Madras High Court
R. Sathya Moorthy And Ors. vs Union Of India And Ors. on 29 August, 1989
Equivalent citations: [1991]189ITR491(MAD)
Author: S. Mohan
Bench: S. Mohan
JUDGMENT
S. Mohan, Officiating C.J.
1. All these writ petitions can be dealt with under a common judgment, since the prayer is one and the same, viz., for a declaration that section 44AB of the Income-tax Act, 1961, which imposes audit of accounts of assessees by accountants alone and restraining the other authorised and qualified practitioners as unreasonable, discriminatory and unconstitutional. In all the cases, barring W.P. No. 10765 of 1989, the petitioners are income-tax practitioners. The petitioner in W.P. No. 10765 of 1985 is an assessee.
2. It is enough if we refer to W.P. No. 3203 of 1985. The petitioner herein is an income-tax practitioner. He has been so registered with the Commissioner of Income-tax and, in the course of the exercise of his procession, he assists assessees in the preparation of accounts, balance-sheets, profit and loss accounts, statements and return of income to be filed before the income-tax authorities. He has been carrying on his profession since 1976.
3. He is an authorised representative within the meaning of section 288(1) of the Act. The relevant clause applicable would be clause (vi) of sub-section (2) which reads as follows :
"(vi) any person who has acquired such educational qualifications as the Board may prescribe for this purpose".
4. Section 139 of the Act provides for filing a return. Sub-section (9) read along with the Explanation says that the return of income shall be accompanied by statements relating to the computation of the income chargeable under various heads of accounts, computation of the gross total income and computation of the tax payable on the income returned.
5. As per rule 12A of the Rules, every authorised representative, before he makes an appearance before the Income-tax Officer or after making such appearance, shall furnish to the officer :
(a) particulars of accounts, statements or other documents supplied to him by the assessee for the preparation of the return of income; and
(b) if the authorised representative has for the purpose of the preparation of the return of income carried out any examination of such accounts, statements or documents, a report on the scope and results of such examination.
Therefore, as per the above provision, he is an authorised representative to what is commonly known as "audit".
The Finance Act, 1984, has introduced a new section 44AB which runs as follows :
"Audit of accounts of certain persons carrying on business or profession. -
Every person, -
(a) carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds forty lakh rupees in any previous year or year relevant to the assessment year commencing on the day of April 1, 1985, or any subsequent assessment year; or
(b) carrying on profession shall, if his gross receipts in profession exceed ten lakh rupees in any previous year or years relevant to the assessment year commencing on the day of April 1, 1985, or any subsequent assessment year, get his accounts of such previous year or years audited by an accountant before the specified date and obtain before that date the report of such audit in the prescribed from duly signed and verified by such accountant and setting forth such particulars as may be prescribed :
Provided that in a case where such person is required by or under any other law to get his accounts audited by an accountant, it shall be sufficient compliance with the provisions of the section if such person gets the accounts of such business or profession audited under such law before the specified date and obtains before that date the report of the audit as required under such other law and a further report in the form prescribed under this section.
Explanation. -For the purposes of the section. -
(i) 'accountant' shall have the same meaning as in the Explanation below sub-section (2) of section 288;
(ii) 'specified date', in relation to the accounts of the previous year or years relevant to an assessment year, means the date of the expiry of four months from the end of the previous year or, where there is more than one previous year, from the end of the previous year which expired last before the commencement of the assessment year, or the day of June 30 of the assessment year, whichever is later".
6. Consequent to the introduction of this section, the authorised representatives other than the chartered accountants are gravely affected as they are denied the right to carry on their profession effectively. In practical terms, this would, in fact, exclude all authorised representatives other than chartered accountants from practising their profession as authorised representatives in respect of the assessees whose turnover exceeds rupees forty lakhs and in respect of professional whose income (gross receipts from profession) exceeds rupees ten lakhs.
