Certain accountants not to give reports/certificates

The Act contains several provisions (e.g. section 44AB, section 80-IA, section 92E, section 115JB, etc.) which mandate the taxpayers to furnish audit reports and certificates issued by an ‘accountant’ for ensuring correct reporting/computation of taxable income by the tax payers. Explanation below section 288(2) of the Act defines an ‘accountant’ as a chartered accountant within the meaning of Chartered Accountants Act, 1949 (including a person eligible to be appointed as auditor under section 226(2) of the Companies Act, 1956, of the companies registered under any State).

The Comptroller and Auditor General of India (C&AG) published its report on “Appreciation of Third Party (Chartered Accountant) Certification in Assessment Proceedings” (No.32 of 2014). In para 3.9 of the Report, it has been stated that the Chartered Accountant Act, 1949 debars an auditor to express his opinion on the financial statement of any business or any enterprise in which he, his relative, his firm or partner in the firm, has substantial interest. However, during the course of audit, it has been noticed that an auditor has furnished his report in Form 56F in respect of a closely held company in which the auditor’s brother was the managing director.

To ensure the independence of auditor, sub-section (3) of section 141 of the Companies Act, 2013 contains a list of certain persons who are not eligible for appointment as auditor. The audit/certification function under the Income-tax Act is mainly provided for protecting the interests of revenue. An auditor who is not independent cannot meaningfully discharge his function of protecting the interests of revenue. Therefore, it is proposed to amend section 288 of the Act to provide that an auditor who is not eligible to be appointed as auditor of a company as per the provisions of sub-section (3) of section 141 of the Companies Act, 2013 shall not be eligible for carrying out any audit or furnishing of any report/certificate under any provisions of the Act in respect of that company. On similar lines, ineligibility for carrying out any audit or furnishing of any report/certificate under any provisions of the Act in respect of non-company is also proposed to be provided. However, it is proposed to provide that the ineligibility for carrying out any audit or furnishing of any report/certificate in respect of an assessee shall not make an accountant ineligible for attending income-tax proceeding referred to in sub-section (1) of section 288 of the Act as authorised representative on behalf of that assessee. It is further proposed to provide that the person convicted by a court of an offence involving fraud shall not be eligible to act as authorised representative for a period of 10 years from the date of such conviction. (It is also proposed to revise the definition of ‘accountant’ in Explanation below section 288(2) of the Act on the lines of definition of ‘chartered accountant’ in the Companies Act, 2013).

These amendments will take effect from 1st June, 2015.

NOTE ON RELEVANT CLAUSES  OF FINANCE BILL 2015

Clause 77 of the Bill seeks to amend section 288 of the Income-tax Act relating to appearance by authorised representative.

The existing Explanation below sub-section (2) of aforesaid section provides that in the aforesaid section, “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.

It is proposed to substitute the said Explanation so as to provide that the expression “accountant” means a chartered accountant as defined in clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 who holds a valid certificate of practice under sub-section (1) of section 6 of that Act. It is further proposed to provide that the accountant shall not include the following persons (except for the purposes of representing an assessee under sub-section (1))—

(a)      in case of an assessee, being a company, the person who is not eligible for appointment as an auditor of the said company in accordance with the provisions of sub-section (3) of section 141 of the Companies Act, 2013; or

(b)      in any other case, (i) the assessee himself or in case of the assessee, being a firm or association of persons or Hindu undivided family, any partner of the firm, or member of the association or the family; (ii) in case of the assessee, being a trust or institution, any persons referred to in clauses (a),(b), (c) and (cc) of sub-section (3) of section 13; (iii) in case of a person other than persons referred to in sub-clause (i) and (ii), the person who is competent to verify the return under section 139 in accordance with the provisions of the section 140; (iv) any relative of any of the persons referred to in sub-clauses (i),(ii) and (iii); (v) an officer or employee of the assessee; (vi) an individual who is a partner, or who is in the employment, of an officer or employee of the assessee; (vii) an individual who, or his relative or partner is holding any security of or interest in the assessee. It is also provided that the relative may hold security or interest in the assessee of the face value not exceeding one hundred thousand rupees; an individual who, or his relative or partner is indebted to the assessee. It is also provided that the relative may be indebted to the assessee for an amount not exceeding one hundred thousand rupees; an individual who, or his relative or partner has given a guarantee or provided any security in connection with the indebtedness of any third person to the assessee. It is also provided that the relative may give guarantee or provide any security in connection with the indebtedness of any third person to the assessee for an amount not exceeding one hundred thousand rupees; (viii) a person who, whether directly or indirectly, has business relationship with the assessee of such nature as may be prescribed; (ix) a person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction.

It is further proposed to amend sub-section (4) of the said section so as to provide that a person who has been convicted by a court of an offence involving fraud shall not be qualified to represent an assessee under sub-section (1) of the said section for a period of ten years from the date of conviction.

