TaxTMI 
TaxTMI 
1985 (4) TMI 49
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....advocates who are on the rolls of one or the other Bar Council in the country, whose enrolment, conduct and other related matters are regulated by the Advocates Act of 1961 (Central Act No. 25 of 1961). A number of advocates, some of whom are petitioners before us, besides possessing a qualification in law which is necessary to enroll them as advocates, possess qualifications in commerce like a Degree of Bachelor in Commerce or a Master's Degree in Commerce or a Diploma in Commerce. With this added qualification that stands them in good stead, these advocates prepare the returns of their clients-tax payers-file them and then represent them before the original, appellate and revisional authorities under the Act. Some of the advocates, though they do not possess qualifications of Degree or Diploma in Commerce, have gained necessary experience in the preparation and filing of returns before the authorities. 5. Besides the advocates, there are others with qualifications such as Degree or Diploma in Commerce who have chosen to practise exclusively before the authorities under the Act. A large number of them are registered or recognised income-tax practitioners under Part XI of the ....
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....ive privilege conferred on the CAs, who may dictate their own terms against them. 10. In their common return, the respondents without admitting the correctness of the assertions and contentions urged by the petitioners assert that s. 44AB providing for compulsory audit exclusively by CAs who have superior qualifications and expertise to audit the accounts of big assessees had been enacted to check evasion of taxes and facilitate the administration, was not violative of arts. 14 and 19 of the Constitution and was in any event saved by art. 19(6) of the Constitution. 11. Sriyuths Viswanath Iyer, G. Sarangan, B. V. Katageri, B. P. Gandhi, K. B. Basavarajan and Kishore Mallya, learned advocates, have appeared for the petitioners. Whenever we refer to the arguments addressed by Sriyuths Viswanath Iyer or Sarangan, we should be understood as referring to all the learned counsel for the petitioners. 12. Sri. K. Srinivasan, senior standing counsel for the Income-tax Department, assisted by Sri H. Raghavendra Rao, junior standing counsel, appeared for the respondents. 13. Both sides in their elaborate and very painstaking arguments, extending for five days, have relied on a large number....
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.... or "bigger class" of assessees under the Act in these words: "2.144 Compulsory audit of accounts.-We think it would facilitate the administration of tax laws to a considerable extent if, simultaneously with the compulsory maintenance of accounts, there is a statutory provision for their mandatory audit, at least in the bigger cases. Audit would ensure that the books and records are properly maintained, and that they reflect faithfully the taxpayer's income (as shown in the books of account) and claims for deductions. Audit would also help in the proper presentation of the accounts before the tax authorities thereby making assessment proceedings more meaningful. Further, in a vast majority of cases, it would save considerable time of the assessing officers which is at present spent on carrying out routine verification, like correctness of totals and whether purchases and sales are properly vouched or not. The time thus saved could then be utilised for attending to more important investigational aspects of a case. The information which the auditor could be required to furnish with his certificate would also enable building up of information exchange for purposes of cross-verif....
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....turned income from business exceeds Rs. 50,000 and the returns are prepared by Chartered Accountants. 2.146. In the questionnaire issued by us, we had specifically elicited views on this subject. Most of the departmental officers who appeared before us welcomed the suggestion and there was near unanimity among them that this would also go a long way in fighting tax evasion. Even among taxpayers, we found a sizable support for the measure, which they felt would smoothen proceedings before the income-tax authorities. Some of the persons who appeared before us have, however, expressed their fears that a provision for compulsory audit of accounts might put an undue burden on the taxpayer. We concede that this may no doubt be true in the case of small business or professional men or persons deriving income from other sources. We are, therefore, of the view that such persons should not be required to get their accounts audited. The requirement of compulsory audit of accounts should be applicable to persons engaged in business or profession where the income or turnover/receipts exceed certain specified limits. 2.147. Doubts have also been expressed whether enough qualified auditors wi....
