AI Drafter 
TaxTMI 
TaxTMI 
2008 (3) TMI 641
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....vocates and sales tax practitioners to audit and give report in form No. 704. There are some other incidental challenges in Writ Petition No. 1777 of 2007 to contend that the Explanation also be declared void as being violative of article 265 which provides that no tax shall be levied or collected except by the authority of law and article 301 as it infringes the freedom to carry on trade, commerce and intercourse throughout the territory of India. Writ Petition No. 3203 of 2006 is filed by the association and its President who is petitioner No. 2. The association is registered under the Societies Registration Act, 1960 having registration No. Bom 166/71. They contend that for the last 56 years, advocates and sales tax practitioners who are its members have been enjoying an equal level field in practice before the sales tax authorities. The impugned provision seeks to keep out a class of advocates and sales tax practitioners from their legitimate field of practice. This class of practitioners and advocates have attained appreciable standard of expertise to understand and interpret the sales tax laws before the tax authorities under the Act. The Advocates also practice in the ....
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.... assessment and if necessary in appeals. There has been no grievance made against the easily accessible and expert services of this class. Even under the present enactment, the traders continue to be advised and guided by this class of sales tax practitioners and advocates and their returns are being compiled by them on the basis of their records. The sales tax practitioners and advocates have been giving commendable services to the industries at all stages of sales tax proceedings. Their valuable guidance and help is easily accessible at affordable charges. By the amendment what is sought to be done is to have the assessment of tax liability under the Act assessed, approved and certified as the correct liability of a dealer by a third agency who is described as class of persons called chartered accountants. The work that the chartered accountant has to do is to verify the return with full details and certify legality or otherwise of the claims in the returns. This function of the assessment for the tax dues from a dealer under the MVAT Act has already been assigned and entrusted to the Commissioner or its delegates or officers appointed under the said Act. The industries, there....
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....ufacture of Potable Liquor Rules, 1966, or (ii) Form B.R.L. under the Maharashtra Manufacture of Beer and Wine Rules, 1966, or (iii) Form E under the Special Permits and Licence Rules, 1952, or (iv) Forms FL-I, FL-II, FL-III, FL-IV under the Bombay Foreign Liquor Rules, 1953, or (v) Forms CL-I, CL-II, CL-III, CL/FL/TOD-III under the Maharashtra Country Liquor Rules, 1973 get his accounts in respect of such year audited by an accountant within the prescribed period from the end of that year and furnish within that period the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars and certificates as may be prescribed. Explanation.-For the purposes of this section 'accountant' means a chartered accountant within the meaning of the Chartered Accountants Act, 1949 or a cost accountant within the meaning of the Cost and Works Accountants Act, 1959. (2) If any dealer liable to get his accounts audited under subsection (1) fails to furnish a copy of such report within the time as aforesaid, the Commissioner may, after giving the dealer a reasonable opportunity of being heard, impose on him, in add....
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....y for such period as is stated in the order, from attending, before any such authority, any legal practitioner, chartered accountant, cost accountant or sales tax practitioner,- (i) who has been removed or dismissed from Government service, or (ii) who being a legal practitioner, a chartered accountant or a cost accountant is found guilty of misconduct in connection with any proceedings under this Act by an authority, empowered to take disciplinary action against the member of the profession to which he belongs, or (iii) who, being a sales tax practitioner, is found guilty of such misconduct by the Commissioner . . ." The Statement of Objects and Reasons as annexed to the Bill in so far as section 61 is concerned, reads as under: "Clauses 55 to 62.-A new provision is made for advance ruling by the Tribunal on any question relating to interpretation of the law. A new provision provides for compulsory audit to be made in certain circumstances by qualified accountants." The State of Maharashtra by Maharashtra Act No. 25 of 2007 amended the MVAT Act. We are concerned with the amendment to section 61. The relevant portion reads as under: "17. In section 61 of the....
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....illors and Ratepayers of the Shire of Frankston and Hastings v. Cohen 102 CLR 607 before the High Court of Australia the expression "audit" came up for consideration and it was explained as under: "But the word, 'audit' is a well-known English word, and the general nature of what constitutes an audit seems plain enough. The Oxford English Dictionary defines the noun 'audit' as 'an official examination of accounts with verification by reference to witnesses and vouchers'. Mr. R.A. Irish in his book 'practical auditing' (page 1) says: 'An audit may be said to be a skilled examination of such books, accounts and vouchers as will enable the auditor to verify the balance sheet. The main objects of any audit are: (a) To certify to the correctness of the financial position as shown in the balance sheet, and the accompanying revenue statements, (b) The detection of errors, (c) The detection of fraud. The detection of fraud is generally regarded as being of primary importance'." Thus the word has a specific connotation in the matter of examination, investigation and auditing of accounts, where detection of fraud is of primary importance. The ....
