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TMI Blog2008 (3) TMI 641X X X X Extracts X X X X X X X X Extracts X X X X ..... ees before assessing authority but they are not equals for the purpose of compulsory audit. In the light of this object, chartered accountants and others cannot be said to be similarly situate. The qualifications and eligibility to be enrolled as income-tax practitioners are entirely different from that of chartered accountants from the point of view Of auditing. Merely because, apart from dealers whose turnover is more than 40 lakhs, dealers dealing in liquor trade have also to get their accounts audited does not make the provision arbitrary. Such dealers are a class by themselves as they are carrying on a trade which is res extra commercium. Section 29 of the Advocates Act till date has not been brought into force. Apart from that one fails to understand the stand of the Bar Council after the decision of the Supreme Court in T.D. Venkata Rao [1998 (12) TMI 6 - SUPREME Court] wherein the Supreme Court has accepted the fact that chartered accountants by the reason of their training have special aptitude in the matter of audit. The act of maintaining accounts is neither pleading, practice nor acting. For the reasons already discussed, we find that the challenge to the constitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r collected except by the authority of law and article 301 as it infringes the freedom to carry on trade, commerce and intercourse throughout the territory of India. Writ Petition No. 3203 of 2006 is filed by the association and its President who is petitioner No. 2. The association is registered under the Societies Registration Act, 1960 having registration No. Bom 166/71. They contend that for the last 56 years, advocates and sales tax practitioners who are its members have been enjoying an equal level field in practice before the sales tax authorities. The impugned provision seeks to keep out a class of advocates and sales tax practitioners from their legitimate field of practice. This class of practitioners and advocates have attained appreciable standard of expertise to understand and interpret the sales tax laws before the tax authorities under the Act. The Advocates also practice in the field of sales tax before the High Court and the Supreme Court. Therefore, there is no reason to take away a vested right of such a large class of practitioners in a bid to favour a particular class at the cost of rest of the categories. Under section 82 of the Act, various categories o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urns are being compiled by them on the basis of their records. The sales tax practitioners and advocates have been giving commendable services to the industries at all stages of sales tax proceedings. Their valuable guidance and help is easily accessible at affordable charges. By the amendment what is sought to be done is to have the assessment of tax liability under the Act assessed, approved and certified as the correct liability of a dealer by a third agency who is described as class of persons called chartered accountants. The work that the chartered accountant has to do is to verify the return with full details and certify legality or otherwise of the claims in the returns. This function of the assessment for the tax dues from a dealer under the MVAT Act has already been assigned and entrusted to the Commissioner or its delegates or officers appointed under the said Act. The industries, therefore, it is contended would be obliged to engage the services of chartered accountants over and above their respective appointee from the class of sales tax practitioners or advocates. On account of this heavy financial burden would be cast on small-scale industries and such burden is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r (v) Forms CL-I, CL-II, CL-III, CL/FL/TOD-III under the Maharashtra Country Liquor Rules, 1973 get his accounts in respect of such year audited by an accountant within the prescribed period from the end of that year and furnish within that period the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars and certificates as may be prescribed. Explanation. For the purposes of this section 'accountant' means a chartered accountant within the meaning of the Chartered Accountants Act, 1949 or a cost accountant within the meaning of the Cost and Works Accountants Act, 1959. (2) If any dealer liable to get his accounts audited under subsection (1) fails to furnish a copy of such report within the time as aforesaid, the Commissioner may, after giving the dealer a reasonable opportunity of being heard, impose on him, in addition to any tax payable, a sum by way of penalty equal to one tenth per cent, of the total sales: Provided that, if the dealer fails to furnish a copy of such report within the period prescribed under sub-section (1), but files it within one month of the end of the said period, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chartered accountant or a cost accountant is found guilty of misconduct in connection with any proceedings under this Act by an authority, empowered to take disciplinary action against the member of