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....aining facts and figures that could be relied upon. To the extent the time and effort of the Income-tax Officer now spent on gathering requisite information and verifying its correctness is saved, he would be enabled to apply himself more fruitfully to complicated aspects of law and investigation. We, therefore, recommend that a provision be introduced in the law making presentation of audited accounts mandatory in all cases of business or profession where the sales/turnover/receipts exceed Rs. 5 lakhs or the profit before tax exceeds Rs. 50,000. We further recommend that form of audit report be prescribed taking due note of the manner in which documents, records and books are maintained in the non-corporate sector. Auditor's report should include, among other things, pertinent information like the following: 1. Scope of examination-whether full check, test-check or mere reconciliation-in order to satisfy that purchases, sales, income and expenses are properly accounted for and balance-sheet is properly drawn up. 2. Nature of security offered for obtaining secured loans. Particulars of security not recorded or accounted for in the books to be stated. 3. Computation of ad....
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....he profession has developed, the role of the auditors has obviously come under a cloud. Some auditors have set themselves up as management consultants, directors, businessmen, income-tax experts (sic). They seem to do almost everything else other than searching audit. There can be no doubt that when an auditor starts to sell management and 'other' advice and offers various unspecified services, he immediately compromises his objectivity. Virtually one ends up with a situation where the company that has purchased the 'services' of the auditors in various forms follows the recommendations of its own auditor consultant leaving little else for ' audit'. In some cases at least it would mean that the auditors concerned are being asked to pass on their own firms 'other work'. And these instances are by no means small. A study of 501 companies showed that payments to auditors for services other than auditing were is high as 60 to 65 per cent. of the total payment made to the auditors by these companies. There are also cases where travelling and other allowances (which are usually reserved for salaried employees) are paid to auditors. Difficulties arise bec....
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....a corps of audit firms exclusively doing audit work on the lines of specialised legal and medical services. (ii) No auditor should be allowed any position on the board of directors of any company so long as he continues to be a professional auditor. Any auditor who prefers to be a director of a company or engage himself in tax consultancy work, system, design or any other similar work should be debarred from audit work. (iii) Any complaint on the accuracy of audit made by 10 per cent. of the shareholders (present and voting at a general body meeting) should be compulsorily followed up by an independent investigation. (iv) In order to reduce concentration of audit business among selected firms, a system of rotation should be followed whereby no audit firm is allowed to audit the accounts of the same client for more than three years. (v) As general rule, a supervisory audit should be undertaken every three years by an audit firm other than the one contractually employed as auditor of a particular company. The supervisory audit should be done by an auditor nominated by the Comptroller and Auditor-General of India. (vi) The Company Law should be amended to define the role of ....
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....rtered accountants are likely to cause harassment, inconvenience and unnecessary expense to the assessees particularly in the mofussil areas and other places where chartered accountants are not readily available, without any corresponding substantial benefit to the Government revenue. Sub-clause (i) of clause 39 has been omitted accordingly. (ii) However, the Committee are of the opinion that in a case, where the nature and complexity of the accounts of the assessee and the interests of Government revenue so require, the Department should be empowered to direct the assessee to get his accounts audited by a chartered accountant and furnish a report of such audit in the prescribed manner. In order to see that no harassment is caused to the assessee and he is not put to unnecessary expense, the decision to get his accounts audited should be taken at the level of the Commissioner of Income-tax and the chartered accountant for the purpose should also be nominated by him. Clause 44 has been amended accordingly." 23. The Bill as modified by the Select Committee and passed by Parliament as the Taxation Laws (Amendment) Act of 1975 (Central Act No. 41 of 1975) (1975 Act), inter alia, i....
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....ious year which expired last before the commencement of that assessment year or the 30th June of such assessment year, whichever date falls later. The proposed amendment will take effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years." 25. On this aspect, the Hon'ble Finance Minister in introducing the 1984 Bill and his budget proposals stated in Parliament thus : " With the reduction in rates and expeditious disposal of assessments, I believe there can now be no excuse for any leniency to be shown to those who abuse our laws. Such cases will necessarily have to be dealt with severely. In order to discourage tax avoidance and tax evasion, I am also introducing some further measures. In all cases where the annual turnover exceeds Rs. 20 lakhs or where the gross receipts from a profession exceed Rs. 10 lakhs, I am providing for a compulsory audit of accounts. This is intended to ensure that the books of account and other records are properly maintained and faithfully reflect the true income of the taxpayer." 26. The 1984 Bill enacted as the Finance Act of 1984 (Central Act No. II of 1984), introduced s. 44A....
