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Finance Act, 1984 introduced Section 44AB under Income-tax Act, 1961 w.e.f Assessment Year 1985-86. Under this section, if the total sales / turnover or gross receipts for previous year exceed the prescribed limits then assessee is required to get his accounts audited by an “Accountant”. This audit is popularly known as Tax Audit.

Applicability of Tax Audit: Section 44AB of Income-tax Act provides for compulsory audit of accounts of certain persons carrying on business or profession.




Every assessee, whose total sales or gross receipts in any previous year exceed Rs. 1 Crore, has to get his accounts audited.


Every assessee, whose gross receipts in any previous year exceed Rs.25 Lakhs has to get his accounts audited.

Special Cases

Assessee covered u/s 44AD / 44AE / 44BB / 44BBB, if claim that profits from such activities are lower than presumptive income and his income exceed maximum exemption limit.

Objective of Tax Audit:

Objective of Tax Audit is to ensure that assessee’s books of account and other records are maintained in accordance with provisions of Income Tax Act and reflect correct income. This audit is for curbing Tax Evasion and ensures Tax Compliance.

About this article: This article is divided in two parts.

(a) Changed in “Accountant” definition

(b) Benefits to Government and Society by this change

(a) Changed in “Accountant” definition.

As we all knew Income-tax Act, 1961 is going to be replace by proposed Direct Tax Code (DTC) 2013. Many sections/definitions are changed in proposed DTC 2013 but here I will limit my article to much awaited and welcome changed in “Accountant” definition.  

As per the proposed DTC, Accountant means Practicing CA, CMA or CS within the meaning of their respective acts. In other words, DTC allows Tax Audit not only by Chartered Accountants/CAs but also by Cost Accountants/CMAs.

The expansion of definition of Accountant under DTC is welcome change. Till now only Chartered Accountants are authorized for Tax Audit and enjoying monopoly of authority, which causing strict hurdle for voluntary compliance. Therefore, it is welcome that this monopoly is broken and Let the country gain by better, effective tax compliance.

This change in “Accountant” definition and authorizing CMAs for Tax Audit has raised some unnecessary doubts in our fellow professional friends. Here I am trying to help them to overcome their doubts, one by one.

Tax Audit is the exclusive domain of Chartered Accountants only?

For overcoming this doubts, let’s go to history, how this Tax Audit came into existence and how only CAs authorized for it?

ICAI Financial, ICAI Cost, ICSI were established in 1949, 1959, 1980 respectively.

Finance Act 1984 introduced Tax Audit u/s 44AB under Income Tax Act, 1961 w.e.f Assessment Year 1985-86.   At that time, ICAI- Cost was just two years old and ICSI was not even established. At the time out of all professional institute only ICAI- Financial was completely established and had good members’ strength therefore non-inclusion of CMAs/CS in Accountant definition and only authorizing CAs, at that time is justified.

But now ICAI- Cost is more than 50 years old with good member strength too, and its members efficiently doing audit of Excise Duty, Service Tax, VAT etc. because of this, now government decided to take their services in income tax too.

So thinking that Tax Audit is the exclusive domain of Chartered Accountants only, is completely wrong.

Are CMAs competent enough to handle Tax Audit?

Syllabus, Exam procedure and Passing percentage of both ICAI are same. Perception is that because of their 3 years articleship training CAs has more practical experience to trickle Tax Audit cases.

Here I make it clear, CMA become eligible for practice only after 3 years of post-qualification experience and no one can disagree that having post qualification experience as a professional is far better than having articleship experience as trainee. Assessing officers of Income-Tax Department, who come from different streams conducting audit and scrutinizing assessment proceedings are not CA. They are able to do because of their experience they gain after joining these jobs.

CMAs are already conducting taxation audit of Excise Duty, Service Tax VAT etc, then why not Income Tax. I explained above why their name was not included earlier, now that limitation had been over and that why government authorised them in the field of Income tax too.

Along with Taxations, CMAs have wide knowledge in the field of valuation and costing, it will definitely help in curbing Tax Evasion in case of under/ over valuation of inventory. How CMAs can be useful in this, I explained in next part of this article.

(b) Benefits to Government and Society by this change

Valuation is one of the most important part of Tax Audit. If valuation is not done properly than government will lose revenue because of under computation of income. Closing stock is a powerful aspect for declaring profit. If it raised profit raised and if its value fall, profit will also fall.  So closing stock valuation is an important matter for calculating correct profit and curbing Tax Evasion.

But in Audit Report/Balance Sheet of many businesses, one can easily find a note states –

“All Inventories are valued at cost, as per certificate of the management. There is no change in the method of valuation of opening and closing stock. Physically verification of stock has not been carried out by us and the same is taken as certified by the management.” Or

“Inventory -  (As valued and certified by Management).”

This gives an impression that inventory valuation is not done by auditor. If inventory valuation is left to management then it is not good as a business can easily reduce its income taxes liability by adjusting its inventory value and which is against the main objective of Tax Audit.

Few Examples are given below:

a. The cost of goods sold is the largest cost component, so method used to calculate it, can have a great impact on taxable income. Cost of goods sold is depends on inventory value. A higher inventory amount would naturally reduce the gross profit amount, thereby having the same reduction affects on taxable net profit.

b. In times of inflation and rising prices, LIFO method can be used to increase cost of goods sold. Increasing the cost of goods sold will reduce profits, which in result reduce income tax liability.

c. In same way using FIFO method for inventory valuation also provides income tax benefits in some cases. If the price of goods rises over the year, FIFO method that can be used to increase cost of goods sold that will reduce taxable income.

Yes, there are regulations that must be adhered before changing certain valuation methods for accounting purposes. One cannot change valuation of inventory now then but if inventory valuation is left for management then they can change valuation method as and when it suits them. They have to just give a declaration and they knew their business licences will not be cancelled if they gave wrong declaration, unlike CAs/CMAs who have to face disciplinary action or even their COP may be cancelled if it found they had given wrong declaration. 

So inventory valuation is very important for ensuring that assessee’s books of account reflect correct income and objective of Tax Audit is fulfilled.

As now CMAs is coming into Tax Audit, we can expect a better inventory valuation because they are valuation experts. They will calculate true value of inventory by using Cost Accounting Standards - CAS and other Costing Techniques and businesses will has to pay correct income tax amount.

With their knowledge and skills, CMAs will surely set some benchmark in valuation and in result, it will help in curbing Tax Evasion in case of under/ over valuation. So change in “Accountant” definition is proof to be benefits for Government and Society.

Every company submit profit and loss account and balance sheet to income tax department.  It includes closing stock too. For better result, In proposed DTC, Government should insure that assesses who are filing tax audit report must submit another form for closing stock valuation, which is to be mandatorily fled with form 3CD and must be certified by CMAs even if Tax Audit is done by other professionals.


Government has shown confidence on CMAs and they worth it. They have required knowledge, skill and efficiently doing taxation audit of Excise Duty, Service Tax VAT etc. Go to any MNC/PSU, one can easily find CMAs doing jobs as Manager – Taxation, Manager – Accounts, Manager – Credit etc. and some are holding top management positions. so doubting their professional efficiency is completely senseless. Give some time, India will see great impact of their service in Income Tax.

CMA Arif Farooqui



Published by

CMA Arif Farooqui
(Cost Accountant)
Category Audit   Report

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