AI Drafter 
TaxTMI 
TaxTMI 
2024 (1) TMI 254
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....of reports D. Finding on the Articles of Charges of Professional Misconduct by the Firm and CA K E. Penalty & Sanctions EXECUTIVE SUMMARY 3. In August 2022 the Director General of Income Tax (Investigation), Bengaluru (IT department) shared information about claim of deduction under section 80 JJAA of Income Tax Act totalling Rs 1135.41 crores by Quess based on form 10 DA issued by two chartered accountants for Financial Years 2016-17, 2017-18, 2018-19, 2019-20 & 2020-21. NFRA Suo motu initiated action under Section 132(4) of the Companies Act 2013 ('Act' hereafter) to look into the professional conduct of the chartered accountants and their firms involved in the said certification. 4. NFRA's investigations inter alia revealed that the CA failed to exercise due diligence and obtain sufficient information before issuing reports under the Income Tax Act. The CA failed to apply the necessary checks, e.g., (a) verify reorganization of business with various parties; (b) exclude employees whose EPS [EPS - Employees' Pension Scheme] contribution was paid by the Government; (c) correctly report the number of additional employees during FY 2020-....
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....chnology Solutions. CA Pawan Jain, partner of Mis Kumar Jain & Associates, has signed the reports in form 1ODA, which formed the basis of Quess claiming deduction under section 80JJAA of the Income Tax Act for FY 2018-19, 2019-20 and 2020-21. 9. NFRA Suo motu initiated proceedings under section 132(4) of the Act and on 23.09.2022 the CA was advised to submit the working files relating to the deduction claimed by Quess. The CA submitted the Files on 29.09.2022 and 11.10.2022. Based on their examination, NFRA, after observing prima facie professional misconduct, issued a Show Cause Notice ('SCN' hereafter) dated 21.06.2023 under section 132(4) of the Act, for (a) failure to exercise due diligence and being grossly negligent in the conduct of professional duties, and (b) failure to obtain an appropriate information necessary for expression of an opinion or its exceptions to negate the expression of an opinion. All of these constituted professional misconducts. 10. The CA sought extension of 7 days for replying, which was allowed. Vide email dated 28.07.2023 he submitted the reply to SCN. A personal hearing was also scheduled for 21.08.2023, but CA Pawan Jain sought exten....
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....er section 80JJAA, e). total amount of emoluments paid or payable to additional employee entitled for deduction u/s 80JJAA, f). the amount of deduction eligible u/s 80JJAA in respect of payments for the emoluments paid or payable to the additional employee. 12. CA Pawan Jain had issued 4 reports in Form 10 DA based on which Quess had claimed deduction of Rs. 970.82 crores from its taxable income, the details of which are as under in Table 1: One of the basic preconditions to this deduction is that the business should not be formed due to the splitting up, reconstruction or reorganization of any business. Subsection 2 of section 80JJAA is quoted below: "80JJAA(2) : No deduction under sub-section (1) shall be allowed,- (a) if the business is formed by splitting up, or the reconstruction, of an existing business: Provided that nothing contained in this clause shall apply in respect of a business which is formed as a result of re-establishment, reconstruction or revival by the assessee of the business in the circumstances and within the period specified in section 33B; (b) if the business is acquired by the assessee by w....
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.... in FY 2019-20, benefit under section 80 JJAA was claimed for 42,447 employees, excluding 24,023 employees who had not completed 240 days. As the employees of Aravon & MSSPL had completed more than 240 days (Aravon & MSSPL were merged with effect from 01.04.2019), it is obvious that the number of employees for whom the benefit was claimed included those of Aravon & MSSPL. Table-3 Sr no. Particulars 1. Total employees on 31.03.2019 2,23,322 2 Total employees on 31.03.2020 2,89,792 3 Additional employees during 2019-20 (2-1) 66,470 4 Additional employees who did not complete 240 days in FY 2019-20, hence not eligible for deduction u/s 80 JJAA 24,023 5 Balance additional employees, in respect of whom benefit u/s 80 JJAA was claimed (3-4) 42,447 15. CA Pawan Jain had relied on para 1 and 2 of Management Representation Letter (MRL) dated 30.03.2021, which stated that "1. Business of the company is not formed by splitting up or the reconstruction of an existing business. 2. Business is not acquired by the company by way of transfer from any other person or as a result of any business reorganization". The factual position ....
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....9;entire contribution', and in the case of Mis Quess Corp only a part of the contribution was paid by the Govt. for the employees, for whom the deduction was claimed. He referred to Annexure 2 of his reply as proof that he had verified on a sample basis. 20. On perusal of his reply along with Annexure -2 to his reply, containing a list of 7 employees with details of month wise PMRPY receipt, we find that in the initial one or two months of employment of new employees, the respective columns reflecting amount of PMRPY receipt from government are blank. This is because of the time lag in reimbursement of money by the Government as salary/wages are paid on the last day of the month or first week of next month and thereafter the claim is submitted to the Government. After processing the claim, the government reimburses the money to the claimant. Section 80 JJAA does not use the words 'entire period'. Therefore, in case "entire contribution" has been paid by the Government for a specific period, then also the Taxpayer is not entitled for deduction u/s 80 JJAA for that specific period. We note that the words 'entire contribution' used in sub section 2 of section 80....
