Supreme Court of India
Shaji Poulose vs The Institute Of Chartered Accountants … on 17 May, 2024
Author: B.V. Nagarathna
Bench: B.V. Nagarathna
2024 INSC 451
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL ORIGINAL JURISDICTION
TRANSFERRED CASE (CIVIL) NO.29 OF 2021
SHAJI POULOSE ….. PETITIONER
VERSUS
INSTITUTE OF CHARTERED
ACCOUNTANTS OF INDIA & OTHERS ….. RESPONDENTS
WITH
WRIT PETITION (CIVIL) NO.267 OF 2021
WRIT PETITION (CIVIL) NO.272 OF 2021
WRIT PETITION (CIVIL) NO.371 OF 2021
WRIT PETITION (CIVIL) NO.581 OF 2021
WRIT PETITION (CIVIL) NO.670 OF 2021
WRIT PETITION (CIVIL) NO.1084 OF 2021
WRIT PETITION (CIVIL) NO.1200 OF 2021
WRIT PETITION (CIVIL) NO.1256 OF 2021
WRIT PETITION (CIVIL) NO.1291 OF 2021
WRIT PETITION (CIVIL) NO.1295 OF 2021
WRIT PETITION (CIVIL) NO.1360 OF 2021
Signature Not Verified
Digitally signed by
RADHA SHARMA
Date: 2024.05.20
15:29:20 IST
WRIT PETITION (CIVIL) NO.32 OF 2022
Reason:
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WRIT PETITION (CIVIL) NO.186 OF 2022
WRIT PETITION (CIVIL) NO.833 OF 2022
TRANSFERRED CASE (CIVIL) NO.27 OF 2021
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TRANSFERRED CASE (CIVIL) NO.67 OF 2023
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TRANSFERRED CASE (CIVIL) NO.87 OF 2023
TRANSFERRED CASE (CIVIL) NO.88 OF 2023
T.C. (Civil) No.29 of 2021 Etc. 4
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
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- 89
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?
10 Re: Point No. 2: Whether the restrictions imposed are 95
unreasonable and therefore, violative of the right
guaranteed to Chartered Accountants under Article
19(1)(g) of the Constitution?
11 Re: Point No.3: Whether the restrictions imposed are 95
arbitrary and illegal and therefore, impermissible
under Article 14 of the Constitution?
12 Re: Point No.4: Whether exceeding such specified 124
number of tax audits can be deemed to be ‘professional
misconduct’?
13 Conclusion 137
T.C. (Civil) No.29 of 2021 Etc. 5
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.
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,
T.C. (Civil) No.29 of 2021 Etc. 6
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
T.C. (Civil) No.29 of 2021 Etc. 7
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 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
T.C. (Civil) No.29 of 2021 Etc. 8
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,
T.C. (Civil) No.29 of 2021 Etc. 9
(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 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
T.C. (Civil) No.29 of 2021 Etc. 10
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
T.C. (Civil) No.29 of 2021 Etc. 11
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
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)
T.C. (Civil) No.29 of 2021 Etc. 12
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,
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
T.C. (Civil) No.29 of 2021 Etc. 13
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:
T.C. (Civil) No.29 of 2021 Etc. 14
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 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
T.C. (Civil) No.29 of 2021 Etc. 15
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 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
T.C. (Civil) No.29 of 2021 Etc. 16
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:
T.C. (Civil) No.29 of 2021 Etc. 17
“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.
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
T.C. (Civil) No.29 of 2021 Etc. 18
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 28.04.1988–30.04.1988, the Council of the respondent-
Institute in its 133rd 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. It was further decided
T.C. (Civil) No.29 of 2021 Etc. 19
that in case of a partnership firm, the number of tax audits
shall be counted at the rate of thirty assignments per partner
of thirty tax audit. In pursuance of this decision, Notification
No.1/CA(7)/3/88 dated 13.01.1989 was issued by the Council,
setting the limit of thirty tax audits. Admittedly, at this point,
the ceiling limit was intended as only a self-regulatory
mechanism to be followed by all members.
3.12 The vires and constitutionality of aforesaid Notification
No. 1/CA(7)/3/88, dated 13.01.1989 was the subject of much
litigation before several High Courts. In fact, the Notification
was successfully challenged by a practicing Chartered
Accountant, in Writ Petition No.5925 of 1989 before the Madras
High Court. The legality and validity of the Notification
No.1/CA(7)/3/88, dated 13.01.1989 as also Notification No.1-
CA(7)/15887 dated 25.05.1987 was also assailed in Writ
Petition No.5926 of 1989. The central challenge in both writ
petitions was to the Notifications being violative of Article
19(1)(g) of the Constitution. Of imminent interest is the
constitutional challenge to the ceiling limit in Writ Petition
No.5925/1989. The Madras High Court observed
T.C. (Civil) No.29 of 2021 Etc. 20
that ‘accepting a legitimate professional engagement by a
professional can never be considered unprofessional and be
made a misconduct’. It was further noted that, once a person
acquires the requisite qualifications to be a Chartered
Accountant, he would be free to engage himself in the
profession restricted only by conduct marred with dishonesty
and inviting condemnation. Therefore, it was observed that the
Act and the Rules could bring in restrictions or provisions only
for the purpose of attaining the aforesaid professional
standards. The judgment in Writ Petition No.5925 of 1989 was
affirmed by the Division Bench in Writ Appeal Nos.1452-1453
of 1998, on 24.03.2005. Furthermore, in SLP(C) Nos. 14370-
14371/2005 preferred by respondent-Institute, this Court vide
Order dated 29.07.2005, issued notice and granted a stay on
the operation of the judgment of learned Division Bench of
Madras High Court. The aforesaid captioned Special Leave
Petitions were admitted as Civil Appeal Nos. 7208-7209 of
2005.
3.13 Certain other High Courts dismissed the challenge to the
vires and constitutionality of the Notification dated 13.01.1989.
T.C. (Civil) No.29 of 2021 Etc. 21
Amongst others, four such petitions filed before the Madhya
Pradesh High Court have been brought to our attention, being
Miscellaneous Petition No.2844 of 1989 – Prem Chand vs.
Institute of Chartered Accountants of India; Miscellaneous
Petition No.2792 of 1990 – Ram Narain vs. Institute of Chartered
Accountants of India; Miscellaneous Petition No.4202 of 1992 –
Arun Grover vs. Institute of Chartered Accountants of India; and
Miscellaneous Petition No.3307 of 1993 – Anil Kumar Gupta vs.
Institute of Chartered Accountants of India. The challenge in all
the above captioned petitions was to the validity and legality of
the Notification dated 13.01.1989. By way of a common
judgment dated 18.04.1995 passed by the Division Bench of
the Madhya Pradesh High Court, the aforesaid writ petitions
were dismissed holding that the Notification does not take away
the right of petitioners to carry on their profession but only
placed a ceiling limit for purposes of effective and business-like
audit. Furthermore, the Division Bench of the High Court
found that public interest was met by distribution of work
amongst many Chartered Accountants. Against the aforesaid
judgment of the Division Bench of Madhya Pradesh High Court,
leave was granted by this Court in Special Leave Petition (Civil)
T.C. (Civil) No.29 of 2021 Etc. 22
No.21988 of 1995 but the Civil Appeal was dismissed as
withdrawn by order dated 04.05.1999. Before the Madhya
Pradesh High Court, in another Writ Petition No.2085 of 1993
– Prakash Mehta vs. ICAI, the validity and legality of the
Notification dated 13.01.1989 was challenged. However, the
said writ petition was dismissed by the said High Court by its
order dated 16.05.2005.
3.14 Further, a challenge to Notification dated 13.01.1989 was
dismissed by the High Court of Kerala vide judgment dated
25.02.2003 in O.P. No. 3775 of 1991. Dismissing the challenge,
it was noted that Section 30(2)(k) of the 1949 Act vests power
on the Council to make regulations for regulating and
maintaining the status of members of the Institute and
standard of professional qualifications of members of the
Institute. It was noted that the restriction therein, as it does
here, confined the ceiling limit only to tax audit assignments
accepted under Section 44AB and not to any other audit work,
unless otherwise restricted under any law. Noting the
importance attributed to a certificate of audit issued by a
Chartered Accountant and its concomitant serious public
T.C. (Civil) No.29 of 2021 Etc. 23
interest, it was further noted that audit is a time-bound work
demanding precision and that the intent of the restriction was
to ensure quality and accuracy in execution. It was further
noted that on recommendation of the Professional Development
Committee, the Notification had been issued by the Council of
Chartered Accountants, which is composed of its members, by
its members and for its members. Observing that under Section
15 of the 1949 Act, it is the duty and function of the Council to
make provision for regulating and maintaining the status of
members of the Institute and that Section 30(2)(k) empowers
the Council to frame regulations in that regard, the restriction
was held to be reasonable. It is also pertinent to highlight that
the judgments in writ petitions before the Madras High Court
and Madhya Pradesh High Court were considered and the latter
High Court found itself in disagreement with the Madras High
Court on the ground that the restriction had been imposed by
a competent statutory body of professionals in the interest of
the profession. It was reasoned that no interference was
warranted when the statutory body had taken a decision within
its powers in the interest of the profession. Against the
aforesaid judgment of the High Court of Kerala, Writ Appeal
T.C. (Civil) No.29 of 2021 Etc. 24
No.1116/2003 was filed before the Division Bench of the Kerala
High Court but was dismissed as infructuous on 14.01.2016
on account of the death of the writ petitioner therein.
3.15 At the 184th Meeting of the Council in the year 1997, it
considered the issue of certain Chartered Accountants
exceeding the prescribed limit and proceeded to refer the
matter to the Committee for Ethical Standards and Unjustified
Removal of Auditors (CESURA) for a detailed review on the limit
of thirty tax audits in a year and also to examine the issue of
developing a suitable mechanism for the purpose of monitoring
such limit. CESURA, in its 58th Meeting held on 25.02.1997
recommended that the Council, before developing a suitable
mechanism for the purpose of monitoring such limit, should
ask members to submit a report on the number of tax audits
carried out by them in a prescribed format. At its 186th Meeting,
the Council took up the recommendation of the CESURA and
asked members to submit a report on the number of tax audits
carried out by them, as per the prescribed format appearing at
pages 61 to 63 of the Guidance Note on Tax under Section 44AB
of the IT Act, 1961. In pursuance of the decision of the Council
T.C. (Civil) No.29 of 2021 Etc. 25
taken at the 186th Meeting, an announcement was published
in April, 1998 whereby members were requested to furnish the
reports on number of tax audits carried out by them in the
financial year corresponding to the assessment year 1997-98.
3.16 After several iterations of the announcement calling for
the reports from members, the Council at its 197th Meeting,
held on 16.01.1999-18.01.1999, considered the matter of
review of limit of thirty tax audits in a year. It is important to
note that members, even in the year 1999, were of the view that
the objective of calling the information was only to review the
limit and not to take disciplinary action and requested the
President to suitably publish the view of the Council. In
pursuance thereof, an announcement was published in the
Institute’s Journal in March, 1999, the relevant portion of it is
reproduced as under:
“Dear Colleague,
March is a month of marching ahead.
X X X
T.C. (Civil) No.29 of 2021 Etc. 26
Ceiling on Tax Audit Under Section 44AB
The revision of ceiling on tax audit under Section 44AB
of the Income Tax Act is under consideration of the
Council. In order to enable the Council to take an
appropriate decision in the matter, members are
requested to comply with the requirements called for
in the format published in the Journal. The
information is being collected only for statistical
purposes and will be treated as confidential.
X X X
Yours in professional fellowship
New Delhi S.P. Chhajed,
March 1, 1999 President”
3.17 At the 66th Meeting of the CESURA, held on 08.09.1999
and 05.10.1999, 12,196 reports received from members/firms
were examined and it was concluded that the average number
of Tax Audits done by a member came out to be about 14-15
audits per partner/proprietor. Reviewing the same at the 205th
Meeting of the Council held from 15.12.1999-17.12.1999, it
was decided that since the average number of tax audits done
by a member/partner of a firm came to be about 14 to 15
audits, therefore, no change was warranted. Notably, the
minutes of 205th Meeting of the Council record the Institute’s
President’s reference to a relevant paper presented in CAPA
T.C. (Civil) No.29 of 2021 Etc. 27
Conference at Korea in 1989. The minutes of the said Meeting
describe the paper discussed in the Meeting of the Council as
under:
“The main thrust of the Korean paper was that when
there was ceiling on audit, there was less competition.
When less competition was there, the audit reports
were qualified. When there was no ceiling, a member
was free to accept any number of Tax Audits as a
result of which there was more competition finally
resulting in unqualified audit reports.”
3.18 Considering that fourteen years had passed since the last
ceiling limit was fixed in 1989 and that the number of persons
eligible to tax audit had considerably increased due to the
change in limits prescribed under Section 44AB, IT Act, 1961,
the Financial Law Committee meeting of the respondent-
Institute, held on 12.09.2003, recommended that the Council
may increase the ceiling limit for tax audit assignments to fifty.
However, the Council at its 236th Meeting decided against
increasing the limit from thirty to fifty tax audits per member.
3.19 In exercise of powers conferred on the respondent-
Institute by clauses (c) and (d) of Sub-section (2) of Section 29A,
read with Sub-section (4) of Section 21 and Sub-sections (2)
and (4) of Section 21B of the 1949 Act, the Central Government
T.C. (Civil) No.29 of 2021 Etc. 28
notified the Chartered Accountants (Procedure of
Investigations of Professional and Other Misconduct and
Conduct of Cases) Rules, 2007. The said Rules came into effect
from 27.02.2007.
3.20 At the 268th Meeting, held on 30.04.2007 – 02.05.2007,
the Council discussed whether it should revise the ceiling limit
on number of tax audits. The Council was divided on the issue
whether the Council should increase the ceiling limit of tax
audits although factors such as the increased permeation of
access to technology and consequential increased professional
competence of auditors, dynamic and increasing economy,
growth of new and specialized areas of practices, and such
other factors prevailed. The Council, finally authorized its
President to decide upon an appropriate increase in the ceiling
on number of tax audits after taking into consideration the
views expressed by its members. In pursuance thereof, on
11.05.2007, the respondent-Institute increased the limit on
number of tax audits from thirty to forty-five per Chartered
Accountant per year.
T.C. (Civil) No.29 of 2021 Etc. 29
3.21 At this stage it is pertinent to note that the respondent-
Institute was of the opinion that the extant self-regulatory
mechanism was ineffective in ensuring compliance of the
maximum limit. Therefore, the 1949 Act was amended by the
Parliament by the Chartered Accountants (Amendment) Act,
2006 (hereinafter referred to as “Amendment Act, 2006”) by
which the erstwhile Notifications were superseded by
Guidelines dated 08.08.2008. In view of the above
development, this Court by order dated 01.04.2013 dismissed
the Civil Appeal Nos.7208-7209 of 2005 as having become
infructuous. For ease of reference, the said order is extracted
as under:
“Civil Appeal No(s). 7208-7209 of 2005
Decided on April 1, 2013
ORDER
These appeals have been preferred against the
impugned judgment and order dated 24.3.2005
passed in Writ Appeal No .1452 & 1453/1998 by the
High Court of Madras quashing the notifications
issued by the appellant by which it has quashed the
notifications dated 25.5.1987 and 13.1.1989 by which
certain regulatory measures have been taken by the
appellant against its members.
Mr. N.K. Poddar, learned senior counsel appearing
for the appellant stated that both these notifications
do not survive. They have been withdrawn and
subsequently two guidelines have been issued by the
T.C. (Civil) No.29 of 2021 Etc. 30
appellant on 8th August, 2008 for regulating the
business of its members. However, subsequently one
of them had also been withdrawn in 2011 and today
only one guidelines is issued for which the appellant
has not received any representation, ventilation or any
grievance from any member of the appellant
association in respect of the existing guidelines which
deals with Section 44 A(b) of the Income Tax Act, 1961.
