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December 10, 2022

ICAI imposes Rs. 5 Lakh and 3 months Probation on Chartered Accountant who conducted 1,397 Audits in excess of limits u/s 44AB of Tax Audits

by CA Shivam Jaiswal in ICAI, Legal Court Judgement

ICAI imposes Rs. 5 Lakh and 3 months Probation on Chartered Accountant who conducted 1,397 Audits in excess of limits u/s 44AB of Tax Audits

Facts and Issues of the Case

At the time of the hearing on the 18th. The Committee noted that the authorised respondent representative showed up before it for a hearing in October 2021. After that, he made a declaration saying that no one else was in the room where he was appearing before the Committee and that he would not record or store the Committee’s proceedings in any form. The Committee then questioned him about whether he wished the charges read out loud or if they could be taken as written. The respondent’s counsel claimed that he was aware of the charge against the respondent and that it may be taken as read. When asked about whether the respondent had entered a guilty plea, he responded that he had not, and he thereafter , made his submissions in the matter.

The Committee decided to continue after initially noting that there was no against the current matter’s proceedings by any court of law. The Committee concluded its hearing in the case based on the records’ information and documentation and after taking into account the respondent’s oral and written arguments.As a result, the case was heard and concluded.

The counsel for respondent claimed during oral arguments and in a letter dated nil received on 8th September , 2020 submitted that the provisions for compulsory tax audit under section 44AB were introduced in the Income Tax Act, 1961 to ensure the accuracy of non-corporate companies and professionals records.The Law did not impposed any restrictions on the number of tax audits when it was first launched in 1984. He became qualified as a CA in January 1986, and in 1986, he decided not to seek employment but to open his own practise in the hopes of finding sufficient work through tax audits.

He said that the limits on tax audit to be unlawful because they violated Articles 14 and 19(1)(g) of the constitution in case of K. Bhagavatheeswaran Vs ICAI (1999 237 ITR 208).He said that several Institute members had filed writ petitions with various High Courts, and that the ICAI itself had petitioned the Hon. Supreme Court to join all of the writ cases for uniformity. In view of the same, he requested that the disciplinary proceedings against him should be kept in abeyance and the proceedings should be dropped till the Hon’ble Supreme Court rules ‘on the constitutionality of the ICAI Guidelines pertaining to arbitrary limit on the tax audits. Further, he said that after receiving the letter in August 2014, there was no willful or inadvertent violation of the prescribed limits. He pointed out that so far neither Institute nor the Tax Authorities have come up with any mechanism to restrict members from filing Tax Audit report beyond stipulated limit which has left ample scope for unintentional and inadvertent non-compliance.

Observation of the Court

Before taking a final decision, the Committee took notice of the background information regarding the facts mentioned below :

Section 44AB of the Income-tax Act, 1961 came into force w.e.f. 01.04.1985. According to the introduction of Section 44AB, the Government of India, Ministry of Finance, Department of Revenue (CBDT), New Delhi, examined the tax audit reports submitted by Chartered Accountants in a significant number of cases during the course of the next two years. The government became aware that some auditors were completing up to fifty (50) audits a month, which had a negative impact on the audit’s quality. Therefore, the Tax Authorities in the field suggested to the Government that it fix a limit on the number of audits that an auditor could conduct under Section 44AB of the Income-tax Act of 1961, similar to Section 224 of the Companies Act of 1956, whereby the number of company audits that a Chartered Accountant could conduct do had been restricted to twenty (20). In light of the aforementioned facts, the Government of India, Ministry of Finance, Department of Revenue (CBDT), New Delhi sent a letter dated January 19, 1988 to then Secretary of the Institute , asking for his comments on the suggestion of restricting the number of tax audits a Chartered Accountant might be allowed to complete in a year under section 44AB of the Income Tax Act, 1961.The aforementioned letter, dated 19 January 1988, was first considered by the Institute’s Professional Development Committee (PDC), thereafter Council of the Institute during its 133rd meeting on April 28–30, 1988. After detailed discussion, the Institute’s then-Council resolved to set a limit of thirty (30) tax audit assignments starting on April 1st, 1989.

