CAG’s Entertainment Sector Audit: A Bureaucratic Hygiene-closing
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From Audit to Action-or Avoidance: The C&AG’s 2019 Audit on the Entertainment Sector and CBDT’s Paper Compliance
By P SESH KUMAR
New Delhi, October 25, 2025 — The Comptroller and Auditor General’s (C&AG) Performance Audit Report No. 1 of 2019 on “Assessment of Assessees in the Entertainment Sector” exposed deep inconsistencies in how Assessing Officers (AOs) across India handled similar cases involving film, television, and related entertainment enterprises. The Public Accounts Committee (PAC) echoed these concerns, urging the Central Board of Direct Taxes (CBDT) to ensure greater uniformity and transparency.
In response, the CBDT issued an advisory on 21 October 2025 (F.No. 225/215/2018/ITA-II), highlighting audit concerns and advising its field officers on pre-operative expenses, film-production costs, and Form 52A declarations.
Yet the circular’s non-binding, advisory nature raises questions about whether it represents substantive reform or a perfunctory gesture to placate parliamentary oversight.
The Audit That Unmasked Administrative Inconsistency
The C&AG’s 2019 performance audit was no routine exercise-it was an X-ray of the Income Tax Department’s assessment culture within India’s entertainment sector. Covering an eclectic mix-films, television, music, animation, sports, radio, and event management-the audit found that Assessing Officers were applying different yardsticks to identical facts. Some allowed pre-operative expenses freely; others disallowed them outright. The absence of uniform guidelines meant that tax outcomes varied by geography and officer temperament rather than legal principle.
The audit also flagged chronic non-submission of Form 52A, the disclosure form that film producers must file detailing production start and completion dates and payments above ₹50,000. Equally disturbing was the uneven application of Rules 9A and 9B of the Income-tax Rules-governing deductions for film production and distribution. The result: a tax system that treated similar taxpayers differently, inviting both litigation and revenue loss.
When the Public Accounts Committee (PAC) of the 17th Lok Sabha took up the audit, it pressed CBDT to restore consistency, build training systems, and enforce checks on film-sector assessments. The PAC’s scrutiny was pointed-why did the Department not have uniform procedures despite earlier audit alerts? Why were penalties for non-filing of Form 52A rarely invoked? The Department promised corrective action-and the CBDT’s October 2025 circular was born. One cannot lose sight of the fact that the symbolic circular was issued a good 6 years after CAG came out with its report.
CBDT’s Circular: A Face-Saving Gesture More Than a Guarantee
At first glance, the CBDT’s 21 October 2025 instruction seems thorough. It reiterates statutory provisions, reminds officers to check pre-operative expenses under Section 35D (mistyped as 32D in the letter), to verify Form 52A filings, and to assess film production and distribution costs strictly under Rules 9A and 9B. It even hints at penalties under Section 272A for failure to file disclosures.
But beneath the procedural prose lies a tactical truth: the circular’s primary function was not reform but reassurance. Issued days before the PAC’s review, it served as proof that CBDT had “taken cognisance” of C&AG’s audit. By issuing a broad advisory rather than a binding instruction (legally questionable), the Board managed to appear responsive while retaining legal deniability.
Under Section 119 of the Income-tax Act, the CBDT can issue instructions “for the proper administration of the Act,” but cannot dictate outcomes in individual cases because assessments are quasi-judicial functions. Courts have repeatedly held that CBDT circulars bind departmental officers but not the assessee or appellate authorities. Thus, an AO must consider such guidance but remains free to decide based on evidence. This legal architecture shields the Department from charges of interference but also dilutes the efficacy of its own instructions.
In effect, the circular achieved bureaucratic hygiene-closing the audit paragraph without guaranteeing behavioural change on the ground.
The Illusion of Action: No Monitoring, No Metrics
What undermines the CBDT’s initiative most is the total absence of a monitoring mechanism. The circular offers no plan for follow-up-no requirement for regional reports, no data capture on how many entertainment-sector assessments invoked the new checks, no quarterly reviews, and no performance dashboards.
Without metrics, such advisories drift into oblivion. Field officers remain free to interpret “case-to-case examination” as they please, and headquarters can always claim “instructions were issued.” This bureaucratic sleight of hand converts the C&AG’s hard-hitting audit into a mere compliance ritual. The file is stamped “action taken,” the audit para is treated as “settled,” and systemic inconsistency lives on-only now cloaked in paperwork. CAG, of course can verify status and extent of compliance with PAC recommendations and CBDT’s advisory circulars during its regular audits.
The Accountability Mirage
This, however, is the recurring paradox in India’s administrative oversight cycle. The C&AG identifies a weakness; the PAC demands reform; the Department produces a circular; the file is closed. The real problem-lack of capacity, supervision, and data transparency-remains untouched.
For true course correction, the CBDT must go beyond perfunctory memos. It should commission periodic thematic reviews of entertainment-sector assessments through its Directorate of Income-tax (Systems), or its internal audit set-up, compare treatment across regions, and publish anonymised compliance statistics. Only measurable feedback can convert “instructions” into “implementation.”
Otherwise, the same inconsistencies will resurface in the next audit cycle, prompting another round of cosmetic circulars-each a paper shield against parliamentary censure.
How Far Has the Audit Actually Helped?
Even with its limitations, the 2019 audit did some heavy lifting. It forced the Department to acknowledge sectoral peculiarities and spurred nationwide discussion about uniform assessment practices. The CBDT’s circular, however symbolic, at least documented the issues and provided legal hooks (Rules 9A/9B, Form 52A, Section 35D). It also created a reference point for future audits and appellate scrutiny.
But the real transformation will depend on whether CBDT institutionalises what the audit ignited: continuous learning, data-driven monitoring, and officer accountability. Without that, the audit’s contribution remains moral rather than material—a nudge, not a shift.
Way Forward: From Circulars to Consequences
If CBDT genuinely intends to honour the spirit of the C&AG’s audit and PAC’s oversight, it must convert advisories into outcomes- not only in the instant report but in all accepted CAG findings through three reforms:
- Institutional Monitoring: Create a sector-specific monitoring cell (CBDT has a Member dedicated to Audit matters) to track how field formations implement audit-driven instructions and publish an annual compliance report.
- Analytic Supervision: Use existing systems such as Insight and ITBA to compare entertainment-sector assessments region-wise, identifying outliers in treatment of pre-operative and production expenses.
- Capacity Building: Train Assessing Officers (CBDT has National Academy and scores of Regional Training Institutes) in the business models and cost structures of the entertainment industry (and other selected sectors or areas) so that “case-to-case” discretion becomes informed judgment rather than random variance.
Only when instructions are measured, monitored, and managed will audit insights translate into administrative consistency. Until then, every circular that begins with “Kind reference is invited to the C&AG’s Performance Audit Report…” will remain just that-kind, but not corrective.
(This is an opinion piece, and views expressed are those of the author only)
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