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TMI Blog1986 (3) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... directions to quash and set aside the said provisions. Special Civil Application No. 2068 of 1985 has been moved by two registered associations of engineers and oil millers, being petitioners Nos.1 and 2, respectively, having a membership of more than 500 and 250 persons respectively, as well as by different partnership firms, being petitioners Nos. 3 to 6, carrying on business in different commodities, turnover of each of them exceeding Rs. 40 lakhs. The petitioners claim that the members of the first and second petitioner-associations as well as petitioners Nos. 3 to 6 are represented by non-chartered accountant authorised representatives in the preparations of their accounts, various statements and returns of income to be filed before the Income-tax Officer for the purpose of their assessment as permitted by section 288 of the Income-tax Act, 1961 (hereinafter referred to as " the Act "). Broadly stated, the case of the petitioners is that the Act does not make any distinction whatsoever between various categories of authorised representatives specified in section 288(2) while discharging their functions and duties under the Act. The authorised representatives comprise mainly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stances which would warrant the necessity of the impugned provisions. The grievance of the petitioners is that their right to carry on and manage their business including their right to be represented by the authorised representatives for the purposes of their tax assessment under the Act before the concerned authorities is virtually rendered nugatory by the impugned provisions inasmuch as they would be constrained to represent their cases through chartered accountants to whom they would be required to entrust the work of audit of their accounts and obtain their reports of audit containing the particulars as prescribed under the impugned provisions. According to them, for all practical purposes, they would be denied the choice of selecting their authorised representatives from non-chartered accountant practitioners. The impugned provisions, in so far as they tend to restrict this right, would cause harassment, inconvenience and unnecessary expense to them, and particularly in mofussil and other places where the services of chartered accountants would not be readily available without conferring any corresponding substantial benefit to the Government revenue, which was a raison d'etr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d these petitioners to move this petition are the same as those averred in Special Civil Application No. 2068 of 1985, since the impugned provisions have a direct and immediate impact on their fundamental right to practise and appear on behalf of the assessees and represent them in the assessment proceedings before the tax authorities as permitted under section 288 of the Act. The purpose and the intention of the impugned provisions is apparent in so far as the same requires the tax audit to be carried out by chartered accountants only and, therefore, there is a clear hostile discrimination against them. The impugned provisions are irrational, arbitrary and do not subserve public interest as considered by the Select Committee of Parliament in 1973. The objects and reasons of the impugned provisions, as stated by the Finance Minister on the floor of Parliament, are not capable of being achieved by the same. The impugned rules and the forms go beyond the purpose of section 44AB enjoining for a prescribed class of assessees, the audit of accounts which even in the extended sense of the term would not include the tax audit required under the Rules. They have also, therefore, prayed for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther by Mr. Kaji who appeared on behalf of the petitioners in Special Civil Application No. 2069 of 1985 and 450 intervening assessee-respondents in Special Civil Application No. 2068 of 1985. On behalf of the Union Government, the learned Advocate-General of Tamil Nadu, Shri A. Krishnamurthi, advanced arguments and was supported by the learned advocate, Shri G. N. Desai, appearing on behalf of the chartered accountant, respondents Nos. 4 to 6 in Special Civil Application No. 2068 of 1985. Broadly stated, four questions were raised for our consideration and decision. A number of subsidiary contentions and counter-contentions have been urged in support of or opposition to the rival contentions. The said four broad contentions raised before us are as under: 1. Whether the impuged rule 6G and the Forms Nos. 3CA to 3CE of the Income-tax (Amendment) Rules, 1985, are ultra vires section 44AB of the Income-tax Act, 1961, inasmuch as the obligations and functions prescribed for the chartered accountants are beyond the obligations and functions associated with the auditors in the classical sense since the main enactment in the section enjoins audit for a prescribed category of assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a hostile discrimination qua the legal practitioners of income-tax; and (ii) because the sub-classification makes the main classification absolutely unintelligible since the amendment to the proviso to section 44AB treats the audit made by the persons who are non-chartered accountants and permitted to audit under the special statutes as sufficient compliance of the main enactment. (4) Whether the impugned provisions of the Act and the Rules are ultra vires article 19 of the Constitution inasmuch as they prescribe unreasonable restrictions on the right to carry on business or profession. Before we deal with these contentions, we may set out the impugned provisions, namely, section 44AB and rule 6G: " Section 44AB. Every person, (a) carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds forty lakh rupees in any previous year or years relevant to the assessment year commencing on the 1st day of April, 1985, or any subsequent assessment year; or (b) carrying on profession shall, if his gross receipts in profession exceed ten lakh rupees in any previous year or years relevant to the assessment year co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the impugned section to be furnished in cases where the business accounts of a person have been audited under any special law by an accountant. Form No. 3CB is a pro forma of the report applicable in the case of a person carrying on a business. Form No. 3CC is a pro forma of the audit report applicable in the case of person carrying on a profession. Form No. 3CD is a statement which a tax auditor has to file containing particulars prescribed in the form in the case of a person carrying on a business, while Form No. 3CE is a statement of particulars in the case of a person carrying on a profession. What is the power of judicial scrutiny in a case where a taxing statute or a provision thereof has been challenged as violative of article 14 and/or article 19 of the Constitution ? A taxing statute or a provision thereof does not enjoy absolute immunity from attack on the ground that it is violative of article 14 of