Supreme Court of India
SHAJI POULOSEversusINSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA & OTHERS
- Citation
- 2024 INSC 451
- Decided
- 17 May 2024
- Disposal
- Disposed off
- Bench
- B V NAGARATHNA
Holding
The Council’s guideline restricting tax audits is a valid, reasonable restriction under Article 19(6) and does not violate Articles 19(1)(g) or 14, but its operation is stayed until 1 April 2024 and the disciplinary proceedings against the petitioners are quashed.
Summary
The petitioners, chartered accountants, challenged the Council of the Institute of Chartered Accountants of India's Guidelines dated 08‑08‑2008 that capped the number of tax audits a member could undertake under section 44AB of the Income Tax Act. They argued that the restriction was beyond the Council's competence, violated their fundamental right to practice a profession under Article 19(1)(g), and was arbitrary and discriminatory under Article 14. The Court examined the statutory powers granted to the Council under the Chartered Accountants Act, 1949, and held that the Council was competent to impose such a reasonable restriction in the public interest, which is saved by Article 19(6). It further found that the restriction was not unreasonable or arbitrary, given the CAG report and CBDT inputs on audit quality, and that exceeding the cap could constitute professional misconduct. However, because the Guidelines had not been effectively enforced and there was uncertainty in law, the Court stayed their operation until 1 April 2024 and quashed the disciplinary proceedings against the petitioners. The Institute was directed to consider enhancing the audit cap and to allow representations from members.
Issues considered
- Whether the Council of the Institute of Chartered Accountants of India is competent to impose a numerical restriction on the maximum number of tax audits under section 44AB of the Income Tax Act by way of Guidelines.
- Whether the restriction is unreasonable and violative of the right to practice a profession under Article 19(1)(g) of the Constitution.
- Whether the restriction is arbitrary, illegal and violative of Article 14 of the Constitution.
- Whether exceeding the specified number of tax audits constitutes ‘professional misconduct’ under the Chartered Accountants Act.
- Appropriate relief and order to be granted.
Legislation cited
- Chartered Accountants Act, 1949s. 15, s. 2, s. 21, s. 21A, s. 21B, s. 22, s. 30, s. 30B, s. 9
- Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007
- Companies Act, 1956s. 224
- Finance Act, 1984
- Income Tax Act, 1961s. 44AB
Subjects
Chartered AccountantsProfessional misconductReasonable restriction on the right to practise the profession by a Chartered AccountantDelegationExcessive delegationNumerical restriction on the maximum number of tax auditsPublic interestPrivilegeCompulsory tax auditsVirtuous circle of trustIntegrity and standards of Chartered AccountantsNation’s taxation systemCompilation of credible financial statementsUnfair meansProfessional or other misconductMisconductMisdemeanour, omissions or commissions of Chartered AccountantsProfessional ethicsCorporate governancePrevent evasion of taxesTax avoidanceTax administration
Judgment
[2024] 6 S.C.R. 777 : 2024 INSC 451
Shaji Poulose
v.
Institute of Chartered Accountants of India & Others
(Transferred Case (Civil) No. 29 of 2021 )
17 May 2024
[B.V. Nagarathna* and Augustine George Masih, JJ.]
Issue for Consideration
Council of the Institute of Chartered Accountants of India,
if competent to impose, by way of Guidelines, a numerical
restriction on the maximum number of tax audits that could be
accepted by a Chartered Accountant, u/s. 44AB of the 1961
Act, in a Financial Year by way of a Guideline; the restrictions
imposed, if unreasonable, arbitrary and illegal and thus, violative
of the right guaranteed to Chartered Accountants u/Art. 19(1)(g)
and impermissible u/Art. 14 of the Constitution; and exceeding
of the specified number of tax audits, if can be deemed to be
‘professional misconduct’.
Headnotes
Chartered Accountants Act, 1949 – Income Tax Act, 1961 – s.
44AB – Audit of accounts – Clause 6 of Guidelines No.1-
CA(7)/02/2008 dated 08.08.2008 issued by the Institute of
Chartered Accountants of India, restricting the number of tax
audits that a Chartered Accountant could carry out which was
initially thirty and later raised to forty-five and thereafter to
sixty in an assessment year – Petitioners undertook audits
u/s. 44AB of the IT Act, 1961 over and above the number of
tax audits specified as per the Guidelines dated 08.08.2008 –
Issuance of the notices to the petitioners for violation of the
Guideline which was a misconduct – Initiation of disciplinary
proceedings by the Institute against the petitioners – Challenge
to the Guidelines as well as to the disciplinary proceedings:
Held: Clause 6.0, Chapter VI of the Guidelines dated 08.08.2008
and its subsequent amendment is valid and not violative of Art.
19(1)(g) as it is a reasonable restriction on the right to practise
the profession by a Chartered Accountant and is protected or
justifiable u/Art. 19(6) – However, the said clause 6.0, Chapter VI
* Author
778 [2024] 6 S.C.R.
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of the Guidelines dated 08.08.2008 and its subsequent amendment
is deemed not to be given effect to till 01.04.2024 – Thus, all
proceedings initiated pursuant to the impugned Guideline in
respect of the writ petitioners and other similarly situated Chartered
Accountants quashed – Institute at liberty to enhance the specified
number of audits that a Chartered Accountant can undertake u/s.
44AB, if it deems fit – Writ petitioners or any other member of the
Institute at liberty to make a representation. [Para 50]
Chartered Accountants Act, 1949 – s. 22 – Income Tax Act,
1961 – s. 44AB – Guidelines No.1-CA(7)/02/2008 dt 08.08.2008
restricting the maximum number of tax audits that could be
accepted by a Chartered Accountant, u/s. 44AB of the Income
Tax Act, 1961, in a Financial Year – Competency of the Council
of the Institute of Chartered Accountants of India, to impose
restriction, by way of Guidelines:
Held: Council of the Institute had the legal competence to frame
the impugned Guideline restricting the number of tax audits that a
Chartered Accountant could carry out which was initially thirty and
later raised to forty-five and thereafter to sixty in an assessment
year, the breach of which would result in professional misconduct,
in terms of clause 1 of Part II of the Second Schedule of the 1949
Act – It is not vitiated on account of there being lack of competency
or powers to frame the Guideline by the Council of the Institute –
Issuance of the Guidelines dt 08.08.2008 by the Institute not hit
by the vice of excessive delegation – Thus, the Regulation or
Guideline issued by the Council, being a part of clause 1 of Part
II of the Second Schedule have to be read as part and parcel of
the 1949 Act itself – Delegation of powers to add newer types of
misconducts by way of a regulation or Guideline neither excessive
nor ultra vires u/s. 22. [Paras 13.1-13.3]
Chartered Accountants Act, 1949 – Income Tax Act, 1961 – s.
44AB – Council of the Institute of Chartered Accountants of
India, imposing by way of Guidelines No.1-CA(7)/02/2008 dated
08.08.2008 , a numerical restriction on the maximum number of
tax audits that could be accepted by a Chartered Accountant,
u/s. 44AB of the Income Tax Act, 1961, in a Financial Year by
way of a Guideline – Restrictions imposed, if unreasonable,
arbitrary and illegal and thus, violative of the right guaranteed
to Chartered Accountants u/Art. 19(1)(g) and impermissible
u/Art. 14 of the Constitution:
[2024] 6 S.C.R. 779
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
Held: Guidelines dated 08.08.2008 and its subsequent amendment
is valid and not violative of Art. 19(1)(g) and is protected or justifiable
u/Art.19(6) – Ample material placed to establish that the legislation
comes within the permissible limits of clause (6) – By virtue of being
a licensee, a privilege is conferred on Chartered Accountants – It
is in pursuance of the primary goal of public interest that a further
privilege u/s. 44AB was extended to Chartered Accountants to
conduct quality tax audits subject to reasonable restrictions, so
as to enable the interest of the public exchequer – Court must
consider the public interest involved not only from the perspective
of the Chartered Accountants but rather from the perspective of the
general public – Chartered Accountants is a profession-licensed
by the State that also discharges public duties crucial in public
interest – Compulsory tax audits was neither an inherent part of the
practice of Chartered Accountant nor essential function which could
be claimed as a fundamental right u/Art.19(1)(g) – Where public
interest was the genesis of a privilege being extended to Chartered
Accountants and not a right, it is reasonable that the Institute, would
have the authority to regulate the privilege extended to Chartered
Accountants in a reasonable manner deemed appropriate to serve
public interest – Public interest involved in the instant petitions
being pervasive is evidenced through CAG’s recommendation to
the Government to insert a provision in the statute book putting a
cap on the number of tax audits permissible – Also restriction placed
u/s.224 of the Companies Act with regard to the number of companies
which could be audited by an auditor or firm of auditors is also an
instance of regulation of the profession of Chartered Accountants
intended by the Parliament to ensure that standard and quality in
the audit of accounts of companies are maintained – Furthermore,
where the devolution of privilege is justifiably restricted in public
interest and such restriction has rational nexus with the objects
sought to be achieved, the restriction cannot be held unreasonable
due to hardship faced by a certain section of professionals.
[Paras 19, 22,24-25, 29, 33, 36-37, 50]
Chartered Accountants Act, 1949 – Income Tax Act, 1961 –
s. 44AB – Clause 6 of Guidelines No.1-CA(7)/02/2008 dt
08.08.2008 issued by the Institute of Chartered Accountants
of India, restricting the number of tax audits that Chartered
Accountant could carry out which was initially thirty and later
raised to forty-five and thereafter to sixty in an assessment
year – Petitioners undertook audits u/s.44AB over and above
780 [2024] 6 S.C.R.