Mr. Poddar further submitted that in case, the
appellant receives any representation against such
existing guidelines, the highest body of the appellant
will consider it and will take a decision as to whether
such guidelines would continue or require any kind of
modification.
In view of the above, we do not propose to hear the
appeals on merit and the same are dismissed as
having become infructuous. However, in case any
member is aggrieved of the existing guidelines and files
a representation before the appellant, the appellant
shall consider it and pass appropriate order, and if any
member is aggrieved thereof whether he has made
representation or not, would have right to challenge it
before the appropriate forum.
With the aforesaid observations, the appeals stand
dismissed. Before parting with the case, we express
our thanks to Shri K.V. Vishwanathan, learned senior
counsel, Amicus Curiae, for rendering assistance in
the instant case.”
3.22 In a further exercise of review of the limit, at the 331st
Meeting of the Council held in February 2014, it was again
decided to increase the limit on accepting tax audits from forty-
five to sixty w.e.f. from the financial year 2014-15.
T.C. (Civil) No.29 of 2021 Etc. 31
3.23 In order to establish that the restriction has been
incisively deliberated upon and the need of the restriction has
been supported by expert practitioners over an extended period
of time, the respondent-Institute has placed heavy reliance on
the above-discussed CBDT letter dated 19.01.1988 and the
Report of the Comptroller and Auditor General of India (for
short, “CAG”), being No. 32 of 2014, tiled “Performance Audit
on Appreciation of Third Party (Chartered Accountant)
Reporting in Assessment Proceedings”, presented to the
Parliament on 19.12.2014.
3.24 Our attention was drawn to ‘Section 3.6 Control on
number of tax audit assignment’ of the CAG’s Report
wherein pertinent observations were made on effectuating
control on Chartered Accountants undertaking tax audit
assignments under Section 44AB of the IT Act, 1961.
Highlighting the relationship between the number of tax audits
undertaken and the quality of tax audits, the CAG reported that
there was no system in field offices of Income-Tax Department
(for short, “ITD”) to monitor compliance by Chartered
Accountants of ceiling limit set by respondent-Institute. The
T.C. (Civil) No.29 of 2021 Etc. 32
CAG was informed by the respondent-Institute, in September
2014, that even though Chartered Accountants have been
provided with Form of Tax Audit particulars to be maintained
by members/Firm, maintenance of such records is a self-
regulatory mechanism and can be called upon by respondent-
Institute for checking adherence to the Guidelines. However,
any formal complaint received by respondent-Institute was
acted upon within the framework provided in the Chartered
Accountants Act and the Misconduct Rules, 2007 framed
thereunder.
3.25 As per information provided by DGIT(Systems), ITD to the
CAG in August, 2014:
a. 65,898 Chartered Accountants submitted at least one Tax
Audit Report (TAR) for AY 2013-14. Further, out of total
65,898 records of Chartered Accountants:
i. 81.13% Chartered Accountants adhered to the
limit of forty-five prescribed by ICAI (Institute of
Chartered Accountants of India).
ii. 18.87% submitted more than forty-five TARs (Tax
Audit Reports).
T.C. (Civil) No.29 of 2021 Etc. 33
iii. Excess number of tax audits ranged from 46 to
2471.
b. A table showing twenty-two Chartered Accountants who
issued more than forty-five TARs for the annual year 2013-
2014 ranged from 401 TARs up to 2471 TARs.
The CAG Report pointed out that the purpose of
maintenance of quality audit work had suffered due to no
monitoring mechanism of this crucial ceiling limit by either
respondent-Institute or ITD as per the following statistics:
Stratification of total TARs issued by Chartered
Accountant for Assessment Year 2013-14
(vide CAG Report No. 32/2014, Section 3.6)Range of TARs Total Number of Percentage of
issued Accountants Total
Accountants
1-45 53,463 81.13
46-100 10,838 16.45
101-200 1,364 2.07
201-300 166 0.25
301-400 45 0.07
401-500 10 0.02
501-1000 11 0.02
> 1000 1 0
Total 65,898 100
AccountantsNote: 81.13% adhered to the ceiling limit.
T.C. (Civil) No.29 of 2021 Etc. 34
Therefore, the CAG, at Section 3.11(d) Recommendations
of the same Report recommended that the:
d. Ministry may ensure limiting the tax audit
assignments in order to ensure quality of Tax Audit.
3.26 The Ministry replied contending that the respondent-
Institute, as an expert statutory body, would lay down
restrictions on the number of tax audits and be capable of
enforcing it. However, the CAG noted that Chartered
Accountants have been assigned very crucial work of tax audit
and therefore, the introduction of a suitable control mechanism
in the IT system, by the Ministry, in consultation with
respondent-Institute, was in the interest of the revenue for
ensuring quality of tax audit.
3.27 Respondent-Institute at its 339th Meeting held from
23.12.2014 to 25.12.2014 discussed the report of the CAG and
in pursuance thereof, a group of Council Members was
constituted on 24.01.2015 to study the report of the CAG for
the year ending March, 2014 and place its findings before the
Council for appropriate direction. The Council decided to refer
all cases, where ceiling was exceeded, to the Director
(Discipline).
T.C. (Civil) No.29 of 2021 Etc. 35
3.28 It is averred that respondent-Institute had no mechanism
to record exact data on number of tax audits undertaken by a
Chartered Accountant until the respondent-Institute made it
mandatory in 2019 that submission of all tax audit reports
undertaken by a Chartered Accountants be marked with a
‘Unique Document Identification Number (‘UDIN’). Lacking
such a mechanism, the respondent-Institute, seeking to
initiate disciplinary proceedings for professional
misconduct for carrying out tax audits assignments under
Section 44AB of the IT Act, 1961, treated data gathered by the
CAG as complaints and issued communications to some
petitioner-Chartered Accountants who accepted more than
specified limit of tax audits for the Assessment Year 2013-14,
namely, forty-five.
3.29 It was submitted on behalf of respondent-Institute in the
course of proceedings that it decided to issue communications
to only those Chartered Accountants who had conducted more
than 200 tax audits in a relevant Assessment Year. As of date,
the respondent-Institute has issued only 276 notices although
T.C. (Civil) No.29 of 2021 Etc. 36
there has been violation by over ten thousand Chartered
Accountants.
3.30 Aggrieved by the aforesaid communications seeking
initiation of disciplinary proceedings for professional
misconduct, several petitioner-Chartered Accountants have
challenged the impugned Guidelines dated 08.08.2008 as well
as the communications initiated by the respondent-Institute
before respective High Courts having jurisdiction. In some writ
petitions pending before various High Courts, stay of the
disciplinary proceedings initiated by the respondent-Institute
has been granted.
3.31 In order to avoid multiplicity of proceedings and
conflicting decisions by various High Courts seized of identical
issues, respondent-Institute filed Transfer Petition (Civil) Nos.
2849-2859 of 2019 and 727-728 of 2020 before this Court
seeking transfer of the various Writ Petitions pending in the
High Courts of Kerala, Madras and Calcutta to this Court. By
order dated 09.12.2020, a three-Judge Bench of this Court, in
T.P.(C) Nos. 2849-2859 of 2019, noting in paragraph 16 that
the question involved was of public importance and
T.C. (Civil) No.29 of 2021 Etc. 37
necessitated a comprehensive settlement of the question of law,
allowed the transfer petitions. Consequently, the writ petitions
were withdrawn from the respective High Courts and
transferred to this Court. Thereafter, by subsequent orders
passed by this Court, all the identical writ petitions pending
before various High Courts were transferred to this Court. That
is why, all these transferred cases and the writ petitions filed
under Article 32 of the Constitution of India have been heard
together. The relief sought in these writ petitions are similar
and hence the relief sought in Writ Petition No. 25662 of 2016
before Kerala High Court [Transferred Case (Civil) No.29 of
2021 before this Court] are extracted as under:
“RELIEFS:-
(a) Declare that the restriction imposed by Ext P2
circular on the number of tax audits is
discriminatory, unreasonable and violative of
article 19(1)(g) of the Indian Constitution.
(b) To call for records leading to Ext P2 guidelines
2008 and issue a writ in the nature of certiorari or
any other appropriate writ, order or direction and
quash and set aside chapter VI of Ext P2, which
deals with tax audit assignments under section
44AB of the Income Tax Act 1961.
(c) To call for records leading to Exhibit P3, Exhibit
P7 and Exhibit P9 and issue a writ in the nature
of certiorari or any other appropriate writ order or
direction, setting aside Ext P3, P7 and P9 as the
same is violative of fundamental rights guaranteedT.C. (Civil) No.29 of 2021 Etc. 38
under Article 14 and l9(1)(g) and also against the
direction in Ext Pl judgment.
(d) To direct the highest body of the 1st respondent to
pass orders on Ext P5 representation filed by the
petitioner.
(e) To grant such other appropriate reliefs to the
Petitioner as this Hon’ble Court may deem fit and
proper in the interest of justice.”Hence, this Court has now come to be seized of the present
petitions and questions involved therein.
Submissions:
4. We have heard learned senior counsel Sri V. Giri, Sri P.S.
Patwalia, Sri Preetesh Kapur, Sri Rajashekhar Rao, Sri Tapesh
Kumar Singh and learned counsel Sri Manish K. Bishnoi, Sri
Pai Amit, Sri Goutham Shivshankar, Sri Nirmal Kumar
Ambastha, Sri Ashwin Kumar Das, Sri B. Ramana Kumar and
other learned counsel for the petitioners and learned senior
counsel for the respondents Sri Arvind P. Datar ably assisted
by Sri Nikunj Dayal, Advocate and learned counsel for the
intervenors Sri Wills Mathews.
Submissions of the Petitioners:
4.1 Leading the arguments, Sri V. Giri submitted that the
primary case of the petitioners is that the impugned Chapter
T.C. (Civil) No.29 of 2021 Etc. 39
VI of the Guidelines dated 08.08.2008 imposing anunreasonable restriction on a Chartered Accountant duly
qualified to practice the profession of Chartered Accountancy
in India is violative of Article 19(1)(g) of the Constitution.
Furthermore, the impugned Guidelines are arbitrary and lack
any rational nexus with the objects sought to be achieved by
the 1949 Act, namely, the regulation and maintenance of the
status and standard of professional qualifications of the
members of the Institute.
4.2 Learned senior counsel appearing for petitioners
submitted that the intention of the 1949 Act was to provide for
a rigorous test and exemplary qualification to enter into the
sphere of the profession of accountants in practice and once in
possession of requisite qualification, such a person is entitled
to follow a profession which is exclusive and special on its own
merit without any kind of restriction except for a conduct
amounting to misconduct within the rigours of the 1949 Act.
As a consequence, petitioners contended that accepting a
legitimate professional engagement by a professional can never
be considered unprofessional or be considered a misconduct.
T.C. (Civil) No.29 of 2021 Etc. 40
4.3 To highlight the arbitrariness of the restriction, it was
contended on behalf of the petitioners that the restriction lacks
any reasonable classification and reasonable nexus with the
objects sought to be achieved. If the ceiling limit has been
imposed on audits under Section 44AB, to achieve purity and
quality of work, the restriction should have been imposed on
the volume of work, as evidenced from the number of
transactions and not on the number of audits. It was argued
that a single audit work itself could be voluminous and occupy
significant amount of a Chartered Accountant’s time, whereas
another audit work itself could be completed with relative ease
and within a limited time.
4.4 Furthermore, it was contended that the impugned
Guidelines lack any reasonable classification or reasonable
differentia on putting a ceiling limit on the number of tax audits
under Section 44AB, IT Act, 1961 insofar as no maximum cap
is placed on other audit assignments under the IT Act, 1961
that are carried out by Chartered Accountants with similarly
taxing reporting requirements, such as Sections 44AD, 44AE,
44AF of the IT Act, 1961. In furtherance of the above, it was
T.C. (Civil) No.29 of 2021 Etc. 41
also urged that the impugned Guidelines, in effect, also
discriminate between Chartered Accountants practicing in
smaller cities and towns as they are not in a position to charge
the fee for each tax audit assignment in the same manner
which can be charged by a Chartered Accountant practicing in
big metropolitan cities. In effect, it was contended that the
restriction will cause a more significant drop in the income of
Chartered Accountants practicing in mofussil areas. As a result
of this uneven restriction, an efficient Chartered Accountant
may be able to complete the entire audit work within a short
duration and remain unemployed for the rest of the year, was
the submission made.
4.5 As further contended by the petitioners, the main object
of the 1949 Act, is to regulate the conduct of the members of
the respondent-Institute in carrying out their professional
duties and the exercise of agency by a Chartered Accountant in
choosing his own volume of work cannot be considered
professional misconduct. Furthermore, where the Act and
Rules made thereunder would be entitled to bring restrictions
or provisions only for the purpose of attaining the prescribed
T.C. (Civil) No.29 of 2021 Etc. 42
professional standards, a mere choice of work could not be
considered professional misconduct.
4.6 During the course of arguments, analogies were often
drawn to the legal profession to argue that, it is, firstly,
inconceivable that a cap could be put on the number of cases
that an advocate can take up and, secondly, there is no norm,
custom, or practice of the profession that would require the
rule-making body to ensure equitable distribution of work to
younger Chartered Accountants. Relatedly, it was contended
that the equitable distribution of work cannot automatically
lead to betterment of the standards of chartered accountancy
profession in the country.
4.7 It was further submitted on behalf of the petitioners that
a Chartered Accountant’s fundamental right to practice the
profession is unreasonably restricted as there is no sanctity in
the ceiling limit prescribed by the respondent-Institute.
According to the petitioners, such a restriction ignores the
differentiation in professional competence, sincerity,
experience, ability and other factors that would enable a
Chartered Accountant to complete more than the specified limit
T.C. (Civil) No.29 of 2021 Etc. 43
while simultaneously ensuring compliance with all quality
standards. The petitioners also vehemently argued that all
auditors cannot be assumed to take equal time in completing a
tax audit and the consequential conclusion that a Chartered
Accountant would be able to satisfactorily fulfil his obligations
only up to specified tax audit assignments under Section 44AB
of the IT Act, 1961 would be fallacious. Furthermore, according
to petitioners, by classifying both in the same category, the
Guidelines fail to acknowledge the difference in competency
between a senior Chartered Accountant who has years of
experience, reputation, facility of ten articled clerks and
availability of other audit staff with a fresh Chartered
Accountant who has no articled clerk and no audit staff.
Reliance in this regard was placed on Raja Video Parlour vs.
State of Punjab, (1993) 3 SCC 708 (“Raja Video Parlour”),
wherein this Court held that limiting the maximum seating
capacity to 50, irrespective of the size of the screen in a cinema
hall was unconstitutional and violative of Article 19(1)(g).
4.8 Learned counsel for the petitioners have vehemently
argued that in the absence of any statistics or data supporting
T.C. (Civil) No.29 of 2021 Etc. 44
the restriction on the number of tax audits and a related
reasonable explanation justifying such a cap, this restriction
could not be justified under Article 19(6) of the Constitution.
Thereby, the petitioners have contended, that the limit on the
number of tax audits a Chartered Accountant could accept has
no reasonable nexus with the provisions of Section 44AB.
4.9 The petitioners have also drawn our attention to allegedly-
identical Notification No.1/CA(7)/3/88 dated 13.01.1989
issued by the Council of the respondent-Institute in exercise
of powers conferred under Clause (ii) of Part II of Second
Schedule to the 1949 Act. It was highlighted that said
Notification brought a restriction of the exact nature, function
and importantly, restrictive effect wherein a ceiling limit of
thirty tax audits was imposed under Section 44AB of the IT Act,
1961. The petitioners have placed most significant reliance on
the fact that the said Notification was quashed and held to be
ultra vires the Constitution by a judgment of the Madras High
Court dated 13.07.1998 in Writ Petition (C) No.5925 of 1989
and the same was affirmed by a Division Bench of the same
Court.
