CAG conducts Audit on Income Tax Dept Assessments detects lower Tax demand of Rs 44,000 crores

The Comptroller and Auditor General (CAG) found that income-tax department had under-assessed income in a sample of scrutiny assessment cases, leading to a lower tax demand by over Rs 44,000 crore.

The CAG also known as the Supreme Audit Institution of India, mandated by the Constitution of India, strives to promote accountability, transparency and good governance through high quality auditing and accounting and provide independent assurance to their stakeholders, the Legislature, the Executive and the Public, that public funds are being used efficiently and for the intended purposes.

CAG conducted Performance Audit on search and seizure assessments in Income Tax Department. The Performance Audit (PA) covered the search assessments completed during the financial years 2014-15 to 2017-18.

Why did CAG conduct the Performance Audit?

• It was noticed that the search operations conducted by department brought Rs 10288 crore of undisclosed income to tax in 2014-15 which increased to Rs 15497 crore in 2016-17.
• Thus, there was a significant growth of 51% increase in undisclosed income on account of search conducted in 2016-17 as compared to 2014-15.
• A performance audit on search and seizure was conducted and included in the CAG Report No.7 of 2006 wherein low sustainability of additions made in assessments in search and seizure cases at the appellate stage due to deficiency in investigation and assessment was pointed out.
• Therefore, it was important for Audit to carry out a follow up.

Observations of the Audit on deficiencies in assessments conducted by the Department

• The income-tax department had under-assessed income in a sample of scrutiny assessment cases, leading to a lower tax demand by over Rs 44,000 crore.
• There were cases where there were loopholes/deficiency in the provisions of the Act in respect of search assessments. These deficiencies mainly related to absence of specific provisions in the Act/Rules.
• In respect of certain Groups that 76.5% of additions made in assessments did not stand the test of judicial scrutiny in appeals at the level of CIT (A)/ITAT. We also observed cases where sustainability of additions made in the assessment orders was nil at appellate stage.
• There were cases where AOs, while finalizing the assessments, did not take uniform stand in making additions on account of bogus purchases, accommodation entries and in adoption of figures of assessed income/revised income.
• The additions were made arbitrarily either on lump sum amount basis or different percentage ranging from 5% to 50% under similar circumstances without proper justification.
• The CAG audited nearly 3.32 lakh such cases where the Income Tax Department had under assessed income for financial years 2017-18 and 2018-19.
• The Report stated that, Assessment orders had irregularities in allowing depreciation/business losses/capital losses and instances of incorrect allowance of business expenditure.

Observations of the Audit on Issues in Appraisal Report

• An appraisal report is a report which contains the investigation proceedings of the assessee whereas assessment order is an order passed by the assessing officer for the purpose of determination of liability.
• Audit noticed that the department did not centralise all cases in respect of certain groups for assessments due to which issues relating to the assessees pointed out in Appraisal Report could not be addressed.
• There was delay ranging from 1 month to 14 months in handing over of Appraisal Report along with seized material to the AO.
• This inordinate delay in handing over seized materials may result in less time for assessment which has attendant risk of human error for hasty completion of assessment thus affecting the quality of assessments.
• There were cases where AO did not verify the genuineness of the transaction pointed out in Appraisal Report and did not add undisclosed income recommended in the Appraisal Report.
• Unsecured loan/advance received from entry provider, entire undisclosed income pointed out in Appraisal Report was not assessed, expenditure was not added back to the income of the assessee for want of evidence of TDS, action was not initiated by the department despite receipt of search folders and materials.

• Though the department was required to coordinate with other wings of ITD viz Investigation wing, TDS circle etc. in these cases and resolve the issues before finalization of the assessments but the same was not done.
• Audit noticed cases that though the information relating to sellers of land/flat/commodities had been pointed out in the respective Appraisal Report, who could be potential assessees. Yet Department did not initiate any action in this regard.
• The department also did not confirm whether these sellers were in the tax net of the department and regularly filing the return.

Observations of the Audit on Improper Refunds

• Audit noticed 1,130 instances where modification by AOs in interest amount resulted in blockade of refund amounting to Rs 4,395.7 crore which was due to be payable to the concerned assessee.
• Moreover, in many cases excess or irregular refunds/interest on refunds had been approved.
• Additionally, there was also discrepancy in the IT system which calculated interest on late tax payment by assessee or interest owed to the taxpayers due to delay in refund.
• Although the system allowed manual intervention by assessing officers (AOs) to correct interest calculation, in many cases AOs blocked refund due to the assessees by modifying the interest component causing undue hardship and harassment.

Observations of the Audit on TDS

• Many taxpayers faced harassment because of mismatch in tax deducted at source (TDS) in more than 17 lakh returns.
• Due to such mismatch TDS credit was denied to the assessee (taxpayer) despite receipt of the revenue by the department or presence of Form 16/16A issued by deductor in support of his claim.
• This resulted in disallowance of refunds and also in creation of infructuous demands for tax resulting in avoidable harassment to the taxpayer.

Observations of the Audit on non-compliances by AO

The audit noticed that there were:

• Cases of non-compliance of CBDT’s instructions/orders such as allowing appeal without collecting the requisite demand and non-filing of appeal in the High Court despite the directions of DGIT (Investigation).
• Cases where AO dropped penalty proceedings under sections 271(1)(c)/271AAB of the Act without approval of higher authority.
• Cases where, AO did not assess the income of the relevant assessment year covered under search.
• Cases where AO, while finalizing the search assessments, did not levy penalty though the same was leviable.
• Cases where AO while finalizing the search assessments, did not assess unexplained credit, levied tax on normal provisions instead of leviable under special provisions of section 115JB of the Act, computed short demand, charged tax at a rate less than the prescribed rate, short levied interest, surcharge and did not disallow expenditure related to exempt income, allowed incorrect MAT credit etc.
• Cases where AO did not comply with the provisions such as non-referring of cases to Transfer Pricing Officer (TPO), Action on offence committed by Chartered Accountant in IT Act, Delay in action on Entry provider, Assessment without filing of IT Return, Prior approval of Joint Commissioner not taken before passing assessment order, etc. during search assessments.
• Cases where AO had not made addition of undisclosed income admitted by the assessee or disallowed the expenditure based on the statement made on oath during the course of search and also had not resolved the matter with the Investigation Wing.

Recurrence of irregularities, despite being pointed out repeatedly in audit reports, was indicative of non-seriousness of the department. The lack of effective monitoring and absence of an institutional mechanism to respond to the systematic and structural weaknesses lead to revenue leakage.