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Issues Involved:
1. Ultra vires of Rule 6G and Forms Nos. 3CA to 3CE 2. Statements on Taxability of Income and Admissibility of Expenses 3. Violation of Article 14 of the Constitution 4. Violation of Article 19 of the Constitution Summary: Issue 1: Ultra vires of Rule 6G and Forms Nos. 3CA to 3CE The petitioners argued that Rule 6G and Forms Nos. 3CA to 3CE of the Income-tax (Amendment) Rules, 1985, are ultra vires section 44AB of the Income-tax Act, 1961, as they impose obligations and functions beyond those associated with auditors in the classical sense. The court rejected this contention, stating that the term "audit" has expanded in scope and Parliament has extended the scope of the work of an auditor for tax audit purposes. Issue 2: Statements on Taxability of Income and Admissibility of Expenses The petitioners contended that the rule and forms requiring auditors to furnish statements about the taxability of income and the admissibility of expenses would estop the assessees from pleading against such statements. The court found this contention unfounded, noting that the Income-tax Officer ultimately decides on these matters, and the auditor's report or certificate, even if prejudicial, would not preclude the assessee from contesting it. Issue 3: Violation of Article 14 of the Constitution The petitioners claimed that section 44AB read with Rule 6G and Forms Nos. 3CA to 3CE are ultra vires Article 14 of the Constitution as they are arbitrary, unreasonable, and discriminatory. The court examined several sub-contentions under this issue: - Arbitrary and Unreasonable: The court found that linking the obligation of compulsory audit with gross receipts or turnover is not unreasonable, as it provides a clear and consistent basis for determining the necessity of an audit. - Time Limit for Audit Reports: The court acknowledged the hardship caused by the time limits but noted that penalties under section 271B would not apply if there was a reasonable cause for delay. - Penalty Provisions: The court held that section 271B, which prescribes a flat penalty, is not arbitrary or unreasonable, as the Income-tax Officer must consider all relevant circumstances, including the period of default, before imposing a penalty. - Retroactive Operation: The court rejected the contention that retroactive operation of the rules is unreasonable, stating that the validity of a law does not depend on whether it is prospective or retrospective. - Lack of Safeguards: The court acknowledged concerns about the lack of safeguards like empanelling auditors and a schedule of maximum fees but did not find this sufficient to render the provisions unreasonable. - Qualified Certificates: The court noted that opinions given by chartered accountants are not binding on the assessees or the assessing officer, mitigating concerns about qualified certificates. Discrimination: - The court found the classification of auditors and non-auditors intelligible and justified, given the specialized training and expertise required for tax audits. - The court also addressed the sub-classification of special auditors under other laws, finding that this does not make the main classification unintelligible or violate Article 14, as it serves a fair reason related to the purpose of the law. Issue 4: Violation of Article 19 of the Constitution The petitioners argued that the impugned provisions impose unreasonable restrictions on the right to carry on business or profession. The court rejected this contention, stating that the provisions do not restrict the right of assessees to select their authorized representatives and that the measures are in the public interest to safeguard against tax evasion and avoidance. Conclusion: The petitions were dismissed, and the court granted a certificate for leave to appeal to the Supreme Court, recognizing that the case involves substantial questions of law of general importance.
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