2010 (5) TMI 277 - HC - Income Tax

Audit of accounts u/s 142(2D) remuneration to be paid to the auditors fixation Held that The auditor, to whom the work is assigned, is not under any obligation to accept the assignment and is very much at liberty, while making offer for appointing him as Special Auditor or while accepting the assignment, to insist upon payment of such fee as he may deem adequate for the work assigned to him. Therefore, necessarily he needs to know, what will be paid to him for the work proposed to be assigned to him. If the remuneration demanded by the person proposed to be appointed as Special Auditor is not acceptable to the Chief Commissioner or the Commissioner, as the case may be, he may not assign the work to him. But it would be difficult to accept that the special audit can be assigned to a person without fixing either the remuneration or the norms on which the remuneration is to be calculated after the work is completed and conveying the same to him. Taking such a view would amount to giving an arbitrary power to the Chief Commissioner or the Commissioner, as the case may be, to fix any fee which he may decide to fix irrespective of the quantum of the work and the scale on which the remuneration is to be determined taking the quantum of work into consideration. This, to our mind is not the scheme of Section 142(2D) of the Act. Under the Scheme of the Act, the assessee has no role to play in determination of the remuneration by the Commissioner of Income Tax and it has to pay, to the Special Auditor, whatever amount is determined by the Commissioner. Hence, the mutual agreement between the Auditor and the assessee in no case could have been the sole basis of the order passed by him. Of course, there could be no objection to the Commissioner accepting any amount agreed to by the Special Auditor, in case the amount otherwise determined by him was found to be higher than the amount agreed to by the Auditor. But, before doing that he must apply his mind to all the factors and determine the amount which in his opinion should be paid to the Auditor. CIT is directed to re-determine the remuneration of the petitioner on the basis of the scale approved by the Institute for the nature of the work carried out by the petitioner. If, however, the remuneration, payable to the petitioner in terms of the scale approved by the Institute, is found to be more than Rs 30 lakhs either for the year 2002-03 or for the year 2003-04 or for both, the remuneration will be restricted to Rs 30 lakhs for the year(s) for which it is found to be more than Rs 30 lakhs

Summary

Issues Involved:
1. Determination of remuneration for special audit under section 142(2A) of the Income-tax Act, 1961.
2. Alleged mutual agreement on remuneration between the petitioner and the respondents.
3. Authority of the Commissioner of Income-tax in fixing remuneration.
4. Compliance with the scale prescribed by the Institute of Chartered Accountants of India (ICAI).

Issue-wise Detailed Analysis:

1. Determination of remuneration for special audit under section 142(2A) of the Income-tax Act, 1961:
The petitioner, a firm of chartered accountants, was appointed as a special auditor for respondent No. 3 for the financial years 2002-03 and 2003-04. The remuneration for this audit was initially discussed and agreed upon based on the scale prescribed by the Institute of Chartered Accountants of India (ICAI). The petitioner raised bills for Rs. 49,94,419 and Rs. 44,69,447 for the respective years, which were initially paid by respondent No. 3.

2. Alleged mutual agreement on remuneration between the petitioner and the respondents:
A meeting held on April 10, 2007, allegedly resulted in a mutual agreement to fix the remuneration at Rs. 20 lakhs per year. The petitioner contended that this agreement was not genuinely consented to by its representative and was signed under pressure. The petitioner subsequently wrote a letter on April 11, 2007, withdrawing any alleged consent and insisting on remuneration based on the ICAI scale.

3. Authority of the Commissioner of Income-tax in fixing remuneration:
Section 142(2D) of the Income-tax Act mandates that the remuneration of the special auditor is to be determined by the Chief Commissioner of Income-tax, and this determination is final. The Commissioner had initially directed that the audit charges would be based on ICAI guidelines. Despite this, the Commissioner later fixed the remuneration at Rs. 20 lakhs per year without providing a clear basis or adhering to the previously agreed scale.

4. Compliance with the scale prescribed by the Institute of Chartered Accountants of India (ICAI):
The court found that the Commissioner had noted in the departmental file that the charges would be based on ICAI guidelines. The petitioner's acceptance letters also stipulated that the remuneration would be as per the ICAI scale. The respondents did not object to these terms at the time, indicating implicit acceptance. The court held that once the Commissioner had decided to fix the remuneration according to the ICAI scale, he could not later deviate from this decision without proper justification.

Conclusion:
The court quashed the impugned orders dated July 26, 2007, and September 18, 2007, which had fixed the remuneration at Rs. 20 lakhs per year. The court directed the Commissioner to re-determine the remuneration based on the ICAI scale, capping it at Rs. 30 lakhs per year if the calculated amount exceeded this figure. The re-determination was to be completed within six weeks from the date of receipt of the court's order. The writ petition was disposed of with each party bearing its own costs.