AUDIT PROCEDURE

RAP / IAP
 INTERNAL AUDIT
• INTRODUCED IN THE YEAR 1954
• OBJECTIVE : PROVIDING SECOND CHECK OVER THE
ACCURACY IN COMPUTATION OF INCOME AND
DETERMINATION OF TAX
• SCOPE OF INTERNAL AUDIT – COEXTENSIVE WITH
REVENUE AUDIT SINCE 1960.
• IN 2001 CHAIN AUDIT INTRODUCED- DID NOT
PERFORM TO EXPECTATION – ADVERSE COMMENTS
FROM C&AG AND PAC
• IN 2007 – NEW AUDIT SYSEM INTRODUCED –
SEPARATE AUDIT STRUCTURE TO PEFORM AUDIT
WORK
 IAP SETUP
• From 1.6.2007 separate field organization for
audit work was set up directly under the
cadre-controlling Pr.CCIT, who cannot delegate
the administrative control and supervision
over CsIT to any other CCIT.
 IAP SETUP
• The distribution of newly sanctioned ITOs, ITIs
and Sr.TAs/TAs at the headquarters of CIT
(Audit) shall be as under:
• Sl.No. Designation ITO’s ITIs PA/Steno Sr. TAs/TAs

• 1 CIT (Audit) 2 2 1 4
• 2 Addl. CIT( Audit) 1 2 1 2
• 3 Dy. Asst. CIT (SAP) Nil 2 1 1
• 4 ITOs (IAP) 1 2 - 1
 ROLE OF CCIT (CCA)
• The CCIT (CCA) shall
• (i) review the performance of Internal Audit Wing, at least quarterly;
• (ii) be responsible and accountable for effective functioning and
performance of the Internal Audit Wing under the CsIT(Audit);
• (iii) provide requisite infrastructure (adequate office space & furniture I
fittings, PCs, telephone & fax, etc ) for Internal Audit Wing;
• (iv) ensure postings of competent officers & staff under the CsIT(Audit).
The normal stay in Audit Wing shall be two years;
• (v) ensure, in co-ordination with the NADT/RTIs and MSTUs, that
appropriate training is imparted to the officers and staff posted in the
Internal Audit Wing, every year after the AGT;
• (vi) ensure that the norms for Internal Audit are followed and
implemented, and targets thereof, as well as the targets for Receipt Audit,
are achieved;
• (vii) CCIT (CCA) may relax the norms for audit by Addl. CIT / SAP / IAP so
as to ensure that number of auditable cases is not less than the number
of cases to be audited by each Officer.
 ROLE OF DIT (AUDIT)
• Role of DlT(Audit) : The Director of Income Tax ( Audit ), through the DGIT (Admin.),
shall continue to act as the field arm of the Board in respect of the Internal Audit
functions of the Department.
The functions of the DIT (Audit) shall, inter alia, include,
• (i) preparation of the National Action Plan Targets for Internal Audit Wing, both for
Internal and Receipt Audit, for consideration of the Board for its inclusion in the Annual
Central Action Plan;
• (ii) prescription of the norms for Internal Audit, keeping in view the increase in the tax
base, focus areas of the Department and other relevant factors as may be prescribed by
the Board;
• (iii) monitor the functioning of the Internal Audit Wing;
• (iv) monitoring the settlement of major internal audit objections in accordance with the
criteria and the time schedule;
• (v) carry out Inspection of the functioning of the Internal Audit Wing under the
respective CCs (CCA), with the approval of the DGIT (Admin.), and submit report to the
DGIT(Admin.) within a fortnight thereafter;
• (vi) collection and collation of information regarding critical areas where mistakes have
been detected by Revenue Audit and Internal Audit.
 ROLE OF DIT (AUDIT)
• Role of DlT(Audit) :
(vii) coordination with CIT(Audit) and Administrative CIT regarding maintenance of
Ledger Cards, and Registers, in respect of both the Internal Audit and Receipt
Audit;
• (viii) preparation of updated Check Sheet for Internal Audit, to be incorporated in
the software subsequently and to be revised/updated every 3 years, and its
circulation to the CCs(CCA)/ CsIT(Audit);
• (ix) conduct Seminars /Workshops every year for the officers/staff posted in the
Internal Audit Wing in co-ordination with the CCs(CCA)/CsIT(Audit), and ensure
that similar training programmes are organized by the CCs(CCA)/CsIT(Audit) every
year ;
• (x) devise necessary reporting mechanism, and to prescribe the forms and
registers in consultation with DIT(Systems) and DOMS;
• (xi) prepare Annual Report of Internal Audit Functions of the Department,
incorporating the highlights gathered through Inspections and Performance Audit,
and submit the Annual Report to the Board by 30th June every year.
 Role of Administrative CsIT l DsIT
The administrative CsITl DslT shall:
• (i) extend all cooperation to the CIT(Audit) for preparation of the list of
auditable cases, production of records/registers to the Internal Audit
within the scheduled time frame, conduct of audit by the Internal Audit
and settlement of Internal, as well as Receipt Audit, objections, and action
to be taken against the officers/staff in respect of internal audit;
• (ii) ensure maintenance of the Ledger Cards and the Registers, manual as
well as in electronic media, as per guidelines given in the Internal Audit
Manual, 2003, as amended from time to time;
• (iii) prepare and send the necessary reports and statistics to the CIT
(Audit);
