Income Tax Act Prevails Over MSMED Act For Special Audit Fee Dispute With The Department: Delhi High Court

While allowing the Revenue Department’s petition challenging the directions for reference to arbitration passed by the Micro and Small Enterprise Facilitation Council (MSEFC) involving a special audit fee dispute between a CA Firm and IT Dept., the Delhi High Court ruled that Income-tax Act, 1961 prevails over MSMED Act for Special Audit Fee dispute with IT Dept.

In short, the High Court thus, clarified that a special audit firm cannot invoke the provisions of the MSMED Act against the I-T department qua the amount payable for carrying out such audit.

A Single Judge Bench of Justice Prathiba M. Singh observed that “The MSMED Act has no applicability to the nature of the assignment which has been given to the Respondent/CA Firm. The CA Firm may be registered as a Micro or Small enterprise and may be entitled to an invocation of the jurisdiction of the MSMED Act for other purposes. Insofar as the assignment is emanating from a statute i.e., under Section 142(2A) of the IT Act, the determination of the remuneration is solely the prerogative of the Commissioner or the Chief Commissioner”.

The Bench further elaborated that the same would not be liable to be called into question either in a civil court or in a commercial suit or civil suit as one of recovery of money, and therefore, the nomination as a Special Auditor for the conduct of Special Audit is governed purely by the provisions of the Income Tax Act and Rules.

Senior Advocate Ruchir Bhatia appeared for the Petitioner (Revenue Department), whereas Advocate Avishkar Singhvi appeared for the Respondent.

The brief facts of the case are that the Respondent CA Firm engaged in conducting Special Audit of Oracle India, Sahara India Financial Corporation and Reverse Logistics, had raised the invoice of Rs.6.44 Crores. The Revenue Department, however, determined and paid fees of Rs.1.36 Crores for only two audit assignments whereas the fees for all three assignments were determined at Rs.1.6 Crores. The CA Firm treated the fee outstanding as per the invoice as the fee payable and approached MSEFC by way of references under Section 18 of the MSMED Act. Under the said references, the matter was thereafter referred to the Delhi International Arbitration Centre (DIAC) by the MSEFC. Thereafter, the Income Tax Department preferred two 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 under Section 142(2A) in respect of the fee payable in terms of Section 142(2D) of the I-T Act.

After considering the submission, the Bench noted that the nature of the Special Audit and the way the fee is determined requires domain expertise and knowledge which MSEFC cannot possess.

While expounding on the function which is in effect delegated to the Audit firm is one which is exercised under the Income Tax Act and would be purely governed by the said statute, the Bench categorically upheld the ‘statutory nature’ of assessments where the Special Auditor assists the AO.

Thus, the Bench held that the Income Tax Dept. cannot be termed as a ‘buyer’ for availing the services of a CA Firm, which cannot be termed as a ‘supplier’.

Observing that invoking MSMED Act over the statutory duty of Special Audit is not tenable, the High Court clarifies that a CA Firm may be registered as a micro or small enterprise and may be entitled to the invocation of the jurisdiction of the MSMED Act for other purposes.

Further, the High Court elucidated that the determination of the CA Firm's remuneration is solely the prerogative of the specified Revenue authorities and would not be liable to be called into question either in a commercial suit or civil suit for recovery of money.

Therefore, finding a clear lack of jurisdiction in the MSEFC, which even failed to consider whether the MSMED Act would itself be applicable or not, the High Court emphasized that insofar as Audits under Section 142(2A) are concerned, the IT Act would have to be reckoned as the Special Act and the MSMED Act as the general Act dealing with MSME disputes.

Cause Title: Principal Commissioner of Income tax v. MSEFC and Anr. [Neutral Citation: 2023: DHC: 4581]

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