Section 44AB in Income-Tax Act, 1961 was enacted to facilitate the administration of laws by proper presentation of the accounts before the assessing officers (AOs) in carrying out routine verification, such as checking correctness of totals and verifying whether purchases and sales are properly vouched (CBDT Circular No. 387 dated July 6, 1984). Hence, a tax audit report was prescribed to be prepared by an accountant (read chartered accountant) and was to be sent to the AO along with the return of income.
With the passage of time, the scope of the report in Form 3CD got extended, allowing the accountant to comment even on matters such as whether a particular receipt/expenditure is of revenue or capital nature or of a personal nature, about claims of depreciation, whether a liability is of a contingent nature and hence, disallowable, and many other such issues. Whereas a quasi-judicial authority like the AO is expected to take decisions uninfluenced by any outsider.
Such extension amounted to outsourcing some important decision-making areas to CAs for their report.
This procedure has been continuing since 1984 and the scope of Form 3CD has been widened from time-to-time the latest change in the Form has been made by the Income Tax (Ninth Amendment) Rules, 2006.
It is unfortunate that the CBDT, after insertion of Section 44AB in the Act, has almost forgot about it and no study of any kind has been made concerning the implementation of this provision (and various other provisions, where a CAs report is to be filed) to see whether the intended objectives are being achieved.
However, the Comptroller & Auditor General (CAG) of India in its 2006-07 report, placed in Parliament on March 11, 2008, mentions serious deficiencies in the working of this Section. The important ones are:
In 237 cases examined by the CAG, the reports furnished did not contain adequate information, but the I-T Department did not recommend any action against the erring accountants.
In 665 cases, the AOs did not pursue the matters further to make additions or disallowances on the basis of tax audit reports. This resulted in understatement of income, having a revenue impact of Rs 425.44 crore.
In 233 cases, the AOs failed to utilise the information available in the tax audit reports of CAs involving a revenue impact of Rs 228.01 crore.
In some cases, incomplete/non-committal comments have been made by the accountants, but no action has been suggested against them.
Some reports were found to have been submitted even without the signatures of the CAs.
There is no system by way of internal controls to indicate that such reports are properly pursued and utilised in making assessments.
The CAG has observed that in 233 cases, though relevant information was available in the reports, yet, it was not utilised while finalising the scrutiny assessments.
Penalty was not found to have been imposed in 109 cases examined, where tax audit reports were not filed or filed late.
There are various other irregularities of similar nature with examples to support the conclusions reached.
The CAG has made recommendations to improve the situation such as:
Taking action against the accountants, where reports do not contain adequate/inaccurate information.
The AOs should critically examine the reports and utilise these at the time of making assessments.
The internal control system regarding such reports should be strengthened to ensure proper utilisation and follow-up.
The I-T Department should ensure timely filing of such reports.
The CAGs audit parties have done a commendable job in highlighting the gross neglect of tax audit reports, which undermines the very objective of introducing such reports. Hence, the CBDT needs to give serious thought to this.
One method to ensure proper utilisation of such reports could be to prescribe that each AO, in cases where such reports have been filed, sign a statement at the end of the assessment order (which is not to be communicated to the assessees) that he has thoroughly examined the audit report under Section 44AB and has utilised the information, where found necessary, in making the assessment.
This would ensure due compliance and accountability in cases of defaults/neglects.
T. N. Pandey (The author is a former chairman of CBDT.)