Chartered Accountants can Demand High Remuneration on Producing Good Quality Audit Reports: Delhi HC [Read Judgment]

Chartered Accountants - UDIN

“Chartered Accountants are not automatons who, without having access to food or being able to attend to all other necessities, would churn out good quality reports after analysing voluminous records”.

In Rakesh Raj & Associates v. CIT, the division bench of the Delhi High Court held that,  Chartered Accountants (CA) can demand high remuneration if the audit report produced is of good quality.

The petitioner, a CA Firm, was appointed by the Revenue for conducting a special audit in Company.

The petitioners were aggrieved by the order of the Revenue whereby the AO rejected the attendance report of the audit team by stating that the total of 1315 man hours multiplied by the maximum prescribed average rate of 7,500/- per hour was not justified.

The AO was of the opinion that all the members of the team not being qualified personnel, some being semi qualified personnel, the billing could not have been at the maximum prescribed rate. Furthermore, he was of the view that time must have been spent on lunch, refreshments etc, which should have been proportionately discounted from the bill. Accordingly, he reduced 15% of the billed hours and computed at an average rate of 4,000/- per hour.

The petitioner claimed that the report was in terms of the Notification No.20/2008 dated 05.02.2008, which prescribes the guidelines for the purposes of determining expenses for audit under Rule 14B of the Income Tax Rules, 1962 and there were no dispute with regard to the quality of the report.

Allowing the petition, the bench comprising of Justice S. Ravindra Bhatt and Justice Najmi Waziri observed that, spending 9 to 10 hours a day for a special audit would include the time spent on basic necessities, food and refreshments etc. “Unlike employees, professionals do spend 9 to 10 hours a day on their work, even at odd hours, and attend to their basic necessities in the remaining hours of the day. Exclusion of such necessary recess for consumption of food and refreshment, etc. for a person to render quality work is illogical. In any case, the billing is not for 24 hours a day but for a part thereof. Therefore, to assume that the time billed was not exclusively for the professional work is without basis and untenable.”

“Chartered Accountants are not automatons who, without having access to food or being able to attend to all other necessities, would churn out good quality reports after analysing voluminous records. It is noteworthy that the quality of the report has been assessed as ‘very good’ by the AO. An addition of over `720 crores has been made to the income tax of the auditee. The work was rendered by the petitioner’s four partners, Chartered Accountants and other personnel i.e. by qualified assistants and semi-qualified assistants,however, the impugned order questions the billing only on the basis of their experience and number of years in the profession and not on the quality of the work”, the bench added.

The bench also observed that the disallowance of certain hours based on the assumption that the auditors would have spent some time on lunches, refreshments etc. is erroneous.

“If such disallowance is permitted then the corollary argument would be that some members of the audit team or the entire team was not adequately focussed on the special audit. This kind of reasoning assumes thought-control or thought-intensity monitoring. Such nature of control is neither envisaged under the Rules nor is it reasonable. What the Revenue is to assess in such circumstances is whether the special audit report was (i) within time, (ii) of the desired quality (iii) the billing is commensurate to the nature of inquiry and the quantum of the records to be looked into; etc. If the audit report is of good quality and inter alia, authored by a qualified professional having a fair number of years of experience then he/she may well be entitled to ask for the highest prescribed billing rate. The Revenue should have kept in mind the rate of ` 5000/- per hour accepted for the petitioner in the special audit for M/s. Naftogaz India Pvt. Ltd”, the bench also added.

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