# Shaji Poulose v. Institute of Chartered Accountants of India & Others

- **Citation:** 2024 INSC 451
- **Court:** Supreme Court of India
- **Decided:** 2024-05-17
- **Bench:** B.V. Nagarathna, Augustine George Masih
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/shaji-poulose-v-institute-of-chartered-accountants-of-india-others-37789
- **Pages:** 87

## Headnote

Council of the Institute of Chartered Accountants of India,
if competent to impose, by way of Guidelines, a numerical
restriction on the maximum number of tax audits that could be
accepted by a Chartered Accountant, u/s. 44AB of the 1961
Act, in a Financial Year by way of a Guideline; the restrictions
imposed, if unreasonable, arbitrary and illegal and thus, violative
of the right guaranteed to Chartered Accountants u/Art. 19(1)(g)
and impermissible u/Art. 14 of the Constitution; and exceeding
of the specified number of tax audits, if can be deemed to be
'professional misconduct'.
Headnotes
Chartered Accountants Act, 1949 - Income Tax Act, 1961 - s.
44AB - Audit of accounts - Clause 6 of Guidelines No.1CA(7)/02/2008 dated 08.08.2008 issued by the Institute of
Chartered Accountants of India, restricting the number of tax
audits that a Chartered Accountant could carry out which was
initially thirty and later raised to forty-five and thereafter to
sixty in an assessment year - Petitioners undertook audits
u/s. 44AB of the IT Act, 1961 over and above the number of
tax audits specified as per the Guidelines dated 08.08.2008 -
Issuance of the notices to the petitioners for violation of the
Guideline which was a misconduct - Initiation of disciplinary
proceedings by the Institute against the petitioners - Challenge
to the Guidelines as well as to the disciplinary proceedings:
Held: Clause 6.0, Chapter VI of the Guidelines dated 08.08.2008
and its subsequent amendment is valid and not violative of Art.
19(1)(g) as it is a reasonable restriction on the right to practise
the profession by a Chartered Accountant and is protected or
justifiable u/Art. 19(6) - However, the said clause 6.0, Chapter VI
778
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of the Guidelines dated 08.08.2008 and its subsequent amendment
is deemed not to be given effect to till 01.04.2024 - Thus, all
proceedings initiated pursuant to the impugned Guideline in
respect of the writ petitioners and other similarly situated Chartered
Accountants quashed - Institute at liberty to enhance the specified
number of audits that a Chartered Accountant can undertake u/s.
44AB, if it deems fit - Writ petitioners or any other member of the
Institute at liberty to make a representation. [Para 50]
Chartered Accountants Act, 1949 - s. 22 - Income Tax Act,
1961 - s. 44AB - Guidelines No.1-CA(7)/02/2008 dt 08.08.2008
restricting the maximum number of tax audits that could be
accepted by a Chartered Accountant, u/s. 44AB of the Income
Tax Act, 1961, in a Financial Year - Competency of the Council
of the Institute of Chartered Accountants of India, to impose
restriction, by way of Guidelines:
Held: Council of the Institute had the legal competence to frame
the impugned Guideline restricting the number of tax audits that a
Chartered Accountant could carry out which was initially thirty and
later raised to forty-five and thereafter to sixty in an assessment
year, the breach of which would result in professional misconduct,
in terms of clause 1 of Part II of the Second Schedule of the 1949
Act - It is not vitiated on account of there being lack of competency
or powers to frame the Guideline by the Council of the Institute -
Issuance of the Guidelines dt 08.08.2008 by the Institute not hit
by the vice of excessive delegation - Thus, the Regulation or
Guideline issued by the Council, being a part of clause 1 of Part
II of the Second Schedule have to be read as part and parcel of
the 1949 Act itself - Delegation of powers to add newer types of
misconducts by way of a regulation or Guideline neither excessive
nor ultra vires u/s. 22. [Paras 13.1-13.3]
Chartered Accountants Act, 1949 - Income Tax Act, 1961 - s.
44AB - Council of the Institute of Chartered Accountants of
India, imposing by way of Guidelines No.1-CA(7)/02/2008 dated
08.08.2008 , a numerical restriction on the maximum number of
tax audits that could be accepted by a Chartered Accountant,
u/s. 44AB of the Income Tax Act, 1961, in

## Text

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* Author
[2024] 6 S.C.R. 777 : 2024 INSC 451
Shaji Poulose
v.
Institute of Chartered Accountants of India & Others
(Transferred Case (Civil) No. 29 of 2021 )
17 May 2024
[B.V. Nagarathna* and Augustine George Masih, JJ.]
Issue for Consideration
Council of the Institute of Chartered Accountants of India,
if competent to impose, by way of Guidelines, a numerical
restriction on the maximum number of tax audits that could be
accepted by a Chartered Accountant, u/s. 44AB of the 1961
Act, in a Financial Year by way of a Guideline; the restrictions
imposed, if unreasonable, arbitrary and illegal and thus, violative
of the right guaranteed to Chartered Accountants u/Art. 19(1)(g)
and impermissible u/Art. 14 of the Constitution; and exceeding
of the specified number of tax audits, if can be deemed to be
'professional misconduct'.
