The article discusses Legislative History behind enactment of Tax Audit Provisions, Imposition of Restriction on number of such Audit to be conducted by Chartered Accountants (CAs) by Institute of Chartered Accountant of India (ICAI), Decision of Honorable High Court and Supreme court on the issue, Report of C&AG on Violation of ICAI guideline , Constitutional Validity of Such restriction imposed by ICAI, Disciplinary Proceeding by ICAI against erring members and Stay by Kerala High Court against any action till disposal of representation of erring members.
1. In order to maintain the quality of tax audit to be conducted by CAs, ICAI prescribed a limit on tax audit assignments that can be under taken by a CA in a FY under Section 44AB of the Income Tax Act, 1961. In case of a Firm, specified number of tax audit assignments shall be applicable for every partners of the Firm. In view of the enhancement of professional competence of members to perform service in IT enabled environment, ICAI raised in February 2014 the limit of tax audit assignments from 45 to 60 and made it effective from audits conducted during F.Y. 2014-15 onwards. ICAI has further changed the same limit from per Financial Year to per Assessment Year in July 2014 by amending the 6.0 and 6.1 of Council Guidelines No. 1-CA(7)/02/2008 dated 8th August, 2008.
Link to above discussed matters:-
C&AG Report on Violation of Tax Audit Limit Prescribed by ICAI
2. In December 2014, a C&AG Audit Report has revealed that 18.87% Chartered Accountants issued Tax Audit reports U/s. 44AB more than the limit prescribed by ICAI under the provisions of the Chartered Accounts Act, 1949. C&AG report revealed that Tax Audit Report issued by such Chartered Accountant is Practice Ranged from 46 to 2471 and out 65898 CAs, 12435 CAs issued Excess Tax Audit Reports than the prescribed Tax Audit Limit. It has also come to notice that there were 22 CAs who issued more than 400 Tax Audit reports.
3. Here one thing is of worthy noting that Income Tax Act, 1961 prescribes only when the provisions of Tax Audit is applicable and who can conduct such Audits but it do not put any limit on number of such audit a CA can perform in a Financial Year or Assessment Year and it’s only the guideline issued by ICAI under the provisions of Chartered Accounts Act, 1949, which puts such restrictions.
Damage Control mode of ICAI
4. Based on above C&AG report ICAI has announced on 27th December, 2014 that it will act against the erring members wherever any act of professional misconduct is observed and it will Refer details of all such members to the Disciplinary Directorate, who are said to have done Tax Audit, under section 44AB of the Income Tax Act, 1961, more than the limit prescribed by the Institute.
5. ICAI has further decided to develop an IT based system in coordination with the authorities concerned especially to obtain the report of total numbers of Tax Audit done by each member to find out the details of the members not adhering to the Institute’s guidelines.
6. ICAI has also constituted a group pursuant to C&AG’s Report `Performance Audit on Appreciation of Third Party (Chartered Accountants) – Reporting in Assessment Proceedings’ and issued a press release to such effect on 24.01.2015.
Legislative History behind the Introduction of Section 44AB of Income Tax Act, 1961
7. On March 2, 1970, the Government of India constituted a high power committee of experts under the chairmanship of Chief Justice K.N. Wanchoo, retired Chief Justice of India, to examine and suggest legal and administrative measures for counteracting evasion and avoidance of direct taxes in the country [as stated in Chapter-I-Introduction of Direct Taxes Enquiry Committee-Final Report, published by the Government of India in December, 1971]. The Wanchoo Committee was asked to examine and recommend-
(a) concrete and effective measures
(i) to unearth black money and prevent its proliferation through further evasion;
(ii) to check avoidance of tax through various legal devices, including the formation of trusts; and
(iii) to reduce tax arrears;
(b) examine various exemptions allowed by the tax laws with a view to their modification, curtailment or withdrawal,
(c) indicate the manner in which tax assessment and administration may be improved for giving effect to all its recommendations.