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..... 23. The total number of employees in Quess, as mentioned earlier, was 2,89,792 as on 31/3/2020 and 2,70,596 as on 31/03/21 indicating a reduction of 19,196 in the total number of employees during FY 2020-21. However, the CA reported that Quess was eligible for deduction of Rs 140.57 crores u/s 80 JJAA in respect of 24,023 spillover employees of 2019-20. Therefore, even after considering 24,023 spillover employees, additional employees should have been considered as 4,827 (24,023-19,196). 24. The response of CA Pawan Jain was that Quess was eligible for deduction in respect of whole of 24,023 spill over employees without any adjustment due to the provisions of the second proviso to explanation (ii) of sub-section 2 of the section 80 JJAA. 25. We note that increase in the actual number of employees is fundamental to section 80 JJAA as is evident from:- (a) Explanation (i) to said section that the additional employee cost shall be Nil if "there is no increase in the number of employees from the total number of employees employed as on the last day of the preceding year" ; (b) Explanation (ii) to said section that "additional employee means an employee who ....
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....nce & professional skepticism in this matter. 28. The CA replied that Quess makes salary payment in bulk and it is impossible to check payment to each and every additional employee; that he had relied on the Internal Financial Controls (IFC) framework in Quess and statutory auditors report on IFC; that the Quess payroll software is designed to function with minimal manual intervention; and that only minimal cash balance was maintained by Quess. 29. This reply is not supported by any evidence in the Working Files. The CA has not verified even a single case, to ascertain that salary was paid to an "additional employee" by way of an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account. Therefore, the basic requirement of the section enabling the company to claim the deduction was not verified by the CA while issuing the reports to enable claims under section 80 JJAA of the Income Tax Act. This constitutes gross negligence on the part of the CA. V. Failure to verify salary limit of Rs 25,000 per month for new employees 30. The explanation (ii) to section 80 JJAA of Income Tax Act states that ""additional employee" m....
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....al, we find that this case is not relevant as Hon'ble High Court of Gujarat had set aside the additional tax levied by the Income Tax Department/Income Tax Appellate Tribunal; and the matter regarding calculation of monthly contribution per student was not commented upon by the Hon'ble High Court. In this case monthly contribution per student was calculated by the assessing officer based on annual contribution made by Gujarat Milk to Anandalaya Education Society, which imparts education to children of Gujarat Milk's employees. Further, the CA referred to the case of Delhi Public School (DPS) (2012) 247 CTR 308 (P&H). On perusal of this case, we find that the facts of this case are not relevant as they pertain to deductibility of Rs 1,000/- per month (taken as Rs 12,000 per year) from the cost incurred by the employer for free education provided to the children of DPS's employees; and the method of calculation was not commented upon by the Hon'ble High Court of Punjab and Haryana. Hence both the cases relied upon are not relevant to the facts of this case, as the Income Tax law is specific in its requirement for assessee to avail of the deduction under section 80....
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....was increase in the total number of employees; (d) whether additional employee cost was paid by account payee cheque/draft/electronic means; and (e) whether total emoluments of additional employee was not more than Rs 25000 per month. 34. In addition to the above charges, there are many other conditionalities under section 80JJAA, which are required to be checked by the CA who certifies eligibility of the amount of Income Tax deduction to be claimed by the assessee company. These relate to ascertaining whether the new employees participated in a recognized Provident fund, whether there was no rehiring of old employees, and whether additional employees were employed for not less than 240 days. Besides these, there were deficiencies in sample testing done by the CA. The CA was charged with non-verification of the same. While denying all of these charges, the CA claimed that he had looked into these matters. As stated earlier, none of these are evidenced in the working file and therefore, we are unable to accept his defense. D. Findings on the Articles of Charges of Professional Misconduct 35. The Income Tax Act, requires the accountant (in this case CA Pawan Jain) to provide....
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....em authority to certify certain claims of taxpayers. The chartered accountants have the responsibility to ensure that the amount of deduction certified in these reports are correct. They are required to exercise due diligence while performing such work so that the trust of the Government remains in the profession. 38. This Order has detailed the lapses by the CA in issuance of report/certificate in form 10 DA on the basis of which Quess claimed deduction u/s 80 JJAA of the Income Tax Act, 1961 of Rs. 113.86 crore, Rs. 428.80 crore and Rs. 428.16 crore during FY 2018-19, 2019-20 and 2020- 21 respectively. Thus, the work of the CA has major implications for revenue. 39. We find that CA Pawan Jain failed to exercise due diligence in the conduct of professional duties while certifying the information in form 10 DA based on examination of the relevant records. It has been proved that before issuing the reports, the CA did not obtain sufficient appropriate evidence with regard to compliance of conditions stipulated in section 80 JJAA for claiming deduction in respect of new employees. 40. Section 132(4)(c)_ of the Companies Act 2013 provides that National Financial Reporting Aut....