VAT Audit — Writ Petitions

The main contentions of the petitioners were :

The petitioners placed reliance in the judgments of Omprakash Sud and Ors. v. State of J. & K. and Ors., 1981 (2) SCC 270, Suneel Jetley and Ors. v. State of Haryana, 1984(4) SCC 296, Deepak Sibal v. Punjab University & Ors., 1989(2) SCC 145, Ahmedabad Municipal Corpn. and Anr. v. Nilaybhai R. Thakore and Anr., 1999 (8) SCC 139 and in D. S. Nakara and Ors. v. Union of India, 1983 1 S.CC 305.

The petitioners also argued that S. 22 of the MVAT Act provides for audit (by the Department). S. 22(1)(a) to (e) contemplates all situations which require audit. This audit is carried out by the Officers empowered by the Commissioner or to whom powers have been delegated. S. 22 therefore, covers all situations which require audit. This situation arises after the returns are filed. There is no indication of any requirement of audit before filing of returns, and as such, S. 61 is directly in conflict with S. 22 and is ultra vires the scope of S. 22. S. 22(3) permits the audit to be conducted by an officer who may not be a chartered accountant. If S. 22 audit can be conducted by an officer who may not be a chartered accountant, then there is no reason why S. 61 audit cannot also be conducted by a person who is not a chartered accountant. S. 61 which requires audit only by a chartered accountant, therefore, is discriminatory. Reliance is placed on Municipal Corporation of Grater Bombay and Ors. v. Thukral Anjali Deokumar and Ors., (1989) 2 S.CC 249.

Before proceeding further, the Honourable High Court first made a reference to S. 61 of the MVAT Act and the amendments made thereto. The Court also referred to S. 82 of the MVAT Act and observed “S. 82 of the Act  permits  sales tax practitioners  and others set out therein, the right of appearance before any –  authority in proceedings under the Act. The right of appearance, therefore, has not been taken away. The right to appear subsists.  The limited  question  is whether u/s.61, the exercise of getting  the accounts audited, can be said to be part of the right to appear and plead before the Courts or judicial forums and or getting the accounts audited is part of the right conferred by S. 82 or in the alternative excluding other than chartered accountants and cost accountants is arbitrary or violative of the rights of these excluded categories to carryon their trade or profession. “

The Court also referred  to the dictionary  meaning of the expression  ‘audit’  and  ‘auditor’  as given in P. Ramanatha  Aiyar’s  Advanced  Law Lexicon, 3rd Edition,  Oxford  English  Dictionary  and  Mr. R. A. Irish’s book ‘Practical  Auditing’.  It also referred  to the discussion  on the subject in President,  Councillors and  Ratepayers  of the  Shire of Frankston  and Hastings v. Cohen, 102 C.L.R.  607 the High Court of Australia.

Responses  were invited from the respondents i.e., (1)the Government of Maharashtra and (2) the Institute of Chartered Accountants of India.

In its detailed reply, the Government of Maharashtra, through its Dy. Commissioner of Sales Tax submitted as follows:

“The Government of Maharashtra decided to introduce VAT system with effect from 1st April, 2005. At that time the Government decided to amend the VAT Act, 2002 in terms of the national consensus arrived at by the Empowered Committee of State
 

Finance Ministers. Accordingly, a draft bill was prepared for submission to the Government and it was made open for comments of the public. The amendment bill inter alia included a proposal on the request of advocates, tax practitioners and cost accountants to include them u/s.61 for tax audit along with the chartered accountants having stand-ing in profession for a period of 7 years or more. But there was no assurance directly or impliedly that such proposal will be accepted by the Govern-ment or enacted by the Legislature. Various aspects were considered including that under the Companies Act. S. 211(C) of the Companies Act requires that all companies in India must prepare their annual accounts in accordance with the Accounting Standards and get those accounts audited in accordance with the Auditing Standards laid down by the Institute of Chartered Accountants of India. The Government decided to continue the old provision of audit under MVAT i.e., audit u/s.61 only by chartered accountants.