8. On a detailed examination of the questions referred to it, the Wanchoo Committee, in its Final Report, submitted to the Government in December, 1971, made a number of recommendations, one of which related to compulsory audit of accounts., which would facilitate the administration of tax laws to a considerable extent if, simultaneously with the compulsory maintenance of accounts, there is a statutory provision for their mandatory audit. Audit would ensure that the books and records are properly maintained, and that they reflect faithfully the taxpayer’s income (as shown in the books of account) and claims for deductions. Audit would also help in the proper presentation of the accounts before the tax authorities, thereby making assessment proceedings more meaningful. Further, in a vast majority of cases, it would save considerable time of the assessing officers which is at present spent on carrying out routine verification, like correctness of totals and whether purchases and sales are properly vouched or not. The time thus saved could then be utilized for attending to more important investigational aspects of a case. The information which the auditor could be required to furnish with his certificate would also enable building up of information exchange for purposes of cross-verification which will be invaluable in detecting tax evasion and spotting new assessees. Audit would also help to check fraudulent practices such as concoction of accounts at later dates, maintaining duplicate sets of accounts, etc.
9. On this aspect, the Hon’ble Finance Minister in introducing the 1984 Bill and his budget proposals stated in Parliament thus (as stated in  146 ITR (St.) 36):
“With the reduction in rates and expeditious disposal of assessments, I believe there can now be no excuse for any leniency to be shown to those who abuse our laws. Such cases will necessarily have to be dealt with severely. In order to discourage tax avoidance and tax evasion, I am also introducing some further measures. In all cases where the annual turnover exceeds Rs. 20 lakhs or where the gross receipts from a profession exceed Rs. 10 lakhs, I am providing for a compulsory audit of accounts. This is intended to ensure that the books of account and other records are properly maintained and faithfully reflect the true income of the taxpayer.”
10. Clause No. 11 of the Finance Bill of 1984 (Bill No. 11 of 1984) (1984 Bill), was introduced in Parliament to give effect to the financial proposals of the Central Government for the financial year 1984-85. It proposed the introduction of section 44AB in the Act from April 1, 1985, providing for compulsory audit in the non-corporate sector. The notes to this clause explain the object and purposes in these words (as stated in  146 ITR (St.) 139):
“Clause 11 seeks to insert a new section 44AB in the Income-tax Act relating to audit of accounts of certain persons carrying on business or profession. The proposed provision seeks to make it obligatory for a person carrying on business to get his accounts audited before the ‘specified date ‘ by an accountant, if the total sales, turnover or gross receipts in the business for the previous year or years exceeds or exceed twenty lakh rupees. A person carrying on profession will also have to get his accounts audited before the said date if his gross receipts in profession for the previous year or years exceeds or exceed ten lakh rupees. Such persons will also be required to obtain before the specified date a report of the audit in the prescribed form. These requirements will apply only in relation to the accounts for the previous year or years relevant to any assessment year commencing on 1st April, 1985, or any subsequent assessment year. In cases where the accounts of a person are required to be audited by or under any other law, it will suffice if the person gets his accounts audited under such other law before the specified date and also obtains before the said date, the report of audit in the prescribed form, in addition to the report of audit required under such other law. The expression ‘accountant’, for the purposes of this provision, will have the same meaning as in the Explanation below section 288(2) of the Income-tax Act. The expression ‘specified date’, in relation to the accounts of the previous year or years relevant to any assessment year, means, the date of the expiry of four months from the end of that year or where there is more than one previous year, from the end of the previous year which expired last before the commencement of that assessment year or the 30th June of such assessment year, whichever date falls later. The proposed amendment will take effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years.”
11. Thus after the introduction of Section 44AB, when persons who carry on a business or profession covered by section 44AB of the Income Tax Act file their returns under the Income Tax Act, they are compulsorily required to get their accounts of such previous year or years audited by a CA of their choice before the specified date and obtain a report of such audit in the prescribed form duly signed and verified by him furnishing the particulars stipulated in the rules made by the Board and annex them to their returns filed under Section 139 of the Act. When a return of any such person is not accompanied with an audit report and the particulars prescribed by the rules, then the assessing authority is required to exercise his powers under s. 139(9) of the Act and enforce its compliance hereto under the Act. Section 44AB of the Act excluded income tax practitioners and persons similarly situated‑ from auditing the accounts of their clients who come within the sweep of the section. What is true of the professionals is also true of persons carrying on their business or profession. In other words, those that fall within the sweep of section 44AB of the Act are bound to get their accounts audited from CAs only and not from any other person on and after the enforcement of that provision.
