Tax Audit u/s 44AB Restrictions under ICAI Guidelines: Key Takeaways from Shaji Poulose vs ICAI

CASE DETAILS

Case Name: SHAJI POULOSE vs INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA & OTHERS

Court Name and Jurisdiction: Supreme Court

Date of Judgment: May 17, 2024

Bench: Justice B.V. Nagarathna, Justice Augustine George Masih

FACTS OF THE CASE

The genesis of the dispute lies in Clause 6 of Guidelines No.1-CA (7)/02/2008, issued by the Institute of Chartered Accountants of India ( ICAI ) on August 8, 2008. This Guideline imposed a numerical restriction on the maximum number of tax audits that a Chartered Accountant could accept under Section 44AB of the Income Tax Act, 1961 (IT Act) in a financial year. Initially, the limit was set at 30 audits, which was subsequently revised to 45, and currently stands at 60 audits.

The petitioners, Shaji Poulose and other CA, who are practicing Chartered Accountants, challenged the validity and enforceability of this restriction. They contended that the Guideline was illegal, arbitrary, and violative of their fundamental right to practice any profession, as enshrined under Article 19(1)(g) of the Constitution of India, and also offended the principle of equality under Article 14 of the Constitution. Disciplinary proceedings were initiated by the ICAI against several Chartered Accountants who were alleged to have exceeded the specified audit limit.

Given the multitude of challenges filed across various High Courts and the potential for conflicting judgments on a matter of national importance concerning a regulated profession, the Supreme Court of India transferred these cases to itself for a consolidated hearing and definitive pronouncement.

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The most important component of the factual matrix was the existence of past judgments from the Madras High Court which ruled similar notices to be ultra vires, hence creating a degree of legal uncertainty and selective implementation of the Guideline by the ICAI.

LEGAL ISSUES RAISED:

The Supreme Court raised the following pivotal questions:

Whether the Council of the Institute of Chartered Accountants of India, acting under the provisions of the Chartered Accountants Act, 1949, possessed the requisite legal competence to impose, through the issuance of Guidelines, a numerical restriction on the number of tax audits that could be accepted by a Chartered Accountant under Section 44AB of the Income Tax Act, 1961.

Whether the restrictions so imposed by the ICAI were unreasonable in nature and consequently infringed upon the fundamental right guaranteed to Chartered Accountants under Article 19(1)(g) of the Constitution of India.

• Whether the restrictions imposed were arbitrary and illegal, rendering them impermissible under the mandate of Article 14 of the Constitution of India.
• Whether the act of exceeding the specified number of tax audits, as stipulated by the impugned Guideline, could legitimately be deemed to constitute "professional misconduct" warranting disciplinary action.

RULE OF LAW APPLICABLE

The Income Tax Act, 1961: Specifically Section 44AB which explained that: 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 one crore rupees in any previous year, (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”

The Constitution of India: Article 14 (Equality before law), Article 19(1)(g) (Right to practice any profession), Article 19(6) (Reasonable restrictions on fundamental rights).

The Chartered Accountants Act, 1949: Particularly, the provisions empowering the ICAI Council to regulate the profession and define professional misconduct, including Part II of the Second Schedule.

PETITIONERS ARGUMENTS:

The Petitioners argued that restricting tax audits to 60 per year violates their fundamental right to practice under Article 19(1)(g) without reasonable justification under Article 19(6), discriminates arbitrarily under Article 14 by applying only to Section 44AB audits while exempting others and disadvantaging individual practitioners over firms, was issued without proper legislative authority as the power to issue guidelines was granted only in 2022, failed to follow mandatory procedures like gazette notification and parliamentary approval, contradicts the binding Madras High Court judgment that struck down an identical restriction, and has been selectively enforced against only a few hundred CAs while 12,000 violators remain unpunished, warranting quashing under the principle against doubtful penalization during the period of legal uncertainty.

RESPONDENTS ARGUMENTS:

The Respondents contended that the Guidelines represent a valid exercise of statutory authority under Clause 1 of Part II of the Second Schedule to regulate professional conduct, constitute a reasonable restriction under Article 19(6) serving compelling public interest in quality tax administration and revenue protection as evidenced by the 1988 CBDT letter and 2014 CAG Report documenting quality deterioration when CAs conduct excessive audits, treat tax audits as a statutory privilege rather than an inherent fundamental right since Parliament could eliminate Section 44AB entirely, apply uniformly to all CAs without discrimination while recognizing that Section 44AB audits form a distinct class requiring special regulation due to their critical public revenue implications, and justified initial selective enforcement as resulting from monitoring limitations before 2019 and reasonable prioritization of egregious violators rather than discriminatory intent, supported by analogous restrictions like Section 224 of the Companies Act limiting company audits and favourable High Court precedents from Kerala and Madhya Pradesh.

