Suggestions on Clause 86 of Finance Bill 2017- Section 271J- Penalty imposable on chartered accountant for furnishing incorrect information in reports or certificates – Penalty may be removed
In order to ensure that the person furnishing report or certificate undertakes due diligence before making such certification, new section 271J is proposed to be inserted so as to provide that if an accountant or a merchant banker or a registered valuer, furnishes incorrect information in a report or certificate under any provisions of the Act or the rules made there under, the Assessing Officer or the Commissioner (Appeals) may direct him to pay a sum of ten thousand rupees for each such report or certificate by way of penalty.
a) C&AG Report and Response of Ministry of Finance to the Observations of ClisAG in its report No. 32 of 2014 : No requirement for additional penal provisions in the Income-tax Act, 1961 against CAs
Observations of C&AG in its report No. 32 of 2014
(i) The observations of C&AG in its report No. 32 of 2014 have been viewed seriously by ICAI. Suitable steps have been taken by ICAI in respect of various observations of C&AG. The C&AG in its report had stated that it is the joint responsibility of ITD and ICAI to ensure the compliance of the Act. Assuming the said responsibility, the ICAI, on its part, has also suggested changes in the return format so as to plug the possibility of a chartered accountant exceeding the specified limit in respect of number of tax audit assignments but the same is yet to be given effect to by the CBDT.
It is pertinent to note that the C&AG has, in its report, also made a mention of cases where the report of chartered accountants was not fully utilized by the Assessing Officers despite audit objection of a CA, the deduction/exemption has been allowed by the Assessing Officer.
(ii) It is pertinent to mention that C&AG in its Report No.32 of 2014 had recommended incorporation of penal provisions against erring CAs found indulging in gross professional misconduct. The response of the Ministry of Finance as stated in the aforesaid report is as under:
“The Ministry stated (October 2014) that there is no need for any fresh provision in the Income-tax Act for taking penal action against CAs who signed incorrect reports as there were already sufficient provisions in sections 277, 277A and 278 of the Act.”
In light of the specific and pertinent observations of Ministry of Finance and without prejudice to the other suggestions given below, it is suggested that status quo be maintained and the proposed provision be dropped.
b) Audit Opinion not to be construed as incorrect information thereby increasing litigation
Auditors are required to follow Auditing and Assurance standards issued by ICAI for the conduct of audit and issue the audit report accordingly. It is pertinent to mention here that in normal circumstances, an auditor is not required to be investigative. The role of audit is derived from various assurance standards developed by the ICAI on the basis of global standards. Therefore, whether a member is responsible for the perceived incorrectness in the report or not requires the matters to be examined from the points of view of process of audit adopted by the Chartered Accountant and whether due process is followed by him in providing the report and/or certificate.
In a case where the accountant furnishes information on the basis of his opinion in respect of a particular transaction based on a court judgement, and the Assessing Officer is of a different view based on a contrary judgement, the same would not tantamount to furnishing of incorrect information. Different views taken on the basis of judicial decisions and sound judicial principles cannot be treated as non-compliance with the tax laws and auditors cannot be penalised. Such aspects have been dealt with by the ICAI in various guidance notes for e.g. Guidance Note in relation to tax audits u/s.44AB.
Therefore, whether the auditor has functioned diligently or not, whether he has provided incorrect information without a reasonable cause, etc. will have to be judged by taking into account various pronouncements on the role of an auditor. The proposed section 271J does not define “incorrect information”, absence of which may give unbridled powers to the Assessing Officer to impose penalty thereunder. It is also pertinent to mention here that such pronouncements are made by the ICAI from time to time taking into consideration the provisions of related laws as also the international standards on the subject.