• (iv) ensure that the list of auditable cases (category wise) of a particular
month are sent to the CIT(Audit) concerned by the 10th of the following
month;
• (v) ensure that the relevant records/registers are produced before the
Internal Audit alongwith the list of auditable cases, and wherever records
etc are not given to Internal Audit without adequate reasons, take suitable
action against the officer/staff concerned under intimation to the
CIT(Audit);
 Role of Administrative CsIT l DsIT
The administrative CsITl DslT shall:
• (vi) ensure that the internal audit objections are examined in accordance with
parameters laid down, and that remedial action in accepted cases are initiated
accordingly within a month of the receipt of the internal audit memos;
• (vii) ensure that acceptance/non-acceptance of the internal audit objection is
done with appropriate reasons and the details of remedial action initiated in
accepted cases, is communicated to the CIT(Audit) within 3 months of receipt of
the internal audit memos;
• (viii) settle, with the CIT (Audit) concerned, the major internal audit objections
having tax effect above Rs.2,00,000/- in IT/CT and Rs.30,000/- in Other Taxes, and
ensure that the Addl./Jt. CIT Range settles the internal audit objections involving
tax effect below these limits with the Addl. CIT (Audit), within 4 months of the
receipt of the Internal Audit memos;
• (ix) in a case where there is dispute between the administrative CIT and the CIT
(Audit) with regard to the settlement of the internal audit objection, and/or the
remedial action
• (x) taken, the administrative CIT shall report the matter, with full facts and reasons,
to his/her jurisdictional CCIT, who shall take up the matter with the CIT(Audit), and
the decision of the CCIT shall be final.
 ROLE OF CIT(AUDIT)
• The CsIT (Audit) shall
• (i) To hold jurisdiction for Internal Audit – cases assessed under CsIT
assigned to him
• (ii) have administrative control over Additional CsIT(Audit), SAPs and IAPs;
• (iii) Regularly review the work of IAPs and SAPs;
• (iv) To co-ordinate with the administrative CCsIT/DGsIT and CsIT/DsIT for
preparation of the lists of auditable cases, timely production of
records/registers to the Internal/Receipt Audit teams within the scheduled
time frame, smooth conduct of audit and settlement of Internal, as well as
Receipt Audit, objections, and action to be taken against officers staff in
respect of Internal Audit;
• (v) Maintain the Ledger Cards and the Registers in respect of Internal /
Receipt Audit;
• (vi) draw action plan for Internal Audit for the year in consultation with
CCITI DGIT concerned with the approval of the CCIT(CCA);
 ROLE OF CIT(AUDIT)
• The CsIT (Audit) shall
• (vii) ensure that the norms for Internal Audit are followed/implemented, and
targets thereof, as well as the targets for Receipt Audit, are achieved;
• (viii) ensure that the internal audit of the auditable cases of a particular month are
completed within 30 days, and the records/registers received with the list of
auditable cases are handed over to the Addl. Jt. CIT Range/the Assessing Officers
within one week thereafter;
• (ix) ensure that the audit objection memos are sent to the administrative CsIT, with
copies to the Addl./Jt. CIT Range and the AOs, within a week of audit;
• (x) settle, with the administrative CIT concerned, the major internal audit
objections having tax effect above Rs.2,00,000/- in IT/CT and Rs.30,000/- in Other
Taxes, and ensure that the Add!. CIT (Audit) settles the internal audit objections
involving tax effect below these limits with the Addl./Jt. CIT Ranges concerned,
within 4 months of sending audit memos to the CsIT;
• (xi) take measures to the effect that a uniform stand is taken by the officers in the
Region on a issue/fact of law; and
• (xii) prepare and send the necessary reports and statistics to the Board/
Directorates and the AGs.
 Role of Additional CsIT (Audit)
• The Addl./ Jt. CsIT(Audit) shall:
• (i) have audit jurisdiction over cases pertaining to jurisdiction of CsIT assigned
to him;
• (ii) have administrative control and supervision over the working of IAPs and
SAPs functioning under him;
• (iii) ensure the effective functioning of the IAPs and SAPs;
• (iv) submit monthly report to CIT (Audit) with regard to the work done by the
IAPs and SAPs;
• (v) assist the CIT (Audit) in maintenance of Ledger Cards and Registers with
regard to Internal / Receipt Audit objections;
• (vi) coordinate with the concerned Addl. CIT/JCIT Range with regard to
expeditious settlement of Internal Audit Objections involving tax effect below
Rs.2,00,000 in IT/CT and Rs.30,000 in Other taxes, within prescribed time limit;
• (vii) ensure that the norms of Internal Audit are followed / implemented and
that the targets of Internal Audit are achieved; and,
• (viii) assist the CIT (Audit) in ensuring proper maintenance of prescribed
registers and timely submission of reports and statistics.
 ROLE OF ADDL.CIT (ASST RANGE)