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the number of tax audits specified as per the Guidelines –
Exceeding specified number of tax audits, if ‘professional
misconduct’ – Institute initiating disciplinary proceedings
only against few Chartered Accountants, including petitioners,
while majority of Chartered Accountants who had breached
the Guideline not facing any proceeding, if discriminatory:
Held: There has been an uncertainty in law due to a similar Guideline
being successfully assailed and during the pendency of the matter
before this Court the impugned Guideline being enforced and selective
implementation of the same by the Institute – Initially notices were
sent only selectively to Chartered Accountants who had completed
more than two hundred audits not to all who had breached the
impugned Guideline – For the limited period of uncertainty, the rule
against doubtful penalization as a principle could, in the interest of
justice and equity, be made applicable and the benefit of uncertainty
be given to those subjected to misconduct proceedings in the instant
writ petitions and to also those Chartered Accountants who may have
received notices from the Institute and who may not have approached
any court of law or to other similarly situated Chartered Accountants –
Disciplinary proceedings initiated against the petitioners is quashed,
since only the writ petitioners have been proceeded against, while
around twelve thousand Chartered Accountants who had breached
the Guideline were left out – Furthermore, a reasonable provision may
with the passage of time become unreasonable – As regards, the
restriction on the specified audits u/s. 44AB, Minutes of the Council
of the Institute reflect that with the passage of time, the number
of tax audits to be permitted have been repeatedly deliberated,
re-evaluated and increased, subject to final decision taken by the
Council – Since the last revision to sixty tax audits was made a
decade ago, the Council to consider if the time is ripe to enhance
the specified number of tax audits – Institute at liberty to enhance
the specified number of tax audits that could be undertaken by the
Chartered Accountants. [Paras 46, 47]
Chartered Accountants Act, 1949 – s. 22 – “professional or
other misconduct” – Definition:
Held: s. 22 defines “professional or other misconduct” to deem to
include any act or omission provided in any of the Schedules –
However, nothing in s. 22 shall be construed to limit or abridge in
any way the power conferred or duty cast on the Director (Discipline)
under sub-section (1) of s. 21 to inquire into the conduct of any
[2024] 6 S.C.R. 781
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
member of the Institute under any other circumstances – Schedules
which enumerate various kinds of misconducts are not exhaustive
or static – With the passage of decades and with the emerging
varieties of misdemeanour, omissions or commissions of Chartered
Accountants which are not in consonance with professional ethics and
would amount to misconduct can be defined under the Schedules
so as to ensure quality service being rendered by the Chartered
Accountants as professionals and there could be newer misconducts
which could be included in the Schedules in the form of regulations
or Guidelines – Part II of Second Schedule has delegated the power
to the Council to make any regulation or Guideline, the breach of
which would amount to a misconduct – This delegation to define
and enumerate a misconduct by way of a regulation or a Guideline
is a legislative device adopted by the Parliament so as to leave it
to the discretion of the Council of the Institute to incorporate, define
and insert a Guideline or a regulation, the breach of which would
result in misconduct committed by Chartered Accountant. [Para 13.1]
Chartered Accountants Act, 1949 – Scheme and object of the
enactment – Stated. [Paras 7.1-7.12]
Chartered Accountants – Role and importance of:
Held: Chartered Accountants can serve as effective catalysts in
securing the virtuous circle of trust between the taxpayer and the
tax administration – This is because a large proportion of the tax
payers in India seek advice of Chartered Accountants – Integrity
and standards of Chartered Accountants determine the efficiency
in the functioning of the nation’s taxation system – Onus is on
Chartered Accountants to ensure that the Nation’s businesses
do indeed conform to high corporate governance standards –
By providing the foundation for compilation of credible financial
statements, the accounting profession facilitates market discipline,
engenders confidence among various stakeholders and reduces
the possibility of misleading information that can disrupt stability
of financial systems – Thus, the need for quality assessments
particularly u/s. 44AB of the IT Act, 1961 – Chartered Accountants
must themselves comply with the relevant laws and regulations
and avoid any conduct that discredits the profession – Chartered
Accountants must refuse to represent clients who insist on resorting
to unfair means – Chartered accountants are relevant not only in
securing corporate governance, but governance in broader contexts
too – Chartered Accountants face many different responsibilities
782 [2024] 6 S.C.R.
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to the profession; to the tax administration; to the client and to the
economy at large – Integrity, objectivity, professional competence
and due care and confidentiality must be the doctrines guiding their
work ethic. [Paras 49.1, 49.3-49.6]
Chartered Accountancy – Institute of Chartered Accountants
of India – Role of:
Held: Institute has a significant role in ensuring the dynamism of the
Chartered Accountancy course curriculum and the credibility of the
examinations – Institute must be committed towards convergence of
accounting, auditing and ethical standards with international practices
and for its endeavour towards securing the highest standards of
corporate governance – True test however, lies in application and
enforcement of these standards in the Indian context. [Para 48]
Income Tax Act, 1961 – s. 44AB – Audit of accounts – Object
and purpose of:
Held: s. 44AB provides that every person carrying on business,
whose total sale, turnover or gross receipts exceed Rs.10 crore,
and every person carrying on a profession, if his gross receipts
exceed Rs.50 lakhs, in any previous year, is required to get
his accounts of such previous year audited and verified by a
Chartered Accountant – Said provision is called “compulsory tax
audits” – Object and purpose of s. 44AB is to prevent evasion of
taxes, plug loopholes enabling tax avoidance and also facilitate
tax administration. [Para 7.14]
Case Law Cited
B.P. Sharma v. Union of India [2003] Supp. 2 SCR 684 : (2003) 7
SCC 309; Minerva Talkies, Bangalore v. State of Karnataka [1988]
2 SCR 511 : AIR 1988 SC 526; B.K. Kamath v. The Institute of
Chartered Accountants (2003) 2 KLJ 21 – relied on.
Saghir Ahmad v. State of U.P. [1955] 1 SCR 707 : (1954) 2 SCC
399; Institute of Chartered Financial Analysts of India v. Council
of the Institute of Chartered Accountants of India [2007] 6 SCR
1127 : (2007) 12 SCC 210 – distinguished.
Raja Video Parlour v. State of Punjab [1993] Supp. 1 SCR 149 :
(1993) 3 SCC 708; Kusum Ingots & Alloys Ltd. v. Union of India
[2004] Supp. 1 SCR 841 : (2004) 6 SCC 254; Municipal Corporation
of Greater Mumbai v. Anil Shantaram Khoje [2014] 3 SCR 511 :
(2016) 15 SCC 726; Modern Dental College and Research Centre
[2024] 6 S.C.R. 783
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
v. State of Madhya Pradesh [2016] 3 SCR 579 : (2016) 7 SCC
353; V. Sasidharan v. Peter and Karunakar [1985] 1 SCR 601 :
(1984) 4 SCC 230; Aswini Kumar Ghose v. Arabinda Bose [1953]
1 SCR 1 : (1952) 2 SCC 237; Devata Prasad Singh Chaudhuri v.
Chief Justice and Judges of Patna High Court [1962] 3 SCR 305; Shri
R. Nanabhoy v. Union of India (1982) SCC Online Del. 210; Shree
Chamundi Mopeds Ltd. v. Church of South India Trust Association
CSI CINOD Secretariat, Madras [1992] 2 SCR 999 : (1992) 3 SCC 1;
Pathumma v. State of Kerala [1978] 2 SCR 537 : (1978) 2 SCC 1;
M/s Laxmi Khandsari v. State of U.P. [1981] 3 SCR 92 : (1981) 2
SCC 600; Deepak Theatre, Dhuri v. State of Punjab [1991] Supp. 3
SCR 242 : 1992 Suppl. 1 SCC 684; T. Velayudhan Achari v. Union
of India [1993] 1 SCR 832 : (1993) 2 SCC 582; All-India Federation
of Tax Practitioners v. Union of India [2007] 9 SCR 147 : (2007) 7
SCC 527; Kerala Ayurveda Paramparya Vaidya Forum v. State of
Kerala [2018] 5 SCR 566 : (2018) 6 SCC 648; Nagar Rice and Flour
Mills v. N. Teekappa Gowda and Bros. [1970] 3 SCR 846 : (1970) 1
SCC 575; Hathising Manufacturing Co. Ltd. v. Union of India [1960]
3 SCR 528; Sakhawant Ali v. State of Orissa [1955] 1 SCR 1004 :
(1954) 2 SCC 758; Mohd. Faruk v. State of M.P. [1970] 1 SCR 156 :
(1969) 1 SCC 853; K. K. Kochuni v. States of Madras and Kerala
[1960] 3 SCR 887 : (1958) SCC OnLine SC 12; Krishnan Kakkanth
v. Govt. of Kerala [1996] Supp. 7 SCR 487 : (1997) 9 SCC 495;
Sukumar Mukherjee v. State of W.B. [1993] Supp. 1 SCR 339 :
(1993) 3 SCC 723; P.V. Sivarajan v. Union of India [1959] Supp. 1
SCR 779 : AIR (1959) SC 556; Jindal Paper & Plastics v. Union of
India (1997) 10 SCC 536; Kasinka Trading v. UOI [1994] Supp. 4
SCR 448 : (1995) 1 SCC 274; Malpe Vishwanath Acharya v. State
of Maharashtra [1997] Supp. 6 SCR 717 : (1998) 2 SCC 1; Motor
General Traders v. State of A.P. [1984] 1 SCR 594 : (1984) 1 SCC
222 – referred to.
Stephen Otis & Joseph F. Gassman v. E. A. Parker 187 U.S. 606
(1903); (1903) SCC OnLine US SC 22; Ohralik v. Ohio State Bar
Association 436 U.S. 447 (1978); Williamson vs. Lee Optical Co. 348
U.S. 483 (1955); Semler v. Oregon State Board of Dental Examiners
294 U.S. 608 (1935); Goldfarb v. Virginia State Bar 421 U.S. 773,
792, (1975) – referred to.
Books and Periodicals Cited
Halsbury Laws of England, 5th Edn. Volume 96 (2018); Francis
Bennion on Statutory Interpretation (8th Edn, 2020 at Section
26.4) – referred to.
784 [2024] 6 S.C.R.
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List of Acts
Chartered Accountants Act, 1949; Constitution of India; Income
Tax Act, 1961; Taxation Laws (Amendment) Act, 1975; Finance
Act, 1984; Finance Bill, 1984; Income Tax Rules, 1962; Chartered
Accountants (Procedure of Investigations of Professional and
Other Misconduct and Conduct of Cases) Rules, 2007; Chartered
Accountants (Amendment) Act, 2006; Government of India Act,
1935; Companies Act, 1956; Auditors Certificate Rules; Companies
Act, 1913; Chartered Accountants, the Cost and Works Accountants
and the Company Secretaries (Amendment) Act, 2022; Chartered
Accountants Regulations, 1988.