7. As a result of this compulsory audit by the chartered accountants, necessarily, one has to engage the services of chartered accountants. The result will be to exclude all authorised representatives other than chartered accountants from practising their professional and this would amount to an unreasonable restriction, amounting to almost a prohibition. Further, it brings about a discrimination in favour of a class of persons, viz., chartered accountants. Therefore, this provision is attacked in the affidavit as follows :
"The petitioner submits that the classification made by choosing only chartered accountants for favoured treatment as against other classes of authorised representatives would be a person who falls within one of the clauses of section 288(2). I am authorised to appear before an Income-tax Officer as an authorised representative by virtue of clause (v) of section 288(2) read with rule 51(1). In view of the equal treatment of authorised representatives contemplated by section 288(2), there is no justification to single out only chartered accountants and give them a favoured treatment as contemplated by section 44AB. The classification is arbitrary and irrational.
The petitioner submits that section 139(9) and rule 12A are the provisions dealing with filing of the return of income and completion of an assessment thereon, and the discrimination brought out between chartered accountants on the one hand and other categories of authorised representatives is unjustified. The information that is to be furnished before the Income-tax Officer is the same whether it is filed by a chartered accountant or by any other authorised representatives and all the necessary information is furnished to the Income-tax Officer. Section 44AB is, therefore, violative of article 14 of the Constitution.
The effect of section 44AB is that it discriminates between the different classes of authorised representatives and imposes a restriction upon certain categories of authorised representatives. Since the direct effect of section 44AB is to exclude all other categories of authorised representatives except chartered accountants from carrying on their profession, it brings in an oppressive restriction in the guise of an obligation. Hence, section 44AB is violative of article 14 of the Constitution.
The petitioner submits that he has a fundamental right to carry on his profession as an authorised representative without any hindrance. This right is guaranteed under article 14 of the Constitution. Further, article 19(1)(g) confers a fundamental right upon which only reasonable restrictions in the public interest may be imposed. Section 44AB is so arbitrary and unreasonable that it violates both articles 14 and 19(1)(g) of the Constitution."
8. In the counter filed by the Chief Commissioner of Income-tax and Commissioner of Income-tax, Tamil Nadu, after tracing out the advantages of compulsory audit of accounts, it is stated that, in the year 1984, it was found that time was ripe to introduce compulsory audit in the case of big assessees in non-corporate sector. The tax administration has become complex with the increase in the number of assessees and it was felt necessary by the Government that compulsory audit in the cases of bigger the Income-tax Officer to concentrate on the investigational aspect of the assessment rather than attending to routine check of the accounts maintained by the assessees. It is incorrect to contend that the chartered accounts have been favoured to the exclusion of the income-tax practitioners. Auditing of accounts is a specialised job. It means official examination of accounts and verification by reference to receipts and vouchers. Therefore, only chartered accountants have acquired such skill and knowledge. It may be true that some income-tax practitioners may also acquire that skill by sheer practice without passing the necessary examinations. But that does not preclude Parliament from prescribing special qualifications with reference to the auditing of the accounts.
9. The inevitability brought about by section 44AB by restraining certain class of authorised representatives from being engaged by certain assessee for audit of their records and accounts itself cannot render the provision unconstitutional. Chartered accountants are a class by themselves. Therefore no discrimination ever arises. Equally, the right of the petitioners under article 19(1)(g) of the Constitution is not in any way affected. A comparison between the income-tax practitioners on the one hand and the chartered accountants on the other is obvious. The impugned section does not preclude assessees from taking advice from legal practitioners for their legal problems. Even now, nothing prevents the income-tax practitioners from preparing the return of the bigger assessees or representing them before the income-tax authorities. Where a provision is sought for making the tax administration more efficient, the petitioners have no right to complain about the infraction of their fundamental rights. Prescribing qualification for audit of certain assessee's accounts is certainly within the legislative competence of Parliament. Therefore, article 19(1)(g) of the Constitution is not violated. The writ petition is, therefore, devoid of merit and is liable to be dismissed.
