Modification to the amended definition of “accountant” under section 288 of the Income- tax Act 1961 (IT Act)
The definition of accountant was amended vide the Finance Act, 2015. The reason for introducing the amended definition of an “accountant” as per the Explanatory Memorandum to Finance Bill 2015 was to avoid conflict of interest and for better governance. In fact, this amendment was brought in for the limited purpose of disqualifying a relative from conducting the tax audit report based on a CAG report finding.
In case of an assessee, being a company, the disqualification for being appointed for a tax certification service applies to 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 (2013 Act).
In this regard, one can consider two situations where a CA in practice (individually or through a firm of CA) is called upon by a company to provide tax certification services as an accountant.
a. Situation 1– where the CA is the statutory auditor of the company.
From the governance perspective, the Board of Directors has to approve the appointment of the statutory auditor for providing the Non Audit Services (NAS) in terms of section 144 of the 2013 Act.
It may be noted that, in the case of a company, the statutory auditor and entities related to it in the manner specified in section 144 are prohibited to provide the specified NAS to the audit client or its holding or subsidiary.
However, the list of the prohibited NAS by the statutory auditor of a company does not contain provision of tax services including tax certification services. Therefore, there is no restriction on the statutory auditor to provide tax certification services subject to approval of the Board under section 144 of the 2013 Act.
b. Situation 2– where the CA is not the statutory auditor of a company.
In such a case, the CA can be appointed to provide the NAS, by the management on such terms as it consider appropriate.
It is here that the amended explanation of the term ‘accountant” under Section 288 of the IT Act becomes more onerous than the original intention of the amendment, which as stated earlier, was for the limited purpose of disqualifying a relative from conducting the tax audit report based on a CAG report finding.
Thus, pursuant to the amendment to the definition of “accountant” under section 288, once a CA, who is not the statutory auditor of the company, is appointed to provide tax certification services, he is being subject to the same service restrictions specified in section 144 of the 2013 Act as the statutory auditor of the company although the scope of work of tax certification is much narrower than statutory audit. The statutory auditor is required to audit the whole financial statements and opine as to whether the same present a true and fair view. However, opining on the financial statements as a whole is not required in case of issue of a tax certificate by a non-auditor wherein the scope of inquiry is specific to the section or sections concerned of the IT Act. However, the CA even in a case where the scope of service is limited to tax certification, is prohibited from providing other NAS specified in section 144 of the 2013 Act which he could have provided but for section 288 of the I T Act. Further, it is discriminatory if a CA who is providing tax certification services to a company of which he is not the statutory auditor is subject to greater restrictions for provisions of NAS than a CA who is appointed to provide tax advisory (not tax certification services) to a company of which he is not the statutory auditor.
In case of other than company assesses, explanation under section 288 of the Income- tax Act prescribes the eligibility requirements only for the assessee and not for any other related entities. Further, there is no prohibition from providing other NAS specified in section 144 of the 2013 Act. By making eligibility criteria for company assesses with reference to the section 141(3) of the Companies Act, 2013, the scope of restrictions have been broadened to extend to other related entities of the company as well as prohibition of NAS under section 144 of the Companies Act, 2013. A comparison of the restrictions as applicable to an accountant in the case of an assessee, being a company, and in the case of other assesses is provided in Sec 288 of the Income tax Act, 1961.
The IESBA Code of Ethics issued by IFAC / the ICAI Code of Ethics distinguishes audit services and non-audit assurance services. As there is no expression of opinion on the financial statements as a part of tax certification services, at best, such tax certification services would fall under “non-audit assurance services”.
In such situations, the personal independence prohibitions/ restrictions are applicable to “assurance engagement team members”. Further, NAS are subject to threats and safeguards, only if the NAS relates only to the subject matter of the assurance service i.e., tax certification. Given the nature of services, it would be prudent to apply “non-audit assurance” independence policies instead of “audit” independence policies.
In view of the above, the definition of the term accountant as contained in section 288 of the IT Act should be modified suitably to remove the applicability of section 141(3) of the 2013 Act so that:
a. A CA providing tax certification services to a company of which he is not the statutory auditor has the same opportunity to provide the NAS to a company as a CA who is not providing tax certification services but is providing tax advisory services and other NAS to a company of which he is not a statutory auditor to avoid unreasonable compliance requirements.
b. Requirements prescribed for non-company assesses should be made applicable to company assesses to ensure parity in applicability of the eligibility requirements for being an accountant under section 288 of the IT Act. Further, “Relative” under the explanation should be replaced with “Immediate Family Members” as is used in in the IESBA Code of Ethics.