Headnotes
Chartered Accountants Act, 1949 - Income Tax Act, 1961 - s.
44AB - Audit of accounts - Clause 6 of Guidelines No.1CA(7)/02/2008 dated 08.08.2008 issued by the Institute of
Chartered Accountants of India, restricting the number of tax
audits that a Chartered Accountant could carry out which was
initially thirty and later raised to forty-five and thereafter to
sixty in an assessment year - Petitioners undertook audits
u/s. 44AB of the IT Act, 1961 over and above the number of
tax audits specified as per the Guidelines dated 08.08.2008 -
Issuance of the notices to the petitioners for violation of the
Guideline which was a misconduct - Initiation of disciplinary
proceedings by the Institute against the petitioners - Challenge
to the Guidelines as well as to the disciplinary proceedings:
Held: Clause 6.0, Chapter VI of the Guidelines dated 08.08.2008
and its subsequent amendment is valid and not violative of Art.
19(1)(g) as it is a reasonable restriction on the right to practise
the profession by a Chartered Accountant and is protected or
justifiable u/Art. 19(6) - However, the said clause 6.0, Chapter VI
778
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of the Guidelines dated 08.08.2008 and its subsequent amendment
is deemed not to be given effect to till 01.04.2024 - Thus, all
proceedings initiated pursuant to the impugned Guideline in
respect of the writ petitioners and other similarly situated Chartered
Accountants quashed - Institute at liberty to enhance the specified
number of audits that a Chartered Accountant can undertake u/s.
44AB, if it deems fit - Writ petitioners or any other member of the
Institute at liberty to make a representation. [Para 50]
Chartered Accountants Act, 1949 - s. 22 - Income Tax Act,
1961 - s. 44AB - Guidelines No.1-CA(7)/02/2008 dt 08.08.2008
restricting the maximum number of tax audits that could be
accepted by a Chartered Accountant, u/s. 44AB of the Income
Tax Act, 1961, in a Financial Year - Competency of the Council
of the Institute of Chartered Accountants of India, to impose
restriction, by way of Guidelines:
Held: Council of the Institute had the legal competence to frame
the impugned Guideline restricting the number of tax audits that a
Chartered Accountant could carry out which was initially thirty and
later raised to forty-five and thereafter to sixty in an assessment
year, the breach of which would result in professional misconduct,
in terms of clause 1 of Part II of the Second Schedule of the 1949
Act - It is not vitiated on account of there being lack of competency
or powers to frame the Guideline by the Council of the Institute -
Issuance of the Guidelines dt 08.08.2008 by the Institute not hit
by the vice of excessive delegation - Thus, the Regulation or
Guideline issued by the Council, being a part of clause 1 of Part
II of the Second Schedule have to be read as part and parcel of
the 1949 Act itself - Delegation of powers to add newer types of
misconducts by way of a regulation or Guideline neither excessive
nor ultra vires u/s. 22. [Paras 13.1-13.3]
Chartered Accountants Act, 1949 - Income Tax Act, 1961 - s.
44AB - Council of the Institute of Chartered Accountants of
India, imposing by way of Guidelines No.1-CA(7)/02/2008 dated
08.08.2008 , a numerical restriction on the maximum number of
tax audits that could be accepted by a Chartered Accountant,
u/s. 44AB of the Income Tax Act, 1961, in a Financial Year by
way of a Guideline - Restrictions imposed, if unreasonable,
arbitrary and illegal and thus, violative of the right guaranteed
to Chartered Accountants u/Art. 19(1)(g) and impermissible
u/Art. 14 of the Constitution:
[2024] 6 S.C.R.
779
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
Held: Guidelines dated 08.08.2008 and its subsequent amendment
is valid and not violative of Art. 19(1)(g) and is protected or justifiable
u/Art.19(6) - Ample material placed to establish that the legislation
comes within the permissible limits of clause (6) - By virtue of being
a licensee, a privilege is conferred on Chartered Accountants - It
is in pursuance of the primary goal of public interest that a further
privilege u/s. 44AB was extended to Chartered Accountants to
conduct quality tax audits subject to reasonable restrictions, so
as to enable the interest of the public exchequer - Court must
consider the public interest involved not only from the perspective
of the Chartered Accountants but rather from the perspective of the
general public - Chartered Accountants is a profession-licensed
by the State that also discharges public duties crucial in public
interest - Compulsory tax audits was neither an inherent part of the
practice of Chartered Accountant nor essential function which could
be claimed as a fundamental right u/Art.19(1)(g) - Where public
interest was the genesis of a privilege being extended to Chartered
Accountants and not a right, it is reasonable that the Institute, would
have the authority to regulate the privilege extended to Chartered
Accountants in a reasonable manner deemed appropriate to serve
public interest - Public interest involved in the instant petitions
being pervasive is evidenced through CAG's recommendation to
the Government to insert a provision in the statute book putting a
cap on the number of tax audits permissible - Also restriction placed
u/s.224 of the Companies Act with regard to the number of companies
which could be audited by an auditor or firm of auditors is also an
instance of regulation of the profession of Chartered Accountants
intended by the Parliament to ensure that standard and quality in
the audit of accounts of companies are maintained - Furthermore,
where the devolution of privilege is justifiably restricted in public
interest and such restriction has rational nexus with the objects
sought to be achieved, the restriction cannot be held unreasonable
due to hardship faced by a certain section of professionals.