• Ensure remedial action is taken within 4 months

and shall facilitate prompt recovery of tax
• Ensure records requisitioned by IAP/SAP are
made available expeditiously
• Ensure that A.Os maintain the relevant records
and registers with regard to IAP objections
• Ensure that cases selected for internal audit are
audited by internal audit before relevant case
records are given to Receipt /Revenue audit.
Role of Jurisdictional CCIT/DGIT on
IAP Objections

In case there is difference of opinion between

concerned CIT(Admn) and CIT(Audit), the CCIT
having administrative control over the CIT in
whose charge an audit objection has been
raised shall be the authority to decide whether
the audit objection raised by a IAP is to be
accepted or not.
 Targets for Internal Audit
• The minimum number of cases to be audited
by each Additional CIT, SAP or IAP in a year
shall be as under:
• Additional CIT (Audit) : 150
• SAP : 300
• IAP : 600 (Corporate Cases) or 700 (Non-
corporate Cases)
 Monetary limits for Internal Audit
• The monetary limit for Internal Audit Officers in respect of Tamilnadu Region were
revised in March 2015, by Pr. CCIT. The limits for Chennai region, are as under:
Addl. CIT (Audit)
• Corporate cases – Income / Loss & claim of dedn u/s 10, 11, 32, 54 and Ch. VI-A >
Rs.20 crore
• Non-corporate cases – -DO- > 10 crore
DCIT (Audit) – SAP
• Corporate cases – Income / Loss Rs.10 Cr to Rs.20 Cr
• Claim of dedn u/s 10, 11, 32, 54 and Ch. VI-A between 5 to 20 cr.
• Non-corporate cases – Income / Loss & claim of dedn u/s 10, 11, 32, 54 and Ch. VI-
A Rs.2 Cr to Rs.10 crores
ITO (IAP)
• Corporate cases – Income / Loss < Rs.10 crore
• Claim of dedn u/s 10, 11, 32, 54 and Ch. VI-A < Rs.5 Cr
• Non-corporate cases – Income / loss < 2 crore
• Claim of dedn u/s 10, 11, 32, 54 and Ch. VI-A < Rs.2 Cr
 AUDIT SETUP
• RECEIPT AUDIT (C & AG)
• Restructuring of Audit Offices in IA&AD took place in
April 2012 - separation of central and state audit.
• Throughout the country, nine Central Audit Offices are
responsible for the Audit of income tax receipts and
refunds, expenditure as well as non-assessment
functions of units under the DT Wing.
• Director General of Audit (Central) or DGA (Central),
Chennai is the Central Audit Office having jurisdiction
over Tamilnadu, Kerala and Puducherry. A Branch
Office located at Kochi with jurisdiction over Kerala.
 Process of RAP
• The main items of work undertaken during the
Compliance Audit are:
 Entry meeting with CIT/Jurisdictional AO
 Getting Demand and Collection (DCR) Register and
preparation of list of selected cases there from
 Collection of records and scrutiny thereof
 Collection of statistical information
 Issue of audit objections
 Follow up of pending audit objections
 Preparation of draft LAR and
 Exit meeting.
 Process of RAP
 The programme of Local Audit is communicated by the
Revenue Audit at least one month before the Local Audit.
 All co-operation and assistance should be extended to the
Revenue Audit Party (RAP) during the audit process.
 The records requisitioned by the RAP should be entered in
the 'Register' maintained for this purpose and complete
records should be made available.
 If it is not possible to make available any particular record
required by the RAP, the reasons for the same should be
communicated to the RAP, in writing.
 The record should on no account be withheld on flimsy
grounds.
 Wherever records not given without valid reasons, CIT shall
call for explanation from the Officer / Staff and suitable
action to be taken.
 SCOPE OF RAP
The Audit scrutiny of assessment records need to be done to find
out:

a) Whether the assessment made is in accordance with the

provisions of the Direct Taxes Act & Rules
b) Whether the instructions/procedures prescribed by the CBDT
have been followed by the CIT/AO; and
c) Whether the instructions/circulars/notifications/orders issued by
the higher authorities viz. CBDT, DIT, CIT, Addl. CIT/Jt. CIT etc.
have been complied with.
d) That claims on taxpayers are pursued with due diligence and are
not abandoned or reduced except with adequate justification
and proper authority;
 SCOPE OF RAP
 To ensure that mandatory provisions of the Act are properly and
correctly observed.
 Not question the discretionary powers statutorily vested in the AO
unless there is clear evidence of misuse.
 Not to step into the shoes of the A.O – Not suggest additions to the
total income on the basis of estimates.
 Audit should not involve itself in legal controversies regarding the
interpretation of a particular provision of expenditure is of a revenue or
capital in nature unless there is a clear mistake (e.g cost of machinery
allowed as revenue.
 If interpretation given by the revenue authorities in respect of a
particular provision of the Act is against authoritative judicial decision
(jurisdictional HC or SC), Audit may point out this.
 SCOPE OF RAP
FURTHER, RAP is also empowered to-
 Verify orders of CIT u/s 263 or 264 or 273A or 18B of the
Act to check any patent misinterpretation of law or any
general departure from the plain meaning of law.
 Verify the cases earlier checked by the Internal Audit to
verify the effectiveness of Department’s Internal Audit.
 Point out cases of over assessment since it constitute an
irregularity and departure from the plain provisions of Law.

CIT(A)’s orders may be questioned by RAP only if they raise a

general issue wherein CIT(A)’s view is against the plain
meaning of Law or against the procedure that has been
followed on the basis of authoritative decision of the
Government or a Court of Law.
 AUDIT PROCEDURE - RAP
Exhaustive Instructions on Procedure for Audit and
guidelines for remedial action given in Board’s Instruction
No.9 of 2006, as amended by circular No.8 of 2016.