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.... exclusion, the provision is arbitrary being violative of article 14. (b) The practice of sales tax accounts was open to all including chartered accountants, advocates and tax practitioners. The chartered accountant who happens to pass the examination and has no expertise to adjudicate upon the legality or otherwise of the assessees' claims of sales tax law can issue certificate. Similarly chartered accountants however, senior they may be, who have not practised sales tax law and who could not gather experience can issue certificate. There is no relation with object of the enactment for such arbitrary selection of class without relation to their authority, efficiency or otherwise. The sole object and purpose of section 61(1) is that every dealer who is covered by sub-section (a) and (b) should get their returns verified and get their tax liability assessed by a professional so as to enable them to provide the information required to furnish a report under rule 65 and to fill out form 704. There is no other purpose behind section 61. This purpose and object completely exhausts the scope of section 61. If this being so, the requirement of C. A. alone for the certification in f....
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.... section 61 audit is of routine nature. In that sense, on a lower pedestal requiring no investigation, when compared to the section 22 audit. If section 22 audit can be conducted by an officer who may not be a chartered accountant, then there is no reason why section 61 audit cannot also be conducted by a person who is not a chartered accountant. Section 61 which requires audit only by a chartered accountant, therefore, is discriminatory. Reliance is placed on Municipal Corporation of Grater Bombay v. Thukral Anjali Deokumar [1989] 2 SCC 249. (e) Section 61 also suffers from arbitrariness as it violates article 14 by being classificatory. Section 61(1)(a) and (b) creates two classes. If the object of the section 61 is to create a class of tax-payers who would be liable to pay tax, then the classification with reference to turnover exceeding Rs. 40 lakhs is understandable. However, the creation of another class under section 61(1)(b), namely, dealers in liquor, irrespective of their turnover is an arbitrary classification, having no nexus with the object of section 61, viz., to tax traders whose turnover exceeds Rs. 40 lakhs. (f) Similarly, the advocates qualified are denied r....
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....t of work of income-tax audit to a specialised chartered accountant. There is now to be a separate C.A. for sales tax audit. The industries also have to engage a sales tax practitioner or advocates for their sales tax returns and day-to-day guidance. The audit charges to be paid to C.A. are perceptively heavy. The industry will have to pay heavy burden by way of audit fees. This is a direct impediment to trade and cuts into their net profit. This additional compliance cost in terms of money and waste of time is an added impediment. This additional payment to the C.A. would, in pith and substance, amount to compulsory levy amounting to tax by the State in contravention of article 265 of the Constitution of India. (j) The provisions for punishment to a dealer for not engaging C.A. are highly penal and without any cap. It is difficult to get a qualified C.A. to take up audit within a short time as provided in the Act and the C.A. usually depends upon the sales tax practitioner of the dealer for his audit. This creates anxious time for the dealer and source of tension. The impugned provision does not serve any purpose of revenue under the MVAT Act. The provisions are therefore, unre....
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....ng Standards Board of IFAC in the year 2002-2003 stands converted into independent Accounting Standards Board (ISAB). The Board, to start with, adopted the Accounting Standards (AS) issued by IFAC and now is in the process of revision of some of these standards. The AS are very complex and there are major variances in respect of turnover of sales and purchases accounted as per AAS in the profit and loss account of the enterprise and turnover of sales and purchases which is required to be considered for the purpose of levy of tax under the Maharashtra Value Added Tax Act, 2002. Clear cut comments on the major changes made by any firm in a given period in respect of accounting system, method of valuation of stocks and business model, etc., are required from the auditor. These are complex accounting and audit issues which advocates, sales tax practitioners' and company secretaries are not professionally qualified to handle. Section 29 of the Advocates Act, 1961 provides that advocates would be the only class of persons to "practice the profession of law". Section 33 of the Advocates Act bars any other professional to practice in any court or before any authority, etc. Section 4....