[Paras 19, 22,24-25, 29, 33, 36-37, 50]
Chartered Accountants Act, 1949 - Income Tax Act, 1961 -
s. 44AB - Clause 6 of Guidelines No.1-CA(7)/02/2008 dt
08.08.2008 issued by the Institute of Chartered Accountants
of India, restricting the number of tax audits that Chartered
Accountant could carry out which was initially thirty and later
raised to forty-five and thereafter to sixty in an assessment
year - Petitioners undertook audits u/s.44AB over and above
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the number of tax audits specified as per the Guidelines -
Exceeding specified number of tax audits, if 'professional
misconduct' - Institute initiating disciplinary proceedings
only against few Chartered Accountants, including petitioners,
while majority of Chartered Accountants who had breached
the Guideline not facing any proceeding, if discriminatory:
Held: There has been an uncertainty in law due to a similar Guideline
being successfully assailed and during the pendency of the matter
before this Court the impugned Guideline being enforced and selective
implementation of the same by the Institute - Initially notices were
sent only selectively to Chartered Accountants who had completed
more than two hundred audits not to all who had breached the
impugned Guideline - For the limited period of uncertainty, the rule
against doubtful penalization as a principle could, in the interest of
justice and equity, be made applicable and the benefit of uncertainty
be given to those subjected to misconduct proceedings in the instant
writ petitions and to also those Chartered Accountants who may have
received notices from the Institute and who may not have approached
any court of law or to other similarly situated Chartered Accountants -
Disciplinary proceedings initiated against the petitioners is quashed,
since only the writ petitioners have been proceeded against, while
around twelve thousand Chartered Accountants who had breached
the Guideline were left out - Furthermore, a reasonable provision may
with the passage of time become unreasonable - As regards, the
restriction on the specified audits u/s. 44AB, Minutes of the Council
of the Institute reflect that with the passage of time, the number
of tax audits to be permitted have been repeatedly deliberated,
re-evaluated and increased, subject to final decision taken by the
Council - Since the last revision to sixty tax audits was made a
decade ago, the Council to consider if the time is ripe to enhance
the specified number of tax audits - Institute at liberty to enhance
the specified number of tax audits that could be undertaken by the
Chartered Accountants. [Paras 46, 47]
Chartered Accountants Act, 1949 - s. 22 - "professional or
other misconduct" - Definition:
Held: s. 22 defines "professional or other misconduct" to deem to
include any act or omission provided in any of the Schedules -
However, nothing in s. 22 shall be construed to limit or abridge in
any way the power conferred or duty cast on the Director (Discipline)
under sub-section (1) of s. 21 to inquire into the conduct of any
[2024] 6 S.C.R.
781
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
member of the Institute under any other circumstances - Schedules
which enumerate various kinds of misconducts are not exhaustive
or static - With the passage of decades and with the emerging
varieties of misdemeanour, omissions or commissions of Chartered
Accountants which are not in consonance with professional ethics and
would amount to misconduct can be defined under the Schedules
so as to ensure quality service being rendered by the Chartered
Accountants as professionals and there could be newer misconducts
which could be included in the Schedules in the form of regulations
or Guidelines - Part II of Second Schedule has delegated the power
to the Council to make any regulation or Guideline, the breach of
which would amount to a misconduct - This delegation to define
and enumerate a misconduct by way of a regulation or a Guideline
is a legislative device adopted by the Parliament so as to leave it
to the discretion of the Council of the Institute to incorporate, define
and insert a Guideline or a regulation, the breach of which would
result in misconduct committed by Chartered Accountant. [Para 13.1]
Chartered Accountants Act, 1949 - Scheme and object of the
enactment - Stated. [Paras 7.1-7.12]
Chartered Accountants - Role and importance of:
Held: Chartered Accountants can serve as effective catalysts in
securing the virtuous circle of trust between the taxpayer and the
tax administration - This is because a large proportion of the tax
payers in India seek advice of Chartered Accountants - Integrity
and standards of Chartered Accountants determine the efficiency
in the functioning of the nation's taxation system - Onus is on
Chartered Accountants to ensure that the Nation's businesses
do indeed conform to high corporate governance standards -
By providing the foundation for compilation of credible financial
statements, the accounting profession facilitates market discipline,
engenders confidence among various stakeholders and reduces
the possibility of misleading information that can disrupt stability
of financial systems - Thus, the need for quality assessments
particularly u/s. 44AB of the IT Act, 1961 - Chartered Accountants
must themselves comply with the relevant laws and regulations
and avoid any conduct that discredits the profession - Chartered
Accountants must refuse to represent clients who insist on resorting
to unfair means - Chartered accountants are relevant not only in
securing corporate governance, but governance in broader contexts
too - Chartered Accountants face many different responsibilities
782
[2024] 6 S.C.R.
