There is a need to drop areas of audit where the working has more or less stabilised and where the revenue impact is minimal.
The Comptroller and Auditor General of India (CAG) conducts audit of revenues from direct taxes of the Central Government under Section 16 of the CAG (Duties, Powers and Conditions of Service) Act, 1971. The audit covers the following areas:
Assessments through test check;
Rational for issue of instructions and circulars;
Decisions taken in particular cases; and
Efficacy and adequacy of systems and procedure of tax collection, appeals and overall tax administration.
How is audit conducted?
As regards audit involving the above areas, reports of the past show that it has been conducted on set lines without taking note of the changes in the tax laws, globalisation of the economy, and such other developments. Further, the reports show that in some areas audit is being done despite the revenue impact being inconsequential. Hence, there is need to re-orient the audit system.
A look at the reports of the past few years shows that the following areas have been chalked out for audit:
a) Avoidable mistakes in computation of income-tax; (b) failure to observe the Finance Act provisions; (c) incorrect status adopted in assets; (d) incorrect computation of salary income; (e) incorrect income from house property; (f) incorrect computation of business income; (g) irregularities in allowing depreciation; (h) irregularities in computing capital gains; (i) mistakes in firms assessments; (j) mistakes relating to clubbing the income of spouse/minor child; (k) income not assessed; (l) irregular set off of losses; (m) mistakes in giving effect to appellate orders; (n) irregular exemptions and excess relief given; (o) excess/irregular refunds; (p) mistakes relating to levy of interest; (q) incorrect payment of interest by the government; (r) omission/short levy of penalty; and (s) miscellaneous mistakes.
The repetitive exercises concerning the same fields year-after-year not only make the reports look drab and routine but also leave many important facets of Income-Tax (I-T) Departments working unexamined. Further, some of the areas chosen do not appear to be representative because of the lesser number of cases checked and small revenues involved.
The following are examples of such cases from the 2005-06 report: i) mistakes in clubbing the income of spouse/minor child 10 cases checked involving a revenue of Rs 1.10 crore; b) mistakes in giving effect to appellate orders 67 cases, Rs 5.33 crore; and c) incorrect status adopted 36 cases, Rs 4.29 crore.
There is a need to drop areas where the working has more or less stabilised and the revenue impact is minimal. And, hitherto untapped areas must be added.
Some of the new areas could be assessments under Section 115JB (MAT cases); transfer pricing cases; non-residents; political parties; trusts/religious and charitable institutions; assessees of the North-East region; public financial institutions; fringe benefits; where, prima-facie, avoidable interest has been paid to the assessees by the tax department; scientific research institutions; where assessees have filed returns utilising Section 44AD, 44AE and 44AF provisions; orders passed on applications under Sections 195(2), 197, 197A, etc.
The foregoing list is illustrative and not exhaustive.
System appraisal reports
System appraisal reports can, inter alia, relate to the following areas:
i) Impact of the Banking Cash Transactions Act and the Securities Transaction Tax Act.
ii) Why the number of high-income group cases is low both in the categories of corporate and non-corporate cases? Is it because of: a) host of exemptions and deductions, including total exemption for agricultural income and dividends; or inefficient handling of such cases.
iii) Why the number of scrutiny cases has fallen in the past 2-3 years?
iv) Why pendency in penalty cases is increasing year-after-year and why even in cases where such proceedings have been initiated, the I-T Department is able to impose penalties only in less than 50 per cent of the cases.
(v) Why despite heavy pendency of prosecution cases, the position regarding disposal and conviction is abysmally low as can be seen from the following figures: Year 2004-05: Pending as on March 31, 11,895; disposal during the year, 350 (including 262 cases compounding); conviction in cases disposed of, one.
Year 2005-06: Pending as on March 31, 11,871; disposal during the year, 125 (including 85 cases compounding); conviction in cases disposed of, one.
vi) Revenue loss each year because of total exemption of agricultural income and dividend income.
Each year some new areas can be taken for system appraisal.
Considerable time (in the form of man-hours) and expenditure are incurred both by the CAG and the I-T Department in carrying out yearly audits. These can be reduced by intelligent and imaginative functioning not by treading the old path but by making changes in keeping with the times.
T. N. Pandey (The author is a former Chairman of CBDT.)