Under the Companies Act, the Central Government has also constituted a National Advisory Committee on Accounting Standards (NACAS), which is required to recommend the Accounting and Auditing Standards. However, the Central Government did not issue any notification based on the recommendations of NACAS. The Accounting and Auditing Standards issued by the Institute of Chartered Accountants of India are binding. Thus, no corporate entity can prepare its accounts by an method other than that provided by ICAL Similarly, no audit can be conducted without following Auditing and Assurance Standards (AAS) issued by ICAL

The Accounting and Auditing Standards issued by the Institute of Chartered Accountants of India are based upon the Accounting and Auditing Standards issued by the International Federation of Accountants (IFAC). Accounting Standards Board of IFAC in the year 2002-2003 stands converted into independent Accounting Standards Board (ISAB). The Board to start with, Adopted Accounting Standards (AAS) issued by IFAC and now is in the process of revision of some of these Standards. The AS are very complex and there are major variances in respect of turnover of sales and purchases accounted as per AAS in the profit and loss account of the enterprise and turnover of sales and purchases which is required to be considered for the purpose of levy of tax under the Maharashtra Value Added Tax Act, 2002. Clear-cut comments on the major changes made by any firm in a given period in respect of accounting system, method of valuation of stocks and business model, etc. are required from the auditor.

These are complex accounting and audit issues which advocates, sales tax practitioners and company secretaries are not professionally qualified to handle.

S. 29 of the Advocates Act, 1961 provides that advocates would be the only class of persons to ‘practise the profession of law’. S. 33 of the Advocates Act bars any other professional to practise in any Court or before any authority, etc. S. 49 of the Advocates Act gives general powers to the Bar Council of India to make such rules. Under this power, the Bar Council of India has framed the rules, which prohibit an advocate from engaging in any other profession other than practicsing the profession of law. The requirement of S. 61 of the MVAT Act is of auditing of the books of accounts and giving a certificate of his conclusion after verification. This cannot be called as ‘practise the profession of law’.

The area u/s.61 is practising in the field of accountancy and auditing, which an advocate is not competent to undertake under the Rules framed by the Bar Council of India u/s.49 of the Advocates Act, 1961.

Parliament of the country has framed the Chartered Accountants Act, 1949. U/s.2(2) the area in which a member of the Institute of Chartered Accounts of India (ICAI) can practise is defined. The practice of accountancy and auditing can be carried out by the chartered accountants who are members of ICAI and are holding a certificate of practice.

If the advocates embark on practice in the area of accountancy and auditing work, then it would amount to practice in accounting and auditing and thus will violate the provisions of the Advocates Act, 1961 and the rules framed thereunder by the Bar Council of India. Therefore, the advocates cannot be allowed to carry out the function of an accountant or of an auditor.

As regards sales tax practitioners, they are not governed by any professional Act. Any graduate having acquired a Diploma in Taxation or having passed specified accountancy examination and acquired such qualifications as are prescribed by the Central Board of Revenue or having retired as an officer from the Sales Tax Department, can enrol with the Sales Tax Department as a sales tax practitioner. He is not required to be a qualified auditor, nor is he governed by the strict discipline and acceptability required under the Chartered Accountants Act, 1949 for any acts of omission and commission in the conduct of audit. Hence, a sales tax practitioner cannot be expected to provide the level of assurance and creditability of the audit of the accounts of a VAT payer expected by the Revenue. Hence, while a sales tax practitioner is qualified to appear in proceedings, he cannot conduct audit u/s.61.

All over India, as per information available, 30 States and Union Territories have introduced VAT, either in the year 2005-2006 or in the year 2006-2007. Information about audit provision in two States i.e., Nagaland and Mizoram is not available. Out of the remaining 28 States, four States (Haryana, Himachal Pradesh, Sikkim, West Bengal) have no provision for audit from independent professionals. Thirteen States and Union Territories have called for an Audit Report under the VAT Act exclusively from chartered accountants. These States are (i) Auranachal Pradesh, (ii) Bihar, (iii) Chattisgarh, (iv) Goa, (v) Madhya Pradesh, (vi) Maharashtra, (vii) Manipur, (viii) Meghalaya, (ix) Punjab, (x) Rajasthan, (xi) Dadra and Nagar Haveli, (xii) Daman and Diu, (xii) Chandigarh.

