Report no.-32 of 2014-Union Government (Department of Revenue-Direct Taxes) – Report of the Comptroller and Auditor General of India on Performance Audit on Appreciation of Third Party (Chartered Accountant) Reporting in Assessment Proceedings.
The Report has been laid on the table of the Parliament house on 19-12-2014
This Report for the year ended March 2014 has been prepared for submission to the President under Article 151 of the Constitution of India.
The Report contains significant results of the performance audit of Appreciation of Third Party (Chartered Accountant) Certification in Assessment Proceedings of the Department of Revenue – Direct Taxes of the Union Government.
The instances mentioned in this Report are those, which came to notice in the course of test audit for the period 2010-11 to 2013-14 conducted during January to May 2014.
The audit has been conducted in conformity with the Auditing Standards issued by the Comptroller and Auditor General of India.
Audit wishes to acknowledge the cooperation received from the Department of Revenue – Central Board of Direct Taxes at each stage of the audit process.
The Income Tax Act, 1961 (Act) contains several provisions which mandate the assessees to furnish audit reports and certificates issued by the ‘Accountant’ in the prescribed Form for meeting the specific objectives. Tax audit under Section 44AB under the Act was introduced in 1984 in order to ensure that the books of account and other records of the assessees are properly maintained and faithfully reflect the true income of the taxpayer. The objective of reporting/ certification is to discourage tax avoidance and tax evasion.
The Act defines an ‘Accountant’ as a Chartered Accountant (CA) within the meaning of the Chartered Accountants Act, 1949 under explanation to Section 288(2) of the Act. Audit reporting and certification by CAs under the Act are thus Third Party Reporting. The CAs are regarded as facilitators for the Income Tax Department (ITD) in administering the provisions of the Act correctly. The Tax Audit Reports (TARs)/certificates issued by them serve as a valuable reference guide to the Assessing Officers (AOs) while making assessments.
We conducted Performance Audit on “Appreciation of Third Party (Chartered Accountant) Certification in Assessment Proceedings” with the objectives to see whether (a) all the requisite reports/certificates were obtained and kept on record at the time of assessments; (b) tax audit reports were complete to provide sufficient and requisite information to the AO, thereby, aiding him in completing the assessment as required under the Act; (c) the AO had evaluated and utilized the information while completing assessments, (d) in case of professional negligence of the Accountant, the matter has been taken up by the Commissioners with the Institute of Chartered Accountant of India (ICAO and (e) there are lacunae or ambiguities in the provisions of the Act/reports.
This Performance Audit covered assessments completed during the period from financial years 2010-11 to 2012-13 and upto the date of audit. In case of major audit observations, assessment records of previous assessment years were also linked wherever found necessary. All circles/wards taken up for regular audit during the period from January to May 2014 were treated as selected units. All cases of scrutiny assessments, appeal and rectification cases within the selected units were examined in audit. We conducted entry meeting with CBDT in February 2014 in which audit objectives, scope and methodology were discussed.
We found cases (a) where the CAs failed to report full and correct information in 367 cases leading to short levy of taxes of Rs. 2,813.11 crore and (b) where the AOs failed to utilize the information available in 102 reports/certificates submitted to them leading to short levy of taxes of Rs. 1,310.05 crore. Some of the important audit findings are as follows:
a. Tax auditors failed to give correct information relating to allowance of depreciation in 66 cases involving short levy of tax of Rs. 457.79 crore (Paragraph 2.3).
b. Tax auditors did not report correct information regarding brought forward loss/depreciation resulting in irregular brought forward loss/depreciation allowance in 46 cases involving short levy of tax of Rs. 557.79 crore (Paragraph 2.4).
c. In 42 cases personal/capital expenditure was incorrectly allowed as the tax auditors did not report the amount in their tax audit reports which resulted in short levy of tax of Rs. 477.89 crore (Paragraph 2.5).
d. CAs have certified wrong information/claims for various exemptions and deductions in 74 cases having tax effect of Rs. 259.72 crore (Paragraph 2.7).
e. CAs gave incorrect/incomplete information in TARs/certificates in 132 cases having a revenue impact of Rs. 1,037.61 crore (Paragraph 2.8).
