Ceiling On Tax Audit Assignments- Resurrection Of A Scragged Law?
Chartered Accountancy stands as one of the esteemed professions alongside Lawyers and Doctors. The Institute of Chartered Accountants of India (referred to as ‘ICAI’ or the ‘Institute’ for brevity) is a statutory body established under the Chartered Accountants Act, 1949 (‘the Act’). Its mandate includes the regulation of the Chartered Accountancy profession nationwide. This encompasses various functions such as conducting examinations, offering post-qualification courses, devising accounting procedures, setting ethical standards, and administering disciplinary actions. Section 30(1) of the Act grants the Institute the authority to formulate regulations through notification in the Gazette of India to fulfill its objectives.
Certainly, the Institute has a statutory obligation to oversee and uphold the standards and qualifications of its members. However, the recent guideline (Council Guidelines No.1-CA (7)/02/2008, dated 8th August 2008) from the ICAI, which imposes a limit of 60 tax audit assignments per year, has sparked controversy within the professional community. While the Institute defends this limit as a regulatory measure aimed at ensuring the quality of tax audits conducted by Chartered Accountants, practitioners argue that it infringes upon their constitutional right to practice their profession freely, as guaranteed under Article 19(1)(g) of the Constitution of India.
Indeed, the primary concern for practitioners stemmed not from the audit limit itself, but from the consequences they would face for exceeding it. The ICAI classified undertaking excessive audit assignments beyond the threshold as ‘Professional Misconduct’. Intriguingly, a previous guideline from 1989, which also imposed a cap on audits, had already been deemed unconstitutional. Therefore, the crucial question arises: can the ICAI enforce the new guideline, essentially a replica of the earlier one nullified by the Court, simply by altering the threshold limit? Does such a rehash have the legal footing to withstand scrutiny?
A timeline of the restrictions on the Audit Assignments: –
The restriction on the number of tax audits permissible for a Chartered Accountant in a fiscal year was initially introduced by the Institute in 1989 through a notification dated January 13, 1989. This notification limited the number of tax audit assignments to 30 for each Chartered Accountant per fiscal year. Subsequently, this notification was legally contested before the Madras High Court in the case of K. Bhagavatheeswaran v. Institute of Chartered Accountants of India (1999 237 ITR 208 (Madras). The single judge of the Madras High Court invalidated the January 13, 1989 notification, citing it as a violation of constitutional provisions. Upon appeal, the Division Bench in the case of Institute of Chartered Accountants of India v. K. Bhagavatheeswaran upheld the single judge’s decision. It remarked that “placing restrictions on the number of cases/audits which can be accepted by a Lawyer/Chartered Accountant is an unreasonable restriction under Article 19(6) of the Constitution and is also violative of Article 14, taking into account the historical growth and development of these professions, and their traditional and customary practices.” ICAI then appealed against the Division Bench’s ruling to the Supreme Court through a Special Leave Petition (SLP) under Civil Appeal Nos. 7208 and 7209 of 2005. However, during the pendency of the SLP, ICAI withdrew the 1989 notification and replaced it with the 2008 guidelines, which raised the cap on tax audit assignments from 30 to 45.
In light of these events, the Supreme Court dismissed the appeal as ‘infructuous’ without delving into the case’s merits. Following the issuance of the 2008 guideline and the Supreme Court’s decision, the Institute, during its 331st meeting held in February 2014, opted to elevate the specified number of tax audit assignments from 45 to 60. Consequently, the pivotal query arises: are the guidelines regarding audit limits legally defensible considering they essentially replicate an earlier notification dated January 13, 1989, which had already been invalidated by a learned single judge of the Madras High Court and subsequently affirmed by a Division Bench of the same court? Presently, the Institute remains bound by the judgment of the Division Bench of the Madras High Court, and any increase in the number of audits fails to eradicate the concerns of unconstitutionality.
Can willingness to work more be termed as ‘Professional Misconduct’?
