ICAI competent to impose restriction on number of tax audits u/s 44AB per year – Supreme Court settles the pending controversy.
In a recent judgment, the Hon’ble Supreme Court has upheld the competence of ICAI to impose a restriction on the maximum number of tax audits that could be accepted by a Chartered Accountant u/s 44AB in a Financial Year. The ICAI was also directed to directed to consider to enhance the specified number of tax audits.
ABCAUS Case Law Citation:
ABCAUS 4082 (2024) (06) SC
In the instant cases Chartered Accountants were Petitioners who Had challenged the validity of Clause 6 of Guidelines No.1-CA(7)/02/2008 dated 08.08.2008 issued by the Institute of Chartered Accountants of India (ICAI) under the Chartered Accountants Act, 1949 (the 1949 Act) on the ground that the same is illegal, arbitrary and violative of Article 19(1)(g) of the Constitution of India.
The said guidelines of ICAI put a mandatory ceiling limit (presently 60) on the number of tax audits that that a Chartered Accountant can accept in a financial year under Section 44AB of the Income Tax Act, 1961 (IT Act). In the case of a firm of Chartered Accountants, the “specified number of tax audit assignments” are construed as the specified number of tax audit assignments for every partner of the firm.
The petitioners CAs alternatively sought a direction for quashing and/or setting aside of the disciplinary proceedings initiated against them by ICAI for accepting more than specified number of tax audit assignment in violation of the Impugned Guidelines. It was argued that that the ICAI had initiated disciplinary proceedings only against a few Chartered Accountants, including petitioners herein, while a majority of the Chartered Accountants who had breached the Guideline are not facing any disciplinary proceeding and had not been proceeded against.
It was contended that the impugned Guideline had been on the statute book since 2008, the disciplinary proceedings have been initiated only recently. The impugned Guideline had not been effectively given effect to. That when the ICAI had remained silent and not acted upon the Guideline, since it was issued on 08.08.2008, all of a sudden there could not have been initiation of disciplinary proceedings only against the petitioners herein and possibly others who may not have approached any court of law, whereas many other Chartered Accountants had not been proceeded against and are virtually scot-free. Therefore, there is discrimination and violation of Article 14 of the Constitution of India herein in the implementation of the Guideline vide Notification dated 08.08.2008. Therefore, it was prayed that pending full and effective implementation of the 2008 Guideline the impugned proceedings against the petitioners for alleged misconduct on their part for violating the Guideline may be dropped.
Thus, the controversy was firstly, whether the ICAI, constituted under the 1949 Act, had the competency to impose a restriction on the tax audit assignment? secondly, whether a Chartered Accountant’s right “to practice any profession” as provided under Article 19(1)(g) of the Constitution, is unreasonably restricted by the ceiling limit of tax audits?
The following questions of law were framed by the Hon’ble Supreme Court:
(i) Whether ICAI was competent to impose a numerical restriction on the maximum number of tax audits that could be accepted by a Chartered Accountant, u/s 44AB of the IT Act, 1961, in a Financial Year?
(ii) Whether the restrictions imposed are unreasonable and therefore, violative of the right guaranteed to Chartered Accountants under Article 19(1)(g) of the Constitution?
(iii) Whether the restrictions imposed are arbitrary and illegal and therefore, impermissible under Article 14 of the Constitution?
(iv) Whether exceeding such specified number of tax audits can be deemed to be ‘professional misconduct’?
The Hon’ble Supreme Court in an elaborative and exhaustive judgment running into 130 pages has put an end to the controversy on the competence of ICAI to prescribe a ceiling on the number of tax audits a CA can undertake in a financial year.
The Hon’ble Supreme Court observed that one of the objects of the 1949 Act is to ensure that
the profession of the Chartered Accountant in the country maintains high professional ethics and renders quality service inasmuch as Chartered Accountants are absolutely necessary for the efficient tax administration in the country. That on account of their services, the onerous duties cast on the assessing officer as well as the Income Tax Department is reduced. This This would however depend upon the quality of service that is rendered by the Chartered Accountant as a professional for which regulation of the profession is necessary and the ICAI has been established for, inter alia, such regulation of the profession.
The Hon’ble Supreme Court further noted that with the passage of decades and with the emerging varieties of misdemeanour, omissions or commissions of Chartered Accountants which are not in consonance with professional ethics and would amount to misconduct can be
defined under the Schedules so as to ensure quality service being rendered by the Chartered Accountants as professionals. Therefore, the deeming provision would imply that with the passage of time, there could be newer misconducts which could be included in the Schedules in the form of regulations or Guidelines.