It is also proposed to insert an Explanation at the end of the said section so as to provide that the expression “relative” in relation to an individual means (a) spouse of the individual; (b) brother or sister of the individual; (c) brother or sister of the spouse of the individual; (d) any lineal ascendant or descendant of the individual; (e) any lineal ascendant or descendant of the spouse of the individual; (f) spouse of a person referred to in clause (b), clause (c), clause (d) or clause (e); (g) any lineal descendant of a brother or sister of either the individual or of the spouse of the individual.

These amendments will take effect from 1st June, 2015.

EXTRACT OF RELEVANT CLAUSES FROM FINANCE BILL 2015

77. Amendment of section 288.
In section 288 of the Income-tax Act, with effect from the 1st day of June, 2015,—
(i) after sub-section (2), for the Explanation, the following Explanation shall be substituted, namely:—

‘Explanation.—In this section, “accountant” means a chartered accountant as defined in clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 who holds a valid certificate of practice under sub-section (1) of section 6 of that Act, but does not include [except for the purposes of representing the assessee under sub-section (1)]—

(a)      in case of an assessee, being a company, the person who is not eligible for appointment as an auditor of the said company in accordance with the provisions of sub-section (3) of section 141 of the Companies Act, 2013; or

(b)      in any other case,—

(i)       the assessee himself or in case of the assessee, being a firm or association of persons or Hindu undivided family, any partner of the firm, or member of the association or the family;

(ii)      in case of the assessee, being a trust or institution, any person referred to in clauses (a), (b), (c) and (cc) of sub-section (3) of section 13;

(iii) in case of any person other than persons referred to in sub-clauses (i) and (ii), the person who is competent to verify the return under section 139 in accordance with the provisions of section 140;

(vii)    an individual who, or his relative or partner— (I) is holding any security of, or interest in, the assessee:

Provided that the relative may hold security or interest in the assessee of the face value not exceeding one hundred thousand rupees;

(II) is indebted to the assessee:

Provided that the relative may be indebted to the assessee for an amount not exceeding one hundred thousand rupees;

(III) has given a guarantee or provided any security in connection with the indebtedness of any third person to the assessee:

Provided that the relative may give guarantee or provide any security in connection with the indebtedness of any third person to the assessee for an amount not exceeding one hundred thousand rupees;

(viii)   a person who, whether directly or indirectly, has business relationship with the assessee of such nature as may be prescribed;

(ix) a person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction.’;

(ii)      in sub-section (4), for the portion beginning with brackets, letter and words “(c) who has become an insolvent,” and ending with the words, brackets and letter “in the case of a person referred to in sub-clause (c)”, the following shall be substituted, namely:—

“(c) who has become an insolvent; or

(d) who has been convicted by a court for an offence involving fraud, shall be qualified to represent an assessee under sub-section (1), for all times in the case of a person referred to in clause (a), for such time as the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may by order determine in the case of  a person referred to in clause (b), for the period during which the insolvency continues in the case of a person referred to in clause (c), and for a period of ten years from the date of conviction in the case of person referred to in clause (d).”;

(iii)     after sub-section (7), the following Explanation shall be inserted, namely:— ‘Explanation.—For the purposes of this section, “relative” in relation to an individual, means—

(a) spouse of the individual;

(b)      brother or sister of the individual;

(c)      brother or sister of the spouse of the individual;

(d)      any lineal ascendant or descendant of the individual;

(e)      any lineal ascendant or descendant of the spouse of the individual;

(f) spouse of a person referred to in clause (b), clause (c), clause (d) or clause (e);

(g) any lineal descendant of a brother or sister of either the individual or of the spouse of the individual.’.

( Compiled by Taxguru Team)

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Type : Articles (13914)

0 responses to “Restriction on Income Tax Audit / Certification by Certain Auditors”

  1. jiten says:

    dose limit of tax audit under section 44AB includes the limit of company audit under section 141(3)(g)

  2. Sanchay Kumar Roy CMA, MICA says:

    To provide better service to the Industries.Central Govt. should amend the definition of Accountant in Income tax act and Cost Accountants, Company Secretary and Income Tax Advocate should also be included in the definition of Accountant in Income Tax Act and Accountant should be define to act as an auditor.http://taxguru.in/income-tax/restriction-income-tax-audit-certification-auditors.html#sthash.nfm1pc0Z.dpuf

  3. CA Vishnu says:

    Who ever may be included the definition of accountants but Accountability Should be mandatory.

  4. CMA NABANEETA MUKHERJEE says:

    TO STOP MONOPOLY OF ONE INSTITUTE AND CORRUPTION OF SOME CHARTERED ACCOUNTANTS IT IS VERY MUCH NECESSARY OF CENTRAL GOVT. TO INCLUDE COST ACCOUNTANTS (CMA) IN THE DEFINITION OF ACCOUNTANT UNDER THE INCOME TAX ACT.

  5. CMA S. Rahalkar says:

    For better services to the Business Concerns, definition of ‘ Accountant ‘ in the Income Tax Act should include ‘Cost Accountants’ as per Cost Accountants Act 1959.

  6. CA.A ROY says:

    To provide better service to the Industries.Central Govt. should amend the definition of Accountant in Income tax act and Cost Accountants and Company Secretaries should also be included in the definition of Accountant in Income Tax Act.

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