Pursuant to the above, and in exercise of the powers conferred by Clause (ii) of Part 11 of the Second Schedule to the Act (as it then stood), the Council of the Institute issued a notification bearing No. 1-CA(7)/3/88 dated 13th January, 1989 stating that a member of the Institute in practise would be considered to have engaged in professional misconduct , if he accepted in a financial year, more than specified number of tax audit assignments under Section 44AB of the Income-tax Act,1961.

For both corporate and non-corporate assessees, the then-specified number in a financial year was 30. Following the aforementioned, the Institute’s Council gave the issue several considerations with regard to the revision of the ceiling on the number of tax audits. In 2007, the ceiling was raised from 30 to 45, and it was further raised to 60 in 2014.Considering that the turnover of the limit of tax audit has been increased from Rs. 40 Lakhs to Rs. 1 Crore in recent years, the Council decided, that no change is require in the existing tax audit limit prescribed by the ICAI by way of Guidelines.

It may be noted that Section 15 of the Act enumerates the functions to be performed by the Council apart from the general functions to carry out the objects of the Act. Under Section 15(2)(j), it is one of the functions of the Council “to regulate and maintain the status and standard of professional qualifications of members of the Institute”. Accordingly, each of these Notifications had been issued by the Council of the Institute after. considering the report of the PDC; and the whole object thereof was to ensure efficiency, improve the quality of service, ensure maintenance of high standards of performance in the field of tax audit assignments, ensure timely completion of audits and filing of tax returns by the assessees, for better and equitable distribution of work amongst Chartered Accountants, as also to avoid monopolization of professional work in a few hands.

The Chartered Accountants Act, 1949 was amended by the Parliament by the Chartered Accountants (Amendment) Act, 2006, which came into force on 17th November, 2006. After, the amendments in the Chartered Accountants Act, 1949 in 2006, the notifications were superseded by the guidelines.

It is important to remember that the aforementioned restriction only applies to audit assignments pursuant to Section 44AB of the Income Tax Act of 1961. As far as the other audit works are concerned, there are no restrictions. Further, tax audit assignments are time-bound assignments for individuals covered by Section 44AB of the Income-tax Act, and unlike other professional fields, and unlike other professional fields , the work of audit requires precision. The certificate of audit issued by a Chartered Accountant has statutory
force for the purpose of Income Tax whereas a Chartered Accountant in practice is free to accept audits under Sections 44AD, and 44AE of the Income-tax Act, 1961 without any limit. Taking note of all these relevant factors,. it cannot be said that ceiling of tax audit limit is in any way unreasonable or discriminatory. Therefore, there is no basis for the contention that there is violation of Article 14 or Article 19(1)(g) of the Constitution of India.

This restriction on audit assignments is comparable to that imposed under Section sub-section (1B) of Section 224 of the Companies Act, 1956, read with Explanations 1 and 2, or that imposed under Section 141(3)(g) of the Companies Act, 2013, which prohibits Chartered Accountants from auditing more than 20 businesses in one financial year. The said limit earlier excluded private limited companies. However, later Act excludes one person companies, dormant companies, small companies and private companies having paid-up share capital less than Rs. 100 crores.

In view of above, the Council, which is duty-bound to regulate the professionals,
i.e. the Chartered Accountants, has considered it fit to put such restrictions in the
interest of the profession. It is regulatory in nature, and such regulation is permitted by the Chartered Accountants Act of 19419. The Guidelines do not in any way affect the rights of the Chartered Accountant under the Constitution of India being only a reasonable restriction. The procedures taken to cap tax audit assignments as part of the regulation and maintenance of the status of chartered accountant are meant to maintain and improve the quality of work and cannot in any way be stated to be an unreasonable restriction. Such restrictions are necessary for maintaining the status of Chartered Accountants and also for ensuring quality of work by Chartered Accountants.

This Act aims to regulate the profession, hence the guidelines are made to assure maintenance of quality and standards in the work done by chartered accountants, which is indisputably in furtherance of the statutory duty laid upon them. Chartered Accountants are subject to regulation by the ICAI.

In view of the above, the Council after consideration of all relevant material and facts as also the nature of tax audits, had found such a ceiling to be necessary in the larger interest of the profession and the guidelines on the tax audit .


In view of above mentioned facts and discussion, in the considered opinion of the
Committee is that the Respondent is held guilty of professional misconduct in under Clause (1) of Part Il of the second Schedule to the Chartered Accountant Act, 1949.


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