• The RAP issues an Audit Memo (Half Margin Note) - A.O to

furnish half margin reply within three days.
• At half margin stage, clear stand to be taken – whether to
accept or not to accept.
• Mistake already detected by IAP /AO is raised as objection –
point out the fact in half margin Note stage
• General purpose statements like “The issue will be looked
into” etc to be avoided as far as possible.
• Where the issue is debatable and is not accepted, it should
clearly be stated at the half margin stage.
• Where discretionary power used- record basis of
judgment/decision (Eg. 14A..)
 AUDIT PROCEDURE - RAP
• The DAG forwards the Local Audit Report (LAR) to
the Assessing Officer with a copy to the CIT.
PART I – INTRODUCTORY AND OUTSTANDING
OBJECTIONS OF PREVIOUS REPORT
PART II – MAJOR IRREGULARITIES AND IMPORTANT
POINTS
IIA – Major Objections; IIB – Minor Objections
PART III – OBSERVATION-NO REPORT IS TO BE SENT.
REMEDIAL ACTION SHOULD BE TAKEN WITHIN
THREE MONTHS.
 AUDIT PROCEDURE - RAP
• The Assessing Officer should send his report on
the objections in respect of the individual cases
included in the respective audit 'paras' of Part-I
(Introductory and Outstanding Objections of the
previous Report) and Part-II (Major Irregularities
and Important Points) of the LAR to the CIT
through the Addl. CIT Range within 30 days of the
receipt of LAR.
• No reply is required to be sent regarding Part-III,
but appropriate remedial action must be taken by
the Assessing Officer within three months.
 AUDIT PROCEDURE - RAP
• On receipt of the Assessing Officer's report, the Jt./Addl. CIT Range will
examine the audit objections in the light of the Assessing Officer's
comments and send a reply to the CIT within a fortnight. The CIT should
take a decision and send an appropriate reply to the AG/DAG within a
fortnight thereafter.
• Where the AG does not accept the views of the Commissioner and/or is
not prepared to drop the audit objection, he conveys this to the CIT
through a 'Statement of Fact' (SoF).
• The CIT should send appropriate reply to the AG within a fortnight of the
receipt of 'SoF'.
• In a case where the AG does not accept the views of the Commissioner
and/or is not prepared to drop the audit objection, the audit objection is
converted into a 'Draft Para', proposed to be included in the Audit Report
of the C&AG of India. On receipt of the Draft Para, the CIT, through the
CCIT, should send a report immediately to the Board so as to enable the
Board to submit reply to the C&AG of India within the scheduled six
weeks.
[Indeed, if the earlier stages of processing of the objections had been
carefully gone into the required information should already be on the CIT's
file.]
 AUDIT PROCEDURE - RAP
• Draft Paras on Audit Objections - Proforma Report and Follow-up Action
• The Proforma Report in Part A should be sent to the Board strictly within four
weeks of the receipt of the Draft Para Key by the CCs (CCA), with a copy to the DIT
(Audit); and,
The Proforma Report in Part B should be sent to the DIT (Audit) within two months
of the receipt of the Draft Para Key by the CCs (CCA), with a copy to the Board, to
facilitate preparation of the Action Taken Note (ATN).

• On receipt of the above-mentioned report from the CCIT/CIT, the Board will inform
the C&AG, inter alia, about the acceptance or non-acceptance of the audit
objection, endorsing a copy to the CCIT/CIT/ DIT(Audit). On receipt of the above
endorsement, the DIT(Audit) will move ahead with the preparation of the
comprehensive ATNs after securing such further information and particulars from
the field formations as may be required.
• After the receipt of the Audit Report presented to the Parliament, the DIT(Audit)
will give concluding shape to the ATNs on Audit Paras, and send these to the
Board, through the DGIT (Admin.), for submission to the C&AG of India after
necessary vetting and consideration in the Board.
 Monetary Limits in LAR
• Monetary limits for categorisation of LAR Para DT Wing of C&AG HQ
revises the monetary limits for categorization of LAR para.
• With effect from 01 April 2014, the monetary limits of LAR paras,
applicable for all cases of Corporate Tax (CT), Income Tax (IT) and Other
Direct Taxes (ODT) for Category ‘A’ (Andhra Pradesh, Delhi, Gujarat,
Karnataka, Maharashtra, Tami Nadu, West Bengal and Uttar Pradesh) and
Category ‘B’ (Assam, Bihar, Chhattisgarh, Goa, Haryana, Himachal Pradesh,
Jammu & Kashmir, Jharkhand, Kerala, Madhya Pradesh, Odisha, Punjab,
Rajasthan, Uttarakhand and UT Chandigarh) states are given as under:
TAX PART II A PART II B
Category A Category B Category A Category B
CT Above Rs.15 Lac Above Rs.8 Lac 15L to 30,000 8L to 30,000
IT Above Rs.8 Lac Above Rs.4 Lac 8L to 20,000 4L to 20,000
ODT Above Rs.75,000 Above Rs.40,000 75K to 10K 40K to 10K

• Audit findings of serious nature may be included in Part IIA irrespective of

prescribed tax limit involved but in exceptional case only
 Monetary Limits of Draft Paras
• Monetary limits for converting a case for draft
paragraph – w.e.f May 2012.
[All cases exceeding the threshold limit are treated as Potential draft para
cases. Depending on the reply given by the Department, the cases are
either dropped are further converted into draft para.]