We also found in another 616 cases where CAs committed mistakes viz. in allowance of exemption/deductions, charging of tax on Book Profit under Section 115JB, adoption of Arm’s Length Price and reporting on cash payments exceeding Rs. 20,000 per day (Paragraphs 2.6 and 2.10-2.12). In 109 cases, assessees did not furnish requisite Form 3CEB on verification of ALP and Form 29B relating to certification for Book Profit (Paragraphs 2.10-2.11).
We have also commented on lacunae in the existing Forms which need modification in order to capture full information of the affairs of assessees so that taxes are applied correctly (Paragraph 3.2-3.4). Regarding monitoring of work of CAs and ensuring quality tax audit, ICAI issued guidance to its members for limiting the tax audit assignments in a financial year. We found that 18.87 per cent of CAs (12,435 CAs) for AY 2013-14 issued more tax audit reports than prescribed by ICAI (Paragraph 3.6). We also got cases where CAs did not mention their membership numbers (Paragraph 3.7). ITD did not refer any case for professional negligence to ICAI for taking action against erring CAs in terms of Section 288 of the Act (Paragraph 3.9).
The audit findings on non-adherence to various provisions of the Act by CAs led to deny proper dues to the Government. AOs have also failed to utilize information available in Accountant’s reports/certificates. CBDT have emphasized the use of information available in Accountant’s reports/certificates by AOs at the time of assessments.
In our recommendations, we have suggested ITD to utilize information available in tax audit reports/certificates at the time of assessment proceedings. To improve the quality of work done by CAs, we recommend referring the cases of professional negligence to ICAI. Besides, we also recommended to make provisions in the Act to limit the number of tax audit, provide suitable controls in the ITD system and validating the membership of CAs at the time of e-filing (Paragraph 3.11).
Since the introduction of Section 44AB in the Act in 1984, we have evaluated the system of tax audit/certification by Accountants in 1997 (Para 3.2 of Audit Report No. 12 of 1997) and again in Audit Report No. PA 7 of 2008. In both the Audit Reports, we pointed out non-utilization of information by AOs in assessment proceedings and incorrect information furnished by CAs in TARs/Certificates. These irregularities are still persisting. Thus objective of introducing tax audit and certification by Accountants gets defeated. With growing revenue forgone every year and complex nature of business environments, Accountant’s role in ensuring true picture of accounts and taxes due to the Government as per the Act is very crucial. It is joint responsibility of ITD and ICAI to ensure compliance to the Act. Necessary control mechanism over the third party certification in assessment proceedings must be ensured, by making suitable provisions in the Act, if necessary.
Summary of Recommendations
1. The Ministry may ensure that the AOs shall not grant exemptions/ deductions if the assessee does not submit necessary certificates/ reports.
The Ministry replied (October 2014) that there are sufficient provisions in Sections 10A, 10(23C), 80IA, 8018, etc. of the Act which ensure that tax audit reports are available with the ITD. These provisions themselves ensure that in case of failure to file prescribed audit reports, exemptions/deductions thus claimed are not allowed. The Ministry also replied that the CBDT’s Instruction No.9/2008 also reiterated that the tax audit reports as well as other statutory audit reports should be critically examined along with connected records and other available evidence while scrutinizing the cases. The Ministry also replied that a proviso to Rule 12 of IT Rules 1962 has been substituted with retrospective effect from 01 April 2013 requiring the assessee, claiming exemptions/ deductions under various provisions of the Act, to file the prescribed reports of audit electronically.
Audit is of the opinion that though sufficient provisions are available in the Act, however, AOs did not follow during assessment meticulously which need attention by the Ministry.
2. The Ministry may ensure that the AOs fully utilize the available information in CAs report/certificates.
The Ministry replied (October 2014) that necessary instructions have been issued in 2008 to critically examine tax audit reports as well as other statutory audit reports and to utilize effectively the information available in these reports while finalizing scrutiny assessments. The Ministry further replied (October 2014) that e-filing of audit reports has been introduced from AY 2013-14. Information furnished in e-filed audit reports was used in selecting cases for scrutiny under Computer Assisted Scrutiny Selection. The reason for selection of case was also displayed to the AOs for effective utilization of available information.
