2024 (1) TMI 254 - NFRA - Companies Law

Professional Misconduct - The reports issued in form 10 DA u/s 80 JJAA of Income Tax Act - failure to obtain sufficient appropriate evidence and failure to exercise due diligence professional skepticism - Failure to verify reorganization of business with various parties - Failure to exclude employees whose contribution was paid by the Government - Lapses in reporting additional employees during FY 2020-21 - Failure to verify payment of additional employee cost by account payee cheque/draft/electronic means - Failure to verify salary limit of Rs 25,000 per month for new employees - penalties and sanctions. HELD THAT - It has been established that CA Pawan Jain failed to obtain sufficient appropriate evidence and failed to exercise due diligence professional skepticism before issuing report in Form 10 DA. He did not verify the basic conditions i.e., (a) excluding the additional employees of merged/amalgamated business; (b) excluding additional employees whose EPS contribution was paid by the Government; (c) whether there was increase in the total number of employees; (d) whether additional employee cost was paid by account payee cheque/draft/electronic means; and (e) whether total emoluments of additional employee was not more than Rs 25000 per month. In addition to the above charges, there are many other conditionalities under section 80JJAA, which are required to be checked by the CA who certifies eligibility of the amount of Income Tax deduction to be claimed by the assessee company. These relate to ascertaining whether the new employees participated in a recognized Provident fund, whether there was no rehiring of old employees, and whether additional employees were employed for not less than 240 days. Besides these, there were deficiencies in sample testing done by the CA. The CA was charged with non-verification of the same. While denying all of these charges, the CA claimed that he had looked into these matters. As stated earlier, none of these are evidenced in the working file and therefore, we are unable to accept his defense. Findings on the Articles of Charges of Professional Misconduct - HELD THAT - CA Pawan Jain has failed to exercise due diligence in ensuring the presence of the basic qualifying criteria to qualify for the tax benefit and obtaining sufficient appropriate evidence to support his certification. Thus, he was negligent in the conduct of his professional duties by not adhering to the scope of the work undertaken by him. As per section 132(4) of the Companies Act, Professional or other misconduct shall have the same meaning assigned to it under section 22 of The Chartered Accountants Act 1949. Thus, failure of CA Pawan Jain to exercise due diligence and failure to obtain sufficient appropriate evidence resulted in the following professional misconducts within the meaning of Section 132 (4) of the Companies Act, 2013 a) Failure to exercise due diligence in the conduct of professional duties (clause 7 of part-I of second schedule of The Chartered Accountants Act 1949), This charge is proved that the CA Pawan Jain failed to exercise due diligence in the conduct of professional duties as explained in Section - C- I to V above. b) Failure to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion. (clause 8 of part-I of second schedule of The Chartered Accountants Act 1949). This charge is proved as CA Pawan Jain failed to obtain sufficient information which was necessary to ensure that the report issued by him in Form 10 DA is true and correct. Penalty and sanctions - HELD THAT - Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proved cases of professional misconduct are viewed is evident from the fact that a minimum punishment is laid down by the law - CA Pawan Jain failed to exercise due diligence in the conduct of professional duties while certifying the information in form 10 DA based on examination of the relevant records. It has been proved that before issuing the reports, the CA did not obtain sufficient appropriate evidence with regard to compliance of conditions stipulated in section 80 JJAA for claiming deduction in respect of new employees. Considering the proved professional misconduct and keeping in mind the nature of violations, their impact on revenue and deterrence against future professional misconduct, monetary penalty of Rs fifty (50) lakhs only imposed upon CA Pawan Jain.

Summary

Issues Involved:
1. Lapses in issuing reports.
2. Professional misconduct by the Chartered Accountant (CA).
3. Penalty and sanctions.

Summary:

I. Lapses in Issuing Reports:
The CA failed to exercise due diligence and obtain sufficient information before issuing reports under the Income Tax Act. Specific lapses included:
- Failure to verify reorganization of business with various parties.
- Failure to exclude employees whose EPS contribution was paid by the Government.
- Incorrect reporting of the number of additional employees during FY 2020-21.
- Failure to verify that payment of additional employee costs was made by account payee cheque/draft/electronic means.
- Failure to verify the salary limit of Rs 25,000 per month for new employees.

II. Professional Misconduct by the Chartered Accountant:
The CA was found guilty of professional misconduct under Section 132 (4) of the Companies Act 2013. The charges included:
- Failure to exercise due diligence in the conduct of professional duties.
- Failure to obtain sufficient information necessary for the expression of an opinion or its exceptions.

III. Penalty and Sanctions:
The CA was imposed a monetary penalty of Rs fifty (50) lakhs, effective 30 days from the issuance of the order. The seriousness of the misconduct and its implications for government revenue were highlighted, emphasizing the need for chartered accountants to exercise due diligence in their professional duties.