Restrictions on Tax Audit Assignments: A Landmark Judgment by the Supreme Court of India

In a landmark judgment by the Supreme Court of India, a ruling was made regarding the restrictions on tax audit assignments. This decision carries implications for professional ethics and accountability in the field of accounting. Stay tuned for key insights and analysis on this crucial legal matter.

Facts

• The Council of the Institute increased the ceiling limit for tax audits based on various factors over time.
• Challenges were raised against the mandatory ceiling limit imposed by Clause 6 of Guidelines issued by the Institute of Chartered Accountants of India.
• Several writ petitions filed in High Courts were transferred to the Supreme Court for hearing together.
• The Chartered Accountants Act, 1949 vests powers in the Council to regulate the number of tax audit assignments a member can accept.
• The Wanchoo Committee was constituted by the Government of India in 1970 to examine direct taxation issues.
• The Wanchoo Committee submitted its Final Report in December 1971.
• The ceiling limit for tax audits was set at sixty at the 2014 Council meeting.
• Challenges were made against the validity of the Notification dated 13.01.1989 which initially set the limit at thirty audits.
• The Council is considering revising the ceiling limit, and petitioners seek to quash disciplinary proceedings initiated based on the Impugned Guideline.
• A three-Judge Bench of the Court allowed transfer petitions in a case of public importance to settle a question of law comprehensively.
• The High Court found that public interest was served by distributing work among many Chartered Accountants.
• A Civil Appeal against the High Court’s judgment was dismissed as withdrawn.
• The validity of a Notification dated 13.01.1989 was challenged in Writ Petition No.2085 of 1993.
• The President of the Council was authorized to increase the limit on tax audits after considering member views.
• The Institute increased the limit on tax audits from thirty to forty-five per Chartered Accountant per year.
• The self-regulatory mechanism was deemed ineffective, leading to the Amendment Act, 2006 superseding old Notifications with new Guidelines.
• Several High Courts dismissed challenges against the restrictions imposed by the notifications.
• The restriction on the number of tax audits was considered reasonable under Section 15 of the 1949 Act by regulating the status of Institute members.
• The Madras High Court observed that professional engagements cannot be deemed unprofessional or misconduct.
• The Act and Rules were held to be capable of imposing restrictions for maintaining professional standards.
• Writ Appeal No.1116/2003 in the Kerala High Court was dismissed due to the petitioner’s death.

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Issue

• Whether the respondent-Institute had the competency to impose a restriction on the maximum number of tax audits accepted by a Chartered Accountant in a financial year under Section 44AB of the IT Act.
• If yes, whether such restriction unreasonably restricts a Chartered Accountant’s right to practice any profession under Article 19(1)(g) of the Constitution.
• Considering whether the impugned Guideline is saved under Article 19(6) of the Constitution of India.
• Examining whether the restrictions imposed are arbitrary, illegal, and impermissible under Article 14 of the Constitution.

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Arguments

• The petitioners argued that the restriction imposed by the guidelines on the number of tax audits is discriminatory, unreasonable, and violative of article 19(1)(g) of the Indian Constitution.
• They emphasized the difference in professional competence between senior and fresh Chartered Accountants, highlighting the fallacious assumption that all auditors take equal time in completing a tax audit.
• The petitioners contended that the ceiling limit imposed under Section 44AB should be based on the volume of work rather than the number of audits.
• They cited a judgment in Pathumma vs State of Kerala to argue for a balance between fundamental rights and societal interests.
• The petitioners also argued that a Chartered Accountant’s right to practice cannot be unreasonably limited and that the guidelines lack a reasonable classification or nexus with the objectives of the 1949 Act.
• They raised concerns about the selective implementation of the guidelines and questioned the authority of the respondent-Institute to impose such restrictions.
• The petitioners challenged the imposition of professional misconduct for exceeding the specified number of tax audits without a qualitative assessment.
• They highlighted the lack of notification of the guidelines in the official gazette and raised procedural impropriety issues.
• The petitioners also referenced past judgments and legal precedents to support their arguments against the guidelines.
• They contended that the guidelines were arbitrary, lacked a rational nexus with the Act, and imposed undue restrictions on the fundamental right to practice as a Chartered Accountant.
• Minerva Talkies case was relied upon to argue that 63 Chartered Accountants do not have an unrestricted fundamental right to practice their profession unregulated by the provisions of the 1949 Act.
• The restriction to limit the number of cinema shows to four in a day was upheld in the Minerva Talkies case.
• M/s Laxmi Khandsari case was referenced to support that restrictions consistent with the Directive Principles of State Policy must be upheld in the public interest.
• It was argued that the current restriction imposed is in furtherance of Part IV of the Constitution and should be considered reasonable.
• The petitioners in the Chamundi Mopeds case contended that the stay on the Madras High Court judgment only suspended its operation, not declared the judgment bad in law.
• It was emphasized that a law cannot be deemed unreasonable solely because it reduces a citizen’s income.
• Regulation of business or profession includes the power to prescribe and enforce just and reasonable rules, as established in the Deepak Theatre case.
• The T. Velayudhan Achari case was cited to support that limitations imposed in the public interest, like limiting the number of depositors under a banking law, are not violative of Article 19(1)(g) of the Constitution.
• Allegations of discrimination and violation of Article 14 of the Constitution were raised due to selective initiation of disciplinary proceedings against some Chartered Accountants based on a guideline while others remained untouched.

