2024 (5) TMI 1141 - SC - Income Tax

Validity of limits on tax audits to be done by the Chartered Accountants - 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 - numerical restriction on the maximum number of tax audits accepted by CA - Potential Enhancement of the Specified Number of Tax Audits - 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 ICAI - Liberty as reserved to the respondent-Institute to enhance the specified number of audits that a Chartered Accountant can undertake under Section 44AB of the IT Act, 1961, Whether the Council of the respondent-Institute, under the 1949 Act, was competent to impose, by way of Guidelines, a numerical restriction on the maximum number of tax audits that could be accepted by a Chartered Accountant, u/s 44AB of the IT Act, 1961, in a Financial Year by way of a Guideline? - HELD THAT - As perused the impugned Guideline dated 08.08.2008 which is extracted above. The same has to be read in the context of the respondent-Institute functioning under the overall control, guidance and supervision of the Council which means the Council of the Institute has to carry out the duties so as to achieve the objects of the Act as delineated in its various provisions of the 1949 Act, vide Section 15. The power vested in the Council is general insofar as the carrying out the provision of the Act is concerned and in particular and without prejudice to the generality of the aforesaid powers, certain duties have been specifically delineated. This is evident on a reading of sub-sections (1) and (2) of Section 15 of the 1949 Act. One of the objects of the 1949 Act is to ensure that the profession of the Chartered Accountant in the country maintains high professional ethics and renders quality service inasmuch as Chartered Accountants are absolutely necessary for the efficient tax administration in the country. That on account of their services, the onerous duties cast on the assessing officer as well as the ITD is reduced. This would however depend upon the quality of service that is rendered by the Chartered Accountant as a professional for which regulation of the profession is necessary and the respondent-Institute has been established for, inter alia, such regulation of the profession. Chapter V of the 1949 Act assumes importance - the deeming provision would imply that with the passage of time, there could be newer misconducts which could be included in the Schedules in the form of regulations or Guidelines. The Schedules are a part of the 1949 Act which has been passed by the Parliament. But bearing in mind the fact that in future, it may not always be possible for the Parliament to go on amending the Schedules to the Act so as to incorporate newer professional misconducts particularly with emerging technology and its applicability to the profession of Chartered Accountancy in India, Part II of Second Schedule by way of a foresight has delegated the power to the Council to make any regulation or Guideline, the breach of which would amount to a misconduct. This delegation to define and enumerate a misconduct by way of a regulation or a Guideline is a legislative device adopted by the Parliament so as to leave it to the discretion of the Council of the respondent-Institute to incorporate, define and insert a Guideline or a regulation, the breach of which would result in a misconduct committed by a Chartered Accountant. The delegation of this power under Part II of the Second Schedule of the 1949 Act made by Parliament in favour of the Council of the respondent-Institute cannot be faulted with. This is on account of the fact that the 1949 Act itself defines certain types of misconduct vis- -vis a Chartered Accountant. But in the year 1949, the Parliament could not have envisaged every possible variety or type of commission or omission which could be a misconduct by a Chartered Accountant. Therefore, the delegation has been made by the Parliament to the Council of the respondent-Institute to make regulations or Guidelines, the breach of which would result in a professional misconduct. The aforesaid delegation of the Parliament to the Council of the respondent-Institute is clearly to define possible types of misdemeanours in the Second Schedule in the form of a regulation or a Guideline, the breach of which would result in a misconduct in futuro. This is in order to avoid the Parliament itself amending the Schedules to the 1949 Act every time a different type of misconduct is to be inserted to the Schedules by way of an amendment to the Act. Therefore, the regulation or Guideline issued by the Council, the breach of which would result in a professional misconduct, being a part of clause 1 of Part II of the Second Schedule have to be read as part and parcel of the 1949 Act itself. The delegation of powers to add newer types of misconducts by way of a regulation or a Guideline is neither excessive nor ultra vires under Section 22 of the 1949 Act which deems any breach of a regulation or Guideline as a misconduct as per Clause 1 of part II of Schedule II to the 1949 Act. Thus Council of the respondent-Institute had the legal competence to frame the impugned Guideline restricting the number of tax audits that a Chartered Accountant could carry out which was initially thirty and later raised to forty-five and thereafter to sixty in an assessment year. Therefore, the Council of the respondent-Institute having the legal competence to frame the Guidelines, the breach of which would result in professional misconduct, in terms of clause 1 of Part II of the Second Schedule of the 1949 Act cannot be held to be vitiated on account of there being lack of competency or powers to frame the impugned Guideline by the Council of the respondent-Institute. The argument advanced by the petitioners regarding the issuance of the Guidelines dated 08.08.2008 by the respondent-Institute is hit by the vice of excessive delegation, is hence without substance. Accordingly, we answered the point No. 1. Reasonable restrictions upon the freedom of trade, business, occupation or profession in