List of Keywords
Chartered Accountants; Professional misconduct; Reasonable
restriction on the right to practise the profession by a Chartered
Accountant; Delegation; Excessive delegation; Numerical restriction
on the maximum number of tax audits; Public interest; Privilege;
Compulsory tax audits; Virtuous circle of trust; Integrity and
standards of Chartered Accountants; Nation’s taxation system;
Compilation of credible financial statements; Unfair means;
Professional or other misconduct; Misconduct; Misdemeanour,
omissions or commissions of Chartered Accountants; Professional
ethics; Corporate governance; Prevent evasion of taxes; Tax
avoidance; Tax administration.
Case Arising From
CIVIL ORIGINAL JURISDICTION: Transferred Case (Civil) No. 29
of 2021
From the Judgment and Order dated 09.12.2020 of the Supreme
Court of India in T.P. (C) No. 2849 of 2019
With
Writ Petition (Civil) Nos. 267, 272 371, 581, 670, 1084, 1200, 1256,
1291, 1295 and 1360 of 2021, Writ Petition (Civil) Nos. 32, 186 and
833 of 2022, Transferred Case (Civil) Nos. 27, 28, 30, 31, 32, 33, 34,
35, 36, 37, 38 and 39 of 2021 and Transferred Case (Civil) Nos. 32,
33, 34, 35, 36, 37, 38, 39, 47, 48, 49, 50, 51, 52, 53, 54, 55, 56, 57,
58, 59, 60, 61, 62, 63 , 64, 66, 67, 68, 69, 70,71, 72, 73, 74, 75, 76,
77, 78, 79, 81, 82, 83, 84, 85, 86, 87 and 88 of 2023
[2024] 6 S.C.R. 785
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
Appearances for Parties
P.S. Patwalia, Rajshekhar Rao, Preetesh Kapur, Sr. Advs., Pai Amit,
Ms. Pankhuri Bhardwaj, Abhiyudaya Vats, Nikhil Pahwa, Kushal Dube,
Tathagata Dutta, Ms. Vanshika Dubey, P. Ashok, Ms. Lochana S. Babu,
Smarhar Singh, Kunal Sharma, Jai Krishna Singh, Vikas Chopra, Ms.
Shweta Kumari, Manoj Kumar, Rishi Raj, Manish K. Bishnoi, M. Anand,
Shubhendu Bhattarcharyya, Ms. Ila Shikhar Sheel, Hitesh Lodwal, Arjun
Garg, Shobhit Jain, Aakash Nandolia, Ms. Sagun Srivastava, Ms. Kriti
Gupta, Nirmal Kumar Ambastha, Ms. Ashmita Bisarya, Sanjay Dutt, Ms.
Lakshmi N. Kaimal, E. M. S. Anam, Ashwin Kumar Das, Ms. Aditi Anil
Dani, Rangasaran Mohan, Ishan Roy Chowdhury, Ms. Surbhi Mehta,
Tapesh Kumar Singh, Sukant Vikram, Prashant Bhardwaj, Aditya P.
Singh, Animesh Dubey, Ravi Raghunath, Aakashi Lodha, Goutham
Shivshankar, Ms. Ruchira Goel, Adit Jayeshbhai Shah, Ms. Sharanya
Sinha, Ms. Shagun Parashar, K. Paari Vendhan, Anas Tanwir, Ebad,
Parijat Kishore, Sanyat Lodha, Advs. for the Petitioner.
K.M. Natraj, ASG, Arvind P. Datar, Rupesh Kumar, Sr. Advs., Pramod
Dayal, Nikunj Dayal, Raj Bahadur Yadav, Piyush Beriwal, Ms.
Swayam Prabha Das, Shivank Pratap Singh, Shashank Bajpai, Ashok
Panigrahi, Vatsal Joshi, Prahlad Singh, Diwakar Sharma, Amrish
Kumar, Wills Mathews, Ms. Nanditta Batra, Paul John Edison, Ms.
Shweta Garg, Advs. for the Respondent.
Petitioner-in-person
By Courts Motion
Judgment / Order of the Supreme Court
Judgment
Nagarathna, J.
Table of Contents*
S.No. Particulars Page No.
01 Bird’s Eye View of the Controversy 8
02 Historical Perspective 8
03 Submissions 39
* Ed. Note: Pagination as per the original Judgment.
786 [2024] 6 S.C.R.
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04 Submissions of the Petitioners 39
05 Submission of the Respondents 55
06 Points for Consideration 64
07 Legal Framework 65
08 Discussion 86
09 Re: Point No.1: Whether the Council of the 89
respondent-Institute, under the 1949 Act, was
competent to impose, by way of Guidelines, a
numerical restriction on the maximum number of
tax audits that could be accepted by a Chartered
Accountant, under Section 44AB of the 1961 Act,
in a Financial Year by way of a Guideline?
10 Re: Point No. 2: Whether the restrictions imposed 95
are unreasonable and therefore, violative of the
right guaranteed to Chartered Accountants under
Article 19(1)(g) of the Constitution?
11 Re: Point No.3: Whether the restrictions imposed 95
are arbitrary and illegal and therefore, impermissible
under Article 14 of the Constitution?
12 Re: Point No.4: Whether exceeding such specified 124
number of tax audits can be deemed to be
‘professional misconduct’?
13 Conclusion 137
The petitioners herein are Chartered Accountants who have
challenged the validity of Clause 6 of Guidelines No.1-CA(7)/02/2008
dated 08.08.2008 issued by the Institute of Chartered Accountants of
India (hereinafter referred as, “respondent-Institute”), under powers
conferred by the Chartered Accountants Act, 1949 (hereinafter
referred to as “the 1949 Act”) on the ground that the same is illegal,
arbitrary and violative of Article 19(1)(g) of the Constitution of India.
1.1 Some of the present writ petitions have been filed before this
Court under Article 32 of the Constitution while others were
filed before various High Courts invoking Article 226 thereof. By
order dated 09.12.2020, this Court transferred the writ petitions
pending before various High Courts to this Court. That is how,
these cases have been clubbed and were heard together and
are being disposed of by this common order.
[2024] 6 S.C.R. 787
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
1.2 The petitioners are, specifically, aggrieved by the mandatory
ceiling limit imposed by Clause 6.0, Chapter VI of said Guidelines
on the number of tax audits that a Chartered Accountant can
accept in a financial year under Section 44AB of the Income Tax
Act, 1961 (hereinafter referred to as, “IT Act, 1961”). Additionally,
and importantly, the petitioners seek a direction for quashing
and/or setting aside of the disciplinary proceedings initiated by
the respondent-Institute in pursuance of the Impugned Guideline.
Clause 6.0, Chapter VI of Guidelines dated 08.08.2008 provides
that a member of the Institute in practice shall not accept, in
a financial year, more than the “specified number of tax audit
assignments” under Section 44AB of the IT Act, 1961. It further
provides that in the case of a firm of Chartered Accountants, the
“specified number of tax audit assignments” shall be construed
as the specified number of tax audit assignments for every
partner of the firm.
1.3 At the outset, we find it pertinent to note that the ceiling limit,
that is the subject of controversy has not been stagnant but
has, on the basis of several factors, been increased by the
Council of respondent-Institute during the passage of time.
Initially, the Council of respondent-Institute vide Notification
No.1/CA(7)/3/88 dated 13.01.1989 set a limit of thirty audits,
in exercise of powers conferred on it under Clause (ii), Part II,
Second Schedule of the 1949 Act. Further, in February 2014,
vide resolution adopted at the 331st Meeting of the Council of
respondent-Institute, the ceiling limit in question was specified
as sixty and presently stands the same.
Bird’s Eye View of the Controversy:
2. The controversy that has arisen in these petitions is two-fold: firstly,
whether the respondent-Institute, constituted under the 1949 Act, had
the competency to impose a restriction of the nature and effect herein?
If the answer is in the affirmative, secondly, whether a Chartered
Accountant’s right “to practice any profession” as provided under
Article 19(1)(g) of the Constitution, is unreasonably restricted by a
ceiling limit imposed by respondent-Institute on the number of tax
audits, under Section 44AB, that can be accepted by a Chartered
Accountant in a financial year? In other words, whether a Chartered
Accountant can be restricted from undertaking more tax audits
788 [2024] 6 S.C.R.
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than specified by the respondent-Institute? Whether the impugned
Guideline is saved under Article 19(6) of the Constitution of India?
Historical Perspective:
3. It is apposite for us, at this juncture, to preface the origin of Section
44AB in the IT Act, 1961, popularly known as the compulsory audit
provision and the ceiling limit imposed by the respondent-Institute
on the Chartered Accountants by way of a Guideline, violation of
which would result in a misconduct.
3.1 With the aim of examining and suggesting legal and administrative
measures for countering evasion and avoidance in direct taxation
in the country, the Government of India on 02.03.1970, constituted
a High Power Committee of Experts, namely, the Direct Taxes
Enquiry Committee, under the chairmanship of Justice K.N.
Wanchoo, retired Chief Justice of India. In December 1971,
the Wanchoo Committee submitted its Final Report to the
Government of India. A bare perusal of Chapter 1 – Introduction,
Direct Taxes Enquiry Committee-Final Report elucidates that the
Wanchoo Committee was asked to examine and recommend:
(a) concrete and effective measures (i) to unearth black money
and prevent its proliferation through further evasion; (ii)
to check avoidance of tax through various legal devices,
including the formation of trusts; and (iii) to reduce tax
arrears,
(b) examine various exemptions allowed by the tax laws with
a view to their modification, curtailment or withdrawal, and
(c) indicate the manner in which tax assessment and
administration may be improved for giving effect to all its
recommendations.
3.2 In order for the tax administration to become more efficient, the
Committee, inter alia, made other extensive recommendations,
in Chapter 2 – Black Money and Tax Evasion and recommended
insertion of a statutory provision for compulsory audit of accounts.
The Committee noted that mandatory audit, simultaneously with
compulsory maintenance of accounts, would ensure that books
and records are properly maintained; the taxpayer’s income is
faithfully presented, and proper presentation is facilitated before
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Shaji Poulose v.