the profession to which he belongs, or (iii) who, being a sales tax practitioner, is found guilty of such misconduct by the Commissioner . . . The Statement of Objects and Reasons as annexed to the Bill in so far as section 61 is concerned, reads as under: Clauses 55 to 62. A new provision is made for advance ruling by the Tribunal on any question relating to interpretation of the law. A new provision provides for compulsory audit to be made in certain circumstances by qualified accountants. The State of Maharashtra by Maharashtra Act No. 25 of 2007 amended the MVAT Act. We are concerned with the amendment to section 61. The relevant portion reads as under: 17. In section 61 of the Value Added Tax Act, (1) in sub-section (1), in the Explanation, for the words and figures 'Accountants Act, 1949' the words and figures 'Accountants Act, 1949 or a cost accountant within the meaning of the Cost and Works Accountants Act, 1959', shall be substituted; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itutes an audit seems plain enough. The Oxford English Dictionary defines the noun 'audit' as 'an official examination of accounts with verification by reference to witnesses and vouchers'. Mr. R.A. Irish in his book 'practical auditing' (page 1) says: 'An audit may be said to be a skilled examination of such books, accounts and vouchers as will enable the auditor to verify the balance sheet. The main objects of any audit are: (a) To certify to the correctness of the financial position as shown in the balance sheet, and the accompanying revenue statements, (b) The detection of errors, (c) The detection of fraud. The detection of fraud is generally regarded as being of primary importance'. Thus the word has a specific connotation in the matter of examination, investigation and auditing of accounts, where detection of fraud is of primary importance. The prayers as sought and noted earlier are to declare section 61 of the MVAT Act, 2002 as unconstitutional and ultra vires being violative of articles 14, 19(1)(g), 254, 265 and 301 of the Constitution of India or in the alternative to read down or interpret the impugned provisions, i.e., section 61 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ality or otherwise of the assessees' claims of sales tax law can issue certificate. Similarly chartered accountants however, senior they may be, who have not practised sales tax law and who could not gather experience can issue certificate. There is no relation with object of the enactment for such arbitrary selection of class without relation to their authority, efficiency or otherwise. The sole object and purpose of section 61(1) is that every dealer who is covered by sub-section (a) and (b) should get their returns verified and get their tax liability assessed by a professional so as to enable them to provide the information required to furnish a report under rule 65 and to fill out form 704. There is no other purpose behind section 61. This purpose and object completely exhausts the scope of section 61. If this being so, the requirement of C. A. alone for the certification in form 704 is wholly irrelevant and arbitrary. In any case, all information contained in form 704 is for assessment of tax liability by the expert professionals who on the basis of same information are authorised to fill all types of returns in forms 221 to 225 and no purpose is served by the C.A.'s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by a person who is not a chartered accountant. Section 61 which requires audit only by a chartered accountant, therefore, is discriminatory. Reliance is placed on Municipal Corporation of Grater Bombay v. Thukral Anjali Deokumar [1989] 2 SCC 249. (e) Section 61 also suffers from arbitrariness as it violates article 14 by being classificatory. Section 61(1)(a) and (b) creates two classes. If the object of the section 61 is to create a class of tax-payers who would be liable to pay tax, then the classification with reference to turnover exceeding Rs. 40 lakhs is understandable. However, the creation of another class under section 61(1)(b), namely, dealers in liquor, irrespective of their turnover is an arbitrary classification, having no nexus with the object of section 61, viz., to tax traders whose turnover exceeds Rs. 40 lakhs. (f) Similarly, the advocates qualified are denied right of certification or correction or otherwise of dealers' claims which require judicial background and expertise in the law. A perusal of the form prescribed would show that it is nothing but certification of claims which is arrived at on the basis of clarification of claims. The legal complian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly heavy. The industry will have to pay heavy burden by way of audit fees. This is a direct impediment to trade and cuts into their net profit. This additional compliance cost in terms of money and waste of time is an added impediment. This additional payment to the C.A. would, in pith and substance, amount to compulsory levy amounting to tax by the State in contravention of article 265 of the Constitution of India. (j) The provisions for punishment to a dealer for not engaging C.A. are highly penal and without any