12. By Finance Act, 1984 a new Section viz., Section 44 AB was introduced in the Income-tax Act, 1961 by which certain classes of assessees such as businessmen with a turnover of more than Rs.40 lakhs and a person carrying on a profession with a gross receipt of Rs.10 lakhs a year were required to get their accounts audited by a Chartered Accountant and get a report from him.
ICAI Provisions imposing Limit on Number of Tax Audit & Related Guideline issued by it
13. The profession of Chartered Accountants is governed by the Chartered Accountants Act, 1949 (herein after referred to as the CA Act 1949). Section 3 of the CA Act 1949 provides that chartered accountants registered under Section 4, constitute a body called the Institute of Chartered Accountants of India. The Council of the said Institute constituted under Section 9 of the Act carries out the various functions mentioned in Section 15 and other provisions of the Act. Various enactments such as the Companies Act, 1956, Income-tax Act, 1961 and the Banking Companies Regulations Act provide that only Chartered Accountants have a specified role to play in companies and other organizations. The intention obviously is that there should be uniform accountancy methods and high level of professionalism. Many years of hard work and knowledge is required to qualify as Member of the Institute and once a person has acquired the required qualification he is free to engage himself in the profession without any kind of restriction except for professional misconduct as mentioned in Section – 2 2 of the CA Act 1949. The Council set up by the Act has a general power to enquire into the allegations of misconduct of members of the Institute. It may be mentioned that there is compulsory audit of the books of accounts and other records of companies incorporated under the Companies Act, 1956 and also of all other persons whose turnover is in excess of Rs.20 lakhs under the Income-tax Act. Only a Chartered Accountant can issue a certificate under these Acts.
14. Section 22 of the CA Act 1949 defines professional misconduct as follows : “For the purposes of the Act, the expression ‘professional misconduct’ shall be deemed to include any act or omission specified in any of the Schedules, but nothing in this section shall be construed to limit or abridge in any way the power conferred or the duty cast on the Council under Sub-section (1) of Section 21 to inquire into the conduct of any member of the Institute under any other circumstances.” The section is an inclusive section and not an exhaustive one and that discretion is vested in the Council to inquire into the conduct of any member of the Institute under any circumstances. The First Schedule, Part 1, defines what is professional misconduct in relation to chartered accountants in practice. Part II of the First Schedule sets out professional misconduct in relation to members of the Institute in service and Part III sets out professional misconduct in relation to members of the Institute in general. In exercise of the powers contained in Schedule II set out above, the Council has been issuing notifications. One such notification is dated 13.01.1989, wherein restrictions were placed on right to practice as Chartered Accountant with regard to the number of audits that could be performed and the same was challenged before the Honourable Madras High Court as W.P.(C) No 5925 of 1989 and WPC No 5926 of 1989.
15. The ICAI notification dated 13-01-1989 read as follows:- “No.1-CA (7)/3/88:- In exercise of the powers conferred by clause ( ii) of Part-II of the Second Schedule to the Chartered Accountants Act, 1949, the Council of the Institute of Chartered Accountants of India hereby specifies that a member of the Institute in practice shall be deemed to be guilty of professional misconduct if he accepts, in a financial year, more than the specified number of tax audit assignments under Section 44 AB of the Income-tax Act, 1961”.
History of Challenge to above provisions, Verdict of Judiciary and Action taken by ICAI
16. The Learned Single Judge of the Honourable High Court of Madras in the case reported in 1998 93 Comp Cas 625 Mad, allowed the writ petition on 13-07-1998 setting aside the notification dated 13- 01-1989. This was challenged by the ICAI before the Division Bench of the Honourable Madras High Court and the appeal was dismissed on 24-03-2005, affirming the judgment setting aside the notification dated 13-01-1989. The issue was agitated again by the ICAI before the Honourable Supreme Court by filing Civil Appeals No 7208 and 7209 of 2005 arising out of High Court of Madras in Writ Appeal Nos 1452 and 1453 of 1998 dated 24-03-2005 quashing the notification dated 13-01-1989 and 25-05-1987 issued by the ICAI.
