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Tax audit is an important tool for revenue department which ensures compliance of various provisions of income tax act, reduces the cost in context of diversity and complexity of the calculation of taxes and collection thereof by using the services of specialised professional.

ith the growing number of assesses under the head “income from business or profession” due to economic development of the country translating into the growth of business houses. Tax audit under section 44AB was introduced in India in the year 1984. At that time revenue department found it difficult to complete assessments of Income Tax Returns filed within the stipulated time frame effectively and efficiently that too without losing revenue.

The idea of implementing Tax Audit under section 44AB was to get the accounts of business houses and Professionals having a specific turnover audited by accountants who are supposed to be well versed with the provisions of the income tax. The report thus submitted helps assessing officers in quick disposal of assessments. The job of Tax audit was assigned to Practicing Chartered accountants with a limit on the number of Tax audits one can undertake.

In the case of: Abhay Kumar And Co., Mehta ... vs Union of India (Uoi) And Ors. on 14 April 1986: Equivalent citations: 1987 164 ITR 148 Raj, 1986 63 STC 203 Raj

JUDGMENT A.K. Mathur, J

"Thus, in the present case, the object is to check evasion of tax. That can be achieved through checking the accounts of the assesses and for that purpose a specialised person like a chartered accountant is well equipped to check into all its aspects. Thus, this particular job has been entrusted to the accountant who is fully qualified under the Chartered Accountants Act…….”

From the above observation a tax auditor need to understand that  his/her job is not only to provide the information in 3CD report or in the annexures attached there with to the assessing officer  for the purpose of the Tax calculations but is expected to verify and ensure that the provisions of the income tax act have been complied fully ensuring  that there is no loss of revenue to the exchequer.  Thus, on the one side tax auditor has to ensure that his client has deposited or deducted tax as per the provisions of law and on the other side provide information in such a manner which helps assessing officer in discharging his/her duty of making assessments. A tax auditor must ensure that he performs his/her duty with honesty and sincerity. Any deviation may attract penalty under section 271J in addition to disciplinary action from the Institute of Chartered Accountants of India as a member.

There can be following three situations for a Tax Auditor while discharging his/her duties:

Where a statutory auditor is appointed to carry out the job of tax auditor also. Statutory auditor who is appointed by following the process as applicable under different laws is also assigned the job to carry out tax audit. It is advisable to have appointment letter issued by the authorised person of the organisation for future reference and record. In such cases the statutory auditor is advised to carry out both audits concurrently for the sake of time and cost saving. Care must be taken while finalizing the Tax audit report to eliminate any inconsistency with the audited financial statements and the notes to account signed as statutory auditor.
Where the statutory auditor and tax auditor are two different auditors. The responsibility of the tax auditor in such cases is independent of statutory auditor. Tax auditor may rely on the audited financials of statutory auditor, but he must give his opinion as to whether the particulars given and signed by him/her in tax audit report are true and correct. Thus, tax auditor is not absolved of the responsibility of incorrect statement or details because of the fact that he relied on the audited financials submitted by statutory auditor.
In such cases where nature of business and profession is such that there is no requirement to get accounts audit under any law but is required to get the audit done under section 44AB. The auditor has both the responsibilities i.e. to give opinion based on the information and explanations which, to the best of his knowledge and belief, were necessary for the purpose of the audit along with an opinion on the proper books of account and opinion on the notes to accounts. 

In case of audit of branches or head office and few branches Branch or like that a tax auditor is supposed to submit tax audit report for such branches separately i.e. branch wise.

In the case of point number 1 & 2 above the audit report to be given is in Form No. 3CA and for point number 3 the Form number applicable is 3CB.

There are no guidelines as to how or to what extent the verification of data and relevant information is required to be carried out by the tax auditor. The Institute of Chartered Accountants of India has permitted use of test check where 100% audit is impracticable. It is advised to plan tax audit keeping in view the volume of the work and its practicality based on one’s own judgement. In case of any observation on the applicability of tax provisions or on the data being produced in 3CD the tax auditor must report the same in the Tax Audit Report.

Note: Read various articles and court judgments

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