Another 7 States have called for Audit Report only from professionals who have knowledge in the field of accountancy i.e., chartered accountants or cost accountants. In those States the sales tax practitioners or advocates are not authorised to give the Audit Report, though they are allowed to represent. before the authorities. These States are (i) Assam, (ii) Delhi, (iii) Kerala, (iv) Orissa, (v) Tripura, (vi) Jammu and Kashmir, (vii) Uttranchal.

Only four States have allowed other professionals besides chartered accountants and cost accountants to conduct this audit. These States are (i) Andhra Pradesh, (Ii) Gujarat, (iii) Jharkhand and (iv) Karnataka.

The C.A.s were included after consideration and analysis of the facts as to their expertise and specialised training. The VAT is designed for the purpose of self- assessment by certifying returns by the C.As. The VAT is invoice-based system and the deductions are based on certification. A true and correct invoice of having paid Value Added Tax, in the treasury is required. It is therefore, necessary ingredient of certification of data contained in returns and encompasses entire sphere of verification of account books and vouchers. It is submitted that the experience of the income tax department shows that independent tax audit has improved the proper maintenance of books of accounts from the taxation point of view. The Empowered Committee had referred the issue to the Group of Commissioners of Sales Tax to decide the necessary provisions for audit. It was recommended by the said committee that the audit of certification of the books of accounts should be by specified authority only.”

The Institute of Chartered Accountants of India in its reply, submitted that VAT is an invoice-based system, where the major thrust is on self-assessment of the tax liability by the dealer. It is necessary therefore to respect book-keeping requirements and also necessary to ensure that the particulars furnished by the dealer are true and correct. Consequently, in the interest of the State, the Legislature has found it necessary to have the accounts audited.

The audit is a specialised subject and the same is required to be carried out after detailed verification of the books of accounts applying the accounting and auditing principles. Audit of accounts requires expertise. The chartered accountants being experts in the field of accounting and auditing, the said Act rightly provides that the accounts be audited only by chartered accountants.

To consider the challenges under Articles 14 and 19(1)(g), the Hon’ble Court referred to S. 44AB of the Income-tax Act, which contains a similar provision for audit of accounts of persons whose total sales or turnover or gross receipts exceeds the pre-scribed limits. This provision, when introduced for the first time, was challenged before various High Courts. And the Supreme Court in an appeal before it, has upheld the legality of the Section. [T. D. Venkata Rao (SC) (AIR 1999 sC 2242)]

In the case of R. Sathya Moorthy and Ors. v. Union of India and Ors., (1991) 189 ITR 491, the petitioner challenged the validity of S. 44AB of the Income-tax Act, before the Madras High Court. The challenge made was on behalf of Income-tax practitioners as also an assessee, to contend that u/s.44AB, as compulsory audit was restricted to chartered accountants, it violates both, Articles 14 and 19 of the Constitution.

The petition was dismissed and an appeal was filed before the Supreme Court. While dismissing the appeal, the Supreme Court held as under:

“The chartered accountants by reasons of their training having special aptitude in the matters of audits. It is reasonable that they, who form a class by themselves, should be required to audit the accounts of businesses whose income exceeds RsAO lakhs and professionals whose income ex-ceeds Rs.10 lakhs in any given year. There is no material on record, and indeed, in our view, there cannot be, that an income tax practitioner has the same expertise as chartered accountants in the matter of accounts. For the same reasons, the challenge under Article 19 must fail, and it must be pointed out that these income tax practitioners are still entitled to be authorised representatives of assessees.”