3. The Ministry may consider modifying the Form 3CD to incorporate date of declaration/ payment of distributed profits in order to verify whether the tax has been paid within the stipulated period or any interest is to be charged due to delay.
4. The Ministry may consider modifying the Form3CD or 29B certificate to give details of the available MAT credit assessment year-wise that can be carried forward by the assessee in order to ensure the correctness of the claim for credit under Section 115JAA of the Act.
On recommendations 3 and 4 above, the Ministry replied (October 2014) that Tax Audit Report (Form 3CA, Form 3CB and Form 3CD) have been comprehensively revised in July 2014 therefore it would not be advisable to again revise the same for capturing the date of declaration/payment of dividend for the purpose of verifying whether DDT is paid within the specified time or capturing the available MAT credit assessment year-wise. The Ministry also mentioned that the required details are already being captured in the Income-tax Return forms in schedules MATC and DDT of Form ITR-6 from 2013-14 onwards. However, the Ministry has noted the suggestions raised by audit and replied that it would be considered for incorporation in the next revision of forms of Tax Audit Report.
5. The Ministry may consider modifying Form 10B and 1OBB for providing details regarding last ten years accumulation or utilization of amounts set aside as application by the Charitable Trusts/Institutions in order to check correctness of investment and application of the accumulated fund
The Ministry stated (October 2014) that the required details were already being captured in the Income-tax Return forms. Incorporating similar details in Form 10B and 1OBB would amount to duplication.
Audit is of the opinion that though ITR captures the relevant information, the certification by CAs would ensure the correctness of information furnished in ITR.
6. The Ministry may ensure limiting the tax audit assignments in order to ensure quality of tax audit.
The Ministry replied (October 2014) that it would be for the regulatory body i.e. the Institute of Chartered Accountants of India (ICAI) to lay down restrictions on the number of tax audit and to enforce the same. The Ministry further replied (October 2014) that it is difficult to place control in ITD systems to regulate the number of tax audit reports (TAR) as CAs affix their signatures on TAR in their individual capacity and also while representing Firms of CAs and certain types of audits are exempted from the maximum number specified as per ICAI guidelines. ITD provides the list of cases where the number of TARs is apparently exceeded to ICAI for their action.
Reply of the Ministry is not acceptable as the Act requires tax audit under Section 44AB is to be conducted by an Accountant, not by a firm of CAs. Further, limit on tax audit assignment has been fixed by ICAI for all tax audits to be done under Section 44AB.
Audit is of the opinion that CAs has been assigned the work of tax audit which is very crucial in claiming exemptions/deduction by assessees. Therefore, in the interest of revenue and ensuring quality of tax audit, the Ministry may introduce suitable control mechanism in the IT system to adhere to the limit on tax audits in consultation with ICAI.
7. The Ministry may ensure to prohibit a CA who is a relative of the assessee or directors of a company, from signing any report or certificates.
The Ministry stated (October 2014) that prohibiting a CA who is relative of the assessee or director of a company from signing any report or certificates may be examined during budgetary exercise of 2015.
8. The Ministry may ensure the implementation of CBDT instruction no.1959 of 1999 and Section 288 of the Act.
The Ministry stated (October 2014) that in view of the initiatives already taken vide instructions nos. 1959 of 1999 and 09/2008 and provisions contained in section 288 of the Act, no further action was required on this issue.
Audit is of the opinion that though instructions have been issued in past, audit has come up with cases where AOs have not fully utilise the information available in CA reports/certificates. The Ministry may provide intensive training to AOs on utilisation of information and strengthen its internal audit in this regard.
9. The Ministry may put in place a mechanism in the ITD system for AO to record instances of mistakes committed by CAs in order to take action under Section 288 of the Act.
The Ministry stated (October 2014) that suggestion of audit can be incorporated by DGIT (System) to facilitate AOs for recording such instances in the system.