cap. It is difficult to get a qualified C.A. to take up audit within a short time as provided in the Act and the C.A. usually depends upon the sales tax practitioner of the dealer for his audit. This creates anxious time for the dealer and source of tension. The impugned provision does not serve any purpose of revenue under the MVAT Act. The provisions are therefore, unreasonable and a restraint on freedom of trade. Before answering the issues, we may advert to the reply filed on behalf of the State Government through Mr. Pandit Vitthal Khade, Deputy Commissioner of Sales Tax. Pointing to the history of legislation, it is set out that the Government of Maharashtra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ajor variances in respect of turnover of sales and purchases accounted as per AAS in the profit and loss account of the enterprise and turnover of sales and purchases which is required to be considered for the purpose of levy of tax under the Maharashtra Value Added Tax Act, 2002. Clear cut comments on the major changes made by any firm in a given period in respect of accounting system, method of valuation of stocks and business model, etc., are required from the auditor. These are complex accounting and audit issues which advocates, sales tax practitioners' and company secretaries are not professionally qualified to handle. Section 29 of the Advocates Act, 1961 provides that advocates would be the only class of persons to practice the profession of law . Section 33 of the Advocates Act bars any other professional to practice in any court or before any authority, etc. Section 49 of the Advocates Act gives general powers to the Bar Council of India to make such rules. Under this power the Bar Council of India has framed the Rules which prohibit an Advocate from engaging in any other profession other than practising the profession of law. The requirement of section 61 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... audit from independent professionals. Thirteen States and Union Territories have called for an audit report under the VAT Act exclusively from chartered accountants. These States are (i) Arunachal Pradesh, (ii) Bihar, (iii) Chattisgarh, (iv) Goa, (v) Madhya Pradesh, (vi) Maharashtra, (vii) Manipur, (viii) Meghalaya, (ix) Punjab, (x) Rajasthan, (xi) Dadra and Nagar Haveli, (xii) Daman and Diu, (xiii) Chandigarh. Another 7 States have called for audit report only from professionals who have knowledge in the field of accountancy, i.e., chartered accountants or cost accountants. In those States the sales tax practitioners or advocates are not authorised to give the audit report, though they are allowed to represent before the authorities. These States are (i) Assam, (ii) Delhi, (iii) Kerala, (iv) Orissa, (v) Tripura, (vi) Jammu and Kashmir, (vii) Uttranchal. Only four States have allowed other professionals besides chartered accountant and cost accountant to conduct this audit. These States are (i) Andhra Pradesh, (ii) Gujarat, (iii) Jharkhand and (iv) Karnataka. The C.A.s were included after consideration and analysis of the facts as to their expertise and specialised training. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly and completely maintained. Though various judgments have been cited, it is only to the extent that they are required to be considered, will they be considered as the challenge on the grounds of articles 14 and 19(1)(g) are well-settled and the tests are based on the objects of the statute and the nature of the infraction challenged. There is no direct challenge to accountant within the meaning of the Explanation to section 61 doing the work of audit and certification. The contention is to the exclusion of advocates and sales tax practitioners from doing the work of audit and certification. The challenge to the reasonability of the provision must be understood in that context. The substantial challenge is to the classification. To consider the challenges under articles 14 and 19(1)(g), we may at once refer to section 44AB of the Income-tax Act, 1961. This provision as in the present case provides for audit of persons whose total sales or turnover or gross receipts exceed forty lakhs per year. This provision was challenged before various High Courts. The Supreme Court in an appeal before it, has upheld the legality of the section. Section 44AB of the Income-tax Act reads ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibed. Explanation to section 44AB provides that accountant shall have the same meaning as in the Explanation below sub-section (2) of section 288. Explanation to section 288 defines accountant to mean the chartered accountant within the meaning of Chartered Accountants Act, 1949 and includes by virtue of provisions of sub-section (2) of section 226 of the Companies Act any person who is entitled to be appointed to act as auditor of companies registered in that State. Before the Madras High Court, the challenges were considered in the case of R. Sathya Moorthy v. Union of India [1991] 189 ITR 491. This judgment came up for consideration before the Supreme Court in an appeal, in T.D. Venkata Rao v. Union of India [1999] 237 ITR 315; AIR 1999 SC 2242. The challenge to