T.C. (Civil) No.29 of 2021 Etc. 45
4.10 The contention is that the respondent-Institute issued
impugned Guidelines dated 08.08.2008 during the pendency of
the challenge to the Madras High Court judgment before this
Court, solely to negate the binding dictum of judgment of the
Madras High Court. Neither was any permission of this Court
sought by respondent-Institute nor was this Court informed on
01.04.2013 that new Guidelines were of identical nature as the
Notification impugned therein. Importantly, the argument of
the petitioners is that the respondent-Institute could not have
issued notices or instituted disciplinary proceedings, as doing
so would be in teeth of the dictum laid by the Madras High
Court which had not been reversed on merits by this Court.
Reliance was placed by learned counsel for the petitioners on
Kusum Ingots & Alloys Ltd. vs. Union of India, (2004) 6
SCC 254 (“Kusum Ingots & Alloys Ltd.”), to contend that
when the Madras High Court had quashed an identical
Notification dated 13.01.1989, the same was in effect
throughout the territory of India. It was held in Kusum Ingots
& Alloys Ltd. as under:
T.C. (Civil) No.29 of 2021 Etc. 46
“22. The Court must have the requisite territorial
jurisdiction. An order passed on a writ petition
questioning the constitutionality of a parliamentary
Act, whether interim or final keeping in view the
provisions contained in clause (2) of Article 226 of the
Constitution of India, will have effect throughout the
territory of India subject of course to the applicability
of the Act.”4.11 Challenge to procedural impropriety in issuance of the
impugned Guidelines was also advanced by the petitioners. It
was highlighted that impugned Guidelines were not issued in
compliance with provisions of the 1949 Act as the Regulations
made by the Council of the respondent-Institute were not
notified in the official Gazette of India and despite the
requirements of Section 30B of the Act, Impugned Guidelines
were not laid before both Houses of Parliament. Thereby, it was
contended, that the impugned Guidelines do not have the
sanction of law. Therefore, learned senior counsel and learned
counsel for the petitioners contended that the Guidelines dated
08.08.2008 may be struck down as running foul of Articles
19(1)(g) and 14 of the Constitution of India.
4.12 Learned senior counsel for petitioner in Writ Petition(C)
No.1360 of 2021, Sri P.S. Patwalia relied upon the judgment of
this Court in Institute of Chartered Financial Analysts of
T.C. (Civil) No.29 of 2021 Etc. 47
India vs. Council of the Institute of Chartered Accountantsof India, (2007) 12 SCC 210, (“Institute of Chartered
Financial Analysts of India”) to contend that undertaking
more tax audits could not possibly classify as professional
misconduct. According to the learned senior counsel, the
aforesaid case assists their submissions insofar as it was held
that classification of an activity must be looked at
pragmatically and within the structural context and realities.
Therein, it was held that acquiring a qualification could not be
construed as a professional misconduct and consequentially,
such a restriction was held to be violative of Articles 14 and
19(1)(g). On a similar ground, emphasizing the sanctity of a
right guaranteed under Article 19(1)(g), reliance was placed on
paras 14 and 15 of the judgment in B.P. Sharma vs. Union of
India, (2003) 7 SCC 309, (“B.P. Sharma”), wherein this Court
held as unconstitutional, a ban on carrying on a private
profession or self-employment on attaining a certain age
specified by the State in the absence of any reasons therefor.
4.13 Learned senior counsel appearing for the petitioners in
Writ Petition (C) No.267/2021 argued that by no stretch of
T.C. (Civil) No.29 of 2021 Etc. 48
imagination could the restriction as sought to be imposed
herein could be achieved simply through a resolution – a
delegated legislation not specifically provided for by the
Parliament to impose a quantitative restriction. It was further
contended that the Guidelines are ultra vires the provisions of
the Act inasmuch as there is no power at all under the Act to
lay down a maximum limit on the number of tax audits.
Learned senior counsel focused on the language of the
Preamble of the 1949 Act to argue that the Act was sought by
the Parliament to ‘make provisions’ to regulate the profession.
Thereby, any regulation made has to relate to a specific
provision and no omnibus power to regulate has been granted
to the Council.
4.14 Learned senior counsel Sri Patwalia further contended
that the power to issue Guidelines has been conferred for the
first time by the Amendment Act, 2022 by way of insertion of
sub-clause (fa) and hence the impugned Guideline issued
earlier in the year 2008 is without authority of law.
Furthermore, it was contended that where Section 30B of the
1949 Act provides for power to make Regulations “for the
T.C. (Civil) No.29 of 2021 Etc. 49
purpose of carrying out the objects of the Act”, subject to the
following conditions: (i) prior approval of the Central
Government under Sub-section (3) of Section 30 and (ii) the
requirement under Section 30-B of laying the same before
Parliament. The Council could not have circumvented the
aforesaid mandatory safeguards by resorting to power under
Section 15, especially when creating penal consequences.
Reliance in this regard was placed on Municipal Corporation
of Greater Mumbai vs. Anil Shantaram Khoje, (2016) 15
SCC 726, (“MCGM”) to contend that a regulation comes into
operation only after promulgation in the official gazette.
4.15 Furthermore, learned senior counsel Sri Preetesh Kapur
submitted that a restriction of this nature, to be found good in
law, must have a legitimate nexus to the object sought and
also, necessarily satisfy the proportionality test elucidated by
this Court in Modern Dental College and Research Centre
vs. State of Madhya Pradesh, (2016) 7 SCC 353, (“Modern
Dental College and Research Centre”). Learned counsel
contended that where a fundamental right of an individual is
abridged, justification of the restriction needs more than mere
T.C. (Civil) No.29 of 2021 Etc. 50
demonstration of power; that the aforesaid position forms a
part of our jurisprudence.
4.16 Learned senior counsel elucidated that a significant effect
of the present restriction would be that a structural advantage
is accrued to partnership firms over sole practitioners as a
partnership firm of Chartered Accountants will be able to take
up more multiples of tax audits than an individual practitioner
permissibly can under the Guidelines. Learned counsel
contended that a Chartered Accountant has a fundamental
right to carry out tax audit, guaranteed under Article 19(1)(g)
and such a right could not be bartered away to colleagues in a
partnership firm.
4.17 Learned senior counsel also argued that the impugned
Guideline is hit from the vice of excessive delegation as a
resolution, by itself, could not penalize as misconduct for
taking on more clients. Also, reliance was placed on V.
Sasidharan vs. Peter and Karunakar, (1984) 4 SCC 230,
(“V. Sasidharan”) wherein this Court had held that the office
of a lawyer is not a commercial establishment under the Shop
& Establishments Act, 1968 (Kerala Act). Relying on the
T.C. (Civil) No.29 of 2021 Etc. 51
aforesaid, it was contended by learned counsel that a technical
profession stands on a different footing to other professions and
while a prescription for technical qualification would be a
reasonable restriction under Article 19(6), any other restriction
on a profession must be carefully construed.
4.18 It was argued by learned senior counsel Sri Singh that
professions have existed even before the Constitution came into
being. Prior to the enforcement of the Constitution, an attempt
to move a legislation to restrict the practice of a profession was
subject to seeking the assent of Governor-General, in case of
Federal Legislature, and the Governor in case of provincial
legislature. Importantly, the Governor-General could not have
given sanction, if a legislation was framed to restrict lawful
practice of the profession, except in ‘public interest’. As per
learned counsel, the position could not have been said to be
worse off after the coming into force of our Constitution, i.e.
after repeal of the Government of India Act, 1935. That even if
there were some safeguards and guardrails, the same could
only be further emboldened. To buttress his submissions,
learned counsel Sri Singh also laid emphasis on the judgment
T.C. (Civil) No.29 of 2021 Etc. 52
of a Constitution Bench of this Court in Aswini Kumar Ghose
vs. Arabinda Bose, (1952) 2 SCC 237, (“Aswini Kumar
Ghose”) and Devata Prasad Singh Chaudhuri vs. Chief
Justice and Judges of Patna High Court, (1962) 3 SCR 305,
(“Devata Prasad Singh Chaudhuri”), to contend that a rule
made by an authority to deny the right to exercise essential
part of a function would be a serious invasion on the statutory
right to practice.
4.19 Learned senior counsel, Sri Rajshekhar Rao, appearing
for some of the petitioners submitted on the importance of
professional identity of a Chartered Accountant. He also argued
that the object of attaining quality has no nexus with the
imposed restriction which, effectively restricts both the
practitioner and the client in making a choice. It was pressed
that the consequences of a punishment being imposed by the
respondent-Institute are grave insofar as besides the
punishment imposed, various audit works namely, Bank Audit
etc. have a requirement that the auditor must not have suffered
any kind of punishment for professional misconduct.
T.C. (Civil) No.29 of 2021 Etc. 53
4.20 According to learned senior counsel, the Council of
respondent-Institute, under powers conferred on it by the 1949
Act, deems a member to be qualified and competent to dutifully
practice the services required of a Chartered Accountant and
thereby, imposition of a blanket ban by the same Council
without any qualitative assessment imposes an onerous
penalty on the rights of a Chartered Accountant. More so, to
attach a label of professional misconduct without any
qualitative assessment, simply due to exceeding the maximum
limit, would be incongruous with the object sought and damage
future potential prospects without any established relationship
between numerical benchmark and quality.
4.21 Reliance was placed by the petitioners on a judgment of
the High Court of Delhi in Shri R. Nanabhoy vs. Union of
India, 1982 SCC Online Del. 210 : CWP No. 2398/81, (“Shri
R. Nanabhoy”). It was held by Wad, J. therein that Section
233(B) and Section 637(A) of the Companies Act, 1956 did not
empower the Central Government to impose any restriction on
the number of cost audits which a cost accountant may
undertake. Noting that there was no material to base such a
T.C. (Civil) No.29 of 2021 Etc. 54
restriction, he further found that such a cap on maximum
number of audits was arbitrary and in violation of Article 14 of
the Constitution.
4.22 It was also canvassed on behalf of the petitioners that
where the challenge to an erstwhile in pari materia Notification
was not decided on merits the respondent-Institute erred in
initiating disciplinary proceedings and imposing punishments,
especially where a stay on the operation of the judgment of
Madras High Court had been granted. Reliance was placed on
Shree Chamundi Mopeds Ltd. vs. Church of South India
Trust Association CSI CINOD Secretariat, Madras, (1992)
3 SCC 1 (‘Chamundi Mopeds’). Petitioners therefore sought
the reliefs as noted above by allowing the writ petitions.
Submission of the Respondents:
5. Per contra, learned senior counsel Sri Arvind Datar, ably
assisted by learned counsel Sri Nikunj Dayal, contended that
the Guideline with regard to exceeding the specified number of
tax audits being a misconduct was inserted pursuant to the
communication received from the CBDT and with the aim of
maintaining quality in tax audits. According to learned senior
T.C. (Civil) No.29 of 2021 Etc. 55
counsel, putting a cap on the tax audits to be undertaken bythe Chartered Accountants under Section 44AB of the IT Act,
1961, would not in any way restrict the freedom envisaged
under Article 19(1)(g) of the Constitution of India. The said cap
has been envisaged in public interest and therefore saved
under Article 19(6) of the Constitution of India.
5.1 Learned senior counsel Shri Datar submitted that all writ
petitioners herein have breached the Guideline and undertaken
more than the specified number of tax audits as envisaged,
thereby clearly committing a misconduct. Therefore, they
would have to face the disciplinary proceedings initiated by the
respondent-Institute and cannot assail the validity of the
Guideline by either questioning the competence of the
respondent-Institute in making such a Guideline or the
manner in which the said Guideline was introduced on the
statute book.
5.2 That, the Guidelines dated 08.08.2008 were issued in
exercise of powers under clause (i) of Part II of the Second
Schedule of the 1949 Act and in its role as the only statutory
body for regulating and governing the profession of Chartered
T.C. (Civil) No.29 of 2021 Etc. 56
Accountants, the respondent-Institute can define misconductto ensure quality and professional good conduct. Further, the
object is not to prohibit practice of but only to maintain quality
in audit work, which is wholly in the interest of the general
public including the ITD. It was further contended that the
objects of both, the instant Guidelines dated 08.08.2008 and
the erstwhile Notification dated 13.01.1989 have been to
ensure efficiency, improve quality service, ensure maintenance
of high standards of performance and to have equitable
distribution of tax audit work amongst members of the
respondent-Institute.
5.3 Learned senior counsel for the respondent-Institute
submitted that the notified limit on tax audits has been decided
by the Council, an expert body, on consideration of all
pragmatic limitations and other work undertaken by a
Chartered Accountant besides tax audit under Section 44AB,
IT Act,1961. Section 139 of the IT Act, 1961 mandatorily
requires every assessee, governed by provisions of Section
44AB of the IT Act, 1961, to file tax audit report along with his
return before the due date – presently, 30th September of every
T.C. (Civil) No.29 of 2021 Etc. 57
year. That being the case, the respondent-Institute contendedthat a Chartered Accountant cannot conceivably complete
more than the specified number of audits in a period of 25-30
weeks, i.e., from April-September of the relevant assessment
year.
5.4 Learned senior counsel sought to repel the argument that
the petitioners’ right under Article 19(1)(g) is violated by the
restriction. Instead, it was argued that the right of an Indian
citizen under the Constitution to practice any profession is not
an absolute right but can be appropriately limited under Article
19(6). It was submitted that the right to practice as a Chartered
Accountant is conferred by the 1949 Act and the same may be
limited by conditions and limitations stipulated under the Act
or Regulations or Guidelines framed thereunder. The
contention of the respondent-Institute was that under Article
19(1)(g), what is available is a right to practice as a Chartered
Accountant in accordance with the 1949 Act and the
Guidelines or regulations made thereunder which is subject to
reasonable restrictions.
T.C. (Civil) No.29 of 2021 Etc. 58
5.5 Sri Datar took us through a wide variety of professionalwork that can be undertaken by a Chartered Accountant in
practice such as statutory corporate audit, representation
before tax authorities, consultation, audits under Section
44AF, audits under Section 141(3)(g) of the Companies Act, etc.
It was contended that the ceiling has been imposed only in
respect of the statutory tax audits under Section 44AB of the
IT Act, 1961, which form a class by themselves as they involve
more time and effort and are significantly more onerous.
5.6 On the question of professional misconduct, respondent-
Institute sought to argue that the expression ‘professional
misconduct’ cannot be construed to mean only an irregularity
or an act of lowering of dignity of the profession. Rather, the
respondent-Institute being a regulatory body of professionals
can define misconduct to control and penalize a deviation from
the quality compliance standards, inter alia, for which the
respondent-Institute has been established by the Parliament to
ensure. Reliance was placed on Section 30 of the 1949 Act, read
with clause (i) of Part II of the Second Schedule of the 1949 Act,
T.C. (Civil) No.29 of 2021 Etc. 59
to act effectively for ensuring compliance with standards of the
Institute by penalizing a deviation as a misconduct.
5.7 Learned senior counsel for the respondent-
Institute argued that a serious public purpose involved behind
the Notification is visible under the 1949 Act which seeks to
regulate the profession, hence the impugned Guidelines are
issued to ensure maintenance of quality and standards in the
work done and services rendered by Chartered Accountants.
This would also aid in better and equitable distribution of work
amongst the Chartered Accountants and to avoid
concentration of professional work in a few hands, to ensure
which is also a duty cast upon the Council in furtherance of its
regulatory functions under the said Act. As per the respondent-
Institute, the Council is in the best position to have definite
information about deterioration in the quality of work, as also
monopolization – both relevant factors in taking a decision on
the maximum number of tax audits to be accepted.
5.8 It was also contended that a reduction in income and/or
client base is not a ground in itself to say that fundamental
T.C. (Civil) No.29 of 2021 Etc. 60
rights of a professional are affected. Nor can there by a
comparison with the Advocate’s profession.
