AI Drafter 
TaxTMI 
TaxTMI 
1985 (4) TMI 49
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....refer to them as ITPS. 4. The ITPs consist of 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 recogn....
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....ardships and difficulties they are exposed to by the exclusive 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 painstakin....
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....ommittee recommended for compulsory audit of accounts in the "bigger cases" 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....
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.... to provide for furnishing of certain additional information in all cases in which the returned 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....
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.... verification of accounts than an Income-tax Officer, auditor's services could be usefully harnessed for obtaining 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 ....
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....ation that absolves auditors of all responsibilities for certifying financial jugglery, black-money manipulation, inventory and other irregularities. In the manner in which the 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 aud....
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....not be allowed to render any service other than the professional service of auditing. Those auditors who prefer to render `other services' should not be allowed to take up audit work. The idea is to develop 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 t....
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....dit by a CA and the recommendation made thereon is in these words: "35. Clauses 38 and 43 (Original clauses 39 and 44) :-(i) The Committee feel that the proposed provisions of clause 39 requiring compulsory audit of accounts of persons (not being companies) by chartered 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 charter....
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....tion below section 288(2) of the Income-tax Act. The expression `specified date', in relation to the accounts of the previous year or years relevant to any assessment year, means, the date of the expiry of four months from the end of that year or where there is more than one previous year, from the end of the previous 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 p....
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....of this section, the Central Board of Direct Taxes (Board) has framed detailed rules on January 31, 1985, prescribing the forms of audit reports or certificates that should be furnished by the auditors or CAs and the details of statements that should accompany such audit reports. The forms of audit reports which should be furnished by CAs or the auditors in the case of persons carrying on "business" 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 ....
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.... to the best of *my/our information and according to explanations given to *me/us, these are true and correct. Place......... ........... Signed Date: **Accountant Notes : 1. *Delete whichever is not applicable. 2. Where any of the matters stated in this report is answered in the negative or with a qualification, the report shall state the reasons therefor. 3. **This report has to be given by (i) a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 1949), or (ii) any person who, 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 leg....
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....revious year or years audited by CA of their choice before the specified date and obtain a report of such audit in the prescribed form duly signed and verified by him furnishing the particulars stipulated in the rules made by the Board and annex them to their returns filed under s. 139 of the Act. When a return of any such person is not accompanied with an audit report and the particulars prescribed by the rules, then the assessing authority is required to exercise his powers under s. 139(9) of the Act and enforce its compliance thereto under the Act. 34. The proviso to s. 44AB only carves out an exception 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. ....
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....and ambit, even observing that the avalanche of cases on that article had even made it platitudinous. In that case, the court summarised the true scope and ambit of art. 14 of the Constitution in these words (p. 508) : " 72. There are numerous cases which deal with different facets of problems arising under article 14 and which set out principles applicable to questions which commonly arise under that article. Among those may be mentioned the decisions in Budhan Choudhry v. State of Bihar [1955] 1 SCR 1045; AIR 1955 SC 191 ; Ram Krishna Dalmia v. Tendolkar [1959] SCR 279; AIR 1958 SC 538; Emden v. State of UP [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 ....
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....e circumstances. 2. The State, in the exercise of its governmental power, has of necessity to make laws operating differently on different groups or classes of persons within its territory to attain particular ends in giving effect to its policies, and it must possess for that purpose large powers of distinguishing and classifying persons or things to be subjected to such laws. 3. The constitutional command to the State to afford equal protection of its laws sets a goal not attainable by the invention and application of precise formula. Therefore, classification need not be constituted by an exact or scientific exclusion or inclusion of persons 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 circ....
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....ies proposed to be imposed, it does not forbid classification for the purpose of legislation, provided such classification is not arbitrary in the sense above mentioned. 9. If the legislative policy is clear and definite and as an effective method of carrying out that policy, a discretion is vested by the statute upon a body of administrators or officers to make selective application of the law to certain classes or groups of persons, the statute itself cannot be condemned as a piece of discriminatory legislation. In such cases, the power given to the executive body would import a duty on it to classify the subject-matter of legislation in accordance with the objective indicated in the statute. 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 a....
