Wednesday, August 17, 2016

All about ICAI Restriction on Number of Tax Audits

CA Sandeep Kanoi

The article discusses Legislative History behind enactment of Tax Audit Provisions, Imposition of Restriction on number of such Audit to be conducted by Chartered Accountants (CAs) by Institute of Chartered Accountant of India (ICAI), Decision of Honorable High Court and Supreme court on the issue, Report of C&AG on Violation of ICAI guideline , Constitutional Validity of Such restriction imposed by ICAI, Disciplinary Proceeding by ICAI against erring members and Stay by Kerala High Court against any action till disposal of representation of erring members.


1. In order to maintain the quality of tax audit to be conducted by CAs, ICAI prescribed a limit on tax audit assignments that can be under taken by a CA in a FY under Section 44AB of the Income Tax Act, 1961. In case of a Firm, specified number of tax audit assignments shall be applicable for every partners of the Firm. In view of the enhancement of professional competence of members to perform service in IT enabled environment, ICAI raised in February 2014 the limit of tax audit assignments from 45 to 60 and made it effective from audits conducted during F.Y. 2014-15 onwards. ICAI has further changed the same limit from per Financial Year to per Assessment Year in July 2014 by amending the 6.0 and 6.1 of Council Guidelines No. 1-CA(7)/02/2008 dated 8th August, 2008.

Link to above discussed matters:-

Tax Audit Limit Increased From 45 to 60 for audits

Audit Limit of 60 for Tax Audit is per Assessment year – ICAI

No. of Tax Audits & Company Audits Permissible for a Member

C&AG Report on Violation of Tax Audit Limit Prescribed by ICAI

2. In December 2014, a C&AG Audit Report has revealed that 18.87% Chartered Accountants issued Tax Audit reports U/s. 44AB more than the limit prescribed by ICAI under the provisions of the Chartered Accounts Act, 1949. C&AG report revealed that Tax Audit Report issued by such Chartered Accountant is Practice Ranged from 46 to 2471 and out 65898 CAs, 12435 CAs issued Excess Tax Audit Reports than the prescribed Tax Audit Limit. It has also come to notice that there were 22 CAs who issued more than 400 Tax Audit reports.

3. Here one thing is of worthy noting that Income Tax Act, 1961 prescribes only when the provisions of Tax Audit is applicable and who can conduct such Audits but it do not put any limit on number of such audit a CA can perform in a Financial Year or Assessment Year and it’s only the guideline issued by ICAI under the provisions of Chartered Accounts Act, 1949, which puts such restrictions.

Damage Control mode of ICAI

4. Based on above C&AG report ICAI has announced on 27th December, 2014 that it will act against the erring members wherever any act of professional misconduct is observed and it will Refer details of all such members to the Disciplinary Directorate, who are said to have done Tax Audit, under section 44AB of the Income Tax Act, 1961, more than the limit prescribed by the Institute.

ICAI will act against members signing Tax Audit Report more than prescribed

5. ICAI has further decided to develop an IT based system in coordination with the authorities concerned especially to obtain the report of total numbers of Tax Audit done by each member to find out the details of the members not adhering to the Institute’s guidelines.

6. ICAI has also constituted a group pursuant to C&AG’s Report `Performance Audit on Appreciation of Third Party (Chartered Accountants) – Reporting in Assessment Proceedings’ and issued a press release to such effect on 24.01.2015.

Legislative History behind the Introduction of Section 44AB of Income Tax Act, 1961

7. On March 2, 1970, the Government of India constituted a high power committee of experts under the chairmanship of Chief Justice K.N. Wanchoo, retired Chief Justice of India, to examine and suggest legal and administrative measures for counteracting evasion and avoidance of direct taxes in the country [as stated in Chapter-I-Introduction of Direct Taxes Enquiry Committee-Final Report, published by the Government of India in December, 1971]. The Wanchoo Committee was asked to examine and recommend-

(a) concrete and effective measures

(i) to unearth black money and prevent its proliferation through further evasion;

(ii) to check avoidance of tax through various legal devices, including the formation of trusts; and

(iii) to reduce tax arrears;

(b) examine various exemptions allowed by the tax laws with a view to their modification, curtailment or withdrawal,

(c) indicate the manner in which tax assessment and administration may be improved for giving effect to all its recommendations.

