MSMED Act Would Not Be Applicable To CA Firms Appointed As ‘Special Auditors’ Under Section 142(2A) Of The Income Tax Act, 1961: Delhi High Court

The bench of Justice Prathiba M. Singh held that MSMED Act no applicability in cases of CA firms appointed under Section 142(2A) of the IT Act for the purpose of carrying out special audit as there is no relationship of buyer and seller between the parties. Moreover, the assignment under Section 142(2A) is a statutory assignment and not a contractual relationship between the parties, therefore, despite their registration under the MSMED Act, a special audit firm cannot invoke the provisions of the Act against the IT department qua the amount payable for carrying out such audit.

It held that the remuneration payable to the accountant cannot also be termed as ‘consideration’ as the Special Audit is a statutory duty being performed by the accountant for and on behalf of the Assessing Officer (AO). It further held that the determination of the remuneration payable under Section 142(2D) of the IT Act is the sole prerogative of the IT Commissioner.

Facts

In brief, the dispute essentially pertained to the determination of the remuneration payable to respondent no.2 (CA Firm) for rendering its auditing services for the petitioner (IT Department) as a ‘special auditor’ under Section 142(2A) of the IT Act.

Aggrieved by the remuneration received from the petitioner, the respondent no. 2 invoked the provisions of Section 18 of MSMED Act and referred the dispute to MSEF Council. On the failure of the conciliation proceedings, the Council referred the parties to arbitration under the aegis of DIAC. Notice for appearance was issued to the petitioner to appear before the arbitral tribunal, however, it filed the writ petition before the High Court challenging the applicability of the MSMED Act and the jurisdiction of the tribunal constituted thereunder.

Contention of the Parties

The petitioner challenged the impugned order on the following grounds:

• The appointed of the ‘special auditor’ under the Act is in the nature of a ‘statutory obligation’. The responsibility being given to the Special Auditor is not a contractual relationship. The conduct of Special Audit is a statutory duty cast upon the Special Auditor and there is a statutory determination of the fee in terms of the provisions of the IT Act. There is no contractual relationship between the IT Department and the Special Auditor.
• The assignment, being ‘statutory’ in nature, the only remedy is under the Income Tax Act, 1961 or by way of a writ petition. Such an audit can never be described as a ‘commercial contract’ or an ‘agreement’ where the word ‘consideration’ is used.
• The applicability of the MSMED Act, requires the existence of a buyer and supplier relationship and agreement between the parties, there is no ‘consideration’ which is paid in terms of the Indian Contract Act,1872 and therefore, it cannot be held that the relationship is a contractual relationship.
• The Petitioner/IT Department cannot be termed as a ‘buyer’ within the meaning of the MSMED Act as there is no ‘consideration’ which has been paid. There is also no agreement but a ‘nomination’ which has been made by the IT Department. Since the MSMED Act itself is not attracted in the present case, Section 24 of the said Act would have no application.
• Any orders made under the IT Act cannot challenged in any civil proceedings and arbitration proceedings are akin to civil proceedings, therefore, the arbitration proceedings sought to conducted are barred by the application of Section 293 of the IT Act.

The respondent made the following submissions in support of the jurisdiction of the tribunal to decide its claim:

• That where there is a relationship of ‘buyer’ and ‘supplier’ and there is ‘consideration’ involved under an agreement /contract, the MSMED Act would be attracted. Reference is made to Section 18(1) as also Section 2(n) and 2(d) of the MSMED Act to argue that in terms of the definitions of ‘buyer’ and ‘supplier’, respectively, the Respondent is the ‘supplier’, and the IT Department is the ‘buyer’ of the Special Audit ‘services’ supplied by the former to the latter in terms of an ‘agreement/contract’. Thus, all the necessary trappings of a commercial contract exist in this regard. The exact nature of the appointment is also clearly prescribed in the nomination letter. Thus, the MSMED Act would be applicable.
• That in terms of the procedure for the appointment of a Special Auditor under Section 142(2A) of the IT Act, it is the discretion of the CA Firm so appointed to accept or decline such offer before the nomination of the CA Firm by the IT Department.
• That the reports which were submitted by the CA Firm, were fully accepted by the IT Department and no deficiencies were raised. All the Special Audit assignments were also carried out on time. Since there exists a promise to pay, the word ‘remuneration’ as used in Section 142(2D) of the IT Act would have to be deemed to be ‘consideration’.
• Bar of Section 293 of the IT Act would not apply to MSEF Council as it is not a judicial authority let alone any civil court.
• The appointment under Section 142(2A) of the IT Act is not a statutory appointment since it fastens the duty upon the Assessee to get its accounts audited from the nominated CA concern. It does not cast any obligation on the CA firm to compulsorily carry out the audit.
• The respondent CA firm is registered under the MSMED Act and in terms of Sections 18 and 24 of the Act, the provisions of the Act would have an overriding effect over Sections 293 and 142(2D) of the IT Act.
• The petition is not maintainable as the jurisdiction of the MSEF Council was not challenged during the facilitation proceedings, therefore, the petitioner has waived it right to challenge its jurisdiction at a later stage and the same cannot be done through a writ petition.