the Constitution. It is the settled position in law that the courts are not concerned with the policy or purpose of a taxing statute, or any other manner of taxing a subject or article in a way different from which the court might think fair and just in the circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 34(3) of the Indian Income-tax Act, 1922, as being bad on the ground that it violated article 14 of the Constitution. The Division Bench of the Bombay High Court from the decision of which the appeal was preferred to the Supreme Court had struck down the said proviso. The majority of the judges of the Supreme Court in that case agreed with the decision of the High Court as in their opinion, the persons with regard to whom a finding or direction was given and the persons with regard to whom no finding or direction was given really belonged to the same category, namely, the category of persons who were liable to pay tax and had failed to pay it for one reason or the other, and the persons who were liable to pay tax and had not paid it could not be proceeded against after the period of limitation, unless a finding or direction with regard to them was given by some Tribunal under various sections mentioned in the proviso and, therefore, out of the large category of people who were liable to pay tax but failed to pay it, a certain number was selected for action by the proviso and with regard to that small number, the right of limitation given to them was taken away. In the opinio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bition of article 14, must be founded on intelligible differentia which distinguishes persons grouped together from those that are left out and that differentia must have a rational nexus with the object sought to be achieved by the Act. In matters of challenge to fiscal measures on the ground of article 14, courts have laid down more rigorous considerations which must be borne in mind while considering challenge under article 14. In Twyford Tea Co. Ltd. v. State of Kerala, AIR 1970 SC 1133, where the court was considering a challenge under article 14 to the provisions of the Kerala Plantations (Additional Tax) Act (17 of 1960) as amended by the Kerala Plantations (Additional Tax) Amendment Act (19 of 1967), Mr. Justice Hidayatullah (as he then was), speaking for the court, observed in paragraphs 15 and 16 as under (at 1137-38): " We may now state the principles on which the present case must be decided. These principles have been stated earlier but are often ignored when the question of the application of article 14 arises. One principle on which our courts (as indeed the Supreme Court in the United States) have always acted, is nowhere better stated than by Willis in his Consti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s proving not possible 'inequality' but hostile 'unequal' treatment. This is more so when uniform taxes are levied. It is not proved to us how the different plantations can be said to be 'hostilely or unequally' treated. A uniform wheel tax on cars does not take into account the value of the car, the mileage it runs, or in the case of taxis, the profits it makes and the miles per gallon it delivers. An Ambassador taxi and a Fiat taxi give different out-turns in terms of money and mileage. Cinemas pay the same show fee. We do not take a doctrinaire view of equality. The Legislature has obviously thought of equalising the tax through a method which is inherent in the tax scheme. Nothing has been said to show that there is inequality much less 'hostile treatment'. All that is said is that the State must demonstrate equality. That is not the approach. At this rate, nothing can ever be proved to be equal to another." In Vivian Joseph Ferreira v. Municipal Corporation of Greater Bombay, AIR 1972 SC 845, the court was concerned with the validity of certain provisions of the Bombay Buildings Repairs and Reconstruction Board Act (47 of 1969) as being ultra vires article 14 of the Constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r assessment follows under the law in the same manner as in the case of tax evaders who are not found in possession of concealed income. In one set of cases, the fiscal authorities make sure of recoveries, in the other, they are unable to do so-not because the provisions of section 132 do not operate on them, but because action under that section by search and seizure is futile. The court rejected the challenge because all evaders of tax can be proceeded against under section 132 and only in some cases the search may be useful, in others it may not be. The court did not find any substance in the contention that two different procedures for assessment are adopted, and hence, there was discrimination under article 14. In State of Gujarat v. Shri Ambica Mills Ltd., AIR 1974 SC 1300, the State of Gujarat was in appeal against the decision of this court holding that section 3(1) of the Bombay Labour Welfare Fund Act (40 of 1953) as amended by the Gujarat Act of 1961, in so far as it related to unpaid accumulations specified in section 3(2)(b), section 3(4) and section 6A of the said Act and the rules 3 and 4 of the rules, was unconstitutional and void. Section 3(1) and section 3(2)(b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any claim received whether in answer to the notice or otherwise within a period of four years from any worker would be transferred by the Board to the authority appointed under section 15 of the Payment of Wages Act. On adjudication of the claim, the authority would order the Board to pay the claimant the amount of the claim as allowed by it. Appeal is also provided against the decision of the authority. The section also made consequential provisions in that behalf. This amendment was made in view of the reasons which weighed with the court in Bombay Dyeing Mfg. Co.'s case, AIR 1958 SC 328, to declare the original section 3(1) and section 3(2)(b) as ultra vires article 19 of the Constitution. One of the grounds on which the provisions were challenged was that discrimination was writ large in the definition of the term de establishment " in section 2 This court held that there was no intelligible differentia to distinguish establishments grouped together under the definition of "establishment" under section 2(4) and establishments left out of the group and that, in any event, the differentia has no rational relation or nexus with the object sought to be achieved by the Act and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d none who are not. The question then is : what does the phrase 'similarly situated' mean ? The answer to the question is that we must look beyond the classification to the purpose of the law. A reasonable classification is one which includes all persons who are similarly situated with respect to the purpose of the law. The purpose of law may be either the elimination of a public mischief or the achievement of some positive public good. 54. A classification is under-inclusive when all who are included in the class are tainted with the mischief but there are others also tainted whom the classification does not include. In other words, a classification is bad as under-inclusive when a State benefits or burdens persons in manner that furthers a legitimate purpose but does not confer the same benefit or place the same burden on others who are similarly situated. classification is over-inclusive when it includes not only those who are similarly situated with respect to the purpose but others who are not so situated as well. In other words, this type of classification imposes burden upon a wider range of individuals than are included in the class of those attended with mischief at whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered that legislative dealing with such problems is usually an experimental matter. It is impossible to tell how successful a particular approach may be, what dislocations might occur, what evasions might develop, what new evils might be generated in the attempt. Administrative expedients must be forged and tested. Legislators, recognizing these factors, may wish to proceed cautiously, and courts must allow them to do so. (37 California Rev. 341). 