cases Assessee covered u/s 44AD / 44AE / 44BB / 44BBB, if claim that profits from such activities are lower than presumptive income and his income exceed maximum exemption limit.

 Objective of Tax Audit:

Objective of Tax Audit is to ensure that assessee’s books of account and other records are maintained in accordance with provisions of Income Tax Act and reflect correct income. This audit is for curbing Tax Evasion and ensures Tax Compliance.

About this article:This article is divided in two parts.

(a) Changed in “Accountant” definition

(b) Benefits to Government and Society by this change

(a) Changed in “Accountant” definition.

As we all knew Income-tax Act, 1961 is going to be replace by proposed Direct Tax Code (DTC) 2013. Many sections/definitions are changed in proposed DTC 2013 but here I will limit my article to much awaited and welcome changed in “Accountant” definition.

As per the proposed DTC, Accountant means Practicing CA, CMA or CS within the meaning of their respective acts. In other words, DTC allows Tax Audit not only by Chartered Accountants/CAs but also by Cost Accountants/CMAs.

The expansion of definition of Accountant under DTC is welcome change. Till now only Chartered Accountants are authorized for Tax Audit and enjoying monopoly of authority, which causing strict hurdle for voluntary compliance. Therefore, it is welcome that this monopoly is broken and Let the country gain by better, effective tax compliance.

This change in “Accountant” definition and authorizing CMAs for Tax Audit has raised some unnecessary doubts in our fellow professional friends. Here I am trying to help them to overcome their doubts, one by one.

Tax Audit is the exclusive domain of Chartered Accountants only??

For overcoming this doubts, let’s go to history, how this Tax Audit came into existence and how only CAs authorized for it?

ICAI Financial, ICAI Cost, ICSI were established in 1949, 1959, 1980 respectively.

Finance Act 1984 introduced Tax Audit u/s 44AB under Income Tax Act, 1961 w.e.f Assessment Year 1985-86.  At that time, ICAI- Cost was just two years old and ICSI was not even established. At the time out of all professional institute only ICAI- Financial was completely established and had good members’ strength therefore non-inclusion of CMAs/CS in Accountant definition and only authorizing CAs, at that time is justified.

But now ICAI- Cost is more than 50 years old with good member strength too, and its members efficiently doing audit of Excise Duty, Service Tax, VAT etc. because of this, now government decided to take their services in income tax too.

So thinking that Tax Audit is the exclusive domain of Chartered Accountants only, is completely wrong.

Are CMAs competent enough to handle Tax Audit??

Syllabus, Exam procedure and Passing percentage of both ICAI are same. Perception is that because of their 3 years articleship training CAs has more practical experience to trickle Tax Audit cases.

Here I make it clear, CMA become eligible for practice only after 3 years of post-qualification experience and no one can disagree that having post qualification experience as a professional is far better than having articleship experience as trainee. Assessing officers of Income-Tax Department, who come from different streams conducting audit and scrutinizing assessment proceedings are not CA. They are able to do because of their experience they gain after joining these jobs.

CMAs are already conducting taxation audit of Excise Duty, Service Tax VAT etc, then why not Income Tax. I explained above why their name was not included earlier, now that limitation had been over and that why government authorised them in the field of Income tax too.

Along with Taxations, CMAs have wide knowledge in the field of valuation and costing, it will definitely help in curbing Tax Evasion in case of under/ over valuation of inventory. How CMAs can be useful in this, I explained in next part of this article.

(b) Benefits to Government and Society by this change

Valuation is one of the most important part of Tax Audit. If valuation is not done properly than government will lose revenue because of under computation of income. Closing stock is a powerful aspect for declaring profit. If it raised profit raised and if its value fall, profit will also fall.  So closing stock valuation is an important matter for calculating correct profit and curbing Tax Evasion.

But in Audit Report/Balance Sheet of many businesses, one can easily find a note states –

“All Inventories are valued at cost, as per certificate of the management. There is no change in the method of valuation of opening and closing stock. Physically verification of stock has not been carried out by us and the same is taken as certified by the management.


“Inventory – (As valued and certified by Management).”

This gives an impression that inventory valuation is not done by auditor. If inventory valuation is left to management then it is not good as a business can easily reduce its income taxes liability by adjusting its inventory value and which is against the main objective of Tax Audit.