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....siness" and "profession", reads thus : " FORM No. 3CA [See rule 6G(1)(a)] Audit Report under section 44AB of the Income-tax Act, 1961, in case where the accounts of the business of a person have been audited under any law by an accountant. *I/We have to report that the statutory audit of...... (name and address of the assessee) (Permanent Account No....... )was conducted by *me/us M/s.............. chartered accountants/auditors of companies, in pursuance of the provisions of the...... Act, and *I/We annex hereto a copy of *my/our audit report dated...... along with a copy each of the audited profit and loss account for the year ended on...... and a copy of the audited balance-sheet as at...... along with the documents declared by the relevant Act to be part of, or annexed to, the profit and loss account and balance-sheet. A further report as required under the proviso to section 44AB is furnished in Form No. 3CD annexed hereto. In *my/our opinion and to the best of *my/our information and according to explanations given to *me/us, the particulars given in Form No. 3CD are true and correct. Place: (Sd.) ............ Date: **Accountant Notes : 1. *Delete whichever is....
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...., in relation to any State, is, by virtue of the provisions of sub-section (2) of section 226 of the Companies Act, 1956 (1 of 1956), entitled to be appointed to act as an auditor of companies registered in that State. 28. Clause 13 of the Finance Bill of 1985 (Bill No. 49 of 1985), introduced in the Lok Sabha to give effect to the financial proposals of the Central Government for the year 1985-86, proposes to delete the words "by an accountant" in the proviso to s. 44AB of the Act. As this is in the stage of a bill, we exclude the same from our consideration. 29. With this backdrop of legislation, we now turn to ascertain the true scope and ambit of s. 44AB of the Act bearing in mind the well-settled rules of construction of statutes, one of which is that a machinery provision in a taxation measure must be construed so as to effectuate the charging provisions or the tax measure as such. 30. The heading of a section gives a clue to the understanding of a section though it cannot control the plain language of the section itself. The heading of s. 44AB, viz., Audit of accounts of certain persons carrying on business or profession provides for audit of certain class of persons or c....
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....tion to those persons whose accounts are compulsorily audited under other laws in the country, like the Companies Act or the Co-operative Societies Act. But, here also the exemption is not absolute but is subject to the conditions stipulated in the proviso itself. The proviso only recognises the audit of accounts carried on by those who are authorised by other laws to perform those functions here to before. The proviso requires the person carrying on business or profession but is governed by other laws to furnish a report and the particulars in the form prescribed by the Board. 35. The explanation appended to the section only defines the terms "accountant" and the "specified date". The word "accountant" means a chartered accountant who is a member of the institute under the CA Act. The word "specified date" has been defined as the date of expiry of four months from the end of the previous year or where there is more than one previous year from the end of the previous year which expires last before the commencement of the assessment year or the 30th day of June of the assessment year, whichever is later. The specified date defined in s. 44AB has relevance to the specified date befo....
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....1960] 2 SCR 592; AIR 1960 SC 548; Kangshari Halder v. State of West Bengal [1960] 2 SCR 646; AIR 1960 SC 457 ; Jyothi Pershad v. Administrator for the Union Territory of Delhi [1962] 2 SCR 125; AIR 1961 SC 1602 and State of Gujarat v. Shri Ambica Mills Ltd. [1974] 3 SCR 760; AIR 1974 SC 1300. But as observed by Mathew J. in the last mentioned case: 'It would be an idle parade of familiar learning to review the multitudinous cases in which the constitutional assurance of equality before the law has been applied.' We have, therefore, confined our attention to those cases only in which special tribunals or courts were set up or special judges were appointed for trying offences or classes of offences or cases or classes of cases. The survey which we have made of those cases may be sufficient to give a fair idea of the principles which ought to be followed in determining the validity of classification in such cases and the reasonableness of special procedure prescribed for the trial of offenders alleged to constitute a separate or distinct class. 39. As long back as in 1960, it was said by this court in Kangshari Halder v. State of West Bengal [1960] 2 SCR 646 ; AIR 1960 SC 457....