58. Administrative convenience in the collection of unpaid accumulations is a factor to be taken into account in adjudging whether the classification is reasonable. A legislation may take one step at a time addressing itself to the phase of the problem which seems most acute to the legislative mind. Therefore, a Legislature might select only one phase of one field for application of a remedy. (See Two Guys from Harrison-Allentown v McGinley [1961] 366 US 582, 592). 59. It may be remembered that article 14 does not require that every regulatory statute applies to all in the same business: where size is an index to the evil at which the law is directed, discriminations between the large and small are permissible, and it is also p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y becomes, the greater the diversity of its problems and the more does legislation direct itself to the diversities. 'Statutes are directed to less than universal situations. Law reflects distinctions that exist in fact or at least appear to exist in the judgment of Legislators-those who have the responsibility for making law fit into fact. Legislation is essentially empiric. It addresses itself to the more or less crude outside world and not to the neat logical models of the mind. Classification is inherent in legislation. To recognise marked differences that exist in fact is living law ; to disregard practical differences and concentrate on some abstract identities is lifeless ". (See the observations of justice Frankfurter in Morey v. Doud [1957] 354 US 457, 472). 65. That the legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry, that exact wisdom and nice adaption of remedies cannot be required, that judgment is largely a prophecy based on meagre an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cise of its taxing power (as in the case of the act now under consideration), the means employed to effectuate this legitimate functioning are in their nature practical, belonging to the field of experiment and experience, and outside of the field of judicial knowledge. Hence, if it once be determined that the main provision of the Act levying the tax and defining its incidence is constitutional (as it is undoubtedly in the act now under consideration), the means devised by Congress for the collection of the tax and the prevention of frauds in connection with it will, except in the most extraordinary cases, be held to be within the proper scope of the legislative power. " (emphasis supplied) No doubt, this is said in the context of the legislative power and the incidental matters in connection with a legislative topic. None the less, it throws a great light on the contour of the power of judicial scrutiny. Article 14 of the Constitution of India has, according to the Supreme Court, a wider content and reach inasmuch as it not only forbids discrimination but it also strikes at arbitrariness in the State action and ensures fairness and equality of treatment. The principle of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is levied and the manner in which it is sought to be recovered are all matters within the competence of the Legislature. The court would, therefore, be circumspect and cautious in dealing with the contentions raised by a citizen that the taxing, statute contravenes article 19 of the Constitution. However, if a given taxing statute is plainly discriminatory or provides no procedural machinery for assessment and levy of tax or is confiscatory in nature, the statute can be impugned and struck down as unconstitutional; in such cases, the character of the material provisions of the impugned statute is such that the court would feel justified in taking a view that, in substance, the taxing statute is a cloak adopted by the Legislature for achieving its confiscatory purpose (See Rai Ramkrishna v. State of Bihar, AIR 1963 SC 1667). It is in the backdrop of this settled legal position that we have to examine the challenge as to whether the impugned provisions are violative of article 14 of the Constitution, since we intend dealing with the constitutional challenge to the impugned provisions raised in contentions Nos. 3 and 4 in the first instance. Re: Contention No. 3(a)(i): Broad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counts, was of the view that compulsory audit in the case of businesses with large incomes would be desirable. The Direct Taxes Administration Enquiry Committee also recommended that in the interest of expeditious and proper assessment of taxpayers in higher income group, audit of accounts in all cases of business, profession and vocation, where the total assessed income in any one of the last three years exceeded Rs. 50,000, should be made compulsory by law and that audit should also be made compulsory in those cases of business, profession and vocation where the returned income for the first time exceeds Rs. 50,000. The working group of the Administrative Reforms Commission also favoured compulsory audit by chartered accountants of cases with income over Rs. 50,000. However, the Administrative Reforms Commission, while agreeing that audit by qualified chartered accountants would be helpful in relieving the assessing authority of the need to make routine checks and enabling him to concentrate on the broader aspects of determination of the assessee's correct liability, felt that the number of chartered accountants being limited, it may not be possible for all assessees to secure th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Accountants who can undertake additional workload of audit in the non-corporate sector without much difficulty. 