Institute of Chartered Accountants of India & Others
the Assessing Officer. It was further understood that information
furnished by the Auditor along with his certificate would enable
building up of information for cross-verification leading to
prevention of tax evasion and identification of new assessees. At
para 2.145, it was interestingly noted that earlier Committees and
Working Groups had also deliberated on a provision providing for
compulsory audit. In furtherance, it was noted that the Working
Group of the Administrative Reforms Commission had favoured
compulsory audit by Chartered Accountants of persons with
income over Rs.50,000 but it was finally decided that due to
limited number of Chartered Accountants at that point in time,
it may not be possible for all assesses to secure their services,
except at heavy cost and delay. Noting, at para 2.148, that an
auditor can devote more time to examination and verification of
accounts than an Income-Tax Officer, the Wanchoo Committee
recommended insertion of a provision for mandatory presentation
of audited accounts and if found necessary, in practice, future
evolution of proforma for furnishing of information by auditors.
3.3 It is pertinent to highlight that by the Taxation Laws (Amendment)
Act, 1975, Section 142(2A) was inserted to the IT Act, 1961
conferring special power of audit by a Chartered Accountant in
certain cases where so sought by the Assessing Officer.
3.4 Thereby, only a few of the recommendations of the Wanchoo
Committee were accepted in the first instance and legislated
upon by the Parliament. As per the respondent-Institute, this
conspicuously reflects that the Parliament did not favour
compulsory tax audit provision of all sizeable cases by Chartered
Accountants and as a necessary corollary, the opportunity to
conduct tax audits must be seen as a privilege extended by
a statute.
3.5 Later, the provision for compulsory audits found favour with
the Parliament and was inserted by the Parliament through
Finance Act, 1984. The then Finance Minister, while introducing
the budget through the Finance Bill, 1984 stated in Parliament
as under:
“With the reduction in rates and expeditious disposal
of assessments, I believe there will now be no excuse
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for any leniency to be shown to those who abuse our
laws, such cases will necessarily have to be dealt
with severely. In order to discourage tax avoidance
and tax evasion, I am also introducing some further
measures. In all cases where the annual turnover
exceeds Rs. 20 lakhs or where the gross receipts
from a profession exceed Rs. 10 lakhs, I am providing
for a compulsory audit of accounts. This is intended
to ensure that the books of account and other
records are properly maintained and faithfully
reflect the true income of the taxpayer. …”
(emphasis supplied)
3.6 The relevant portion of the Memorandum explaining the
provisions in Finance Bill, 1984, which proposed to introduce
Section 44AB, reads as under:
“16. A proper audit for tax purposes would ensure
that the books of account and other records are
properly maintained and that they faithfully
reflect the income of the tax payer and claims for
deductions are correctly made by him. Such audit
would also help in checking fraudulent practices. It
can also facilitate the administration of tax laws by
proper presentation of the accounts before the tax
authorities and considerably saving the time of
the assessing officers in carrying out routine
verifications, like checking correctness of totals and
verifying whether purchases and sales are properly
vouched or not. The time of the assessing officers
thus saved could be utilized for attending to more
important investigational aspects of a case.”
(emphasis supplied)
3.7 Finally, Clause No. 11 of the Finance Bill, 1984 (Bill No. 11
of 1984), was introduced in Parliament to give effect to the
proposals of the Central Government. Resultantly, Section 44AB
of the IT Act, 1961 was inserted and came into force w.e.f.
01.04.1985, providing for compulsory audit. Section 44AB, as
it stood then, provided that every person carrying on business,
[2024] 6 S.C.R. 791
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
if his total sale, turnover or gross receipts exceed Rs.40 Lakhs
and every person carrying on a profession, if his gross receipts
exceed Rs.10 Lakhs, in any previous year, is required to get
his accounts of such previous year audited by an Accountant
and obtain before the specified date, a report of the audit in
the prescribed form duly signed and verified. Explanation (i) to
the Section 44AB clarified that the word ‘accountant’ shall have
the meaning as in the Explanation to sub-section (2) of Section
288. The present position is that a tax audit, under Section
44AB, can be undertaken only by a Chartered Accountant. For
immediate reference, Section 44AB when it was introduced is
extracted as under:
“44AB. 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 forty lakh rupees
in any previous year or years relevant to the
assessment year commencing on the 1st day
of April, 1985 or any subsequent assessment
year; or
(b) carrying on profession shall, if his gross
receipts in profession exceed ten lakh rupees
in any previous year or years relevant to the
assessment year commencing on the 1st day of
April, 1985 or any subsequent assessment year,
get his accounts of such previous year or years
audited by an accountant before the specified date
and obtain before that date the report of such audit
in the prescribed form duly signed and verified by
such accountant and setting forth such particulars
as may be prescribed:
Provided that in a case where such person is required
by or under any other law to get his accounts audited
by an accountant, it shall be sufficient compliance
with the provisions of this section if such person gets
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the accounts of such business or profession audited
under such law before the specified date and obtains
before that date the report of the audit as required
under such other law and a further report in the form
prescribed under this section.
Explanation.—For the purposes of this section,—
(i) “accountant” shall have the same meaning as
in the Explanation below sub-section (2) of
section 288;
[(ii) “specified date”, in relation to the accounts
of the previous year or years relevant to an
assessment year, means the date of the expiry
of four months from the end of the previous
year or, where there is more than one previous
year, from the end of the previous year which
expired last before the commencement of the
assessment year, or the 30th day of June of the
assessment year, whichever is later.’.”
3.8 Pragmatically, the insertion of Section 44AB meant that persons
covered by the provision must compulsorily get their accounts
of relevant assessment year audited by a Chartered Accountant
before the specified date and obtain a report of such audit in
the prescribed form duly signed and verified by the Chartered
Accountant furnishing the particulars stipulated in the rules
made by the Central Board of Direct Taxes (for short, “CBDT”)
and annex them to their returns filed in accordance with Section
139 of the IT Act, 1961. Consequently, Rule 6G to the Income
Tax Rules, 1962 was inserted.
3.9 At this chronological juncture, a perusal of relevant material
indicates that the objective of the insertion of Section 44AB
was multifold: firstly, it was intended that compulsory audit will
discourage tax avoidance and tax evasion by allowing faithful
reflection of income of the taxpayer and only appropriate
claims for deductions. Secondly, and importantly, as Chartered
Accountants can devote more time to examination and verification
of accounts than an Assessing Officer, it was believed that a
compulsory audit would save considerable and precious time of
[2024] 6 S.C.R. 793
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
assessing officers. Thirdly, it was hoped that proper presentation
of income and records in a structured and presentable manner
will be facilitated by compulsory audit. Comprehensively, it is
apparent that the intent behind Section 44AB was not to codify
an essential extant practice of the Chartered Accountant’s
profession but to mandate tax audits to prevent evasion of taxes,
plug loopholes leading to tax avoidance and also facilitate tax
administration, thereby ensuring that the economic system does
not result in concentration of wealth to the common detriment.
3.10 Post insertion of Section 44AB in the statute book and in
pursuance of its operation, CBDT noted that the quality of
tax audits was deteriorating as some Chartered Accountants
were completing fifty tax audits a month. It is apparent on the
face of the material perused that such a finding would run
counter to the long sought and deliberated goal of plugging the
loopholes in tax administration and saving considerable and
precious time of assessing officers by presentation of quality
audit reports. To remedy this, authorities in tax administration
were of the view that the Government could impose a ceiling
on maximum number of audits an auditor could undertake.
Vide letter dt. 19.01.1988, CBDT sought comments from the
Secretary, Institute of Chartered Accountants of India on possibly
restricting the number of tax audits a Chartered Accountant may
be permitted to complete in a year. The contents of the CBDT
letter dated 19.01.1988 are reproduced as under:
“F.No.225/2/88-IT.ALL
Government of India
Ministry of Finance
Department of Revenue
(C.B.D.T.)
New Delhi, Dated the 19th January, 1988.
Shri R.L. Chopra,
Secretary,
Institute of Chartered Accountants of India,
I.P. Estate,
New Delhi.
Sub: Fixation of number of tax audit per auditor.
794 [2024] 6 S.C.R.
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Dear Sir,
As per the provisions of Section 44AB of the Income
Tax Act, a class of assesses have to get their accounts
audited by auditor. This audit has to be completed
by a particular date as provided in Section 44AB of
the Act. It has been represented that some of the
auditors are completing around 50 audits in a month
which result in the deterioration of the quality of audit.
It has, therefore, been that the Government may fix
the maximum number of audits which an auditor
may be allowed to undertake under the provisions of
Section 44AB of the Income Tax Act. In this connection
reference has also been invited to Section 224 of
the Companies Act whereby the number of company
audits which a Chartered Accountant can do has
been restricted to 20.
2. You are requested to kindly send your comments
regarding the suggestion of restricting the number
of audits under Section 44AB of the Income Tax Act
which a Chartered Accountant may be permitted
to complete. The number of audits as in the case
of Section 224 of the Companies Act may also be
indicated. I would request you to kindly forward the
comments of the Institute at the earliest.
Yours faithfully,
Sd/-
(M.G.C. Goyal)
Officer on Special Duty (IT.ALL)
Central Board of Direct Taxes.”
3.11 After consideration of the aforesaid letter, the Professional
Development Committee of the respondent-Institute at its
90th Meeting held on 22.02.1988 recommended that every
Chartered Accountant be permitted to conduct a maximum of
twenty tax audits of non-corporate assessees every year in
addition to entitlement of audits conducted under the Companies
Act and other statutes. Considering the recommendation of
the Professional Development Committee, on 28.04.1988–
30.04.1988, the Council of the respondent-Institute in its 133rd
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Shaji Poulose v.
Institute of Chartered Accountants of India & Others
Meeting decided to issue a Notification under Clause (ii) of
Part II of the Second Schedule of the 1949 Act specifying
that w.e.f. 01.04.1989 a member of the respondent-Institute
in practice shall be deemed guilty of professional misconduct,
if he accepts in a financial year more than thirty assignments
of tax audit, be they in respect of corporate or non-corporate
assessees. It was further decided that in case of a partnership
firm, the number of tax audits shall be counted at the rate of
thirty assignments per partner of thirty tax audit. In pursuance
of this decision, Notification No.1/CA(7)/3/88 dated 13.01.1989
was issued by the Council, setting the limit of thirty tax audits.
Admittedly, at this point, the ceiling limit was intended as only
a self-regulatory mechanism to be followed by all members.
3.12 The vires and constitutionality of aforesaid Notification No.
1/CA(7)/3/88, dated 13.01.1989 was the subject of much
litigation before several High Courts. In fact, the Notification was
successfully challenged by a practicing Chartered Accountant,
in Writ Petition No.5925 of 1989 before the Madras High Court.
