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Supreme Court upholds Tax Audit Caps for Chartered Accountants: Weighs public Interest over workload

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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

  1. Whether the restrictions imposed are unreasonable and therefore, violative of the right guaranteed to Chartered Accountants under Article 19(1)(g) of the Constitution.

 

  1. 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

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Mandatory for the IT Department to comply with the CBDT’s Digital Evidence Investigation Manual while conducting search and seizure: Madras High Court

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Case title – W.P.No.9753, 9757 and 9761 of 2023 – M/s.Saravana Selvarathnam Retails Pvt Ltd, M/s.Shri Rathna Akshaya Estates Pvt Ltd & Ors V/S The Commissioner of Income Tax, The Assistant Commissioner of IT, The Deputy Director of IT

W.P.No.11176 of 2023 – M/s.Saravana Selvarathnam Trading & Manufacturing Pvt Ltd V/S The Assistant Commissioner of Income Tax, The Deputy Director of Income Tax

Case no. – W.P.Nos.9753, 9757, 9761 & 11176 of 2023 and W.M.P.Nos.11043, 9838, 9842 & 11041 of 2023

Decision on – February 23, 2024

Quoram – Justice Krishnan Ramaswamy

Facts of the case                          

The case of the petitioner is that the respondents-Department had conducted a sudden search under Section 132 of the Income Tax Act, 1961 on different dates. In the said searches, the 2nd respondent had seized the electronic data.

In both the proceedings the Show Cause Notices were issued by the respondent and the responses on the same was filed by the petitioner. Subsequently, the assessment orders were passed on the subject matter of both the proceedings.

In light of such circumstances, the petitioner had made several representations to the respondents for the purpose of getting copies of the materials collected from their premises. The petitioner also provided the additional reply, wherein they had categorically requested the respondents to provide the additional documents collected by them, however the same was not been provided.

At this juncture, the respondents had passed the impugned assessment orders in both the proceedings. However, in all these cases, neither the additional documents nor the opportunity of personal hearing was provided to the petitioner before passing the orders.

Issues

The Petitioner in the first proceedings filed the writ petitions Nos.9753, 9757 and 9761 of 2023 challenging the admissibility of evidence against the orders of the respondents. They sought to declare that the seizure of the .txt files by the 2nd respondent from an undisclosed location without any valid search warrant and without following the guidelines issued by the CBDT is not in accordance with law and therefore inadmissible in evidence.

Whereas, in the second proceedings the petitioner filed the writ petitions No.11176 of 2023 challenging the orders of the respondents that were passed without hearing the petitioner which violates the principles of natural justice.

Submission of the Parties

The Counsel appearing on behalf of the Petitioner submitted that the search and seizure was conducted and the assessment orders were passed in a hasty manner. Further, at the time of search and in the event of collection of electronic data, the respondents failed to comply with the procedures laid down in the Digital Evidence Investigation Manual, which is issued in terms of Section 119 of the Act by CBDT. He contended that the guidelines were framed by CBDT in order to avoid the invalidation of evidences collected by the Department and thus it was mandatory for them follow it.

He also submitted that the petitioner was not given an opportunity to be heard while passing the orders which led to the violation of principles of natural justice.

The Counsel submits that this raises the issue of suspiciousness regarding the manner in which the respondents had collected and preserved the data. He contends that it is the duty of the respondents to corroborate the evidences. Even if it is the oral evidence of any person, they should have allowed the petitioner to cross- examine the said person and must have produced the evidences accordingly. But however, the Counsel submits that the respondents have defaulted in that too.

The Counsel appearing on behalf of the Respondents stated that the writ of declaration regarding the evidentiary value is not maintainable. He contended that the assessment is completed and appeal is pending before the Appellate Authority and hence, petitioner has to agitate all the issues before the Appellate Authority.

The Counsel thus, submitted that the admissibility, nature of evidence and the manner of proof cannot be questioned in the writ petitions. The Counsel further contended that the Manual issued by the CBDT was only optional for the Department to follow and not mandatory.

Court’s Analysis and Judgement

The Court on perusal of the documents on record observed that despite several representations made by the petitioner before the respondents imploring for the copy of the documents and other data collected from their premise of the petitioner, the respondents failed to provide any of the documents. Moreover, the Court observed the lethargic and irresponsible behaviour on the part of the respondents in misplacing the documents, while it was their duty to collect and preserve the evidences as per the procedure laid down in the said Manual.

The Court while pondering upon the issue of maintainability noted that the present writ petitions clearly falls within the purview of the exemptions provided by the Apex Court in the Chabbil Dass case and therefore, upheld the maintainability of the instant writ petitions.

The Court further noted that the respondents while passing the assessment order considered the sale value of 25th December and it throughout the year in a mechanical manner. The Covid pandemic where there was complete closure of shops was not taken into consideration. The Court pointed out such acts to be totally arbitrary and lacks any corroborative evidences. Hence, reliance on such data and evidences is unjustified.

The Court noted that the collection of materials and preservation of the same at the place of the respondents is entirely suspicious and assessments were made by virtue of guess work and without any valid evidence in the eye of law.

The Court asserted that in the present case, necessary documents have not been produced and the assessment orders were passed hurriedly within a short span of 10 days and 30 days. Thus, the impugned order passed by the 2nd respondent is in a serious flaw, which makes the orders nullity inasmuch as it amounted to violation of principles of natural justice because of which the Assessee was adversely affected.

The Court is of the considered view that since the respondents had not followed the procedure under the said Manual, no corroborative evidence was placed on record and hence, the said search and seizure is against the law and ab initio bad.

The Court further noted that neither the opportunity of personal hearing nor the opportunity to cross-examine the witnesses was provided to the petitioner. Therefore, it light of the above defaults the Court set aside the three impugned assessment orders and remitted the matter back to the concerned authority for re-consideration.

The Madras High Court has held that it is mandatory for the income tax department to follow the Digital Evidence Investigation Manual issued by the Central Board of Direct Taxes (CBDT) while conducting searches and seizing electronic evidence.

The Court also issued certain directions to the Respondents in the matter-

  • The 2nd respondent is directed to provide all the documents relied upon by them in the Show Cause Notice as requested by the petitioner.
  • If any oral/documentary evidence is relied upon to corroborate the electronic data, the 2nd respondent is directed to allow the Assessee to cross-examine the witnesses.
  • After completion of the cross-examination and before passing the final assessment order, the 2nd respondent is directed to provide an opportunity of personal hearing to the petitioner to put forth their case before the Assessing Officer;
  • The AO is directed to pass the assessment order in detail taking into consideration of the deposition of the witnesses, during the cross-examination, whose statements are relied upon by the 2nd respondent to corroborate the electronic data collected by them.
  • The Assessing Officer is directed to follow the above procedures in the event of issuance of any further show cause notices in connection with the present search and seizure relating to other assessment years.

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Judgement Reviewed by – Keerthi K

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