• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

R. Anand

R. Anand on the need for revamping the tax audit provisions

COME October and the corporate sector gets busy finalising tax audit reports and returns of income, to be filed before the October 31 deadline.

This is an annual feature and treated as a routine affair. The concept of tax audit was first introduced in 1985 via Section 44AB of the Income-Tax Act, 1961. This section requires every person whose total sales/ turnover exceeds Rs 40 lakh to compulsorily get his/her accounts tax audited; for professionals, tax audit becomes compulsory when gross receipts exceed Rs 10 lakh. The tax audit report is certified in Form 3CA.

The statement of particulars, running to 32 clauses, are furnished in Form 3CD. Though tax audit has been in existence for the past 17 years, there has been no review by the Department — but for the changes introduced in 1999 — about whether the information and the report have served any purpose or if any changes/modifications are required.

Much time, energy and costs are incurred in gathering the particulars, collecting the information and finalising the report.

Cost, benefit

The concept of tax audit had a laudable objective when introduced in 1985: To simplify the process of regular assessment and help assessing officers (AOs) get the relevant data/information in a capsule form. It is, however, unfortunate that in reality the tax audit report is not given due weightage at the time of assessment.

Despite the particulars in the form being available on record, the AOs continue to ask for further details, some of which are repetitive and, thereby, defeating the very purpose of Form 3CD.

This naturally raises the issue of cost versus benefit. If there is no tangible benefit from Form 3CD, should it not be reviewed and modified to make it workable and acceptable?

Method of accounting

One of the important clauses (Clause 11) of Form 3CD requires information to be captured on the accounting method employed in the relevant previous years. This clause has to read in conjunction with the method of accounting expressed in the notes of accounts to the relevant balance-sheet. Admittedly, this is the most important clause and the foundation on which the profits of the relevant company are assessed.

With the Institute of Chartered Accountants of India (ICAI) introducing several accounting standards for corporate and non-corporate assessees, this clause would have to be reviewed and re-framed to gel with the standards. It is time this clause was worded in a way that the essence of the accounting method and the reason for deviation are captured, as there is a danger of conveying too much in the method of accounting without giving necessary information to arrive at the true profits of the company for assessment of taxes.

Particulars of payments

Clause 18 of the tax audit report requires furnishing of detailed information on various payments made to relatives of assessees, directors of a company and relatives of such directors, and so on. The object of this information is to ensure that any expenditure incurred for such specified persons is reasonable and anything excessive and unreasonable is not allowed as business expenditure. With the introduction of AS-18 (Related Party Disclosures), there is a need to synchronise the information furnished in the annual report for the purpose of AS-18 and the particulars furnished in the tax audit report for Section 40A(2)(b). To this extent, Clause 18 needs modification.

Loans and deposits

Clause 24 requires particulars of each loan/deposit in excess of limits specified in Section 269SS of the Act — the current limit is Rs 20,000. For companies where the main business is to accept deposits and grant loans, this information runs to innumerable pages and every year this is furnished along with the tax audit report. Whether such plethora of information has served any purpose needs to be reviewed.

A report on exceptional items can be solicited so that attention is given only to such information rather than getting all the information and not knowing how to proceed with the data. Time has also come to accept information/data of such nature in electronic form.

Quantitative particulars, ratios: Clauses 28 and 32 require furnishing of quantitative particulars of raw materials, finished products and bye-products.

These are in addition to the quantitative details prescribed in part II Schedule VI to the Companies Act, which forms the basis of drawing up the accounts for shareholders.

Most of the data contained in these clauses can be unearthed from the annual reports itself and a quick and meaningful analysis of ratios worked out from the figures in the profit and loss account and balance-sheet can itself be an aid to the process of good tax assessments.

In sum, the entire particulars in Form 3CD needs to be revisited in the light of: a) developments in the field of accounting standards; b) court decisions on what is revenue and what is capital expenditure; and c) details of transactions which are outside the scope of income-tax assessment, such as particulars of loans/deposits, and so on.

There can be no two opinions that a well-structured tax audit report can act a useful tool to finalise tax assessments.

The problem is not in the concept, but in the implementation. One of the reasons for partial failure of tax audit reports is that it carries too much of information without a proper ABC analysis.

A shorter and meaningful report can serve the purpose.

Send this article to Friends by E-Mail
Comment on this article to BLFeedback@thehindu.co.in

Stories in this Section
Undermining coal

Copyright © 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line