Corporation Tax – CAG lambasts CBDT
One single factor attributed for the totally illogical actions of the babus, is the fear of Audit, especially the Audit by the CAG’s audit teams.
This is how it works - After completion of audit of each assessment unit, audit observations are conveyed to the department through a local audit report (LAR). In the case of important observations, a statement of facts (SOF) is issued to the department for verification of facts and obtaining their comments. Important audit findings are forwarded to the Board and Ministry of Finance in the form of draft paragraphs (DAP). Finally, the Audit Report on direct taxes is forwarded to Parliament through the President of India.
In the next few days DDT will bring you extracts from the CAG’s latest Audit reports to Parliament on both the Direct Taxes and Indirect Taxes. Mind you, these reports have crossed the stages of LAR, SOF and DAPs and are pure distilled objections for consideration by the ultimate supreme authority – the parliament.
Today we bring you highlights from the CAG’s report on Corporation Taxes.
Corporation tax constituted 62.71 percent of the total collection from direct taxes in 2006-07. There were 3,99,627 corporate assessees as on 31 March 2007, which represented a slight increase of 1.80 percent over the previous year.
Audit issued 686 observations to the Ministry of Finance involving revenue impact of Rs. 1669.38 crore highlighting various irregularities, omissions and mistakes, for comments. The Ministry had accepted 204 observations involving revenue impact of Rs. 712.44 crore till 7 December 2007.
Assessing officers committed mistakes in:
1. Computation, carry forward and set off of losses in 59 cases involving revenue impact of Rs. 414.22 crore.
2. Allowance of deduction towards depreciation, actual payment and capital/non business expenditure in 113 cases involving revenue impact of Rs. 398.62 crore.
3. Implementation of appellate orders and non/short levy of interest in 61 cases involving revenue impact of Rs. 199.02 crore.
4. Adoption of correct figures, allowance of provisions and computation of income under special provisions in 102 cases involving revenue impact of Rs. 174.24 crore.
5. Allowance of prior period expenses / deductions not admissible, exemptions and relief in 49 cases involving revenue impact of Rs. 71.63 crore.
6. Deductions under chapter VIA and allowance of refund in 51 cases involving revenue impact of Rs. 24.20 crore
7. Assessees had availed unentitled benefit in summary assessments in 145 cases involving revenue impact of Rs. 149.30 crore.
Mistakes in implementation of appellate orders
An aggrieved assessee can appeal to the Commissioner of Income Tax (Appeals) against the order of an assessing officer who shall comply with the directions given in the appellate order. Further appeal is also permitted to be made on questions of fact and law to Income Tax Appellate Tribunal and on the questions of law alone to the High Court and the Supreme Court thereafter. Any mistake committed while giving effect to an appellate order results in underassessment/over assessment of income.
Assessing officers did not implement appellate orders correctly, which resulted in short levy of tax totalling Rs. 105.68 crore in 9 cases in Gujarat, Haryana, Maharashtra, Orissa, Rajasthan, Tamil Nadu and Uttaranchal.
One sample case
In Haryana, CIT, Hisar charge, the assessment of a company, M/s Parkash Industries Ltd., for the assessment year 1999-2000, was finalised in scrutiny manner in March 2002 determining a loss of Rs. 33.40 crore. The assessee had filed an appeal before the Commissioner of Income Tax (Appeals) against this assessment order and was allowed a relief of Rs. four lakh in February 2006. Audit examination revealed that the assessing officer while giving effect to the appellate orders, incorrectly determined the net loss as Rs. 274.21 crore instead of Rs. 33.44 crore. The mistake resulted in overassessment of loss of Rs. 240.77 crore involving potential revenue impact of Rs. 84.27 crore.
Excess allowance of refund / interest on refund
Where, as a result of any order passed in assessment, appeal, revision or any other proceedings, refund of any amount becomes due to an assessee, this may be granted in cash or adjusted or set off against the outstanding dues to the assessee for any assessment year.
Interest on excess payment of advance tax, tax deducted or collected at source and any other tax or penalty becoming refundable will be paid at the rate of one percent (since reduced to two third percent with effect from 1 June 2002 and one half-percent from 8 September 2003) for every month or part of month for the period from 1 April of the relevant assessment year to the date on which the refund is granted. No interest will be payable, if the amount of refund is less than ten percent of the tax determined under summary or on regular assessment.
Where as a result of an order under section 154, 155, 250, 254, 260, 262, 263 and 264, the amount of refund on which interest was payable has been increased or reduced, the interest thereon shall be increased or reduced accordingly.
If the proceedings resulting in refund is delayed for reasons attributable to the assessee, whether wholly or in part, the period of delay so attributable to him shall be excluded from the period for which interest is payable.
Non compliance with the above provisions by the assessing officers resulted in excess allowance of refund or interest on refund totalling Rs. 6.68 crore in 10 cases in Gujarat, Karnataka, Kerala, Maharashtra and West Bengal.
Mistakes in computation of capital gains
Any profit and gains arising from the transfer of a capital asset shall be chargeable to income tax under the head ‘capital gains’ and is taxable in the year in which the transfer took place. The mode of computation of capital gains in respect of long-term capital asset provides for deduction, from the consideration received, of the cost of acquisition of assets and the cost of any improvement thereto and of expenditure incurred wholly and exclusively in connection with such transfer.
Where full value of consideration received or accruing as a result of transfer of any capital asset falling within a block of assets, on which depreciation has been allowed under the Act, exceeds the written down value of the block of assets at the beginning of the relevant previous year, the excess shall be deemed to be capital gains arising from the transfer of short term assets.
Where a capital asset is converted by the owner thereof into, or is treated by him as stock-in-trade of a business carried on by him, such conversion or treatment shall be treated as transfer and capital gain thereon shall be computed as per section 45(2). Further, as per Supreme Court’s decision, the business income shall be computed on the difference between the sale proceeds and the fair market value of the asset as on the date of conversion into stock-in-trade.
Assessing officers did not apply the above provisions correctly, which resulted in short levy of tax aggregating Rs. 2.36 crore in five cases in Tamil Nadu and Maharashtra.