Direct Tax

Report No. 7 of 2014 - Performance Audit on Assessment of Firms Union Government, Department of Revenue - Direct Taxes

Date on which Report Tabled:
Fri 18 Jul, 2014
Date of sending the report to Government
Government Type
Union Department
Direct Tax
Sector Taxes and Duties


Partnership Firms (Firms) along with Association of Persons (AOPs) and Body of Individuals (BOIs) constitute one of the major businesses apart from the corporate sector in India. Firms are governed by India Partnership Act, 1932. The Income Tax Act, 1961 (Act) provides various exemptions and deductions to the Firms. Income Tax Department (ITD) has the responsibility to oversee that the conditions specified in provisions of the Act for availing exemptions/ deductions are fulfilled. The main objective of the present review is to seek an assurance that system and procedures of the ITD are sufficient relating to provisions of the Firms vis-a-vis existence of proper machinery within the ITD to exercise necessary checks/controls in the area of potential misuse of the provisions of the Act.

The returned income of the Firms1 2 has increased from RS 36,942 crore in Assessment Year (AY) 09 to RS 51,482 crore in AY 12. Firms pay income tax at the rate of 30.90 percent1, however, effective tax rate in their case is only 23.80 percent3 as number of tax concessions are given to Firm assessees. This necessitates examination of the veracity of exemptions/deductions allowed to the partnership Firms vis-a-vis the claims made by the Firms.

We requisitioned 27,944 assessment records relating to Firms, out of which ITD produced and we audited 26,328 records. We have highlighted 1,497 cases involving a tax effect of RS 328.04 crore relating to systemic, compliance and control issues in assessment.

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