Before us, the following points, are urged :
(a) This is an unreasonable classification because where, for long, the petitioners have all along been furnishing statements of accounts and representing the cases of various assessees, irrespective of what their income, suddenly that right cannot be exclusively conferred on chartered accountants;
(b) This section takes away the fundamental right of practising and
(c) Having regard to the terms of the proviso, it clearly brings about discrimination because a person other than a chartered accountant would represent the case. In the case of co-operative societies, for instance, if the auditor is enabled to audit the accounts under any special law, the same auditor cannot represent in the case of any other assessees. From this point of view, it is hit by article 14 of the Constitution of India.
10. Mr. k. Srinivasan, appearing for the assessee in W.P. No. 10765 of 1985, states that every person has a right to carry on business in his own way. All that it required of him is to file a true return. Such a return can be filed by the assessee himself. There is no necessity to engage a chartered accountant. If that be so, why not allow the assessee himself to file a statement of accounts and why compel him to take the services of a chartered accountant. By reason of this compulsion, freedom of trade guaranteed under article 19(1)(g) of the Constitution is denied in the case of an assessee. Therefore, beside the points raised on behalf of the income-tax practitioners, he would add this as well.
11. Mrs. Nalini Chidambaram, appearing for the Department, would state that the points raised by both counsel (in all these writ petitions) either on behalf of the income-tax practitioners or on behalf of the assessee are no longer res integra. There are several decisions which have upheld the validity of the section wherein identical contentions raised on behalf of the petitioners have been held to be untenable. Counsel submitted in support of their submissions Mohan Trading Co. v. Union of India ; Rajkot Engineering Association v. Union of India [1986] 162 ITR 28 (Guj); Abhay Kumar and Co. v. Union of India ; A. S. Sarma v. Union of India and T. S. Nataraj v. Union of India [1985] 155 ITR 81 (Kar). She is adopting the reasoning contained in these judgments as her arguments and would submit that the writ petitions are liable to be dismissed.
12. Having regard to the above arguments, we are only to consider whether the main provision under section 44AB is violative of either article 14 or article 19(1)(g) of the Constitution of India. Then, the other question would be relating to the proviso. We do not think that we need dwell at length because, as rightly urged on behalf of the Revenue, all the points either from the point of view of the income-tax practitioners or from the point of view of the assessee have been considered elaborately in several decisions. First of all, we would refer to the objects and reasons for introduction of the section (see [1985] 146 (St.) 161) :
"Accounts maintained by companies are required to be audited under the Companies Act, 1956. Accounts maintained by co-operative societies are also required to be audited under the Co-operative Societies Act, 1912. There is, however, no obligation on other categories of taxpayers to get their accounts audited.
A proper audit for tax purposes would ensure that the books of account and other records are properly maintained and that they faithfully reflect the income of the taxpayer and claims for deductions are correctly made by him. Such audit would also help in checking fraudulent practices. It can also facilitate the administration of tax laws by a proper presentation of the accounts before the tax authorities and considerably saving the time of assessing officers in carrying out routine vertifications, like checking correctness of totals and verifying whether purchases and sales are property vouched or not. The time of the Assessing Officers thus saved could be utilised for attending to more important investigational aspects of the case.
Having regard to the foregoing considerations, the Bill seeks to make a new provision in the income-tax Act making it obligatory on 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 business for the accounting year or years relevant to the assessment year 1985-86 or any subsequent assessment year exceed or exceeds forty (forty, by F. A. 1984 from 1-4-85) See [1984] 147 ITR (St.) 43.lakhs rupees. A person carrying on profession will also have to get his accounts audited before the 'specified date', if his gross receipts in profession for an accounting year or years relevant to any of the aforesaid assessment years exceed ten lakhs rupees. The proposed new provision also casts an obligation on such persons to obtain before the 'specified date' a report of the audit in the prescribed form duly signed and verified by the 'accountant' setting for the such particulars as may be prescribed by rules made in this behalf by the Central Board of Direct Taxes.
In cases where accounts are required to be audited by or under any other law (as in the case of companies and co-operative societies), it will suffice if the accounts are audited under such other law before the 'specified date' and the assessee obtains before the said date the report of the audit as required under such other law, and also a report of audit in the form to be prescribed by the Central Board of Direct Taxes.
