2017 (3) TMI 732 - HC - Income Tax

Determination of fee payable to Chartered Accountant (CA) for special audit assigned to him u/s 142 - Calculation of time billed for professional work - Held that - Spending 9 to 10 hours a day for a special audit would include the time spent on basic necessities food and refreshments etc. Unlike employees professionals do spend 9 to 10 hours a day on their work even at odd hours and attend to their basic necessities in the remaining hours of the day. Exclusion of such necessary recess for consumption of food and refreshment etc. for a person to render quality work is illogical. In any case the billing is not for 24 hours a day but for a part thereof. Therefore to assume that the time billed was not exclusively for the professional work is without basis and untenable. Chartered Accountants are not automatons who without having access to food or being able to attend to all other necessities would churn out good quality reports after analysing voluminous records. Notably the work experience of the partners ranges from 3 to 27 years while the range permissible billing rate is between 3, 500/- to 7, 500/- and the rate of sitting could have been correspondingly adjusted as per their regular sitting hours or accepted degree of competence; instead it has arbitrarily been reduced to an average rate of 4, 000/- per hour. The disallowance of certain hours based on the assumption that the auditors would have spent some time on lunches refreshments etc. is erroneous. If such disallowance is permitted then the corollary argument would be that some members of the audit team or the entire team was not adequately focussed on the special audit. This kind of reasoning assumes thought-control or thought-intensity monitoring. Such nature of control is neither envisaged under the Rules nor is it reasonable. What the Revenue is to assess in such circumstances is whether the special audit report was (i) within time (ii) of the desired quality (iii) the billing is commensurate to the nature of inquiry and the quantum of the records to be looked into; etc. If the audit report is of good quality and inter alia authored by a qualified professional having a fair number of years of experience then he/she may well be entitled to ask for the highest prescribed billing rate.In the circumstances the Court is of the view that the bill submitted by the petitioner needs a fresh look.

Summary

Issues:
Challenge to order passed by Commissioner of Income Tax under Section 142(2D) of the Income Tax Act regarding fee for special audit services.

Analysis:
1. The petitioner sought to quash/modification of an order passed by the Commissioner of Income Tax under Section 142(2D) of the Income Tax Act, seeking payment for a special audit conducted for seven years for an auditee company. The audit report was termed as 'very good,' and an addition of over ?720 crores was made to the auditee's returns. The petitioner billed for 1078 hours at the client's place and 237 hours at their office. However, the Commissioner restricted the payable hours to 709 at an average rate of ?4,000 per hour, totaling ?28,36,000 plus service tax. The petitioner disputed this computation, citing the quality of work and past orders in their favor.

2. The impugned order questioned the billing based on the experience of the audit team members and the assumption of time spent on non-audit activities like lunch. The Court noted that professionals spend 9 to 10 hours a day on work, including basic necessities, and the exclusion of necessary breaks for food and refreshments was illogical. The Court found the reasoning behind limiting the billed hours and reducing the rate to be arbitrary and questioned the assumption of distractions during the audit process. The Court emphasized that the focus should be on the quality and timeliness of the audit report rather than arbitrary reductions based on assumptions.

3. The Court set aside the impugned order and directed the Commissioner to re-determine the fee payable to the petitioner, considering the observations made. The Court highlighted the need for a fresh look at the bill submitted by the petitioner, emphasizing the importance of assessing the quality of the audit report and the experience of the professionals involved. The Court's decision aimed to ensure a fair evaluation of the services provided during the special audit, emphasizing the need for a balanced approach in determining the fee for such specialized services.