2.148. We are conscious that determination of taxable income is altogether different from that of commercial profits. The scope of audit and examination of accounts for the purpose of determination of taxable income has, therefore, to be wider. Apart from examining the evidence for a particular item of expense or income, an auditor has to ascertain whether the expenditure is allowable or the income taxable. Allowance of a certain expenditure turns on its being reasonable or in consonance with the fair market price for similar goods or services. This is a matter which depends on the subjective judgment of the Income-tax Officer. Similarly, about cash credits and other items, inference from facts is likely to differ from person to person. Further, there could well be cases where some bank accounts in the name of the taxpayer or his benamidar were not disclosed to the auditor, or where some receipts and payments were omitted to be entered in the books. In the case of non-corporate assessees, imperfect methods of record keeping in many a case may well hinder the auditor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e separate legislation or by amending the present legislation relating to auditors ensures the independence, impartiality and accountability of the auditors concerned, the well intended provisions which have been impugned in these petitions may not possibly achieve the real purpose. The absence of any provision circumscribing the right of an auditor from undertaking the role of management consultant or accepting directorship on the board of companies has resulted in the present tragic situation that in spite of the statutory provision of compulsory audit in the Companies Act, black money has proliferated beyond comprehension. We find ourselves in general agreement with the views expressed in the dissenting note of Shri D. K. Rangnekar, member of Wanchoo Committee. We do not think, however, that inspite of some force in this contention of the learned Advocate-General of Gujarat, the impugned provisions can be said to be unreasonable because they have been linked up with the gross receipts or turnover. The reasons are obvious. If any other basis like that of income or taxable income had been adopted as the basis for compulsory audit, such a provision would have been self-defeating. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specified date. This specified date is defined in the Explanation to the section. It means the last day of the four months from the end of the previous year or where there are more than one previous year, from the end of the previous year which expired last before the commencement of the assessment year or 30th June, whichever is later. It should be noted that the impugned provision, namely, section 44AB, has been put on the statute book by the Finance Act No. 49 of 1984, but has been made effective from April 1, 1985, while the rules were published on January 31, 1985, and they have been also made applicable from April 1, 1985. It should be further noted that the prescriptions about how audit is to be carried out and what particulars the audit report should contain are provided for the first time by the aforesaid rules. Now, these rules were published, as stated earlier, on January 31, 1985, by which time the previous year relevant to the assessment year 1985-86 of a majority of the assessees in the State would have ended either on October 24, 1984, or December 31, 1984, or March 31, 1985, with the result that these assessees, particularly non-corporate assessees, would not have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. [1977] 107 ITR 214 [FB]. In no case, the return would be treated as incomplete because under section 139(9), the Income-tax Officer has to give an opportunity to remove the defect and, therefore, the contention that the absence of the provision would entail ipso facto the penal consequences is not well-founded. The learned Advocate-General for Tamil Nadu invited our attention in this connection to the circular issued by the Central Board of Direct Taxes being Circular No. 422 dated June 19, 1985, that on a consideration of the representation received from the assessees and various trade associations expressing their difficulties in getting their accounts audited by the specified date, it was decided that 1985-86, being the first year of the operation of the section, and the relevant rule being not notified till January 31, 1985, penalty proceedings under section 271B should not be initiated for the assessment year 1985-86, in cases where the prescribed audit report has been obtained by September 30, 1985, and the self-assessment tax under section 140A has been paid within the normal period prescribed under section 139(1) of the Act. We have given anxious consideration to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is covered in more than one of the specified clauses in the statement of particulars, care should be taken to make a suitable reference to such items at the appropriate places. 13. 'Books of account examined'. 13.1 The auditor should obtain from the assessee a complete list of books of account and other documents maintained by the assessee (both financial and non-financial records) and make appropriate marks of identification to ensure the identification of the books and records produced before him for audit. If the books of account examined are not complete, a reference should be made to this effect against this clause. The list of books of account examined by the auditor should be given against this clause. 13.2. Attention is invited to the Institute's publication 'Monograph on Compulsory Maintenance of Accounts' dealing with the requirements of provisions of section 44AA relating to the books of account to be maintained by the tax payers falling within the said section. Section 44AA(2) provides that persons carrying on business or profession other than those specified in sub-section (1) shall keep and maintain such books of account and other documents as may enable th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the profit and loss account, the direction at point 17.2 is worth noting : " 17.2. Some tests which however are generally applied to determine whether a particular item of expenditure is of capital nature are set out hereunder : (i) Whether it brings into existence an asset or advantage of enduring benefit. The question whether a particular benefit is of an enduring or permanent nature will depend upon the facts and circumstances of each case, the concept of permanency being relative. (ii) Whether it is referable to fixed capital or fixed assets in contrast to circulating capital or current assets. (iii) Whether it relates to the very framework of the assessee's business. (iv) Whether it is an initial expenditure or on expenditure incurred in setting the profit earning machinery into motion. (v) Whether it is an expenditure to acquire a concern or goodwill. The nature of a receipt in the hands of the recipient is not a determinative factor to determine the nature of a payment in the hands of the payer. If the amount is in the nature of capital receipt in the hands of the payee, it does not imply that it is capital expenditure for the payer and vice versa. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch evidence which may be available and in the absence of conclusive or satisfactory evidence, he should make a suitable comment in his report as suggested in para 33.2." As regards the particulars about quantitative details of the raw materials and finished products, the directions contained in paras 46. 1, 46.2, 46.3 and 46.4 are worth noting: " 46. 