Analysis by the Court

At the outset, the Court examined the issue of the maintainability of the petition. The Court held that it is a trite law that writ petition in arbitration can only be maintained in exceptional matters and not as a routine practice. The Court held that a situation where the applicability of the MSMED Act itself is questioned constitute an exceptional circumstance as if the MSMED Act is held to be non-maintainable, the petitioner cannot be subjected to the lengthy arbitral proceedings under the said Act which also entails various other consequences including extremely high rates of interest under Section 16 of the Act. In order to avoid further complications and delay in adjudication by the competent forum, the question as to jurisdiction thus deserves to be considered by the Court in the writ petition.

The Court held that under the IT Act, an individual or entity subject to assessment, referred to as the Assessee, is required to submit returns in accordance with the Act and its corresponding Rules. These returns must be verified in accordance with the provisions outlined in Section 140 of the IT Act. Additionally, the Assessee has the option to conduct self-assessment as per the guidelines laid out in Section 140A of the IT Act. Subsequently, it is the responsibility of the IT Department to carry out an assessment of the tax liability that needs to be paid.

It held that Section 142(2A) of the IT Act, contemplates the nomination of an accountant by the Commissioner or by other high-ranking officials of the IT Department, in a situation where the Assessing Officer is of the opinion that owing to the volume, nature and complexity of accounts, doubt regarding the correctness of the accounts, specialized nature of the business activity etc. of the Assessee and in the interest of Revenue, an audit of the accounts of the Assessee is required and In terms of Section 142(2D) of the IT Act, such accountant, who may be engaged for the purpose of audit, is to be paid “remuneration”. The said remuneration is to be determined by the Commissioner or the Principal Commissioner, Chief Commissioner or the Principal Chief Commissioner. Upon being determined, the said remuneration, shall be final, also, Rule 14B of the IT Rules provides for the manner in which the remuneration, payable to the auditor, is to be determined.

It held that the determination of the remuneration is a task, which is of a specialized nature, which only the Income Tax Department would be able to undertake as the department takes into consideration various aspects, as provided under rule 14B, to arrive at a remuneration to be paid to the special auditor.

The Court held that nature of the Audit and the manner in which remuneration is to be determined would require domain expertise and knowledge which the MSEFC cannot possess. Moreover, the function which is in effect delegated to the Audit firm is one which is exercised under the Income Tax Act and would be purely governed by the said statute. Payment of remuneration is also based on the factors prescribed in the Rules.

The Court held that insofar as Audits under Section 142(2A) are concerned, the IT Act would have to be reckoned as the Special Act and the MSMED Act as the general Act dealing with MSME disputes. Thus, in the facts and circumstances as discussed above, the Income Tax Act would thus prevail over the provisions of the MSMED Act.

Accordingly, the Court allowed the writ petition.

Case Title: PR. COMMISSIONER OF INCOME TAX v. MSECF and Anr, W.P.(C) 13754 of 2019

Citation: 2023 LiveLaw (Del) 568

Counsel for the Petitioner: Mr. Ruchir Bhatia, Sr. Standing Counsel, Mr. Shlok Chandra, Jr. Standing Counsel with Mr. Keshav Garg, Advocate

Counsel for the Respondents: Mr Avishkar Singhvi Advocate with Mr Naved and Mr Vivek Kumar Advocates for R-1. Mr. Jitendra Kumar Singh, Adv. for R-2. Mr. S.B. Gupta in person.

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