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....d Union Territories have introduced VAT either in the year 2005-06 or in the year 2006-07. Information about audit provision in two States, i.e., Nagaland and Mizoram is not available. Out of the remaining 28 States, four States (Haryana, Himachal Pradesh, Sikkim and West Bengal) have no provision for audit from independent professionals. Thirteen States and Union Territories have called for an audit report under the VAT Act exclusively from chartered accountants. These States are (i) Arunachal Pradesh, (ii) Bihar, (iii) Chattisgarh, (iv) Goa, (v) Madhya Pradesh, (vi) Maharashtra, (vii) Manipur, (viii) Meghalaya, (ix) Punjab, (x) Rajasthan, (xi) Dadra and Nagar Haveli, (xii) Daman and Diu, (xiii) Chandigarh. Another 7 States have called for audit report only from professionals who have knowledge in the field of accountancy, i.e., chartered accountants or cost accountants. In those States the sales tax practitioners or advocates are not authorised to give the audit report, though they are allowed to represent before the authorities. These States are (i) Assam, (ii) Delhi, (iii) Kerala, (iv) Orissa, (v) Tripura, (vi) Jammu and Kashmir, (vii) Uttranchal. Only four States have allowed ....
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....ut even after verification of books of account, the turnover which could be subjected to tax. Reference is then made to various columns of form 704 and it is explained as to why it is only experts in the field of accounts and audit who can carry out the work to find out whether the records have been correctly and completely maintained. Though various judgments have been cited, it is only to the extent that they are required to be considered, will they be considered as the challenge on the grounds of articles 14 and 19(1)(g) are well-settled and the tests are based on the objects of the statute and the nature of the infraction challenged. There is no direct challenge to "accountant" within the meaning of the Explanation to section 61 doing the work of audit and certification. The contention is to the exclusion of advocates and sales tax practitioners from doing the work of audit and certification. The challenge to the reasonability of the provision must be understood in that context. The substantial challenge is to the classification. To consider the challenges under articles 14 and 19(1)(g), we may at once refer to section 44AB of the Income-tax Act, 1961. This provision as i....
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....ent year." Section 44AB thus also requires every person who carries on business and if his total sales, turnover or gross receipts as the case may be, in business exceed or exceeds forty lakh rupees in any previous year or years relevant to the assessment year to get the accounts audited in the manner prescribed. Explanation to section 44AB provides that "accountant" shall have the same meaning as in the Explanation below sub-section (2) of section 288. Explanation to section 288 defines "accountant" to mean "the chartered accountant within the meaning of Chartered Accountants Act, 1949 and includes by virtue of provisions of sub-section (2) of section 226 of the Companies Act any person who is entitled to be appointed to act as auditor of companies registered in that State." Before the Madras High Court, the challenges were considered in the case of R. Sathya Moorthy v. Union of India [1991] 189 ITR 491. This judgment came up for consideration before the Supreme Court in an appeal, in T.D. Venkata Rao v. Union of India [1999] 237 ITR 315; AIR 1999 SC 2242. The challenge to the validity of the section before the Madras High Court, the challenge made was on behalf of in....
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....d) Such report to be submitted in the prescribed form. (e) The form should be duly signed and verified by such accountant. (f) Such particulars and certificates as may be prescribed to be set forth. Rule 65 would demonstrate that the report of an audit is to be submitted in form No. 704 and it is not that an audit is to be conducted in form No. 704. The various submissions now made under articles 14 and 19 in the challenge to section 61 were also advanced whilst challenging section 44AB of the Income-tax Act before the various High Courts. The Madras High Court had referred to judgments of various other High Courts which had decided the challenge to section 44AB. The judgments of the High Courts are Mohan Trading Co. v. Union of India [1985] 156 ITR 134 (MP), Rajkot Engineering Association v. Union of India [1986] 162 ITR 28 (Guj). Abhay Kumar and Co. v. Union of India [1987] 164 ITR 148 (Raj), A.S. Sarma v. Union of India [1989] 175 ITR 254 (AP) and T.S. Nataraj v. Union of India [1985] 155 ITR 81 (Karn). In Mohan Trading Co. [1985] 156 ITR 134 (MP) the main contentions which were raised and rejected by the learned Bench of the Madhya Pradesh High Court were: The....
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....t the economic system does not result in concentration of wealth to the common detriment. The report which an auditor has to submit containing the statement of particulars as prescribed under rule 6G(2)(a) in form No. 3CD would certainly advance the purpose of the statute. The provisions are not unreasonable or arbitrary. Non-chartered accountants from amongst the authorised representatives would not be competent to discharge onerous responsibility cast upon the chartered accountant having regard to the expertise achieved as a result of their academic knowledge and practical experience. The chartered accountant by his very privileged status exposes himself to the consequences of civil liability for negligence, specific statutory liabilities such as misfeasance under the Companies Act, liability for professional misconduct in disciplinary proceedings under the Chartered Accountants Act, 1949 and sometimes to criminal liability under the Penal Code. It, therefore, cannot be said that Parliament, by selecting chartered accountants from amongst various representatives to act as tax auditors has given a preferential treatment to them vis-a-vis the non-chartered accountants' segme....