1. This information should be given only in respect of those items where it is practicable to do so having regard to the records maintained by the assessee In other cases, the auditor may be well advised to indicate in his report that the relevant records were either not maintained or inadequate for the purpose of furnishing the relevant information. 46.2. In a large concern, it may be difficult for the auditor to verify each and every item of purchase, consumption and production. In such cases, he may verify the figures on a sampling method and satisfy himself as to the correctness of the figures furnished. This clause requires that quantitative details of 'principal items' of raw materials and finished goods should be given. Therefore, information about petty items need not be given. What would constitute principal items, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Taxes have by Circular No. 205 F. No. 201/50/76-II(A2) dated July 27, 1976 [1976] 104 ITR (Statutes) 63, clarified that the requirements contained in sub-sections (1) and (2) of section 44AA regarding maintenance of books of account and documents would apply only in relation to the books of account and documents in respect of the accounting years commencing on or after April 1, 1976. It should be noted that what type of books of account and documents are to be maintained in respect of the profession specified in sub-section (1) have been prescribed by rule 6F. In respect of the persons governed under sub-section (2), no such rules have been framed to prescribe what kinds of books of account and documents should be maintained. What would be the necessary records of accounting and what would be the mechanics of accounting are also indicated by the Institute of Chartered Accountants of India in the Monograph on Compulsory Maintenance of Accounts, Chapter-4, paragraph 4.13.2 is instructive. It reads as under: " 4.13.2. Vouchers or Documentary Evidence.-The reliability placed on accounts prepared by a firm will depend on the manner in which the accounts have been written up and on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y evidence of letters sent to various parties but also shows the amount spent as postage during the period concerned. (ii) The memos that accompany the finished goods from the factory to the finished goods godown. (iii) Goods inward book. (iv) Goods outward book. (v) One should take care to: (i) get the cash memos, invoices, receipts and the memos to accompany finished goods transfer, printed and pre-numbered; (ii) see that the stock of such stationery is kept under lock and key with some responsible person who should issue only the requisite quantity at one time; and (iii) ensure that all the leaves in books are properly accounted for, in other words, there should be no number missing from the cash memos book or from the receipts book. All vouchers should be kept in good order serially. All vouchers showing payments should be signed by someone in authority and then stamped prominently to prevent their being produced again as evidence for payment. Cash memos, invoices, counterfoils of receipts, etc., should also be initialled by the person whose duty is to see that all these have been properly accounted for." Paragraph 4.20.1 is also important which reads ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d date without reasonable cause. It will be for the Department to prima facie show that there was want of reasonable cause on the part of the assessee for committing the default as held by the Full Bench of this court in L M. Patel Co.'s case [1977] 107 ITR 214 [FB]. We do not think that the return can also be treated as incomplete merely because the assessee has committed default in annexing the auditors' report with the return. The Income-tax Officer has to give him time to remove the defect and if within the stipulated time of a fortnight or the extended time, the assessee is able to comply with the requirement, we do not think that his return can be treated as defective or incomplete. We are sure that the income-tax authorities will bear in mind this peculiar situation as it prevails particularly in relation to the assessment year 1985-86 and will not be unmindful of the hardships of the assessee in not complying with this provision for some time to come particularly with reference to the assessment year 1985-86. In that view of the matter, therefore, the second limb of the contention, though no doubt it has some force in it in so far as it causes hardship to the assessee, pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 246 of the Act provides for an appeal to the Commissioner (Appeals) against an order imposing penalty under section 271B, the subject-matter of the appeal can be only as to whether the assessee has defaulted without reasonable cause and not about the quantum of penalty, since the section provides for a flat amount of penalty. In this connection, he invited our attention to sections 271, 271A, 272, 272A, 272B and 273 of the Act where the Income-tax Officer has been invested with the discretion as to the quantum of penalty or its link up with the period of default. In so far as section 271B does not leave any discretion to the Income-tax Officer or does not link the quantum of penalty with the period of default, nor is any appeal competent in respect of the quantum of penalty by the very nature of the provision contained in section 271B, the substantive and procedural provisions relating to penalty contained in these sections, have become too onerous and, therefore, the penalty provision is arbitrary and unreasonable and a fortiori the main provision also becomes arbitrary and unreasonable to that extent. On the face of it, the contention appears to be very attractive. We have, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum Penalty is Prescribed, the authority competent to impose the Penalty will be justified in refusing to impose Penalty, when there is a technical or venial breach of the Provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute." (emphasis supplied). It should be noted that section 12(5) of the Orissa Sales Tax Act provided penalty for failure to apply for registration without sufficient cause and the Commissioner was empowered to levy by way of penalty a sum not exceeding one and a half times that amount. In Addl. CIT v. L M. Patel [1977] 107 ITR 214 [FB], the Full Bench of this court in the context of the failure to furnish return without reasonable cause ruled that under section 271(1)(a.) of the Act, failure "without reasonable cause " to furnish the return is an ingredien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax Act, 1961, on the ground of its being violative of article 14 of the Constitution inasmuch as the extent of the guilt and the extent of the penalty were not co-related resulting in unreasonable hardship. The Division Bench, speaking through Diwan C.J. (as he then was), rejected this contention on the ground that the apparent harshness of the provision arises on account of the different levels of taxation for different levels of income. In any view of the matter and particularly, since we are reading down this penal provision contained