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December 14, 2020

CAs challenge limit of Tax Audits in SC

by CA Shivam Jaiswal in ICAI, Income Tax

CAs challenge limit of Tax Audits in SC

There are various kinds of audits being conducted under different laws such as company audit, statutory audit conducted under company law provisions, cost audit, stock audit etc. Similarly, income tax law also mandates an audit called ‘Tax Audit’.

Section 44AB of the Income-tax Act, 1961 contains the provisions for the tax audit of an entity. As per these provisions, tax audit shall be conducted by a Chartered Accountant who ensures that the taxpayers has maintained proper books of account and complied with the provisions of the Income-tax Act. Tax Audit conducted by a Chartered Accountant is reported to the Income-tax department in Form no. 3CA/3CB and Form no. 3CD along with the income tax return.

What is Tax Audit under section 44AB?

  • Tax Audit refers to the independent verification of the books of accounts of the assessee to form an opinion on the matters related to taxation compliances carried out by the assessee.
  • While preparing the books of accounts of the business or profession for the purpose of income tax filing, the assessee has to comply with the provisions of Income-tax Act, 1961.
  • Tax audit can be conducted by a Chartered Accountant who holds the certificate of practice and is in full-time practice.
  • However certain classes have been defined who cannot conduct tax audit under section 44AB. 
  • The tax auditor (CA) carries out a systematical examination of books of account as per the formats prescribed by the department. 

How Many Tax Audit Report a CA can sign?

  • As per amended Chapter VI of Council General Guidelines, 2008 (Tax Audit Assignments under Section 44AB of the Income Tax Act, 1961), a member of the Institute in practice shall not accept, in a financial year, more than the specified number of tax audit assignments as prescribed under Section 44AB of the Income Tax Act, 1961.
  • The specified number of tax audit assignments under Section 44AB of the Income Tax Act, 1961 is 60.

CA’s challenge tax audit limit

Writ petitioners have challenged validity of Chapter VI of Guidelines No.1‑CA(7)/02/2008 dated 08.08.2008 issued by the Council of petitioner Institute on the ground that the same is violative of Article 19(1)(g) of the Constitution of India. This has happened in the case of The Institute of Chartered Accountants of India & Ors. Vs. Shaji Poulose & Ors. (Supreme Court).

What is claimed by the petitioners?

  • Writ petitioners have challenged validity of Guidelines issued by the Council of petitioner Institute on the ground that the same is violative of Article 19(1)(g) of the Constitution
  • The said Chapter VI of the Guidelines stipulated that a member of the Institute in practice shall not accept, in a financial year, more than the “specified number of tax audit assignments”, which is at present 60 under Section 44AB of the Income-tax Act, 1961.
  • Also, Section 22 of the Chartered Accountants Act, 1949 defines “professional or other misconduct” to include any act or omission provided in any of the Schedules to the Act.
  • Clause (1) of Part II of the Second Schedule to the Act stipulates that a member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct if he contravenes any of the provisions of the Act or the regulations made thereunder or any guidelines issued by the Council of the Institute.
  • As such, if a member of the Institute contravenes the provisions of the aforesaid Chapter VI of the Guidelines, he shall be deemed to be guilty of professional misconduct under the Chartered Accountants Act, 1949.

Observations of SC on provisions of Section 44AB

  • Section 44AB of the Income-tax Act, 1961 was inserted in the statute book by the Finance Act, 1984 and the same came into force w.e.f. 01.04.1985.
  • Section 44AB provides that every person carrying on business, if his total sales, turnover or gross receipts exceed Rs.1 crore, and every person carrying on a profession, if his gross receipts exceed Rs.50 lakhs, in any previous year, is required to get his accounts of such previous year audited by a CA, and obtain before the specified date, a report of the audit in the prescribed form duly signed and verified by such CA.
  • The said provisions are popularly called “compulsory tax audits”.
  • The said Section 44AB was enacted to prevent evasion of taxes, plug loopholes enabling tax avoidance and also facilitate tax administration, which would ensure that the economic system does not result in concentration of wealth to the common detriment.
  • The said section therefore fulfilled the directive principles laid down under Article 39(c) of the Constitution of India.

Observations of HC on submissions made by the Respondents

  • In various writ petitions filed in different High Courts apart from challenging the guidelines, disciplinary proceedings initiated against the writ petitioner for violation of the guidelines were also challenged.
  • For example, in writ petition of Shaji Poulose versus Institute of Chartered Accountant of India and others, the guidelines were under challenge.
  • The High Court issued notice and stayed the disciplinary proceeding against the writ petitioner therein.
  • Respondents also relied on the judgment of SC in Institute of Chartered Accountants of India versus Southern Petrochemical Industries Corporation Limited and another, (2007), in which case the Transfer petition was filed in this Court by the Institute of Chartered Accountants of India for transferring writ petitions filed in different High Courts challenging Constitutional validity of paragraph 33 of Accounting Standard 22 framed by Institute of Chartered Accountant of India.
  • SC allowed the Transfer petition and directed all the writ petitions to be heard by Calcutta High Court.
  • Respondent submitted that SC may consider transferring all the writ petitions to any one High Court in the present matter also.
  • The fact that SC on 03.04.1991 had dismissed the Transfer Petition Nos. 614-615 of 1990 observing that the concerned High Courts may dispose of the writ petition on early date could be treated any kind of bar in transferring the writ petition in the present batch of cases.
  • At the time when the earlier transfer petition was dismissed, conflicting judgments on subject in issue by different High Courts had not come.
  • With respect to the cap on the number of audits, there were conflicting judgments of different High Courts taking different views on the similar guidelines.
  • Further, SC’s judgment in Institute of Chartered Accountants of India versus Southern Petrochemical Industries Corporation Limited and another (supra), transferring the writ petition to one High Court i.e. Calcutta High Court did not preclude the consideration of prayer of the petitioner for transferring the writ petitions to this Court in present matter.

Conclusion by SC

The guidelines which were impugned in the HC and consequent disciplinary proceedings initiated against various chartered accountants throughout the country was an issue of public importance affecting Chartered Accountants as well as the citizens who have to obtain compulsory tax audits. We are satisfied that to settle the law and to clear the uncertainty among tax professionals and citizens, it is appropriate that this Court may transfer the writ petition, to authoritatively pronounce the law on the subject.

SC, found substance in the submissions made by the respondents-writ petitioners that the interim orders operating in different writ petitions which were sought to be transferred should be allowed to be continued till this Court considers the matter and passes any other order. In result, the Transfer Petitions were allowed.

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