Few Examples are given below:

→ The cost of goods sold is the largest cost component, so method used to calculate it, can have a great impact on taxable income. Cost of goods sold is depends on inventory value. A higher inventory amount would naturally reduce the gross profit amount, thereby having the same reduction affects on taxable net profit.

→ In times of inflation and rising prices, LIFO method can be used to increase cost of goods sold. Increasing the cost of goods sold will reduce profits, which in result reduce income tax liability.

→ In same way using FIFO method for inventory valuation also provides income tax benefits in some cases. If the price of goods rises over the year, FIFO method that can be used to increase cost of goods sold that will reduce taxable income.

Yes, there are regulations that must be adhered before changing certain valuation methods for accounting purposes. One cannot change valuation of inventory now then but if inventory valuation is left for management then they can change valuation method as and when it suits them. They have to just give a declaration and they knew their business licences will not be cancelled if they gave wrong declaration, unlike CAs/CMAs who have to face disciplinary action or even their COP may be cancelled if it found they had given wrong declaration.

So inventory valuation is very important for ensuring that assessee’s books of account reflect correct income and objective of Tax Audit is fulfilled.

As now CMAs is coming into Tax Audit, we can expect a better inventory valuation because they are valuation experts. They will calculate true value of inventory by using Cost Accounting Standards – CAS and other Costing Techniques and businesses will has to pay correct income tax amount.

With their knowledge and skills, CMAs will surely set some benchmark in valuation and in result, it will help in curbing Tax Evasion in case of under/ over valuation. So change in “Accountant” definition is proof to be benefits for Government and Society.

Every company submit profit and loss account and balance sheet to income tax department.  It includes closing stock too. For better result, In proposed DTC, Government should insure that assesses who are filing tax audit report must submit another form for closing stock valuation, which is to be mandatorily fled with form 3CD and must be certified by CMAs even if Tax Audit is done by other professionals.


Government has shown confidence on CMAs and they worth it. They have required knowledge, skill and efficiently doing taxation audit of Excise Duty, Service Tax VAT etc. Go to any MNC/PSU, one can easily find CMAs doing jobs as Manager – Taxation, Manager – Accounts, Manager – Credit etc. and some are holding top management positions. so doubting their professional efficiency is completely senseless. Give some time, India will see great impact of their service in Income Tax.

(Author can be reached at E- Mail-

More Under CA, CS, CMA

Posted Under

Category : CA, CS, CMA (3826)
Type : Articles (17579) Featured (4025)
Tags : CMA (343) CMA Arif Farooqui (10) ICAI (2670) ICSI (426) section 44AB (165) Tax Audit (294) Tax Audit Report (173) tax auditor (114)

54 responses to “CMAs’ Role in Tax Audit”

  1. VENKATESH says:

    You may be think yourself as like CA but u cannot do the job as like by CA.CA is always supreme and ultimate

  2. CMA Ram Dhongade says:

    Very Informative Article

  3. Binay Singh says:

    Good achievement for CMA , CS

  4. ashwini kumar behera says:

    Yes … it’s a great achievement for public…
    And right justice to cma and cs profession. .


  5. sameer says:

    sir my CA charge me Audit fees and till date i check he not file my audit report i so many time remind him he say i file return when ask for return give me copy he say i not file and give so many excuse tom me i want who us responsible for penalty from various dept. i am proprietor kindly guide me

  6. CMA.Vikash says:


  7. Shahab says:

    Nice article by Mr. Arif, and many thanks for introducing the roles of CMA in tax audit. CAs and CMAs are equally qualified and talented as their syllabus is almost same. They should respect each other and CMAs should not be underestimated.


  8. CP says:

    There is huge difference between allowing tax audit to CMAs and CS and allowing CAs to conduct cost audit.There should be no overlap in the core domain of all three professionals viz CAs for financial audit, CMA-Cost Audit and CS-Secretarial Audit.

    But tax audit and other indirect tax audits should be open for all CAs, CMa and CS because there is enormous scope in our economy and tax compliances will dfinitely increase. The client should decide whom he should hire.Lets all the three institutes work in co-operation and colloboration to prove value added services to the clients.