Type of Draft paras Category A States Category B States

Corporate Tax Above Rs.50 Lac Above Rs.25 Lac

Income Tax Above Rs.20 Lac Above Rs.10 Lac

Others viz., W.T Above Rs.2,00,000 Above Rs.1,00,000

 REMEDIAL ACTION ON RAP OBJECTION

• Audit objection relating to an error of facts or an issue of

law is found to be correct, should be accepted.
• Appropriate remedial action should invariably be
initiated within two month of the receipt of the Local
Audit Report, and necessary orders should be passed
within six months thereafter.
• Where the PCIT / CIT does not accept the Audit
objection, he may record his reasons for doing so and
inform the AG accordingly within two months from the
date of receipt of the LAR. No remedial action needs to
be taken in such cases – (Vide Circular No.8 of 2016)
• (Earlier, even if objection is not accepted, remedial action
should be initiated as precautionary measure – Ch.11)
 REMEDIAL ACTION ON RAP OBJECTION

• Major Audit Objection Part IIA of LAR –

The Commissioners concerned shall be personally responsible
for careful examination of such objections and issue of
instructions to the Assessing Officers on the appropriate
remedial action to be taken within a month of the receipt of
the Local Audit Report.

• Other than Major Objections

The Commissioners should ensure that the Addl./Jt. Cs.I.T
Ranges issue similar instructions to the Assessing Officers
within the said period of one month.

• The choice of such remedial action, whether under section

154 or 147 or 263, should be carefully considered in the light
of existing legal provisions and its sustainability in appeal.
 REMEDIAL ACTION ON RAP OBJECTION
In following cases CIT can decide not to initiate
remedial action :
 Interpretation of fact or law by the RAP / IAP is in conflict
with a decision of the Supreme Court and the decision
squarely applies to the facts of the case.
 Interpretation of law or fact by RAP / IAP is in conflict
with decision of jurisdictional High Court which is
squarely applicable to the facts of the case, and the
operation of which has not been stayed by the Supreme
Court.
 If CIT is of the view that AO has acted in conformity with
Board’s instruction/circular; or
 The audit obj. raised is on facts and after verification is
of opinion that audit objection is factually incorrect.
 SECOND APPEAL
• The adverse order of the first appellate authority in
cases involving revenue audit objections should be
carefully scrutinised by the PCIT/CIT, and appeal should
not be preferred if the order is justified either in law
or on facts. Reasons for not filing appeal may be
recorded by the PCIT/CIT.
• (Earlier, an adverse appellate order by the first
appellate authority should be dealt with in the same
manner as in the case of an objection accepted by the
CIT and / or the Ministry till the AG / C & AG agrees
with the views of the Department / Ministry)
 PROCEDURE TO BE FOLLOWED IN FIELD OFFICES ON
RECEIPT OF INTERNAL AUDIT OBJECTIONS

• Maintain separate movement register for files sent to IAP

• Collect IAP objections and place report in separate folder.
• Make entry in internal audit receipt register (format)
• Mark the period of limitation for action, if any against
each item
• Take decision on acceptance/non acceptance of audit
objection
• Take appropriate remedial action as per guideline (para
5.4 audit manual)
 Records of Important Irregularities - Pendency and
Settlement thereof

• REGISTERS TO BE MAINTAINED IN THE INTERNAL

AUDIT WING :
• Receipt Audit Register-l: This is the Register recording Receipt Audit
Major Objections. Apart from particulars regarding the objections
and remedial action thereon, Column 16 of this Register also
maintains information whether the case was seen by Internal Audit,
and if not, the reasons therefor.
• Receipt Audit Register-2: This the Register of Receipt Audit Minor
Objections.
• Receipt Audit Register- 3: This Register records details of Receipt
audit Objections (both Major & minor) settled during the month.
• Receipt Audit Register-4: This is the Register regarding Draft Paras.
 Records of Important Irregularities - Pendency and
Settlement thereof
• REGISTERS TO BE MAINTAINED BY A.O.s
Register of Requisitions: A register should be maintained by the
A.O.s to keep particulars of all case records requisitioned by Receipt
Audit, the date of supplying such records, reasons for not supplying,
if any, gist of objections raised in Audit Memos in all cases and also
the date when the Audit Memo was received and replied to.
• AO's Register No.I dealing with Receipt Audit Major Objections .
• AO’s Register No.2 dealing with Receipt Audit Minor Objections
• AO’S REGISTER-1 - Major/Minor objections - AO’S REGISTER OF INTERNAL
AUDIT OBJECTION .

