Introduction
In the case of Shaji Poulose v. Institute of Chartered Accountants of India & Ors.[i], the Hon'ble Supreme Court (‘SC’) disposed of tagged Writ Petitions (‘WPs’) filed by Chartered Accountants (‘CA’) challenging clause 6.0, chapter VI of the guidelines dated 08.08.2008 (‘2008 Guideline’) and its amendment. The SC held that the said amendment is valid and is not violative of a. 19(1) (g) of the Constitution of India (‘Constitution’). It observed that the limit of 60 tax audits under s. 44AB of the Income Tax Act, 1961 (‘IT Act’) per CA is a reasonable restriction under a. 19 (6) of the Constitution.
Brief Facts
· The Petitioners, being CAs, aggrieved by Clause 6 of Guidelines No.1- CA (7)/02/2008 dated 08.08.2008 (‘Impugned Clause’) issued by the Institute of Chartered Accountants of India (‘ICAI’) challenged the validity of the Impugned Clause of the 2008 Guideline vide a batch of WPs.
Consequently, the Petitioners vide these WPs were aggrieved and praying for the following:
Favourably amending the ceiling limit to only 60 tax audits, which every CA can conduct and accept in one assessment year as per s. 44AB of the IT Act being the compulsory audit provision. This ceiling limit has been a topic of debate, and the ICAI has increased the limit over time based on various considerations. Initially, they set a limit of 30 audits in 1989. Then, in February 2014, they raised the limit to 60 audits through a resolution passed in the 331st meeting of the Council of the ICAI, which is the current limit under challenge;
Quashing or setting aside the disciplinary proceedings initiated by ICAI for professional misconduct by the CAs for not complying with the ceiling limit as laid down in the 2008 Guideline.
Some WPs were filed on the basis of the CA right under a. 19(1) (g) of the Constitution being violated and the Impugned Clause being arbitrary and illegal in nature. Other WPs were filed invoking a.32 and a.226 of the Constitution, praying for appropriate directions from various High Courts (‘HC’). The SC, vide an order 09.12.2020, transferred the entire batch of the aforementioned WPs to the current bench of SC, tagging all the cases together for appropriate disposal.
Observations
Before the SC proceeded with its observations on merits, the Bench focused on the right of the CA granted by the Chartered Accountants Act, 1949 (‘CA Act’). The SC, by placing reliance on the decision of All-India Federation of Tax Practitioners v. Union of India[ii]., observed and agreed as laid down in paragraph 34 of the judgment a CA or a Cost Accountant obtains its license from the relevant competent bodies to practice the profession. The SC further noted that s. 2(1)(b) of the CA Act defines a CA as someone who is a member of the ICAI, suggesting that as someone who is a member of the ICAI, the institute itself grants the privilege to the professionals practising as a CA.
With respect to the first issue relating to the 2008 Guideline limiting the number of conducting tax audits under s. 44AB of the IT Act and imposing restrictions on the same, the SC observed as follows:
The SC, with respect to this issue, observed that the Council of ICAI had the authority to issue the 2008 Guideline limiting the tax audits per CA, restricting the number of tax audits, which was initially 30, which was later raised to 45 and finally to 60. Therefore, it was held that the Council of ICAI has the legal authority to create the 2008 Guideline as per clause 1 of Part II of the Second Schedule of the CA Act, and this power can hence not be challenged as it is not arbitrary and unreasonable. However, the said Impugned Clause of the 2008 Guideline and its subsequent amendment will not be deemed in effect till 01.04.2024.
Chapter V of the CA Act, which deals with misconduct, allows the Council of the ICAI to define new types of misconduct through regulations or guidelines, bearing in mind that new technologies and developments can create new forms of unprofessional behaviour. Furthermore, amending the CA Act for such new instances would be impractical and therefore, the Council of ICAI has the power to define misconduct.
With respect to the second and third issues relating to the 2008 Guideline, if these restrictions imposed by the Council of ICAI were violating the fundamental right of the CAs under a. 19(1)(g) of the Constitution and whether these restrictions are arbitrary and impermissible under a. 14 of the Constitution, the SC held and observed as follows:
By relying on the various cases of the SC, it was noted that the Constitution allows the State to place some valid restrictions on professions, which must be reasonable and justified under a. 19(6) of the Constitution. Secondly, it permits the State to set qualifications required for a profession or carry on any trade or profession. Lastly, the SC noted that there cannot be any restrictions on professions beyond what is stated and permitted under a. 19(6) of the Constitution.
The SC relied on and trusted the judgement of the ICAI, considering that they acted on well-intentioned recommendations from the Comptroller and Auditor General of India and the Central Board of Direct Taxes. The SC found no complication in the ICAI’s effort to prevent tax audits' unethical and poor quality. Therefore, it noted that setting a ceiling limit to conduct tax audits was necessary.
The SC further observed that there is a crucial distinction between a right and a privilege. It was noted that performing a tax audit is not an inherent part of being a CA, nor is it essential to the profession, and therefore, it is not a fundamental right of the CA protected by a. 19(1)(g) of the Constitution. Since performing tax audits is a privilege granted to the CAs by the ICAI, it can be reasonably restricted. A restriction like limiting the number of audits is less severe than completely taking the privilege away. Therefore, the SC held that the ICAI has the complete authority to regulate this privilege of conducting tax audits in a way that serves the public interest.
With respect to the final issue, considering the limit on tax audits as professional misconduct, the SC quashed the disciplinary actions initiated against the Petitioners due to legal uncertainty caused by the previous guideline of ICAI being cancelled and the 2008 Guideline being challenged. Ultimately, the SC held that the Impugned Clause of the 2008 Guideline will be deemed to be in effect from 01.04.2024.
Lastly, the SC allowed the ICAI to raise the limit of tax audits a CA can perform under s. 44AB of the IT Act, in case they decide to do so, further grants liberty to the Petitioners and other members of ICAI to submit their suggestions regarding the increase of limit for the ICAI to consider and accordingly change the 2008 Guideline.
Our Analysis
This decision of the SC has significant consequences for the CAs and tax compliance. The SC sided with the ICAI while balancing the interests of both the CAs and the public. Importantly, the SC acknowledged the authority of the ICAI to modify these guidelines in the future, reflecting on the adaptability of the regulations in response to the changing circumstances. While acknowledging the supremacy of the ICAI and its efforts in regulating the profession, it also did justice to the CAs by quashing the disciplinary proceedings initiated against them by the ICAI in certainty to the legal position under challenge.
In conclusion, this decision will be considered an important precedent as it has upheld the ICAI’s limit on tax audits and clarified the difference between the rights and privileges of the professionals by defining the boundaries of the professional practice of CAs in India within the framework of the Constitution.
End Notes
[i] 2024 SCC OnLine SC 988
[ii] (2007) 7 SCC 527
Authored by Aishwarya Pawar, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.