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to the profession; to the tax administration; to the client and to the
economy at large - Integrity, objectivity, professional competence
and due care and confidentiality must be the doctrines guiding their
work ethic. [Paras 49.1, 49.3-49.6]
Chartered Accountancy - Institute of Chartered Accountants
of India - Role of:
Held: Institute has a significant role in ensuring the dynamism of the
Chartered Accountancy course curriculum and the credibility of the
examinations - Institute must be committed towards convergence of
accounting, auditing and ethical standards with international practices
and for its endeavour towards securing the highest standards of
corporate governance - True test however, lies in application and
enforcement of these standards in the Indian context. [Para 48]
Income Tax Act, 1961 - s. 44AB - Audit of accounts - Object
and purpose of:
Held: s. 44AB provides that every person carrying on business,
whose total sale, turnover or gross receipts exceed Rs.10 crore,
and every person carrying on a profession, if his gross receipts
exceed Rs.50 lakhs, in any previous year, is required to get
his accounts of such previous year audited and verified by a
Chartered Accountant - Said provision is called "compulsory tax
audits" - Object and purpose of s. 44AB is to prevent evasion of
taxes, plug loopholes enabling tax avoidance and also facilitate
tax administration. [Para 7.14]
Case Law Cited
B.P. Sharma v. Union of India [2003] Supp. 2 SCR 684 : (2003) 7
SCC 309; Minerva Talkies, Bangalore v. State of Karnataka [1988]
2 SCR 511 : AIR 1988 SC 526; B.K. Kamath v. The Institute of
Chartered Accountants (2003) 2 KLJ 21 - relied on.
Saghir Ahmad v. State of U.P. [1955] 1 SCR 707 : (1954) 2 SCC
399; Institute of Chartered Financial Analysts of India v. Council
of the Institute of Chartered Accountants of India [2007] 6 SCR
1127 : (2007) 12 SCC 210 - distinguished.
Raja Video Parlour v. State of Punjab [1993] Supp. 1 SCR 149 :
(1993) 3 SCC 708; Kusum Ingots & Alloys Ltd. v. Union of India
[2004] Supp. 1 SCR 841 : (2004) 6 SCC 254; Municipal Corporation
of Greater Mumbai v. Anil Shantaram Khoje [2014] 3 SCR 511 :
(2016) 15 SCC 726; Modern Dental College and Research Centre
[2024] 6 S.C.R.
783
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
v. State of Madhya Pradesh [2016] 3 SCR 579 : (2016) 7 SCC
353; V. Sasidharan v. Peter and Karunakar [1985] 1 SCR 601 :
(1984) 4 SCC 230; Aswini Kumar Ghose v. Arabinda Bose [1953]
1 SCR 1 : (1952) 2 SCC 237; Devata Prasad Singh Chaudhuri v.
Chief Justice and Judges of Patna High Court [1962] 3 SCR 305; Shri
R. Nanabhoy v. Union of India (1982) SCC Online Del. 210; Shree
Chamundi Mopeds Ltd. v. Church of South India Trust Association
CSI CINOD Secretariat, Madras [1992] 2 SCR 999 : (1992) 3 SCC 1;
Pathumma v. State of Kerala [1978] 2 SCR 537 : (1978) 2 SCC 1;
M/s Laxmi Khandsari v. State of U.P. [1981] 3 SCR 92 : (1981) 2
SCC 600; Deepak Theatre, Dhuri v. State of Punjab [1991] Supp. 3
SCR 242 : 1992 Suppl. 1 SCC 684; T. Velayudhan Achari v. Union
of India [1993] 1 SCR 832 : (1993) 2 SCC 582; All-India Federation
of Tax Practitioners v. Union of India [2007] 9 SCR 147 : (2007) 7
SCC 527; Kerala Ayurveda Paramparya Vaidya Forum v. State of
Kerala [2018] 5 SCR 566 : (2018) 6 SCC 648; Nagar Rice and Flour
Mills v. N. Teekappa Gowda and Bros. [1970] 3 SCR 846 : (1970) 1
SCC 575; Hathising Manufacturing Co. Ltd. v. Union of India [1960]
3 SCR 528; Sakhawant Ali v. State of Orissa [1955] 1 SCR 1004 :
(1954) 2 SCC 758; Mohd. Faruk v. State of M.P. [1970] 1 SCR 156 :
(1969) 1 SCC 853; K. K. Kochuni v. States of Madras and Kerala
[1960] 3 SCR 887 : (1958) SCC OnLine SC 12; Krishnan Kakkanth
v. Govt. of Kerala [1996] Supp. 7 SCR 487 : (1997) 9 SCC 495;
Sukumar Mukherjee v. State of W.B. [1993] Supp. 1 SCR 339 :
(1993) 3 SCC 723; P.V. Sivarajan v. Union of India [1959] Supp. 1
SCR 779 : AIR (1959) SC 556; Jindal Paper & Plastics v. Union of
India (1997) 10 SCC 536; Kasinka Trading v. UOI [1994] Supp. 4
SCR 448 : (1995) 1 SCC 274; Malpe Vishwanath Acharya v. State
of Maharashtra [1997] Supp. 6 SCR 717 : (1998) 2 SCC 1; Motor
General Traders v. State of A.P. [1984] 1 SCR 594 : (1984) 1 SCC
222 - referred to.
