Standard Operating

Procedure
for
AUDIT

IAP / RAP
 OBJECTIVE OF AUDIT
To ensure proper implementation of law.
To prevent loss of revenue.
To ensure that all procedures and rules are
working effectively.

First, a corrective role - of pointing mistakes

for taking remedial action
Secondly, a preventive role - avoiding
recurrence of mistakes.
MSTU, CHENNAI
 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
(renamed as RECEIPT AUDIT) SINCE 1960.
• To ensure that proper procedures and laws have been followed,
improving quality of assessments, so as to prevent detections of
mistakes by the ‘Receipt Audit’ and thereby improve the working of
the Department.
• 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

MSTU, CHENNAI
 Instruction No.6/2017 - IAP
• The working of the Internal Audit set up has been
reviewed, in the light of observations of the C&AG
Audit report (Performance Audit – 2015).
• The Income-tax Business Application (ITBA) is being
rolled out and assessment and other ancillary work
would be done on the system.
• With the availability of data on the system, the
objective of audit of top potential cases would be
achieved, as such cases would be identified easily.
• INSTRUCTION NO.6/2017 [F.NO.240/08/2015-A &
PAC-II], DATED 21-7-2017 – Supercedes earlier
instructions.
MSTU, CHENNAI
 AUDIT SETUP
• In CBDT, matters relating to Internal Audit and
Public Accounts Committee are looked after
by Member (A & J).
• The Directorate of Audit has been brought
under the administrative control of Pr.
Director General of Income Tax (L&R).
• The Inspections work has also been shifted
from ADG (Exam) to ADG (Audit) and the post
of ADG (Audit) has been re-designated as ADG
(Audit & Inspections).
MSTU, CHENNAI
 AUDIT SETUP
• There is an Internal Audit setup for each region under the direct
supervision and control of the Pr. CCIT – To review the progress of
settlement of objections on quarterly basis – submit a report within
15 days of each quarterly review to the Member (A&J), CBDT.
• The audit structure is headed by a CIT (Audit) in each Pr. CCIT
Region.
• However, in the metro charges of Delhi, Mumbai, Kolkata and
Chennai, there are two CsIT (Audit).
• The CIT (Audit) has the headquarters at the same station as that of
the Pr. CCIT. There are 22 CsIT (Audit) in the Internal Audit set-up in
the country.
• Each CIT (Audit) has one JCIT (Audit) and one ITO (H.Q)
• Each JCIT (Audit) has one SAP (Special Audit Party) headed by
ACIT(Audit) and as many IAPs (Internal Audit Party)
• Apart from audit of cases, the JCIT (Audit) will supervise the work of
SAPs and IAPs assigned for audit.
MSTU, CHENNAI
 Targets for Internal Audit
As per instruction No.6 / 2017:
• The minimum number of cases to be audited by each JCIT, SAP or IAP in a year
shall be as under:
• JCIT (Audit) : 200 points
• SAP : 400 points
• IAP : 720 points
NOTE: Audit of Regular or complete scrutiny = 1 point (for corporate case 1.2);
Limited scrutiny = 0.5 point
As modified by CBDT vide F. No. 246/15/2019 A&PAC-II dated 20.8.2019.

Audit Party Minimum Annual Audit Party Minimum Annual Audit Party Minimum Annual
Target (No. of cases) Target (No. of cases) Target (No. of cases)
Monthly Target (No. of Monthly Target (No. of cases) Monthly Target (No. of cases)
cases)
Addl CIT / JCIT (Audit) 120 + 50 (Exemption Regn)* 10

DCIT (SAP) 480 40

ITO (IAP) 720 60

* Process of Regn of charitable trusts / institutions toMSTU,

be audited by 30th June of next year
CHENNAI
 Targets for Internal Audit
Re-checking of Audited cases
The CIT(Audit) shall randomly select 5% of the cases audited by JCIT (Audit)
and SAP (where objections not raised) and conduct re-checking.
Similarly, JCIT (Audit) shall randomly select 1% of the cases audited by ITO
(IAPs).
TARGET:
Name of Officer Cases audited by Target % Cases per month Minimum target
per year