Indeed, the debate extends beyond merely the imposition of restrictions on accepting assignments; it delves into the contentious labelling of exceeding these limits as ‘Professional Misconduct’ and equating it with malpractice. On the surface, it appears punitive to be penalized for diligent work. However, from a technical standpoint, Part II of the II Schedule of the Act explicitly states that a member of the Institute, whether in practice or not, commits professional misconduct if they contravene any provisions of the Act, its regulations, or guidelines issued by the Institute. Therefore, until the guidelines on audit caps are overturned by the Courts, any breach thereof constitutes ‘Professional Misconduct’ in the strictest sense. In this context, the Division Bench’s observation in Institute of Chartered Accountants of India v. K. Bhagavatheeswaran is pertinent: –
The term ‘professional misconduct’ has a historical and traditional meaning attached to it. So far as it relates to the Chartered Accountant’s profession, ‘professional misconduct’ really means acts mentioned in the Schedules to the Act or similar acts like cheating or dishonesty but it cannot mean accepting a large number of cases/audits or a certain fee. Some lawyers/accountants are more intelligent and more hard working than others. That being so it would be penalising them for their intelligence, knowledge and hard work. The choice of the Lawyer/ Chartered Accountant and the fee should be left at the option of the client. It is a matter of free contact between the client and the Lawyer/Chartered Accountant. Artificial devices like the kind of the impugned restrictions cannot be accepted in these professional occupations.”
The Test of Constitutionality: –
The right to engage in a trade and profession is a fundamental right guaranteed under Article 19(1)(g) of the Constitution of India. It is acknowledged that such right can be subject to reasonable restrictions. However, critics of the guideline argue that it is unreasonable on several grounds. They contend that the threshold is arbitrarily determined without empirical evidence or reasonable justification. Moreover, factors such as individual ability, infrastructure, and the nature of clients are disregarded. Additionally, it is not logical to assume that all Chartered Accountants can only fulfill their obligations up to a specified number of tax audit assignments. The guideline also overlooks the size and complexity of audits, leading to potential disparities in professional rewards, especially for Chartered Accountants practicing in rural areas with SMEs compared to their counterparts in metropolitan areas. By treating unequal’s as equals, it could be argued that this guideline violates Article 14 of the Constitution of India.
Pendente Lite :-
As the Institute began issuing show cause notices and initiating disciplinary proceedings against Chartered Accountants, the affected individuals sought relief from the writ court, challenging both the disciplinary actions and the guideline itself. Similar writ petitions were filed in various High Courts, leading the ICAI to apply to the Apex Court to consolidate and hear all related writ petitions for consistency. Meanwhile, Chartered Accountants involved in substantial cases await the Court’s decision with apprehension. Many are also uncertain about the enforceability of the audit cap rule, given that the previous guideline, which varied only in terms of the number, was invalidated by the Court, and an appeal against it was dismissed by the Apex Court. Therefore, one can only hope that the prevailing confusion within the profession is resolved either by the Court or by the regulatory body, thereby reinstating the fundamental principles of the profession enshrined in our Constitution.
Conclusion: –
The Division Bench Comprising Justices B.V. Nagarathna and Augustine George Masih has ruled in a leading case that Clause 6.0, Chapter VI of the contested Guidelines, along with its subsequent amendment, is legally sound and does not infringe upon Article 19(1)(g) of the Constitution, as it constitutes a reasonable restriction on the right of Chartered Accountants to practice their profession, and is justified under Article 19(6) of the Constitution. However, the implementation of the aforementioned Clause 6.0, Chapter VI of the Guidelines, and its subsequent amendment, is suspended until April 1, 2024. Any ongoing proceedings initiated based on the contested Guidelines concerning the petitioners and other Chartered Accountants in similar situations are nullified. The Institute is granted the discretion to revise the specified number of audits a Chartered Accountant can undertake under Section 44AB of the IT Act, 1961, if it deems necessary, which has been increased from 45 audits to 60 audits now. The petitioners or any other member of the Institute are given the opportunity to make representations in this regard, which will be considered if the Institute decides to amend the Guidelines.