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....ersons or things. The courts should not insist on delusive exactness or apply doctrinaire tests for determining the validity of classification in any given case. Classification is justified if it is not palpably arbitrary. 4. The principle underlying the guarantee of article 14 is not that the same rules of law should be applicable to all persons within the Indian territory or that the same remedies should be made available to them irrespective of differences of circumstances. It only means that all persons similarly circumstanced shall be treated alike both in privileges conferred and liabilities imposed. Equal laws would have to be applied to all in the same situation, and there should be no discrimination between one person and another if as regards the subject-matter of the legislation their position is substantially the same. 5. By the process of classification, the State has the power of determining who should be regarded as a class for purposes of legislation and in relation to a law enacted on a particular subject. This power, no doubt, in some degree is likely to produce some inequality; but if a law deals with the liberties of a number of well-defined classes, it is n....
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....atute. If the administrative body proceeds to classify persons or things on a basis which has no rational relation to the objective of the legislature, its action can be annulled as offending against the equal protection clause. On the other hand, if the statute itself does not disclose definite policy or objective and it confers authority on another to make selection at its pleasure, the statute would be held on the face of it to be discriminatory, irrespective of the way in which it is applied. 10. Whether a law conferring discretionary powers on an administrative authority is constitutionally valid or not should not be determined on the assumption that such authority will act in an arbitrary manner in exercising the discretion committed to it. Abuse of power given by law does occur; but the validity of the law cannot be contested because of such an apprehension. Discretionary power is not necessarily a discriminatory power. 11. Classification necessarily implies the making of a distinction or: discrimination between persons classified and those who are not members of that class. It is the essence of a classification that upon the class are cast duties and burdens different f....
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....a Bench of seven judges of this court, it is binding upon us. That decision sets out several propositions delineating the true scope and ambit of article 14 but not all of them are relevant for our purpose and, hence, we shall refer only to those which have a direct bearing on the issue before us. They clearly recognise that classification can be made for the purpose of legislation but lay down that: 1. The classification must not be arbitrary but must be rational, that is to say, it must not only be based on some qualities or characteristics which are to be found in all the persons grouped together and not in others who are left out but those qualities or characteristics must have reasonable relation to the object of the legislation. In order to pass the test, two conditions must be fulfilled, namely, (1) that the classification must be founded on an intelligible differentia which distinguishes those that are grouped together from others, and (2) that that differentia must have a rational relation to the object sought to be achieved by the Act. 2. The differentia which is the basis of the classification and the object of the Act are distinct things and what is necessary is tha....
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....ivities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion, etc. It has been said by no less a person than Holmes J., that the Legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or strait-jacket formula and this is particularly true in the case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Doud [1957] 354 U S 457, where Frankfurter J., said in his inimitable style : ` In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The Legislature after all has the affirmative responsibility. The courts have only the power to destroy....
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....ide and inspire the Legislature in dealing with complex economic issues." 41. In E.P. Royappa v. State of Tamil Nadu, AIR 1974 SC 555, Bhagwati J., speaking for himself and also on behalf of Chandrachud J. (as His Lordship then was) and Krishna Iyer J., evolved the principle that arbitrariness was the very antithesis of the rule of law enshrined in art. 14 of the Constitution in these words (p. 583): " We cannot countenance any attempt to truncate its all embracing scope and meaning, for to do so would be to violate its activist magnitude. Equality is a dynamic concept with many aspects and dimensions and it cannot be 'cribbed, cabined and confined' within traditional and doctrinaire limits. From a positivistic point of view, equality is antithetic to arbitrariness. In fact equality and arbitrariness are sworn enemies; one belongs to the rule of law in a republic while the other, to the whim and caprice of an absolute monarch. Where an act is arbitrary, it is implicit in it that it is unequal both according to political logic and constitutional law and is therefore violative of article 14......" 42. In the later cases notably in Smt. Maneka Gandhi v. Union of India, AIR....
