Ceiling on Tax Audits in India for Chartered Accountants

Tax Auditing

Auditing is the systematic examination of financial statements to verify compliance with regulatory standards and internal controls. It plays a major role in every firm, ensuring transparency and accuracy and helping to build trust among shareholders.

A tax audit ensures that the taxpayer has provided all the necessary details regarding their income, taxes, deductions, and other financial details. Individuals earning income from a business or profession are required to maintain books of accounts and undergo a tax audit unless their turnover is below the prescribed threshold limits or if they have opted for presumptive taxation under sections 44AD, 44ADA, or 44AE of the Income Tax.

Section 44AB of the Income Tax Act of 1961 sets out the rules and regulations for conducting tax audits for entities or firms. This audit is carried out by a Chartered Accountant (CA).

Thresholds and Conditions for Mandatory Tax Audit

A tax audit is required for a taxpayer if the sales, turnover, or gross receipts of a business exceed ₹1 crore in a financial year, or ₹10 crore if cash transactions make up no more than 5% of total transactions (i.e., cash receipts and payments are within 5% of total receipts and payments). For professionals, a tax audit is mandatory if gross receipts exceed ₹50 lakhs in a financial year and this increases to Rs. 75 lakhs if at least 95% of receipts are in digital mode.

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Tax Audit Assignment Caps

Objective:

The guideline defining any breach of the specified limit on tax audits as misconduct was introduced to uphold the quality and integrity of tax audits. This restriction aims to prevent audits from being conducted in an insincere, unethical, or unprofessional manner. It was implemented as the most practical solution to address these concerns and ensure that Chartered Accountants maintain high standards in conducting tax audits, ultimately serving the public interest.

The Chartered Accountants Act, 1949

Under Clause 1 of Part II of the Second Schedule to the Chartered Accountants Act, 1949, a Chartered Accountant is deemed guilty of professional misconduct if they accept more than the prescribed limit of tax audit assignments under Section 44AB of the Income-tax Act, 1961

· “A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct, if he−

contravenes any of the provisions of this Act or the regulations made thereunder or any guidelines3 issued by the Council;”

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Council General Guidelines, 2008: Specified number of tax audit assignments for CA’s

In the Council General Guidelines, 2008 (Guidelines No. 1-CA(7)/02/2008, dated 8th August 2008), under Chapter VI titled "Tax Audit Assignments under Section 44AB of the Income-tax Act, 1961," the specified limit of tax audit assignments for practicing Chartered Accountants, previously set at "45" in the Explanation under Para 6.1, sub-para (a) and sub-para (b), has been revised to "60."

Currently, a Chartered Accountant in practice is restricted to taking on no more than 60 tax audit assignments annually. Other assignments such as statutory audits, internal audits, concurrent audits, or any other audits mandated by law to be conducted by a Chartered Accountant are not included in the limit of 60 tax audits specified under Section 44AB.

Special Scenarios:

              i.  Chartered Accountants Practicing Individually

For Chartered Accountants practicing individually, the total number of tax audit assignments they can undertake in a year is capped at 60. This ensures they maintain the required standards of quality in their work.

            ii.   Chartered Accountants in Multiple Firms

If a Chartered Accountant is associated with multiple firms, the aggregate number of tax audit assignments handled across all firms must not exceed 60. The limit applies collectively to all assignments undertaken.

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            iii.    Chartered Accountants in Partnership Firms

For those working as partners in a partnership firm, the limit of 60 assignments applies to the individual Chartered Accountant, irrespective of the number of partners or the size of the firm. This ensures equitable distribution of work and adherence to quality standards.

Consequences of Exceeding Prescribed Audit Limits

If a member exceeds the prescribed limits for tax and statutory audits set by the ICAI Council guidelines, it constitutes a violation of the Second Schedule. Such cases are referred to the Disciplinary Committee, which, upon finding the member guilty, may take the following actions:

• Reprimand
• Removal from the Register of Members (permanent or temporary)
• A fine of up to ₹5,00,000

Supreme Court on Tax Audit Assignment Caps:

The Supreme Court addressed the issue of capping tax audit assignments in the case of Shaji Poulose v. Institute of Chartered Accountants of India. The primary questions before the Court were:

1. Whether the ICAI had the authority to impose a limit on the number of tax audit assignments undertaken by Chartered Accountants.
2. Whether imposing such a limit violated Article 19(1)(g) of the Constitution of India, which guarantees the right to practice any profession or to carry on any occupation, trade, or business.

During the hearing, the counsel representing the ICAI argued that the guideline treating the exceeding of the specified number of tax audits as misconduct was introduced following communication from the CBDT and to maintain the quality of tax audits. It was further contended that placing a cap on the number of tax audits under Section 44AB of the Income Tax Act, 1961, does not restrict the freedom guaranteed under Article 19(1)(g) of the Constitution. Instead, the cap was introduced in the public interest and is, therefore, protected under Article 19(6) of the Constitution.

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While determining the constitutionality of the provisions, the Court observed a critical distinction between a right and a privilege. It noted that performing tax audits is not an inherent part of being a Chartered Accountant, nor is it essential to the profession, and thus it does not fall under the fundamental rights protected by Article 19(1)(g) of the Constitution. Since conducting tax audits is a privilege granted by the ICAI, it can be reasonably restricted. The Court further reasoned that imposing a limit on the number of tax audits is a less severe measure than revoking the privilege entirely. Therefore, it upheld the ICAI’s authority to regulate this privilege in a manner that serves the public interest.

Conclusion

The imposition of limits on tax audit assignments by the ICAI is a significant step towards ensuring the quality, efficiency, and ethical conduct of Chartered Accountants. By capping the number of audits under Section 44AB of the Income Tax Act, 1961, the ICAI seeks to uphold public interest and maintain professional standards.

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