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.... of article 14 has been the subjectmatter of discussion in numerous decisions of this court and the propositions applicable to cases arising under that article have been repeated so many times during the last 30 years that they now sound platitudinous. The latest and most complete exposition of the propositions relating to the applicability of article 14 as emerging from the 'avalanche of cases which have flooded this court' since the commencement of the Constitution is to be found in the judgment of one of us (Chandrachud J., as he then was) in Special Courts Bill, 1978, In re [1979] 2 SCR 476; AIR 1979 SC 478. It not only contains a lucid statement of the propositions arising under article 14, but being a decision given by 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 ....
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....the burden is upon him who attacks it to show that there has been a clear transgression of the constitutional principles. This rule is based on the assumption, judicially recognised and accepted, that the legislature understands and correctly appreciates the needs of its own people, its laws are directed to problems made manifest by experience and its discrimination is based on adequate grounds. The presumption of constitutionality is indeed so strong that in order to sustain it, the court may take into consideration matters of common knowledge, matters of common report, the history of the times and may assume every state of facts which can be conceived existing at the time of legislation. Another rule of equal importance is that laws relating to economic activities 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 de....
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....ture to anticipate as if by some divine prescience, distortions and abuses of its legislation, which may be made by those subject to its provisions, and to provide against such distortions and abuses. Indeed, howsoever great may be the care bestowed on its framing, it is difficult to conceive of a legislation which is not capable of being abused by perverted human ingenuity. The court must, therefore, adjudge the constitutionality of such legislation by the generality of its provisions and not by its crudities or inequities or by the possibilities of abuse of any of its provisions. If any crudities, inequities or possibilities of abuse come to light, the Legislature can always step in and enact suitable amendatory legislation. That is the essence of pragmatic approach which must guide 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): ....
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....osophy and the scale of values of the judges participating in the decision should play an important part, and the limit to their interference with legislative judgment in such cases can only be dictated by their sense of responsibility and self-restraint and the sobering reflection that the Constitution is meant not only for people of their way of thinking but for all, and that the majority of the elected representatives of the people have, in authorising the imposition of the restrictions, considered them to be reasonable." 45. In Narendra Kumar v. Union of India, AIR 1960 SC 430, a Constitution Bench of the Supreme Court, reviewing the earlier cases, explained the scope and ambit of this article in these words (p. 435): "It is clear that, in these three cases, viz., Chintamanrao's case, [1950] SCR 759; 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, ....
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.... of the contravention, be void...' As it was to remedy the harm that would otherwise be caused by the provisions of art. 13, that these saving provisions were made, it is proper to remember the words of art. 13 in interpreting the words 'reasonable restrictions' on the exercise of the right as used in cl. (2). It is reasonable to think that the makers of the Constitution considered the word ' restriction' to be sufficiently wide to save laws 'inconsistent ' with art. 19(1), or 'taking away the rights ' conferred by the article, provided this inconsistency or taking away was reasonable in the interests of the different matters mentioned in the clause. There can be no doubt therefore that they intended the word 'restriction ' to include cases of ' prohibition ' also. The contention 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 rest....
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....e in public interest and manifestly reasonable. Further, restrictions may be partial or complete, permanent or temporary but they must bear a close nexus with the object in the interest of which they are imposed. Sometimes even a complete prohibition of the fundamental right to trade may be upheld if the commodity in which the trade is carried on is essential to the life of the community and the said restriction has been imposed for a limited period in order to achieve the desired goal. Another important consideration is that the restrictions must be in public interest and are imposed by striking a just balance between the deprivation of right and danger or evil sought to be avoided ........ 47. Bearing these principles, it is necessary to examine the challenge of the petitioners based on arts. 14 and 19 of the Constitution. 48. The term "audit" which 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)..." (vi....
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....ccounting specialists who are not the same accountants responsible for their preparation. Public auditing by independent accountants has acquired professional status and become increasingly common with the rise of large business units and the separation of ownership from control. The public accountant performs tests to determine whether the management's statements fairly present the firm's financial position and operating results; such independent evaluations of management reports are of interest to actual and prospective shareholders, bankers, suppliers, lessors and government agencies. In English speaking countries, public auditors are usually certified, and high standards are encouraged by professional societies. Most European and former British Commonwealth nations follow the example of Great Britain, where Government-chartered organizations of accountants have developed their own admission standards. Other countries follow the 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 U....