  9. BSKRAO says:

    LATEST RTI TO MCA : Indian economy is growing at an average rate of 5%. Hence, I want to know that requisite annual output of Practicing Chartered Accountants inducted to the stream of Indian economy on regular basis, to support voluntary compliance in all Indian taxation laws. The Institute of Chartered Accountants of India is administered by Ministry of Corporate Affairs. Therefore, kindly provide me “Financial Year” wise “Output of Number of Registered Chartered Accountants”, “Number of Registered Chartered Accountants opted to take Certificate of Practice” and “Number of Registered Chartered Accountant deleted from the list of Certificate of Practice” as per the format enclosed as Exhibit-A, U/s 6(1) of Right to Information Act.

  10. B S K RAO says:

    Ram Kumar (CA) Sir,

    Audit means “verification”, depending on the purpose they are classified as Energy Audit, Environment Audit, Product Audit, Process Audit, Legal Audit in USA & Tax Audit in Indian Income-Tax Act. Here, person conducting audit should be specialized in that subject. Hence, the word “Audit” is not the domain of Chartered Accountants. Assessing officers of Income-Tax Deptt. who come from different streams conducting audit in scrutiny assessment proceedings are not Chartered Accountants. In conclusion, person specialized in Income-Tax law should issue Certificates/Reports in Income-Tax Act.

    Practice of law is the Prerogative Power of Advocates in India. Whereas practice of Cost Accounts, Management Accounts & Financial Accounts are not the prerogative powers of respective professional body. Because, penalty has been prescribed U/s 45 of Advocates Act, 1961 for persons illegally practicing the Profession of Law. Under Indian Constitution CAG are the Auditors with wide powers, carrying out meaningful job.

  11. B S K RAO says:


    Account books of State Co-Operative Societies are audited by co-operative auditors of respective State Government. Similarly, in Karnataka Value Added Tax Act, 2003 accounts of registered dealers are audited by Cost Accountants & Sales Tax Practitioners. 2nd Proviso to Section 44AB of Income-Tax Act which reads as under, authorizes auditor under any other law to sign audit report Form No.3CA & 3CD (See Note Below) & hence it takes care of such situation to avoid repetitive audit. Central Board of Direct Taxes issued Circular bearing F.No.225/168/200/ITA.II Dt.16.10.200 in this regard:-

    “Provided further that in a case where such person is required by or under any other law to get his accounts audited, it shall be sufficient compliance with the provisions of this section if such person gets the accounts of such business or profession audited under such law before the specified date and furnish by that date the report of the audit as required under such other law and a further report [by an accountant]* in the form prescribed under this section”

    The main intention of legislature here is to avoid repetitive audit “by an accountant” as defined under Income-Tax Act & the same person conducting audit under any other law was allowed to sign audit report in Form No.3CA & 3CD (See Note Below). Here, there is deemed presumption that person conducting audit can only be able to furnish information required to be filled-up in Form No.3CD, part of attachment to Form No.3CA.

    *In Finance Act, 2001, amendment carried out in 2nd Proviso to Section 44AB of Income-Tax Act & inserted the words “by an accountant” in 2nd Proviso also. Now the situation is very typical one, that “accountants” are wrongly signing the audit report in Form No.3CA & 3CD:-

    =>that too for the opinion of auditor under any other law &
    =>without actually conducting audit of accounts of assesses

    Therefore, 2nd Proviso to Section 44AB of Income-Tax Act has become redundant on date.

    NOTE: Rule 6G(1)(a) prescribes Form No.3CA applicable to the cases covered under 2nd Proviso to Section 44AB of Income-Tax Act. In Form No.3CA, it is clearly mentioned under Note No.2(iii) any person who is, by virtue of any other law, entitled to audit the accounts of the assessee for the relevant previous year has to sign Form No.3CA. Hence, amendment carried out in Finance Act, 2001, inserting the word “by an accountant” in 2nd Proviso to Section 44AB also, is contrary to the original intention of legislature to avoid repetitive audit by an accountant and accountant is signing audit report without practically conducting audit.

  12. Ram Kumar (CA) says:

    I concur with CA Jay Sharms ! All audits including cost are in the domain of CAs ! If CMAs are authorised for tax audits ICAI shud relax the maximum no. of Tax audits for CAs

  13. B S K RAO says:


Leave a Reply

Your email address will not be published. Required fields are marked *

Featured Posts