the validity of the section before the Madras High Court, the challenge made was on behalf of income-tax practitioners as also an assessee, to contend that under section 44AB, as compulsory audit was restricted to chartered accountants, it would result in excluding all authorised representatives other than chartered accountants. Such a restriction was an oppressive restriction in the guise of an obligation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n audit is to be conducted in form No. 704. The various submissions now made under articles 14 and 19 in the challenge to section 61 were also advanced whilst challenging section 44AB of the Income-tax Act before the various High Courts. The Madras High Court had referred to judgments of various other High Courts which had decided the challenge to section 44AB. The judgments of the High Courts are Mohan Trading Co. v. Union of India [1985] 156 ITR 134 (MP), Rajkot Engineering Association v. Union of India [1986] 162 ITR 28 (Guj). Abhay Kumar and Co. v. Union of India [1987] 164 ITR 148 (Raj), A.S. Sarma v. Union of India [1989] 175 ITR 254 (AP) and T.S. Nataraj v. Union of India [1985] 155 ITR 81 (Karn). In Mohan Trading Co. [1985] 156 ITR 134 (MP) the main contentions which were raised and rejected by the learned Bench of the Madhya Pradesh High Court were: There is no delegation to the accountant or abdication of the assessing authority's function. In a taxing statute, classification of assessees on the basis of turnover is a reasonable classification and greater latitude is available to the Legislature for classification. The classification on the very face of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary. Non-chartered accountants from amongst the authorised representatives would not be competent to discharge onerous responsibility cast upon the chartered accountant having regard to the expertise achieved as a result of their academic knowledge and practical experience. The chartered accountant by his very privileged status exposes himself to the consequences of civil liability for negligence, specific statutory liabilities such as misfeasance under the Companies Act, liability for professional misconduct in disciplinary proceedings under the Chartered Accountants Act, 1949 and sometimes to criminal liability under the Penal Code. It, therefore, cannot be said that Parliament, by selecting chartered accountants from amongst various representatives to act as tax auditors has given a preferential treatment to them vis-a-vis the non-chartered accountants' segment of authorised representatives. These are two distinct classes. There is no restriction on the right of the assessees to select as their authorised representatives whomever they like, either the chartered accountants or other income-tax practitioners. In A.S. Sarma v. Union of India [1989] 175 ITR 254 (AP), it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... object of the provisions, which is prevention of evasion of tax dues. (ii) The contention that such a provision brings in an oppressive restriction is also liable to be rejected as auditing accounts is a specialised job. It may be true that some income-tax practitioners may also acquire that skill by sheer practice without passing the necessary examination. But that does not preclude Parliament from prescribing special qualifications with reference to the auditing of accounts. (iii) Legal practitioners and chartered accountants are equal for the purpose of representation of assessees before assessing authority but they are not equals for the purpose of compulsory audit. The preferential treatment given to the chartered accountants for the purpose of compulsory audit does not militate against the rule of equality under article 14 of the Constitution. The terms audit , auditing and the functions of auditor clearly bring about the difference between the chartered accountants and others. The object and purpose in providing compulsory audit is to facilitate the prevention of evasion of taxes, administrative convenience in quick and proper completion of assessments, etc. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titioner and retired employees definitely not. The settled law on the subject is that as long as the twin tests of reasonableness of the classification and nexus with the object are satisfied, wisdom of legislation cannot be substituted. The State Legislature is free to decide in its wisdom as to how best to safeguard the State revenue. Different States may adopt different standards and policy of one Legislature may not be adopted by another Legislature as the matter lies in the domain of policy making. Because some States have permitted sales tax practitioners to carry on audit need not necessarily mean that as the Legislature of the State of Maharashtra has not so provided, that would be arbitrary or that the classification considering the nexus of the object is arbitrary. It is for the State Legislature to decide how to protect its revenue and this is more true with regard to economic legislation. See R.K. Garg v. Union of India [1982] 133 ITR 239 (SC) as also the observations of the Supreme Court in para 16 in Directorate of Film Festivals