CIT (Audit) Addl CIT / JCIT 5% 3 30

(Audit) & DCIT
(SAP)
Addl CIT / JCIT ITO (IAP) 1% 10 120
(Audit)

• If any mistake found during re-checking, the concerned IAP to raise

objection.
• CIT(Audit) should report the above work in the monthly audit report.
MSTU, CHENNAI
 Norms for Internal Audit
 Since capacity of IAP set up is quite limited, high risk cases (where likelihood of
mistake is more) are taken for internal audit. For this purpose, generation of list by
ITBA for internal audit would be based on ‘Audit Potential Index’ as under:
API = Assessed Income + 2 x (Exemptions + Deductions) + 4 x Total Refund granted
(for the relevant asst year)
(The exemptions and deductions referred to above shall be those under Chapter
III, Chapter VI-A, sections 32, 35 and 54 to 54H)

 API shall be computed in all cases where asst has been completed and shall be
arranged in list of descending order (combined list for the Pr. CCIT).

 The users in ITBA system have been provided filters to generate list of auditable
cases from entire pool of assessment completed in a particular period for all the
CCsIT/PCsIT assigned to a CIT (Audit).
 The same can also be generated individually for any particular CCIT/PCIT/JCIT/AO

 From the list, cases for audit may be assigned by CIT (Audit) to JCIT / SAP / IAPs.
CIT (Audit) can identify and mark the cases in ITBA.

 List of cases where assessment was completed manually and out of the purview
of ITBA, like Central, TDS, Reward cases, etc. shall be prepared separately. These
cases shall be audited manually.
MSTU, CHENNAI
 Norms for Internal Audit
 While assigning the cases to audit units, the CIT(Audit) may take into
consideration:-
 Preference for audit is given to high risk cases
 The target of minimum number of cases to be audited by audit unit has to
be evenly distributed over the year.
 At least some cases from all assessment units (AOs) should be audited.
 In multi-station regions, cases from all stations are audited.
 The cases audited are a reasonable mix of corporate and non-corporate
cases as also complete and limited scrutiny.
 Sectors of business that have more potential for audit during the relevant
year be preferred.
 Appropriate number of cases of International tax, Exemption, TDS are
subjected to Audit.

MSTU, CHENNAI
 Internal Audit for TPO and TRO
 The CCIT (International tax) shall put in place a system of
audit by one TPO by another TPO, preferably of an other
CIT (TP) charge or at least of different range.
 The Audit objections raised shall be submitted to the
CIT(Audit) attached to the Pr.CCIT in whose jurisdiction the
AO concerned is situated for follow up and record
purposes.
 This concept of chain audit would be in place till
experienced officers are available to set up a dedicated
internal audit team for Transfer Pricing.
 The Pr. CCIT shall put in place a system of audit of one TRO
by another TRO. The audit objections raised shall be
followed up by CIT (Audit).
MSTU, CHENNAI
 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

MSTU, CHENNAI
 AUDIT PROCEDURE
• Requisitions for records would be made through the system. It shall be the
responsibility of the Assessing officer to deliver the records to the Audit
unit. In search & Seizure cases, the Appraisal Report shall also be made
available to audit, if requisitioned.
• The Audit unit shall complete the audit work expeditiously and forward
the objection, if any, in the form of 'Audit memo' in a format prescribed.
The Audit memo shall be sent to the office of PCIT / CIT concerned, with a
copy each to the CIT (Audit), JCIT (Audit), Range head and the Assessing
officer.
• In order to make it convenient to decide the appropriate course of
remedial action and facilitate its settlement, the audit objection shall be
categorized, depending upon the issue raised by the audit unit concerned,
into (i) Factual, or (ii) Legal Question, or (iii) Mixed Issues
• For each mistake, even for the same case in same assessment year,
separate audit memo shall be issued for proper monitoring and ITBA
system will assign a unique identification number (UIN) to each audit
memo.

MSTU, CHENNAI
 AUDIT PROCEDURE
 The audit memo shall be issued after vetting by JCIT (Audit), if the
Revenue effect is more than Rs. 1 crore and if the Revenue effect
exceeds Rs. 10 crores, it shall be vetted by the CIT (Audit) before it
is issued. The vetting shall be done and recorded on ITBA system
itself.

