2004 (10) TMI 30 - HC - Income Tax

Court upholds Commissioner's order on special auditor fees under Income-tax Act, deeming amount reasonable.

PN. Misra And Others Versus Union of India And Others, Dhanesh Gupta And Co. Versus Union of India And Others.

The court upheld the Commissioner of Income-tax's order under section 142(2D) of the Income-tax Act, 1961, determining the special auditor's fees at Rs. 5 ... Fee of special auditor (chartered accountant) - fixation of the remuneration of the auditors - Order made by the Commissioner of Income-tax u/s 142(2D) - order speaks about the maintenance of a diary of work done with details of time allocation of the audit work. The Commissioner of Income-tax after a careful consideration of all the aspects of the cases and work done by the auditors fixed the fees at Rs. 5 lakhs. was appointed as a special auditor to examine the matters and to submit a report. - It should not be forgotten that the chartered accountant is a professional and so far as fees are concerned ordinarily it would differ from person to person. However, in the instant case, we are of the opinion that the fees have been charged as per the norms laid down by the All India Institute of Chartered Accountants - we cannot interfere with the order made by the Commissioner of Income-tax u/s 142(2D) - assessee is directed to pay the amount to the chartered accountant within a period of four weeks with interest at the rate of 15 per cent, from the date of submitting the bill. ISSUES PRESENTED AND CONSIDERED 1. Whether the determination of expenses and remuneration of a special auditor under section 142(2D) of the Income-tax Act is amenable to judicial interference on grounds of alleged inflation or lack of basis. 2. Whether the Commissioner's fixation of the special auditor's fees must conform to scales or rates prescribed by the Institute of Chartered Accountants of India and what weight such scales carry. 3. Whether absence of assessee-wise certification of time records or documentary separation of seized material precludes the Commissioner from accepting the special auditor's bill. 4. What is the scope of the Court's review of a Commissioner's determination under section 142(2D) - i.e., whether the Court may re-evaluate the merits or is confined to examining legality and reasonableness based on material before the authority. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of Commissioner's determination under section 142(2D) Legal framework: Section 142(2D) provides that expenses incidental to any audit under subsection (2A), including the remuneration of the accountant, shall be determined by the Chief Commissioner or Commissioner and that such determination shall be final; the expenses are payable by the assessee and recoverable as arrears of tax. Precedent Treatment: No specific judicial precedents were relied upon or overruled in the judgment; the Court approached the matter on statutory text and administrative record. Interpretation and reasoning: The Court construed the statutory provision as conferring finality on the Commissioner's determination but subjected the determination to limited judicial review to ensure it was arrived at on the basis of material placed before the authority and after hearing the parties. The Court emphasized that it does not sit as an appellate body to re-assess the quantum of fees; rather it must satisfy itself that the authority acted objectively, considering nature and complexity of work, hours expended and documentary support. Ratio vs. Obiter: Ratio - A determination under section 142(2D) is final but amenable to limited judicial review to ensure the decision is based on material and was reached after hearing; the Court will not substitute its own view on the appropriate fee where the authority has acted objectively. Conclusions: The Commissioner's decision fixing the fee was upheld as being based on material and after affording opportunity of hearing; judicial interference to substitute a different fee was declined. Issue 2 - Role and weight of ICAI fee scales in fixing remuneration Legal framework: No statutory mandate requires strict adherence to professional institute scales; relevance of ICAI scales arises from professional norms and practice. Precedent Treatment: Not addressed by prior authoritative decisions in the text; treated as a relevant professional benchmark. Interpretation and reasoning: The Court noted that fees charged were in conformity with norms laid down by the Institute of Chartered Accountants (ICA I) and that the revenue itself averred application of ICAI norms. The presence of such norms was held to be a legitimate and persuasive factor in assessing reasonableness of fees, though not binding in the strict sense. Ratio vs. Obiter: Ratio - Professional scales such as those of ICAI are proper normative guides for assessing reasonableness of auditor remuneration and may be relied upon by the Commissioner; they are not mandatory but are weighty indicia of propriety. Conclusions: The Court accepted application of ICAI scales as supporting the reasonableness of the fee and declined to set aside the Commissioner's reliance on those scales. Issue 3 - Adequacy of evidence: certification of time records and segregation of seized materials Legal framework: Determination under section 142(2D) must be based on material; evidentiary sufficiency is judged by whether records supporting the fee were available to and verified by the assessing authority. Precedent Treatment: No precedent cited; the matter was resolved on facts before the authority and affidavits filed in Court. Interpretation and reasoning: The assessor's affidavit and the Deputy Commissioner's affidavit stated that daily man-hour records were maintained by the auditor and counter-signed/certified by the Assessing Officer, and originals were available with the auditor. The auditor explained why assessee-wise segregation of time could not reliably be produced given scattered and mixed seized material. The Court gave weight to the existence of contemporaneous work diaries and certification by the Assessing Officer as adequate material supporting the fee, and held that absence of separate assessee-wise tally in the seized, inter-mingled documents did not render the bill inherently inflated. Ratio vs. Obiter: Ratio - Where contemporaneous time records and certification by the Assessing Officer exist and the nature of seized material makes assessee-wise segregation impracticable, the Commissioner may reasonably accept aggregated billing supported by such records; lack of separate segregation is not fatal if verification by revenue officers is shown. Conclusions: The Commissioner did not act arbitrarily in accepting the auditor's billed work-hours and in fixing fees after considering certified records and explanations about the condition of seized material. Issue 4 - Scope of judicial review and permissible relief (including interest and payment directions) Legal framework: Finality clause in section 142(2D) limits re-determination but does not oust judicial review for legality and reasonableness; Court's relief must respect statutory finality while ensuring the decision was taken on material and after hearing. Precedent Treatment: No precedents relied upon; Court applied principles of limited review. Interpretation and reasoning: The Court reiterated that it is not to act as an appellate authority to re-weigh evidence; its role is to ensure the authority arrived at a reasoned conclusion on recorded material. Having found the Commissioner's decision to be objectively reached and supported, the Court declined to disturb it. The Court also exercised its power to direct payment of the fixed sum to the auditor and to award interest at a commercial rate (15%) from date of bill submission to incentivize compliance and compensate delay. Ratio vs. Obiter: Ratio - Judicial intervention will be limited to ensuring procedural fairness and evidentiary basis; if satisfied, the Court will not substitute its own assessment and may direct payment as determined by the statutory authority, including interest for delayed payment. Conclusions: The Court dismissed challenges to the Commissioner's fixation, directed payment of the fixed fee to the auditor within a specified period, and ordered interest at 15% from the date of bill submission; no further points were examined.