Stephen Otis & Joseph F. Gassman v. E. A. Parker 187 U.S. 606
(1903); (1903) SCC OnLine US SC 22; Ohralik v. Ohio State Bar
Association 436 U.S. 447 (1978); Williamson vs. Lee Optical Co. 348
U.S. 483 (1955); Semler v. Oregon State Board of Dental Examiners
294 U.S. 608 (1935); Goldfarb v. Virginia State Bar 421 U.S. 773,
792, (1975) - referred to.
Books and Periodicals Cited
Halsbury Laws of England, 5th Edn. Volume 96 (2018); Francis
Bennion on Statutory Interpretation (8th Edn, 2020 at Section
26.4) - referred to.
784
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List of Acts
Chartered Accountants Act, 1949; Constitution of India; Income
Tax Act, 1961; Taxation Laws (Amendment) Act, 1975; Finance
Act, 1984; Finance Bill, 1984; Income Tax Rules, 1962; Chartered
Accountants (Procedure of Investigations of Professional and
Other Misconduct and Conduct of Cases) Rules, 2007; Chartered
Accountants (Amendment) Act, 2006; Government of India Act,
1935; Companies Act, 1956; Auditors Certificate Rules; Companies
Act, 1913; Chartered Accountants, the Cost and Works Accountants
and the Company Secretaries (Amendment) Act, 2022; Chartered
Accountants Regulations, 1988.
List of Keywords
Chartered Accountants; Professional misconduct; Reasonable
restriction on the right to practise the profession by a Chartered
Accountant; Delegation; Excessive delegation; Numerical restriction
on the maximum number of tax audits; Public interest; Privilege;
Compulsory tax audits; Virtuous circle of trust; Integrity and
standards of Chartered Accountants; Nation's taxation system;
Compilation of credible financial statements; Unfair means;
Professional or other misconduct; Misconduct; Misdemeanour,
omissions or commissions of Chartered Accountants; Professional
ethics; Corporate governance; Prevent evasion of taxes; Tax
avoidance; Tax administration.
Case Arising From
CIVIL ORIGINAL JURISDICTION: Transferred Case (Civil) No. 29
of 2021
From the Judgment and Order dated 09.12.2020 of the Supreme
Court of India in T.P. (C) No. 2849 of 2019
With
Writ Petition (Civil) Nos. 267, 272 371, 581, 670, 1084, 1200, 1256,
1291, 1295 and 1360 of 2021, Writ Petition (Civil) Nos. 32, 186 and
833 of 2022, Transferred Case (Civil) Nos. 27, 28, 30, 31, 32, 33, 34,
35, 36, 37, 38 and 39 of 2021 and Transferred Case (Civil) Nos. 32,
33, 34, 35, 36, 37, 38, 39, 47, 48, 49, 50, 51, 52, 53, 54, 55, 56, 57,
58, 59, 60, 61, 62, 63 , 64, 66, 67, 68, 69, 70,71, 72, 73, 74, 75, 76,
77, 78, 79, 81, 82, 83, 84, 85, 86, 87 and 88 of 2023
[2024] 6 S.C.R.
785
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
Appearances for Parties
P.S. Patwalia, Rajshekhar Rao, Preetesh Kapur, Sr. Advs., Pai Amit,
Ms. Pankhuri Bhardwaj, Abhiyudaya Vats, Nikhil Pahwa, Kushal Dube,
Tathagata Dutta, Ms. Vanshika Dubey, P. Ashok, Ms. Lochana S. Babu,
Smarhar Singh, Kunal Sharma, Jai Krishna Singh, Vikas Chopra, Ms.
Shweta Kumari, Manoj Kumar, Rishi Raj, Manish K. Bishnoi, M. Anand,
Shubhendu Bhattarcharyya, Ms. Ila Shikhar Sheel, Hitesh Lodwal, Arjun
Garg, Shobhit Jain, Aakash Nandolia, Ms. Sagun Srivastava, Ms. Kriti
Gupta, Nirmal Kumar Ambastha, Ms. Ashmita Bisarya, Sanjay Dutt, Ms.
Lakshmi N. Kaimal, E. M. S. Anam, Ashwin Kumar Das, Ms. Aditi Anil
Dani, Rangasaran Mohan, Ishan Roy Chowdhury, Ms. Surbhi Mehta,
Tapesh Kumar Singh, Sukant Vikram, Prashant Bhardwaj, Aditya P.
