Tax auditor's duty of due diligence in Form 3CD disclosure upheld, while the penalty was reduced to reprimand.

A tax auditor is required to disclose in Form 3CD any case where tax was deductible but not deducted on consultancy payments under section 194J, and failure to make that disclosure amounts to lack of due diligence and professional misconduct under the Chartered Accountants Act. The record showed consultancy expenses and the audit report was filed after the CBDT notification expanding reporting requirements, so the non-disclosure was not accepted. While the finding of guilt was upheld, the penalty was reduced from removal of name for one year to reprimand in light of the appellant's relative inexperience, cooperation, and the nature of the default.

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Issues: (i) Whether the appellant, while conducting tax audit and issuing Form 3CD, failed to exercise due diligence by not reporting that tax was deductible but not deducted on consultancy payments under section 194J of the Income-tax Act, 1961, thereby committing professional misconduct under Clause (7) of Part-I of the Second Schedule to the Chartered Accountants Act, 1949. (ii) Whether the punishment of removal of name from the register for one year called for interference and modification.

Issue (i): Whether the appellant, while conducting tax audit and issuing Form 3CD, failed to exercise due diligence by not reporting that tax was deductible but not deducted on consultancy payments under section 194J of the Income-tax Act, 1961, thereby committing professional misconduct under Clause (7) of Part-I of the Second Schedule to the Chartered Accountants Act, 1949.

Analysis: The audit report was signed after the CBDT notification widening the reporting requirements in Form 3CD. The return and accompanying records showed consultancy charges in the assessee's expenses, and the form required disclosure of tax deductible but not deducted. The explanation that the payments were not expenses or that no deduction under section 194J was required was found unacceptable on the record. The auditor was obliged to disclose the non-deduction so that the revenue authorities could understand the basis for non-deduction.

Conclusion: The appellant was rightly held guilty of professional misconduct for not exercising due diligence in reporting the default.

Issue (ii): Whether the punishment of removal of name from the register for one year called for interference and modification.

Analysis: The appellant was relatively new in practice, cooperated throughout the proceedings, and the default was treated as capable of being dealt with more leniently. In the circumstances, the penalty was considered capable of being reduced to meet the ends of justice.

Conclusion: The punishment was modified from removal of name for one year to reprimand.

Final Conclusion: The finding of guilt for professional misconduct was upheld, but the penalty was reduced to reprimand, so the appeal succeeded only on the question of quantum of punishment.

Ratio Decidendi: A tax auditor must disclose in the prescribed audit report any instance where tax was deductible but not deducted, and failure to make that disclosure constitutes lack of due diligence and professional misconduct.

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