SC to hear Plea Challenging ICAI Rule to Limit on Tax Audits by Chartered Accountants Per Year

SC to hear Plea Challenging ICAI Rule to Limit on Tax Audits by Chartered Accountants Per Year

Reetu | Sep 27, 2022 |

SC to hear Plea Challenging ICAI Rule to Limit on Tax Audits by Chartered Accountants Per Year

SC to hear Plea Challenging ICAI Rule to Limit on Tax Audits by Chartered Accountants Per Year

The Supreme Court of India‘s Division Bench resumed to hear arguments in the case challenging an ICAI rule prohibiting members from accepting more than the “determined number of tax audit assignments” (at the moment, the maximum is fixed at 60) in a financial year. Nearly two years after the Supreme Court made the decision to dismiss related writ petitions that were pending in several High Courts and authoritatively establish the law on the matter itself, this matter is finally being decided.

The addition of Section 44AB to the Income-tax Act, 1961, which took effect on April 1, 1985, marked the beginning of the mandatory tax audit regime. This clause makes it mandatory for anyone operating a business or a profession with total sales, turnover, or gross receipts over a particular level specified in the Act in any previous year to have their accounts from that prior year audited by a Chartered Accountant. The requirement outlined in this section is only satisfied when an assessee obtains an audit report in the required format, fully signed and verified by a chartered accountant, by a given deadline.

According to the Businesses Act of 1956 and the Co-operative Societies Act of 1912, respectively, only the accounts kept by companies and cooperative societies were needed to be audited prior to 1985. Other taxpayer groups were excused from having to have their accounts audited. The main reasons that Section 44AB was passed were to combat tax evasion and stop fraudulent activities.

In 1988, the Council of the Institute of Chartered Accountants of India issued a notification prohibiting members from accepting more than the allotted number of tax audit assignments under Section 44AB of the Income-tax Act in a financial year. This was done in the exercise of the authority granted by Clause (ii) of Part II of the Second Schedule to the Chartered Accountants Act, 1949. Each partner in a firm of chartered accountants would be subject to this restriction. In the notification, it was expressly stated that failure to comply with the aforementioned requirement would constitute “professional misconduct” on the part of the defaulting member.

After the Parliament modified the Chartered Accountants Act of 1949 in 2006, the disputed notification was replaced by Guidelines published on August 8, 2008.

The primary justification for challenging the legality of the contested clause was that it violated both Article 14’s guarantee of equality as well as citizens’ basic right to engage in any activity, trade, or business as stated in Article 19(1)(g). It was also questioned whether the Institute was qualified to issue this directive. Senior Advocate Paramjit Singh Patwalia was one of the legal representatives for the petitioners.

The Institute was represented by Senior Advocate Arvind P. Datar, who began his arguments by providing a historical overview of the beginnings of the Income-tax Act, 1961’s need that a larger class of assessees undergo a mandatory audit of their financial records. Prior to the conclusion of the meeting, he gave a brief explanation of the rationale behind the maximum restriction. This week’s hearing will include the final batch of senior counsel’s arguments.

The matter has been rescheduled for hearing this week by the Bench. In his submissions, Justice Khanna asked Datar to address the following questions.

“First, why are there two sets of parameters under this Act and the Companies Act, 2013, when the objectives and the purposes of the audit mandated in both the enactments are the same? When a company is an assessee, they have to get the auditing done from two different persons. Second, when you have already increased the upper limit to 60 per CA or partner of a CA firm, why should that benefit not be given with retrospective effect?”

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