5.9 To contravene the contention raised by petitioners that
neither does the 1949 Act contemplate distribution of available
work amongst Chartered Accountants, nor is there any
obligation to provide work for young Chartered Accountants, it
was contended that under the 1949 Act, the respondent-
Institute has a responsibility to regulate the profession and
hence, the Guidelines have been made to ensure quality work
and equitable distribution of work amongst Chartered
Accountants which objects are indisputably in furtherance of
that statutory duty.
It was also submitted that the Division Bench of Madras
High Court did not consider the judgment of the learned Single
Judge of the Kerala High Court in B.K. Kamath vs. The
Institute of Chartered Accountants, (2003) 2 KLJ 21, (“B.K.
Kamath”). However, the judgment of learned Single Judge of
the Madras High Court was considered and dealt with by the
Kerala High Court.
5.10 Learned senior counsel, Sri Datar placed reliance on a
judgment of this court in Pathumma vs. State of Kerala,
T.C. (Civil) No.29 of 2021 Etc. 61
(1978) 2 SCC 1, (“Pathumma”), in support of his contention
that a just balance between the fundamental rights and the
larger and broader interest of society must be struck by this
Court while trying to protect fundamental rights. Furthermore,
it was argued that this Court should defer to the Legislature in
appreciating the needs of the people and interfere only when
the statute is clearly violative of the right conferred on the
citizens under Part III of the Constitution. In addition to the
foregoing, reliance was also placed on M/s Laxmi Khandsari
vs. State of U.P., (1981) 2 SCC 600, (“M/s Laxmi
Khandsari”), to submit that if the restrictions imposed appear
to be consistent with the Directive Principles of State Policy in
Part IV of the Constitution they would have to be upheld as the
same would be in public interest and reasonable. Further,
according to learned senior counsel, in judging the
reasonableness, this Court should bear in mind that the
present restriction is imposed in furtherance of Part IV of the
Constitution.
5.11 Further reliance was also placed on Minerva Talkies,
Bangalore vs. State of Karnataka, AIR 1988 SC 526
(“Minerva Talkies”), in support of the contention that
T.C. (Civil) No.29 of 2021 Etc. 62
Chartered Accountants have no unrestricted fundamental right
to carry on the profession unregulated by the provisions of the
the 1949 Act, including the regulations made and the
Guidelines issued thereunder in the interest of general public
and the society at large. In Minerva Talkies, this Court had
upheld the restriction to limit the number of cinema shows to
four in a day. This Court had further held that no law can be
held to be unreasonable merely because it results in reduction
in the income of the citizen.
5.12 Learned senior counsel, Sri Datar, also argued that the
power to regulate a particular business or profession implies
the power to prescribe and enforce all such just and reasonable
rules and regulations, as may be deemed necessary for conduct
of business or profession in a proper and orderly manner vide
Deepak Theatre, Dhuri vs. State of Punjab, 1992 Suppl. (1)
SCC 684, (“Deepak Theatre”). Reliance was further placed by
the respondents on T. Velayudhan Achari vs. Union of
India, (1993) 2 SCC 582, (“T. Velayudhan Achari”), wherein
it was held that limiting the number of depositors that can be
accepted by an individual, firm or unincorporated associations
under Section 45S(1) of the Banking Laws (Amendment) Act,
T.C. (Civil) No.29 of 2021 Etc. 63
1983 is not violative of Article 19(1)(g) of the Constitution, as it
is in public interest that larger interests of the depositors are
protected.
5.13 The judgment of Delhi High Court in Shri R. Nanabhoy,
was sought to be distinguished from the present case by citing
the presence of both legislative sanction and expert opinion,
vide CBDT Letter dated 19.01.1988 and CAG Report No.32 of
2014, supporting the utility of the measure in achieving the
objects sought, namely, quality and accuracy in such audits.
5.14 Therefore, it was prayed by the respondent-Institute that
all the writ petitions/transferred cases filed before various High
Courts and this Court challenging the validity of Chapter VI of
the Council Guidelines No.1-CA(7)/02/2008 dated 08.08.2008
issued by the respondent-Institute be held to be devoid of any
merits and thereby dismissed.
Points for Consideration:
6. Having heard learned senior counsel and learned counsel
appearing for the respective parties and upon perusal of the
record, the following points would arise for our consideration:
T.C. (Civil) No.29 of 2021 Etc. 64
(i) 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 IT Act, 1961, in a Financial Year
by way of a Guideline?
(ii) Whether the restrictions imposed are unreasonable and
therefore, violative of the right guaranteed to Chartered
Accountants under Article 19(1)(g) of the Constitution?
(iii) Whether the restrictions imposed are arbitrary and illegal
and therefore, impermissible under Article 14 of the
Constitution?
(iv) Whether exceeding such specified number of tax audits can
be deemed to be ‘professional misconduct’?
(v) What order?
Legal Framework:
7. At this stage, the relevant provisions of the 1949 Act must
be perused. The Government of India framed the Auditors
Certificate Rules in 1932 in exercise of the powers conferred by
Section 144 of the Indian Companies Act, 1913. While the
accountancy profession in India was regulated under those
T.C. (Civil) No.29 of 2021 Etc. 65
Rules, in order to have a permanent regulation of accountancy
profession, it was found necessary to have a body to secure and
maintain all the requisite standards of professional
qualifications, discipline and conduct of the accountancy.
7.1 In the above context, of particular relevance is the
Statement of Objects and Reasons of the 1949 Act (see Gazette
of India, 11-09-1948, Pt. V, p. 709), which is reproduced
hereunder:-
“STATEMENT OF OBJECTS AND REASONS
1. The accountancy profession in India is at present
regulated by the Auditors Certificates Rules framed in
1932 in exercise of the powers conferred on the
Government of India by Section 144 of the Indian
Companies Act, 1913, and the Indian Accountancy
Board advises Government in all matters relating to
the profession and assists it in maintaining the
standards of the professional qualifications and
conduct required of the members of the profession.
The majority of the Board’s members are elected by
Registered Accountants members of the profession
from all parts of India. These arrangements have,
however, all long been intended to be only transitional,
to lead up to a system in which such accountants
will, in autonomous association of themselves,
largely assume the responsibilities involved in the
discharge of their public duties by securing
maintenance of the requisite standard of
professional qualifications, discipline and
conduct, the control of the Central Government being
confined to a very few specified matters.
2. The Bill seeks to authorise the incorporation by
statute of such an autonomous professional body and
T.C. (Civil) No.29 of 2021 Etc. 66
embodies a scheme which is largely the result of a
detailed examination of the whole position by an ad
hoc expert body constituted for the purpose, after
taking into account the views expressed by the various
Provincial Governments and public bodies concerned.”
(emphasis supplied)
Therefore, the 1949 Act was enacted with the object of
incorporating an autonomous professional body of accountants
that would, in respect of discharge of their public duties,
provide for uniform regulation of the profession. Thereby, it is
apparent that the relationship of the profession to public duty
is closely present even in the earliest statutory prescription.
7.2 It is pertinent to note that the long title and preamble of
the 1949 Act was amended, w.e.f. 10.05.2022, vide the
Chartered Accountants, the Cost and Works Accountants and
the Company Secretaries (Amendment) Act, 2022, to substitute
“regulation and development” instead of the extant
“regulation”.
The amended long title and preamble of the 1949 Act
reads as under:
“An Act to make provision for the regulation and
development of the profession of Chartered
Accountants.”
(emphasis supplied)T.C. (Civil) No.29 of 2021 Etc. 67
7.3 Section 2 of the 1949 Act deals with interpretation and
the relevant clauses of Section 2 are extracted as under:
“2. Interpretation.- (1) In this Act, unless there is
anything repugnant in the subject or context,−
x x x
(b) “chartered accountant” means a person who is a
member of the Institute;
(c) “Council” means the Council of the Institute;
x x x
(e) “Institute” means the Institute of Chartered
Accountants of India constituted under this Act;
x x x
(2) A member of the Institute shall be deemed “to be in
practice”, when individually or in partnership with
chartered accountants in practice, or in partnership
with members of such other recognised professions as
may be prescribed, he, in consideration of
remuneration received or to be received,−
(i) engages himself in the practice of accountancy; or
(ii) offers to perform or performs services involving the
auditing or verification of financial transactions,
books, accounts or records, or the preparation,
verification or certification of financial accounting
and related statements or holds himself out to the
public as an accountant; or
(iii) renders professional services or assistance in or
about matters of principle or detail relating to
accounting procedure or the recording,
presentation or certification of financial facts or
data: or
(iv) renders such other services as, in the opinion of
the Council are or may be rendered by a chartered
accountant in practice;
T.C. (Civil) No.29 of 2021 Etc. 68
and the words “to be in practice” with their
grammatical variations and cognate expressions shall
be construed accordingly.
Explanation.− An associate or a fellow of the
Institute who is a salaried employee of a chartered
accountant in practice or a firm of such chartered
accountants or firm consisting of one or more
chartered accountants and members of any other
professional body having prescribed qualifications
shall, notwithstanding such employment, be deemed
to be in practice for the limited purpose of the training
of articled assistants.”
7.4 Section 3 deals with incorporation of Institute of
Chartered Accountants of India while Section 7 states that
every member of the Institute is to be known as Chartered
Accountant. Vide Section 9, the Council of the Institute is
constituted for the management of the affairs of the
Institute and for discharging the functions assigned to it
under the Act and its functions are delineated in Section
15. The above-mentioned Sections are extracted as under:
“3. Incorporation of the Institute.-
(1) All persons whose names are entered in the
Register at the commencement of this Act and all
persons who may hereafter have their names entered
in the Register under the provisions of this Act, so long
as they continue to have their names borne on the said
Register, are hereby constituted a body corporate by
the name of the Institute of Chartered Accountants of
India, and all such persons shall be known as
members of the Institute.
T.C. (Civil) No.29 of 2021 Etc. 69
(2) The Institute shall have perpetual succession and
a common seal and shall have power to acquire, hold
and dispose of property, both movable and immovable,
and shall by its name sue or be sued.
x x x
7. Members to be known as Chartered
Accountants.- Every member of the Institute in
practice shall, and any other member may, use the
designation of a chartered accountant and no member
using such designation shall use any other
description, whether in addition thereto or in
substitution therefor:
Provided that nothing contained in this Section
shall be deemed to prohibit any such person from
adding any other description or letters to his name, if
entitled thereto, to indicate membership of such other
Institute of accountancy, whether in India or
elsewhere, as may be recognised in this behalf by the
Council, or any other qualification that he may
possess, or to prohibit a firm, all the partners of which
are members of the Institute and in practice, from
being known by its firm name as Chartered
Accountants.
x x x
9. Constitution of the Council of the Institute.- (1)
There shall be a Council of the Institute for the
management of the affairs of the Institute and for
discharging the functions assigned to it under this Act.
(2) The Council shall be composed of the following
persons, namely :−
(a) not more than thirty-two persons elected by the
members of the Institute from amongst the fellows
of the Institute chosen in such manner and from
such regional constituencies as may be specified:
Provided that a fellow of the Institute, who has been
found guilty of any professional or other misconduct
and whose name is removed from the Register or hasT.C. (Civil) No.29 of 2021 Etc. 70
been awarded penalty of fine, shall not be eligible to
contest the election,−
(i) in case of misconduct falling under the First
Schedule of this Act, for a period of three years;
(ii) in case of misconduct falling under the Second
Schedule of this Act, for a period of six years,
from the completion of the period of removal of
name from the Register or payment of fine, as the
case may be;
(b) not more than eight persons to be nominated in
the specified manner, by the Central Government.
(3) No person holding a post under the Central
Government or a State Government shall be eligible for
election to the Council under clause (a) of sub-section
(2).
(4) No person who has been auditor of the Institute
shall be eligible for election to the Council under
clause (a) of sub-section (2), for a period of three years
after he ceases to be an auditor.
x x x
15. Functions of Council.-
(1) The Institute shall function under the overall
control, guidance and supervision of the Council and
the duty of carrying out the provisions of this Act shall
be vested in the Council.
(2) In particular, and without prejudice to the
generality of the foregoing powers, the duties of the
Council shall include –
(a) to approve academic courses and their contents;
(b) the examination of candidates for enrolment and
the prescribing of fees therefor;
(c) the regulation of the engagement and training of
articled and audit assistants;
(d) the prescribing of qualifications for entry in the
Register;
T.C. (Civil) No.29 of 2021 Etc. 71
(e) the recognition of foreign qualifications and
training for the purposes of enrolment;
(f) the granting or refusal of certificates of practice
under this Act;
(g) the maintenance and publication of a Register of
persons qualified to practice as chartered
accountants;
(h) the levy and collection of fees from members,
examinees and other persons;
(i) subject to the orders of the appropriate authorities
under the Act, the removal of names from the
Register and the restoration to the Register of
names which have been removed;
(j) the regulation and maintenance of the status and
standard of professional qualifications of
members of the Institute;
(k) the carrying out, by granting financial assistance
to persons other than members of the Council or
in any other manner, of research in accountancy;
(l) the maintenance of a library and publication of
books and periodicals relating to accountancy;
(m) to enable functioning of the Director (Discipline),
the Board of Discipline, the Disciplinary
Committee and the Appellate Authority
constituted under the provisions of this Act;
(n) to enable functioning of the Quality Review Board;
(o) consideration of the recommendations of the
Quality Review Board made under clause (a) of
Section 28B and the details of action taken
thereon in its annual report; and
(p) to ensure the functioning of the Institute in
accordance with the provisions of this Act and in
performance of other statutory duties as may be
entrusted to the Institute from time to time.”
T.C. (Civil) No.29 of 2021 Etc. 72
7.5 Clause (fa) was inserted by the ‘Chartered Accountants,
the Cost and Works Accountants and the Company Secretaries
(Amendment) Act, 2022’ and the same reads as under:
“15. Functions of Council.-
(2) In particular, and without prejudice to the
generality of the foregoing powers, the duties of the
Council shall include –
x x x
(fa) to issue guidelines for the purpose of carrying out
the objects of this Act;”7.6 Chapter V of the 1949 Act deals with Misconduct. Section
22 defines professional or other misconduct as under:
“22. Professional or other misconduct defined.- For
the purposes of this Act, the expression “professional
or other misconduct” shall be deemed to include any
act or omission provided in any of the Schedules, but
nothing in this Section 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
Section 21 to inquire into the conduct of any member
of the Institute under any other circumstances.”Section 22 of the 1949 Act defines “professional or other
misconduct” to include any act or omission provided in any of
the Schedules to the Act. Clause (1) of Part II of the Second
Schedule to the Act stipulates that a member of the Institute,
whether in practice or not, shall be deemed to be guilty of
T.C. (Civil) No.29 of 2021 Etc. 73
professional misconduct if he contravenes any of the provisionsof the Act or the regulations made thereunder or any Guidelines
issued by the Council of the respondent-Institute. For
immediate reference the same reads as under:
“PART II: Professional misconduct in relation to
members of the Institute generallyA member of the Institute, whether in practice or
not, shall be deemed to be guilty of professional
misconduct, if he –(1) contravenes any of the provisions of this Act
or the regulations made thereunder or any
guidelines issued by the Council;”Therefore, if a member of the Institute contravenes the
provisions of the aforesaid Chapter VI of the Guidelines dated
08.08.2008, he shall be deemed to be guilty of professional
misconduct under the 1949 Act. Clause 6 is extracted as
under:
“Chapter VI
Tax Audit assignments under Section 44AB of the
Income-tax Act, 19616.0 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 Income-tax Act,
1961.
Provided that in the case of a firm of
Chartered Accountants in practice, the
“specified number of tax audit assignments”
shall be construed as the specified number of
T.C. (Civil) No.29 of 2021 Etc. 74
tax audit assignments for every partner of the
firm.
Provided further that where any partner of
the firm is also a partner of any other firm or
firms of Chartered Accountants in practice, the
number of tax audit assignments which may be
taken for all the firms together in relation to
such partner shall not exceed the “specified
number of tax audit assignments” in the
aggregate.