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.... follows: 'He must exercise such reasonable care as would satisfy a man that the accounts are genuine, assuming that there is nothing to arouse his suspicion of honesty and if he does that, he fulfils his duty; if his suspicion is aroused, his duty is to probe the thing to the bottom and tell the directors of it and get what information he can " (Vide also the observations in In re London and General Bank (No. 2) LI 985] 2 Ch 673 ; In re Kingston Cotton Mill Co. (No. 2) [1896] 2 Ch 279 and In re City Equitable Fire Insurance Co. Limited. [1925] Ch. 407 (CA))'." 51. In the oft-quoted celebrated passage, Lopes L.J., in c re Kingston Cotton Mill Company (No. 2) [1896] 2 Ch 279 (CA) at p. 288, explains the role of an auditor in these words: " An auditor is not bound to be a detective, or ......... to approach his work ...... with a foregone conclusion that there is something wrong. He is a watch-dog, but not a bloodhound. He is justified in believing tried servants of the 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 anythin....
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....#39;s true position. He must take reasonable care to ascertain that they do so. Unless he does this, his audit would be worse than an idle farce. Assuming the books to be so kept as to show the true position of a company, the auditor has to frame balance-sheet showing that position according to the books and to certify that the balance-sheet presented is correct in that sense. But, his first duty is to examine the books, not merely for the purpose of ascertaining what they do show, but also for the purpose of satisfying himself that they show the true financial position of the company. This is quite in accordance with the decision of Stirling J., in Leeds Estate Building and Investment Co. v. Shepherd [1887) 36 Ch D 787, 802. An auditor, however, is not bound to do more than exercise reasonable care and skill in making inquiries and investigations. He is not an insurer; he does not guarantee that the books do correctly show the true position of the company's affairs; he does not even guarantee that his balance-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 re....
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....or instance, a point of law arising in the course of auditing a company's accounts. He may come upon a payment which, it appears to him, may be unlawful in that it may not be within the powers of the corporation, or improper in that it may have no warrant or justification. He is then not only entitled but bound to inquire into it and, if need be, to disallow it, see Roberts v. Hopwood (1925] AC 578, 605 ; 41 TLR 436 and In re Ridsdel [1947] Ch 597, 604; [1947] 2 All ER 312. It may be, of course, that he has sufficient legal knowledge to deal with it himself, as many accountants have, but if it is beyond him he is entitled to take legal advice on the principle stated in Bevan v. Webb [1901] 2 Ch 59, 75 ; 17 TLR 440, that 'permission to a man to do an act, which he cannot do effectually without the help of an agent, carried with it the right to employ an agent'. So also with an auditor who is employed for the purpose of checking the royalties payable. It is part of his duty to use reasonable care to see that 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....
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....e Act. We see no merit in this contention of Sri Iyer and reject the same. 59. We propose to record, at the very threshold, that the case of taxpayers to invalidate s. 44AB of the Act either under art. 14 or art. 19 of the Constitution is really very weak. The case that really calls for somewhat serious examination is that of the ITPs, whose case we now proceed to examine. But, when we find that the case of the ITPs should be rejected on parity of reasoning, we must be understood to have rejected the case of the taxpayers also. 60. Under the Chartered Accountants Act and the Chartered Accountants Regulations of 1964 framed thereunder, a person, to be enrolled as a chartered accountant, must possess the special qualifications prescribed by the regulations which require him to undergo an arduous and intensive training and then pass the various tough examinations that qualify him for enrolment as a chartered accountant. In that process, one of the qualifications acquired will be the special skill or knowledge in the audit of 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 h....
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....y a more competent and specialised agency. On any test, the court cannot hold that the provision is an arbitrary provision and is the very antithesis of rule of law enshrined by article 14 of the Constitution. We have earlier found that the provision had been enacted to prevent evasion of taxes and facilitate the administration. If that is so, it is undoubtedly a reasonable provision that furthers the objects and purposes of the Act. 63. We are of the view that the principles enunciated by the High Court of Madras in Kandaswami Reddiar v. Textile Commissioner, AIR 1952 Mad 409, on which strong reliance was placed by Sri Viswanatha Iyer, even if correct, do not bear on the point and assist the petitioners. 64. When one examines the provisions in the light of the principles enunciated in every one of the cases referred to by us dealing with the scope and ambit of article 14 of the Constitution, we find it difficult to hold that the provision is violative of article 14 of the Constitution. 65. Sri Sarangan has alternatively urged that the exclusive right or privilege conferred on chartered accountants should alone be struck down which would necessarily enable all the ITPs to ....