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....; AIR 1951 SC 118, Cooverjee's case, [1954] SCR 873; AIR 1954 SC 220 and M. B. Cotton Association Limited's case, AIR 1954 SC 634, the court considered the real question to be whether the interference with the fundamental right was 'reasonable' or not in the interests of the general public and that if the answer to the question was in the affirmative, the law would be valid and it would be invalid if the test of reasonableness was not passed. Prohibition was in all these cases treated as only a kind of 'restriction '. Any other view would, in our opinion, defeat the intention of the Constitution. After art. 19(1) has conferred on the citizen the several rights set out in its seven sub-clauses, action is at once taken by the Constitution in cls. 2 to 6 to keep the way of social control free from unreasonable impediment. The raison d'etre of a State being the welfare of the members of the State by suitable legislation and appropriate administration, the whole purpose of the creation of the State would be frustrated if the conferment of these seven rights would result in cessation of legislation in the extensive fields where these seven rights operate. Bu....
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.... that a law prohibiting the exercise of a fundamental right is in no case saved, cannot, therefore, be accepted. It is undoubtedly correct, however, that when, as in the present case, the restriction reaches the stage of prohibition, special care has to be taken by the court to see that the test of reasonableness is satisfied. The greater the restriction, the more the need for strict scrutiny by the court. In applying the test of reasonableness, the court has to consider the question in the background of the facts and circumstances under which the order was made, taking into account the nature of the evil that was sought to be remedied by such law, the ratio of the harm caused to individual citizens by the proposed remedy, to the beneficial effect reasonably expected to result to the general public. It will also be necessary to consider in that connection whether the restraint caused by the law is more than was necessary in the interests of the general public." 46. In Laxmi Khandsari's case, AIR 1981 SC 873, a Division Bench of the Supreme Court, speaking through Fazal Ali J., referring to all the earlier cases, in particular the two cases noticed earlier, has expressed on t....
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....ch is not defined in the Act or the General Clauses Act, is defined in the following dictionaries as hereunder: "Audit. ... 2. Official examination of accounts with verification by reference to witnesses and vouchers..." " Audit: 1. To make an official systematic examination of (accounts)..." (vide: Shorter Oxford English Dictionary, third edition revised with addenda page 122). "Audit: 1. (a): a formal or official examination and verification of books of account (as for reporting on the financial condition of a business at given date or on the results of its operations for a given period) (b) : methodical examination and review of a situation or condition (as within business enterprise) concluding with a detailed report of findings : rendering and settling of accounts. 2. the final report following a formal examination of books of account : an account as adjusted by auditors: final statement of account. 3. archaic: a judicial examination (as in a court) 4. Auditale. 5. a check of publishers' records to verify claims as to the extent of publication's circulation. Audit: 1. to examine and verify (as the books of account of a company or a treasurer's accounts) .......
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.... pattern in the United States where the States have set legal requirements for licensing. Most countries have specific agencies or departments charged with the auditing of their public accounts (e.g. the General Accounting Office in the United States and the cour des comptes in France). Internal auditing is relatively new, designed primarily to meet the needs of management. Internal auditors try to determine whether the requirements of the accounting system are being met effectively and also whether the system itself is adequate for management needs. Perhaps the most familiar type of "auditing is the administrative audit, or pre-audit, in which individual vouchers, invoices or other documents are investigated for accuracy and proper authorisation before they are paid or entered in the books..." An auditor is one who audits or is engaged in audit. What is true of an It "auditor" is also true of "audit". 49. In a number of cases, English and Indian courts had occasion to deal with the true role of an auditor either under their respective Companies Act or under the Acts regulating the profession of Chartered Accountants. Every one of those rulings that very aptly describe the ro....
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....he company in whom confidence is placed by the company. He is entitled to assume that they are honest, and to rely on their representations, provided he takes reasonable care. If there is anything calculated to excite suspicion he should probe it to the bottom; but in the absence of anything of that kind, he is only bound to be reasonably cautious and careful." 52. But, on these very observations of Lopes L.J., Ramaiya in his Guide to the Companies Act, 9th edition, page 513, referring to a ruling rendered by Lord justice Holmes in Irish Woollen Co. v. Tyson [1900] 26, the Accountant Law Reports, page 13, has this to say: "It has become commonplace to quote a figure of speech employed by Lopes L.J., in Re Kingston Cotton Mill Co. [1896] 2 Ch 279, and say that I the auditor is only a watch-dog and not a bloodhound, which, casting the metaphor aside, means that his duty is verification and not detection. But, does not verification extend to being vigilant ? Is not the watch-dog bound to bark and chase too where necessary ? If when sniffing round, you hit upon a trail of something wrong, surely you must follow it up and there is just as much obligation on the auditor, who is bound ....