Provided further that where any partner of
a firm of Chartered Accountants in practice
accepts one or more tax audit assignments in
his individual capacity, the total number of
such assignments which may be accepted by
him shall not exceed the “specified number of
tax audit assignments” in the aggregate.
Provided also that the audits conducted
under Section 44AD, 44AE and 44AF of the
Income-tax Act, 1961 shall not be taken into
account for the purpose of reckoning the
“specified number of tax audit assignments”.
6.1 Explanation:
For the above purpose, “the specified number of
tax audit assignments” means –
(a) in the case of a Chartered Accountant in
practice or a proprietary firm of Chartered
Accountant, 45 tax audit assignments, in
a financial year, whether in respect of
corporate or non-corporate assesses.
(b) in the case of firm of Chartered
Accountants in practice, 45 tax audit
assignments per partner in the firm, in a
financial year, whether in respect of
corporate or non-corporate assesses.
T.C. (Civil) No.29 of 2021 Etc. 75
6.1.1 In computing the “specified number of tax audit
assignments” each year’s audit would be taken
as a separate assignment.
6.1.2 In computing the “specified number of tax audit
assignments”, the number of such assignments,
which he or any partner of his firm has accepted
whether singly or in combination with any other
Chartered Accountant in practice or firm of
such Chartered Accountants, shall be taken
into account.
6.1.3 The audit of the head office and branch offices
of a concern shall be regarded as one tax audit
assignment.
6.1.4 The audit of one or more branches of the same
concern by one Chartered Accountant in
practice shall be construed as only one tax audit
assignment.
6.1.5 A Chartered Accountant being a part time
practicing partner of a firm shall not be taken
into account for the purpose of reckoning the
tax audit assignments of the firm.
6.1.6 A Chartered Accountant in practice shall
maintain a record of the tax audit assignments
accepted by him relating to each financial year
in the format as may be prescribed by the
Council.”
The Council at its 331st meeting held from 10th to 12th
February, 2014 decided to increase the “specified number of
tax audit assignments” for practicing Chartered Accountants,
as an individual or as a partner in a firm, from forty-five to
T.C. (Civil) No.29 of 2021 Etc. 76
sixty. The said limit will be effective for the audits conducted
during the financial year 2014-15 and onwards.
7.7 Section 21 refers to Disciplinary Directorate, while
Section 21A deals with Board of Discipline and Section 21B
deals with Disciplinary Committee. Section 21C states that the
Authority, the Disciplinary Committee, Board of Discipline and
the Director (Discipline) shall have the powers of a Civil Court.
These provisions have to be read with the Schedules to the
1949 Act. The First Schedule of the 1949 Act deals with
professional misconduct in relation to Chartered Accountants
in practice and it enumerates various types of misconduct. It
has four Parts. Part I deals with professional misconduct in
relation to Chartered Accountants in practice. Part II deals with
professional misconduct in relation to members of the Institute
in service. Part III deals with professional misconduct in
relation to members of the Institute generally. Part IV deals
with other misconduct in relation to members of the Institute
generally. Part I of the Second Schedule speaks about
professional misconduct in relation to Chartered Accountants
in practice while Part II deals with professional misconduct in
T.C. (Civil) No.29 of 2021 Etc. 77
relation to members of the Institute generally. Part III thereof
refers to other misconduct in relation to members of the
Institute generally.
7.8 The First Schedule has to be read as part of Sections
21(3), 21A(3) and 22, while the Second Schedule has to be read
as part of Sections 21(3), 21B(3) and 22.
In particular, what is relevant is with regard to a member
of the Institute, whether in practice or not, contravening any of
the provisions of the Act or the regulations made thereunder or
any Guideline issued by the Council, who shall be deemed to
be guilty of professional misconduct. What falls for
interpretation in this batch of cases is the expression “any
Guidelines issued by the Council”. The Institute issued, inter
alia, the Guidelines by Notification dated 08.08.2008.
7.9 According to the petitioners, the object of ensuring quality
of audits would be served better by frequent reviews by the
Quality Review Board established under Section 28A. The said
section is reproduced as under:
T.C. (Civil) No.29 of 2021 Etc. 78
“28A. Establishment of Quality Review Board
(1) The Central Government shall, by notification,
constitute a Quality Review Board consisting of
a Chairperson and ten other members.
(2) The Chairperson and members of the Board
shall be appointed from amongst the persons of
eminence having experience in the field of law,
economics, business, finance or accountancy.(3) Five members of the Board shall be nominated
by the Council and other five members shall be
nominated by the Central Government.”7.10 Section 30 gives the Council of respondent-Institute the
power to make regulations to fulfil its functions and duties. For
ease of reference, relevant portions of Section 30 read as under:
“30. Power to make regulations
(1) The Council may, by notification in the “Gazette
of India”, make regulations for the purpose of
carrying out the objects of this Act.
(2) In particular, and without prejudice to the
generality of the foregoing power, such
regulations may provide for all or any of the
following matters :−
(a) the standard and conduct of examinations
under this Act;
(b) the qualifications for the entry of the name
of any person in the Register as a member
of the Institute;
(c) the conditions under which any
examination or training may be treated asT.C. (Civil) No.29 of 2021 Etc. 79
equivalent to the examination and training
prescribed for members of the Institute;
(d) the conditions under which any foreign
qualification may be recognised;
(e) the manner in which and the conditions
subject to which applications for entry in
the Register may be made;
(f) the fees payable for membership of the
Institute and the annual fees payable by
associates and fellows of the Institute in
respect of their certificates;
x x x
(k) the regulation and maintenance of the
status and standard of professional
qualifications of members of the Institute;
x x x
(t) any other matter which is required to be or
may be prescribed under this Act.
(3) All regulations made by the Council under this
Act shall be subject to the condition of previous
publication and to the approval of the Central
Government.
(4) Notwithstanding anything contained in sub-
sections (1) and (2) the Central Government may
frame the first regulations for the purposes
mentioned in this Section, and such regulations
shall be deemed to have been made by the
Council, and shall remain in force from the date
of the coming into force of this Act, until they
are amended, altered or revoked by the
Council.”
T.C. (Civil) No.29 of 2021 Etc. 80
7.11 Section 30B deals with laying procedure before the
Parliament and the same is extracted as under:
“30B. Rules, regulations and notifications to be
laid before ParliamentEvery rule and every regulation made and every
notification issued under this Act shall be laid, as soon
as may be after it is made or issued, before each House
of Parliament, while it is in session, for a total period
of thirty days which may be comprised in one session
or in two or more successive sessions, and if, before
the expiry of the session immediately following the
session or the successive sessions aforesaid, both
Houses agree in making any modification in the rule,
regulation or notification, or both Houses agree that
the rule, regulation or notification should not be made
or issued, the rule, regulation or notification, shall
thereafter have effect only in such modified form or be
of no effect, as the case may be; so, however, that any
such modification or annulment shall be without
prejudice to the validity of anything previously done
under that rule, regulation or notification.”7.12 Chapter VIII of the Chartered Accountants Regulations,
1988, framed under the provisions of the 1949 Act, relates to
‘Meetings and Proceedings of the Council’. Regulation 163
provides that the President of the respondent-Institute will
assume the Chairmanship of the Council. Regulation 166
prescribes the manner of passing of resolution at a meeting.
The aforesaid regulations are reproduced as under:
T.C. (Civil) No.29 of 2021 Etc. 81
“163. Chairman of meeting
At a meeting of the Council, the President, or in his
absence the Vice-President, shall preside, or in the
absence of both, a member elected from among the
members who are present, shall preside.
x x x
166. Passing of resolution at a meeting
At a meeting of the Council, a resolution shall be
passed by a majority of the members present unless
otherwise require by the Act or these Regulations, and
in the case of equality of votes, the Chairman of the
meeting shall have a casting vote.”7.13 The Council of the respondent-Institute, in exercise of its
powers conferred by clause (ii) of Part II of the Second Schedule
of the 1949 Act, issued a Notification bearing No.1/CA(7)/3/88
dated 13.01.1989 specifying that a member of the Institute in
practice shall be deemed to be guilty of professional
misconduct, if he accepts in a financial year, more than
specified number of tax audit assignments under Section 44AB
of the IT Act, 1961, the specified number being thirty (now
sixty) in a financial year, whether in respect of corporate or
non-corporate assesses.
7.14 As for relevant provisions of the IT Act, 1961 is concerned,
Section 44AB of the IT Act, 1961 was inserted in the statute
T.C. (Civil) No.29 of 2021 Etc. 82
book by the Finance Act, 1984 and the same came into force
with effect from 01.04.1985. Presently, Section 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 by a Chartered Accountant, and
obtain before the specified date, a report of the audit in the
prescribed form duly signed and verified by such Chartered
Accountant. The said provision is popularly called “compulsory
tax audits”. The object and purpose of Section 44AB is to
prevent evasion of taxes, plug loopholes enabling tax avoidance
and also facilitate tax administration, which would ensure that
the economic system does not result in concentration of wealth
to the common detriment. For immediate reference, Section
44AB of the IT Act, 1961 as it stands presently 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, inT.C. (Civil) No.29 of 2021 Etc. 83
business exceed or exceeds one crore rupees in
any previous year;
Provided that in the case of a person whose-
(a)aggregate of all amounts received including
amount received for sales, turnover or gross
receipts during the previous year, in cash, does
not exceed five per cent of the said amount; and
(b)aggregate of all payments made including
amount incurred for expenditure, in cash,
during the previous year does not exceed five per
cent of the said payment,
this clause shall have effect as if for the words “one
crore rupees”, the words ten crore rupees had been
substituted; or
Provided further that for the purposes of this
clause, the payment or receipt, as the case may be, by
a cheque drawn on a bank or by a bank draft, which
is not account payee, shall be deemed to be the
payment or receipt, as the case may be, in cash.
(b) carrying on profession shall, if his gross receipts
in profession exceed fifty lakh rupees in any
previous year; or
(c) carrying on the business shall, if the profits and
gains from the business are deemed to be the
profits and gains of such person under section
44AE or section 44BB or section 44BBB, as the
case may be, and he has claimed his income to be
lower than the profits or gains so deemed to be the
profits and gains of his business, as the case may
be, in any previous year; or
(d) carrying on the profession shall, if the profits and
gains from the profession are deemed to be the
profits and gains of such person under section
44ADA and he has claimed such income to be
T.C. (Civil) No.29 of 2021 Etc. 84
lower than the profits and gains so deemed to be
the profits and gains of his profession and his
income exceeds the maximum amount which is
not chargeable to income-tax in any previous year;
or
(e) carrying on the business shall, if the provisions of
sub-section (4) of section 44AD are applicable in
his case and his income exceeds the maximum
amount which is not chargeable to income-tax in
any previous year,
get his accounts of such previous year audited by an
accountant before the specified date and furnish by
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 this section shall not apply to a person,
who declares profits and gains for the previous year in
accordance with the provisions of sub-section (1) of
section 44AD or sub-section (1) of Section 44ADA:
Provided further that this section shall not apply to the
person, who derives income of the nature referred to
in section 44B or section 44BBA, on and from the 1st
day of April, 1985, or, as the case may be, the date on
which the relevant section came into force, whichever
is later:
Provided also that in a case where such person is
required by or under any other law to get his accounts
audited, it shall be sufficient compliance with the
provisions of this section if such person gets the
accounts of such business or profession audited
under such law before the specified date and furnishes
by that date the report of the audit as required under
such other law and a further report by an accountant
in the form prescribed under this section.
T.C. (Civil) No.29 of 2021 Etc. 85
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
assessee of the previous year relevant to an
assessment year, means date one month prior to
the due date for furnishing the return of income
under sub-section (1) of section 139.”Discussion:
8. We have heard the matter at length and perused the
compilations submitted by learned senior counsel and learned
counsel and perused the material on record.
9. During the course of submissions, we observed that the
catalyst for filing these writ petitions was the issuance of the
communications/notices to the petitioners herein pursuant to
the Guideline dated 08.08.2008, violation of which is a
misconduct. Although by an amendment made to the said
Guidelines, a new type of misconduct was envisaged, since the
respondent-Institute had initially not taken any steps vis-à-vis
the said misconduct, there was no challenge as such to the
Guideline as well as amendment thereto in question by any of
the petitioners herein. Admittedly, the writ petitioners have
T.C. (Civil) No.29 of 2021 Etc. 86
undertaken audits under Section 44AB of the IT Act, 1961 over
and above the number of tax audits specified as per the
Guidelines dated 08.08.2008. Thereby, it is in the guise of
challenging the disciplinary proceedings initiated by the
respondent-Institute against the petitioners herein for
conducting the audits over and above the specified number of
tax audits that has led to the constitutional challenge to the
Guidelines as well as to the disciplinary proceedings.
10. This challenge is on three grounds: first, the manner in
which the Guideline was brought about was not in accordance
with law; second, that the Guideline is violative of Article
19(1)(g) of the Constitution of India and not protected by Article
19(6) thereof and third, the Guideline which constitutes a
misconduct within Clause (c) of Part II of the Second Schedule
to the 1949 Act has not at all been enforced until very recently
and it has been enforced only selectively, and therefore, there
is non-compliance of the equality clause envisaged under
Article 14 of the Constitution of India.
11. During the course of submissions, learned senior counsel
Sri Datar submitted that although a little over ten thousand
T.C. (Civil) No.29 of 2021 Etc. 87
Chartered Accountants had violated the Guideline in question,
notices for initiation of disciplinary proceedings were at first
issued only in respect of a few of them, including writ
petitioners herein and those who had undertaken more than
two hundred tax audits. In regard to others, who had exceeded
the specified number of tax audits, no disciplinary proceedings
have been initiated as yet.
12. At the outset, we consider it useful to examine the
privilege conferred under the 1949 Act to practise the
profession of a Chartered Accountant. Reference to the
observation of this Court in All-India Federation of Tax
Practitioners vs. Union of India, (2007) 7 SCC 527, (“All-
India Federation of Tax Practitioners”), is helpful in this
regard. In answering the question of whether the Parliament
was competent to levy service tax on services rendered by
Chartered Accountants, this Court observed at para 34 that a
Chartered Accountant or a Cost Accountant obtains a license
or a privilege from the competent body to practise. We find
ourselves in agreement with this observation. Reading along
with Section 2(1)(b) of the 1949 Act which defines a Chartered
T.C. (Civil) No.29 of 2021 Etc. 88
Accountant as a person who is a member of the respondent-
Institute, we find it right to infer that a member of the
respondent-Institute is conferred with the privilege of being
able to practise as a Chartered Accountant.
12.1 As held by this Court in Kerala Ayurveda Paramparya
Vaidya Forum vs. State of Kerala, (2018) 6 SCC 648,
(“Kerala Ayurveda Paramparya Vaidya Forum”) a right to
practice a profession is indeed an acknowledged fundamental
right, but not unrestricted and is subject to any law imposing
regulatory measures aiming to ensure standards of the
profession and nature of public interest involved in the practice
of the profession.
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 IT Act,
1961, in a Financial Year by way of a Guideline?
13. We have perused the impugned Guideline dated
08.08.2008 which is extracted above. The same has to be read
in the context of the respondent-Institute functioning under
the overall control, guidance and supervision of the Council
T.C. (Civil) No.29 of 2021 Etc. 89
which means the Council of the Institute has to carry out the
duties so as to achieve the objects of the Act as delineated in
its various provisions of the 1949 Act, vide Section 15. The
power vested in the Council is general insofar as the carrying
out the provision of the Act is concerned and in particular and
without prejudice to the generality of the aforesaid powers,
certain duties have been specifically delineated. This is evident
on a reading of sub-sections (1) and (2) of Section 15 of the
1949 Act. One of the objects of the 1949 Act is to ensure that
the profession of the Chartered Accountant in the country
maintains high professional ethics and renders quality service
inasmuch as Chartered Accountants are absolutely necessary
for the efficient tax administration in the country. That on
account of their services, the onerous duties cast on the
assessing officer as well as the ITD is reduced. This would
however depend upon the quality of service that is rendered by
the Chartered Accountant as a professional for which
regulation of the profession is necessary and the respondent-
Institute has been established for, inter alia, such regulation of
the profession.