• REGISTER OF DRAFT AUDIT PARAS OF THE C&AG RECEIVED BY CsIT

FROM THE CBDT - This is to be maintained separately for each
Audit Report in the office of the CIT.
 Records of Important Irregularities - Pendency and
Settlement thereof

• (i) Monthly Progress Report of Major & Minor

Receipt Audit Objections. It is due in the office of the
CCIT/DGIT by the 15th of the following month.
• (ii) Quarterly Report (QAR-A-14) on Inter-
departmental machinery - set-up vide Board's
Instruction No. 1552 dated 08.03.1984 to expedite
the settlement of Major Receipt Objections at
various levels. This report should reach the CBDT by
15th of the month following. the quarter, with a copy
to the DIT(A).
 REMEDIAL ACTION ON RAP / IAP OBJECTIONS
• Instructions to be sought from Range CIT/Addl.CIT
regarding remedial action to be taken.
• Major Audit Objection – CIT shall issue
instructions to the AO on appropriate remedial
action to be taken.
• Minor Audit objection - Addl.JCIT Range has to
issue instructions to AO on appropriate remedial
action to be taken.
• Instruction regarding remedial action to be taken
should be issued to AO by CIT/Addl. Within one
month of receipt of audit objection.
 TIME LIMIT FOR REMEDIAL ACTION - IAP

• INITIATION – within one month of receipt of

audit objection memo
• COMPLETION : Within three months of
receipt of audit objection memo.
 Explanation of A.O

(a) Failure to follow departmental Instructions /

Circulars;
(b) failure to follow binding judicial decisions;
and;
(c) palpable mistakes on fact or law, or mistakes
arising from gross negligence or malafide action.
 LEDGER CARD
Ledger cards are to be maintained both for Internal Audit and Receipt Audit
objections where audit objections are accepted and the tax effect is more than
Rs.2 lakhs for Income tax and more than Rs.30,000 for other taxes.
Ledger cards will be maintained in the O/o CIT (Audit) as well as in the O/o
Admn CIT in different formats.
The ledger card is to be maintained for each A.O regarding the mistakes made by
him.
Entries will be made in this card when major audit objections are accepted by the
Department.
The entries would enable the CIT to watch the frequency of mistakes and whether
the A.O’s work is improving.
This card will be kept in view by the CIT while countersigning the Annual Report
of the Officer concerned.
When the A.O moves to another charge on transfer or promotion, the ledger-card
shall be transferred to the CIT in whose jurisdiction he would be working.
 Explanation of Staff
• If the mistake is, inter alia, on account of any one or more of the
following reasons, the explanation of the staff responsible for the
mistake should also be obtained:
a) where an issue is considered/discussed in the body of assessment
order, and necessary addition on the issue is directed to be made,
or where a deduction is directed to be allowed by the Assessing
Officer, but such directions are not taken into account at the time
of calculation of tax, interest and surcharge;
b) where there is totalling mistake in the computation of income;
c) where an income disclosed in the return is not included in the
computation in the assessment order, except where the Assessing
Officer has discussed in the body of assessment order and
directed not to include it;
d) where there is wrong calculation of tax including application of
wrong rate of tax;
 Explanation of Staff