17. While the civil appeals were pending before the Honourable Supreme Court, the notifications of 1989 was withdrawn by the ICAI and new guidelines have been issued by ICAI on 8-4-2008. While the Civil Appeals No 7208 and 7209 of 2005 came up for consideration before the Apex Court, it was contended on behalf of the 1st respondent that the 1989 guideline have been replaced by 2008 guideline and no representations regarding grievance about the 2008 guideline been received. The ICAI undertook that any such representation regarding the grievance by 2008 notification shall be considered by the Highest Body of the ICAI and the highest body will take a decision as to whether such guidelines would continue or require any further modification. The Honourable Supreme Court, dismissed the case, with the following direction:- “ We do not propose to hear the appeals on merit and the same are being dismissed as having become infructuous. However, in case any member is aggrieved of the existing guidelines and files a representation before the appellant, the appellant shall consider it and pass appropriate order, and if any member is aggrieved thereof whether he has made representation or not, would have the right to challenge it before the appropriate forum.”
18. Extract of ICAI Guidelines No 1-CA (7)/02/2008 dated 08.08.2008 as updated with amendment carried out Subsequently
Tax Audit assignments under Section 44AB of the Income-tax Act, 1961
6.0 A member of the Institute in practice shall not accept, relating to an assessment year, more than the “specified number of tax audit assignments” under Section 44AB of the Income-tax Act, 1961.
Provided that in the case of a firm of Chartered Accountants in practice, the “specified number of tax audit assignments” shall be construed as the specified number of tax audit assignments for every partner of the firm.
Provided further that where any partner of the firm is also a partner of any other firm or firms of Chartered Accountants in practice, the number of tax audit assignments which may be taken for all the firms together in relation to such partner shall not exceed the “specified number of tax audit assignments” in the aggregate.
Provided further that where any partner of a firm of Chartered Accountants in practice accepts one or more tax audit assignments in his individual capacity, the total number of such assignments which may be accepted by him shall not exceed the “specified number of tax audit assignments” in the aggregate.
Provided also that the audits conducted under Section 44AD, 44AE and 44AF of the Income Tax Act, 1961 shall not be taken into account for the purpose of reckoning the “specified number of tax audit assignments”.
For the above purpose, “the specified number of tax audit assignments” means –
(a) in the case of a Chartered Accountant in practice or a proprietary firm of Chartered Accountant, 60 tax audit assignments, relating to an assessment year, whether in respect of corporate or non-corporate assesses.
(b) in the case of firm of Chartered Accountants in practice, 60 tax audit assignments per partner in the firm, relating to an assessment year, whether in respect of corporate or non-corporate assesses.
6.1.1 In computing the “specified number of tax audit assignments” each year’s audit would be taken as a separate assignment.
6.1.2 In computing the “specified number of tax audit assignments”, the number of such assignments, which he or any partner of his firm has accepted whether singly or in combination with any other Chartered Accountant in practice or firm of such Chartered Accountants, shall be taken into account.
6.1.3 The audit of the head office and branch offices of a concern shall be regarded as one tax audit assignment.
6.1.4 The audit of one or more branches of the same concern by one Chartered Accountant in practice shall be construed as only one tax audit assignment.
6.1.5 A Chartered Accountant being a part time practicing partner of a firm shall not be taken into account for the purpose of reckoning the tax audit assignments of the firm.
6.1.6 A Chartered Accountant in practice shall maintain a record of the tax audit assignments accepted by him relating to each assessment year in the format as may be prescribed by the Council.
Issue by Notice by ICAI to erring Members
19. ICAI has sent notices to members and one such members has applied High Court to stop ICAI taking any action on the basis of Such Report and to follow the Supreme Court Directive in this regard.