The consequential amendment proposed in section 273B that no penalty under section 271J would be imposable if it is proved that there is reasonable cause for failure may not be of much practical relevance.
c) No right of appeal against order imposing penalty :
It is possible that the income tax authority may find the chartered accountant guilty of providing incorrect information and the concerned chartered accountant may be aggrieved of such a decision. Levy of penalty in a case where a chartered accountant’s opinion on any matter has been perceived as furnishing of incorrect information may have an adverse impact on the professional standing of the chartered accountant. Levy of penalty may also form the basis of initiation of the disciplinary proceedings against him, which may be unjust and also lead to endless litigation. Order imposing penalty under section 271J is also not appealable and hence there is no judicial remedy for unjust levy of penalty.
d) Operational Issues:
Another issue which may arise is regarding the jurisdiction of the Assessing Officer levying penalty under section 271J. There may be cases where accountant is belonging to some other city and the assessee is assessed in another city. If the Assessing Officer is of the opinion that information certified by the accountant is incorrect and he issues show cause notice to the accountant, then, the accountant has to appear before that Assessing Officer to prove reasonable cause for failure. This will create an unnecessary hardship for the accountant, since it would necessitate that the accountant travel to the other city for this purpose.
e) Multiple Adjudicating Authorities:
Cases of gross professional misconduct/gross negligence, are in the normal course reported by the Department to the ICAI, which is the regulatory body governing Chartered Accountants. On the basis of receipt of formal complaint from the Department, action is taken by ICAI within the regulatory framework provided in the Chartered Accountants Act and the Misconduct rules framed there under.
ICAI has sufficient regulatory, supervisory, organisational and budgetary independence as regards the audit profession although it is both a standard setter and a regulator. It is duty bound to continue to discharge its obligations to ensure the highest standards of audit quality as well as to protect public interest.
The ICAI disciplinary mechanism consists of an independent Discipline Directorate headed by Director Discipline. The Council constitutes Board of Discipline and Disciplinary Committee in terms of the provisions of the Chartered Accountants Act, 1949. The Government nominated member is also one of the members of Board of Discipline.
The Director Discipline initiates the disciplinary proceedings on receipt of any information or complaint and places it for adjudication before Board of Discipline and Disciplinary Committee. The decisions of Board of Discipline and Disciplinary Committee are subject to appeal before an Appellate Authority which is presided by a person who is or has been a Judge of the High Court.
Whenever the Income Tax Department has referred the matters to the ICAI for disciplinary actions, the ICAI has acted upon such references and taken them to the logical conclusion. The decisions of the ICAI in such cases are always available to the Department.
As per the provisions of section 21 B of the Chartered Accountants Act, 1949, if disciplinary committee is of the opinion that a member is guilty of a professional or other misconduct, it may thereafter take any one or more of the following actions:
a) Reprimand the member;
b) Remove the name of the member from the register permanently or for such period, as it thinks fit;
c) Impose such fine as it may think fit, which may extend to Rs. 5 lakhs.
Therefore, the proposed provision will lead to a situation where there would be Multiple Adjudicating Authorities, which may not be appropriate.
Attention is hereby invited to the extracts of the Report no.32 of 2014 of C85AG reproduced below:
“The CAs are regarded as facilitators of the Income tax Department (ITD) for administrating the provisions of the Act correctly. The tax audit Reports(TARs)/ certificates issued by them serve as valuable reference guide to the Assessing Officers (AOs) while making assessments. The AO is expected to make his independent judgement while finalizing the assessment and can require the assessee to justify his claims with reference to records and references. The Delhi High Court has observed that the tax audit does not provide any immunity from scrutiny and investigation by ITD.
It is, thus, submitted that, as per the current practice, if it is felt that a chartered accountant who has furnished incorrect information in a report or certificate under any provision of the Act or the Rules made thereunder, is guilty of professional misconduct, the same be referred to the Institute of Chartered Accountants of India by the Income-tax authority.
Considering the robust disciplinary mechanism of ICAI and to avoid conflict of mandate with regard to the same, all the Disciplinary Cases should come to Disciplinary Committee of ICAI as constituted by Government which has two Government Nominees and three ICAI Council members (one being President ICAI and the other ICAI Council member) so that it does not create two parallel mechanisms, governing the same issue.
The need of the hour is to strengthen the system of exchange of information between Income Tax Department (ITD) and ICAI so as to enable timely action against the erring members by
‘CAL It is, thus, suggested that instead of imposing an additional penalty, the present relationship of ICAI and ITD be strengthened with better exchange of data.
Therefore, the proposed levy of penalty under section 271J on a chartered accountant may be withdrawn.
Source- ICAI Post-Budget Memoranda-2017