The Hon’ble Supreme Court observed that the delegation to define and enumerate a misconduct by way of a regulation or a Guideline is a legislative device adopted by the Parliament so as to leave it to the discretion of the Council of the ICAI to incorporate, define and insert a Guideline or a regulation, the breach of which would result in a misconduct committed by a Chartered Accountant. The delegation of powers to add newer types of misconducts by way of a regulation or a Guideline is neither excessive nor ultra vires under Section 22 of the 1949 Act which deems any breach of a regulation or Guideline as a misconduct as per Clause 1 of part II of Schedule II to the 1949 Act.
As a result, the Hon’ble Supreme Court held that ICAI had the legal competence to frame the impugned Guideline restricting the number of tax audits that a Chartered Accountant could carry out which was initially thirty and later raised to forty-five and thereafter to sixty in an assessment year. Therefore, the Council of the ICAI having the legal competence to frame the Guidelines, the breach of which would result in professional misconduct, in terms of clause 1 of Part II of the Second Schedule of the 1949 Act cannot be held to be vitiated on account of there being lack of competency or powers to frame the impugned Guideline by the Council of the respondent-Institute.
The assertion that the undertaking of more than a specified number of tax audit assignments would not imperil the integrity and quality of the tax audit, the Hon’ble Supreme Court rejected it and observed that because a reasonable possibility of the fall in quality owing to the surfeit of tax audit assignments exists. Therefore, it is proper to trust the wisdom of the ICAI as it has acted on bona fide and genuine recommendations of the CAG and the CBDT.
The Hon’ble Supreme Court observed that a reasonable restriction, within the meaning of Article 19(6) must also be ‘in the interests of the general public. Therefore, the Court must consider the public interest involved not only from the perspective of the Chartered Accountants but rather from the perspective of the general public which in the present cases, manifests as a benefit to the public exchequer in terms of appropriate quality of tax audit reports under Section 44AB.
The Hon’ble Supreme Court observed that the genesis of the opportunity to conduct tax audits was not regulation of a practice essential to the Chartered Accountant profession per se but rather to take assistance of auditors, in discharge of their public duties, for plugging tax leakage and thereby saving the time of the Assessment Officers on presentation of quality tax audit reports in a prescribed format. Therefore, it is for these intents and purposes, the privilege of conducting tax audits was extended to Chartered Accountants by creating a privilege to conduct such audits subject to reasonable restrictions.
The Hon’ble Supreme Court observed that where public interest was the genesis of a privilege being extended to Chartered Accountants and not a right, it is reasonable that the ICAI, an expert body, would have the authority to regulate the privilege extended to Chartered Accountants in a reasonable manner deemed appropriate to serve public interest. That the public interest involved in the present petitions being pervasive is evidenced through CAG’s recommendation to the Government to insert a provision in the statute book putting a cap on the number of tax audits permissible. According to the CAG, in the matter of revenue, the IT Act, 1961 should have provision to prescribe for quality of tax audit assignments rather than relying on ICAI.
As a result, the Division Bench of the Hon’ble Supreme Court has upheld that competency of ICAI to impose a numerical restriction on the maximum number of tax audits that could be accepted by a Chartered Accountant, u/s 44AB in a Financial Year. Also, it was held that the restrictions on umber of tax audit assignment is not violative of Article 19(1)(g) of the Constitution and the restriction is permissible under Article 14 of the Constitution.
The Hon’ble Supreme Court observed that there was uncertainty in law only in the context of the pendency of the matter before it on there being quashing of the Guideline by the Madras High Court and an interim stay of the said judgment by it.
However, the Hon’ble Supreme Court observed that there had been an uncertainty in law due to a similar Guideline being successfully assailed and during the pendency of the matter before Supreme Court the impugned Guideline being enforced and selective implementation of the same by the ICAI.
In view of the above the Hon’ble Supreme Court quashed the disciplinary proceedings initiated against the petitioners for the simple reason that only the writ petitioners have been proceeded against, while even according to the respondent- Institute, there were around twelve thousand Chartered Accountants who had breached the Guideline and had undertaken tax audits over and above the specified number but no action whatsoever was initiated against of them.
At the same time the Hon’ble Supreme Court opined that with the passage of time, the number of tax audits to be permitted have been repeatedly deliberated, re-evaluated and increased by the ICAI. However, apparently that decisions of the Council on whether to increase or maintain the status quo have been ad-hoc, influenced by several factors such as technological development, number of practicing Chartered Accountants, etc.
The Hon’ble Supreme Court in view of the fact that since the last revision to sixty tax audits was made a decade ago, directed the Council to consider if the time is ripe to enhance the specified number of tax audits.
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