Provisions Of Income Tax Act Prevails Over MSMED Act Relating To Fee Payable To CA Firms For Special Audits: Delhi High Court

The Delhi High Court has held that the provisions of the Income Tax Act, 1961, prevail over the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act) relating to fees payable to CA firms for Special Audits directed under Section 142(2A) of the Income Tax Act.

The bench of Justice Prathiba M. Singh has observed that insofar as Audits under Section 142(2A) are concerned, the Income Tax Act would have to be reckoned as the Special Act and the MSMED Act as the general Act dealing with MSME disputes.

The Petitioner, the Principal Commissioner of Income Tax, filed the writ petitions challenging the directions for reference to arbitration passed by the Respondent, the Micro and Small Enterprise Facilitation Council (MSEFC), an authority established under Section 20 of the MSMED Act.

The CA Firm, being on the panel of the Income Tax Department, was nominated as a Special Auditor by the Income Tax Department in four cases for carrying out a special audit in terms of Section 142(2A).

After the completion of the Special Audit assignments and the submission of the final audit reports, the CA Firm raised four invoices in respect of the audits. The grievance of the Special Auditor-CA Firm is that, qua the invoices raised, the full payment has not been made. In respect of one of the assignments, the payment has not been received at all.

The respondent, CA Firm, invoked the provisions of the MSMED Act and approached the MSEFC by way of references under Section 18.

The Income Tax Department has preferred the two writ petitions, challenging the reference orders passed by the MSEFC on the ground that the MSEFC under the MSMED Act lacks jurisdiction to deal with claims raised by Special Auditors in respect of the fee payable in terms of Section 142(2D) of the Income Tax Act.

The petitioner contended that the role of the Special Auditor under Section 142(2A) of the Income Tax Act is determined by the Principal Chief Commissioner, the Chief Commissioner, or other similarly placed senior officials of the Income Tax Department. The remuneration is also to be fixed by the senior officials of the Income Tax Department after taking into consideration the nature of the assignment, the kind of work done, and the total time that is reasonably to be spent.

The petitioner contended that Section 24 of the MSMED Act would not be applicable and would not be attracted in this case inasmuch as the Act itself would apply only if the conditions under Section 15 and the definition of ‘buyer’ under Section 2(d) of the MSMED Act are satisfied. The Petitioner/IT Department cannot be termed a ‘buyer’ within the meaning of the MSMED Act as there is no ‘consideration’ that 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 at issue in the present case, Section 24 of the said Act would have no application.

The respondent CA Firm contended that where there is a relationship between ‘buyer’ and ‘supplier’ and there is ‘consideration’ involved under an agreement or contract, the MSMED Act would be attracted. In terms of the procedure for the appointment of a Special Auditor under Section 142(2A) of the IT Act, it is at the discretion of the CA Firm so appointed to accept or decline such an offer before the nomination of the CA Firm by the IT Department.

The court has referred to Sections 142(2A) to 142(2D) of the IT Act, as well as Rule 14B of the IT Rules, which show that a panel of accountants is maintained by the IT Department. The empanelled accountants are fully aware of the nature of the assignment when the nomination is made. Such accountants are also aware of the finality attached to the determination of remuneration under Section 142(2D) of the IT Act. The hourly rates are prescribed under Rule 14B (2). Rule 14B (5) of the IT Rules also specifies clearly that the number of hours claimed has to be commensurate with the size and quality of the report.

"The 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 that is in effect delegated to the Audit firm is one that is exercised under the Income Tax Act and would be purely governed by the said statute," the court said.

Case Title: PCIT Versus Micro And Small Enterprise Facilitation Council

Citation: 2023 LiveLaw (Del) 568

Case No.: W.P.(C) 13754/2019 and CM APPL. 55377/2019, 23859/2021, 42231/2021

Date: 06/07/2023

Counsel For Petitioner: Ruchir Bhatia

Counsel For Respondent: Avishkar Singhvi

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