C&AG recommended referring the cases of professional negligence to ICAI:Serious issued raised by CAG: icai must look into it seriously

NEW DELHI, DEC 21, 2014: CAG’s Performance Audit Report No. 32 of 2014 on ‘Appreciation of Third Party (Chartered Accountant) Reporting in Assessment Proceedings’ was presented in the Parliament on Frioday. The CAG carried out a Performance Audit on ‘Appreciation of Third Party (Chartered Accountant) Reporting in Assessment Proceedings’ during January to May 2014 covering all cases of scrutiny assessments, appeal and rectification, completed during the period of financial years 2010-11 to 2012-13 and upto May 2014 within the selected units. Findings of performance audit were reported to the Central Board of Direct Taxes (CBDT) in September 2014 and results of discussions were incorporated in the Report.


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. 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. Tax audit under Section 44AB of 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.

Audit Findings

During audit, C&AG noticed certain issues with regard to certification of reports/certificates by CAs, which are discussed below in brief:

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.

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.

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.

d. CAs have certified wrong information/claims for various exemptions and deductions in 74 cases having tax effect of Rs. 259.72 crore.

e. CAs gave incorrect/incomplete information in Tax Audit Reports/certificates in 132 cases having a revenue impact of Rs. 1,037.61 crore.

f. CAs committed mistakes in another 616 cases 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.

g. In 109 cases, assessees did not furnish requisite Form 3CEB on verification of ALP and Form 29B relating to certification for Book Profit.

h. Assessing Officers failed to utilize the information available in 102 reports/certificates submitted to them by the assesses leading to short levy of taxes of Rs. 1,310.05 crore.

i. 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. It was found that 18.87 per cent of CAs (12,435 CAs) for AY 2013-14 issued more tax audit reports than prescribed by ICAI.

j. CAs did not mention their membership numbers in many cases.

Recommendations by C&AG

C&AG has suggested ITD to utilize information available in tax audit reports/certificates at the time of assessment proceedings and not to grant exemptions/deductions to the assesses without submission of necessary reports/certificates. To improve the quality of work done by CAs, C&AG recommended referring the cases of professional negligence to ICAI. Besides, C&AG 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. C&AG also recommended to ensure to prohibit a CA who is a relative of the assessee or directors of a company, from signing any report or certificates.

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