[Opinion] Make Tax Audit Guidance Note of ICAI a Practice Manual for the AO

Gopal Nathani – [2022] 140 taxmann.com 166 (Article)

Tax audit is mandatory for specified persons meaning those who surpass a limit of gross turnover or gross receipts from business or profession during any year. The audit is in the form of a questionnaire with 44 clauses that cover almost all sections of the Income tax Act chapters right from the nature of business, the books maintained, classes of incomes to their computations, the allowances and disallowances, high value transactions, deductions inadmissible/admissible etc. The first edition of this Guidance Note was published in the year 1985 immediately after the introduction of tax audit provision u/s 44AB. This publication has been revised from time to time to incorporate changes made by the amendments to the Finance Act, as well as judicial pronouncements, circulars etc. This Guidance Note has been revised in the years 1989, 1998, 1999, 2005, 2013, 2014, 2018. And currently in 2022 an exposure draft of Revised Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 is issued by ICAI in July 2022 seeking comments from the professional fraternity.

This guidance note is a bible to the length and breadth in the design and method of computing income under the head business or profession for the previous year just as the CBDT annual circulars u/s 192 which are a guide in the estimation of income chargeable under the head salary. Unlike salary income the stakes and sizes are however large in the computation of income under the head business or profession. Hence it is utmost desirable to have a clear cut guidance to draw computation of business or professional income in accordance with the provisions of the Income tax Act.

The 248 page exposure draft of tax audit issued by the ICAI is a thorough and researched publication which captures each and every section behind every clause in form 3CD with its nature, import and application with requirements of verifications, inquiries and disclosures. The guidance note provides guidance to admissible and inadmissible items. Most importantly the tax auditor is not expected to express his opinion about allowability or otherwise and strictly required to follow the law and judicial pronouncements on the subjects. In other words the guidance note is an independent expression of law to each of the clauses in form 3CD.

The tax audit report drawn on the basis of this guidance note is a reference document for the assessing officer who while determining assessable income place reliance on the disclosures made in the tax audit report. If we make this guidance note as practice manual for the revenue than there will be reduced litigation as much of the adjustments would be acceptable to both the parties. Given that the auditor is not expected to provide his personal opinion to the admissibility or otherwise of any item is a proof enough for the revenue to trust the report and its contents and therefore make this as part of practice manual for their officers too. By this approach there will be wider acceptance and less amount of tax litigation.

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