2023 (7) TMI 382 - HC - Income Tax

Court Rules MSMED Act Inapplicable to Dispute Between Income Tax Dept & CA Firm

Pr. Commissioner of Income Tax-Central-1 Versus Micro And Small Enterprise Facilitation Council And Anr

The court determined that the MSMED Act does not apply to the dispute between the Income Tax Department and the Chartered Accountant Firm regarding ... Fee payable to CA Firms, for Special Audits directed u/s 142(2A) - CA Firm registered as MSME - Recovery of fees due from the Income Tax Department invoking the provisions of MSMED Act - interplay between the IT Act and the Micro, Small and Medium Enterprises Development Act ( ‘MSMED Act’) - Nomination of the Special Auditor by the IT Department - CA Firm, being on the panel of the Income Tax Department was nominated as a Special Auditor by the IT Department in four cases for carrying out Special Audit in terms of Section 142(2A) HELD THAT:- The nature of the Audit and the manner in which remuneration is to be determined would require domain expertise and knowledge which the MSEFC cannot possess. Function which is in effect delegated to the Audit firm is one which is exercised under the Income Tax Act and would be purely governed by the said statute. Payment of remuneration is also based on the factors prescribed in the Rules as discussed above. The nature of the assessment is not commercial but is a statutory nomination for the assistance of the AO and in effect the IT Department. IT Department cannot be termed as a ‘buyer’ when it is nominating the accountant for conducting a Special Audit and neither can the CA Firm be termed as a ‘supplier’. The remuneration payable to the accountant cannot also be termed as ‘consideration’ as the Special Audit is a statutory duty being performed by the accountant for and on behalf of the AO. The invocation of the provisions of the MSMED Act under such circumstances, in respect of Special Audit remuneration u/s 142(2D) would, therefore, not be tenable and is completely misplaced. MSMED Act has no applicability to the nature of the assignment which has been given to the Respondent/CA Firm. CA Firm may be registered as a Micro or Small enterprise and may be entitled to invocation of the jurisdiction of the MSMED Act for other purposes. Insofar as the assignment is one which is emanating from a statute i.e., u/s 142(2A) of the IT Act, the determination of the remuneration is solely the prerogative of the Commissioner or the Chief Commissioner. The same would not be liable to be called into question either in a civil court or in a commercial suit or civil suit as one of recovery of money. The nomination as a Special Auditor for the conduct of Special Audit is governed purely by the provisions of the Income Tax Act and Rules. This would, however, not bar the remedy of filing of a writ petition. The present is a case where there is a clear lack of jurisdiction in the MSEFC, which even failed to consider as to whether the MSMED Act would itself be applicable or not. MSMED Act would have no applicability, the impugned references by the MSEFC, of the claims raised by the Respondent/CA Firm to arbitration are not sustainable. The same are, accordingly, set aside. Issues Involved:1. Applicability of the MSMED Act to the dispute.2. Jurisdiction of the MSEFC under the MSMED Act.3. Bar under Section 293 of the IT Act.4. Maintainability of the writ petitions.Summary:1. Applicability of the MSMED Act:The court examined whether the MSMED Act applies to the dispute between the Income Tax Department (IT Department) and the Chartered Accountant (CA) Firm concerning the fee for Special Audits under Section 142(2A) of the Income Tax Act (IT Act). The court concluded that the MSMED Act does not apply to this case because the relationship between the IT Department and the CA Firm is not one of buyer and supplier. The Special Audit is a statutory obligation, not a commercial contract, and the remuneration determined by the IT Department is final and not subject to the MSMED Act's provisions.2. Jurisdiction of the MSEFC:The court held that the Micro & Small Enterprise Facilitation Council (MSEFC) lacks jurisdiction to deal with the claims raised by the CA Firm under Section 142(2A) of the IT Act. The nature of the assignment is statutory, and the determination of remuneration by the IT Department is final. The MSEFC's reference to arbitration was found to be misplaced and not tenable.3. Bar under Section 293 of the IT Act:The court noted that Section 293 of the IT Act bars any suit in civil court to set aside or modify any proceedings or orders made under the IT Act. Since arbitration proceedings are akin to civil proceedings, the MSEFC's jurisdiction is barred under Section 293 of the IT Act. The court emphasized that the only remedy available to the CA Firm is through a writ petition.4. Maintainability of the Writ Petitions:The court addressed the maintainability of the writ petitions under Article 227 of the Constitution of India. It concluded that a writ petition is maintainable in exceptional circumstances where there is a complete lack of jurisdiction in the arbitral tribunal. The court found that the MSEFC lacked jurisdiction in this case, making the writ petitions maintainable.Conclusion:The court set aside the impugned references by the MSEFC to arbitration and allowed the writ petitions. The remedies of the CA Firm to challenge the orders passed by the IT Department regarding the determination of remuneration are left open.