TAX AUDIT REPORT - LITTLE MORE CARE FOR BETTER AUDIT SERVICE

[C.A. DEV KUMAR KOTHARI]

Why this article:

During consultancy, appeal etc. the author came across many cases in which the draft tax audit report / tax audit report was not satisfactory. In some cases tax auditors have given superfluous statements about auditing practices adopted by them, some auditors had given remarks which suggested that they have not verified the facts and figures. In one case the tax auditor has in most of the cases states "as "certified by the management". As explained in this write-up, in such circumstances, the tax audit report can be regarded as incomplete and defective. If there is preponderance of qualifying statements suggesting total reliance on management's certificate, the report may be fully or partly rejected by the A.O.  The A.O. can also make out a case of rejecting the report and asking the assessee to pay penalty for not furnishing tax audit report as prescribed.

Objectives of TAR:

Objective on obtaining and furnishing TAR is to assist in the process of computation of income and assessment thereof and to ensure timely compilations, certification and furnishing of prescribed information about accounts and transactions of an assessee to be placed before the Assessing Officer in prescribed and standardized forms which are more reliable.

Tax audit report gives vital information about nature of business of assessee and method of accounting, books of account maintained and allowability of expenses, allowances, and also about certain statutory compliance. It also gives vital information as to funds raised and paid, which can be subject matter of certain legal requirements as well as inquiry or investigation by the Assessing officer not only for assessment of income of assessee but also about levy of interest and penalty in case of delays and defaults. Proper and complete information TAR (which includes audited accounts as annexure to TAR) reduces burden of the assessee as well as the Assessing Officer considerably.

Audited accounts: 

Audited accounts of each unit or consolidated accounts of assessee consisting of different units or accounts are to be attached. In case of an individual all proprietary concerns accounts can be consolidated with his personal account. In case income of any person is to be clubbed, the accounts of such person will also require audit and relevant information on points covered in Form No. 3CD are to be given.

Audited accounts are annexed to TAR:

Full set of audited accounts that is the report of auditors, Balance Sheet, Profit and Loss, and accompanying documents are required to be annexed to the TAR- in form no.3CA or 3CB as the case may be. Therefore, merely submission of form no. 3CD will not be full compliance and the report without audited accounts is liable to be rejected. It has come to notice that in some cases TAR without audited accounts (or even draft accounts) was filed in form no. 3CD. Such report does not fulfill compliance and the assessee may be held liable to penalty. Therefore, care should be taken to prepare full and complete tax audit report. In case for any reason accounts have not been audited, at least provisional unaudited accounts can be annexed with TAR to show substantial compliance. Later after finalization and audit of accounts, revised TAR can be submitted.

 TAR is compilation and certification of information:

Tax audit report is in fact certification of facts and figures given therein. Therefore, it differs from other audits or auditors opinion. The auditor must certify the facts and figures. It is noticed that many tax auditors gives certain notes like:

a.  as certified by the management.

b. as informed by the management

c.  we have not checked the statement.

d.  we are unable to verify the above statement from records… etc.

e.  we have not verified the documents and records.

Such statements are sufficient ground to reject the TAR fully or partly. The TAR is prescribed to ensure that a duly checked and verified statement is placed before the Assessing Officer in form of TAR. If the TAR gives statement like 'as certified by the management ' or as informed by the management', then it can be concluded that the auditor has not verified the same. And the TAR may be rejected fully or on particular matter. Therefore, such practice should be avoided by C.A's.

Depreciation:

 In some reports auditors have given note that the actual cost and the rate of depreciation are as certified by the management. This is also not proper. In case on any particular item a higher rate is adopted, then only for such item a note can be given indicating the basis upon which higher rate has been claimed. Making total depreciation statement as certified by the management will render the report incomplete and can be rejected.

 General auditing practices etc. need not be mentioned:

 As the TAR is to be given in the prescribed form, there should not normally be any variation in the report form. Particularly when it is a mere statement of information to be verified from records of the assessee. It has come to notice that some audit firms have stared practice of giving general notes about use of generally accepted auditing practices, use of sample checking methods, statement like the preparation of the statement is responsibility of management and our responsibility is to express an opinion … etc. as given in statutory audit and other audits. In case of TAR such statements are not only superfluous, but they may be considered as indicative of a report of the management and not a report of Tax Auditors. Such report may be rejected by the A.O. as incomplete. Therefore, the auditors should avoid such comments or observations in the TAR.