v. Gaurav Ashwin Jain [2007] 4 SCC 737. The court observed as under: 16. . . Courts cannot interfere with policy either on the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... audited by a chartered accountant within the meaning of the Chartered Accountants Act, 1949 and shall furnish to the assessing authority, a certificate of such audit in form XXXVII and a statement in form XXXVII along with the statements in forms A.R.I., A.R.II, and A.R. IV. The challenge made was that the rule is unreasonable and violative of the right to carry on a profession under article 19(1)(g). The challenge was rejected. No doubt what was considered there was an exercise in subordinate legislation. We may consider the challenge under article 19(1)(g). Does section 61 prohibit the petitioner from carrying on their profession or does it amount to an unreasonable restriction not protected by article 19(6). In so far as lawyers are concerned, the Supreme Court in V. Sasidharan v. Peter and Karunakar [1984] 4 SCC 230 has held that traditionally lawyers do not carry on trade or business nor do they render services to clients. When can a law be said to amount to a total prohibition. Gainful reference can be made to the judgment of the Supreme Court in State of Gujarat v. Mirzapur Moti Kureshi Kassab Jamat [2005] 8 SCC 534. It was therein sought to be contended that the impug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will only amount to a restriction. Such restriction can be imposed considering article 19(6) of the Constitution of India which provides that it is open to the State in the interest of general public to impose reasonable restrictions on th exercise of right conferred on such class. Apart from that it is further provided that nothing in sub-clause (6) shall prevent the State from making any law relating to professional or technical qualification necessary for practicing the profession, trade or business as the case may be. In other words, apart from the power conferred on the State to impose reasonable restrictions under article 19(6), there is a further power conferred under article 19(6) of laying down professional or technical qualifications necessary for practicing the profession as in the instant case. Considering the tests laid down in MRF Ltd. v. Inspector, Kerala Government [1998] 8 SCC 227 to judge the reasonableness of the restriction, can the provision which requires the audit to be done only by accountant as explained, amount to an unreasonable restriction. In the matter of carrying out audit the State has chosen to confer that right only on a class of persons having ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue of competence of the State Legislature. The petitioner does not dispute that in the matter of enacting the law pertaining to recovery of sales tax, the same clearly falls within entry 54 of the State List. If in the process of making legislation, the Legislature in its wisdom provides for the procedure in the manner in which tax has to be levied, maintenance of books, procedure for checking correctness or verification of books, we fail to see as to how the same amounts to ancillary legislation or procedure not falling within the competence of the State Legislature under entry 54. The Act requires that the dealer has to maintain books and the books have to be audited and required to be certified by a chartered accountant. That will not result in the legislation falling outside the competence of the State Legislature. The legislation, in pith and substance, is relatable to imposition of sales tax which is within the competence of the State Legislature. The courts examine and ascertain the pith and substance on scrutiny of the true character of the enactment. See E.V. Chinnaiah v. State of A.P. [2005] 1 SCC 394. It is so in the instant case. The burden where such a challenge is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se services the dealer seeks to obtain for appearance before sales tax authorities or getting the accounts audited. Under section 82, there are a class of persons from whom a dealer can obtain services for being represented before the authorities under the Act. Under section 61, he is bound to select one of the class of accountants also. This is for a category of dealers whose turnover is more than 40 lakhs. The amount of fee which has to be paid is the amount to be decided between the dealer and that person, whom he selects from amongst the accountants that are available. This cannot be said to amount to compulsory levy amounting to tax. That being the case, the challenge under article 265 must also fail. Similarly, the question of article 301 being attracted, does not arise. The challenge on that count also has to be rejected as the right claimed by the petitioner or their members or by the dealer is that advocate and sales tax practitioner cannot carry out audit in terms of section 61 in the State of Maharashtra. The enactment is pursuant to the power of the State legislation to make law within its competence. This does not attract article 301. For all the aforesaid reason ..... X X X X Extracts X X X X X X X X Extracts X X X X
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