The legality and validity of the Notification No.1/CA(7)/3/88,
dated 13.01.1989 as also Notification No.1-CA(7)/15887
dated 25.05.1987 was also assailed in Writ Petition No.5926
of 1989. The central challenge in both writ petitions was to the
Notifications being violative of Article 19(1)(g) of the Constitution.
Of imminent interest is the constitutional challenge to the ceiling
limit in Writ Petition No.5925/1989. The Madras High Court
observed that ‘accepting a legitimate professional engagement
by a professional can never be considered unprofessional
and be made a misconduct’. It was further noted that, once a
person acquires the requisite qualifications to be a Chartered
Accountant, he would be free to engage himself in the profession
restricted only by conduct marred with dishonesty and inviting
condemnation. Therefore, it was observed that the Act and
the Rules could bring in restrictions or provisions only for the
purpose of attaining the aforesaid professional standards. The
judgment in Writ Petition No.5925 of 1989 was affirmed by
the Division Bench in Writ Appeal Nos.1452-1453 of 1998, on
24.03.2005. Furthermore, in SLP(C) Nos. 14370-14371/2005
preferred by respondent-Institute, this Court vide Order dated
29.07.2005, issued notice and granted a stay on the operation
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of the judgment of learned Division Bench of Madras High Court.
The aforesaid captioned Special Leave Petitions were admitted
as Civil Appeal Nos. 7208-7209 of 2005.
3.13 Certain other High Courts dismissed the challenge to the
vires and constitutionality of the Notification dated 13.01.1989.
Amongst others, four such petitions filed before the Madhya
Pradesh High Court have been brought to our attention, being
Miscellaneous Petition No.2844 of 1989 – Prem Chand vs.
Institute of Chartered Accountants of India; Miscellaneous
Petition No.2792 of 1990 – Ram Narain vs. Institute of Chartered
Accountants of India; Miscellaneous Petition No.4202 of 1992 –
Arun Grover vs. Institute of Chartered Accountants of India; and
Miscellaneous Petition No.3307 of 1993 – Anil Kumar Gupta
vs. Institute of Chartered Accountants of India. The challenge in
all the above captioned petitions was to the validity and legality
of the Notification dated 13.01.1989. By way of a common
judgment dated 18.04.1995 passed by the Division Bench of the
Madhya Pradesh High Court, the aforesaid writ petitions were
dismissed holding that the Notification does not take away the
right of petitioners to carry on their profession but only placed
a ceiling limit for purposes of effective and business-like audit.
Furthermore, the Division Bench of the High Court found that
public interest was met by distribution of work amongst many
Chartered Accountants. Against the aforesaid judgment of the
Division Bench of Madhya Pradesh High Court, leave was
granted by this Court in Special Leave Petition (Civil) No.21988
of 1995 but the Civil Appeal was dismissed as withdrawn by
order dated 04.05.1999. Before the Madhya Pradesh High Court,
in another Writ Petition No.2085 of 1993 – Prakash Mehta vs.
ICAI, the validity and legality of the Notification dated 13.01.1989
was challenged. However, the said writ petition was dismissed
by the said High Court by its order dated 16.05.2005.
3.14 Further, a challenge to Notification dated 13.01.1989 was
dismissed by the High Court of Kerala vide judgment dated
25.02.2003 in O.P. No. 3775 of 1991. Dismissing the challenge,
it was noted that Section 30(2)(k) of the 1949 Act vests power on
the Council to make regulations for regulating and maintaining the
status of members of the Institute and standard of professional
qualifications of members of the Institute. It was noted that the
[2024] 6 S.C.R. 797
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
restriction therein, as it does here, confined the ceiling limit only
to tax audit assignments accepted under Section 44AB and not
to any other audit work, unless otherwise restricted under any
law. Noting the importance attributed to a certificate of audit
issued by a Chartered Accountant and its concomitant serious
public interest, it was further noted that audit is a time-bound
work demanding precision and that the intent of the restriction
was to ensure quality and accuracy in execution. It was further
noted that on recommendation of the Professional Development
Committee, the Notification had been issued by the Council of
Chartered Accountants, which is composed of its members, by its
members and for its members. Observing that under Section 15
of the 1949 Act, it is the duty and function of the Council to make
provision for regulating and maintaining the status of members
of the Institute and that Section 30(2)(k) empowers the Council
to frame regulations in that regard, the restriction was held to be
reasonable. It is also pertinent to highlight that the judgments in
writ petitions before the Madras High Court and Madhya Pradesh
High Court were considered and the latter High Court found itself
in disagreement with the Madras High Court on the ground that
the restriction had been imposed by a competent statutory body
of professionals in the interest of the profession. It was reasoned
that no interference was warranted when the statutory body had
taken a decision within its powers in the interest of the profession.
Against the aforesaid judgment of the High Court of Kerala, Writ
Appeal No.1116/2003 was filed before the Division Bench of the
Kerala High Court but was dismissed as infructuous on 14.01.2016
on account of the death of the writ petitioner therein.
3.15 At the 184th Meeting of the Council in the year 1997, it considered
the issue of certain Chartered Accountants exceeding the
prescribed limit and proceeded to refer the matter to the
Committee for Ethical Standards and Unjustified Removal of
Auditors (CESURA) for a detailed review on the limit of thirty
tax audits in a year and also to examine the issue of developing
a suitable mechanism for the purpose of monitoring such limit.
CESURA, in its 58th Meeting held on 25.02.1997 recommended
that the Council, before developing a suitable mechanism for
the purpose of monitoring such limit, should ask members to
submit a report on the number of tax audits carried out by them
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in a prescribed format. At its 186th Meeting, the Council took
up the recommendation of the CESURA and asked members
to submit a report on the number of tax audits carried out by
them, as per the prescribed format appearing at pages 61 to
63 of the Guidance Note on Tax under Section 44AB of the IT
Act, 1961. In pursuance of the decision of the Council taken
at the 186th Meeting, an announcement was published in April,
1998 whereby members were requested to furnish the reports
on number of tax audits carried out by them in the financial
year corresponding to the assessment year 1997-98.
3.16 After several iterations of the announcement calling for the
reports from members, the Council at its 197th Meeting, held
on 16.01.1999-18.01.1999, considered the matter of review of
limit of thirty tax audits in a year. It is important to note that
members, even in the year 1999, were of the view that the
objective of calling the information was only to review the limit
and not to take disciplinary action and requested the President
to suitably publish the view of the Council. In pursuance thereof,
an announcement was published in the Institute’s Journal in
March, 1999, the relevant portion of it is reproduced as under:
“Dear Colleague,
March is a month of marching ahead.
XXX
Ceiling on Tax Audit Under Section 44AB
The revision of ceiling on tax audit under Section
44AB of the Income Tax Act is under consideration
of the Council. In order to enable the Council to take
an appropriate decision in the matter, members are
requested to comply with the requirements called for in
the format published in the Journal. The information
is being collected only for statistical purposes
and will be treated as confidential.
XXX
Yours in professional fellowship
New Delhi S.P. Chhajed,
March 1, 1999 President”
[2024] 6 S.C.R. 799
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
3.17 At the 66th Meeting of the CESURA, held on 08.09.1999 and
05.10.1999, 12,196 reports received from members/firms were
examined and it was concluded that the average number of
Tax Audits done by a member came out to be about 14-15
audits per partner/proprietor. Reviewing the same at the 205th
Meeting of the Council held from 15.12.1999-17.12.1999, it
was decided that since the average number of tax audits
done by a member/partner of a firm came to be about 14 to
15 audits, therefore, no change was warranted. Notably, the
minutes of 205th Meeting of the Council record the Institute’s
President’s reference to a relevant paper presented in CAPA
Conference at Korea in 1989. The minutes of the said Meeting
describe the paper discussed in the Meeting of the Council
as under:
“The main thrust of the Korean paper was that when
there was ceiling on audit, there was less competition.
When less competition was there, the audit reports
were qualified. When there was no ceiling, a member
was free to accept any number of Tax Audits as a
result of which there was more competition finally
resulting in unqualified audit reports.”
3.18 Considering that fourteen years had passed since the last ceiling
limit was fixed in 1989 and that the number of persons eligible
to tax audit had considerably increased due to the change in
limits prescribed under Section 44AB, IT Act, 1961, the Financial
Law Committee meeting of the respondent-Institute, held on
12.09.2003, recommended that the Council may increase the
ceiling limit for tax audit assignments to fifty. However, the
Council at its 236th Meeting decided against increasing the limit
from thirty to fifty tax audits per member.
3.19 In exercise of powers conferred on the respondent-Institute
by clauses (c) and (d) of Sub-section (2) of Section 29A,
read with Sub-section (4) of Section 21 and Sub-sections
(2) and (4) of Section 21B of the 1949 Act, the Central
Government notified the Chartered Accountants (Procedure
of Investigations of Professional and Other Misconduct and
Conduct of Cases) Rules, 2007. The said Rules came into
effect from 27.02.2007.
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3.20 At the 268th Meeting, held on 30.04.2007 – 02.05.2007, the
Council discussed whether it should revise the ceiling limit on
number of tax audits. The Council was divided on the issue
whether the Council should increase the ceiling limit of tax
audits although factors such as the increased permeation of
access to technology and consequential increased professional
competence of auditors, dynamic and increasing economy,
growth of new and specialized areas of practices, and such
other factors prevailed. The Council, finally authorized its
President to decide upon an appropriate increase in the
ceiling on number of tax audits after taking into consideration
the views expressed by its members. In pursuance thereof,
on 11.05.2007, the respondent-Institute increased the limit
on number of tax audits from thirty to forty-five per Chartered
Accountant per year.
3.21 At this stage it is pertinent to note that the respondent-Institute
was of the opinion that the extant self-regulatory mechanism
was ineffective in ensuring compliance of the maximum limit.
Therefore, the 1949 Act was amended by the Parliament by
the Chartered Accountants (Amendment) Act, 2006 (hereinafter
referred to as “Amendment Act, 2006”) by which the erstwhile
Notifications were superseded by Guidelines dated 08.08.2008.
In view of the above development, this Court by order dated
01.04.2013 dismissed the Civil Appeal Nos.7208-7209 of 2005
as having become infructuous. For ease of reference, the said
order is extracted as under:
“Civil Appeal No(s). 7208-7209 of 2005
Decided on April 1, 2013
ORDER
These appeals have been preferred against the
impugned judgment and order dated 24.3.2005
passed in Writ Appeal No .1452 & 1453/1998 by
the High Court of Madras quashing the notifications
issued by the appellant by which it has quashed the
notifications dated 25.5.1987 and 13.1.1989 by which
certain regulatory measures have been taken by the
appellant against its members.