Tax audit report and provisions of the Act relating to cheques:

Relevant provisions inter-alia are as follows:

A.     S.40A (3) - payment for certain expenses in specified circumstances only by A/c payee crossed cheque or draft .

B.     S. 269SS -taking loan or deposit otherwise by A/c payee cheques or draft.

C.     S.269T -Repayment of loan or deposit by A/c payee's cheques or draft.     

D.     S. 44AB- Tax Audit report- Form 3CD clauses 17 (h) read with S.40A (3) and Rule 6DD of the Income-tax Rules, 1962 and clause 24 read with Section 269SS and 269T. 

The provisions being very popular and used in practice they are just referred to here in and details of limits and applicability during different periods are not discussed for the sake of brevity.

 Usually assesses do not have the copy of cheques issued by them or received by them. The practice of taking back paid cheques from the bank is rarely used in India. Even suppose some one keep a Xerox copy of cheques issued or received by him, still the Tax auditor will not be sure to report whether the cheques was given duly marked A/C Payee or not because a writing of A/c payee can be cancelled, the name can be changed by endorsement of such changes by putting another signature of the drawer of the cheques.

Most of the banks issue cheques without A/c payee crossing marking on them. Even when a specific request is made to issue A/c payee cheques banks may cheques without such marking.  A/c holder is considered responsible to mark A/c payee and not the bank.

In the bank statement or passbook also clear indication is not given. Even if Clearing is written it cannot be said that cheques was crossed A/c payee, because cheques drawn on some other bank will go through clearing process if it is crossed but not crosses as A/c payee. Similarly if Transfer is written in the statement or pass book it cannot be said that the cheques was A/c Payee it may be a simple crossing or crossing with & Co and such cheques can be deposited in any bank account.

Therefore, to play safe, the tax auditors usually mention in the tax audit report that cheques are not in possession of the assessee, therefore they are not in a position to certify whether cheques were A/c payee or not and then they rely on the statement of the assessee.

Healthy practice for assesses:

The tax auditor may advise the client to give standing instructions to the banks in this regard. To avoid above problem the assessee can make request and give standing instructions to the bank to issue cheques books containing A/c payee cheques and other cheques separately and instruct the bank that in the case of account payee cheques variation in the cheque by cancellation of A/c payee or by change of name should not be allowed even if appropriate signature authorizing such variation is made.

The assessee can keep record of two types of cheque books received. Further the bank can also be requested to certify the details of such cheque books. This will go a long way to establish before the Tax Auditor and the authorities whether cheques were crossed A/c Payee or not.

A draft letter to the banker:

Standing instructions can be given to the bank on the following lines:

From:  (account holder)

To,

The Bank,

Reg: Account no.

Dear Sirs,

In respect to the above account kindly note our following requests as our standing instructions:

a. Cheque books containing Cheques marked "A/C PAYEE ONLY" should be issued separately.

b. On cheques crossed "A/C Payee Only", any alteration in the name of payee or cancellation of crossing or variation of crossing should not be permitted even if it is countersigned by authorized signatory.

c.  Cheque books containing cheques without crossing, meant for only cash withdrawal should be issued separately on specific request.

 Please ensure compliance of the above standing instructions and provide us a certificate or certificates about cheque books containing A/c Payee cheques issued by you, which are subjected to the above standing instructions.

Reasonable charges if any, in this regard may be debited to our account.

This is required to ensure better internal check and control, and for satisfaction of our Tax Auditors and tax authorities.

Thanking you,

yours faithfully,

____

If the assessee has followed the above method of assurance about A/c payee cheques, it will be a beyond any doubt solution of the problem and the tax auditor will be able to certify that payments have been made by a/c payee cheques and other cheques.

Supplementary report may be given:

 Tax audit report if prepared, finalized and signed before due date, because otherwise it will be difficult to cope up with work of TAR and filing of returns. Therefore, due to shortage of time available, distant location of units of the assessee the auditor may not be in a position to give information required fully and up to the due date for filing of the return. For example, in respect of items covered under section 43B, full details of payment up to the due date may not be available. The report may be signed few days before the due date. Some other information may not be available by the time TAR is signed or the due date. In such circumstance the tax auditor may give a supplementary report or addenda to the original TAR to provide fully all information duly certified by him. 

It is hoped that the care on the above lines will go a long way in full and better compilation of information in tax audit report; it will help clients and Assessing officer.

Incomplete TAR means deficient audit service:

 In case auditor do not verify major facts and figures available with documentary evidence and gives information in report only as certified by the management, the persons concerned with such report may feel aggrieved. If the report is rejected by authorities and the assessee is made liable to penalty, the assessee may justifiably ask the auditor to indemnify him of such loss for inadequate or inefficient audit service. Therefore, the tax auditor must be very careful in discharging his onerous duty of verifying and certifying the facts and figures given in the report.