In view of above, the Justice F. I. Rebello & R. S. Mohite of the Bombay High Court opined that once the Supreme Court has upheld the legality of S. 44AB of the Income-tax Act, where the same terminology was used and which ‘was also a provision pertaining to audit, in our opinion, and considering the object of both the provisions, which is prevention of evasion of tax dues, the challenge by the petitioners on the ground of infraction of Article 14 and 19 will have to be similarly rejected. There are practically no distinguishing features. The only distinction, if any, is that, whereas S. 44AB is for the purpose of ascertaining ‘total income’, S. 61 is for certification whether VAT had been correctly assessed, collected and paid.

The various submissions now made under Articles 14 and 19 in the challenge to S. 61 were also advanced whilst challenging S. 44AB of the Income-tax Act before the various High Courts. The Madras High Court had referred to judgments of various other High Courts which had decided the challenge to S. 44AB. The judgments of the High Courts are Mohan Trading Co. v. Union of India, 196 ITR 134 (MP). Rajkot Engineering Association v. Union of India, 164 ITR 148 (Raj), A. S. Sharma v. Union of India, (1985) 175 ITR 254 (A.P.) and T. S. Natraj v. Union of India, (1981) 155 ITR 81 (Kar.).

After noting various points from the above-referred judgments, the Court rejected the challenge based on Article 14 on the following grounds:

(i) Chartered accountants by reason of their training have special aptitude in the matter of audit. An income tax practitioner does not have the same expertise as the chartered accountants in the- matter of accounts. The argument therefore, that the effect of such a provision will be to exclude all other categories of authorised representatives except the chartered accountants from carrying on their profession is liable to be rejected, as they constitute two distinct classes having a nexus with the object of the provisions, which is evasion of tax dues.

(ii)The contention that such a provision brings in an oppressive restriction is also liable to be rejected as auditing accounts is a specialised job. It may be true that some income tax practitioners may also ac-quire that skill by sheer practice without passing the necessary examination. But that does not preclude Parliament from prescribing special qualifications with reference to the auditing of accounts.

(iii) Legal practitioners and chartered accountants are equal for the purpose of representation of assesses before the Assessing Authority, but they are not equals for the purpose of compulsory audit. The preferential treatment given to the chartered accountants for the purpose of compulsory audit does not militate against the rule of equality under Article 14 of the Constitution. The terms ‘audit’, ‘auditing’ and the ‘functions of auditor’ clearly bring about the difference between the chartered accountants and others.

The object and purpose in providing compulsory audit is to facilitate the prevention of evasion of taxes, administrative convenience in quick and proper completion of assessments, etc. In the light of this object, chartered accountants and others cannot be said to be similarly situate. The qualifications and eligibility to be enrolled as income tax practitioners are entirely different from that of chartered accountants from the point of view of auditing.

(iv) Merely because apart from dealers whose turnover is more than 40 lacs, dealers dealing in liquor trade have also to get their accounts audited does not make the provision arbitrary. Such dealers are a class by themselves as they are carrying on a trade which is res extra commercium. They constitute a class by themselves and if the Legislature in its wisdom has provided that their accounts should be audited, it is neither unreasonable, nor treating them as a class arbitrary. The classification in the instant case is reasonable and has a nexus with the object which is to direct a class of dealers getting their accounts audited by a specialised agency,…so that there is no tax evasion.
 

On behalf of the petitioners, a distinction was sought to be made in certification under the Income-tax Act and under the VAT Act. In our opinion, the legality of the provisions or its non-arbitrariness is not dependent on the manner in which the form has to be filled, the contents thereof and the procedure. What is relevant is to consider the object of the Act and in selecting the class of professionals whether the Legislature has acted unreasonably or has imposed unreasonable restrictions on the right of the assessee and or income tax practitioners to carryon their occupation or profession. It must be noted that the chartered accoun-tants cannot certify the correctness and completeness of the sales tax returns, unless they audit the accounts of the dealer as maintained in the first part of S. 61. After audit, chartered accountant has to certify the various items in Part I of Form No. 704. These items are subject to audited observations of the chartered accountant and comments about the non-compliance, shortcomings, deficiencies, in the return filed by the dealer. There are various other requirements.