For the purposes of the proposed provisions, the term 'accountant' will have the same meaning as in the Explanation below sub-section (2) of section 288 of the Income-tax Act. The expression 'specified date', in relation to the accounts of any accounting year or years relevant to any assessment year, would mean the date of the expiry of four months from the end of the accounting year or, where the assessee has more than one accounting year, from the end of the accounting year which expired last before the commencement of that assessment year or the June 30 of that assessment year, whichever is later.
If any person fails, without reasonable cause, to get his accounts audited in respect of any accounting year or years relevant to an assessment year or to obtain a report of such audit as required under the aforesaid provision, the Income-tax Officer may direct that such person shall pay, by way of penalty, a sum equal to one-half per cent. of the total sales, turnover or gross receipts, as the case may be, in the business or of the gross receipts in the profession, in such accounting year or years, subject to a maximum of one lakh rupees.
The proposed provision will take effect from April 1, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years."
13. This explains sufficiently the object behind the introduction of this provision. Really, a proper audit for tax purposes would ensure the proper maintenance of accounts which would faithfully reflect the state of affairs. It would help detecting fraudulent practices and, therefore, it is for the benefit of facilitating the administrators of tax laws. The matter will have to be approached only from that perspective.
14. So considered, we find that in Mohan Trading Co. v. Union of India [1985] 156 ITR 134, a Division Bench of the Madhya Pradesh High Court, after referring to the objects and reasons, held concerning violation of article 14 of the Constitution as follows (p. 143) :
"The next contention based on article 14 of the Constitution relates to the alleged unfair advantage to the chartered accountants to dislodge legal practitioners as the assessee's 'authorised representative' before the assessing authority. It was argued that the chartered accountants who would audit the assessee's accounts were more likely to be engaged by the assessees as their 'authorised representative' for representation before the assessing authority in preference to the legal practitioners. It was urged that, in this manner, there was discrimination against the legal practitioners. In our opinion, there is no merit in this contention, which is based on an obvious fallacy.
The chartered accountants, who do the work of audit, perform the function of an 'accountant' on account of the special qualification they have for this purpose and the legal practitioners obviously do not belong to that category. It is, therefore, not a case where the legal practitioners, who are qualified to perform the duty of an 'accountant' have been restrained from doing so. As for representation of the assessee before the assessing authority, the legal practitioner as well as the 'accountant' appear for the assessee, since both are included in the category of persons entitled to represent the assessee as an 'authorised representative' in accordance with section 288 of the Act. It is for the purpose of section 288 of the Act that a legal practitioner and an 'accountant' are equals and not for the purpose of compulsory audit of the assessee's accounts, for which the 'accountant' alone is qualified. Admittedly, there is no discrimination made between a legal practitioner and an 'accountant' for the purpose of appearance as an 'authorised representative" of the assessee in accordance with section 288 of the Act. If a person clubbed with others in section 288 possesses some further qualification enabling him to perform a function in addition to appearance as an 'authorised representative' of the assessee, no discrimination can result from the disability of others for want of qualification, to perform the additional function outside the ambit of section 288 of the Act. The mere possibility of an 'accountant' being preferred to a legal practitioner for the purpose of representing the assessee before the assessing authority is no ground to hold that there is any discrimination between them as equals under section 288 of the Act......
We fail to see how any case for discrimination between legal practitioners and accountants is made out to invoke article 14 of the Constitution simply because both of them are authorised to represent the assessee before the assessing authority by virtue of section 288 while the 'accountant' alone can audit the assessee's accounts as required by section 44AB, of the Act. For the purpose of compulsory audit under section 44AB, an accountant and a legal practitioner are unequals and they cannot, therefore, be treated alike. For the purpose of representing an assessee before the assessing authority, they are equals in accordance with section 288 of the Act and there is no allegation of discrimination between them for this purpose."