in section 271B, we must reject this third limb of the contention. Re: Contention No. 3(a)(iv) 1 The learned Advocate-General, appearing for the petitioners, urged in support of this contention that in so far as the impugned rules which were published in January, 1985, are sought to be operated retrospectively, they cause a great prejudice and are wholly onerous and, therefore, unreasonable. We must reject this contention for the obvious reason that whether a law offends article 14 does not depend upon whether it is prospective or retrospective (see Kangshari Haldar v. State of West Bengal, AIR 1960 SC 457 at p. 466). In that case, the Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght be given to it right at the beginning and no compromise be made in the quality of work to be done and commensurate fees to be charged for the same. A lot of loose rumours are making the rounds as to low fees being offered by many assessees, including public sector undertakings, wholesale rates being offered by some groups, fees for tax-audit being linked to statutory audit fees, at some low percentage thereof, and so on. It is time to reflect. The fixation of audit fees depends on so many factors in the light of actual merits of each case. Cost of audit is increasing year after year, with the volume of professional work having increased so suddenly, the supply of qualified assistants will be scarce and with that the cost of audits will further go up. The Company Law Board issued a circular in June, 1984, on the subject of fixation of audit fees for statutory auditors appointed under section 619(2) of the Companies Act, 1956, and conceded that the fees need upward revision due to phenomenal increase in the cost of service relating to audit. The Company Law Board also has issued guidelines for Government companies regarding fixation of auditor's remuneration. Members ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted in the said article would hardly come to 1/4% in the case of assessees having a turnover of Rs. 40,00,000 and it will have a gradual reducing scale of percentage having regard to the total turnover, sales and gross receipts in the case of assessees having a turnover exceeding Rs. 40,00,000. The learned advocate, Mr. Kaji, urged that there is no guarantee that the tax-auditors will charge the maximum fees of Rs. 10,000 as suggested in the said editorial and the possibility of charging higher fees than that suggested cannot be ruled out. He also invited our attention to the scale of fees prescribed under rule 8C of the Wealth-tax Rules, 1957, where the maximum fee in the cases of assessees valued at Rs. 1,00,000 and more is even less than 1/8%. We appreciate this apprehension expressed by Mr. Kaji. We are of the opinion that it would have been just and fair if the Union Government had prescribed the scale of fees having regard to the overall nature of the work involved in the tax audit so that the assessees may not be left to the vagaries of the profession. As regards the grievance for not empanelling of chartered accountants who can undertake this work, we find it difficult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 'certificate' and 'report'. A certificate is a written confirmation of the accuracy of the facts stated therein and does not involve any estimate or opinion. A report, on the other hand, is a formal statement usually made after an inquiry, examination or review of specified matters under report and includes the reporting auditor's opinion thereon. Thus, when a reporting auditor issues a certificate, he is responsible for the factual accuracy of what is stated therein. On the other hand, when reporting auditor gives a report, he is responsible for ensuring that the report is based on factual data, that his opinion is in due accordance with facts and that it is arrived at by the application of due care and skill. 8.1.... A reporting auditor's examination of certain records or an audit report or certificate for special purposes can also be more intensive than the examination of the same records by the statutory auditor for the purpose of expressing an opinion on the general purpose of financial statements as a whole. 8.2 .... Certain accounts or items of financial statements are interrelated, e. g., sales and debtors, purchases and creditors, fixed assets and depreciation, etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment of India in paragraph 15 that opinions given by the chartered accountants are not binding either on the assessees or on the assessing officer, we do not think that the assessee will be prejudiced by the qualified opinion given by the tax auditor in any given case. It is no doubt true that the assessee concerned may be required to persuade the Income-tax Officer that there was no justification for the qualified opinion or that there were valid and compelling reasons for an assessee for his failure or omission to satisfy an auditor. We are sure that the concerned tax authorities will not approach the matter in a strictly technical manner so as to make a best judgment assessment and/or to levy penalty merely because there is a qualified report of an auditor. The authorities will adopt a judicial approach and consider all attendant circumstances including the fact that the non-corporate assessees were not required to maintain their financial records in the manner in which the corporate assessees maintain as required under the law in force for the time being and the authorities will also bear in mind that non-corporate assessees should have reasonable time to adopt themselves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... untants for preferential treatment without any justification. This classification, according to the learned Advocate-General for the petitioners, has in any case no reasonable nexus with the object of the impugned provisions of the statute. If the object of the impugned provisions is to safeguard tax avoidance and tax evasion as claimed by the Finance Minister in his Budget Speech for 1984-85, it can hardly be successfully claimed that the chartered accountants would be the only competent persons to carry out tax audit particularly when r. 12A recognises the competency and capability of the non-chartered accountants' section also to discharge virtually the similar functions and duties. Secondly, it was urged that in so far as the proviso to the impugned provision of section 44AB as amended by the Finance Act, 1985, with effect from April 1, 1985, permits an assessee required by or under any other law to get his accounts audited by a person authorised under such Act or law to carry out the audit and produce his report and treats it as a sufficient compliance of the main enactment in the impugned section, it creates a sub-classification of what is called special auditors which sub-cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nion, this is merely a concession and not a classification. It is in the backdrop of these rival contentions that we have to decide as to how the challenge is well-founded. We should remind ourselves as to when the classification becomes suspect classification. As has been often