WHETHER C&AG IS HAVING POWER TO AUDIT ON NON GOVERNMENT BODIES UNDER FINANCE ACT, 1994?

[Mr. M. GOVINDARAJAN]

In ‘SKP Securities Limited V. Deputy Director (RA-IDT)’ – 2013 (1) TMI 549 - CALCUTTA HIGH COURT the petitioner company, registered under the Companies Act, 1956 is engaged in the business inter alia of trading in stocks and securities. The petitioner is also a member of the Bombay Stock Exchange as well as the National Stock Exchange.   The petitioner registered with the Department under service tax provisions under the categories of ‘Banking and Other Financial Services’, ‘Stock Broking services’ and ‘Business Auxiliary Services’.

The Principal Director of Audit (Central), Kolkata issued a notice to the petitioner for audit by CERA of the service tax records, accounts and other relevant documents of the petitioner company.   Against this notice the petitioner company filed the present writ petition before the High Court.

The petitioner contended that there is no provision in the Comptroller and Auditor General act which enables the Comptroller and Auditor General of India to audit the accounts of a non government company which is not operated out of the funds of the Union of India or any State Government or any Union Territory or any entity owned and/or financed by them. The Revenue contended that Section 16 of CAG Act empowered the CAG to conduct the audit of the private companies.

The High Court analyzed the provisions of the CAG Act. The perusal of Sections 13 to 15 makes it clear that the primary duty and function of the Comptroller and Auditor General of India is to audit expenditure from the consolidated fund of India and of each State and of each Union territory having a legislative assembly and to ascertain whether the moneys shown in the accounts having been disbursed were legally available for and applicable to the service or purpose for which they have been applied or charged and whether the expenditure conforms to the authority which governs it. They are also required to audit all transactions of the Union and of the States relating to Contingency Funds and Public Accounts and also audit all trading, manufacturing, profit and loss accounts and balance sheets and other subsidiary accounts kept in any department of the Union or of a State.   In addition, where any body or authority is substantially financed by grants or loans from the consolidated fund of India or of any State or of a Union territory having a Legislative Assembly, the Comptroller and Auditor General shall subject to the provisions of any law for the time being in force, applicable to the body or authority, as the case may be, audit all receipts and expenditure of that body or authority and report on the receipts and expenditure audited by them.

The High Court observed that it is nobody’s case that the petitioner was financed by, or is run out of any loan from the Union of India or any State Government or any Union Territory.   The High Court further observed that Section 14(2) of the CAG Act provides that notwithstanding anything contained in Section 14(1) the CAG might, with the previous approval of the President or the Governor of a State, or the Administrator of a Union Territory having a Legislative Assembly, as the case may be, audit all receipts and expenditure of any body or authority\ where the grants or loans to such body or authority from the Consolidated Fund of India or any State or of any Union Territory in a financial year not less than Rs.1 crore. This section has no application in the case of the petitioner.

The High Court further observed that Section 16 provides that it is the duty of Comptroller and Auditor General of India to audit all records which are payable into the Consolidated Fund of India and of each State and of each Union Territory and to satisfy himself that the rules and procedures in that behalf are designed to secure an effective check on the assessment, collection and proper allocation of revenue and are being duly observed, and to make for this purpose such examination of the accounts as he thinks fit and report thereon. The High Court found it difficult to appreciate how the aforesaid provisions can empower the CAG to audit the accounts of a nongovernmental company which does not receive any grant or loan or aid from any government or any government undertaking.  The High Court held that Section 16 of the CAG Act does not authorize the CAG or any audit team under the control of CAG to audit the accounts of a non government company and that too in the absence of any request either from the President of India or the Governor of the State.

Section 19(3) of the CAG Act provides that the Governor of a State or the Administrator of a Union Territory having a Legislative Assembly may, where he is of opinion that it is necessary in the public interest so to do, request the CAG to audit the accounts of a corporation established by law made by the Legislature of the State or of the Union territory, as the case may be, and where such request has been made, the CAG shall audit the accounts of such corporation and shall have, for the purpose of such audit, right of access to the books and accounts of such corporation. Provided that no such request shall be made except after consultation with the CAG and except after giving reasonable opportunity to the corporation to make representations with regard to the proposal for such audit.

In this case there was no request to the CAG by the State in which the petitioner company carries the business.  The condition precedent for audit of a non government body in a request from the President of India, Governor of the State concerned or the Administrator of a Union Territory concerned after consultation with the CAG.   The conditions precedent for an audit by the office of the CAG are wholly absent in the facts and circumstances of the case.

The Revenue further contended that Rule 5A of the Service Tax Rules, 1994 which is almost in pari materia with Rule 173G (6) (c) of the Central Excise Rules, 1944 provides for audit by an audit team deputed by the CAG of India. The petitioner contended that Section 94(2) of the Finance Act does not empower the Central Government to frame rules for audit of the accounts of an assessee by any audit team under the CAG of India.

Rule 5A of Service Tax Rules, 1994 reads as follows-

(1)   An office authorized by the Commissioner in this behalf shall have access to any premises registered under these rules for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue.

(2)   Every assessee shall, on demand, make available to the officer authorized under sub-rule (1) or the audit party deputed by the Commissioner of the Comptroller and Auditor General of India, within a reasonable time not exceeding fifteen working days from the day when such demand is made, or such further period as may be allowed by such officer or the audit party, as the case may be,-

(i)    The records as mentioned in sub-rule (2) of rule 5;

(ii)   Trial balance or its equivalent; and

(iii)  The income tax audit report, if any, under Section 44AV of the Income Tax Act, 1961 (43 of 1961), for the scrutiny of the officer or audit party, as the case may be.

The High Court observed that the Central Government derives the power to make rules from Section 94 of the Finance Act, 1994. Section 94 empowers the Central Government to make rules for carrying out the provisions of Chapter V of the said Act and without prejudice to the generality of the power to make rules for carrying out the provisions of Chapter V, to make rules in respect of matters enumerated in sub section (2) of Section 94 of the Act. The High Court held that the Central Government has no power and/or authority under Section 94 of the Finance Act, 1994 to frame rules for any purpose other than those specified in sub-section (2) of Section 94 of the Finance Act or for any purpose other than carrying out the provisions of Chapter V of the said Act.

The petitioner contended that Rule 5(2) is ultra vires the rule making power conferred on the Central Government by Section 94 of the Finance Act, 1994, since there is no provision in Chapter V of the Finance Act, 1994 which empowers the CAG to audit the accounts of an assessee which is a nongovernmental company, not in receipt of any aid or assistance from any government or government authority.

The High Court held that in the absence of any provision in Chapter V of the Finance Act, 1994 for audit of the accounts of a non government company by the CAG of India or any team under him, the Central Government could not have framed, and has not framed any rule which provide for audit by the CAG of India or any audit team under the control of an assessee which is not a government company.

The High Court held that the notice cannot be sustained and the same is liable to be set aside. The Court is of the view that judicial propriety demands that this writ petition be referred to a Division Bench and directed to put this petition before the Hon’ble Chief Justice for assignment to a Division Bench.