 The Internal Audit Objections shall be classified by ITBA itself, on

the basis of quantum of Revenue effect, into major or minor
objection. The minimum revenue effect to be classified as major
objection would be Rs.10 lakhs.

 The remaining internal audit objections shall be classified as minor

objection in ITBA system. Revenue effect shall include interest etc.
also. The monetary limits for classification of major or minor
objections may be reviewed by ADG (Audit).

 In the cases selected by Computer Aided Scrutiny Selection (CASS)

for ‘limited scrutiny’, scope of audit shall be confined to the issues
for which limited scrutiny was made.
MSTU, CHENNAI
 REMEDIAL ACTION
 The Pr CIT, on the basis of report from A.O, examine major audit
objection and decide acceptability or not within a month of receipt.
 Where objection is accepted, remedial action shall be initiated within 3
months and action completed within 6 months thereafter.
 Where objection not accepted, Pr. CIT shall communicate reasons for the
same to the CIT (Audit).
 If CIT (Audit) disagrees with reply of Pr. CIT, he shall communicate the
same within one month of receipt of reply.
 If Pr. CIT still is of the view that the objection is not acceptable, he shall
intimate the reasons for his view to the jurisdictional CCIT within 15
days, who will consider both the views and issue the final decision on
acceptance or non-acceptance within 15 days.
 For minor objection, Range head shall examine the reply and settle with
JCIT (Audit). Where objection not accepted but JCIT (Audit) disagrees
with the reply of Range Head, issue shall be escalated to Pr. CIT and
above procedure follows.

MSTU, CHENNAI
 REMEDIAL ACTION
• Where IAP objection is accepted, the Pr.CIT shall decide if the
relevant order under audit requires revision u/s 263 as remedial
action.
• If 263 not invoked, Pr. CIT shall communicate A.O, who shall
examine the facts of each case and take a suitable action as per his
independent application of mind on the facts of each case.
• In case the A.O decides to choose section 154 as the appropriate
remedial measure, he shall initiate the action after approval of the
Range head.
• Appropriate remedial action should invariably be initiated within
three month of the receipt of audit objection, and necessary
orders should be passed within six months thereafter.
• The objection shall be treated as settled once the intimation of
completion of remedial action and issue of demand notice is given
to CIT (Audit) for major objection and JCIT (Audit) for minor
objection. – Settlement through ITBA.

MSTU, CHENNAI
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.

MSTU, CHENNAI
 Internal Audit of the Process of Registration of
Charitable Trust / Institutions
• The Internal Audit of the process of registration of Charitable Trusts
/ Institutions of CsIT (Exemptions) – to be done b JCIT (Audit) – To
be completed by 30th June of succeedings F.Y.
• After completion of Audit – JCIT (Audit) to submit report to
CIT(Audit) by 31st August.
• After examination – CIT(Audit) will submit the final objections /
observations to CIT(Exem) by 30th September – copy endorsed to
CCIT (Exem)
• CCIT (Exem) to examine all the Audit reports – seek comments from
respective CIT(Exem) – CCIT (Exem) decision regarding acceptance /
non-acceptance of audit objection / observation shall be final.
• CCIT (Exemption) shall submit his consolidated report to Pr DGIT
(L&R) by 31st December.

MSTU, CHENNAI
 RECEIPT AUDIT PARTY
OBJECTIVE & SCOPE
• The main objective of Receipt Audit is to satisfy itself
that the Income Tax Department has provided
sufficient checks and safeguards against errors and
frauds and that the procedures prescribed are followed
to give effect to the requirements of law.
• An important function of Receipt Audit is to see that
adequate regulations and procedures have been
framed by the Department to effectively check the
accuracy of assessment, issue of refund, collection of
taxes and to satisfy itself that such regulations and
procedures are being followed.

MSTU, CHENNAI
 RECEIPT 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.

MSTU, CHENNAI
 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.