20. Extract of one such Notice issued by ICAI to one of such Member-
In the matter of “Information” treated against you on the basis of C&AG Report no. 32 of 2014 for Assessment Year 2013-14, under Section 21 of the Chartered Accountants Act, 1949.
Our attention has been drawn to the Report of the Comptroller and Auditor General of India (relevant extract enclosed) wherein under table 3.2, the list of Chartered Accountants who have issued more than 400 Tax Audit Reports for Assessment Year 2013-14 under Section 44AB of the Income Tax Act, 1961, has been provided. On perusal of the same, it is seen that your name has been mentioned in the said list. Hence, from the said Report, it is observed that you have violated the Council Guidelines, 2008, relating to number of tax audit assignments. The said Guidelines states that a member of the Institute in practice, shall not accept in a financial year more than “specified numbers” (i.e. 45) of the Audit assignment under Section 44AB of the Income Tax Act, 1961.
In view of the aforesaid Council Guidelines, 2008 read with the reference from C&AG as above, it has been decided to treat the matter as ‘Information’ within the meaning of Rule 7 of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007. A copy of the aforesaid Rules is also enclosed herewith for your ready reference
The aforesaid allegation, if proved, would fall within the purview of professional misconduct falling within the meaning of Clause (1) of Part-II of the Second Schedule to the Chartered Accountants Act, 1949.
In accordance with the provisions of clause (a) of sub-rule (1) of Rule 8 read with Rule 11 of the aforesaid Rules, you are requested to send your Written Statement duly signed (in triplicate), within 21 days of the receipt of this letter in accordance with the provision of Rule 8(3) of the the Chartered Accountants (Procedure of Investigation of Professional and Other Misconduct and Conduct of Cases) Rules, 2007.
Please note that in case no reply is received from you within the aforesaid period of 21 days, it shall be presumed that you have nothing further to state and the matter will be dealt with in accordance with the relevant Rules without any further reference to you.
Argument in favour of non validity of restriction on number of Tax Audits
21. Section 44AB was introduced in the Income Tax Act for a different purpose as explained earlier. Transparency of the accounts of non-corporate entities and professionals was the purpose behind the amendment. By making audit compulsory by CA under Section 44AB, the Government’s aim was to have more time for inspecting officers to go through the returns than just the book of accounts. The first notification of 1989 which was set aside by the Madras High Court was the first time a restriction regarding the number of assignments to be undertaken was thought of. When the same was challenged, the respondents contended in their counter affidavit filed in Writ Petition No.5925 of 1989: “The notification would enable a larger section of the members of the Institute in practice all over the country to conduct tax audit assignments and thus cater to enlargement of the work of professional chartered accountants as a result of the introduction of compulsory tax audit in respect of assessees and professional persons. This restriction would enable professional work in relation to compulsory tax audit to be diversified and distributed among young and less advantaged members who are clamoring for professional work and livelihood. Thus, there is no unreasonable restriction of which any grievance can be made by any professional member of the Institute.” The Single Judge of the Madras High Court held the restriction based on the number of audits which could be done under Section 44AB by A CA, as violative of Article 19(1)(g) and Article 14.
22. Guideline No. 1-CA (7)/02/2008 dated 08.08.2008 states that the total number of audit assignments under section 44AB of the Income-tax Act, 1961, in the case of chartered accountants in practice, shall be restricted to forty five (Sixty from 01.04.2014) audit assignments in a financial year (Assessment Year from 01.04.2014) and, similarly, in the case of a firm of chartered accountants in practice, it shall be restricted to forty five (Sixty from 01.04.2014) audit assignments per partner of the firm in a financial year (Assessment Year from 01.04.2014). There is no sanctity in the above limitation prescribed by the ICAI prescribing forty five five (Sixty from 01.04.2014) tax audit assignments as the outer limit in so far as chartered accountants are concerned. A chartered accountant of experience and ability would be easily in a position to accept and fulfil more than forty five five (Sixty from 01.04.2014) audit assignments in a financial year and by artificially imposing this restriction, the petitioner’s fundamental right to practice the profession guaranteed under article 19(1)(g) of the Constitution is unreasonably restricted.