[2024] 6 S.C.R. 801
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
Mr. N.K. Poddar, learned senior counsel appearing
for the appellant stated that both these notifications
do not survive. They have been withdrawn and
subsequently two guidelines have been issued by
the appellant on 8th August, 2008 for regulating the
business of its members. However, subsequently one
of them had also been withdrawn in 2011 and today
only one guidelines is issued for which the appellant
has not received any representation, ventilation or
any grievance from any member of the appellant
association in respect of the existing guidelines which
deals with Section 44 A(b) of the Income Tax Act,
1961. Mr. Poddar further submitted that in case, the
appellant receives any representation against such
existing guidelines, the highest body of the appellant
will consider it and will take a decision as to whether
such guidelines would continue or require any kind
of modification.
In view of the above, we do not propose to hear
the appeals on merit and the same are dismissed
as having become infructuous. However, in case
any member is aggrieved of the existing guidelines
and files a representation before the appellant, the
appellant shall consider it and pass appropriate order,
and if any member is aggrieved thereof whether he
has made representation or not, would have right to
challenge it before the appropriate forum.
With the aforesaid observations, the appeals stand
dismissed. Before parting with the case, we express
our thanks to Shri K.V. Vishwanathan, learned senior
counsel, Amicus Curiae, for rendering assistance in
the instant case.”
3.22 In a further exercise of review of the limit, at the 331st Meeting
of the Council held in February 2014, it was again decided to
increase the limit on accepting tax audits from forty-five to sixty
w.e.f. from the financial year 2014-15.
3.23 In order to establish that the restriction has been incisively
deliberated upon and the need of the restriction has been
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supported by expert practitioners over an extended period of
time, the respondent-Institute has placed heavy reliance on
the above-discussed CBDT letter dated 19.01.1988 and the
Report of the Comptroller and Auditor General of India (for
short, “CAG”), being No. 32 of 2014, tiled “Performance Audit
on Appreciation of Third Party (Chartered Accountant)
Reporting in Assessment Proceedings”, presented to the
Parliament on 19.12.2014.
3.24 Our attention was drawn to ‘Section 3.6 Control on number of
tax audit assignment’ of the CAG’s Report wherein pertinent
observations were made on effectuating control on Chartered
Accountants undertaking tax audit assignments under Section
44AB of the IT Act, 1961. Highlighting the relationship between
the number of tax audits undertaken and the quality of tax audits,
the CAG reported that there was no system in field offices of
Income-Tax Department (for short, “ITD”) to monitor compliance
by Chartered Accountants of ceiling limit set by respondent-
Institute. The CAG was informed by the respondent-Institute,
in September 2014, that even though Chartered Accountants
have been provided with Form of Tax Audit particulars to be
maintained by members/Firm, maintenance of such records is a
self-regulatory mechanism and can be called upon by respondent-
Institute for checking adherence to the Guidelines. However, any
formal complaint received by respondent-Institute was acted upon
within the framework provided in the Chartered Accountants Act
and the Misconduct Rules, 2007 framed thereunder.
3.25 As per information provided by DGIT(Systems), ITD to the CAG
in August, 2014:
a. 65,898 Chartered Accountants submitted at least one Tax
Audit Report (TAR) for AY 2013-14. Further, out of total
65,898 records of Chartered Accountants:
i. 81.13% Chartered Accountants adhered to the limit
of forty-five prescribed by ICAI (Institute of Chartered
Accountants of India).
ii. 18.87% submitted more than forty-five TARs (Tax
Audit Reports).
iii. Excess number of tax audits ranged from 46 to 2471.
[2024] 6 S.C.R. 803
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
b. A table showing twenty-two Chartered Accountants who
issued more than forty-five TARs for the annual year 2013-
2014 ranged from 401 TARs up to 2471 TARs.
The CAG Report pointed out that the purpose of maintenance of
quality audit work had suffered due to no monitoring mechanism of
this crucial ceiling limit by either respondent-Institute or ITD as per
the following statistics:
Stratification of total TARs issued by Chartered Accountant
for Assessment Year 2013-14
(vide CAG Report No. 32/2014, Section 3.6)
Range of TARs Total Number of Percentage of Total
issued Accountants Accountants
1-45 53,463 81.13
46-100 10,838 16.45
101-200 1,364 2.07
201-300 166 0.25
301-400 45 0.07
401-500 10 0.02
501-1000 11 0.02
> 1000 1 0
Total Accountants 65,898 100
Note: 81.13% adhered to the ceiling limit.
Therefore, the CAG, at Section 3.11(d) Recommendations of the
same Report recommended that the:
d. Ministry may ensure limiting the tax audit assignments
in order to ensure quality of Tax Audit.
3.26 The Ministry replied contending that the respondent-Institute,
as an expert statutory body, would lay down restrictions on the
number of tax audits and be capable of enforcing it. However,
the CAG noted that Chartered Accountants have been assigned
very crucial work of tax audit and therefore, the introduction of
a suitable control mechanism in the IT system, by the Ministry,
804 [2024] 6 S.C.R.
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in consultation with respondent-Institute, was in the interest of
the revenue for ensuring quality of tax audit.
3.27 Respondent-Institute at its 339th Meeting held from 23.12.2014
to 25.12.2014 discussed the report of the CAG and in pursuance
thereof, a group of Council Members was constituted on
24.01.2015 to study the report of the CAG for the year ending
March, 2014 and place its findings before the Council for
appropriate direction. The Council decided to refer all cases,
where ceiling was exceeded, to the Director (Discipline).
3.28 It is averred that respondent-Institute had no mechanism to
record exact data on number of tax audits undertaken by a
Chartered Accountant until the respondent-Institute made it
mandatory in 2019 that submission of all tax audit reports
undertaken by a Chartered Accountants be marked with a
‘Unique Document Identification Number (‘UDIN’). Lacking
such a mechanism, the respondent-Institute, seeking to initiate
disciplinary proceedings for professional misconduct for carrying
out tax audits assignments under Section 44AB of the IT
Act, 1961, treated data gathered by the CAG as complaints
and issued communications to some petitioner-Chartered
Accountants who accepted more than specified limit of tax
audits for the Assessment Year 2013-14, namely, forty-five.
3.29 It was submitted on behalf of respondent-Institute in the course
of proceedings that it decided to issue communications to only
those Chartered Accountants who had conducted more than
200 tax audits in a relevant Assessment Year. As of date, the
respondent-Institute has issued only 276 notices although
there has been violation by over ten thousand Chartered
Accountants.
3.30 Aggrieved by the aforesaid communications seeking initiation
of disciplinary proceedings for professional misconduct,
several petitioner-Chartered Accountants have challenged
the impugned Guidelines dated 08.08.2008 as well as the
communications initiated by the respondent-Institute before
respective High Courts having jurisdiction. In some writ petitions
pending before various High Courts, stay of the disciplinary
proceedings initiated by the respondent-Institute has been
granted.
[2024] 6 S.C.R. 805
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
3.31 In order to avoid multiplicity of proceedings and conflicting
decisions by various High Courts seized of identical issues,
respondent-Institute filed Transfer Petition (Civil) Nos. 2849-
2859 of 2019 and 727-728 of 2020 before this Court seeking
transfer of the various Writ Petitions pending in the High Courts
of Kerala, Madras and Calcutta to this Court. By order dated
09.12.2020, a three-Judge Bench of this Court, in T.P.(C)
Nos. 2849-2859 of 2019, noting in paragraph 16 that the
question involved was of public importance and necessitated a
comprehensive settlement of the question of law, allowed the
transfer petitions. Consequently, the writ petitions were withdrawn
from the respective High Courts and transferred to this Court.
Thereafter, by subsequent orders passed by this Court, all the
identical writ petitions pending before various High Courts were
transferred to this Court. That is why, all these transferred cases
and the writ petitions filed under Article 32 of the Constitution of
India have been heard together. The relief sought in these writ
petitions are similar and hence the relief sought in Writ Petition
No. 25662 of 2016 before Kerala High Court [Transferred Case
(Civil) No.29 of 2021 before this Court] are extracted as under:
“RELIEFS:-
(a) Declare that the restriction imposed by Ext
P2 circular on the number of tax audits is
discriminatory, unreasonable and violative of
article 19(1)(g) of the Indian Constitution.
(b) To call for records leading to Ext P2 guidelines
2008 and issue a writ in the nature of certiorari
or any other appropriate writ, order or direction
and quash and set aside chapter VI of Ext P2,
which deals with tax audit assignments under
section 44AB of the Income Tax Act 1961.
(c) To call for records leading to Exhibit P3, Exhibit
P7 and Exhibit P9 and issue a writ in the nature
of certiorari or any other appropriate writ order
or direction, setting aside Ext P3, P7 and P9
as the same is violative of fundamental rights
guaranteed under Article 14 and l9(1)(g) and
also against the direction in Ext Pl judgment.
806 [2024] 6 S.C.R.
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(d) To direct the highest body of the 1st respondent
to pass orders on Ext P5 representation filed
by the petitioner.
(e) To grant such other appropriate reliefs to the
Petitioner as this Hon’ble Court may deem fit
and proper in the interest of justice.”
Hence, this Court has now come to be seized of the present petitions
and questions involved therein.
Submissions:
4. We have heard learned senior counsel Sri V. Giri, Sri P.S. Patwalia,
Sri Preetesh Kapur, Sri Rajashekhar Rao, Sri Tapesh Kumar Singh
and learned counsel Sri Manish K. Bishnoi, Sri Pai Amit, Sri Goutham
Shivshankar, Sri Nirmal Kumar Ambastha, Sri Ashwin Kumar Das,
Sri B. Ramana Kumar and other learned counsel for the petitioners
and learned senior counsel for the respondents Sri Arvind P. Datar
ably assisted by Sri Nikunj Dayal, Advocate and learned counsel for
the intervenors Sri Wills Mathews.
