The Delhi High Court has held that the remuneration payable to the accountant doing a special audit under the Micro, Small and Medium Enterprises Development Act (MSMED), 2006 does not amount to consideration.
The Petitioner, the Principal Commissioner of Income Tax, Central-1, has filed the writ petitions challenging the directions for reference to arbitration passed by the Respondent No. 1 i.e., the Micro & Small Enterprise Facilitation Council ( ‘MSEFC’) – an authority established under Section 20 of the MSMED Act. Respondent No. 2 i.e., M/s SBG & Co. is a partnership firm of Chartered Accountants (CA Firm’) of which Mr. S.B. Gupta is a Partner.
The said CA Firm is also registered as a `Micro Enterprise’ under the provisions of the MSMED Act. 3. The CA Firm, being on the panel of the Income Tax Department (IT Department), was nominated as a Special Auditor by the IT Department in four cases for carrying out Special Audit in terms of Section 142(2A) of the IT Act.
After the completion of the said Special Audit assignments and the submission of the final audit reports, the CA Firm raised four invoices in respect of the said audits. The grievance of the Special Auditor- CA Firm is that qua the invoices raised, the full payment has not been made. The CA Firm invoked the provisions of the MSMED Act and approached the MSEFC by way of references under Section 18 of the Act.
The procedure for the appointment of a Special Auditor under Section 142(2A) of the Income Tax Act, is the discretion of the CA Firm so appointed to accept or decline such offer before the nomination of the CA Firm by the IT Department. He relies upon ‘Dhanesh Gupta & Co. vs. CIT [327 ITR 246]’ in support of this submission.
The nature of the Audit and how remuneration is to be determined would require domain expertise and knowledge that the MSEFC cannot possess. Moreover, the function which is in effect delegated to the Audit firm is one which is exercised under the Income Tax Act and would be purely governed by the said statute. Payment of remuneration is also based on the factors prescribed in the Rules as discussed above.
The nature of the assessment is not commercial but is a statutory nomination for the assistance of the AO and in effect the IT Department. The IT Department cannot be termed as a ‘buyer’ when it is nominating the accountant for conducting a Special Audit and neither can the CA Firm be termed as a ‘supplier’. The remuneration payable to the accountant cannot also be termed as ‘consideration’ as the Special Audit is a statutory duty being performed by the accountant for and on behalf of the AO.
The invocation of the provisions of the MSMED Act under such circumstances, in respect of Special Audit remuneration under Section 142(2D) of the IT Act, would, therefore, not be tenable and is completely misplaced.
The MSMED Act has no applicability to the nature of the assignment which has been given to the Respondent/CA Firm. The CA Firm may be registered as a Micro or Small enterprise and may be entitled to the invocation of the jurisdiction of the MSMED Act for other purposes. Insofar as the assignment is emanating from a statute i.e., under Section 142(2A) of the IT Act, the determination of the remuneration is solely the prerogative of the Commissioner or the Chief Commissioner.
Justice Prathiba M Singh held that the IT Department cannot be termed as a ‘buyer’ when it is nominating the accountant for conducting a Special Audit and neither can the CA Firm be termed as a ‘supplier’. The remuneration payable to the accountant cannot also be termed as ‘consideration’ as the Special Audit is a statutory duty being performed by the accountant for and on behalf of the AO. Insofar as Audits under Section 142(2A) are concerned, the IT Act would have to be reckoned as the Special Act and the MSMED Act as the general Act dealing with MSME disputes.
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