the interest of the general public - 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? - The present petitioners assertion that the undertaking of more than a specified number of tax audit assignments would not imperil the integrity and quality of the tax audit does not persuade us because a reasonable possibility of the fall in quality owing to the surfeit of tax audit assignments exists. Therefore, we find it proper to trust the wisdom of the respondent-Institute as it has acted on bona fide and genuine recommendations of the CAG and the CBDT. We 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. Keeping the aforesaid in mind, there is no difficulty in concluding that by virtue of being a licensee, a privilege is conferred on Chartered Accountants. An elaborate and extensive process of recommendations and policy-making preceded the insertion of Section 44AB in order to achieve the public interest of prevention of tax leakages and more efficient tax administration. It is in pursuance of this primary goal of public interest that a further privilege under Section 44AB was extended to Chartered Accountants to conduct quality tax audits, so as to enable the interest of the public exchequer. This Court must consider the public interest involved not only from the perspective of the Chartered Accountants but rather from the perspective of the general public. In the present cases, it has been contended that public interest manifests as a benefit to the public exchequer in terms of appropriate quality of tax audit reports under Section 44AB. The restriction placed under Section 224 of the Companies Act, 1956 with regard to the number of companies which could be audited by an auditor or firm of auditors is also an instance of regulation of the profession of Chartered Accountants intended by the Parliament so as to ensure that standard and quality in the audit of accounts of companies as defined under Section 3 of the Companies Act, 1956 are maintained. This is to protect the rights and interest of the shareholders as well as the investors in the companies. Any omission or inadvertence in the auditing of such company accounts would inevitably have an adverse impact not only on the balance-sheets of the companies but also on the potential investments and growth of the companies. There has not been any challenge to the said regulation which is in the form of a restriction. Any breach of the restriction placed on the Chartered Accountants under Section 224 may lead to misconduct under the provision of 1949 Act. Whether exceeding such specified number of tax audits can be deemed to be professional misconduct ? - It was borne out during the course of arguments and through the submissions made in the Counter Affidavit that the tax audit monitoring mechanism was firstly, self-regulatory, wherein the disciplinary mechanism would kick in only on a complaint made/information received and not otherwise. Furthermore, the Tax Audit Monitoring Cell was created only after the CAG Report No. 32/2014, and even after that, initially notices were sent only selectively to Chartered Accountants who had completed more than two hundred audits not to all who had breached the impugned Guideline. As a rule of statutory interpretation, we find that the aforesaid principles, in an equitable legal system, should be applicable to the present circumstances. Thereby, for the limited period of uncertainty, the rule against doubtful penalization as a principle could, in the interest of justice and equity, be made applicable and the benefit of uncertainty be given to those subjected to misconduct proceedings in the instant writ petitions and to also those Chartered Accountants who may have received notices from the respondent-Institute and who may not have approached any court of law or to other similarly situated Chartered Accountants who may not have been proceeded against. We, therefore, find much force in the alternative plea made by the petitioners herein. In these circumstances, due to the uncertainty in law owing to quashing of the earlier Guideline and the pendency of the Special Leave Petition filed by the respondent-Institute before this Court and the enforcement of a fresh Guideline, we quash the disciplinary proceedings initiated against the petitioners herein. This is for the simple reason that only the writ petitioners have been proceeded against, while even according to the respondent-Institute, there were around twelve thousand Chartered Accountants who had breached the Guideline and had undertaken tax audits over and above the specified number but no action whatsoever was initiated against of them. Respondent-Institute is at liberty to enhance the specified number of tax audits that could be undertaken by practicing Chartered Accountants under Section 44AB of the IT Act, 1961. For that purpose, liberty is reserved to the practising Chartered Accountants to make their suggestions to the respondent. We dispose of the writ petitions in the following manner a) 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. b) However, the said clause 6.0, Chapter VI of the Guidelines dated 08.08.2008 and its subsequent amendment is deemed not to be given effect to till 01.04.2024. c) Consequently, all proceedings initiated pursuant to the impugned Guideline in respect of the writ petitioners and other similarly situated Chartered Accountants stand quashed. d) Liberty is reserved to the respondent-Institute to enhance the specified number of audits that a Chartered Accountant can undertake under Section 44AB of the IT Act, 1961, if it deems fit. e) Liberty is also reserved to the writ petitioners or any other member of the respondent-Institute to make a representation in the above context which may be taken into consideration in the event respondent-Institute intends to amend the Guideline as per point No. (d) above. f) The writ petitions as well as all the transferred cases are disposed of in the aforesaid terms. g) The Registry to intimate the concerned High Courts regarding disposal of the transferred cases accordingly.

