It is unacceptable to invoke MSMED laws in relation to special audit compensation for income tax
Fact and issue of the case
Both the present petitions raise interesting legal issues relating to the interplay between the Income Tax Act, 1961 (hereinafter ‘IT Act’) and the Micro, Small and Medium Enterprises Development Act, 2006 (hereinafter ‘MSMED Act’) relating to fee payable to CA Firms, for Special Audits directed under Section 142(2A) of the IT Act.
The Petitioner i.e., the Principal Commissioner of Income Tax, Central-1, has filed the present writ petitions challenging the directions for reference to arbitration passed by the Respondent No. 1 i.e., the Micro & Small Enterprise Facilitation Council (hereinafter ‘MSEFC’) – an authority established under Section 20 of the MSMED Act. Respondent No. 2 i.e., M/s SBG & Co. is a partnership firm of Chartered Accountants (hereinafter ‘CA Firm’) of which Mr. S.B. Gupta is a Partner. The said CA Firm is also registered as a `Micro Enterprise’ under the provisions of the MSMED Act.
The CA Firm, being on the panel of the Income Tax Department (hereinafter ‘IT Department’), was nominated as a Special Auditor by the IT Department in four cases for carrying out Special Audit in terms of Section 142(2A) of the IT Act. After the completion of the said Special Audit assignments and the submission of the final audit reports, the CA Firm raised four invoices in respect of the said audits. The grievance of the Special Auditor- CA Firm is that qua the invoices raised, the full payment has not been made. Further, in respect of one of the assignments the payment has not been received at all. 5. Under such circumstances, the CA Firm invoked the provisions of the MSMED Act and approached the MSEFC by way of references under Section 18 of the Act.
Pursuant to the said references, the matter was thereafter referred to the Delhi International Arbitration Centre (hereinafter ‘DIAC’) by the MSEFC vide the impugned reference orders and a retired judge of the Supreme Court was appointed as the Arbitrator in W.P.(C) No. 16294/2022. However, in W.P.(C) No. 13754/2019, the ld. Arbitrator was yet to be appointed.
The IT Department has preferred the present two writ petitions, challenging the impugned reference orders passed by the MSEFC on the ground that the MSEFC under the MSMED Act lacks jurisdiction to deal with claims raised by Special Auditors under Section 142(2A) in respect of the fee payable in terms of Section 142(2D) of the IT Act.
The facts in the two writ petitions are set out below.
On 21st / 22nd March 2013, the IT Department passed an order under Section 142(2A) of the IT Act, directing the Assessee i.e., M/s Sahara India (Firm), to get its accounts audited by the CA Firm, which was nominated as the Special Auditor, for the assessment year 2010-11. The Special Audit was to be conducted within a period of 60 days.
Thereafter, M/s Sahara India (Firm) filed W.P.(C) No. 3273/2013 titled ‘Sahara India (Firm), Lucknow v. Commissioner of Income Tax, Delhi (Central)-1, New Delhi & Others’ before this Court, challenging the nomination of the Special Auditor by the IT Department.
In W.P.(C) No. 3273/2013, an interim order dated 24th May 2013 was passed, directing that no assessment order by the IT Department would be passed in the said case. It was, however, directed that the Special Audit may continue. It was further directed that while the Special Audit may be carried on, the Special Audit report shall not be served upon M/s Sahara India (Firm).
In the meantime, the IT Department extended the period of Special Audit by a total period of 180 days in terms of Section 142(2C) of the IT Act. A further extension of 45 days was granted vide order dated 4th October 2013 passed in W.P.(C) No. 3273/2013 titled ‘Sahara India (Firm), Lucknow v. Commissioner of Income Tax, Delhi (Central)-1, New Delhi & Others’.
Pursuant to the aforementioned extensions, the CA Firm carried out the Special Audit of M/s Sahara India (Firm).
Thereafter, the IT Department requested the CA Firm to not submit the Special Audit report to M/s Sahara India (Firm) in terms of the directions by the order dated 24th May 2013 passed in W.P.(C) No. 3273/2013 titled ‘Sahara India (Firm), Lucknow v. Commissioner of Income Tax, Delhi (Central)-1, New Delhi & Others’.
The CA Firm, through letter dated 18th November 2013, sought clarification regarding the submission of the Special Audit report to M/s Sahara India (Firm) upon completion of the Special Audit. It also submitted Fee Bill No. 43 dated 14th November 2013, for an amount of Rs. 1,11,37,500/- (exclusive of Service Tax) and Rs.1,25,14,095/- (inclusive of Service Tax) to the IT Department along with the timesheet in respect of the said Special Audit assignment.
On 5th September 2016, W.P.(C) No. 3273/2013 titled ‘Sahara India (Firm), Lucknow v. Commissioner of Income Tax, Delhi (Central)-1, New Delhi & Others’ was disposed of.
In 2018, having not received the payment of its fee bill, the CA Firm filed a writ petition being W.P.(C) No. 1773/2018 titled ‘M/s SBG & Co. vs. The Union of India & Ors.’ before this Court, regarding the payment of its fees.