Singh, Animesh Dubey, Ravi Raghunath, Aakashi Lodha, Goutham
Shivshankar, Ms. Ruchira Goel, Adit Jayeshbhai Shah, Ms. Sharanya
Sinha, Ms. Shagun Parashar, K. Paari Vendhan, Anas Tanwir, Ebad,
Parijat Kishore, Sanyat Lodha, Advs. for the Petitioner.
K.M. Natraj, ASG, Arvind P. Datar, Rupesh Kumar, Sr. Advs., Pramod
Dayal, Nikunj Dayal, Raj Bahadur Yadav, Piyush Beriwal, Ms.
Swayam Prabha Das, Shivank Pratap Singh, Shashank Bajpai, Ashok
Panigrahi, Vatsal Joshi, Prahlad Singh, Diwakar Sharma, Amrish
Kumar, Wills Mathews, Ms. Nanditta Batra, Paul John Edison, Ms.
Shweta Garg, Advs. for the Respondent.
Petitioner-in-person
By Courts Motion
Judgment / Order of the Supreme Court
Judgment
Nagarathna, J.
Table of Contents*
S.No.
Particulars
Page No.
01
Bird's Eye View of the Controversy
8
02
Historical Perspective
8
03
Submissions
39
* Ed. Note: Pagination as per the original Judgment.
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04
Submissions of the Petitioners
39
05
Submission of the Respondents
55
06
Points for Consideration
64
07
Legal Framework
65
08
Discussion
86
09
Re: Point No.1: Whether the Council of the
respondent-Institute, under the 1949 Act, was
competent to impose, by way of Guidelines, a
numerical restriction on the maximum number of
tax audits that could be accepted by a Chartered
Accountant, under Section 44AB of the 1961 Act,
in a Financial Year by way of a Guideline?
89
10
Re: Point No. 2: Whether the restrictions imposed
are unreasonable and therefore, violative of the
right guaranteed to Chartered Accountants under
Article 19(1)(g) of the Constitution?
95
11
Re: Point No.3: Whether the restrictions imposed
are arbitrary and illegal and therefore, impermissible
under Article 14 of the Constitution?
95
12
Re: Point No.4: Whether exceeding such specified
number of tax audits can be deemed to be
'professional misconduct'?
124
13
Conclusion
137
The petitioners herein are Chartered Accountants who have
challenged the validity of Clause 6 of Guidelines No.1-CA(7)/02/2008
dated 08.08.2008 issued by the Institute of Chartered Accountants of
India (hereinafter referred as, "respondent-Institute"), under powers
conferred by the Chartered Accountants Act, 1949 (hereinafter
referred to as "the 1949 Act") on the ground that the same is illegal,
arbitrary and violative of Article 19(1)(g) of the Constitution of India.
1.1 Some of the present writ petitions have been filed before this
Court under Article 32 of the Constitution while others were
filed before various High Courts invoking Article 226 thereof. By
order dated 09.12.2020, this Court transferred the writ petitions
pending before various High Courts to this Court. That is how,
these cases have been clubbed and were heard together and
are being disposed of by this common order.
[2024] 6 S.C.R.
787
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
1.2 The petitioners are, specifically, aggrieved by the mandatory
ceiling limit imposed by Clause 6.0, Chapter VI of said Guidelines
on the number of tax audits that a Chartered Accountant can
accept in a financial year under Section 44AB of the Income Tax
Act, 1961 (hereinafter referred to as, "IT Act, 1961"). Additionally,
and importantly, the petitioners seek a direction for quashing
and/or setting aside of the disciplinary proceedings initiated by
the respondent-Institute in pursuance of the Impugned Guideline.
Clause 6.0, Chapter VI of Guidelines dated 08.08.2008 provides
that a member of the Institute in practice shall not accept, in
a financial year, more than the "specified number of tax audit
assignments" under Section 44AB of the IT Act, 1961. It further
provides that in the case of a firm of Chartered Accountants, the
"specified number of tax audit assignments" shall be construed
as the specified number of tax audit assignments for every
partner of the firm.
1.3 At the outset, we find it pertinent to note that the ceiling limit,
that is the subject of controversy has not been stagnant but
has, on the basis of several factors, been increased by the
Council of respondent-Institute during the passage of time.
Initially, the Council of respondent-Institute vide Notification
No.1/CA(7)/3/88 dated 13.01.1989 set a limit of thirty audits,
in exercise of powers conferred on it under Clause (ii), Part II,
Second Schedule of the 1949 Act. Further, in February 2014,
vide resolution adopted at the 331st Meeting of the Council of
respondent-Institute, the ceiling limit in question was specified
as sixty and presently stands the same.
Bird's Eye View of the Controversy:
2.
The controversy that has arisen in these petitions is two-fold: firstly,
whether the respondent-Institute, constituted under the 1949 Act, had
the competency to impose a restriction of the nature and effect herein?