T.C. (Civil) No.29 of 2021 Etc. 90
13.1 In this context, Chapter V of the 1949 Act assumes
importance. The said Chapter deals with misconduct. Section
22 of the Act defines “professional or other misconduct” to
deem to include any act or omission provided in any of the
Schedules. However, nothing in Section 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 Section 21
to inquire into the conduct of any member of the Institute
under any other circumstances. The two prongs of Section 22
are expansive and wide inasmuch as there is no limitation in
any way on the power conferred or duty cast on the Director
(Discipline) under Sub-section (1) of Section 21 to inquire into
the conduct of any member of the Institute under
circumstances other than what is stated in the Schedules. Also,
professional or other misconduct is defined by a deeming
provision which implies that the Schedules which have
enumerated 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
T.C. (Civil) No.29 of 2021 Etc. 91
defined under the Schedules so as to ensure quality service
being rendered by the Chartered Accountants as professionals.
Therefore, the deeming provision would imply that with the
passage of time, there could be newer misconducts which could
be included in the Schedules in the form of regulations or
Guidelines. The Schedules are a part of the 1949 Act which has
been passed by the Parliament. But bearing in mind the fact
that in future, it may not always be possible for the Parliament
to go on amending the Schedules to the Act so as to incorporate
newer professional misconducts particularly with emerging
technology and its applicability to the profession of Chartered
Accountancy in India, Part II of Second Schedule by way of a
foresight 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 respondent-Institute to
incorporate, define and insert a Guideline or a regulation, the
breach of which would result in a misconduct committed by a
Chartered Accountant.
T.C. (Civil) No.29 of 2021 Etc. 92
13.2 The delegation of this power under Part II of the Second
Schedule of the 1949 Act made by Parliament in favour of the
Council of the respondent-Institute cannot be faulted with.
This is on account of the fact that the 1949 Act itself defines
certain types of misconduct vis-à-vis a Chartered Accountant.
But in the year 1949, the Parliament could not have envisaged
every possible variety or type of commission or omission which
could be a misconduct by a Chartered Accountant. Therefore,
the delegation has been made by the Parliament to the Council
of the respondent-Institute to make regulations or Guidelines,
the breach of which would result in a professional misconduct.
The aforesaid delegation of the Parliament to the Council of the
respondent-Institute is clearly to define possible types of
misdemeanours in the Second Schedule in the form of a
regulation or a Guideline, the breach of which would result in
a misconduct in futuro. This is in order to avoid the Parliament
itself amending the Schedules to the 1949 Act every time a
different type of misconduct is to be inserted to the Schedules
by way of an amendment to the Act. Therefore, the regulation
or Guideline issued by the Council, the breach of which would
T.C. (Civil) No.29 of 2021 Etc. 93
result in a professional misconduct, 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. The delegation of powers to add
newer types of misconducts by way of a regulation or a
Guideline is neither excessive nor ultra vires under Section 22
of the 1949 Act which deems any breach of a regulation or
Guideline as a misconduct as per Clause 1 of part II of Schedule
II to the 1949 Act.
13.3 In the circumstances, we hold that the Council of the
respondent-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. Therefore, the Council of the respondent-
Institute having the legal competence to frame the Guidelines,
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 cannot be held to be vitiated on account of there being
lack of competency or powers to frame the impugned Guideline
by the Council of the respondent-Institute. The argument
T.C. (Civil) No.29 of 2021 Etc. 94
advanced by the petitioners regarding the issuance of the
Guidelines dated 08.08.2008 by the respondent-Institute is hit
by the vice of excessive delegation, is hence without substance.
Accordingly, we answered the point No.1.
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?
And,
Re: Point No.3: Whether the restrictions imposed are
arbitrary and illegal and therefore, impermissible under
Article 14 of the Constitution?
14. Before answering these points for ready reference and
convenience, Article 19(1)(g) and (6) are reproduced as under:
“19. Protection of certain rights regarding freedom
of speech, etc.—(1) All citizens shall have the right—
xxx
(g) to practise any profession, or to carry on any
occupation, trade or business.
xxx
6) Nothing in sub-clause (g) of the said clause shall
affect the operation of any existing law in so far as it
imposes, or prevent the State from making any law
imposing, in the interests of the general public,
reasonable restrictions on the exercise of the right
conferred by the said sub-clause, and, in particular,T.C. (Civil) No.29 of 2021 Etc. 95
nothing in the said sub-clause shall affect the
operation of any existing law in so far as it relates to,
or prevent the State from making any law relating
to,—
(i) the professional or technical qualifications
necessary for practising any profession or carrying
on any occupation, trade or business, or
(ii) the carrying on by the State, or by a corporation
owned or controlled by the State, of any trade,
business, industry or service, whether to the
exclusion, complete or partial, of citizens or
otherwise.”
15. Firstly, Article 19(6) of the Constitution empowers the
State to impose reasonable restrictions upon the freedom of
trade, business, occupation or profession in the interest of the
general public, which freedom is recognised under Article
19(1)(g). Secondly, it empowers the State to prescribe
professional and technical qualifications necessary for
practising any profession or carrying on any occupation, trade
or business. Thirdly, pursuant to the enactment of the
Constitution (First) Amendment Act, 1951 — it enables the
State to carry on any trade or business, either by itself or
through a corporation owned or controlled by the State, to the
exclusion of private citizens wholly or in part. It is trite law that
restrictions imposed by the State upon the freedom guaranteed
T.C. (Civil) No.29 of 2021 Etc. 96
by Article 19(1)(g) cannot be justified on any ground outside
Article 19(6) vide Nagar Rice and Flour Mills vs. N.
Teekappa Gowda and Bros., (1970) 1 SCC 575, (“Nagar
Rice Milling”).
16. The ambit of reasonable restrictions on the exercise of
rights under Article 19(1)(g) in the interest of the general public
under Article 19(6) was further explained in Hathising
Manufacturing Co. Ltd. vs. Union of India, (1960) 3 SCR
528 (“Hathising Manufacturing Co. Ltd.”), which concerned
the challenge to the validity of Section 25FFF(1) of the
Industrial Disputes Act, 1947, which required the industries to
pay compensation on closure of their undertakings:
“10. …Whether an impugned provision imposing a
fetter on the exercise of the fundamental right
guaranteed by Article 19(1)(g) amounts to a reasonable
restriction imposed in the interest of the general public
must be adjudged not in the background of any
theoretical standards or pre-determinate patterns, but
in the light of the nature and incidents of the right the
interest of the general public sought to be secured by
imposing the restriction and the reasonableness of the
quality and extent of the fetter upon the right.”
17. On the scope of restrictions that may be imposed on
fundamental rights, it is apposite to refer to Justice Holmes in
Stephen Otis & Joseph F. Gassman vs. E. A. Parker, 187
T.C. (Civil) No.29 of 2021 Etc. 97
U.S. 606 (1903); 1903 SCC OnLine US SC 22, (“StephenOtis & Joseph F. Gassman”), wherein it was held that if the
State thinks that an admitted evil cannot be prevented except
by prohibiting a calling or transaction not in itself necessarily
objectionable, the courts cannot interfere, unless in looking at
the substance of the matter they can see that it ‘is a clear,
unmistakeable infringement of rights secured by the
fundamental law.’
18. The respondent-Institute has placed reliance on the letter
of CBDT and the CAG Report No. 32/2014 in order to satisfy
us of the overwhelming need and appropriateness of the
decision to place a ceiling limit as the best conceivable and
practical measure at rectifying the targeted mischief. A perusal
of the material on record reflects that the respondent-
Institute’s assertion that there is a probable link between the
number of tax audits undertaken and the quality thereof is
supported by concerns and suggestions shared by experts and
practitioners over a span of time extending over thirty years. In
fact, the preceding sentiment is evidenced by both CBDT’s
letter dated 19.01.1988 seeking views of the respondent-
T.C. (Civil) No.29 of 2021 Etc. 98
Institute on the imposition of a limit and the CAG’s Report
presented to the Parliament on 19.12.2014 discussed above.
19. Following the dicta of the Constitution Bench of this Court
in Saghir Ahmad vs. State of U.P., (1954) 2 SCC 399
(“Saghir Ahmad”), the burden to establish that the
instantiation of the specified number of tax audit assignments
was within the purview of the exception laid down in Article
19(6) is on the respondent-Institute. We find that the
respondent-Institute has placed ample material before this
Court to establish that the legislation comes within the
permissible limits of clause (6). But the factual matrix herein is
dissimilar to Saghir Ahmad, wherein this Court had
‘absolutely no materials’ before it to say in which way the
establishment of State monopoly in road transport service
would be conducive to the general welfare of the public.
20. In this regard, we place reliance upon Sakhawant Ali vs.
State of Orissa, (1954) 2 SCC 758 (“Sakhawant Ali”),
wherein this Court was seized of a challenge to a
disqualification from electoral candidature of legal practitioners
who were employed on payment, on behalf of the municipality
T.C. (Civil) No.29 of 2021 Etc. 99
or to act against the municipality. This Court emphasised upon
the salutary object of the disqualification, i.e., the purity of
public life, which would invariably be thwarted if there arose a
situation where there was a conflict between interest and duty.
This Court took note of the possibility of a conflict of interest
and duty of a municipal councillor employed as a paid legal
practitioner and was alive to the possibility that such a
councillor may misuse his position to obtain municipal briefs,
get unreasonable fees sanctioned or compromise the interests
of the municipality while acting on behalf of private parties.
What is of pertinence here is that this Court was alive to the
fact that cases of misuse may be an exception because lawyers
would be loathe to stoop to such tactics, yet, it upheld the
restriction because it sought to prevent a possible abhorrent
misconduct and malpractice that would be corrosive to public
life. The reasoning in Sakhawant Ali was to the effect that
disqualification of a legal practitioner from contesting elections
did not prevent him from practising his profession of law and
as such, the right to practice the profession of law under Article
19(1)(g) did not imply the existence of a fundamental right in
T.C. (Civil) No.29 of 2021 Etc. 100
any person to stand as a candidate for election to the
municipality.
21. Therefore, the present petitioners’ assertion that the
undertaking of more than a specified number of tax audit
assignments would not imperil the integrity and quality of the
tax audit does not persuade us because a reasonable possibility
of the fall in quality owing to the surfeit of tax audit
assignments exists. Therefore, we find it proper to trust the
wisdom of the respondent-Institute as it has acted on bona fide
and genuine recommendations of the CAG and the CBDT. We
find no fault in the endeavour of the respondent-Institute to
eliminate the possibility of the conduct of tax audits in an
insincere, unethical or unprofessional manner.
22. Keeping the aforesaid in mind, there is no difficulty in
concluding that by virtue of being a licensee, a privilege is
conferred on Chartered Accountants. An elaborate and
extensive process of recommendations and policy-making
preceded the insertion of Section 44AB in order to achieve the
public interest of prevention of tax leakages and more
T.C. (Civil) No.29 of 2021 Etc. 101
efficient tax administration. It is in pursuance of this primary
goal of public interest that a further privilege under Section
44AB was extended to Chartered Accountants to conduct
quality tax audits, so as to enable the interest of the public
exchequer.
23. The present discussion would be enriched by a
comparative discourse on State regulation of licensed
professions as under:
(i) Justice Powell, in Ohralik vs. Ohio State Bar
Association, 436 U.S. 447 (1978), (“Ohralik”), held that the
State’s interests implicated in the case of regulatory restriction
on the practice of a licensed profession are particularly strong.
The case pertained to the conviction of an attorney for
misconduct on the basis of his in-person solicitation from
accident victims. Repelling the attorney’s claims regarding the
violation of the right to freedom, Justice Powell laid stress on
the need for prophylactic regulation to safeguard the interests
of the lay public. This is for the reason that the State bears a
special responsibility for maintaining standards amongst
members of the licensed professions. This view is strengthened
T.C. (Civil) No.29 of 2021 Etc. 102
by the reasoning in Williamson vs. Lee Optical Co., 348 U.S.
483 (1955), (“Williamson”) and Semler vs. Oregon State
Board of Dental Examiners, 294 U.S. 608 (1935),
(“Semler”).
(ii) On this point, the dicta from Goldfarb vs. Virginia State
Bar, 421 U.S. 773, 792, (1975), (“Goldfarb”) is also
instructive and the relevant portion of the judgment reads as
follows:
“….The interest of the States in regulating lawyers is
especially great, since lawyers are essential to the
primary governmental function of administering
justice, and have historically been ‘officers of the
courts.’”
24. We now look at how this Court has understood public
interest in matters pertaining to abridgment of Article 19(1)(g).
(i) A Constitution Bench of this Court, through JC Shah J,
in Mohd. Faruk vs. State of M.P., (1969) 1 SCC 853, held
that the Notification issued by the State Government
prohibiting the slaughter of bulls and bullocks in premises
maintained by a local authority infringed upon the right to
freedom of profession under Article 19(1)(g) of the Constitution.
This Court had emphasized that even though such a
Notification may be issued under the authority of law that was
T.C. (Civil) No.29 of 2021 Etc. 103
enacted by a competent legislature, it would nevertheless be
liable for directly infringing the fundamental right of the
petitioner guaranteed by Article 19(1)(g) unless it is established
that it seeks to impose reasonable restrictions in the interest of
the general public and a less drastic restriction will not ensure
the interest of the general public. It was reasoned that the
judicial determination of the validity of the law imposing a
prohibition on the carrying on of a business or profession
should be informed by:
a. an evaluation of the direct and immediate impact of the
prohibition upon the fundamental rights of the citizens
affected thereby;
b. the larger public interest sought to be ensured in the light
of the object sought to be achieved;
c. the necessity to restrict the citizen’s freedom;
d. the inherently pernicious nature of the act prohibited or its
capacity or tendency to be harmful to the general public;
e. the possibility of achieving the object by imposing a less
drastic restraint; and
f. in the absence of exceptional exigent situations like the
prevalence of a state of emergency national or local, the
T.C. (Civil) No.29 of 2021 Etc. 104
existence of a machinery to satisfy the administrativeauthority that no case for imposing the restriction is made
out or that a less drastic restriction may ensure the object
intended to be achieved.
(ii) A reasonable restriction, within the meaning of Article
19(6) must also be ‘in the interests of the general public.’ Our
Constitution, by establishing a welfare State, emphasises a fine
balance between the public interest of the community and the
liberties of the individual. Indeed, this is not to say that
individual rights and liberties are not a matter of vital public
interest but any policy or law may not be struck down at the
instance of an individual alone. In other words, there is a basic
unity between fundamental rights and the public interest. The
public interest inherent in the said individual’s exercise of a
fundamental right under Part III would need to be delicately
balanced with the imminent constitutional imperative of the
‘ordered progress of society towards a welfare state,’ vide K. K.
Kochuni vs. States of Madras and Kerala, 1958 SCC
OnLine SC 12, Pr. 33.
(iii) In Krishnan Kakkanth vs. Govt. of Kerala, (1997) 9
SCC 495, (“Krishnan Kakkanth”), this Court held as under:
T.C. (Civil) No.29 of 2021 Etc. 105
“27. The reasonableness of restriction is to be
determined in an objective manner and from the
standpoint of the interests of general public and
not from the standpoint of the interests of the
persons upon whom the restrictions are imposed
or upon abstract consideration. A restriction cannot
be said to be unreasonable merely because in a given
case, it operates harshly and even if the persons
affected be petty traders (Mohd. Hanif v. State of
Bihar [AIR 1958 SC 731] ). In determining the
infringement of the right guaranteed under Article
19(1), the nature of right alleged to have been
infringed, the underlying purpose of the restriction
imposed, the extent and urgency of the evil sought
to be remedied thereby, the disproportion of the
imposition, the prevailing conditions at the time,
enter into judicial verdict (Laxmi Khandsari v. State of
U.P. [(1981) 2 SCC 600 : AIR 1981 SC 873] ; D.K.
