Provisions of MSME Act not applicable on remuneration payable to CA firm for Special Audit Assignments: HC

The High Court of Delhi in the matter of Pr. Commissioner Of Income Tax Central-1 Vs. Micro And Small Enterprise Facilitation Council & Anr. has held that provisions of MSMED Act has no applicability special Audit assignment given to CA Firm. The nature of the assessment is not commercial but is a statutory nomination for the assistance of the AO and in effect the IT Department. The IT Department cannot be termed as a ‘buyer’ when it is nominating the accountant for conducting a Special Audit and neither can the CA Firm be termed as a ‘supplier’. The remuneration payable to the accountant cannot also be termed as ‘consideration’ as the Special Audit is a statutory duty being performed by the accountant for and on behalf of the AO.

The Petitioner i.e., the Principal Commissioner of Income Tax, Central-1, has filed the present writ petitions challenging the directions for reference to arbitration passed by the Respondent No. 1 i.e., the Micro & Small Enterprise Facilitation Council (hereinafter ‘MSEFC’) – an authority established under Section 20 of the MSMED Act. Respondent No. 2 i.e., M/s SBG & Co. is a partnership firm of Chartered Accountants (hereinafter ‘CA Firm’) of which Mr. S.B. Gupta is a Partner. The said CA Firm is also registered as a `Micro Enterprise’ under the provisions of the MSMED Act.

The CA Firm, being on the panel of the Income Tax Department (hereinafter ‘IT Department’), was nominated as a Special Auditor by the IT Department in four cases for carrying out Special Audit in terms of Section 142(2A) of the IT Act.

After the completion of the said Special Audit assignments and the submission of the final audit reports, the CA Firm raised four invoices in respect of the said audits. The grievance of the Special Auditor- CA Firm is that qua the invoices raised, the full payment has not been made. Further, in respect of one of the assignments the payment has not been received at all.

Under such circumstances, the CA Firm invoked the provisions of the MSMED Act and approached the MSEFC by way of references under Section 18 of the Act.

A perusal of the decision extracted shows that the purpose of Special Audit is for helping and assisting the AO. It is also for the purpose of facilitating the assessment and for proper determination of the tax liability after arriving at a correct taxable income. In effect, therefore, the Special Audit is made for and on behalf of the AO owing to the complexity of the transactions and such other factors as are set out under Section 142(2A) of the IT Act.

After completion of the Special Audit, the Chief Commissioner or the Commissioner plays a very crucial role in the determination of remuneration. Rule 14B (5) stipulates that the number of hours claimed by the accountant for billing purposes has to be commensurate with the size and quality of the report submitted by the accountant. This provision clearly shows that the invoice, which may be raised by the accountant, is not to be straightaway accepted. The Chief Commissioner or the Commissioner is required to assess various factors, including:

(i) The nature of the work assigned to the accountant
(ii) The quantum of work
(iii) The duration of the work
(iv) The quality of the report
(v) Whether the hours claimed are exaggerated or commensurate or suitable, bearing in mind the above factors.

The accountant has also to submit the timesheet, which may or may not be fully accepted by the IT Department.

Thus, the determination of the remuneration is a task, which is of a specialized nature, which only the Income Tax Department would be able to undertake. The same is evident from the orders which have been passed in the present two writ petitions itself, where the IT Department, after considering comparable assignments, has concluded that the amounts claimed by the CA Firm were highly exaggerated and were not commensurate.

At the time when the nomination is made, the finality attached to the determination of the remuneration by the Commissioner or Chief Commissioner is well within the knowledge of the accountant/ CA Firm.

The nature of the Audit and the manner in which remuneration is to be determined would require domain expertise and knowledge which the MSEFC cannot possess. Moreover, the function which is in effect delegated to the Audit firm is one which is exercised under the Income Tax Act and would be purely governed by the said statute. Payment of remuneration is also based on the factors prescribed in the Rules as discussed above.

The nature of the assessment is not commercial but is a statutory nomination for the assistance of the AO and in effect the IT Department. The IT Department cannot be termed as a ‘buyer’ when it is nominating the accountant for conducting a Special Audit and neither can the CA Firm be termed as a ‘supplier’. The remuneration payable to the accountant cannot also be termed as ‘consideration’ as the Special Audit is a statutory duty being performed by the accountant for and on behalf of the AO.

The invocation of the provisions of the MSMED Act under such circumstances, in respect of Special Audit remuneration under Section 142(2D) of the IT Act, would, therefore, not be tenable and is completely misplaced.

The MSMED Act has no applicability to the nature of the assignment which has been given to the Respondent/CA Firm. The CA Firm may be registered as a Micro or Small enterprise and may be entitled to invocation of the jurisdiction of the MSMED Act for other purposes. Insofar as the assignment is one which is emanating from a statute i.e., under Section 142(2A) of the IT Act, the determination of the remuneration is solely the prerogative of the Commissioner or the Chief Commissioner.

The same would not be liable to be called into question either in a civil court or in a commercial suit or civil suit as one of recovery of money. The nomination as a Special Auditor for the conduct of Special Audit is governed purely by the provisions of the Income Tax Act and Rules. This would, however, not bar the remedy of filing of a writ petition.

The present is a case where there is a clear lack of jurisdiction in the MSEFC, which even failed to consider as to whether the MSMED Act would itself be applicable or not.

Insofar as Audits under Section 142(2A) are concerned, the IT Act would have to be reckoned as the Special Act and the MSMED Act as the general Act dealing with MSME disputes. Thus, in the facts and circumstances as discussed above, the Income Tax Act would thus prevail over the provisions of the MSMED Act.

In view of the fact that the MSMED Act would have no applicability, the impugned references by the MSEFC, of the claims raised by the Respondent/ CA Firm to arbitration are not sustainable. The same are, accordingly, set aside. The remedies of the CA Firm, if any, to challenge the orders passed by the IT Department in respect of determination of remuneration, are left open.

The present petitions, along with all pending applications, are allowed and disposed of in the above terms.

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