Power of Central Excise / Service Tax department to conduct Audit under EA-2000 Scheme – From the outcome of the decision, It may be seen as a professional opportunity by the Chartered Accountants or Cost Accountants but there is no respite to the assessee from Audit.

[CA Surender Gupta]

Related provisions:

Section 72A of the Finance Act, 1994

Rule 5A(2) of the Service Tax Rules, 1994

Decision:

M/S A.C.L. Education Centre (P) Ltd. and others  [2014 (1) TMI 1562 - ALLAHABAD HIGH COURT]

 

Writ petition was filed before the Allahabad High Court challenging the virus of Rule 5A(2) and raising the following question:

“The petitioners-assessees objected and also challenged the vires of Rule 5A(2) of the Service Tax Rules, 1994 interalia on the ground that the provision of Rule 5(A)(2) are contrary to the provision of Section 72A of the Service Tax Act.”

Hon’ble High Court dismissed the petition stating that:

“Rule 5A(2) is not ultra vires, as the same is in consonance to Section 72A of the Finance Act, 1994 and the same was enacted by the competent authority.”

High Court has observed that:

Rule 5-A, sub-rule (2) states that every assessee shall, on demand, make available to the officer authorised or the audit party, records, trial balance and income-tax audit report, if any. So here, the officer will demand the documents just to facilitate the correctness of books of accounts and ultimately, the audit will be conducted by the Audit Party headed by the Chartered Accountant/Cost Accountant, as the case may be, deputed by the Commissioner.

It is Commissioner on whose behalf, the officer will collect the material and the Auditor will perform the audit. In any case, the final report duly signed by the Chartered Accountant will be submitted to the Commissioner. In case of Government Autonomous Body, the function of the audit has been assigned to the Comptroller of Auditor General of India.

From the above, it is crystal clear that in case of private assessee, the Commissioner will refer the matter to an officer to collect the material or Chartered Accountant for the purpose of audit. Thus, for the purpose of audit, the material can be collected either by the officer authorized by the Commissioner or by the Auditor himself. But, audit will be performed only by the Chartered Accountant.

It is pious duty of the assessee to make available the record as mentioned in Rule 5A i.e. trial balance or its equivalent; and the income-tax audit report, if any, under Section 142(2A) of the Income Tax Act, 1961, for the scrutiny of the officer or the Audit Party, as the case may be.

Thus, we find that there is no inconsistency in Rule 5A and Section 72-A of the Finance Act, 1994. The said provision is not arbitrary. The manner for conducting the audit is as per the accounting standard provided by the Institute of Chartered Accountant of India. The audit report will be made available to the assessee, as per law.

Assurance by the Government:

Before the High Court Additional Solicitor General has assured that, the audit will be performed by a qualified Chartered Accountant and as per accounting standard. After the audit report, the assessee will get the copy of the report, as per law.

Outcome of the decision:

For the purpose of audit, the material can be collected either by the officer authorized by the Commissioner or by the Auditor himself. But, audit will be performed only by the Chartered Accountant.

From the outcome of the decision, this decision may be seen as a professional opportunity by the Chartered Accountants or Cost Accountants, as the case may be, but there is no respite to the assessee from Audit.

 See:

 M/S A.C.L. Education Centre (P) Ltd. and others  [2014 (1) TMI 1562 - ALLAHABAD HIGH COURT]

Also see:

An article on Power of CAG to conduct audit under Service Tax

 

Discussions to this article

[CA. Surender Gupta]

While analyzing the decision of Honble High Court, wherein HC held that Rule 5A(2) of Service Tax Rules is not inconsistent with Section 72A of the Finance Act, 1994, I tried to understand to see the future impact of this decision till any other decision from the Apex Court or Amendment by the legislature to the statutory provision.

In view of the assurance given by the ASG, now Departmental officers cannot conduct the audit themselves.

In view of the provisions of Section 72A of the Finance Act, before given an order for Special Audit, Commissioner has to record his reasons of belief for getting the audit conducted.

Now what the department has option after an assurance given by the ASG in the High Court that audit will be conducted by the Chartered Accountant?

It is interesting to  note that there was no challenge to the provisions of Rule 5A(1) wherein Central Excise officers are empowered to access to any registered premises for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue.

Now when I think a situation with closed eyes, I find that it may be a worst scenario as:

(1) Central Excise / Service Tax department still has the power to enter the premises and scrutiny the records. They need not name it as EA-2000 audit.

(2) On the basis of such visit and scrutiny department may raise a demand directly on the assessee

(3) On the basis of such visit and scrutiny or on the basis of any other ground commissioner may have reasonable belief and may appoint an Auditor (Chartered Accountant or Cost Accountant) for getting the audit conducted.

(4) Where Commissioner appoints that auditor, department may seek documents and make them available to auditor for audit. - Now he has to face two authorities and satisfy both of them to get rid of from the possible demand.

(5) In case of special auditor there may be additional (direct or indirect) cost upon the assessee.

It is too early to say "Who is beneficiary" but it is sure to say that difficult days are ahead for the assessee.

[Rakesh Chitkara]

Days of Butter-chicken & Malai Kofta during visit to assessees premises, whether will come to an end ? Whether summons by Audit for non-submission of documents will also come to an end ? Refer Para 10 of  Circular No.491/57/99-CX, dated 28.10.1999   [ http://cbec.gov.in/excise/cx-circulars/cx-circulars-99/491-99-cx.htm ]

"(10)   The Auditors will not issue any summons in cases where the records are not forthcoming/ produced by the assessee for the purpose of audit. They will also not exercise the powers of search, seizure, interrogation and arrest. Where such actions are imperative, they may refer the matter to the Anti-Evasion Wing of the Commissionerate and the latter will take immediate necessary action after taking clearance at a higher level."

There is also the issue of simultaneous probe by Anti-Evasion, by Range & by Audit, in violation of CBECs instructions.

http://www.servicetax.gov.in/audit freqcy norms.htm. Excerpts :

“ The taxpayers whose returns were selected for detailed scrutiny, may not be taken up for Audit that year, to avoid duplication of work. Similarly, the taxpayers who have been selected for Audit, may not be taken up for detailed scrutiny of their ST-3 Returns during that year.”

Not a happy outcome by High Court judgement for assessees but an extremely potential opportunity for CAs & Cost Accts. Three tears for the poor lawyers have been left out in this process.