Has restriction on number of tax audits become redundant if not infructuous ?

Has restriction on number of tax audits become redundant if not infructuous in view of judgment of Madras High Court and dismissal of the SLP of ICAI?

Today, the ICAI has announced that audits conducted under Section 44AD, 44ADA and 44AE of the Income tax Act, 1961 shall not be taken into account for the purpose of reckoning the “specified number of tax audit assignments”.


restriction on tax audit number

How long this game shall go on?

Presently, ICAI Guidelines for the Members (Guidelines No. 1-CA(7)/02/2008, dated 8th August, 2008) provide that  the a member of the Institute in practice shall not accept, relating to an assessment year, more than the “specified number of tax audit assignments” under Section 44AB of the Income-tax Act, 1961. The limit of “specified number” has been revised to 60 from 45 tax audits w.e.f. 1st April, 2014. 

However, the question which arises is whether the above restriction hold any good in view of the law laid down by the Hon’ble Madras High Court and as approved by the Hon’ble Supreme Court.

In 1998, the Madras High Court had held that the restrictions placed by the ICAI in respect of the number of audit assignments not only discriminatory, but also unreasonable. Accordingly while disposing off two writ Petitions filed by the Petitioner CAs, the Hon’ble High Court held that the Notification No. 1-CA(7)/158/87, dated May 25, 1987 related to minimum limit of audit fee and the Notification No. 1-CA(7)/3/88 dated January 13, 1989, were unconstitutional, in violation of article 14 of the Constitution, arbitrary and illegal, and accordingly they were quashed.

Against the judgment of the Hon’ble Madras High Court, the ICAI had filed A SLP before the Hon’ble Supreme Court. The plea taken by the ICAI was that the impugned notification/guidelines have been withdrawn and as on date a new guidelines is in place for which the Institute has not received any representation or grievance from any CA member in respect of the existing guidelines which puts a limit on the number of audit u/s 44-AB of the Income Tax Act, 1961.

ICAI, even submitted that if it receives any representation against existing guidelines, it will consider it and will take a decision as to whether such guidelines would continue or require any kind of modification.

However, the Hon’ble Supreme Court dismissed the SLP of the Institute on merit and directed that in case any member is aggrieved of the existing guidelines and files a representation before the ICAI, the appellant shall consider it and pass appropriate order, and if any member is aggrieved thereof whether he has made representation or not, would have right to challenge it before the appropriate forum.

It is notable that the Petitioner before the Hon’ble Madras High Court had challenged the old Notification as unconstitutional and illegal on the grounds that it violated the fundamental right of the petitioner to carry on a profession offending article 19(1)(g) of the Constitution and also that there was no reasonable classification nor any reasonableness in the restriction brought by the notification in deeming  a misconduct by fixing a limit to the acceptance of a number of tax audit assignments.

The Hon’ble Madras High Court had reached the conclusion after making inter alia the following observations:

1. there was no nexus between the purpose of the Chartered Accountants Act, 1949 and the notification issued which deemed professional misconduct.

2. accepting a legitimate professional engagement by a professional can never be considered unprofessional and be made a misconduct.

3. the main object of the Act is to regulate the conduct of the members of the Institute in carrying out their professional duties. 

4. willingness to carry out his professional work cannot be enlarged into professional misconduct by adopting an artificial device of placing a restriction on the volume of work

5.  a professional has a fundamental right to choose his own volume of work.

6. no other profession has any such restriction.

7. the Act and the Rules would be entitled to bring restrictions or provisions only for the purpose of attaining the professional standards.

8. no reason can be attributed for restricting the number of audits as contained in the notification. 

9. if an auditor is able to complete the entire audit work as restricted, then he may also be unemployed for the rest of the year.

10. All the auditors cannot be placed on an equal footing and an assumption cannot be made that an auditor would be able to fulfil his obligations only up to 30 tax audit assignments under section 44AB of the Income-tax Act, per financial year. 

11. It was not known on what basis or on what statistics it was contended by the UCAU that only 30 tax assignments can be undertaken by a chartered accountant. 

However, a close look at the new guidelines would suggest that in principle, it has got no difference with the old guidelines and more or less is the same. The observation made by the Hon’ble High Court in quashing the old notification equally applies to the prevailing guidelines/Notification also.

A comparison of the relevant text of old the and new notification with respect to the limit on tax audit cases is as under:

Notification No. 1-CA(7)/3/88 dated 13th January, 1989 Appendix No. (34) Guidelines No. 1-CA(7)/02/2008, dated 8th August, 2008

A member of the Institute in practice shall be deemed to be guilty of professional misconduct, if he accepts, in a financial year, more than the “specified number of tax audit assignments” under Section 44AB of the Income-tax Act, 1961.

Provided that in the case of a firm of chartered accountants in practice, the “specified number of tax audit assignments” shall be construed as the specified number of audit tax assignments for every partner of the firm.Provided further that where any partner of the firm is also a partner of any other firm or firms of chartered accountants in practice, the number of tax audit assignments which may be taken for all the firms together in relation to such partner shall not exceed the “specified number of tax audit assignments” in the aggregate.

Provided further that where any partner of a firm of chartered accountants in practice accepts one or more tax audit assignments in his individual capacity, the total number of such assignments which may be accepted by him shall not exceed the “specified number of tax audit assignments” in the aggregate.

Explanation –

1. For the above purpose, “specified number of tax audit assignments” means

(a) in the case of a chartered accountant in practice or a proprietary firm of chartered accountant, 30 tax audit assignments, in a financial year, whether in respect of corporate or non-corporate assesses.

(b) in the case of firm of chartered accountants in practice, 30 tax audit assignments per partner in the firm, in a financial year, whether in respect of corporate or non-corporate assesses.

In computing the “specified number of tax audit assignments”, each year’s audit would be taken as a separate assignment

A member of the Institute in practice shall not accept, relating to an assessment year, more than the “specified number of tax audit assignments” under Section 44AB of the Income-tax Act, 1961.

Provided that in the case of a firm of Chartered Accountants in practice, the “specified number of tax audit assignments” shall be construed as the specified number of tax audit assignments for every partner of  the firm.Provided further that where any partner of the firm is also a partner of any other firm or firms of Chartered Accountants in practice, the number of tax audit assignments which may be taken for all the firms together in relation to such partner shall not exceed the “specified number of tax audit assignments” in the aggregate.

Provided further that where any partner of a firm of Chartered Accountants in practice accepts one or more tax audit assignments in his individual capacity, the total number of such assignments which may be accepted by him shall not exceed the “specified number of tax audit assignments” in the aggregate.

Explanation –

For the above purpose, the “specified number of audit assignments” means –

a. in the case of a Chartered Accountant in practice or a proprietary firm of Chartered Accountant, 60 audit assignments relating to an assessment year whether in respect of private Companies or other Companies.

b. in the case of firm of Chartered Accountants in practice, 45 tax audit assignments per partner in the firm, relating to an assessment year, whether in respect of corporate or non-corporate assesses

Provided that out of such “specified number of audit assignments, the number of audit assignments of public Companies each of which has a paid-up share capital of rupees twenty-five lakhs or more, shall not exceed ten.

In view of the fact that the SLP of the ICAI was dismissed on merit, not merely on technical grounds and coupled with the direction issued by the Hon’ble Supreme Court, does it mean that virtually, the restrictions on the number of tax audits has become redundant if not infructuous?

I am afraid but it seems so.

However, our Hon’ble Council Members would be in a better position to clear the stand of the ICAI and any further development on this issue. Ask them !

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