Bombay HC instructs ICAI to investigate CAs without COP engaged in Illegal Activities for Professional Misconduct

In a recent decision, the Bombay High Court instructed the Institute of Chartered Accountants of India (ICAI) to investigate Chartered Accountants (CAs) working without a Certificate of Practice (COP) who are allegedly engaging in illegal activities and possible professional misconduct.

The issue arose in connection with Buniyad Chemicals Ltd., whose director, Mukesh Choksi, admitted to supplying accommodation entries. The Income Tax Department had identified unexplained cash credits in the company’s bank accounts that were not accompanied by any reported source or beneficiary information. The department said that the company had failed to maintain transparency and therefore be taxed under Section 68 of the Income Tax Act of 1961.

During the hearings, the bench, which included Justice M. S. Sonak and Justice Jitendra Jain, J., was startled to learn that a Chartered Accountant, while not having a COP, was allegedly implicated in financial misconduct.

The bench questioned whether the ICAI had or could take disciplinary action against such individuals under the Chartered Accountants Act of 1949. Finding no clear precedent, the court ordered ICAI to launch an investigation into the professional conduct of CAs without COP who participate in such activities.

The respondent claimed that the deposits in question did not belong to the company but to its clients, and that only the commission derived from such transactions should be taxed. The court considered this argument insufficient, noting that the company was unwilling to reveal the identity of these claimed clients, rendering the entire amount taxable as unexplained revenue.

Previously, the Income Tax Appellate Tribunal had reduced the taxable amount to 0.15% of total deposits, but the High Court ruled that this was unjustified and upheld the Commissioner of Income Tax (Appeals) [CIT(A)]’s decision to tax the entire unexplained sum unless beneficiaries were identified.

The court also noted potential violations of other laws, such as the Prevention of Money Laundering Act (PMLA) and the Indian Penal Code (IPC). It asked the Economic Offenses Wing (EOW), Enforcement Directorate (ED), and Chief Commissioner of Income Tax (Mumbai) to look into the larger consequences of such financial misconduct.

The court also instructed the ICAI to investigate whether CAs operating without a COP may be held liable under the CA Act of 1949, and to report on any actions taken against such individuals.

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