8. On a detailed examination of the questions referred to it, the Wanchoo Committee, in its Final Report, submitted to the Government in December, 1971, made a number of recommendations, one of which related to compulsory audit of accounts., which would facilitate the administration of tax laws to a considerable extent if, simultaneously with the compulsory maintenance of accounts, there is a statutory provision for their mandatory audit. Audit would ensure that the books and records are properly maintained, and that they reflect faithfully the taxpayer’s income (as shown in the books of account) and claims for deductions. Audit would also help in the proper presentation of the accounts before the tax authorities, thereby making assessment proceedings more meaningful. Further, in a vast majority of cases, it would save considerable time of the assessing officers which is at present spent on carrying out routine verification, like correctness of totals and whether purchases and sales are properly vouched or not. The time thus saved could then be utilized for attending to more important investigational aspects of a case. The information which the auditor could be required to furnish with his certificate would also enable building up of information exchange for purposes of cross-verification which will be invaluable in detecting tax evasion and spotting new assessees. Audit would also help to check fraudulent practices such as concoction of accounts at later dates, maintaining duplicate sets of accounts, etc.

9. On this aspect, the Hon’ble Finance Minister in introducing the 1984 Bill and his budget proposals stated in Parliament thus (as stated in [1984] 146 ITR (St.) 36):

“With the reduction in rates and expeditious disposal of assessments, I believe there can now be no excuse for any leniency to be shown to those who abuse our laws. Such cases will necessarily have to be dealt with severely. In order to discourage tax avoidance and tax evasion, I am also introducing some further measures. In all cases where the annual turnover exceeds Rs. 20 lakhs or where the gross receipts from a profession exceed Rs. 10 lakhs, I am providing for a compulsory audit of accounts. This is intended to ensure that the books of account and other records are properly maintained and faithfully reflect the true income of the taxpayer.”

10. Clause No. 11 of the Finance Bill of 1984 (Bill No. 11 of 1984) (1984 Bill), was introduced in Parliament to give effect to the financial proposals of the Central Government for the financial year 1984-85. It proposed the introduction of section 44AB in the Act from April 1, 1985, providing for compulsory audit in the non-corporate sector. The notes to this clause explain the object and purposes in these words (as stated in [1984] 146 ITR (St.) 139):

“Clause 11 seeks to insert a new section 44AB in the Income-tax Act relating to audit of accounts of certain persons carrying on business or profession. The proposed provision seeks to make it obligatory for a person carrying on business to get his accounts audited before the ‘specified date ‘ by an accountant, if the total sales, turnover or gross receipts in the business for the previous year or years exceeds or exceed twenty lakh rupees. A person carrying on profession will also have to get his accounts audited before the said date if his gross receipts in profession for the previous year or years exceeds or exceed ten lakh rupees. Such persons will also be required to obtain before the specified date a report of the audit in the prescribed form. These requirements will apply only in relation to the accounts for the previous year or years relevant to any assessment year commencing on 1st April, 1985, or any subsequent assessment year. In cases where the accounts of a person are required to be audited by or under any other law, it will suffice if the person gets his accounts audited under such other law before the specified date and also obtains before the said date, the report of audit in the prescribed form, in addition to the report of audit required under such other law. The expression ‘accountant’, for the purposes of this provision, will have the same meaning as in the Explanation below section 288(2) of the Income-tax Act. The expression ‘specified date’, in relation to the accounts of the previous year or years relevant to any assessment year, means, the date of the expiry of four months from the end of that year or where there is more than one previous year, from the end of the previous year which expired last before the commencement of that assessment year or the 30th June of such assessment year, whichever date falls later. The proposed amendment will take effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years.”

11. Thus after the introduction of Section 44AB, when persons who carry on a business or profession covered by section 44AB of the Income Tax Act file their returns under the Income Tax Act, they are compulsorily required to get their accounts of such previous year or years audited by a CA of their choice before the specified date and obtain a report of such audit in the prescribed form duly signed and verified by him furnishing the particulars stipulated in the rules made by the Board and annex them to their returns filed under Section 139 of the Act. When a return of any such person is not accompanied with an audit report and the particulars prescribed by the rules, then the assessing authority is required to exercise his powers under s. 139(9) of the Act and enforce its compliance hereto under the Act. Section 44AB of the Act excluded income tax practitioners and persons similarly situated‑ from auditing the accounts of their clients who come within the sweep of the section. What is true of the professionals is also true of persons carrying on their business or profession. In other words, those that fall within the sweep of section 44AB of the Act are bound to get their accounts audited from CAs only and not from any other person on and after the enforcement of that provision.

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