said, article 14 does not forbid classification; it forbids only class-legislation. The classification must be intelligible and must bear a rational relation to the object sought to be achieved by the statute in question. The classification can be based, inter alia, on consideration of occupations. (see Ram Krishna Dalmia v. Justice S. R. Tendulkar, AIR 1958 SC 538). The State, in exercise of its governmental power, has to make laws operating on different groups or classes of persons to achieve a particular objects in execution of its policies and, therefore, must have large powers of distinguishing and classifying of persons or things to be subject to such laws. Such a power of classification is likely to produce some inequality. The method of classification is to segregate in classes and club persons together having common properties and characteristics on a rational basis but it does not mean that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertion indeed meets these criteria. Each of these different types of audit (external, internal, governmental) fulfills a necessary and important social function..." The classical purpose of audit is two-fold-detection and prevention of frauds and detection and prevention of errors. However, with greater financial assistance being made available from financing agencies, the present day purpose has slightly shifted more to ascertaining actual financial conditions and earning of an enterprise rather than detection of fraud and errors. It has been observed in the above book as to how auditors were required to be associated with the task of tax audit in the context of the development of the role of auditors in the wake of the imposition of Federal income-tax in 1913 in the United States: " At the turn of the century, the balance sheet had been the pre-eminent statement as in the United Kingdom, and the auditor's report emphasised it accordingly. Solvency, rather than earning power, was the principal characteristic portrayed by financial statements and conservative valuation of assets were favoured. With the imposition of Federal income-tax in 1913, however, a major new field fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statement under examination " (see page 5 of the Statement of Auditing Standards). The standard connotes a degree of competence required for a particular purpose. The aforesaid Institute enumerates the following as the generally accepted auditing standards: General standards 1. The examination is to be performed by a person or persons having adequate technical training and proficiency as auditor. 2. In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors. 3. Due professional care is to be exercised in the performance of the examination and the preparation of the report. Standards of fieldwork: 1. The work is to be adequately planned and assistants, if any, are to be properly supervised. 2. There is to be a proper study and evaluation of the existing internal control as a basis for reliance thereon and for the determination of the resultant extent of the tests to which auditing procedures are to be restricted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lay person cannot achieve by merely having practical knowledge of the principles of accountancy, and his experience gained in the course of his acting as an income-tax practitioner dealing with the financial documents and records of his clients. It is no doubt true that under rule 12A, even the non-chartered accountants from amongst the various representatives have been permitted and, therefore, considered competent to report about the scope and result of their examination of accounts of the assessees while preparing the return of income, but we are afraid that this cannot, in our opinion, be considered sufficient to endow them with that academic knowledge, practical proficiency and expertise which a person acquires as a result of his intensive academic training and extensive field work before a person is qualified and enrolled as a chartered accountant. The purpose of the impugned provisions appears to be two-fold it is not only to prevent tax evasion and tax avoidance but also to facilitate the Income-tax Officer in completing his assessment. The certificate which a tax auditor has to furnish under rule 6G(1)(b) or 6G(1)(c) in Forms 3CB and 3CC and the particulars to be furnished ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofession audited under such law before the specified date and obtains before that date the report of the audit as required under such other law and a further report in the form prescribed under this section." " Accountant " according to the Explanation is given the same meaning as in the Explanation below sub-section (2) of section 288. Under the Explanation in section 288, the word, " accountant " means a chartered accountant within the meaning of the Chartered Accountants Act, 1949, and includes in relation to any State, any person who by virtue of the provisions of sub-section (2) of section 226 of the Companies Act, 1956, is entitled to be appointed to act as an auditor of companies registered in that State. This proviso was, however, amended by the Finance Act, 1985, by omitting the underlined words " by an accountant ", with the result that the anomaly which would have arisen if it had not been amended was sought to be removed since otherwise the proviso would possibly have been redundant. The purpose of the proviso appears to be that the report of a special auditor auditing the affairs of a person required by or under any other law to get his accounts audited should be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial law is permitted to tender the report of special auditors, it does not absolve them from producing a further report containing the particulars prescribed under rule 6G(2)(a) in Form 3CD. debate took place before us as to whether this interpretation canvassed on behalf of the Union Government was justified or not, and our attention was invited on behalf of the parties to the relevant forms, viz., rule 6G read with Form 3CA. However, in the course of a rejoinder, the learned Advocate-General for Gujarat pointed out that by the Income-tax (6th Amendment) Rules, 1985, dated August 12, 1985, in clause (a) of rule 6(1) the words " by an accountant " have been omitted. Similarly in Form 3CA which is an audit report under section 44AB in a case where the accounts of a business of a person have been audited under any law by an accountant, in the heading, the words " any law by an accountant" were substituted by the words, " any other law ". Similarly, in paragraph I of the said form, the words " chartered accountants/auditors of the companies " have been omitted. Similarly, in the same form, for the words, " signed Accountant " the word " signed " is merely to be substituted. The inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision is an enabling provision which saves the special categories of assessees like co-operative societies from the burden of audit twice over. This contention, however, was sought to be repelled, on behalf of the petitioners, by urging that inasmuch as this concerns the privilege