MSTU, CHENNAI
 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. [Appraisal Report should be given in search cases].
 Wherever records not given without valid reasons, CIT shall
call for explanation from the Officer / Staff and suitable
action to be taken.
MSTU, CHENNAI
 AUDIT PROCEDURE - RAP
• The RAP issues an Audit Memo (Half Margin Note)
• If the Audit Memo is not categorized by the LAP, the AO shall categorize the
objections raised as:
a) Factual mistake; b) Legal issue; or c) Mixed issue.
In case of factual objection:
a) If mistake pointed out by the audit is found to be correct, the AO shall initiate
appropriate remedial action within 5 days and inform the LAP accordingly;
(b) If facts in objection are not found correct, the AO shall give reply to the Audit
specifying correct facts

In case of Legal issue/Mixed issue

(a) The AO shall specify as to whether or not, the factual aspect of the objection is
correct and convey the correct facts relating to the same to the LAP.
(b) For the legal question raised as such or in case of mixed issue, the AO may
intimate to the LAP that the reply would follow after due examination of the
matter.
(c) The AO shall send a status report to the PCIT as regards mistakes involving legal
question/mixed issue, so that a view may be prepared for response on receipt of
LAR.

MSTU, CHENNAI
 LOCAL AUDIT REPORT
• Within about a month of close of audit, a Local Audit Report (LAR) is forwarded to
the PCIT concerned containing audit observations in respect of errors noticed. The
LAR has various parts as under:
• Part-IA : General information - Introduction (assessment unit, LAP and dates of
audit), Administration, Selection, Jurisdiction
• Part-IB : List of outstanding audit observations
• Part-IC : Review Note and Settlement of outstanding paragraphs
• Part-II : Current Audit Observations - Section-A Corporate-tax, Section-B Income-
tax, Section-C Wealth-tax, Section-D Fringe Benefit tax, Section-E Other Misc taxes
(each section for Part IIA, IIB & III)
• Part-IIA : Major Audit Observations above prescribed limits applicable to different
categories (sections A, B, C, D etc) (different limits in metro, non-metro, corporate,
non-corporate etc)
• Part-IIB : Minor Audit Observations in the prescribed limits applicable to different
categories (sections A, B, C, D etc)
• Part-III : Other Audit Observations - NMV (No Monetary Value) paras
• Part-IV : List of cases not produced to audit
• Part-V : Disclaimer Certificate MSTU, CHENNAI
 FOLLOW UP OF LAR
• The AO shall enter all the objections in LAR in ‘Revenue
Audit’ Module in ITBA
• The functionality for recording LAR will be available from
‘Record LAR Screen’.
• The AO should also attach a copy of the LAR and submit the
work item to the Range Head to provide his comments on
the audit objections.
• The AO shall create separate work item for each para in a
LAR even if those relate to the same order.
• The PCIT shall, after calling for report from AO and the
Range Head, if needed, take a decision, whether the
objection is acceptable and communicate the same to the
officer concerned of the C&AG.

MSTU, CHENNAI
 FOLLOW UP OF LAR
• 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.

MSTU, CHENNAI
 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.
• Where RAP objection is accepted, the Pr.CIT shall decide if the
relevant order under audit requires revision u/s 263 as remedial
action.
• If 263 not invoked, Pr. CIT shall communicate A.O, who shall
examine the facts of each case and take a suitable action as per his
independent application of mind on the facts of each case.
• In case the A.O decides to choose section 154 as the appropriate
remedial measure, he shall initiate the action after approval of the
Range head.
• Appropriate remedial action should invariably be initiated within
three month of the receipt of the Local Audit Report, and
necessary orders should be passed within six months thereafter.
• The objection shall be treated as settled once the intimation of
completion of remedial action and issue of demand notice is given
to concerned CAG officer.
MSTU, CHENNAI
 PROCESS WHERE OBJECTION IS NOT ACCEPTABLE

 Where the audit objection is not accepted, the PCIT

shall send a reply to the concerned CAG officer
specifying reasons for non-acceptance of objection
within two months of receiving LAR. A copy of the
reply shall also be marked to the CIT(Audit). Where the
view of PCIT is accepted, the objection will be dropped
and no further action would be required.
 Where the view of PCIT is not accepted and a rejoinder
is received from concerned CAG officer with reasons
for disagreement, the PCIT shall first get the contents
of rejoinder entered in ITBA system. He shall then
reconsider the objection in the light of points raised in
the CAG rejoinder. If PCIT agrees with the views of the
ITRA, the procedure for remedial action shall follow.
MSTU, CHENNAI
 PROCESS WHERE OBJECTION IS NOT ACCEPTABLE

