Shaji Poulose vs Institute of Chartered Accountants of India & Others

Held: Council of the Institute had the legal competence to frame the impugned Guideline restricting the number of tax audits that a Chartered Accountant could carry out which was initially thirty and later raised to forty-five and thereafter to sixty in an assessment year, the breach of which would result in professional misconduct, in terms of clause 1 of Part II of the Second Schedule of the 1949 Act – It is not vitiated on account of there being lack of competency or powers to frame the Guideline by the Council of the Institute – Issuance of the Guidelines dt 08.08.2008 by the Institute not hit by the vice of excessive delegation – Thus, the Regulation or Guideline issued by the Council, being a part of clause 1 of Part II of the Second Schedule have to be read as part and parcel of the 1949 Act itself – Delegation of powers to add newer types of misconducts by way of a regulation or Guideline neither excessive nor ultra vires u/s. 22. [Paras 13.1-13.3]

Chartered Accountants Act, 1949 – Income Tax Act, 1961 – s. 44AB – Council of the Institute of Chartered Accountants of India, imposing by way of Guidelines No.1-CA(7)/02/2008 dated 08.08.2008 , a numerical restriction on the maximum number of tax audits that could be accepted by a Chartered Accountant, u/s. 44AB of the Income Tax Act, 1961, in a Financial Year by way of a Guideline – Restrictions imposed, if unreasonable, arbitrary and illegal and thus, violative of the right guaranteed to Chartered Accountants u/Art. 19(1)(g) and impermissible u/Art. 14 of the Constitution:

Held: Guidelines dated 08.08.2008 and its subsequent amendment is valid and not violative of Art. 19(1)(g) and is protected or justifiable u/Art.19(6) – Ample material placed to establish that the legislation comes within the permissible limits of clause (6) – By virtue of being a licensee, a privilege is conferred on Chartered Accountants – It is in pursuance of the primary goal of public interest that a further privilege u/s. 44AB was extended to Chartered Accountants to conduct quality tax audits subject to reasonable restrictions, so as to enable the interest of the public exchequer – Court must consider the public interest involved not only from the perspective of the Chartered Accountants but rather from the perspective of the general public – Chartered Accountants is a profession-licensed by the State that also discharges public duties crucial in public interest – Compulsory tax audits was neither an inherent part of the practice of Chartered Accountant nor essential function which could be claimed as a fundamental right u/Art.19(1)(g) – Where public interest was the genesis of a privilege being extended to Chartered Accountants and not a right, it is reasonable that the Institute, would have the authority to regulate the privilege extended to Chartered Accountants in a reasonable manner deemed appropriate to serve public interest – Public interest involved in the instant petitions being pervasive is evidenced through CAG’s recommendation to the Government to insert a provision in the statute book putting a cap on the number of tax audits permissible – Also restriction placed u/s.224 of the Companies Act with regard to the number of companies which could be audited by an auditor or firm of auditors is also an instance of regulation of the profession of Chartered Accountants intended by the Parliament to ensure that standard and quality in the audit of accounts of companies are maintained – Furthermore, where the devolution of privilege is justifiably restricted in public interest and such restriction has rational nexus with the objects sought to be achieved, the restriction cannot be held unreasonable due to hardship faced by a certain section of professionals. [Paras 19, 22,24-25, 29, 33, 36-37, 50]

Chartered Accountants Act, 1949 – Income Tax Act, 1961 – s. 44AB – Clause 6 of Guidelines No.1-CA(7)/02/2008 dt 08.08.2008 issued by the Institute of Chartered Accountants of India, restricting the number of tax audits that Chartered Accountant could carry out which was initially thirty and later raised to forty-five and thereafter to sixty in an assessment year – Petitioners undertook audits u/s.44AB over and above the number of tax audits specified as per the Guidelines – Exceeding specified number of tax audits, if ‘professional misconduct’ – Institute initiating disciplinary proceedings only against few Chartered Accountants, including petitioners, while majority of Chartered Accountants who had breached the Guideline not facing any proceeding, if discriminatory: Held: There has been an uncertainty in law due to a similar Guideline being successfully assailed and during the pendency of the matter before this Court the impugned Guideline being enforced and selective implementation of the same by the Institute – Initially notices were sent only selectively to Chartered Accountants who had completed more than two hundred audits not to all who had breached the impugned Guideline – For the limited period of uncertainty, the rule against doubtful penalization as a principle could, in the interest of justice and equity, be made applicable and the benefit of uncertainty be given to those subjected to misconduct proceedings in the instant writ petitions and to also those Chartered Accountants who may have received notices from the Institute and who may not have approached any court of law or to other similarly situated Chartered Accountants – Disciplinary proceedings initiated against the petitioners is quashed, since only the writ petitioners have been proceeded against, while around twelve thousand Chartered Accountants who had breached the Guideline were left out – Furthermore, a reasonable provision may with the passage of time become unreasonable – As regards, the restriction on the specified audits u/s. 44AB, Minutes of the Council of the Institute reflect that with the passage of time, the number of tax audits to be permitted have been repeatedly deliberated, re-evaluated and increased, subject to final decision taken by the Council – Since the last revision to sixty tax audits was made a decade ago, the Council to consider if the time is ripe to enhance the specified number of tax audits – Institute at liberty to enhance the specified number of tax audits that could be undertaken by the Chartered Accountants. [Paras 46, 47]

