The audit watchdog of the government, Comptroller and Auditor General of India or CAG, has come down heavily on the Central Board of Direct Taxation (CBDT), the direct tax wing of the finance ministry, by exposing a series of lapses in its assessment of IT returns, errors in the tax database and its failure to verify exemptions granted to claimants of agriculture income.
CAG has also exposed tax deductions claimed falsely by charitable institutions, as provisions for such tax relief no longer exist.
The broad indictment
"There have been persistent and pervasive irregularities in respect of corporation tax and income tax assessments cases over the years. Recurrence of such irregularities, despite being pointed out repeatedly in the earlier audit reports points to structural weaknesses on the part of department as well as the absence of appropriate institutional mechanisms to address this," CAG observed in its audit report covering fiscal 2017-18.
Failure to recover tax arrears
According to CAG, income tax demand arrears have increased to over 11 lakh crore in FY18 from 10.4 lakh crore in FY17, but interestingly the "department indicated that more than 98.2 percent of uncollected demand would be difficult to recover in FY 2017-18". And CAG notes: "Income Tax Department recovered Rs 183.30 crore during 2017-18 on the basis of observations pointed out by audit."
Faulty tax assessments
CAG said in some of the high value cases, “arithmetical errors in computation of income and tax, mistakes in levy of interest, irregularities in allowing depreciation/business losses/capital losses, incorrect allowance of business expenditure, unexplained investment/cash credit, etc have been found.”
Manual and incorrect interest calculation
CAG also trained its guns on calculation of delayed interest by the taxman, and observed, "Audit noticed cases where the amount of interest was calculated manually and the same was fed into the system (AST). It is not clear why manual modification is permitted, that too apparently without a protocol for seeking senior level clearances if, in exceptional cases, manual intervention is required. In fact, if manual intervention at every level is needed, or continued, it either points to an ill designed IT system, or a deliberate attempt to retain discretion, for no apparent good reason.“
Agri income exemptions not verified
CAG has also come down heavily on assessees claiming exemptions on the ground of agriculture income. And its observations are very revealing.
"CAG found that in 1,527 scrutiny assessments cases (22.5 percent), claim of exemption on account of agricultural income was allowed without adequate documentation and verification of supporting documents. Audit noticed that out of 1,527 cases where documentation and verification by Assessing Officer was inadequate, land records were not available in 716 cases (10.6 percent) and proof of agricultural income and expenditure such as ledger account, bills, invoices etc. were not available in 1,270 cases (18.7 percent)”
CBDT should re-examine all cases under scrutiny
CAG has now advised the CBDT "to re-examine not only the remaining scrutiny cases, but also all cases where income has been allowed as agricultural income above a certain threshold, say Rs 10 lakh or more, to ensure that exemption has been allowed only to eligible assessees, and is based on appropriate documents and their verification."
Data entry errors
CAG has also picked on the issue of data entry errors by the I-T Department saying, "Errors in the database imply a dual risk: of loss of tax on one hand, and of harassment of tax payer on the other hand.“
Bogus claims by charitable trusts and institutions
CAG has also found irregularities in tax assessments of charitable trusts on a number of grounds.
"The irregularities found in Audit are (i) diversion of income/property by trusts to related group trusts/institutions as application of income; (ii) exemptions to assessees whose activities were not ‘charitable’ in nature; (iii) allowance of expenditure and accumulation where exemption was denied; (iv) lack of monitoring the investment of accumulated money by the trusts in the forms or modes other than those specified in the Act; (v) exemptions granted to trust on application of funds given to foreign universities; (vi) exemption to assessee where voluntary contribution including foreign currency donation was considered as corpus fund without specific direction of donor; (vii) non-cancellation of registration where activities of the Trust and Institutions are not in accordance with the provisions of the Act; and (viii) Failure of the Assessment Information System to levy surcharge"
CAG has now advised the CBDT to first "consider amending the provision to make prior approval a pre-condition for foreign donation by a charitable trust or institution.“
Second, "CBDT may consider including a provision to make the trustee also liable in case where the provisions of the Act are not complied with."Third, "CBDT may consider bringing in a level playing field by inserting a sunset clause for such provisions applicable to those Trusts that have retained the benefit on ground of actions, having been taken earlier though these are prohibited now. A sunset clause for such provisions would ensure that benefits not available now are not available to anyone, and thus that all types of Trusts and Institutions are treated on similar lines."