Scrutiny of Tax Audit Report during assessment proceedings : Instruction No. 9/2008, dated 31-7-2008 (reproduced below)

2. C&AG and carried out a systems review of Third Party
certification under the Income-tax Act. This has brought out that in many cases
the information available in the tax audit reports is not being properly
analysed during assessment proceedings, thereby defeating the very purpose of
providing for audit of accounts in the Income-tax Act i.e., to ensure
that correct deductions are claimed by the assessee. It is, therefore,
reiterated that the tax audit reports as well as other statutory audit reports
should be critically examined along with connected records and other available
evidence, and the information as available in these reports should be
effectively utilised while finalising the assessment of cases selected under
scrutiny. In case of e-filed returns as well as annexure-less returns, tax audit
reports and other statutory audit reports should be requisitioned and thoroughly
examined during the assessment proceedings in cases under scrutiny.

3. With effect from 10th August 2006, the ‘Accountants’ are
required to indicate in Form 3CD as to whether a certificate has been obtained
from the respective assessees regarding payment relating to any
expenditure/taking or accepting of loans or deposits or repayment of the same
through account-payee cheque/bank draft (refer points 17(h) and 24(c) of Form
No. 3CD).

4. Instead of simply relying on the said certificates given
by the assessees, the assessing officers should undertake a test-check of such
transactions while completing the assessments under scrutiny. Results of such
test-check should also be kept on record. In case, any violation is noticed,
follow-up action as per the Income-tax Act including invoking of penal
provisions should be taken.

5. In cases where any factual misrepresentation by the
Accountants is observed, suitable action should be taken against them as
provided u/s.288 of the Income-tax Act, 1961.

This may be brought to the notice of all concerned for strict
compliance.