Chartered Accountants Act, 1949 – s. 22 – “professional or other misconduct” – Definition:

Held: s. 22 defines “professional or other misconduct” to deem to include any act or omission provided in any of the Schedules – However, nothing in s. 22 shall be construed to limit or abridge in any way the power conferred or duty cast on the Director (Discipline) under sub-section (1) of s. 21 to inquire into the conduct of any member of the Institute under any other circumstances – Schedules which enumerate various kinds of misconducts are not exhaustive or static – With the passage of decades and with the emerging varieties of misdemeanour, omissions or commissions of Chartered Accountants which are not in consonance with professional ethics and would amount to misconduct can be defined under the Schedules so as to ensure quality service being rendered by the Chartered Accountants as professionals and there could be newer misconducts which could be included in the Schedules in the form of regulations or Guidelines – Part II of Second Schedule has delegated the power to the Council to make any regulation or Guideline, the breach of which would amount to a misconduct – This delegation to define and enumerate a misconduct by way of a regulation or a Guideline is a legislative device adopted by the Parliament so as to leave it to the discretion of the Council of the Institute to incorporate, define and insert a Guideline or a regulation, the breach of which would result in misconduct committed by Chartered Accountant. [Para 13.1] Chartered Accountants Act, 1949 – Scheme and object of the enactment – Stated. [Paras 7.1-7.12]

Chartered Accountants – Role and importance of: Held: Chartered Accountants can serve as effective catalysts in securing the virtuous circle of trust between the taxpayer and the tax administration – This is because a large proportion of the tax payers in India seek advice of Chartered Accountants – Integrity and standards of Chartered Accountants determine the efficiency in the functioning of the nation’s taxation system – Onus is on Chartered Accountants to ensure that the Nation’s businesses do indeed conform to high corporate governance standards – By providing the foundation for compilation of credible financial statements, the accounting profession facilitates market discipline, engenders confidence among various stakeholders and reduces the possibility of misleading information that can disrupt stability of financial systems – Thus, the need for quality assessments particularly u/s. 44AB of the IT Act, 1961 – Chartered Accountants must themselves comply with the relevant laws and regulations and avoid any conduct that discredits the profession – Chartered Accountants must refuse to represent clients who insist on resorting to unfair means – Chartered accountants are relevant not only in securing corporate governance, but governance in broader contexts too – Chartered Accountants face many different responsibilities to the profession; to the tax administration; to the client and to the economy at large – Integrity, objectivity, professional competence and due care and confidentiality must be the doctrines guiding their work ethic. [Paras 49.1, 49.3-49.6]

Chartered Accountancy – Institute of Chartered Accountants of India – Role of:

Held: Institute has a significant role in ensuring the dynamism of the Chartered Accountancy course curriculum and the credibility of the examinations – Institute must be committed towards convergence of accounting, auditing and ethical standards with international practices and for its endeavour towards securing the highest standards of corporate governance – True test however, lies in application and enforcement of these standards in the Indian context. [Para 48] Income Tax Act, 1961 – s. 44AB – Audit of accounts – Object and purpose of:

Held: s. 44AB provides that every person carrying on business, whose total sale, turnover or gross receipts exceed Rs.10 crore, and every person carrying on a profession, if his gross receipts exceed Rs.50 lakhs, in any previous year, is required to get his accounts of such previous year audited and verified by a Chartered Accountant – Said provision is called “compulsory tax audits” – Object and purpose of s. 44AB is to prevent evasion of taxes, plug loopholes enabling tax avoidance and also facilitate tax administration. [Para 7.14]