Submissions of the Petitioners:
4.1 Leading the arguments, Sri V. Giri submitted that the primary
case of the petitioners is that the impugned Chapter VI of
the Guidelines dated 08.08.2008 imposing an unreasonable
restriction on a Chartered Accountant duly qualified to practice
the profession of Chartered Accountancy in India is violative of
Article 19(1)(g) of the Constitution. Furthermore, the impugned
Guidelines are arbitrary and lack any rational nexus with the
objects sought to be achieved by the 1949 Act, namely, the
regulation and maintenance of the status and standard of
professional qualifications of the members of the Institute.
4.2 Learned senior counsel appearing for petitioners submitted that
the intention of the 1949 Act was to provide for a rigorous test and
exemplary qualification to enter into the sphere of the profession
of accountants in practice and once in possession of requisite
qualification, such a person is entitled to follow a profession
which is exclusive and special on its own merit without any kind
of restriction except for a conduct amounting to misconduct
within the rigours of the 1949 Act. As a consequence, petitioners
[2024] 6 S.C.R. 807
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
contended that accepting a legitimate professional engagement
by a professional can never be considered unprofessional or
be considered a misconduct.
4.3 To highlight the arbitrariness of the restriction, it was contended
on behalf of the petitioners that the restriction lacks any
reasonable classification and reasonable nexus with the objects
sought to be achieved. If the ceiling limit has been imposed
on audits under Section 44AB, to achieve purity and quality of
work, the restriction should have been imposed on the volume
of work, as evidenced from the number of transactions and not
on the number of audits. It was argued that a single audit work
itself could be voluminous and occupy significant amount of a
Chartered Accountant’s time, whereas another audit work itself
could be completed with relative ease and within a limited time.
4.4 Furthermore, it was contended that the impugned Guidelines
lack any reasonable classification or reasonable differentia on
putting a ceiling limit on the number of tax audits under Section
44AB, IT Act, 1961 insofar as no maximum cap is placed on
other audit assignments under the IT Act, 1961 that are carried
out by Chartered Accountants with similarly taxing reporting
requirements, such as Sections 44AD, 44AE, 44AF of the IT
Act, 1961. In furtherance of the above, it was also urged that
the impugned Guidelines, in effect, also discriminate between
Chartered Accountants practicing in smaller cities and towns
as they are not in a position to charge the fee for each tax
audit assignment in the same manner which can be charged
by a Chartered Accountant practicing in big metropolitan cities.
In effect, it was contended that the restriction will cause a
more significant drop in the income of Chartered Accountants
practicing in mofussil areas. As a result of this uneven restriction,
an efficient Chartered Accountant may be able to complete the
entire audit work within a short duration and remain unemployed
for the rest of the year, was the submission made.
4.5 As further contended by the petitioners, the main object of the
1949 Act, is to regulate the conduct of the members of the
respondent-Institute in carrying out their professional duties and
the exercise of agency by a Chartered Accountant in choosing
his own volume of work cannot be considered professional
808 [2024] 6 S.C.R.
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misconduct. Furthermore, where the Act and Rules made
thereunder would be entitled to bring restrictions or provisions
only for the purpose of attaining the prescribed professional
standards, a mere choice of work could not be considered
professional misconduct.
4.6 During the course of arguments, analogies were often drawn to
the legal profession to argue that, it is, firstly, inconceivable that
a cap could be put on the number of cases that an advocate can
take up and, secondly, there is no norm, custom, or practice of
the profession that would require the rule-making body to ensure
equitable distribution of work to younger Chartered Accountants.
Relatedly, it was contended that the equitable distribution of
work cannot automatically lead to betterment of the standards
of chartered accountancy profession in the country.
4.7 It was further submitted on behalf of the petitioners that a
Chartered Accountant’s fundamental right to practice the
profession is unreasonably restricted as there is no sanctity in
the ceiling limit prescribed by the respondent-Institute. According
to the petitioners, such a restriction ignores the differentiation
in professional competence, sincerity, experience, ability and
other factors that would enable a Chartered Accountant to
complete more than the specified limit while simultaneously
ensuring compliance with all quality standards. The petitioners
also vehemently argued that all auditors cannot be assumed to
take equal time in completing a tax audit and the consequential
conclusion that a Chartered Accountant would be able to
satisfactorily fulfil his obligations only up to specified tax audit
assignments under Section 44AB of the IT Act, 1961 would be
fallacious. Furthermore, according to petitioners, by classifying
both in the same category, the Guidelines fail to acknowledge
the difference in competency between a senior Chartered
Accountant who has years of experience, reputation, facility
of ten articled clerks and availability of other audit staff with a
fresh Chartered Accountant who has no articled clerk and no
audit staff. Reliance in this regard was placed on Raja Video
Parlour vs. State of Punjab, (1993) 3 SCC 708 (“Raja Video
Parlour”), wherein this Court held that limiting the maximum
seating capacity to 50, irrespective of the size of the screen in a
cinema hall was unconstitutional and violative of Article 19(1)(g).
[2024] 6 S.C.R. 809
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
4.8 Learned counsel for the petitioners have vehemently argued
that in the absence of any statistics or data supporting the
restriction on the number of tax audits and a related reasonable
explanation justifying such a cap, this restriction could not be
justified under Article 19(6) of the Constitution. Thereby, the
petitioners have contended, that the limit on the number of tax
audits a Chartered Accountant could accept has no reasonable
nexus with the provisions of Section 44AB.
4.9 The petitioners have also drawn our attention to allegedly-
identical Notification No.1/CA(7)/3/88 dated 13.01.1989 issued
by the Council of the respondent-Institute in exercise of powers
conferred under Clause (ii) of Part II of Second Schedule to
the 1949 Act. It was highlighted that said Notification brought
a restriction of the exact nature, function and importantly,
restrictive effect wherein a ceiling limit of thirty tax audits was
imposed under Section 44AB of the IT Act, 1961. The petitioners
have placed most significant reliance on the fact that the
said Notification was quashed and held to be ultra vires the
Constitution by a judgment of the Madras High Court dated
13.07.1998 in Writ Petition (C) No.5925 of 1989 and the same
was affirmed by a Division Bench of the same Court.
4.10 The contention is that the respondent-Institute issued impugned
Guidelines dated 08.08.2008 during the pendency of the
challenge to the Madras High Court judgment before this Court,
solely to negate the binding dictum of judgment of the Madras
High Court. Neither was any permission of this Court sought by
respondent-Institute nor was this Court informed on 01.04.2013
that new Guidelines were of identical nature as the Notification
impugned therein. Importantly, the argument of the petitioners
is that the respondent-Institute could not have issued notices
or instituted disciplinary proceedings, as doing so would be in
teeth of the dictum laid by the Madras High Court which had not
been reversed on merits by this Court. Reliance was placed by
learned counsel for the petitioners on Kusum Ingots & Alloys
Ltd. vs. Union of India, (2004) 6 SCC 254 (“Kusum Ingots
& Alloys Ltd.”), to contend that when the Madras High Court
had quashed an identical Notification dated 13.01.1989, the
same was in effect throughout the territory of India. It was held
in Kusum Ingots & Alloys Ltd. as under:
810 [2024] 6 S.C.R.
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“22. The Court must have the requisite territorial
jurisdiction. An order passed on a writ petition
questioning the constitutionality of a parliamentary
Act, whether interim or final keeping in view the
provisions contained in clause (2) of Article 226 of the
Constitution of India, will have effect throughout the
territory of India subject of course to the applicability
of the Act.”
4.11 Challenge to procedural impropriety in issuance of the
impugned Guidelines was also advanced by the petitioners. It
was highlighted that impugned Guidelines were not issued in
compliance with provisions of the 1949 Act as the Regulations
made by the Council of the respondent-Institute were not notified
in the official Gazette of India and despite the requirements
of Section 30B of the Act, Impugned Guidelines were not laid
before both Houses of Parliament. Thereby, it was contended,
that the impugned Guidelines do not have the sanction of law.
Therefore, learned senior counsel and learned counsel for the
petitioners contended that the Guidelines dated 08.08.2008
may be struck down as running foul of Articles 19(1)(g) and 14
of the Constitution of India.
4.12 Learned senior counsel for petitioner in Writ Petition(C) No.1360
of 2021, Sri P.S. Patwalia relied upon the judgment of this
Court in Institute of Chartered Financial Analysts of India
vs. Council of the Institute of Chartered Accountants of
India, (2007) 12 SCC 210, (“Institute of Chartered Financial
Analysts of India”) to contend that undertaking more tax audits
could not possibly classify as professional misconduct. According
to the learned senior counsel, the aforesaid case assists their
submissions insofar as it was held that classification of an activity
must be looked at pragmatically and within the structural context
and realities. Therein, it was held that acquiring a qualification
could not be construed as a professional misconduct and
consequentially, such a restriction was held to be violative of
Articles 14 and 19(1)(g). On a similar ground, emphasizing the
sanctity of a right guaranteed under Article 19(1)(g), reliance was
placed on paras 14 and 15 of the judgment in B.P. Sharma vs.
Union of India, (2003) 7 SCC 309, (“B.P. Sharma”), wherein
this Court held as unconstitutional, a ban on carrying on a
[2024] 6 S.C.R. 811
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
private profession or self-employment on attaining a certain age
specified by the State in the absence of any reasons therefor.
4.13 Learned senior counsel appearing for the petitioners in Writ
Petition (C) No.267/2021 argued that by no stretch of imagination
could the restriction as sought to be imposed herein could be
achieved simply through a resolution – a delegated legislation
not specifically provided for by the Parliament to impose
a quantitative restriction. It was further contended that the
Guidelines are ultra vires the provisions of the Act inasmuch as
there is no power at all under the Act to lay down a maximum
limit on the number of tax audits. Learned senior counsel focused
on the language of the Preamble of the 1949 Act to argue that
the Act was sought by the Parliament to ‘make provisions’ to
regulate the profession. Thereby, any regulation made has to
relate to a specific provision and no omnibus power to regulate
has been granted to the Council.
4.14 Learned senior counsel Sri Patwalia further contended that the
power to issue Guidelines has been conferred for the first time
by the Amendment Act, 2022 by way of insertion of sub-clause
(fa) and hence the impugned Guideline issued earlier in the year
2008 is without authority of law. Furthermore, it was contended
that where Section 30B of the 1949 Act provides for power to
make Regulations “for the purpose of carrying out the objects
of the Act”, subject to the following conditions: (i) prior approval
of the Central Government under Sub-section (3) of Section 30
and (ii) the requirement under Section 30-B of laying the same
before Parliament. The Council could not have circumvented the
aforesaid mandatory safeguards by resorting to power under
Section 15, especially when creating penal consequences.