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Analysis

• Clause (ii) of Part II of the Second Schedule of the 1949 Act stipulates that a member of the Institute, whether in practice or not, shall be deemed guilty of professional misconduct if he contravenes any of the provisions of the Act, regulations, or guidelines issued by the Council.
• Section 44AB of the IT Act, 1961 mandates that every person carrying on business or profession must get their accounts audited by a Chartered Accountant if certain financial thresholds are exceeded.
• The Institute of Chartered Accountants of India issued a notification specifying that a member in practice shall be guilty of professional misconduct if they accept more tax audit assignments than the specified number, currently set at sixty in a financial year.
• Article 19(1)(g) of the Constitution allows reasonable restrictions in the interest of the general public, including regulation of professional qualifications and the State’s power to make laws related to professions.
• The Quality Review Board, established under Section 28A, is responsible for reviewing the quality of services provided by members of the Institute.
• Section 22 of the 1949 Act defines professional misconduct to include acts or omissions listed in the Schedules, with penalties for contravention.
• The Council of the Institute is empowered to make regulations for various matters, including examinations, qualifications, entry in the Register, and other professional standards.
• The amended long title and preamble of the 1949 Act emphasize regulation and development of the profession of Chartered Accountants.
• The Part II of the Second Schedule lists professional misconduct criteria, including contravention of Act provisions or Council guidelines.
• Limitations on the number of tax audit assignments a Chartered Accountant can accept are set to ensure quality and prevent overburdening of individuals or firms.
• The delegation of powers to add newer types of misconducts by way of a regulation or a Guideline is deemed appropriate under Section 22 of the 1949 Act.
• The Council of the Institute is legally competent to frame guidelines restricting the number of tax audits a Chartered Accountant can conduct.
• The primary objective of regulations and guidelines is to ensure high professional ethics and quality services by Chartered Accountants.
• The role of Chartered Accountants in tax administration is crucial for efficient tax compliance and revenue collection.
• The public interest is a key consideration in the implementation of regulations and restrictions in the accounting profession.
• The principle against doubtful penalization is relevant in ensuring clarity and fairness in legal proceedings.
• Restrictions placed on the number of tax audits serve the purpose of maintaining the quality and integrity of audit reports.
• Any deviation from the specified guidelines can be considered as a form of professional misconduct under the relevant provisions of the Act.
• The Institute’s authority to regulate the conduct of Chartered Accountants is supported by legislative provisions and public interest considerations.
• The judgment of Delhi High Court in Shri R. Nanabhoy was distinguished by citing legislative sanction and expert opinion supporting the utility of the measure in achieving quality and accuracy in audits.
• In Krishnan Kakkanth vs Govt. of Kerala, the Court upheld a rule as intra vires the Act and not placing unreasonable restrictions under Article 19(1)(g) of the Constitution. The Court emphasized that the taxation system should incorporate normative considerations like neutrality, fairness, certainty, efficiency, and also promote trust between taxpayers and tax administration.
• The Court recognized that placing a complete prohibition on professional activity must have strong reasons to attain legitimate objectives, non-imposition might jeopardize public interests.
• The regulation and control of trade, while reasonable under Article 19, may lead to hardships if trade persons fail to satisfy the regulatory rules. The onus is on Chartered Accountants to ensure high corporate governance standards.
• The court held that restrictions on the maximum number of tax audits accepted by a Chartered Accountant were reasonable and in the public interest.
• The judgment considered parliamentary acts justified in public interests, considering malpractices in industries like coir and seeks to prevent possible misconduct corrosive in public life.
• The court acknowledged the public interest involved in placing a cap on tax audits, aimed at limiting losses due to qualitative underperformance.
• The court highlighted the importance of credibility in financial market transactions and emphasized the critical role of transparent accounting in this regard.
• Various judgments were cited to argue that restrictions on professions, like limiting the number of depositors accepted by financial entities, are not violative of Article 19(1)(g) if they protect the larger interest of the public.
• All proceedings initiated under the impugned Guideline for writ petitioners and similarly situated Chartered Accountants are quashed.
• Integrity, objectivity, professional competence, due care, and confidentiality must guide the work ethic of Chartered Accountants.

Decision

• Clause 6.0, Chapter VI of the Guidelines dated 08.08.2008 and its subsequent amendment is valid and not violative of Article 19(1)(g) of the Constitution.
• It is a reasonable restriction on the right to practice the profession by a Chartered Accountant, protected under Article 19(6) of the Constitution.
• Clause 6.0, Chapter VI of the Guidelines dated 08.08.2008 and its subsequent amendment will not be enforced until 01.04.2024.
• No costs awarded.
• The writ petitions and transferred cases are disposed of with the mentioned terms.
• Interest for the further period to be paid at the rate of 17.5% per annum as per the High Court order.
• Balance and interest due by the appellants to be paid to the respondents within 8 weeks.
• Liberty reserved for the writ petitioners or any other member of the respondent-Institute to make representations regarding the specified number of audits under Section 44AB of the IT Act.
• The Registry to inform the concerned High Courts about the disposal of transferred cases.

Case Title: SHAJI POULOSE Vs. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (2024 INSC 451)

Case Number: T.C.(C) No.-000029 – 2021

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