#IT ACT – Prime Legal

10 Jun

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

Blog #CBDT, #CharteredAccountant, #CharteredAccountant #supremecourt #centralgovernment, #Comptroller & Auditor General of India, #IT ACT

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.

“PRIME LEGAL is a full-service law firm that has won a National Award and has more than 20 years of experience in an array of sectors and practice areas. Prime legal fall into a category of best law firm, best lawyer, best family lawyer, best divorce lawyer, best divorce law firm, best criminal lawyer, best criminal law firm, best consumer lawyer, best civil lawyer.”

Judgement Reviewed by – Gnaneswarran Beemarao

Click here to view full Judgement

25 May

Emphasizing the importance of “tangible” material in reassessment proceedings and protecting taxpayers’ rights: Bombay High Court

Prime Legal

Blog #BOMBAY HIGH COURT, #incometax, #IT ACT, #primelegal, #writ

The High Court of Bombay passed a judgement on 04 May 2023, addressing the validity of a reassessment notice issued by the Income Tax Department. The petitioner sought to challenge the notice, which proposed to reopen the assessment for the Assessment Year 2014-15. The case of CHANCHAL BHAGWATILAL GOKHRU VS. UNION OF INDIA & ANR. IN WRIT PETITION NO. 2014 OF 2022 which was passed by the division bench comprising of HONOURABLE SHRI JUSTICE DHIRAJ SINGH THAKUR & HONOURABLE JUSTICE G. S. KULKARNI, KAMAL KHATA.

Facts

The petitioner had filed her income tax return for AY 2014-15 on 28th July 2014. The Assessing Officer (AO) subsequently passed an order under section 143(3) of the Income Tax Act, 1961, on 18th November 2016. This order added a specific amount to the petitioner’s total income based on the withdrawal of exemption claimed under section 10(38) of the Act. The petitioner paid the tax on the additional amount as directed by the AO. Furthermore, the petitioner was granted a waiver of penalty for AY 2014-15 on 31st January 2018, based on an application made under section 273A of the Act.

However, to the petitioner’s surprise, a notice under section 148 of the Act was issued on 26th March 2021, proposing to reopen the assessment for AY 2014-15. This notice was issued after a significant gap of four years. In response, the petitioner filed a return of income on 14th April 2021, followed by notices under sections 143(2) and 142(1) on 10th November 2021 and 15th November 2021, respectively. The petitioner provided the requested details and expressed objections to the reassessment through a communication dated 28th January 2022. The objections were disposed of on 11th February 2022. Another notice was issued on 25th February 2022, leading to the filing of the present petition.

Judgment

The court meticulously examined the reasons recorded by the AO for reopening the assessment. The AO primarily relied on the claim made by the petitioner regarding the purchase and sale of shares of penny stock scrips. The AO concluded that the long-term capital gain should be considered as unexplained investment/income from other sources rather than a capital gain, suggesting that the transactions were merely an accommodation entry designed to generate unexplained investment and bogus profits.

However, the court found no indication of the petitioner’s failure to disclose any material facts. It noted that the AO had already considered these transactions during the original assessment proceedings and had added the corresponding amount to the petitioner’s total income. The petitioner had duly paid the tax on this additional income. The court, therefore, found no substance in the AO’s claim that income chargeable to tax had escaped assessment. It emphasized that the mere change of opinion regarding the calculation of tax payable did not provide a valid basis for reopening the assessment. The court reiterated the well-established principle that reassessment proceedings require fresh “tangible material” to justify their validity.

Considering the settled legal position and the facts of the case, the court delivered the following order:

The impugned notice dated 26th March 2021, issued by Respondent No. 2 for AY 2014-15, was quashed, and set aside. All actions taken in furtherance of the notice were prohibited.

JUDGEMENT REVIEWED BY VETHIKA D PORWAL, BMS COLLEGE OF LAW

click here to view judgement

24 May

In our opinion the order passed by the Tribunal warrants no interference. No substantial questions of law arise in the present appeal: Bombay High court

Prime Legal

Blog #incometax, #IT ACT, #primelegal, Blog, MADRAS HIGH COURT, Prime Legal

The High Court of Bombay passed a judgement on 04 May 2023, in a recent legal battle under the Income Tax Act. The case of PR. COMMISSIONER OF INCOME TAX-19 VS. VISHWASHAKTI CONSTRUCTION IN INCOME TAX APPEAL NO. 1016 OF 2018 WITH INCOME TAX APPEAL NO. 1026 OF 2018 two appeals were filed challenging an order passed by the Income Tax Appellate Tribunal (ITAT) in Mumbai. The appeals were related to the assessment years 2009-10 and 2010-11 and were brought forth by a partnership firm engaged in road repairs and construction as a contractor for the Municipal Corporation of Greater Mumbai.

FACTS

The appellant, a partnership firm, filed a return of income for the assessment year 2009-10, declaring a total income of Rs. 37,04,810. During the assessment proceedings, the assessing officer (A.O.) noticed that the firm had claimed purchases totalling Rs. 88,53,059 from various entities. However, suspicions arose when the Sales Tax Department provided information about certain bogus parties, whose TIN matched with those from whom the purchases were allegedly made.

The A.O. issued notices under Section 133(6) of the Act to the parties involved, but there was no compliance. The firm also failed to produce the said parties, and as a result, the A.O. treated the amount of Rs. 88,53,059 as bogus purchases and added it back to the total income. The CIT(A) concurred with the A.O. on the bogus purchases but held that only the profit element embedded in the disputed purchases should be assessed as income, estimating it at 12.5%. The ITAT upheld the CIT(A)’s view and decision.

LAWS INVOLVED

The appeals were preferred under Section 260A of the Income Tax Act, 1961, which allows for appeals against orders of the ITAT. The case involved the interpretation and application of various provisions of the Act, including Section 143(3) and Section 147, which pertain to the assessment of income and reopening of assessments, respectively. Additionally, the decision of the CIT(A) was relied upon, along with the judgment of the Gujarat High Court in CIT v. Bholanath Poly Fab Private. Limited., which formed the basis for the ITAT’s decision.

ARGUMENTS

Two appeals were filed under Section 260A of the Income Tax Act, challenging the order passed by the Income Tax Appellate Tribunal. The appellant, claimed purchases from various entities, which were later flagged as bogus by the assessing officer. The firm argued that the completion of assigned projects for the Municipal Corporation of Greater Mumbai would have been impossible without genuine purchases. The Commissioner of Income Tax (Appeals) agreed partially with the assessing officer’s decision. The ITAT upheld the CIT(A)’s view, treating the purchases as bogus but retaining a portion of the addition. Similar cases were referenced to support the decision. The tribunal found no substantial questions of law and dismissed both appeals.

CONCLUSION

The case discussed highlights the legal implications and complexities surrounding the assessment of purchases made by businesses. While the court acknowledged the presence of bogus purchases, it also considered the practicality of completing assigned works if all purchases were deemed non-genuine. The decision emphasizes the need for a balanced approach when determining the tax implications of disputed purchases. Under Section 260A of the Income Tax Act, both appeals were dismissed, and the ITAT’s decision was upheld.

JUDGEMENT REVIEWED BY VETHIKA D PORWAL, BMS COLLEGE OF LAW

click here to view judgement