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....alance-sheet is accurate according to the books of the company. If he did, he would be responsible for error on his part, even if he were himself deceived without any want of reasonable care on his part, say, by the fraudulent concealment of a book from him. His obligation is not so onerous as this. Such I take to be the duty of the auditor : he must be honest-i.e., he must not certify what he does not believe to be true, and he must take reasonable care and skill before he believes that what he certifies is true. What is reasonable care in any particular case must depend upon the circumstances of that case Where there is nothing to excite suspicion, very little inquiry will be reasonably sufficient, and in practice I believe businessmen select a few cases at haphazard, see that they are right, and assume that others like them are correct also. Where suspicion is aroused, more care is obviously necessary; but, still, an auditor is not bound to exercise more than reasonable care and skill, even in a case of suspicion, and he is perfectly justified in acting on the opinion of an expert where special knowledge is required." 54. In Fomento (Sterling Area) Limited v. Selsdon Fountain P....
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....t none have been omitted which ought to be included. He is not bound to accept the ipse dixit of the licensee that there are no other articles which attract royalty. He is entitled to check the accuracy of that assertion by inquiring the nature of any other articles which, it appears to him, may come within the patented field. If he cannot be sure, of his own knowledge, whether they attract royalty or not, he can take the advice of a patent agent, just as, within the legal sphere, he can take the advice of a lawyer." . 55. In Council of Chartered Accountants v. Shantaram Rao [1977] 1 Karnataka Law journal 256, a Division Bench of this court consisting of Venkataswami and Jagannatha Shetty JJ., dealing with a case of a disciplinary proceeding under the Chartered Accountants Act, vide pages 258 and 259 (paras. 8, 9 and 10) have referred to with approval to some of the cases noticed by us earlier. 56. In CIT v. Dandekar [1952] 22 ITR 235 (Mad) on which reliance was placed by Sri Viswanatha Iyer, the Madras High Court was dealing with the question whether a chartered accountant who had audited the accounts or the returns of an assessee filed before the ITO under the earlier I.T. Act ....
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....accounts which is both a science and an art. Any and every one cannot claim the qualifications and status of a chartered accountant. We can with certainty hold that a CA has the necessary qualification, skill and expertise to audit the accounts required to be filed under the Act. While this is the position of chartered accountants, we cannot hazard to say the same so far as the ITPs are concerned. The class of ITPs cannot compare themselves with the class of CAs. We are here concerned with the superior and special qualifications possessed and recognised by law and not with the individual and special attainments, if any, attained by an individual and not recognised by law. As pointed out by Cardozo J. in Stewart Dry Goods Co. v. Lewis (294 Us 550) quoted with approval by our Supreme Court in Kodar v. State of Kerala [1974] 34 STC 73, the "law builds on the probables only" and cannot possibly comprehend all conceivable situations at any rate in one measure, in any event at one time. What emerges from this discussion is that the ITPs who belong to a separate class cannot compare themselves with the class of chartered accountants that have special qualifications and expertise to do the....
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....at the exclusive right or privilege conferred on chartered accountants should alone be struck down which would necessarily enable all the ITPs to attend to the requirements of s, 44AB of the Act. 66. The arguments of Sri Sarangan are attractive at the first sight. But, close examination of the same shows that it has no merit and is even fraught with serious adverse implications. The reasons given by us earlier equally justify the rejection of this contention also. Even otherwise, we find it difficult to take exception only to the right or privilege conferred on chartered accountants, invalidate the same and thus render the provision itself as unworkable. We see no merit in this contention of Sri Sarangan and reject the same. 67. We have earlier indicated that taxpayers have the weakest case. The bigger cases of bigger assessees whose transactions exceed the specified amounts cannot compare themselves with those that do not exceed the specified limit. Every one of the reasons on which we have held that the provision is not arbitrary and is not violative of article 14, apply with greater force to reject the challenge of the taxpayers. We have, therefore, no hesitation in rejecting ....