The document discusses various aspects of handling internal and revenue audits. It provides details on the audit hierarchy and processes, examples of common tax effect mistakes found during audits of different companies/banks, and suggestions to remedy mistakes and reduce objections raised during audits. It emphasizes taking preventive actions to avoid mistakes, educating staff, allowing internal audits, and taking timely remedial actions in response to audit objections.

1. How to Do & Handle
Audit
• Do Audit –SAP
• Handle Audit- Internal & Revenue Audit if
you are an AO

2. Internal Audit
• Instruction No.3 of 2007
• Comprehensive
• SAP & IAP replace Chain Audit
• Hierarchy

3. Internal Audit
• Instruction No.3 of 2007
Hierarchy
CIT (Audit)
Addl CIT ITO(RA)
(Audit)
IAP
SAP
ITO
DC/AC
ITI
ITI

4. PSEB
• 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

5. GMDC
• 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

6. Central 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

7. Instrumentation Ltd.
• PF dues remitted beyond the due date not
disallowed u/s 43B
 Tax effect Rs.223 lakhs

8. State Bank of Patiala
• Interest u/s 244A allowed although the
refund was less than 10% of the tax
computed
 Tax effect Rs.77 lakhs

9. The Tinplate Company of India
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

10. 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

11. 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

12. IOB
• 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.

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

14. 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.

15. 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.

16. Hindustan Coca Cola Beverages
Ltd
• 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.

17. RIL
• 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.

18. C&AG Report for YE March 2006
DRAFT PARAS
Paras
Year of Amount accep Reply
Report DPs Rs.Cr ted Amt cr due Amt cr
2005-06 905 1971.3 340 328.28 422 1556.68
2004-05 688 3490.55 304 760.31 377 2662.39
2003-04 931 1852.65 572 849.14 175 748.42
2002-03 980 1419.2 802 731.93 97 404.44
2001-02 918 1503.37 663 612.56 92 204.69

19. Magnitude 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 review
 Sum total is enormous
o Above all, these mistakes relate to filers –
not the entire lot of taxpayers - current
/potential/ non-filers/ stop filers/ evaders

20. REMEDY
• 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

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

22. What does C&AG do?
• Covers field offices and CBDT
through -
 audit of assts. upon test check
 exam. of rationale for issue of circulars
 exam of decisions taken in particular
cases
 exam of efficacy of systems and
procedures for collection

23. EVENTS - Revenue Audit
• HM note
• LAR
• PDP/ SOF
• DP
• Audit Para
• Audit Report

24. Evidence before the PAC
• Select CCsIT
• Members, CBDT
• Chairman, CBDT
• Revenue Secretary
• FS

25. Finale

26. Remedy
• 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

27. • Master check list/ update/ Audit Manual
• Consult experts
• Allow internal audit
• Study C&AG Reports
• Study ‘Common Mistakes’

28. Reduction of RAP objections
• Time and other resources saved
• Image of the Dept. high
• Use of resources for other productive
work, neglected hitherto

29. Things 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

30. Some 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

31. Instruction 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)

32. 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)

33. Remedial 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

34. Accountability
• 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.