 Where the PCIT is still of the view that objection is not

acceptable, he shall take up such cases of disagreement, in
inter-departmental meeting with Director General of
Audit or Principal Director of Audit (Central), along with
cases where there is no response to PCIT's replies from the
CAG officer after lapse of two months.
 The CIT(Audit) shall also be invited to the meeting and he
shall play an active role for maintaining consistency of
approach on a particular issue. In the meeting, efforts will
be made to resolve the difference of opinion and arrive at
common view, as far as possible. Detailed 'Minutes of the
Meeting' shall be recorded and sent to all concerned .
However no remedial action shall be initiated in respect of
objections not accepted by PCIT even after discussion in
meeting.
MSTU, CHENNAI
 UNRESOLVED CASES

• Where a Revenue audit objection remains unresolved at field level,

the PCIT shall enter in ITBA system, the outcome of Inter-
Departmental meeting as per minutes recorded.
• In such cases the ADG (Audit) shall be able to generate a summary
of objection in order to take up the matter in the headquarter office
of C&AG.
• The ADG(Audit), acting on behalf of CBDT, shall hold meeting with
the Principal Director of Audit (Direct Taxes) in the Hq office of
C&AG to discuss the objections remaining unresolved at field level.
• For this purpose, the ADG(Audit) may constitute a team of officers
as deemed appropriate, including CIT(A&J), CBDT and officers from
Directorate of L&R, so that the latest judicial position on a legal
issue may be brought to the notice of officers of CAG during
discussion.
• Minutes of the meeting may be recorded and sent to all concerned.
• However no remedial action shall be initiated if the objection
raised by CAG is not found acceptable in the meeting.
MSTU, CHENNAI
 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.

MSTU, CHENNAI
 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)

MSTU, CHENNAI
 DRAFT PARA
• 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.]

MSTU, CHENNAI
 DRAFT PARA
• 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,
Where Audit objection is accepted, the Proforma Report in Part B should be sent
to the ADG (A&I) 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/ ADG (A&I). On receipt of the above
endorsement, the ADG (A&I) 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 ADG (A&I)
will give concluding shape to the ATNs on Audit Paras, and send these to the
Board, through the Pr DGIT (L&R) for submission to the C&AG of India after
necessary vetting and consideration in the Board.
MSTU, CHENNAI
 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 CHENNAI
MSTU, 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

MSTU, CHENNAI
 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.

MSTU, CHENNAI
 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.10 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.
Copy of ledger card should be enclosed with Part B of Draft
Para Report.

MSTU, CHENNAI
 LEDGER CARD
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.
MSTU, CHENNAI
 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;

MSTU, CHENNAI
 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.

MSTU, CHENNAI
 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

MSTU, CHENNAI
 Procedure for Appropriate Action
against the erring officer/staff
(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 Pr CCIT,
for necessary examination in the Board. In a case where the
Member (A&J) decides that disciplinary proceedings needs
to be initiated, the Pr CCIT concerned would then refer the
case to the appropriate Disciplinary Authority along with all
material evidence relevant to the case.
MSTU, CHENNAI
 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.

MSTU, CHENNAI
 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.

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 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).
MSTU, CHENNAI
 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.

MSTU, CHENNAI
 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.

MSTU, CHENNAI
 Reopening of assessment - Audit objection
• Indian Eastern Newspaper society v CIT [ 1979] 119 ITR
996
• The opinion of IAP cannot be regarded as information u/s
147(b)
• Audit may draw the attention of AO to law.
• AO must determine himself the consequence of law
brought to his notice by audit
• The basis for reopening must be the law which has come
to his notice, and not the audit note/ objection.
• When audit party pointed out a fact which has been
overlooked by the AO – reopening of asst is correct – PVS
Beedies – SC decision.
• When the AO disagree with audit objection – subsequent
reopening on the basis of audit objection – Not
sustainable – CIT v. Rajan N. Aswani (Bom)
MSTU, CHENNAI
 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

MSTU, CHENNAI
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

MSTU, CHENNAI
 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.
MSTU, CHENNAI
 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

MSTU, CHENNAI
 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.

MSTU, CHENNAI
THANK YOU

MSTU, CHENNAI