CBDT revised Audit User Manual 2019. Norms for Selection and Audit Potential Index (API)

CBDT revised Audit User Manual 2019. Norms for Selection and Audit Potential Index API, Settlement of Internal Audit Objections, Check Sheet

CBDT revised Audit User Manual 2019

CBDT has issued a revised Audit User Manual 2019. The audit manual outlines the principles, policies, methodologies and modalities of audits to be conducted by Audit Parties with reference to the Income Tax Act, 1961 (Act), Rules made there under and the Circulars and Instructions issued by the CBDT.

The guidelines contained in the CBDT audit manual aims to ensure that the audit is carried out in an objective, uniform, efficient and comprehensive manner adhering to stipulated principles and policies.

Internal Audit was introduced in the Income-tax Department in the year 1954. In 2015 it was reviewed in the light of observation of the C & AG audit report on Performance Assessment of Internal Audit setup of the Department.

Scope of Internal Audit

The scope of Internal Audit has been continuously enlarged and it has been made coterminous with that of Receipt Audit. Broadly, the scope of Internal Audit is to verify the following:

(a) The arithmetical inaccuracy;

(b) Non-application or wrong application of relevant legal provisions;

(c) Orders passed, not in conformity with the binding judicial pronouncements/precedence.

(d) Order passed, not in conformity with Circulars & Instructions issued by CBDT;

However, in cases selected by Computer Aided Scrutiny Selection (CASS) for ‘limited scrutiny’, scope of audit is confined to the issues for which limited scrutiny was made.

Audit Setup within the Income Tax Department

Within Income Tax Department, there is an Internal Audit setup for each region under the direct supervision and control of the Pr. CCIT. The audit structure is headed by a CIT (Audit) in each Pr. CCIT Region. In the metro charges of Delhi, Mumbai, Kolkata and Chennai, there are two CsIT (Audit). The CIT (Audit) has the headquarters at the same station as that of the Pr. CCIT. Each CIT (Audit) has one JCIT (Audit). Each JCIT (Audit) has one SAP (Special Audit Party) headed by ACIT(Audit) and as many IAPs (Internal Audit Party) headed by ITO (Audit). Apart from audit of cases, the JCIT (Audit) also supervises the work of SAPs and IAPs assigned for audit. There are 22 CsIT (Audit) in the Internal Audit set-up in the country.

Norms for selection of cases for Audit

In order that high risk cases, where likelihood of mistake is more, are taken up for audit, a universal criterion has been devised, taking into account various relevant factors. The generation of list by the ITBA for internal audit is based on ‘Audit Potential Index’ (API), which is worked out as under:

API = Assessed Income + 2 x (Exemptions + Deductions) + 4 x Total Refund granted (for the relevant assessment year)

The exemptions and deductions are those under Chapter III, Chapter- VIA, Sections 32, 35 and 54 to 54H of the Act.

CBDT may prescribe different criteria for generation of list of auditable cases in respect of the orders for which it is not possible to apply API, like International Tax, Exemption, Transfer Pricing, TDS, TRO etc. based upon information available in ITBA, in addition to or in supersession of the API based criteria, depending upon the requirement from time to time.

Settlement of Internal Audit Objections

The accepted major internal audit objection is settled by the CIT (Audit) once the required remedial action has been completed in the case and demand notice issued. The accepted minor audit objection is settled by the JCIT (Audit) once the required remedial action has been completed in the case and demand notice issued.

Audit Check Sheet

The manual contains audit check list/sheets. The check list provides the Auditor with a concise list of common issues for ready reference, so that any obvious errors or mistakes in the order under audit are not missed out.

The Check List for audit are related to the following aspects of verification:

(1) Mandatory Preliminary Check List

(2) Income which does not form part of Total Income   


(4) Firms

(5) Book profit, adjusted total income and mat/amt credit

(6) Capital Gains

(7) Income from other Sources

(8) Unexplained cash credit, investment, money & expenses and amount borrowed on hundi

(9) Clubbing of Income

(10) Set off/carry forward & set off of losses

(11) Deductions under chapter-via

(12) TDS Cases

(13) Computation of book profit

(14) Internal Audit of Registration Process of Charitable Trust and Institutions

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