Impact of proposed amendment in definition of Accountant under Income Tax Act, 1961

CA Rockey

Introduction:-Under the Income tax Act, 1961, the power of conducting Tax Audit u/s 44AB and various others certification/attestation work is conferred upon an “Accountant”, the term “Accountant” is defined under explanation to sub-section (2) of section 288 of Income tax Act, 1961 as under:

“accountant” means a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 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 (1 of 1956), is entitled to be appointed to act as an auditor of companies registered in that State.

In simple words the term “Accountant” means followings:

1. Chartered Accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 1949).

2. Any person who by virtue of the provisions of sub-section (2) of section 226 of the Companies Act, 1956 (1 of 1956), is entitled to be appointed to act as an auditor of companies registered in that State.

Relevant extracts of section 226(2) of the Companies Act, 1956 (1 of 1956):-

The holder of a certificate granted under a law in force in the whole or any portion of a Part B State immediately before the commencement of the Part B States (Laws) Act, 1951 (3 of 1951) or of the Jammu and Kashmir (Extension of Laws) Act, 1956 (62 of 1956), as the case may be entitling him to act as an auditor of companies in the territories which, immediately before the 1st November, 1956, were comprised 475 ] in that State or any portion thereof, shall be entitled to be appointed to act as an auditor of companies registered anywhere in India .

Proposed Amendment:-Finance Bill, 2015 has proposed to bring massive amendment in the definition of accountant as follows:-

“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,

The above proposed definition include an additional condition that the person must have a valid COP (i.e. certificate of practice) as prescribed u/s 6(1) of the Chartered Accountants Act, 1949. However this proposed definition also does not include the person as defined u/s 226(2) of the Companies Act, 1956.

Proposed amendment in the definition of accountant also contains the exclusion clauses (these clauses prescribes the some specific criteria which shall not be regarded as accountant), however these exclusion clauses shall not applicable for the purpose of representing the assessee u/s 288(1). Followings are the proposed exclusion clauses:

(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), person who is competent to verify the return under section 139 in accordance with the provisions of 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—

(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.

Analysis of proposed amendment:-Clause (a) of exclusion part is for assessee being a companies, which states that a person who is not eligible to act as an auditor of a company as per sec 141(3) of the Companies Act, 2013, shall not be considered as an Accountant. This clause gives very wide impact. As per section 141(3), The following persons shall not be eligible for appointment as an auditor of a company, namely:-

(a) a body corporate other than a limited liability partnership registered under the Limited Liability Partnership Act, 2008;

(b) an officer or employee of the company;

(c) a person who is a partner, or who is in the employment, of an officer or employee of the company;

(d) a person who, or his relative or partner—

(i) is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company:

Provided that the relative may hold security or interest in the company of face value not exceeding one thousand rupees or such sum as may be prescribed;

(ii) is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of such amount as may be prescribed; or

(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, for such amount as may be prescribed;

(e) a person or a firm who, whether directly or indirectly, has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed;

(f) a person whose relative is a director or is in the employment of the company as a director or key managerial personnel;

(g) a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies;

(h) 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;

(i) any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialised services as provided in section 144.

In simple words, if a person is not qualified to act as a Statutory Auditor of a company then same shall not be regarded as a Accountant for that company.

Clause (b) of exclusion part deal with all assessee other than a company as follows:

1. If assesses is an individual then he shall not be regarded as an Accountant for himself.

2. If assessee is a firm or Association of Persons (AOP) or Hindu undivided Family (HUF), then any partner of the firm, or member of the AOP or the HUF shall not be regarded as an Accountant for that Firm or AOP or HUF.

3. Where assessee is a Trust or Institution, the following person shall not be regarded as a accountant for that Trust or Institution:-

(a)    The author of the trust or the founder of the institution;

(b) Any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution up to the end of the relevant previous year exceeds fifty thousand rupees ;

(c) where such author, founder or person is a Hindu undivided family, a member of the family;

(cc) any trustee of the trust or manager (by whatever name called) of the institution;

4. Any relative of above.

5. An officer or employee of the assessee or an individual who is a partner, or who is in the employment, of an officer or employee of the assessee.

6. An individual who, or his relative or partner is holding any security of, or interest in, is indebted to the assessee, has given a guarantee or provided any security in connection with the indebtedness of any third person to the assessee. However, the relative may hold security, interest, indebted to or give guarantee or provide any security in connection with the indebtedness of any third person in the assessee of the face value not exceeding one hundred thousand rupees.

7. A person who, whether directly or indirectly, has business relationship with the assessee of such nature as may be prescribed.

8. 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.

For the purposes of this section 288, “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.’

Conclusion:- We can categorized the impacts of proposed amendment in section 288 in two category, one for company, now every company has to ensure before getting any certification or attestation work done under Income tax Act, 1961, whether the person who is doing such kind of work for assessee company is comply with the definition of accountant i.e. whether that person is eligible to appoint as a statutory auditor under companies Act, 2013 or not, if yes then such person can do certification or attestation work done under Income tax Act, 1961 for that assessee company. In second category, we can include assessee other than company, for these assessee specific exclusion clauses are proposed to insert, however the exclusion clauses for assessee being a company and assessee other than assessee being a company are same for a great extent.

(Author can be contacted at M- 08287392720 or on Email: carockey99@gmail.com)

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