As regards violation of article 19(1)(g) of the Constitution, it is observed (p. 148) :
"The object clearly is to prevent tax evasion and plug loopholes enabling tax avoidance. The impugned provision have been enacted for this purpose as one of the measures in the drive to unearth black money and to prevent its further growth. Even assuming that this object is not fully achieved by enactment of the impugned provisions, that can be no ground to hold that it is unconstitutional. It cannot, however, be doubted that the impugned provisions are a step towards achieving the professed object and are, therefore, in consonance with it. This alone is sufficient for the present purpose.
It was also urged on behalf of the petitioners that any attempt to check 'tax avoidance' is not a legitimate object since 'tax avoidance' is permissible to an assessee who can reduce his tax burden by arranging his affairs in the manner permitted by law. It is sufficient to say that any attempt to plug loopholes in order to make 'tax avoidance' difficult is a legitimate legislative exercise and no objection can be taken to it. This being so, an attempt in that direction to discourage 'tax avoidance' and 'tax evasion' as stated in the Budget Speech of the Finance Minister cannot be called an illegitimate objective of the Legislature. We may also refer usefully to a recent decision of the Supreme Court in McDowell and Co., Ltd. v. CTO [1985] 154 ITR 148, wherein the shift towards emphasis on frowning at tax avoidance has been indicated. In view of this later decision of the Supreme Court, reference made by the Finance Minister in his Budget Speech to discouraging 'tax avoidance' cannot be objected to.
It follows from the above discussion that challenge to the impugned provisions on all the aforesaid grounds based on article 14 and article 19(1)(g) of the Constitution has no merit and must be rejected.
We may at this stage also refer to a decision of the Karnataka High Court in T. S. Nataraj v. Union of India [1985] 155 ITR 81, wherein a similar challenge to the constitutional validity of these provisions based on articles 14 and 19(1)(g) was rejected. With respect, we are in agreement with the conclusion reached therein."
15. It may be seen that this ruling referred, in its turn to T. S. Nataraj v. Union of India [1985] 155 ITR 81 (Kar) and agreed with the conclusion contained therein. Therefore, we will now take up T. S. Nataraj v. Union of India [1985] 155 ITR 81 (Kar) wherein the petitioners belong to two categories - (1) income-tax practitioners and (2) taxpayers. The taxpayers, as is urged here by Mr. Srinivasan. Urged as follows (at p. 85) :
"The taxpayers, supporting the income-tax practitioners, have urged that section 44AB unreasonably compels them to have their accounts audited by chartered accountants which is satisfactorily attended to by their income-tax practitioners without any complaint by the income-tax authorities. They have highlighted the inconveniences, hardships and difficulties they are exposed to by the exclusive privilege conferred on the chartered accounts; they may dictate their own terms against them."
16. The Division Bench considered the matter at length and came to the conclusion rejection the contention (p. 118) :
"We have earlier indicated that taxpayers have the weakest case. The bigger cases of bigger assessee whose transactions exceed the specified amounts cannot compare themselves with those that do not exceed the specified limit. Every one of the reasons on which we have held that the provision is not arbitrary and is not violative of article 14, apply with greater force to reject the challenge of the taxpayers. We have, therefore, no hesitation in rejecting the challenge of the taxpayers to section 44AB of the Act based on article 14 of the Constitution.
We will now turn to examine the challenge of the petitioners based on article 19(1)(g) of the Constitution.
Every one of the reasons on which we have rejected the challenge of the petitioners based on article 14 are also relevant to decide their challenge based on article 19 also. We, therefore, do not propose to restate them over again and proceed to examine only the special requirements of that article."
17. In Rajkot Engineering Association v. Union of India [1986] 162 ITR 28, a Division Bench of the Gujarat High Court considered this question in a very elaborate way and it also dealt with the proviso, at page 83, as under :
"The second limb of this contention that the sub-classification makes the main classification unintelligible appears to be attractive and, therefore, requires to be examined."