e) Where there is wrong calculation of interest including application

of wrong rate of interest or wrong calculation of period for which
interest is leviable;
f) ; Where any income is added in the computation of income more
than once
g) Where wrong set-off of brought forward losses, unabsorbed
depreciation, loss on long/short-term capital gain, etc., not
commented by the Assessing Officer in the assessment order, has
been allowed;
h) Where wrong verification of, or failure to verify, the arrear
demand before the issue of refund results in wrongful issue of
refund;
i) Where credit of pre-paid taxes is wrongly allowed.
 Procedure for Appropriate Action
against the erring officer/staff
(a) The CIT in whose charge the mistake has occurred should call for the
explanation of the officer/staff responsible for the mistake, and indicate
whether the explanation is acceptable or not and as to whether the mistake
was bona fide or otherwise;
(b) After considering the explanation of the officer/staff concerned, where it is
proposed that a simple warning should be issued, the final decision to give
simple warning should be taken by the CIT in whose charge the mistake
occurred but he should communicate his decision along with the facts of the
case to the Commissioner under whom the officer/staff is working and the
latter should administer the warning;
(c) where the mistake pointed out in the Revenue Audit objection is of a
serious nature, which may call for penal action against the officer/staff
concerned, the CIT in whose charge the mistake occurred (hereinafter referred
as first CIT) shall, after considering the explanation of the officer/staff
concerned, form a view in this regard in consultation with the CIT under whom
the official is presently working.
(d) The first CIT shall, accordingly, recommend appropriate action in the case
to the Member (A&J), through CCIT (CCA), for necessary examination in the
Board. In a case where the Member (A&J) decides that disciplinary
proceedings needs to be initiated, the CCIT (CCA) concerned would then refer
the case to the appropriate Disciplinary Authority along with all material
evidence relevant to the case.
FLOW CHART FOR DEALING
WITH HALF MARGIN NOTES,
L.A.Rs, SOFs AND DRAFT
PARAS
 Remedial actions u/s 154
• Remedial action u/s 154 is generally resorted
to only in clear cases of arithmetical error or
other glaring errors like excess allowance of
brought forward losses, wrong application of
rate of depreciation etc.
• Where assessee contests the issue sought to
be rectified stating that two views are
possible, proceedings u/s 154 to be dropped
and other measures to be considered.
 Remedial actions u/s 147
• Once assessment is completed, reopening is always
fraught with difficulties.
• Where the issue under dispute was subject matter of
any questions during the assessment proceedings, it
becomes difficult to reopen the assessment u/s 147.
• Remedial action is easier if the year involved is within
four years
• Once the year falls beyond four years, even if it is
within six years, Revenue has to prove that the
escapement of income is because of non-disclosure of
information by assessee.
 Remedial actions u/s 263
• Where remedial actions u/s 154 and u/s 147 are
not possible, proposal for revision of assessment
u/s 263 can be sent to the CIT
• Order u/s 263 can be passed only when an order
is both erroneous and prejudicial to revenue
• Time limit of two years is with reference to the
original order and not any subsequent order,
unless the mistake sought to be revised arose in
the subsequent order
Erroneous & prejudicial to revenue
Order would be erroneous if it is based on :-
 An incorrect assumption of facts or
 An incorrect application of law or
 Non-application of mind or
 Based on insufficient materials
 Prejudicial to interest of revenue
• The interpretation of expression "erroneous in so far as it is prejudicial to
the interests of the revenue" has been a contentious issue. Finance Act
2015 provided clarity on the issue
• An order passed by the Assessing Officer shall be deemed to be erroneous
in so far as it is prejudicial to the interests of the revenue, if, in the opinion
of the Principal Commissioner or Commissioner:

– (a) the order is passed without making inquiries or verification

which, should have been made;
– (b) the order is passed allowing any relief without inquiring into
the claim;
– (c) the order has not been made in accordance with any order,
direction or instruction issued by the Board under section 119;
or
– (d) the order has not been passed in accordance with any
decision, prejudicial to the assessee, rendered by the
jurisdictional High Court or Supreme Court in the case of the
assessee or any other person.
 Situations in which action u/s 263 is
not possible
• Where on any particular legal issue, two views are possible
and one possible view has been adopted in the assessment.
Not erroneous unless the view taken by AO is
unsustainable in law. (Eg..)
– Malabar Industrial Co Ltd Vs CIT (2000) 109 Taxman 66 (SC)

• Where in cases where re-assessment was done, the

mistake sought to be rectified was existing even in the
original assessment order
– CIT Vs Alagendran Finance Limited 293 ITR 1 (SC)

• Where the twin conditions of the order being erroneous

and prejudicial to revenue are not satisfied
 Two views possible
The hon’ble Supreme Court of India, in the case of CIT v. G.M. Mittal Stainless
Steels (P) Ltd - 263 ITR 255, held that ‘Revenue authorities are bound to
follow the decision of jurisdictional High Court even if the said decision is
challenged before Supreme court’. The Supreme Court observed that :

• “if the authorities within the State refused to follow the jurisdictional High
Court’s decision on the ground that the decision was pending disposal by
this Court (Supreme court), it would lead to an anarchic situation within
the State.”

The S.C held that where the Assessing Officer has followed the decision of
jurisdictional High Court and had taken a stand, merely because such
decision or similar decision of other courts are pending before Supreme
court, the order of Assessing Officer relying on the decision of
jurisdictional High Court cannot be said to be erroneous and CIT cannot
invoke the provisions of sec.263 of the Act.
THANK YOU