Trivedi and Sons v. State of Gujarat [1986 Supp SCC
20] and Harakchand Ratanchand Banthia v. Union of
India [(1969) 2 SCC 166 : AIR 1970 SC 1453] ).
28. Under clause (1)(g) of Article 19, every citizen has
a freedom and right to choose his own employment or
take up any trade or calling subject only to the limits
as may be imposed by the State in the interests of
public welfare and the other grounds mentioned in
clause (6) of Article 19. But it may be emphasised
that the Constitution does not recognise franchise or
rights to business which are dependent on grants by
the State or business affected by public interest
(Saghir Ahmad v. State of U.P. [(1955) 1 SCR 707 : AIR
1954 SC 728] ).”
(emphasis by us)Therefore, it follows that this Court must consider the
public interest involved not only from the perspective of the
Chartered Accountants but rather from the perspective of the
T.C. (Civil) No.29 of 2021 Etc. 106
general public. In the present cases, it has been contended thatpublic interest manifests as a benefit to the public exchequer
in terms of appropriate quality of tax audit reports under
Section 44AB.
25. At this juncture, it is useful to reiterate the thread of
public interest visible in the 1949 Act since its inception. The
Statement of Objects and Reasons of the 1949 Act makes it
clear that the Act was brought in to ensure that accountants
all over the country, in discharge of their public duties, are
governed by a central body that is not transitional. Our words
should not be mistakenly understood to suggest that the
profession of Chartered Accountants is not a private enterprise
and is concerned solely with rendering of public duties. We
rather only highlight that it is a profession – licensed by the
State – that also discharges public duties crucial in public
interest.
26. In our opinion, a perusal of the Wanchoo Committee
Report, Finance Bill, 1984 and the accompanying
Memorandum makes it explicitly clear that the intent of
insertion of Section 44AB of the IT Act, 1961, was to facilitate
T.C. (Civil) No.29 of 2021 Etc. 107
the process of tax administration to the benefit of the publicexchequer. The genesis of the opportunity to conduct tax audits
was not regulation of a practice essential to the Chartered
Accountant profession per se but rather to take assistance of
auditors, in discharge of their public duties, for plugging tax
leakage and thereby saving the time of the Assessment Officers
on presentation of quality tax audit reports in a prescribed
format. Therefore, it is for these intents and purposes, the
privilege of conducting tax audits was extended to Chartered
Accountants by creating a privilege to conduct such audits
subject to reasonable restrictions.
27. We must be careful in our delineation between a right and
a privilege. As discussed above, the idea of compulsory tax
audits was neither an inherent part of the practice of a
Chartered Accountant nor an essential function which could be
claimed as a fundamental right under Article 19(1)(g).
Furthermore, an examination of the nature of the supposed
right that was being enjoyed by Chartered Accountants reflects
that in practice, an assessee, seeking to comply with the
requirements of Section 44AB, would approach a Chartered
T.C. (Civil) No.29 of 2021 Etc. 108
Accountant to obtain a certificate of audit. We have already
observed and noted that Section 44AB, IT Act, 1961 was
inserted to assist the Revenue Department in public. Thereby,
it is only through the extension of statutory privilege by the
presence of Section 44AB, IT Act, 1961, that a Chartered
Accountant gets the opportunity to undertake tax audits under
the said section. If the Parliament, in its wisdom, at a certain
future date, due to technological developments or any other
reason, finds that expeditious and accurate assessments can
be ensured without imposing on assessees the burden of
additional requirement of tax audit report and thereby deletes
Section 44AB from the IT Act, 1961, it could not be possibly
argued that the right under Article 19(1)(g) has been abridged.
What follows is that when a privilege is being granted, as a
privilege by statute, which could be effaced completely, a
reasonable restriction could also be imposed, the latter being a
restriction of a lesser degree than a complete ban on an activity.
28. On the scope of restrictions imposed to maintain quality
of service where a privilege had been extended by the
Government to medical officers, this Court, in Sukumar
T.C. (Civil) No.29 of 2021 Etc. 109
Mukherjee vs. State of W.B., (1993) 3 SCC 723, (“Sukumar
Mukherjee”), held that the restriction was reasonable where
the State of West Bengal had, vide Section 9 of the West Bengal
State Health Service Act, 1990, prohibited private practice by
members of W.B. Medical Education Service who were also
teaching in medical institutions. It was held that where the
State Government had concluded that the regime of permitting
private practice of those teaching in medical institutions led to
a considerable decline in quality of teaching, such restriction
was reasonable and in the interest of general public as the ban
on private-practice would make available to the teachers-
doctors the time required for reading and research which was
absolutely essential for maintaining quality in their main
profession as teachers in medicine. Furthermore, where for a
brief period, in the facts of that case, private practice by
teaching post-holders was also permitted and then withdrawn,
this Court held that such an extension was only a privilege
extended on people who were regulated by the relevant Act and
rules made thereunder and therefore, the revocation of that
privilege was not the violation of any right.
T.C. (Civil) No.29 of 2021 Etc. 110
29. Where public interest was the genesis of a privilege being
extended to Chartered Accountants and not a right, it is
reasonable that the respondent-Institute, an expert body,
would have the authority to regulate the privilege extended to
Chartered Accountants in a reasonable manner deemed
appropriate to serve public interest. That the public interest
involved in the present 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. According to the CAG, in the matter of
revenue, the IT Act, 1961 should have provision to prescribe for
quality of tax audit assignments rather than relying on
respondent-Institute.
30. It would be apposite at this juncture to refer to the
judgment in P.V. Sivarajan vs. Union of India, AIR 1959 SC
556, (“P.V. Sivarajan”), delivered by a Constitution Bench of
this Court. Petitioner therein was aggrieved by the rejection of
his application as a registered exporter of coir products, on the
ground that he had not already exported the minimum
specified quantity of 500 Cwts. It was observed by this Court
T.C. (Civil) No.29 of 2021 Etc. 111
that Parliament had enacted the Coir Industry Act, 1953,
finding it expedient in public interest that the Union should
take under its control the coir industry as several malpractices
had crept in the export trade such as non-fulfilment of
contracts, supplying goods of inferior quality in an industry
crucial to the repute of India’s products and national economy.
With the intent of limiting these losses due to qualitative
underperformance, the Central Government, under powers
conferred by the statute, framed Rules in 1958. The Rules were
assailed by the petitioner therein, contending that they
erroneously prescribed a quantitative test for registration of
established exporters, when in fact, a qualitative test would be
more suitable. This argument was rejected, holding that once
it is accepted that regulation of coir industry is in public
interest, then it would be erroneous to assert that regulation
must be introduced only on the basis of a qualitative test. This
Court was mindful of the potential difficulties in introducing
and effectively enforcing a qualitative test and thereby held that
it would be for the rule-making authority to decide as to which
test would meet the requirements of public interest and what
T.C. (Civil) No.29 of 2021 Etc. 112
method would be most expedient in controlling the industry for
national good. This Court noted as under:
“7. If it is conceded that the regulation of the coir
industry is in the public interest, then it would be
difficult to entertain the argument that the regulation
or control must be introduced only on the basis of a
qualitative test. It may well be that there are several
difficulties in introducing and effectively enforcing
the qualitative test. It is well known that granting
permits or licences to export or import dealers on the
basis of a quantitative test is not unknown in regard
to export and import of essential commodities. It
would obviously be for the rule-making authority to
decide which test would meet the requirements of
public interest and what method would be most
expedient in controlling the industry for the
national good. Besides, even the adoption of a
qualitative test may tend to extinguish the trade of
those who do not satisfy the said test; but such a
result cannot obviously be treated as contravening the
fundamental rights under Article 19. Control and
regulation of any trade, though reasonable within
the meaning of Article 19, sub-Article (6), may in
some cases lead to hardship to some persons
carrying on the said trade or business if they are
unable to satisfy the requirements of the
regulatory rules or provisions validly introduced;
but once it is conceded that regulation of the trade
and its control are justified in the public interest,
it would not be open to a person who fails to satisfy
the rules or regulations to invoke his fundamental
right under Article 19(g) and challenge the validity
of the regulation or rule in question. In our opinion,
therefore, the challenge to the validity of the rules on
the ground of Article 19 must fail.
8. The challenge to the validity of the said rules on
the ground of Article 14 must also fail, because the
classification of traders made by Rules 18 and 19 isT.C. (Civil) No.29 of 2021 Etc. 113
clearly rational and is founded on an intelligible
differentia distinguishing persons falling under one
class from those falling under the other. It is also clear
that the differentia has a rational relation to the object
sought to be achieved by the Act. As we have already
pointed out, the export trade in coir commodities
disclosed the existence of many malpractices
which not only affected the volume of trade but
also the reputation of Indian traders; and one of the
main reasons which led to this unfortunate result was
that exporters sometimes accepted orders far beyond
their capacity and that inevitably led to non-fulfilment
of contracts or to supply of inferior commodities. In
order to remedy this position the trade had to be
regulated and so the intending exporter was required
to satisfy the test of the prescribed minimum capacity
and to establish the prescribed minimum status
before his application for registration is granted. In
this connection it may also be relevant to point out
that the rules seem to contemplate the granting of
exemption from the operation of some of the relevant
tests to cooperative societies; and that shows that the
intention of the legislature is to encourage small
traders to form co-operative societies and carry on
export trade on behalf of such societies; and so it
would not be possible to accept the argument that the
impugned rules would lead to a monopoly in the trade.
It is thus clear that the main object which the rules
propose to achieve is to improve the anomalies and
malpractices prevailing in the export trade of coir
commodities and to put the said trade on a firm
and enduring basis in the interest of national
economy. We are, therefore, satisfied that the
challenge to the impugned rules on the ground of
infringement of Article 14 of the Constitution must
also fail.”
(emphasis supplied)
31. The further contention that a quantitative test
discriminates between persons carrying on business on a large
T.C. (Civil) No.29 of 2021 Etc. 114
scale and those who carry on business on a small scale as even
the prescription of a qualitative test would also lead to hardship
on those who cannot satisfy the test was rejected.
32. We must also now consider further arguments advanced
by learned senior counsel and counsel for the petitioners.
Heavy reliance placed on Institute of Chartered Financial
Analysts of India, in our considered opinion, is misplaced.
This case concerned whether acquisition of an additional
qualification of Chartered Financial Analyst (“CFA”) by a
Chartered Accountant could be termed as professional
misconduct under Section 22 of the 1949 Act. Holding in the
negative, this Court found that enhancement of knowledge,
training and ability should be encouraged in an emerging
economy and to term the same as professional misconduct
would be violative of Articles 14 and 19(1)(g). That case is
clearly distinguishable. Neither did this Court find that the
restriction placed was in public interest, nor that the
acquisition of an additional qualification hurt the quality of
statutory responsibilities attributed to a Chartered Accountant.
T.C. (Civil) No.29 of 2021 Etc. 115
33. The argument advanced by learned counsel for the
petitioners is that as a direct consequence and effect of the
ceiling limit, an anomalous situation of discrimination between
qualified professionals practicing in metropolitan cities as
against those in mofussil areas, or those catering to small
assessees as against those catering to bigger assessees, must
be categorically rejected. The potential effect of the concerned
restriction is that practitioners dealing in mofussil areas or
catering to small assessees will face a reduction in their income
which is violative of their right to freely engage in their
profession. We find ourselves unable to agree with this
contention. There is no material to suggest that this partial
limitation on the practise of the profession would lead to a
significant reduction in income. In any case, it is trite law that
reduction of income cannot be a ground for holding a
reasonable restriction unreasonable vide Minerva Talkies
which we shall discuss later. Where the devolution of a privilege
is justifiably restricted in public interest and such restriction
has a 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.
T.C. (Civil) No.29 of 2021 Etc. 116
34. The following judgments of this Court are also apposite:
(a) In B.P. Sharma, clause 17 of the instructions issued in
1979 by the Ministry of Tourism and Civil Aviation, Department
of Tourism, Government of India prohibiting the renewal of
identity cards to guides who were carrying on the job of
conducting tourists to historical monuments and other places
of interest and to explain the background and importance of
such places as well as acquaint the tourists with the historical
facts relating to the monuments and landmarks of the area
after they attained the age of sixty years, was assailed. Clause
17 stated that “when a guide attains the age of 60 years the
identity card issued to him or her will not be renewed further”.
This was unsuccessfully challenged by way of a writ petition
under Article 226 of the Constitution before the Allahabad High
Court. But, this Court observed that the freedom guaranteed
under Article 19(1)(g) of the Constitution is valuable and cannot
be violated on grounds which are not established to be in public
interest or just on the basis that it is permissible to do so. For
placing a complete prohibition on any professional activity,
there must exist some strong reason for the same with a view
to attain some legitimate object and non-imposition of such
T.C. (Civil) No.29 of 2021 Etc. 117
prohibition might result in jeopardizing or seriously affecting
the interest of the people in general. Otherwise, it would not be
a reasonable restriction. We do not have any contrary opinion
to what has been observed by this Court in the aforesaid
judgment but the facts of each case would ultimately decide
whether, a complete prohibition, ban or restriction is a
reasonable one or not depending upon the public interest it
would seek to achieve. In the aforesaid case clause 17 of the
instructions was held to be ultra vires Article 19(1)(g) and
hence, quashed by this Court.
(b) In Minerva Talkies, Rule 41-A of Karnataka Cinemas
(Regulations) Rules, 1971 made under Section 19 of the
Karnataka Cinemas (Regulation) Act, 1964 limiting the cinema
shows to four per day was held to be neither ultra vires the said
Act nor violative of Article 19(1)(g) of the Constitution. It was
observed that no licensee can claim to have an unrestricted
right to exhibit cinematograph films for all the twenty-four
hours of the day. Such a claim would obviously be against
public interest. The right to exhibit cinematograph films is
regulated by the provisions of the Act in the interest of the
T.C. (Civil) No.29 of 2021 Etc. 118
general public. The restriction to limit the number of shows to
four in a day placed by Rule 41-A is regulatory in nature which
clearly carries out the purposes of the Act. In the context of
Article 19(1)(g), it was observed that the law placing restrictions
on the citizens’ right to do business must satisfy two conditions
set out in clause (6) of Article 19: firstly, the restrictions
imposed by the law must be reasonable, and secondly, the
restrictions must be in the interests of the general public. If
these two tests are satisfied, the law placing restriction on the
citizens’ right guaranteed under Article 19(1)(g) must be
upheld. While considering the validity of Rule 41-A which had
limited the number of films to be exhibit in a day to four shows,
it was noted that holding of continuous five shows from 10 am
in the morning caused great inconvenience to the incoming and
outgoing cine-goers and endangered public safety. A short
interval of fifteen minutes between two shows is too little time
for cleaning the cinema halls and there was also rush by the
cine-goers to occupy the seats. Moreover, licensees would start
exhibiting approved films and slides before the cine-goers could
occupy their seats, with the result they would not have the
benefit of the same. The absence of interval between the shows
T.C. (Civil) No.29 of 2021 Etc. 119
resulted in denial of fresh air, ventilation and cleanliness in the
cinema halls. In order to remove these maladies, the restriction
on the number of shows to four per day was introduced. After
analysing the inconvenience that would be caused to the cine-
goers and also the fact that if the five shows were exhibited from
10 am to 1 am the next day, there would be great inconvenience
caused to the public, the State Government had promulgated
the restriction to only four shows in a day. Consequently, the
said Rule was upheld by this Court by observing that it was
intra vires the Act as it carried out the purposes of the Act and
it did not place any unreasonable restriction in violation of
Article 19(1)(g) of the Constitution. Consequently, this Court
dismissed the appeals as well as the writ petitions.