If the answer is in the affirmative, secondly, whether a Chartered
Accountant's right "to practice any profession" as provided under
Article 19(1)(g) of the Constitution, is unreasonably restricted by a
ceiling limit imposed by respondent-Institute on the number of tax
audits, under Section 44AB, that can be accepted by a Chartered
Accountant in a financial year? In other words, whether a Chartered
Accountant can be restricted from undertaking more tax audits
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than specified by the respondent-Institute? Whether the impugned
Guideline is saved under Article 19(6) of the Constitution of India?
Historical Perspective:
3.
It is apposite for us, at this juncture, to preface the origin of Section
44AB in the IT Act, 1961, popularly known as the compulsory audit
provision and the ceiling limit imposed by the respondent-Institute
on the Chartered Accountants by way of a Guideline, violation of
which would result in a misconduct.
3.1 With the aim of examining and suggesting legal and administrative
measures for countering evasion and avoidance in direct taxation
in the country, the Government of India on 02.03.1970, constituted
a High Power Committee of Experts, namely, the Direct Taxes
Enquiry Committee, under the chairmanship of Justice K.N.
Wanchoo, retired Chief Justice of India. In December 1971,
the Wanchoo Committee submitted its Final Report to the
Government of India. A bare perusal of Chapter 1 - Introduction,
Direct Taxes Enquiry Committee-Final Report elucidates that 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, and
(c)
indicate the manner in which tax assessment and
administration may be improved for giving effect to all its
recommendations.
3.2 In order for the tax administration to become more efficient, the
Committee, inter alia, made other extensive recommendations,
in Chapter 2 - Black Money and Tax Evasion and recommended
insertion of a statutory provision for compulsory audit of accounts.
The Committee noted that mandatory audit, simultaneously with
compulsory maintenance of accounts, would ensure that books
and records are properly maintained; the taxpayer's income is
faithfully presented, and proper presentation is facilitated before
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Shaji Poulose v.
Institute of Chartered Accountants of India & Others
the Assessing Officer. It was further understood that information
furnished by the Auditor along with his certificate would enable
building up of information for cross-verification leading to
prevention of tax evasion and identification of new assessees. At
para 2.145, it was interestingly noted that earlier Committees and
Working Groups had also deliberated on a provision providing for
compulsory audit. In furtherance, it was noted that the Working
Group of the Administrative Reforms Commission had favoured
compulsory audit by Chartered Accountants of persons with
income over Rs.50,000 but it was finally decided that due to
limited number of Chartered Accountants at that point in time,
it may not be possible for all assesses to secure their services,
except at heavy cost and delay. Noting, at para 2.148, that an
auditor can devote more time to examination and verification of
accounts than an Income-Tax Officer, the Wanchoo Committee
recommended insertion of a provision for mandatory presentation
of audited accounts and if found necessary, in practice, future
evolution of proforma for furnishing of information by auditors.
3.3 It is pertinent to highlight that by the Taxation Laws (Amendment)
Act, 1975, Section 142(2A) was inserted to the IT Act, 1961
conferring special power of audit by a Chartered Accountant in
certain cases where so sought by the Assessing Officer.
3.4 Thereby, only a few of the recommendations of the Wanchoo
Committee were accepted in the first instance and legislated
upon by the Parliament. As per the respondent-Institute, this
conspicuously reflects that the Parliament did not favour
compulsory tax audit provision of all sizeable cases by Chartered
Accountants and as a necessary corollary, the opportunity to
conduct tax audits must be seen as a privilege extended by
a statute.
3.5 Later, the provision for compulsory audits found favour with
the Parliament and was inserted by the Parliament through
Finance Act, 1984. The then Finance Minister, while introducing
the budget through the Finance Bill, 1984 stated in Parliament
as under:
"With the reduction in rates and expeditious disposal
of assessments, I believe there will now be no excuse
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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. ..."
(emphasis supplied)
3.6 The relevant portion of the Memorandum explaining the
provisions in Finance Bill, 1984, which proposed to introduce
Section 44AB, reads as under:
"16. 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 tax payer 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
proper presentation of the accounts before the tax
authorities and considerably saving the time of
the assessing officers in carrying out routine
verifications, like checking correctness of totals and
verifying whether purchases and sales are properly
vouched or not. The time of the assessing officers
thus saved could be utilized for attending to more
important investigational aspects of a case."
(emphasis supplied)
3.7 Finally, Clause No. 11 of the Finance Bill, 1984 (Bill No. 11
of 1984), was introduced in Parliament to give effect to the
proposals of the Central Government. Resultantly, Section 44AB
of the IT Act, 1961 was inserted and came into force w.e.f.
01.04.1985, providing for compulsory audit. Section 44AB, as
it stood then, provided that every person carrying on business,
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791
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
if his total sale, turnover or gross receipts exceed Rs.40 Lakhs
and every person carrying on a profession, if his gross receipts
exceed Rs.10 Lakhs, in any previous year, is required to get
his accounts of such previous year audited by an Accountant
and obtain before the specified date, a report of the audit in
the prescribed form duly signed and verified. Explanation (i) to
the Section 44AB clarified that the word 'accountant' shall have
the meaning as in the Explanation to sub-section (2) of Section
288. The present position is that a tax audit, under Section
44AB, can be undertaken only by a Chartered Accountant. For
immediate reference, Section 44AB when it was introduced is
extracted as under:
"44AB. 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 years relevant to the
assessment year commencing on the 1st day
of April, 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 1st day of
April, 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 form 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 this section if such person gets
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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 this 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 30th day of June of the
assessment year, whichever is later.'."