23. The time taken for audit by an able chartered accountant may be far less than the time taken by another chartered accountant of restricted ability. All the auditors cannot be placed on an equal footing and an assumption cannot be made that an auditor would be able to fulfil his obligations only up to 45 five (Sixty from 01.04.2014) tax audit assignments under section 44AB of the Income-tax Act in the financial year. Neither statistics exist to support the restriction on number of tax audits that could be undertaken by a chartered accountant nor could a reasonable explanation be provided for the capping. The Act does not contemplate distribution of available work to all the chartered accountants on the roll of the Institute, nor does it impose an obligation on the Institute to provide work for a young and aspiring chartered accountant. That being the fact and law involved, the capping on the number of audits a CA could perform has no reasonable nexus with the provisions of Section 44AB.
24. It is significant to note that various enactments such as the Companies Act, 1956, the Income-tax Act, 1961, and the Banking Regulation Act, 1949, provide that only chartered accountants have a specified role to play in companies and other organisations. It is also important to note that the intention of the CA Act 1949 is to provide for a rigorous test and exemplary qualification to enter into the sphere of the profession of accountants actively and once a person acquires such qualifications he would be entitled to follow a profession which is exclusive and special on its own merit. It is no doubt true that it is a highly respected profession with absolute integrity. Years of hard work and knowledge are required to qualify as a member of the Institute and once a person acquires the said qualifications, he would be free to engage himself in the profession without any kind of restriction except for a conduct amounting to dishonesty as it is understood in the ordinary course of the sense of the word and also a conduct which deserves condemnation. It is also significant to note that a chartered accountant is expected to function honestly and not to conduct himself in a manner inviting public criticism and to function with dignity and that is contemplated as regards a CA in Section 22 of the CA Act 1949. It is also significant to note that there is no nexus between the purpose of the Act and the notification issued which deems professional misconduct. Accepting a legitimate professional engagement by a professional can never be considered unprofessional and be made misconduct.
24. There is no reasonable classification nor any reasonableness in the restriction brought by the notification in deeming misconduct by fixing a limit to the acceptance of a number of tax audit assignments.
25. The main object of the CA Act is to regulate the conduct of the members of the Institute in carrying out their professional duties. Willingness to carry out his professional work cannot be enlarged into professional misconduct by adopting an artificial device of placing a restriction/capping on the volume of work. A professional has a fundamental right to choose his own volume of work.
26. It is submitted that years of hard work and knowledge are required to qualify as a member of the ICAI. That being so, once a person acquires the said qualifications, he would be free to engage himself in the profession without any kind of restriction except for a conduct amounting to dishonesty as it is understood in the ordinary course of the sense of the word and also a conduct which deserves condemnation. The Act and the Rules made thereunder would be entitled to bring restrictions or provisions only for the purpose of attaining the aforesaid professional standards. Whereas it is significant to note that by reason of the notification, the choice of a chartered accountant to opt for his own client is considerably abridged and restricted, the proviso to the notification is also quite meaningless in relation to the restrictions placed. There is no justification at all for such restrictions. No reason is attributed for restricting the number of audits as contained in the 2008 notification.
27. The classification adopted itself is wrong and artificial. If the capping on the number of tax audits under Section 44AB is made so as to achieve purity and quality of work, the classification should be in accordance with the volume of work and not in accordance with the number of audits. A single audit work itself would be so voluminous that it may occupy a major portion of a chartered accountant’s time. On the other hand, there may be cases where numerous audits can be completed even on a shorter time. In the latter instance, there cannot be any restriction regarding the number of audits. Therefore, the classification as it is based on the number of tax audits, is an infringement into the efficiency of chartered accountants who are in a position to attend to a number of audits. Anomalous situations would arise, in the sense that, if an auditor is able to complete the entire audit work as restricted now by the 2008 notification, then he may also be unemployed for the rest of the year.
28. It is significant to note that the time taken for audit by an able chartered accountant may be far less than the time taken by another chartered accountant of restricted ability. All the auditors cannot be placed on an equal footing and an assumption cannot be made that an auditor would be able to fulfill his obligations only up to 45 five (Sixty from 01.04.2014) tax audit assignments under Section 44AB of the Income-tax Act, per financial year.