W.P.(C) No. 1773/2018, was disposed of vide order dated 26th February 2018, with a direction that the writ petition would be treated as a representation to the Competent Authority i.e., the IT Department in this case, which would inform the CA Firm about their decision on the fee within a period of eight weeks.
However, no such decision was made by the Competent Authority within the said period. Consequently, the CA Firm filed a contempt petition being CONT.CAS(C) 456/2018 titled ‘SBG & Company v. B K S Pandya’ before this Court. Further, an application was moved seeking extension of time to comply with the said order.
Finally, after various communications and submissions between the IT Department and the CA Firm, on 10th /11th July 2018, the IT Department passed the order under Section 142(2D) of the IT Act, determining the fee of the CA Firm at Rs. 33,84,000/-.
On 11th July 2018, an order was passed disposing of the application seeking extension of time, moved in W.P(C) 1773/2018 recording the submission by the IT Department that the amount payable had been determined and the same would be credited to the CA Firm within one week.
However, the payment of the fee in terms of the abovementioned order dated 11th July 2018 was not credited by the IT Department to the CA Firm within the one-week period.
On 1st September 2018, the IT Department paid the amount of Rs.35,93,808/- (Rs. 33,84,000/- plus GST @ 18% i.e., Rs. 6,09,120/- less TDS @ 10% of Rs. 3,99,312/-) as determined under Section 142(2D) of the IT Act. The receipt of the said payment was acknowledged by the CA Firm in its letter dated 4th September 2018. However, the CA Firm considered the said payment as a part-payment towards its total fee amount and sought the payment of the balance amount along with interest in terms of the provisions of the MSMED Act. Thus, the CA Firm was aggrieved by the amount of fee as determined and paid by the IT Department in terms of Section 142(2D) of the IT Act.
As a result, on 16th November 2018, the CA Firm filed a reference under Section 18 of the MSMED Act before the MSEFC for the recovery of the balance amount of fee along with interest as provided under Section 15 and Section 16 of the MSMED Act.
Thereafter, the MSEFC initiated conciliation proceedings between the CA Firm and the IT Department. Despite a number of meetings being held for conciliation between the parties, conciliation proceedings between the parties failed and were accordingly terminated. It may be pertinent to note that the IT Department raised objections over the applicability of Section 16 of the MSMED Act to payments pursuant to order under Section 142(2D) of the IT Act, as recorded in the minutes of the joint meeting held on 20th December 2018.Further, in its written submissions before the MSEFC, the IT Department challenged the jurisdiction of the MSEFC.
Finally, on 19th September 2019, the MSEFC passed the impugned reference order, whereby the MSEFC referred the case to the DIAC under Section 18(3) of the MSMED Act for initiating arbitration proceedings.
The DIAC thereafter, issued letter dated 28th September 2019 informing the CA Firm and the IT Department of the impugned reference and the details regarding the arbitration proceedings, such as filing of statement of claims as also other formalities pertaining to the arbitration proceedings.
In response to the same, while the CA Firm filed its statement of claim with DIAC, the IT Department vide letter dated 19th November 2019, challenged the jurisdiction of DIAC in terms of Section 293 of the IT Act. Further, it sought minimum 7 days’ time to file the statement of claims and to suggest the names of Arbitrators. The IT Department, vide letter dated 12th December 2019, also informed the DIAC that it was in the process of filing a writ petition and requested that the proceedings be kept in abeyance till the outcome of the writ petition.
Thereafter, the IT Department filed the present writ petition.
Vide order dated 23rd December 2019, this Court stayed the impugned order dated 19th September 2019 along with the proceedings emanating therefrom. W.P. (C) 16294/2022
This petition deals with the Special Audit of three entities, in respect of which the CA Firm was nominated as a Special Auditor by the IT Department under Section 142(2A) of the IT Act. The three entities are: –
M/s Sahara India Financial Corporation Limited (hereinafter ‘SIFCL’)
M/s Reverse Logistics Company Private Limited (hereinafter ‘Reverse’)
M/s Oracle India Private Limited (hereinafter ‘Oracle’)
In the case of Oracle, nomination letter dated 29th December 2011, was issued by the IT Department regarding the nomination of the CA Firm as Special Auditor of Oracle, for the assessment year 2008-09. The Special Audit report was to be submitted within a period of 90 days. Subsequently, vide letter dated 30th March 2018, the IT Department requested the CA Firm to commence the Special Audit after 1st April 2018, in compliance with the order dated 13th March 2018 passed by this Court in ITA No. 1110/2012.
In the case of SIFCL, the IT Department nominated the CA Firm as the Special Auditor on 24th March 2014 vide order under Section 142(2A) of the IT Act, directing the SIFL to get its accounts audited by the CA Firm for the assessment 2011-12. The Special Audit report was to be submitted within a period of 60 days.
In the case of Reverse, nomination letter dated 26th December 2017, was issued by the IT Department regarding the nomination of the CA Firm as Special Auditor of Reverse, for assessment year 2015-16. The Special Audit report was to be submitted within a period of 90 days.
The Special Audits were concluded in respect of all three entities despite some extensions in the audit period and the Special Audit reports were also prepared and provided to the Assessee-entities by the CA Firm.