3.8 Pragmatically, the insertion of Section 44AB meant that persons
covered by the provision must compulsorily get their accounts
of relevant assessment year audited by a Chartered Accountant
before the specified date and obtain a report of such audit in
the prescribed form duly signed and verified by the Chartered
Accountant furnishing the particulars stipulated in the rules
made by the Central Board of Direct Taxes (for short, "CBDT")
and annex them to their returns filed in accordance with Section
139 of the IT Act, 1961. Consequently, Rule 6G to the Income
Tax Rules, 1962 was inserted.
3.9 At this chronological juncture, a perusal of relevant material
indicates that the objective of the insertion of Section 44AB
was multifold: firstly, it was intended that compulsory audit will
discourage tax avoidance and tax evasion by allowing faithful
reflection of income of the taxpayer and only appropriate
claims for deductions. Secondly, and importantly, as Chartered
Accountants can devote more time to examination and verification
of accounts than an Assessing Officer, it was believed that a
compulsory audit would save considerable and precious time of
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Shaji Poulose v.
Institute of Chartered Accountants of India & Others
assessing officers. Thirdly, it was hoped that proper presentation
of income and records in a structured and presentable manner
will be facilitated by compulsory audit. Comprehensively, it is
apparent that the intent behind Section 44AB was not to codify
an essential extant practice of the Chartered Accountant's
profession but to mandate tax audits to prevent evasion of taxes,
plug loopholes leading to tax avoidance and also facilitate tax
administration, thereby ensuring that the economic system does
not result in concentration of wealth to the common detriment.
3.10 Post insertion of Section 44AB in the statute book and in
pursuance of its operation, CBDT noted that the quality of
tax audits was deteriorating as some Chartered Accountants
were completing fifty tax audits a month. It is apparent on the
face of the material perused that such a finding would run
counter to the long sought and deliberated goal of plugging the
loopholes in tax administration and saving considerable and
precious time of assessing officers by presentation of quality
audit reports. To remedy this, authorities in tax administration
were of the view that the Government could impose a ceiling
on maximum number of audits an auditor could undertake.
Vide letter dt. 19.01.1988, CBDT sought comments from the
Secretary, Institute of Chartered Accountants of India on possibly
restricting the number of tax audits a Chartered Accountant may
be permitted to complete in a year. The contents of the CBDT
letter dated 19.01.1988 are reproduced as under:
"F.No.225/2/88-IT.ALL
Government of India
Ministry of Finance
Department of Revenue
(C.B.D.T.)
New Delhi, Dated the 19th January, 1988.
Shri R.L. Chopra,
Secretary,
Institute of Chartered Accountants of India,
I.P. Estate,
New Delhi.
Sub: Fixation of number of tax audit per auditor.
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Dear Sir,
As per the provisions of Section 44AB of the Income
Tax Act, a class of assesses have to get their accounts
audited by auditor. This audit has to be completed
by a particular date as provided in Section 44AB of
the Act. It has been represented that some of the
auditors are completing around 50 audits in a month
which result in the deterioration of the quality of audit.
It has, therefore, been that the Government may fix
the maximum number of audits which an auditor
may be allowed to undertake under the provisions of
Section 44AB of the Income Tax Act. In this connection
reference has also been invited to Section 224 of
the Companies Act whereby the number of company
audits which a Chartered Accountant can do has
been restricted to 20.
2. You are requested to kindly send your comments
regarding the suggestion of restricting the number
of audits under Section 44AB of the Income Tax Act
which a Chartered Accountant may be permitted
to complete. The number of audits as in the case
of Section 224 of the Companies Act may also be
indicated. I would request you to kindly forward the
comments of the Institute at the earliest.
Yours faithfully,
Sd/-
(M.G.C. Goyal)
Officer on Special Duty (IT.ALL)
Central Board of Direct Taxes."
3.11 After consideration of the aforesaid letter, the Professional
Development Committee of the respondent-Institute at its
90th Meeting held on 22.02.1988 recommended that every
Chartered Accountant be permitted to conduct a maximum of
twenty tax audits of non-corporate assessees every year in
addition to entitlement of audits conducted under the Companies
Act and other statutes. Considering the recommendation of
the Professional Development Committee, on 28.04.198830.04.1988, the Council of the respondent-Institute in its 133rd
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Shaji Poulose v.
Institute of Chartered Accountants of India & Others
Meeting decided to issue a Notification under Clause (ii) of
Part II of the Second Schedule of the 1949 Act specifying
that w.e.f. 01.04.1989 a member of the respondent-Institute
in practice shall be deemed guilty of professional misconduct,
if he accepts in a financial year more than thirty assignments
of tax audit, be they in respect of corporate or non-corporate
assessees.