Supreme Court upholds Tax Audit Caps for Chartered Accountants: Weighs public Interest over workload
CASE TITLE – Shaji Poulose v. Institute of Chartered Accountants of India & Ors.
CASE NUMBER – 2024 INSC 451 (Neutral Citation)
DATED ON – 17.05.2024
QUORUM – Justice B.V. Nagarathna & Justice Augustine George Masih
FACTS OF THE CASE
The petitioners herein are Chartered Accountants who have 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 (hereinafter referred as, “respondent-Institute”), under powers conferred by the Chartered Accountants Act, 1949 (hereinafter referred to as “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 petitioners are, specifically, aggrieved by the mandatory ceiling limit imposed by Clause 6.0, Chapter VI of said Guidelines on the number of tax audits that a Chartered Accountant can accept in a financial year under Section 44AB of the Income Tax Act, 1961 (hereinafter referred to as, “IT Act, 1961”). The petitioners seek a direction for quashing and/or setting aside of the disciplinary proceedings initiated by the respondent-Institute in pursuance of the Impugned Guideline. Clause 6.0, Chapter VI of Guidelines dated 08.08.2008 provides that a member of the Institute in practice shall not accept, in a financial year, more than the “specified number of tax audit assignments” under Section 44AB of the IT Act, 1961. It further provides that in the case of a firm of Chartered Accountants, the “specified number of tax audit assignments” shall be construed as the specified number of tax audit assignments for every partner of the firm.
ISSUE
- Whether the restrictions imposed are unreasonable and therefore, violative of the right guaranteed to Chartered Accountants under Article 19(1)(g) of the Constitution.
- Whether the restrictions imposed are arbitrary and illegal and therefore, impermissible under Article 14 of the Constitution.
CONTENTIONS BY THE PETITIONER
The Learned Counsel submitted that the primary case of the petitioners is that the impugned Chapter VI of the Guidelines dated 08.08.2008 imposing an unreasonable restriction on a Chartered Accountant duly qualified to practice the profession of Chartered Accountancy in India is violative of Article 19(1)(g) of the Constitution. Furthermore, the impugned Guidelines are arbitrary and lack any rational nexus with the objects sought to be achieved by the 1949 Act, namely, the regulation and maintenance of the status and standard of professional qualifications of the members of the Institute. it was contended that the restriction lacks any reasonable classification and reasonable nexus with the objects sought to be achieved. If the ceiling limit has been imposed on audits under Section 44AB, to achieve purity and quality of work, the restriction should have been imposed on the volume of work, as evidenced from the number of transactions and not on the number of audits. It was argued that a single audit work itself could be voluminous and occupy significant amount of a Chartered Accountant’s time, whereas another audit work itself could be completed with relative ease and within a limited time. It was also stated that the impugned Guidelines lack any reasonable classification or reasonable differentia on putting a ceiling limit on the number of tax audits under Section 44AB, IT Act, 1961 insofar as no maximum cap is placed on other audit assignments under the IT Act, 1961 that are carried out by Chartered Accountants with similarly taxing reporting requirements, such as Sections 44AD, 44AE, 44AF of the IT Act, 1961. It was also urged that the impugned Guidelines, in effect, also discriminate between Chartered Accountants practicing in smaller cities and towns as they are not in a position to charge the fee for each tax audit assignment in the same manner which can be charged by a Chartered Accountant practicing in big metropolitan cities. In effect, it was contended that the restriction will cause a more significant drop in the income of Chartered Accountants practicing in mofussil areas. As a result of this uneven restriction, an efficient Chartered Accountant may be able to complete the entire audit work within a short duration and remain unemployed for the rest of the year, was the submission made. It was further submitted on behalf of the petitioners that a Chartered Accountant’s fundamental right to practice the profession is unreasonably restricted as there is no sanctity in the ceiling limit prescribed by the respondent-Institute.
CONTENTIONS BY THE RESPONDENT
The Learned Senior Counsel, assisted by the learned counsels contended that the Guideline with regard to exceeding the specified number of tax audits being a misconduct was inserted pursuant to the communication received from the The Central Board of Direct Taxes (CBDT) and with the aim of maintaining quality in tax audits. According to him, putting a cap on the tax audits to be undertaken by the Chartered Accountants under Section 44AB of the IT Act, 1961, would not in any way restrict the freedom envisaged under Article 19(1)(g) of the Constitution of India. The said cap had been envisaged in the public interest and therefore saved under Article 19(6) of the Constitution of India. The Learned Senior Counsel stated that all the writ petitioners herein have breached the Guideline and undertaken more than the specified number of tax audits as envisaged, thereby clearly committing a misconduct. Therefore, they would have to face the disciplinary proceedings initiated by the respondent-Institute and cannot assail the validity of the Guideline by either questioning the competence of the respondent-Institute in making such a Guideline or the manner in which the said Guideline was introduced on the statute book. They also attempted to repel the argument that the petitioners’ right under Article 19(1)(g) is violated by the restriction. Instead, it was argued that the right of an Indian citizen under the Constitution to practice any profession is not an absolute right but can be appropriately limited under Article 19(6). It was submitted that the right to practice as a Chartered Accountant is conferred by the 1949 Act and the same may be limited by conditions and limitations stipulated under the Act or Regulations or Guidelines framed thereunder.
COURT ANALYSIS AND JUDGEMENT
The Hon’ble Supreme Court notes that Article 19(6) of the Constitution empowers the State to impose reasonable restrictions upon the freedom of trade, business, occupation or profession in the interest of the general public, which freedom is recognized under Article 19(1)(g). Secondly, it empowers the State to prescribe professional and technical qualifications necessary for practicing any profession or carrying on any occupation, trade or business. And, pursuant to the enactment of the Constitution (First) Amendment Act, 1951, it enables the State to carry on any trade or business, either by itself or through a corporation owned or controlled by the State, to the exclusion of private citizens wholly or in part. It is also trite law that restrictions imposed by the State upon the freedom guaranteed by Article 19(1)(g) cannot be justified on any ground outside Article 19(6) vide Nagar Rice and Flour Mills vs. N. Teekappa Gowda and Bros. The Hon’ble Supreme Court stated that the petitioners’ assertion in this instance that the undertaking of more than a specified number of tax audit assignments would not imperil the integrity and quality of the tax audit did not convince them to get behind their argument because a reasonable possibility of the fall in quality owing to the surfeit of tax audit assignments exists. Therefore, the Court believed that it would be proper to trust the wisdom of the respondent-Institute as it has acted on bona fide and genuine recommendations of the Comptroller and Auditor General of India (CAG) and the CBDT, and further stated that they could find no fault in the endeavour of the respondent-Institute to eliminate the possibility of the conduct of tax audits in an insincere, unethical or unprofessional manner. In the present case, where public interest was the genesis of a privilege being extended to Chartered Accountants and not a right, The Court found it is reasonable that the respondent-Institute, 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. The Hon’ble Supreme Court reiterated the importance of the respondent-Institute and disposed of all the Writ Petitions, and also stated that all proceedings initiated pursuant to the impugned Guideline in respect of the writ petitioners and other similarly situated Chartered Accountants stand quashed and Clause 6.0, Chapter VI of the Guidelines dated 08.08.2008 and its subsequent amendment is valid and is not violative of Article 19(1)(g) of the Constitution as it is a reasonable restriction on the right to practise the profession by a Chartered Accountant and is protected or justifiable under Article 19(6) of the Constitution, and that Chapter VI of the Guidelines dated 08.08.2008 and its subsequent amendment shall be in effect from 01.04.2024.
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Judgement Reviewed by – Gnaneswarran Beemarao