“Suffice it to say that it is a specialised job which can only be undertaken by the person professionally competent and trained to audit. Advocates are not qualified as observed by the Supreme Court in T. D. Venkatarao v. Union of India, 237 ITR 315. The other sales tax practitioner and retired employees definitely not.”

The settled law on the subject is that as 10Ifgas the twin tests of reasonableness of the classification and nexus with the object are satisfied, wisdom of legislation cannot be substituted. The State Legislature is free to decide in its wisdom as to how best to safeguard the State revenue. Different States may adopt different standards and policy of one Legislature may not be adopted by another Legislature, as the matter lies in the domain of policy making. Because some States have permitted sales tax practitioners to carryon audit need not necessarily mean that as the Legislature of the State of Maharashtra has not so provided, that would be arbitrary or that the classification considering the nexus of the object is arbitrary. It is for the State Legislature to decide how to protect its revenue and this is more true with regard to economic legislation. See R. K. Garg v. Union of India and Ors., 1982 Vol. 133 ITR 239 SC as also the observations of the Supreme Court in Para 16 in Directorate of Film Festivals and Ors. v. Gaurav Ashwin Jain and Ors., (2007) 4 Supreme Court Cases 737 wherein the

Court observed as under:
“16 ….    Courts    cannot    interfere    with  policy, either on the ground that it is erroneous or on the ground that a better, fairer or wiser alternative is available. Legality of the policy, and not the wisdom or soundness of the policy, is the subject of judicial review …. “

Rejecting the challenge under Article 19(1)(g), the Court after referring to the Supreme Court’s decisions in V. Sasidharan v. Peter and Karunakar, 1984 (4) SCC 230, State of Gujarat v. Mirzapur Moti Kureshi Kassab Jamat and Ors., (2005) 8 SCC 534 and Fertiliser Corporation Kamgar Union v. Union of India, AIR 1981 SC 344, observed: “in the instant case considering S. 82 of the VAT Act, the category of persons who are excluded from the ambit of explanation of S. 61 are not denied their right of appearance before the authorities under the Act. In other words, they are not prohibited from carrying on their profession.”

The High Court  further said that  there  is a difference between prohibition and restriction. Article 19(6) of the Constitution empowers the State to put reasonable restrictions in public interest. Apart from the power conferred on the State to impose reasonable restrictions under Article 19(6), there is a further power conferred under Article 19(6) of laying down professional or technical qualifications necessary for practising the profession as in the instant case.

Considering the tests laid down in MRF Ltd. v. Inspector, Kerala Government and Ors., 1998 (8) SCC 227 to judge the reasonableness of the restriction, can the provision which requires the audit to be done only by an accountant as explained, amount to an unreasonable restriction? In the matter of carrying out audit the State has chosen to confer that right only on a class of persons having expertise in the field. This cannot be said to be arbitrary or excessive in nature, so as to go beyond the requirement of the interest of the general public. That would be yet another reason as to why the challenge  under Article  19(1)(g) must fail.

Rejecting the challenge to the Constitutional validity of the Legislation under Articles 14 and 19 at the instance of the Bar Council of Maharashtra and Goa, The Court said :

“We may only point out that S. 29 of the Advocates Act till date has not been brought into force. Apart from that, one fails to understand the stand of the Bar Council after the decision of the Supreme Court in T. D. Venkatrao (supra) where the Supreme Court has accepted the fact that chartered accountants by the reason of their training have special aptitude in the matter of audit. The act of maintaining accounts is neither pleading, practice, nor acting.”

From the conclusion drawn by the Supreme Court and various High Courts and considering the contentions advanced, various challenge made by the petitioners including the challenge based on Articles 14 and 19, etc., the views expressed by the Hon’ble Bombay High Court, in the above decision, may be summarised as follows:

The Bombay High  Court  thus  held:

“In our opinion, there is no merit in any of the petitions and consequently rule discharged in all the petitions. In the circumstances of the case, each party to bear their own costs.”