REASONING AND ANALYSIS OF COURT:

The Supreme Court analysed the arguments presented by both sides, arriving at the following conclusions:

Competency of ICAI

The Court unequivocally held that the ICAI Council possessed the legal competence to frame the impugned Guideline restricting the number of tax audits. This power was deemed to be a valid exercise of delegated legislative authority, entrusted to the ICAI by Parliament under the Chartered Accountants Act, 1949, specifically referencing Part II of the Second Schedule.

The Court stated that as a statutory body responsible for regulating the highly specialized profession of Chartered Accountancy, the ICAI is inherently empowered to establish standards of professional conduct and quality, which includes setting reasonable limits on professional engagements to ensure diligence and ethical practice.

The Court recognized the necessity for self-regulation in such a profession to maintain public trust and the integrity of financial reporting.

Reasonableness of Restrictions (Article 19(1)(g)

The Court determined that the numerical limitations imposed by the ICAI were valid and did not violate the fundamental right guaranteed under Article 19(1)(g) of the Constitution. It reasoned that these restrictions constituted "reasonable restrictions" in the interest of the general public, thereby being justifiable under Article 19(6) of the Constitution.

In support of its finding, the Court placed reliance on the Central Board of Direct Taxes (CBDT) letter dated January 19, 1988, and the Comptroller and Auditor General (CAG) Report No.32 of 2014, both of which highlighted concerns regarding the deteriorating quality of tax audits.

The Court further observed that the opportunity for Chartered Accountants to undertake tax audits under the Income Tax Act is an extension of a statutory privilege, which the government, through its regulatory bodies like the ICAI, inherently possesses the power to subject to reasonable restrictions.

Non-Violation of Article 14:

The Court rejected the petitioners' contention of discrimination, thereby upholding the Guideline against the challenge under Article 14 of the Constitution. The Court found no arbitrary classification or unequal treatment among Chartered Accountants, as the restriction applied uniformly to all members undertaking tax audits under Section 44AB. The differentiation, if any, was based on a rational objective of maintaining audit quality, which is a permissible basis for classification.

Professional Misconduct and quashing of Disciplinary proceedings:

The Court acknowledged the significant uncertainty in law that had prevailed. This uncertainty stemmed from the fact that a similar Guideline had been successfully challenged and assailed in the Madras High Court, and there was a subsequent stay of orders passed by various courts, coupled with the selective implementation of the Guideline by the ICAI itself.

It quashed all disciplinary proceedings initiated against the petitioners and other similarly situated Chartered Accountants for exceeding the specified audit limit prior to the definitive pronouncement of this judgment. This decision provided substantial relief to those who had faced or were facing disciplinary actions due to the inconsistent legal landscape.

JUDGEMENT

The Supreme Court validated the ICAI Guidelines restricting tax audits to 60 per Chartered Accountant as constitutionally sound under Article 19(6), serving legitimate public interest in maintaining audit quality and tax administration efficiency.

However, acknowledging legal uncertainty from conflicting High Court decisions and ICAI's selective enforcement, the Court granted prospective operation from April 1, 2024, and quashed all prior disciplinary proceedings against violators.

The Court directed ICAI to consider increasing the ceiling limit based on evolving circumstances while permitting Chartered Accountants to make representations, thereby balancing regulatory authority with stakeholder participation.

Thus, the judgment stated that Chartered Accountants, as gatekeepers of financial integrity and tax compliance, bear profound responsibilities to uphold professional ethics, maintain independence, ensure transparency, and serve the larger public interest beyond mere client service, recognizing that the quality and integrity of their work directly impacts market confidence, corporate governance standards, and the overall strength of India's economic and financial systems.

LATEST UPDATES OF THE CASE:

ICAI has issued new guidelines for 2025, effective from April 1, 2026, that keep the 60-audit limit but make it much stricter. Now each CA has their own personal limit of 60 audits that cannot be shared with partners, closing loopholes that previously allowed some CAs to handle more audits. The guidelines exclude audits under presumptive taxation schemes and revised reports from this count.

To ensure compliance, ICAI has strengthened monitoring through the UDIN system and mandatory record-keeping. These reforms aim to improve audit quality by preventing CAs from taking on excessive work, ensure fairer distribution of audits across the profession, and reinforce CAs' role as gatekeepers of financial integrity and tax administration quality.

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