Consequently, the CA Firm sent letters to the IT Department dated 3rd December 2014, 20th June 2018 and 19th December 2018 regarding the payment of fees for the Special Audits of SIFCL, Reverse and Oracle, respectively, along with the respective invoices. The details of the invoices are set out as under: –
SIFCL-Invoice No. 21 dated 3rd December 2014 for Rs. 1,56,91,605/- (exclusive of Service Tax) and Rs. 1,76,31,088/-(inclusive of Service Tax)
Reverse-Invoice No. 75 dated 20th June 2018 for Rs. 1,96,12,500/-(exclusive of GST) and Rs. 2,31,42,750/- (inclusive of GST)
Oracle- Invoice No. 23 dated 19th December 2018 for Rs. 2,01,45,000/- (exclusive of GST) and Rs. 2,37,71,100 /- (inclusive of GST)
Observation of the court
A perusal of the decision extracted above shows that the purpose of Special Audit is for helping and assisting the AO. It is also for the purpose of facilitating the assessment and for proper determination of the tax liability after arriving at a correct taxable income. In effect, therefore, the Special Audit is made for and on behalf of the AO owing to the complexity of the transactions and such other factors as are set out under Section 142(2A) of the IT Act.
After completion of the Special Audit, the Chief Commissioner or the Commissioner plays a very crucial role in the determination of remuneration. Rule 14B (5) stipulates that the number of hours claimed by the accountant for billing purposes has to be commensurate with the size and quality of the report submitted by the accountant. This provision clearly shows that the invoice, which may be raised by the accountant, is not to be straightaway accepted. The Chief Commissioner or the Commissioner is required to assess various factors, including: –
The nature of the work assigned to the accountant
The quantum of work
The duration of the work
The quality of the report
Whether the hours claimed are exaggerated or commensurate or suitable, bearing in mind the above factors.
The accountant has also to submit the timesheet, which may or may not be fully accepted by the IT Department.
Thus, the determination of the remuneration is a task, which is of a specialized nature, which only the Income Tax Department would be able to undertake. The same is evident from the orders which have been passed in the present two writ petitions itself, where the IT Department, after considering comparable assignments, has concluded that the amounts claimed by the CA Firm were highly exaggerated and were not commensurate.
At the time when the nomination is made, the finality attached to the determination of the remuneration by the Commissioner or Chief Commissioner is well within the knowledge of the accountant/CA Firm.
The nature of the Audit and the manner in which remuneration is to be determined would require domain expertise and knowledge which the MSEFC cannot possess. Moreover, the function which is in effect delegated to the Audit firm is one which is exercised under the Income Tax Act and would be purely governed by the said statute. Payment of remuneration is also based on the factors prescribed in the Rules as discussed above.
The nature of the assessment is not commercial but is a statutory nomination for the assistance of the AO and in effect the IT Department. The IT Department cannot be termed as a ‘buyer’ when it is nominating the accountant for conducting a Special Audit and neither can the CA Firm be termed as a ‘supplier’. The remuneration payable to the accountant cannot also be termed as ‘consideration’ as the Special Audit is a statutory duty being performed by the accountant for and on behalf of the AO.
The invocation of the provisions of the MSMED Act under such circumstances, in respect of Special Audit remuneration under Section 142(2D) of the IT Act, would, therefore, not be tenable and is completely misplaced.
The MSMED Act has no applicability to the nature of the assignment which has been given to the Respondent/CA Firm. The CA Firm may be registered as a Micro or Small enterprise and may be entitled to invocation of the jurisdiction of the MSMED Act for other purposes. Insofar as the assignment is one which is emanating from a statute i.e., under Section 142(2A) of the IT Act, the determination of the remuneration is solely the prerogative of the Commissioner or the Chief Commissioner.
The same would not be liable to be called into question either in a civil court or in a commercial suit or civil suit as one of recovery of money. The nomination as a Special Auditor for the conduct of Special Audit is governed purely by the provisions of the Income Tax Act and Rules. This would, however, not bar the remedy of filing of a writ petition.
The present is a case where there is a clear lack of jurisdiction in the MSEFC, which even failed to consider as to whether the MSMED Act would itself be applicable or not.
Insofar as Audits under Section 142(2A) are concerned, the IT Act would have to be reckoned as the Special Act and the MSMED Act as the general Act dealing with MSME disputes. Thus, in the facts and circumstances as discussed above, the Income Tax Act would thus prevail over the provisions of the MSMED Act.
In view of the fact that the MSMED Act would have no applicability, the impugned references by the MSEFC, of the claims raised by the Respondent/CA Firm to arbitration are not sustainable. The same are, accordingly, set aside. The remedies of the CA Firm, if any, to challenge the orders passed by the IT Department in respect of determination of remuneration, are left open. The present petitions, along with all pending applications, are allowed and disposed of in the above terms.
In the result, appeal of the assessee is allowed and ruled in favour of the assessee
Read the full order from herePCIT-Vs-Micro-And-Small-Enterprise-Facilitation-Council-And-Anr-2