The Income tax Act, 1961 (the Act) contains several provisions (e.g. section 44AB, section 80-IA, section 92E, section 115JB, etc.) which requires the assessee taxpayers to furnish audit reports and certificates issued by an ‘accountant’ for ensuring correct reporting/computation of taxable income by the tax payers.

Explanation to section 288(2) of the Act defines an ‘accountant’ as a chartered accountant within the meaning of Chartered Accountants Act, 1949 (including a person eligible to be appointed as auditor under section 226(2) of the Companies Act, 1956, of the companies registered under any State).

The Comptroller and Auditor General of India (C&AG) published its report on “Appreciation of Third Party (Chartered Accountant) Certification in Assessment Proceedings” (No.32 of 2014). In para 3.9 of the Report, it has been stated that the Chartered Accountant Act, 1949 debars an auditor to express his opinion on the financial statement of any business or any enterprise in which he, his relative, his firm or partner in the firm, has substantial interest.

However, during the course of audit, it has been noticed that an auditor has furnished his report in Form 56F in respect of a closely held company in which the auditor’s brother was the managing director.

To ensure the independence of auditor, sub-section (3) of section 141 of the Companies Act, 2013 contains a list of certain persons who are not eligible for appointment as auditor.

The audit/certification function under the Income-tax Act is mainly provided for protecting the interests of revenue. An auditor who is not independent cannot meaningfully discharge his function of protecting the interests of revenue.

Therefore, it is proposed to amend section 288 with effect from 1st June, 2015 to provide that an auditor who is not eligible to be appointed as auditor of a company as per the provisions of sub-section (3) of section 141 of the Companies Act, 2013 shall not be eligible for carrying out any audit or furnishing of any report/certificate under any provisions of the Act in respect of that company.

On similar lines, ineligibility for carrying out any audit or furnishing of any report/certificate under any provisions of the Act in respect of non-company is also proposed to be provided.

However, it is proposed to provide that the ineligibility for carrying out any audit or furnishing of any report/certificate in respect of an assessee shall not make an accountant ineligible for attending income-tax proceeding referred to in sub-section (1) of section 288 of the Act as authorised representative on behalf of that assessee.

It is further proposed to provide that the person convicted by a court of an offence involving fraud shall not be eligible to act as authorised representative for a period of 10 years from the date of such conviction. (It is also proposed to revise the definition of ‘accountant’ in Explanation below section 288(2) of the Act on the lines of definition of ‘chartered accountant’ in the Companies Act, 2013).

The existing Explanation to subsection (2) of Section 288 shall be replaced by the following new comprehensive explanation :

‘Explanation .—In this section, “accountant” means a chartered accountant as defined in clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 who holds a valid certificate of practice under sub-section (1) of section 6 of that Act, but does not include [except for the purposes of representing the assessee under sub-section (1)]-

(a)   in case of an assessee, being a company, the person who is not eligible for appointment as an auditor of the said company in accordance with the provisions of sub-section (3) of section 141 of the Companies Act, 2013; or

(b)   in any other case,-

(i)     the assessee himself or in case of the assessee, being a firm or association of persons or Hindu undivided family, any partner of the firm, or member of the association or the family;

(ii)    in case of the assessee, being a trust or institution, any person referred to in clauses (a), (b), (c) and (cc) of sub-section (3) of section 13;

(iii)   in case of any person other than persons referred to in sub-clauses (i) and (ii), the person who is competent to verify the return under section 139 in accordance with the provisions of section 140;

(iv)   any relative of any of the persons referred to in sub-clauses (i), (ii) and (iii);

(v)    an officer or employee of the assessee;

(vi)   an individual who is a partner, or who is in the employment, of an officer or employee of the assessee;

(vii) an individual who, or his relative or partner-

(I) is holding any security of, or interest in, the assessee:

Provided that the relative may hold security or interest in the assessee of the face value not exceeding one hundred thousand rupees;

(II) is indebted to the assessee:

Provided that the relative may be indebted to the assessee for an amount not exceeding one hundred thousand rupees;

(III) has given a guarantee or provided any security in connection with the indebtedness of any third person to the assessee:

Provided that the relative may give guarantee or provide any security in connection with the indebtedness of any third person to the assessee for an amount not exceeding one hundred thousand rupees;

(viii)  a person who, whether directly or indirectly, has business relationship with the assessee of such nature as may be prescribed;

(ix)   a person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction.’;

Another Explanation has been added to section (7) to define relatives as under:

‘Explanation. —For the purposes of this section, “relative” in relation to an individual, means-
(a) spouse of the individual;
(b) brother or sister of the individual;
(c) brother or sister of the spouse of the individual;
(d) any lineal ascendant or descendant of the individual;
(e) any lineal ascendant or descendant of the spouse of the individual;
(f) spouse of a person referred to in clause (b), clause (c), clause (d) or clause (e);
(g) any lineal descendant of a brother or sister of either the individual or of the spouse of the individual

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