SC Upholds ICAI Rule Limiting Number Of Tax Audits Chartered Accountants Can Accept In A Year; Declares It To Be Operative From April 1, 2024

The Supreme Court has upheld the validity of a rule by the Institute of Chartered Accountants of India which limits Chartered Accountants from accepting more than a specific number of tax audit assignments in a financial year.

In that regard, the Bench of Justice BV Nagarathna and Justice Augustine George Masih observed that, "the measures taken, intended to maintain and improve the quality of work and ensure equitable distribution of work among the Chartered Accountants could not be held to be an unreasonable restriction since such restrictions are necessary for maintaining the status of the Chartered Accountants and also for ensuring the quality of the work by them."

The Apex Court also quashed the disciplinary proceedings against the petitioners for violation of the Rule based on the doctrine of uncertainty and ordered that the Rule was deemed operative from 01.04.2024.

Senior Advocate Paramjit Singh Patwalia, along with others, appeared for the petitioners, while Senior Advocate Arvind P. Datar appeared for the respondents.

The compulsory tax audit regime was introduced in 1984 with the addition of Section 44AB to the Income-tax Act, 1961, which became effective on April 1, 1985. This section required individuals running a business or profession with total sales, turnover, or gross receipts exceeding a certain threshold to have their accounts audited by a Chartered Accountant. Compliance was achieved only if the assessee obtained an audit report in the prescribed form, signed and verified by the Chartered Accountant before a specified date.

Before 1985, only companies and cooperative societies were mandated to have their accounts audited under the Companies Act, 1956, and the Co-operative Societies Act, 1912, respectively. Other taxpayers were exempt from this obligation. Section 44AB aimed to combat tax evasion and prevent fraudulent practices.

In 1988, the Institute of Chartered Accountants of India (ICAI) issued a notification limiting the number of tax audit assignments a Chartered Accountant could accept under Section 44AB per financial year. This restriction applied to each partner in a firm and non-compliance was deemed 'professional misconduct'. In 2006, after amendments to the Chartered Accountants Act, 1949, these guidelines were replaced by new ones issued on August 8, 2008.

These new guidelines faced challenges in various High Courts across India, with some petitions also contesting disciplinary proceedings based on the guidelines. Due to conflicting judgments, the Supreme Court agreed in 2020 to transfer all petitions to itself for a final resolution.

The main argument against the guidelines was that they violated the fundamental right to practice any profession or business under Article 19(1)(g) of the Constitution and the right to equality under Article 14. Additionally, the ICAI's authority to issue the guidelines was questioned. 

The Apex Court came to the following conclusions:

a) Clause 6.0, Chapter VI of the Guidelines dated 08.08.2008 and its subsequent amendment is valid and is not violative of Article 19(1)(g) of the Constitution as it is a reasonable restriction on the right to practise the profession by a Chartered Accountant and is protected or justifiable under Article 19(6) of the Constitution.

b) However, the said clause 6.0, Chapter VI of the Guidelines dated 08.08.2008 and its subsequent amendment is deemed not to be given effect to till 01.04.2024.

c) Consequently, all proceedings initiated pursuant to the impugned Guideline in respect of the writ petitioners and other similarly situated Chartered Accountants stand quashed.

d) Liberty is reserved to the respondent-Institute to enhance the specified number of audits that a Chartered Accountant can undertake under Section 44AB of the IT Act, 1961, if it deems fit.

e) Liberty is also reserved to the writ petitioners or any other member of the respondent-Institute to make a representation in the above context which may be taken into consideration in the event respondent-Institute intends to amend the Guideline as per point No.(d) above.

The Registry was directed to intimate the concerned High Courts regarding the disposal of the transferred cases.

Cause Title: Shaji Poulose vs Institute of Chartered Accountants of India & Ors.

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