Summary

Issues Involved:

1. Competency of the Council of the Institute to impose numerical restrictions on tax audits.
2. Reasonableness and constitutionality of the restrictions under Article 19 (1) (g).
3. Arbitrariness and legality of the restrictions under Article 14.
4. Classification of exceeding specified tax audits as 'professional misconduct'.

Summary of Judgment:

Competency of the Council:
The Council of the respondent-Institute was competent to impose, by way of Guidelines, a numerical restriction on the maximum number of tax audits that could be accepted by a Chartered Accountant, under Section 44AB of the IT Act, 1961, in a Financial Year. The delegation of powers to add newer types of misconducts by way of a regulation or a Guideline is neither excessive nor ultra vires under Section 22 of the 1949 Act. Therefore, the Council had the legal competence to frame the impugned Guideline, and the breach of which would result in professional misconduct.

Reasonableness and Constitutionality:
The restrictions imposed are reasonable and therefore, not violative of the right guaranteed to Chartered Accountants under Article 19 (1) (g) of the Constitution. The restriction has a rational nexus with the objects sought to be achieved, such as ensuring quality and accuracy in tax audits, equitable distribution of work, and maintaining high professional standards. The restriction is deemed necessary in public interest to prevent tax evasion and facilitate efficient tax administration.

Arbitrariness and Legality:
The restrictions imposed are not arbitrary and illegal and therefore, permissible under Article 14 of the Constitution. The classification of tax audits and the imposition of a ceiling limit are based on rational criteria aimed at maintaining the quality of audits and preventing monopolization of audit assignments. The restriction does not discriminate between Chartered Accountants practicing in different regions or serving different client bases.

Professional Misconduct:
Exceeding the specified number of tax audits can be deemed to be 'professional misconduct'. However, due to the uncertainty in law and selective implementation of the Guideline, the disciplinary proceedings initiated against the petitioners herein are quashed. The respondent-Institute is at liberty to enhance the specified number of tax audits that could be undertaken by practicing Chartered Accountants under Section 44AB of the IT Act, 1961.

Conclusion:
The writ petitions are disposed of with the following directions:
a) Clause 6.0, Chapter VI of the Guidelines dated 08.08.2008 is valid and not violative of Article 19 (1) (g).
b) The said clause is deemed not to be given effect to till 01.04.2024.
c) All proceedings initiated pursuant to the impugned Guideline in respect of the writ petitioners and other similarly situated Chartered Accountants stand quashed.
d) Liberty is reserved to the respondent-Institute to enhance the specified number of audits.
e) Liberty is also reserved to the writ petitioners or any other member to make a representation regarding the amendment of the Guideline.
f) The writ petitions and all transferred cases are disposed of accordingly.
g) No costs.