Supreme Court Upholds ICAI Rule Limiting Number Of Tax Audits By Chartered Accountants Per Yer; Declares It Operative From April 1, 2024

The Supreme Court on Friday (May 17) upheld a rule issued by the Institute of Chartered Accountants Of India (ICAA) barring Chartered Accountants from accepting more than the "specified number of tax audit assignments" (at present, the upper limit is set at 60) in a financial year.

A bench comprising Justices BV Nagarathna and Augustine George Masih held that the rule (para 6.0 of Chapter VI of the Council Guidelines No. 1-CA(7)/02/2008 dt. 08/08/2008 and the subsequent amendments) are not violative of the fundamental right to practise profession guaranteed under Article 19(1)(g) of the Constitution.

The Court also held that the clause will be deemed to be effective from 01.04.2024 and quashed the disciplinary proceedings initiated against the members for violation of the clause. 

"We quash the disciplinary proceedings initiated against the petitioners on the basis of the doctrine of legal uncertainty," the bench said.

The Court also held that the ICAI will be at liberty to enhance the number of audits that a CA can undertake.

In the judgment, the bench also made certain notable observations regarding the role of the ICAI :

"ICAI has, over time, received recognition as a premier accounting body domestically and globally for maintaining the highest standards…the ICAI has also played a significant role in ensuring the dynamism of the CA course and the credibility of the examination. We commend that the ICAI must be committed towards the convergence of accounting and ethical standards with international standards…the true test, however, lies in enforcement of these standards…." the Court stated.

The bench dictated the conclusions of the judgment as follows :

1. Clause 6 of Chapter 6 and the subsequent amendment is not violative of Article 19 (1)(g) and is a reasonable restriction

2. This clause is deemed to be effect to from 1.04.2024. Consequently, all proceedings initiated… stand quashed.

 3. Liberty is reserved to the respondent institute to enhance the number of audits that a CA can undertake…

Background

The compulsory tax audit regime was introduced in 1984 by the insertion of Section 44AB in the Income-tax Act, 1961, which came into effect on April 1, 1985. This section made it obligatory for a person carrying on a business or a profession with total sales, turnover or gross receipts exceeding a certain threshold prescribed in the Act in any previous year, to get their accounts of such previous year audited by a Chartered Accountant. The condition laid down under this section is fulfilled only when such an assessee procures a report of the audit in the prescribed form duly signed and verified by the Chartered Accountant before a specified date.

Before 1985, only the accounts maintained by companies and cooperative societies were required to be audited under the Companies Act, 1956 and the Co-operative Societies Act, 1912 respectively. Other categories of taxpayers were exempt from this obligation to get their accounts audited. Section 44AB was enacted primarily to counter tax evasion and check fraudulent practices.

In 1988, in the exercise of the powers conferred by Clause (ii) of Part II of the Second Schedule to the Chartered Accountants Act, 1949, the Council of the Institute of Chartered Accountants of India issued a notification prohibiting members from accepting more than the specified number of tax audit assignments under Section 44AB of the Income-tax Act in a financial year. In the case of a Chartered Accountant firm, this limitation would be applicable to each partner. It was categorically stated in the notification that non-compliance with the said provision would result in the delinquent member being held guilty of 'professional misconduct'. In 2006, the Chartered Accountants Act, 1949 was amended by the Parliament, after which the impugned notification was superseded by Guidelines issued on August 8, 2008.

These guidelines were challenged in several writ petitions filed in different High Courts across India. In some petitions, disciplinary proceedings initiated on the strength of the impugned guidelines have also been challenged. Since conflicting judgements have been rendered on the subject, in 2020, the Supreme Court accepted an application moved by the Institute to transfer all the petitions to itself for a final and conclusive determination of the issues involved.

Summary of Arguments

The principal ground for questioning the validity of the impugned stipulation was that it infringed the fundamental right of citizens to practice any profession or to carry on any occupation, trade or business as enshrined in Article 19(1)(g), apart from also being violative of the right to equality under Article 14. The competence of the Institute to issue this guideline was also called into doubt. Among the counsel who represented the petitioners was Senior Advocate Paramjit Singh Patwalia.

The Institute was represented by Senior Advocate Arvind P. Datar who prefaced his submissions by offering a historical conspectus on the origin of compulsory audit of accounts for a bigger class of assessees under the Income-tax Act, 1961. 

Case Title : Shaji Paulose versus Institute of Chartered Accountants of India Transfer Case (Civil) No. 20/2021

Citation : 2024 LiveLaw (SC) 397

Click here to read the judgment