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Service Tax Audit: Rule 5A is just to faciliate section 72A-Allahabad High Court | 19-12-2013 |

Only Chartered Accountants or Cost Accountants can perform the Serive Tax Special Audit

Allahabad High Court has on 19-12-2013, rejected the Writ Petition filed against the intimation issued by Central Excise Department under Rule 5A(2) demanding documents from the assessee for making a reference to conduct an Audit.

Earlier, the assessees had filed a writ petition and objected and also challenged the vires of Rule 5A(2) of the Service Tax Rules, 1994 interalia on the ground that the provision of Rule 5(A)(2) as inserted by Notification No.45/2007-ST to be ultra vires.are contrary to the provision of Section 72 of the Service Tax Act.

It is notable that with effect from 28.05.2012, Section 72A has been inserted in the Finance Act, 1994, for the purpose of Special Audit under Service Tax.

Read the text of section 72A >>

Hon'ble Allahabad High Court held that Rule 5A of the Service Tax Rules, 1994 is just to facilitate the provisions of section 72A.

Read the text of Rule 5A of the Service Tax Rules, 1994 >>

The relevant excerpts of the judgement of the Hon'ble court's Judgement are as under:

Rule 5-A, sub-rule (2) states that every assessee shall, on demand, make available to the officer authorised or the audit party, records, trial balance and income-tax audit report, if any. So here, the officer will demand the documents just to facilitate the correctness of books of accounts and ultimately,the audit will be conducted by the Audit Party headed by the Chartered Accountant/Cost Accountant, as the case may be,deputed by the Commissioner.

It is Commissioner on whose behalf, the officer will collect the material and the Auditor will perform the audit. In any case, the final report duly signed by the Chartered Accountant will be submitted to the Commissioner. In case of Government Autonomous Body, the function of the audit has been assigned to the Comptroller of Auditor General of India. From the above, it is crystal clear that in case of private assessee, the Commissioner will refer the matter to an officer to collect the material or Chartered Accountant for the purpose of audit. Thus, for the purpose of audit, the material can be collected either by the officer authorized by the Commissioner or by the Auditor himself. But, audit will be performed only by the Chartered Accountant.

It is pious duty of the assessee to make available the record as mentioned in Rule 5A i.e. trial balance or its equivalent; and the income-tax audit report, if any, under Section 142(2A) of the Income Tax Act, 1961, for the scrutiny of the officer or the Audit Party, as the case may be.

Thus, we find that there is no inconsistency in Rule 5A and Section 72A of the Finance Act, 1994. The said provision is not arbitrary. The manner for conducting the audit is as per the accounting standard provided by the Institute of Chartered Accountant of India. The audit report will be made available to the assessee, as per law.

Needless to mention that identical provision i.e. special audit is also available in the Income Tax Act, 1961. The Audit Manual, 2011 is for the departmental use and just to facilitate the classification of the material collected from the assessee.

In view of above, we find no inconsistency. Rule 5A(2) is not ultra vires, as the same is in consonance to Section 72A of the Finance Act, 1994 and the same was enacted by the competent authority.

Regarding setting aside of the impugned intimation, it may be mentioned that through the impugned intimation, the Commissioner has asked its officer to collect the material from the assessee for the purpose of audit. The books of accounts/records of the assessee are required by the Chartered Accountant.

During the course of arguments, learned Additional Solicitor General of India has assured that the audit will be performed by a qualified Chartered Accountant and as per accounting standard. After the audit report, the assessee will get the copy of the report, as per law.

Download the copy of the Judgement Click Here >>

On 4th August, 2014, the Honíble Delhi High Court in Travelite India case has ruled that the Finance Act, 1994 does not authorise a general audit of the type envisioned by Rule 5A(2) and has declared rule 5A(2) as ultra viresof the rule making powers. The Court also quashed the CBEC circular dated 1.1.2008 to the extent it provides clarifications on Rule 5A(2). Read more >>

However, The CBEC has vide Notification 23/2014 dated 5-12-2014 amended Rule 5A2 to be in line with the judgment Read more Click Here >>

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