How to Do & Handle How to Do & Handle AuditAudit

• Do Audit –SAP

• Handle Audit- Internal & Revenue Audit if you are an AO

Internal AuditInternal Audit

• Instruction No.3 of 2007

• Comprehensive

• SAP & IAP replace Chain Audit• Hierarchy

Internal AuditInternal Audit

• Instruction No.3 of 2007

Hierarchy

CIT (Audit)

Addl CIT (Audit)

ITO(RA)

SAP IAP

DC/AC

ITO

ITIITI

PSEBPSEB

• While giving effect to the order of CIT(A), the AO treated Rs.159.25 crores as business income instead of the correct amount of Rs.202.49 crores

Tax effect Rs.1859 lakhs

GMDCGMDC

• Unabsorbed depreciation set off in June 2000 was already set off in order u/s 154 passed in April 95

Tax effect Rs.518 lakhs

Central Coal FieldsCentral Coal Fields

• Investment allowance of the Assessment Year 1988-89 set off against income for the Assessment Year 1996-97 (set off beyond 8 years)

Tax effect Rs.433 lakhs

Instrumentation Ltd.Instrumentation Ltd.

• PF dues remitted beyond the due date not disallowed u/s 43B

Tax effect Rs.223 lakhs

State Bank of PatialaState Bank of Patiala

• Interest u/s 244A allowed although the refund was less than 10% of the tax computed

Tax effect Rs.77 lakhs

The Tinplate Company of India The Tinplate Company of India Ltd.Ltd.

• Out of TDS of Rs.242.71 lakhs, amount of Rs.58.63 lakhs and interest thereon of Rs.14.07 refunded a second time

Excess refund Rs.72.70 lakhs

Hindustan Lever Hindustan Lever

• Deduction u/s 80HHC: Turn over of bulk chemicals and fertilizers business not included in total turn over. Further, 90% of other income reduced from export turn over instead of reducing from business profit

Tax effect Rs.2009.31 lakhs

Tata Electric Company Tata Electric Company

• Unabsorbed depreciation of the Assessment Year 1984-85 already set off in the Assessment Year 1985-86 and yet again set off in the Assessment Year 1994-95.

Tax effect Rs.654 lakhs

IOBIOB

• For AY 2002-03, REFUND OF Rs.22.98 crores issued u/s 143(1) but while raising a demand of Rs.109.82 crores in the asst. u/s 143(3), refund of Rs.22.98 crores was not added.

AAIAAI

• For AY 2000-01, sur charge levied at Rs.2.76 crores instead of Rs.13.82 crores.

Jaipur Vidyut Vitran Nigam Ltd.Jaipur Vidyut Vitran Nigam Ltd.

• For A.Y.2002-03, additions made in the asst. u/s 143(3) amounted to Rs.55.75 crores but in the computation additions aggregated to only Rs.25.75 crores.

SKG Consolidated Ltd.SKG Consolidated Ltd.

• For AY 2002-03, sales tax of Rs.24.66 crores not paid before the due date for filing the return not added back u/s 43B.

Hindustan Coca Cola Beverages Hindustan Coca Cola Beverages LtdLtd

• For AY 2001-02 & 2002-03 the AO allowed depreciation on goodwill at Rs.123.87 crores assuming goodwill to be an intangible asset which it is not.

RILRIL

• For AY 2002-03, b/f loss of Reliance Petroleum of Rs.1364.38 crores set off agaisnt the income of RIL whereas after scrutiny of Reliance Petroleum, the merged company, there was no b/f loss.

C&AG Report for YE March 2006 C&AG Report for YE March 2006 DRAFT PARASDRAFT PARAS

204.6992612.566631503.379182001-02

404.4497731.938021419.29802002-03

748.42175849.145721852.659312003-04

2662.39377760.313043490.556882004-05

1556.68422328.283401971.39052005-06

Amt crReply

dueAmt cr

Paras accep

tedAmount

Rs.CrDPsYear of

Report

Magnitude of MistakesMagnitude of Mistakes

• Only test check – not all cases audited• Limited by the capability of RAP to detect errors• Plus mistakes detected by Internal/ chain audit • Plus mistakes detected in inspection• Plus mistakes detected in reviewSum total is enormouso Above all, these mistakes relate to filers –

not the entire lot of taxpayers - current /potential/ non-filers/ stop filers/ evaders

REMEDYREMEDY

• Remedial Action – 154 /263/ 148 – resources of the dept. + the assessee’s resources

• In some cases RA may not be possible – SC decision on reopening; on action u/s 263 (243 ITR 68)

• Resources expected to be deployed in tackling non filers, stop filers & evaders employed in fire fighting

C&AGC&AG

• Constitutional Authority

• Audit carried out u/s 16 of the C&AG of India (Duties, Powers and Conditions of Service) Act, 1971

What does C&AG do?What does C&AG do?

• Covers field offices and CBDT

through - audit of assts. upon test checkexam. of rationale for issue of circularsexam of decisions taken in particular

casesexam of efficacy of systems and

procedures for collection

EVENTS - Revenue Audit EVENTS - Revenue Audit

• HM note

• LAR

• PDP/ SOF• DP

• Audit Para

• Audit Report

Evidence before the PACEvidence before the PAC

• Select CCsIT

• Members, CBDT

• Chairman, CBDT• Revenue Secretary

• FS

FinaleFinale

RemedyRemedy

• Prevent mistakes rather than clearing the mess after the mistakes have been committed

• Find out where things can go wrong, anticipate them and ensure that they are not committed

• Do things right in the first place and always• Educate • Self check after rush period

• Master check list/ update/ Audit Manual

• Consult experts

• Allow internal audit• Study C&AG Reports

• Study ‘Common Mistakes’

Reduction of RAP objectionsReduction of RAP objections

• Time and other resources saved

• Image of the Dept. high• Use of resources for other productive

work, neglected hitherto

Things to doThings to do

• Be passionate about your work

• Audit is not someone else’s job –it is yours

• Have respect for differences of opinion• Take timely remedial action

Some suggestionsSome suggestions

• Master file for every important case• On the MR cover, note the objection• Furnish proper reply at HM stage – time

saver• Educate subordinates – invest your time in

doing this

Instruction No.9 of 2006Instruction No.9 of 2006

• Comprehensive

• Reply to CIT within 30 days

• CIT to send reply within 15 days• Reply to SF within 15 days

• CIT to send PR (since revised) to Board thr’ CCIT within specified date – outer limit 6 weeks. Copy to go to DI (Audit)

Remedial Action Remedial Action

• Take RA if correct

• Initiate RA even if not acceptable

• RA has to be taken-

objection against return processed u/s143(1) if objection is valid

Instruction No.09 of 2006 (para3.2(c)(i)

Remedial ActionRemedial Action

• Major Objections – CIT has to decide nature of RA

• Minor objections – JCIT/Addl.CIT has to decide RA

• Initiate even when an objection is not acceptable• RA initiated can be dropped only with Board’s

approval if the obj involves interpretation of law, etc. – CIT has to send report to Board within 3 months

• CCIT’s approval required in some cases

AccountabilityAccountability

• Expln to be obtained for non furnishing records to RAP and action has to be taken

• Ledger cards maintained• Expln. of AO in tax effect of Rs.1 lakh in IT and

Rs.30000 in other taxes• Expl. In case of default in adhereing to time

limits• Expln for failure to take timely remedial action• Staff also are accountable – if arithmetical

errors, etc.