29. A client must be free to chose his Chartered Accountant, just like a lawyer and conversely the number of cases/audits which can be accepted by a professional must be left free to decide by the Lawyer/Chartered Accountant of his own free will. Such restrictions can only be voluntary and not imposed by any external authority on the members of the profession.
30. Each profession has its own historical conventions, traditions, customs and practices and it has never been the conventions, tradition, custom or practice among the professions like Lawyers’ profession, Chartered Accountants’ profession, etc., that work must be diversified to young and less fortunate professionals by restricting the number of cases/audits which can be accepted by a Lawyer/Chartered Accountant. 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.
31. Accepting larger number of audits cannot be regarded as professional misconduct. 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 dis-honesty 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 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 as in 2008 guidelines, cannot be accepted in these professional occupations.
32. Professions like Lawyer’s profession, Chartered Accountant’s profession, etc cannot be compared to business enterprises as they have their own historical conventions and traditions which have evolved over centuries. Hence, no mechanical application of restrictions is possible as done hereunder, without properly understanding the circumstances. What may be a reasonable restriction for a business may be unreasonable for a profession.
33. The right to carry on a trade and profession is a fundamental right guaranteed under article 19(1)(g) subject to reasonable restrictions. The restrictions are imposed vide article 19(6) and has to be issued in the interest of the general public. Herein, there are no reasons cited for infringing the fundamental right guaranteed. Thus, clause 6 in Ext P2 is illegal, arbitrary, discriminatory and irrational.
34. While different kinds of works are being done by the CAs under the Income Tax Act. The restriction is imposed only on the number of tax audits that could be done by a CA under section 44AB of the Income Tax Act. Capping only tax audits is discriminatory. Further, there is no such capping in any other profession and on this ground also, the impugned guideline is illegal.
35. The compulsory audit is intended to ensure proper maintenance of books of account and other records, in order to reflect the true income of the tax payer and to facilitate the administration of tax laws by a proper presentation of the accounts before the tax authorities. This would also save the time of the Assessing Officers considerably in carrying out the verification. There is no nexus between the object of section 44AB of the Income Tax Act and the Ext P2 guideline in clause 6.
36. The guidelines dated 8-04-2008 of ICAI restricting number audits is unconstitutional being a unreasonable restriction under Article 19(6) is liable to be set aside.
37. The ICAI has a duty to comply with the direction of the Honorable Supreme Court, before initiating any action against petitioner. In so much as, the first notification in 1989 bringing restriction on number of tax audits under 44AB was struck down as unconstitutional as the same was unreasonable and discriminatory by the Single Judge and Division Bench of the Madras High Court, which was affirmed by the Supreme Court.
Appeal before Honourable Kerala High Court and Stay to Petitioner
38. In the case of Shaji Poulose,Chartered Accountant Vs. ICAI Honourable Kerala High Court) has granted Stay to petitioner in following matters and restricted ICAI from taking action against the petitioner till ICAI replies on representation by CA Shaji Poulose to withdraw the guideline by which ICAI has imposed limit on Tax Audits:-
39. The Limit imposed by ICAI seems to be without strong legal backing and position will clear only after Reply of ICAI on the representation of Petitioner and it is likely that ICAI may have to indulge in long legal battle with its members on the issue.
40. It seems that ICAI has taken action only against those members who has done 400 or More Tax Audit in a Year as reported by CAG in its report but actually it should have taken action against all those members who has done Tax Audit in excess of 45 Tax Audits in a Year. In all fairness, proceedings should be initiated against all. Under what authority ICAI has fixed the benchmark at 400 is not known?
41. It should be made known by ICAI if any of the Regional and Central Council Members, both present and past, have exceeded the limit prescribed.
42. Action by ICAI against Members of ICAI in Tax Audit Limit Violation may be against the Supreme Court verdict in the case of Inst.of Chartered Accountants of India Vs K. Bhagavatheeswaran & ANR.