Apex Court upholds validity of Clause 6 of 2008 ICAI Guidelines which imposes mandatory ceiling limit on number of tax audits that a CA can accept in a financial year; grants liberty to Institute to enhance specified number of audits
Justices B.V. Nagarathna & Augustine George Masih [17-05-2024]

Read Order: SHAJI POULOSE v. INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA & OTHERS [SC- WRIT PETITION (CIVIL) NO.267 OF 2021]

Tulip Kanth

New Delhi, May 22, 2024: The Supreme Court has held that Clause 6.0, Chapter VI of the Guidelines dated 08.08.2008 and its subsequent amendment is valid and is not violative of Article 19(1)(g) of the Constitution. The Clause provides that a Chartered Accountant shall not accept, in a financial year, more than the specified number of tax audit assignments under Section 44AB of the IT Act, 1961. Currently the ceiling limit is set at 60 tax audits.

The petitioners-Chartered Accountants challenged the validity of Clause 6 of Guidelines No.1- CA(7)/02/2008 dated 08.08.2008 issued by the Institute of Chartered Accountants of India (respondent-Institute), under powers conferred by the Chartered Accountants Act, 1949 on the ground that the same is illegal, arbitrary and violative of Article 19(1)(g) of the Constitution of India.

The petitioners were specifically, aggrieved by the mandatory ceiling limit imposed by Clause 6.0, Chapter VI of said Guidelines on the number of tax audits that a Chartered Accountant can accept in a financial year under Section 44AB of the Income Tax Act, 1961 (IT Act, 1961). The petitioners also sought a direction for quashing and/or setting aside of the disciplinary proceedings initiated by the respondent-Institute in pursuance of the Impugned Guideline. 

Clause 6.0, Chapter VI of Guidelines dated 08.08.2008 provides that a member of the Institute in practice shall not accept, in a financial year, more than the specified number of tax audit assignments under Section 44AB of the IT Act, 1961. It further provides that in the case of a firm of Chartered Accountants, the specified number of tax audit assignments shall be construed as the specified number of tax audit assignments for every partner of the firm.

The Division Bench of Justice B.V. Nagarathna & Justice Augustine George Masih noted that the ceiling limit has not been stagnant but has, on the basis of several factors, been increased by the Council of respondent-Institute during the passage of time. In February 2014, vide resolution adopted at the 331st Meeting of the Council of respondent-Institute, the ceiling limit in question was specified as sixty and presently stands the same.

Highlighting that one of the objects of the 1949 Act is to ensure that the profession of the Chartered Accountant in the country maintains high professional ethics and renders quality service inasmuch as Chartered Accountants are absolutely necessary for the efficient tax administration in the country, the Bench also noted that on account of their services, the onerous duties cast on the assessing officer as well as the ITD is reduced. 

It was made clear by the Bench that the regulation or Guideline issued by the Council, the breach of which would result in a professional misconduct, 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. The Bench was of the opinion that the Council of the respondent- Institute having the legal competence to frame the Guidelines, 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 couldn’t be held to be vitiated on account of there being lack of competency or powers to frame the impugned Guideline by the Council of the respondent-Institute. 

The other two issues before the Bench were whether the restrictions imposed are unreasonable and therefore, violative of the right guaranteed to Chartered Accountants under Article 19(1)(g) of the Constitution and whether the restrictions imposed are arbitrary and therefore, impermissible under Article 14 of the Constitution.

The Bench found no fault in the endeavor of the respondent-Institute to eliminate the possibility of the conduct of tax audits in an insincere, unethical or unprofessional manner. “There is no difficulty in concluding that by virtue of being a licensee, a privilege is conferred on Chartered Accountants. An elaborate and extensive process of recommendations and policy-making preceded the insertion of Section 44AB in order to achieve the public interest of prevention of tax leakages and more efficient tax administration. It is in pursuance of this primary goal of public interest that a further privilege under Section 44AB was extended to Chartered Accountants to conduct quality tax audits, so as to enable the interest of the public exchequer”, it added.

On a perusal of the Wanchoo Committee Report, Finance Bill, 1984 and the accompanying Memorandum, the Bench made it clear that the intent of insertion of Section 44AB of the IT Act, 1961, was to facilitate the process of tax administration to the benefit of the public exchequer. 

The present petitioners’ assertion that the undertaking of more than a specified number of tax audit assignments would not imperil the integrity and quality of the tax audit did not persuade the Bench because a reasonable possibility of the fall in quality owing to the surfeit of tax audit assignments exists. “Therefore, we find it proper to trust the wisdom of the respondent-Institute as it has acted on bona fide and genuine recommendations of the CAG and the CBDT. We find no fault in the endeavour of the respondent-Institute to eliminate the possibility of the conduct of tax audits in an insincere, unethical or unprofessional manner”, it said while also adding, “It is in pursuance of this primary goal of public interest that a further privilege under Section 44AB was extended to Chartered Accountants to conduct quality tax audits, so as to enable the interest of the public exchequer.”

The Top Court affirmed, “Liberty is reserved to the respondent-Institute to enhance the specified number of audits that a Chartered Accountant can undertake under Section 44AB of the IT Act, 1961, if it deems fit.”

The Bench made it clear that the idea of compulsory tax audits was neither an inherent part of the practice of a Chartered Accountant nor an essential function which could be claimed as a fundamental right under Article 19(1)(g). 

An alternative plea raised by learned senior counsel and learned counsel for the petitioners was that the respondent-Institute initiated disciplinary proceedings only against a few Chartered Accountants, including petitioners herein, while a majority of the Chartered Accountants who had breached the Guideline are not facing any disciplinary proceeding and have not been proceeded against. The Bench was of the view that there cannot be a discrimination, so to say, by the respondent-Institute in the matter. Moreover, the impugned Guideline dated 08.08.2008 has been on the statute book, the disciplinary proceedings had been initiated only recently. Therefore, the disciplinary proceeding was opined to be quashed for the aforesaid reasons. This was for the simple reason that only the writ petitioners have been proceeded against, while even according to the respondent- Institute, there were around twelve thousand Chartered Accountants who had breached the Guideline and had undertaken tax audits over and above the specified number but no action whatsoever was initiated against of them

Referring to the judgments in Malpe Vishwanath Acharya vs. State of Maharashtra, (1998) 2 SCC 1 [LQ/SC/1997/1731] and Motor General Traders vs. State of A.P., (1984) 1 SCC 222 [LQ/SC/1983/312] , the Bench reiterated that a provision which was/is reasonable may with the passage of time become unreasonable. Noting that since the last revision to sixty tax audits was made a decade ago, the Bench directed the Council to consider if the time is ripe to enhance the specified number of tax audits and to delineate the factors that it may consider in taking such a decision.

Thus, in conclusion, the Bench held, “Clause 6.0, Chapter VI of the Guidelines dated 08.08.2008 and its subsequent amendment is valid and is not violative of Article 19(1)(g) of the Constitution as it is a reasonable restriction on the right to practise the profession by a Chartered Accountant and is protected or justifiable under Article 19(6) of the Constitution. However, the said clause 6.0, Chapter VI of the Guidelines dated 08.08.2008 and its subsequent amendment is deemed not to be given effect to till 01.04.2024.”