(c) In T. Velayudhan Achari, Section 45-S (1) as introduced
by Banking Laws (Amendment) Act, 1983 limiting the number
of depositors that can be accepted by individual, firm or
unincorporated association, was held to be not violative of
Article 19(1)(g) of the Constitution as the said limitation
protected larger interest of depositors. It was observed that a
ceiling for acceptance of deposits and to require maintenance
T.C. (Civil) No.29 of 2021 Etc. 120
of certain liquidity of funds as well as not to exceed borrowings
beyond a particular percentage of the net-owned funds had
been provided in the corporate sector. But for these safeguards,
the depositors would be left high and dry without any remedy.
It was held that the restrictions were reasonable and were in
the public interest.
(d) In B.K. Kamath, Kurian Joseph J. (as a Judge of the Kerala
High Court), observed that the Chartered Accountants Act was
enacted for regulating the profession and in the process
regulating and maintaining the status of the Chartered
Accountants. Therefore, 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. Comparing the said restriction to Section 224 of
the Companies Act, 1956 wherein a Chartered Accountant is
permitted to audit only twenty companies in a financial year
since the introduction of the said provision in the year 1974, it
T.C. (Civil) No.29 of 2021 Etc. 121
was observed that such regulatory measures are provided in
view of the onerous and time-consuming nature of the work of
the Chartered Accountant requiring accuracy and perfection.
The Income Tax Act attributes much importance to the
certificate of audit by the Chartered Accountant and therefore,
it is in public interest also to introduce certain restrictions on
the volume of work lest it would affect professional standards
apart from affecting the professional status. We are in complete
agreement with the aforesaid observations. In our view, the
comparison made between Chartered Accountants and
Advocates by the petitioners is also inappropriate.
35. It is also noted that under Section 224 of the Companies
Act, 1956 which deals with appointment and remuneration of
auditors, there is a bar with regard to appointment or
reappointment of any person as an auditor of a company, if
such person or firm of auditors is, at the date of such
appointment or reappointment, holding appointment as
auditor of specified number of companies or more than the
specified number of companies. Explanation (1) to Section 224
defines specified number to mean (a) in the case of a person or
T.C. (Civil) No.29 of 2021 Etc. 122
firm holding appointment as auditor of a number of companies
each of which has paid-up share capital of less than rupees
twenty-five lakh, twenty such companies; and (b) in any other
case, twenty companies, out of which not more than ten shall
be companies each of which has paid-up share capital of
rupees twenty-five lakh or more. Explanation-II states that in
computing the specified number, the number of companies in
respect of which or any part of which any person or firm has
been appointed as an auditor, whether singly or in combination
with any other person or firm, shall be taken into account.
36. The restriction placed under Section 224 of the
Companies Act, 1956 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 so as to ensure that
standard and quality in the audit of accounts of companies as
defined under Section 3 of the Companies Act, 1956 are
maintained. This is to protect the rights and interest of the
shareholders as well as the investors in the companies. Any
omission or inadvertence in the auditing of such company
T.C. (Civil) No.29 of 2021 Etc. 123
accounts would inevitably have an adverse impact not only on
the balance-sheets of the companies but also on the potential
investments and growth of the companies. There has not been
any challenge to the said regulation which is in the form of a
restriction. Any breach of the restriction placed on the
Chartered Accountants under Section 224 may lead to
misconduct under the provision of 1949 Act.
37. It is for the foregoing reasons that we find that questions
(i), (ii) and (iii) ought to be held in favour of the respondent-
Institute.
Re: Point No.4: Whether exceeding such specified number
of tax audits can be deemed to be ‘professional
misconduct’?
38. During the course of submissions, an alternative plea
raised by learned senior counsel and learned counsel for the
petitioners was that the respondent-Institute initiated
disciplinary proceedings only against a few Chartered
Accountants, including petitioners herein, while a majority of
the Chartered Accountants who had breached the Guideline
are not facing any disciplinary proceeding and have not been
proceeded against. Secondly, it was contended that it was only
T.C. (Civil) No.29 of 2021 Etc. 124
recently that notices have been issued to the writ petitioners
herein to respond to the same and for conducting disciplinary
proceedings. That there cannot be a discrimination, so to say,
by the respondent-Institute in the matter. That, the impugned
Guideline dated 08.08.2008 has been on the statute book, the
disciplinary proceedings have been initiated only recently. The
impugned Guideline has not been effectively given effect to.
Therefore, the disciplinary proceeding may be quashed for the
aforesaid reasons. In this regard, it was contended that when
the respondent-Institute has remained silent and not acted
upon the Guideline, since it was issued on 08.08.2008, all of a
sudden there could not have been initiation of disciplinary
proceedings only against the petitioners herein and possibly
others who may not have approached any court of law, whereas
many other Chartered Accountants have not been proceeded
against and are virtually scot-free. Therefore, there is
discrimination and violation of Article 14 of the Constitution of
India herein in the implementation of the Guideline vide
Notification dated 08.08.2008. Therefore, pending full and
effective implementation of the Guideline impugned herein of
the impugned proceedings against the petitioners herein for the
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alleged misconduct on their part for violating the Guideline may
be dropped.
39. It is observed that 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 respondent-Institute.
Relying on the dictum of this Court in Chamundi Mopeds, the
petitioners contended that a stay on the judgment of Madras
High Court was only on the operation of the judgment and not
a declaration that the judgment was bad in law. As the special
leave petition impugning the judgment of Madras High Court
was dismissed as infructuous and any action taken by the
respondent-Institute on the superseding Guideline dated
08.08.2008 was taken only belatedly, we find force in the
submission that there was uncertainty in law only in the
context of the pendency of the matter before this Court on there
being quashing of the Guideline by the Madras High Court and
an interim stay of the said judgment by this Court.
T.C. (Civil) No.29 of 2021 Etc. 126
40. In this regard, we may refer to Halsbury Laws of England,
[5th Edn. Volume 96 (2018)] dealing with the principle against
doubtful penalisation:
“774. Principle Against Doubtful Penalisation
“It is a principle of legal policy that a person should not
be penalised except under clear law, …”
41. Francis Bennion on Statutory Interpretation (8th Edn,
2020 at Section 26.4) deals with principle against doubtful
penalisation in the following words:
“It is a principle of legal policy that a person should not
be penalised except under clear law. This principle
forms part of the context against which legislation is
enacted and, when interpreting legislation, a court
should take it into account.”
42. It was borne out during the course of arguments and
through the submissions made in the Counter Affidavit that the
tax audit monitoring mechanism was firstly, self-regulatory,
wherein the disciplinary mechanism would kick in only on a
complaint made/information received and not
otherwise. Furthermore, the Tax Audit Monitoring Cell was
created only after the CAG Report No. 32/2014, and even after
that, initially notices were sent only selectively to Chartered
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Accountants who had completed more than two hundred
audits not to all who had breached the impugned Guideline.
43. As a rule of statutory interpretation, we find that the
aforesaid principles, in an equitable legal system, should be
applicable to the present circumstances. Thereby, 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 respondent-Institute
and who may not have approached any court of law or to other
similarly situated Chartered Accountants who may not have
been proceeded against.
44. Reference may also be made to judgment of this Court in
Jindal Paper & Plastics vs. Union of India, (1997) 10 SCC
536, (“Jindal Paper & Plastics”) wherein the question on
merits was settled by a judgment of this Court in Kasinka
Trading vs. Union of India, (1995) 1 SCC 274, (“Kasinka
Trading”), delivered on 18.10.1994 and a larger bench on
T.C. (Civil) No.29 of 2021 Etc. 128
20.12.1996 concluded that the judgment dated 18.10.1994
was good law. This Court allowed the petitioner’s prayer therein
that for the period of uncertainty in law, i.e., until the law, on
merits, was settled by this Court on 18.10.1994, a lesser
interest rate of 12% be charged instead of 17.5%, as ordered by
the High Court. In these circumstances, this Court held as
follows:
“4. We are of the view that there was uncertainty
about the law until the decision in the case
of Kasinka Trading [(1995) 1 SCC 274 : JT (1994)
7 SC 362] was rendered on 18-10-1994, and that,
therefore, interest from the date it became payable
until 18-10-1994, should be payable at the rate of 12%
per annum. Interest for the further period should be
at the rate of 17.5% per annum, as ordered by the High
Court. Calculations shall be made accordingly and the
balance and interest as aforesaid due by the
appellants shall be paid to the respondents within 8
weeks.”
(emphasis supplied)
45. We, therefore, find much force in the alternative plea
made by the petitioners herein. In these circumstances, due to
the uncertainty in law owing to quashing of the earlier
Guideline and the pendency of the Special Leave Petition filed
by the respondent-Institute before this Court and the
enforcement of a fresh Guideline, we quash the disciplinary
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proceedings initiated against the petitioners herein. This is forthe simple reason that only the writ petitioners have been
proceeded against, while even according to the respondent-
Institute, there were around twelve thousand Chartered
Accountants who had breached the Guideline and had
undertaken tax audits over and above the specified number but
no action whatsoever was initiated against of them.
46. In conclusion, we must also note the dictum in Malpe
Vishwanath Acharya vs. State of Maharashtra, (1998) 2
SCC 1, (“Malpe Vishwanath Acharya”), wherein this Court,
relying on Motor General Traders vs. State of A.P., (1984) 1
SCC 222, (“Motor General Traders”), reiterated that a
provision which was/is reasonable may with the passage of
time become unreasonable. In the context of restriction on the
specified audits under Section 44AB of IT Act, 1961, Minutes
of the Council of the respondent-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. However, it also
becomes apparent that decisions of the Council on whether to
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increase or maintain the status quo have been ad-hoc,
influenced by several factors such as technological
development, number of practicing Chartered Accountants,
etc. Since the last revision to sixty tax audits was made a
decade ago, we direct the Council to consider if the time is ripe
to enhance the specified number of tax audits and to delineate
the factors that it may consider in taking such a decision.
47. In that view of the matter, the respondent-Institute is at
liberty to enhance the specified number of tax audits that could
be undertaken by practicing Chartered Accountants under
Section 44AB of the IT Act, 1961. For that purpose, liberty is
reserved to the practising Chartered Accountants to make their
suggestions to the respondent.
48. We wish to make certain observations before parting with
these writ petitions. The Institute of Chartered Accountants of
India over a period of time, has received recognition as a
premier accounting body, domestically and globally, for
maintaining highest standards in technical, ethical areas and
for sustaining stringent examination and educational
standards. Since its inception in the year 1949, the profession
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of Chartered Accountancy and accounting has grown leaps and
bounds in terms of the number of members, which now stands
at over 3.5 lakhs. The respondent-Institute has also played a
significant role in ensuring the dynamism of the Chartered
Accountancy course curriculum and the credibility of the
examinations. The financial skills of the aspirants are fairly
consolidated, at the time of joining the profession itself- this is
owing to the robust examination pattern. We commend that the
respondent-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. The true test
however, lies in application and enforcement of these standards
in the Indian context.
49. The power to control and impose taxes is a cornerstone of
State sovereignty. Welfare States impose taxes to generate
revenue that enables investment in human capital,
infrastructure and services for citizens and businesses. The
Tax Law landscape in India has been one of the most dynamic
areas of law and has witnessed several changes over the last
T.C. (Civil) No.29 of 2021 Etc. 132
few decades. The Taxation Systems in India have been
periodically assessed and several changes have been brought
about from time to time. Such changes have been introduced
with a view to either widen the tax base; to simplify and
rationalise laws and procedures; to bring about modernization
through computerization of tax returns; to enhance efficiency
of the tax administration; or to maintain progressivity at such
levels as would not induce evasion.
49.1 In relation to direct taxation, we believe that the taxation
system must be one that not only incorporates the normative
and prescriptive considerations of neutrality, fairness,
certainty, efficiency etc. but one that also promotes the
virtuous circle of increased trust between tax payers and the
tax administration. We call this a “virtuous circle” because it
seeks to achieve a dual purpose: it reinforces voluntary
compliance while at the same time promoting good governance.
Good governance is achieved in an attempt to secure the
confidence of the taxpayer. Once a taxpayer is certain that tax
revenue is being channelled in an efficient manner, consistent
with the objectives of a welfare state, enhanced tax compliance
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is likely to follow. It is in this context that we stress on the
significance of the role played by Chartered Accountants. They
can serve as effective catalysts in securing this 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 to understand the rules of the
road. The integrity and standards of Chartered Accountants
determine the efficiency in the functioning of the nation’s
taxation system.
49.2 There are many concepts and processes in the present
taxation regime that rest, almost completely, on the vigilance
of Chartered Accountants and auditors. The very concept of
self-assessment carries with it the requirement of good faith
practices. The most recent tax reforms seek to achieve
transparent taxation by “Honouring the Honest taxpayer.” The
success of such initiatives depends, to a very large extent, on
the vigilance demonstrated by Chartered Accountants.
49.3 Transparency in accounting is imperative to the economy
in many ways. For instance, in the absence of accurate
financial reporting, it would become difficult for banks to make
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informed decisions about credit allocation. It is the quality,
reliability and objectivity of this information which
stakeholders rely upon to make informed judgments and
allocate resources efficiently. The role of transparent
accounting is critical in lending credibility to the financial
market transactions. Market participants, investors and
shareholders look towards this community for accurate
information, which ensures market discipline and fosters
confidence of various stakeholders. The onus is on Chartered
Accountants to ensure that our Nation’s businesses do indeed
conform to high corporate governance standards. Further,
while the quality of information has immediate and far-
reaching implications for a particular enterprise, it eventually
permeates to the market and the economy as a whole. It is
therefore not surprising to find that the accounting profession
is being constantly challenged to meet the demands for quality
information. As key providers and verifiers of information, the
bottom-line is simple: the higher the quality and integrity
maintained by the profession, the stronger and more resilient
will our markets be. By providing the foundation for
compilation of credible financial statements, the accounting
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profession facilitates market discipline, engenders confidence
among various stakeholders and reduces the possibility of
misleading information that can disrupt stability of financial
systems. Therefore, the need for quality assessments
particularly under Section 44AB of the IT Act, 1961.
49.4 In the public discourse on governance, we find that the
corporate governance agenda garners attention only during
times when the Country is faced with the most notorious
corporate scams. Shareholder democracy has come to stay and
Chartered Accountants are the gatekeepers of this new
corporate world which poses challenges as well as
unprecedented opportunities. Thus, the importance of integrity
of auditing functions for maintaining financial stability is now
well-recognised.
49.5 More importantly, Chartered Accountants must
themselves comply with the relevant laws and regulations and
avoid any conduct that discredits the profession. Needless to
specify that Chartered Accountants must refuse to represent
clients who insist on resorting to unfair means. Chartered
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accountants are relevant not only in securing corporate
governance, but governance in broader contexts too.
49.6 Chartered Accountants face many different
responsibilities: to the profession; to the tax administration; to
the client and to the economy at large. In that context, we stress
on the importance of preserving their independence of view and
integrity; to separate their client-advisory role from their role
as public citizens seeking to improve the functioning of the tax
machinery of the Nation. Integrity, objectivity, professional
competence and due care and confidentiality must be the
doctrines guiding their work ethic.
Conclusion:
50. In the circumstances, we dispose of the writ petitions in
the following manner:
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.
T.C. (Civil) No.29 of 2021 Etc. 137
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.
f) The writ petitions as well as all the transferred
cases are disposed of in the aforesaid terms.
T.C. (Civil) No.29 of 2021 Etc. 138
g) The Registry to intimate the concerned High
Courts regarding disposal of the transferred cases
accordingly.
h) No costs.
. . . . . . . . . . . . . . . .. . . . . . . . J.
[B.V. NAGARATHNA]
. . . . . . . . . . . . . . . . . . . . . . . J.
[AUGUSTINE GEORGE MASIH]
New Delhi;
May 17, 2024.
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