The answer is found at page 88 of 162 ITR which runs as below :
"In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment..... If, therefore, Parliament in its legislative wisdom has thought it fit to extend the special privilege, if there is any, of being entitled to carry out tax audit to special auditors who are recognised under a special law to be auditors for a category of assessees, we do not think that we would be justified in treating this impugned provision as violative of article 14 of the Constitution since in our opinion there is a fair reason for granting this preferential treatment to the special categories of assessees who are required under the special law to get their accounts audited, as for example, co-operative societies under the relevant Co-operative Societies Act since otherwise these welfare agencies would be subjected to the burden of audit twice over-one being commercial audit and the other being tax audit. It cannot be said that there is no fair reason underlying the proviso for giving preferential treatment to a specified category of assessees, this apparent preferential treatment does not militate against the rule of equality enshrined under article 14 of the Constitution. The non-corporate assessees who are not required to get their accounts audited under any law cannot, therefore, press this proviso in support of their plea of under-classification, because Parliament having recognised that these welfare agencies constituted under the special Act subjecting them to commercial audit thought it fit to exclude them from the obligation of the tax audit by the chartered accounts and to treat the report of the special auditor as sufficient compliance with the obligation under the impugned section, we do not think that it can be said that there is no fair reason for the apparent under-classification. We are, therefore, unable to agree with the 'two-fold contention urged by the learned Advocate-General of Gujarat appearing for the petitioners."
18. The same line of reasoning was adopted by a recent judgment of the Andhra Pradesh High Court in A. S. Sarma v. Union of India [1989] 175 ITR 254. Here again, the Division Bench held as under dealing with the aspect of equality (p. 261) :
"Income-tax practitioners an auditors cannot be considered on par with chartered accountants regarding expertise and excellence in audit. It is contended that the income-tax practitioners, advocates and chartered accountants are considered and treated alike under section 288 and, therefore, there is no logic for this differentiation. Section 288 enumerates the diverse categories of persons entitled to attend on behalf of the assessee before the hierarchy of authorities under the Act and apart from other persons, income-tax practitioners, advocates and chartered accountants are mentioned. A glance at the list of persons set out in sub-section (2) of section 288 reveals that the persons who are expected to make an effective and genuine representation and having an over-view knowledge of the affairs of the assessee are authorised to represent without reference to any specialised proficiency in taxation or otherwise. It is patent that all those categories are lined up on an equal footing under section 288 for the purpose of representation of the case of the assessee and this equal eye should be confined to the purpose of representation only and it cannot be expected of advocates and income-tax practitioners with their background of education and academic attainment to give a good account of themselves in audit. Equally, chartered accountants cannot be credited with legal education. Chartered accounts constitute a distinct group and income-tax practitioners and advocates cannot be equated with them in so far as audit is concerned and as such section 44AB is not violative of article 14 of the Constitution. In T. S. Nataraj v. Union of India [1985] 155 ITR 81 (Kar) and Mohan Trading Co. v. Union of India , the Karnataka and Madhya Pradesh High Courts, respectively, took the same view."
It may also be noticed that the Division Bench further held as below (p. 261) :
"The object of section 44AB is to have a detailed scan of accounts of assessees in higher income brackets so that the detection of evasion, if any, may yield attractive dividends regarding exigibility to tax. Further, the compulsory audit facilitates the assessing authority to get at a neat epitome of the transactions without the necessity of devoting considerable time to scrutiny of accounts and transactions. The audit report contributes to expeditious and accelerated assessments and detection of evasion. The stipulation of audit by chartered accountants has a legitimate affinity to the object sought to be achieved. Learned counsel for the petitioner contended that by diverting their clientele to the corridors of chartered accounts for the purpose of audit, the petitioners lose their grip over them and there is a remote possibility of such assessees unfolding themselves from the nest of chartered accountants. This contention is far-fetched and not founded upon proximity to a realistic approach."
19. It may be noticed that the two decisions to which we have made reference had been cited with approval. Therefore, with respect, adopting the reasoning in these decisions, we find absolutely no difficulty in upholding the validity of section 44AB.
20. All these writ petitions will, accordingly, stand dismissed with costs, counsel's fee Rs. 500 in each petition.
21. Some after we delivered judgment, an oral application was made for leave to appeal to the Supreme Court. Leave granted.