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....ed accountants in the matter of accounts. The argument therefore, that the effect of such a provision will be to exclude all other categories of authorised representatives except the chartered accountants from carrying on their profession is liable to be rejected, as they constitute two distinct class having a nexus with the object of the provisions, which is prevention of evasion of tax dues. (ii) The contention that such a provision brings in an oppressive restriction is also liable to be rejected as auditing accounts is a specialised job. It may be true that some income-tax practitioners may also acquire that skill by sheer practice without passing the necessary examination. But that does not preclude Parliament from prescribing special qualifications with reference to the auditing of accounts. (iii) Legal practitioners and chartered accountants are equal for the purpose of representation of assessees before assessing authority but they are not equals for the purpose of compulsory audit. The preferential treatment given to the chartered accountants for the purpose of compulsory audit does not militate against the rule of equality under article 14 of the Constitution. The t....
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.... various other requirements. Suffice it to say that it is a specialised job which can only be undertaken by the person professionally competent and trained to audit. Advocates are not qualified as observed by the Supreme Court in T.D. Venkata Rao v. Union of India [1999] 237 ITR 315; AIR 1999 SC 2242. The other sales tax practitioner and retired employees definitely not. The settled law on the subject is that as long as the twin tests of reasonableness of the classification and nexus with the object are satisfied, wisdom of legislation cannot be substituted. The State Legislature is free to decide in its wisdom as to how best to safeguard the State revenue. Different States may adopt different standards and policy of one Legislature may not be adopted by another Legislature as the matter lies in the domain of policy making. Because some States have permitted sales tax practitioners to carry on audit need not necessarily mean that as the Legislature of the State of Maharashtra has not so provided, that would be arbitrary or that the classification considering the nexus of the object is arbitrary. It is for the State Legislature to decide how to protect its revenue and this is mor....
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.... of Commercial Taxes [2002] 127 STC 177 (AP), the constitutional validity of sub-rule (5A) of rule 17 of the Andhra Pradesh General Sales Tax Rules, 1957 had come up for challenge. The rule required that any dealer whose total turnover is not less than 40 lakhs of rupees, shall get the accounts maintained by him for any year, audited by a chartered accountant within the meaning of the Chartered Accountants Act, 1949 and shall furnish to the assessing authority, a certificate of such audit in form XXXVII and a statement in form XXXVII along with the statements in forms A.R.I., A.R.II, and A.R. IV. The challenge made was that the rule is unreasonable and violative of the right to carry on a profession under article 19(1)(g). The challenge was rejected. No doubt what was considered there was an exercise in subordinate legislation. We may consider the challenge under article 19(1)(g). Does section 61 prohibit the petitioner from carrying on their profession or does it amount to an unreasonable restriction not protected by article 19(6). In so far as lawyers are concerned, the Supreme Court in V. Sasidharan v. Peter and Karunakar [1984] 4 SCC 230 has held that traditionally lawyers d....
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.... one of the contentions raised was that sale by the company of its assets would affect their fundamental right under article 19(1)(g). The court held that closure of an establishment does not infringe his fundamental right to carry on an occupation or the fact that some workers may eventually be retrenched. At the highest, it will only amount to a restriction. Such restriction can be imposed considering article 19(6) of the Constitution of India which provides that it is open to the State in the interest of general public to impose reasonable restrictions on th exercise of right conferred on such class. Apart from that it is further provided that nothing in sub-clause (6) shall prevent the State from making any law relating to professional or technical qualification necessary for practicing the profession, trade or business as the case may be. In other words, apart from the power conferred on the State to impose reasonable restrictions under article 19(6), there is a further power conferred under article 19(6) of laying down professional or technical qualifications necessary for practicing the profession as in the instant case. Considering the tests laid down in MRF Ltd. v. Inspect....
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....eading, practice nor acting. For the reasons already discussed, we find that the challenge to the constitutional validity of the legislation under articles 14 and 19 at the instance of the Bar Council will also have to be rejected. That leaves us with the additional submission made in Writ Petition No. 1777 of 2007, the issue of competence of the State Legislature. The petitioner does not dispute that in the matter of enacting the law pertaining to recovery of sales tax, the same clearly falls within entry 54 of the State List. If in the process of making legislation, the Legislature in its wisdom provides for the procedure in the manner in which tax has to be levied, maintenance of books, procedure for checking correctness or verification of books, we fail to see as to how the same amounts to ancillary legislation or procedure not falling within the competence of the State Legislature under entry 54. The Act requires that the dealer has to maintain books and the books have to be audited and required to be certified by a chartered accountant. That will not result in the legislation falling outside the competence of the State Legislature. The legislation, in pith and substance....