of a class of assessees, it does create a further sub-classification which, if it is not intelligible and without any reasonable nexus to the object, will render the impugned section violative of article 14 of the Constitution. It is axiomatic that a reasonable classification is one which includes all who are similarly situate and none who are not. The crux of the problem in the first instance would, therefore, be that what is the meaning of the phrase " similarly situate ". In Ambica Mills' case [1974] 45 FJR 381 ; AIR 1974 SC 1300 Mathew J. answered this question by stating that a reasonable classification is one which includes all persons who are similarly situate with respect to the purpose of law. The purpose of law, as indicated by Mathew J., may be either the elimination of public mischief or the achievement of some positive public good. A classification becomes an under-classification when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th these provisions are different and, if in the course of acting in pursuance of the respective privilege, some work is of similar nature for the authorised representatives and tax auditors, that fact would not by itself make them similarly situate persons with regard to the other work. The second limb of the contention urged on behalf of the petitioners that a sub-classification of special auditors makes the main classification unintelligible, though, it appears to be attractive, on close scrutiny cannot be sustained. The main classification, in view of the sub-classification, might appear at first blush, to be unreasonable inasmuch as there is no reasonable nexus between the sub-classification of special auditors and the object of the impugned statute. In this context, it is worth while to remind ourselves at the cost of repetition of the following observation of Mathew J. in Ambica Mills' case [1974] 45 FJR 381 ; AIR 1974 SC 1300. The court was considering in that case as to whether exclusion of an establishment carrying on business or trade and employing less than 50 persons makes the classification under-inclusive when it is seen that all factories employing 10 or 20 persons, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk that we would be justified in treating this impugned provision as violative of article 14 of the Constitution since in our opinion there is a fair reason for granting this preferential treatment to the special categories of assessees who are required under the special law to get their accounts audited as for example, co-operative societies under the relevant Co-operative Societies Act since otherwise these welfare agencies would be subjected to the burden of audit twice over-one being commercial audit and the other being tax audit. It cannot be said that there is no fair reason underlying the proviso for giving preferential treatment to a specified category of assessees. This apparent preferential treatment does not militate against the rule of equality enshrined under article 14 of the Constitution. The non-corporate assessees who are not required to get their accounts audited under any law cannot, therefore, press this proviso in support of their plea of under-classification, because Parliament having recognised that these welfare agencies constituted under the special Act subjecting them to commercial audit thought it fit to exclude them from the obligation of the tax audit b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... informed assessees who are subject to tax audit may like to appear only through their tax auditors thinking it to be the wise course in their own interest. These impugned provisions, however, in our opinion, do not lead to the inevitable consequence, as sought to be urged on behalf of the petitioners before us in both these petitions, that this will deprive the assessees of their causes being represented by non-chartered accountants to represent the case of such assessees. In the present state of income-tax law, the interpretation and development of which has become very intricate and complex, it is not difficult to anticipate that a situation has arisen where more and more assessees would like to be assisted both by the chartered accountants as well as income-tax consultants and practitioners who may be non-chartered accountants in arranging their financial affairs and in the maintenance of their accounts, records and documents for preparation of the returns and in the course of assessment before tax authorities. We are afraid that the contention advanced about the provision being violative of article 19(1)(g) is too specious to which we can adhere. The obligation of the tax audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... othing has been pointed out to us that the prescribed method of tax audit would frustrate the purpose. The contention was urged that the impugned provisions would not really achieve the purpose since, unless the measures are adopted as pointed out in the dissenting note of Rangnekar, a member of the Wanchoo Committee, the purpose of curbing tax avoidance and tax evasion would not be fulfilled. We do see some force in this contention. But we do not think that the possibility of the provisions being not adequate in this direction can be tantamount to saying that no purpose would be achieved or it would be frustrated. It is possible that the purpose may not be wholly achieved. In that view of the matter, therefore, we must reject this contention. Re: Contention No 1.-On behalf of the petitioners, it has been urged that the impugned rules and forms are ultra vires the impugned section 44AB of the Income-tax Act, 1961, inasmuch as the obligations and functions prescribed for the chartered accountants are beyond the obligations and functions associated with the auditors in the classical sense since the main enactment in the section enjoins audit for a prescribed category of assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxability of the income and admissibility of the expenses, and the auditor's report or certificate even if prejudicial to the assessee cannot preclude him from pleading that the auditor's opinion was not well-founded or legally correct. As a matter of fact, in the reply affidavit filed on behalf of the Union Government, it has been clearly conceded that auditor's report or certificate if prejudicial to the assessee would not estop the assessee concerned from doubting the correctness of it and it will not be binding in the sense that he would be estopped or precluded from pleading against it. The contention, therefore, stands rejected. No other contentions have been urged. The result is that these two petitions fail and are dismissed subject to our observations in the course of dealing with the various contentions. Rule in each of these two petitions is discharged with no order as to costs. Mr. J. M. Thakore, learned Advocate-General with Mr. K. H. Kaji, learned advocate for the petitioners of Special Civil Application No. 2068 of 1985, and Mr. K. H. Kaji, learned advocate for the petitioners of Special Civil Application No. 2069 of 1985, make oral applications for a certi ..... 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