Reliance in this regard was placed on Municipal Corporation
of Greater Mumbai vs. Anil Shantaram Khoje, (2016) 15
SCC 726, (“MCGM”) to contend that a regulation comes into
operation only after promulgation in the official gazette.
4.15 Furthermore, learned senior counsel Sri Preetesh Kapur
submitted that a restriction of this nature, to be found good
in law, must have a legitimate nexus to the object sought and
also, necessarily satisfy the proportionality test elucidated by
this Court in Modern Dental College and Research Centre
812 [2024] 6 S.C.R.
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vs. State of Madhya Pradesh, (2016) 7 SCC 353, (“Modern
Dental College and Research Centre”). Learned counsel
contended that where a fundamental right of an individual is
abridged, justification of the restriction needs more than mere
demonstration of power; that the aforesaid position forms a
part of our jurisprudence.
4.16 Learned senior counsel elucidated that a significant effect of
the present restriction would be that a structural advantage
is accrued to partnership firms over sole practitioners as a
partnership firm of Chartered Accountants will be able to take
up more multiples of tax audits than an individual practitioner
permissibly can under the Guidelines. Learned counsel
contended that a Chartered Accountant has a fundamental
right to carry out tax audit, guaranteed under Article 19(1)(g)
and such a right could not be bartered away to colleagues in
a partnership firm.
4.17 Learned senior counsel also argued that the impugned Guideline
is hit from the vice of excessive delegation as a resolution,
by itself, could not penalize as misconduct for taking on
more clients. Also, reliance was placed on V. Sasidharan vs.
Peter and Karunakar, (1984) 4 SCC 230, (“V. Sasidharan”)
wherein this Court had held that the office of a lawyer is not a
commercial establishment under the Shop & Establishments Act,
1968 (Kerala Act). Relying on the aforesaid, it was contended
by learned counsel that a technical profession stands on a
different footing to other professions and while a prescription
for technical qualification would be a reasonable restriction
under Article 19(6), any other restriction on a profession must
be carefully construed.
4.18 It was argued by learned senior counsel Sri Singh that
professions have existed even before the Constitution came into
being. Prior to the enforcement of the Constitution, an attempt
to move a legislation to restrict the practice of a profession was
subject to seeking the assent of Governor-General, in case of
Federal Legislature, and the Governor in case of provincial
legislature. Importantly, the Governor-General could not have
given sanction, if a legislation was framed to restrict lawful
practice of the profession, except in ‘public interest’. As per
[2024] 6 S.C.R. 813
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
learned counsel, the position could not have been said to be
worse off after the coming into force of our Constitution, i.e.
after repeal of the Government of India Act, 1935. That even
if there were some safeguards and guardrails, the same could
only be further emboldened. To buttress his submissions, learned
counsel Sri Singh also laid emphasis on the judgment of a
Constitution Bench of this Court in Aswini Kumar Ghose vs.
Arabinda Bose, (1952) 2 SCC 237, (“Aswini Kumar Ghose”)
and Devata Prasad Singh Chaudhuri vs. Chief Justice and
Judges of Patna High Court, (1962) 3 SCR 305, (“Devata
Prasad Singh Chaudhuri”), to contend that a rule made by an
authority to deny the right to exercise essential part of a function
would be a serious invasion on the statutory right to practice.
4.19 Learned senior counsel, Sri Rajshekhar Rao, appearing for some
of the petitioners submitted on the importance of professional
identity of a Chartered Accountant. He also argued that the object
of attaining quality has no nexus with the imposed restriction
which, effectively restricts both the practitioner and the client
in making a choice. It was pressed that the consequences of
a punishment being imposed by the respondent-Institute are
grave insofar as besides the punishment imposed, various
audit works namely, Bank Audit etc. have a requirement that
the auditor must not have suffered any kind of punishment for
professional misconduct.
4.20 According to learned senior counsel, the Council of respondent-
Institute, under powers conferred on it by the 1949 Act, deems
a member to be qualified and competent to dutifully practice
the services required of a Chartered Accountant and thereby,
imposition of a blanket ban by the same Council without
any qualitative assessment imposes an onerous penalty
on the rights of a Chartered Accountant. More so, to attach
a label of professional misconduct without any qualitative
assessment, simply due to exceeding the maximum limit,
would be incongruous with the object sought and damage
future potential prospects without any established relationship
between numerical benchmark and quality.
4.21 Reliance was placed by the petitioners on a judgment of the
High Court of Delhi in Shri R. Nanabhoy vs. Union of India,
814 [2024] 6 S.C.R.
Digital Supreme Court Reports
1982 SCC Online Del. 210 : CWP No. 2398/81, (“Shri R.
Nanabhoy”). It was held by Wad, J. therein that Section
233(B) and Section 637(A) of the Companies Act, 1956 did
not empower the Central Government to impose any restriction
on the number of cost audits which a cost accountant may
undertake. Noting that there was no material to base such
a restriction, he further found that such a cap on maximum
number of audits was arbitrary and in violation of Article 14 of
the Constitution.
4.22 It was also canvassed on behalf of the petitioners that where
the challenge to an erstwhile in pari materia Notification was
not decided on merits the respondent-Institute erred in initiating
disciplinary proceedings and imposing punishments, especially
where a stay on the operation of the judgment of Madras
High Court had been granted. Reliance was placed on Shree
Chamundi Mopeds Ltd. vs. Church of South India Trust
Association CSI CINOD Secretariat, Madras, (1992) 3 SCC 1
(‘Chamundi Mopeds’). Petitioners therefore sought the reliefs
as noted above by allowing the writ petitions.
Submission of the Respondents:
5. Per contra, learned senior counsel Sri Arvind Datar, ably assisted
by learned counsel Sri Nikunj Dayal, contended that the Guideline
with regard to exceeding the specified number of tax audits being a
misconduct was inserted pursuant to the communication received
from the CBDT and with the aim of maintaining quality in tax audits.
According to learned senior counsel, putting a cap on the tax audits to
be undertaken by the Chartered Accountants under Section 44AB of
the IT Act, 1961, would not in any way restrict the freedom envisaged
under Article 19(1)(g) of the Constitution of India. The said cap has
been envisaged in public interest and therefore saved under Article
19(6) of the Constitution of India.
5.1 Learned senior counsel Shri Datar submitted that all writ
petitioners herein have breached the Guideline and undertaken
more than the specified number of tax audits as envisaged,
thereby clearly committing a misconduct. Therefore, they
would have to face the disciplinary proceedings initiated by
the respondent-Institute and cannot assail the validity of
the Guideline by either questioning the competence of the
[2024] 6 S.C.R. 815
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
respondent-Institute in making such a Guideline or the manner
in which the said Guideline was introduced on the statute book.
5.2 That, the Guidelines dated 08.08.2008 were issued in exercise
of powers under clause (i) of Part II of the Second Schedule
of the 1949 Act and in its role as the only statutory body
for regulating and governing the profession of Chartered
Accountants, the respondent-Institute can define misconduct
to ensure quality and professional good conduct. Further, the
object is not to prohibit practice of but only to maintain quality in
audit work, which is wholly in the interest of the general public
including the ITD. It was further contended that the objects of
both, the instant Guidelines dated 08.08.2008 and the erstwhile
Notification dated 13.01.1989 have been to ensure efficiency,
improve quality service, ensure maintenance of high standards
of performance and to have equitable distribution of tax audit
work amongst members of the respondent-Institute.
5.3 Learned senior counsel for the respondent-Institute submitted
that the notified limit on tax audits has been decided by the
Council, an expert body, on consideration of all pragmatic
limitations and other work undertaken by a Chartered Accountant
besides tax audit under Section 44AB, IT Act,1961. Section
139 of the IT Act, 1961 mandatorily requires every assessee,
governed by provisions of Section 44AB of the IT Act, 1961, to
file tax audit report along with his return before the due date –
presently, 30th September of every year. That being the case,
the respondent-Institute contended that a Chartered Accountant
cannot conceivably complete more than the specified number
of audits in a period of 25-30 weeks, i.e., from April-September
of the relevant assessment year.
5.4 Learned senior counsel sought to repel the argument that
the petitioners’ right under Article 19(1)(g) is violated by the
restriction. Instead, it was argued that the right of an Indian
citizen under the Constitution to practice any profession is not
an absolute right but can be appropriately limited under Article
19(6). It was submitted that the right to practice as a Chartered
Accountant is conferred by the 1949 Act and the same may be
limited by conditions and limitations stipulated under the Act or
Regulations or Guidelines framed thereunder. The contention
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of the respondent-Institute was that under Article 19(1)(g), what
is available is a right to practice as a Chartered Accountant in
accordance with the 1949 Act and the Guidelines or regulations
made thereunder which is subject to reasonable restrictions.
5.5 Sri Datar took us through a wide variety of professional work
that can be undertaken by a Chartered Accountant in practice
such as statutory corporate audit, representation before tax
authorities, consultation, audits under Section 44AF, audits
under Section 141(3)(g) of the Companies Act, etc. It was
contended that the ceiling has been imposed only in respect
of the statutory tax audits under Section 44AB of the IT Act,
1961, which form a class by themselves as they involve more
time and effort and are significantly more onerous.
5.6 On the question of professional misconduct, respondent-Institute
sought to argue that the expression ‘professional misconduct’
cannot be construed to mean only an irregularity or an act of
lowering of dignity of the profession. Rather, the respondent-
Institute being a regulatory body of professionals can define
misconduct to control and penalize a deviation from the quality
compliance standards, inter alia, for which the respondent-
Institute has been established by the Parliament to ensure.
Reliance was placed on Section 30 of the 1949 Act, read with
clause (i) of Part II of the Second Schedule of the 1949 Act, to
act effectively for ensuring compliance with standards of the
Institute by penalizing a deviation as a misconduct.
5.7 Learned senior counsel for the respondent-Institute argued
that a serious public purpose involved behind the Notification
is visible under the 1949 Act which seeks to regulate the
profession, hence the impugned Guidelines are issued to ensure
maintenance of quality and standards in the work done and
services rendered by Chartered Accountants. This would also aid
in better and equitable distribution of work amongst the Chartered
Accountants and to avoid concentration of professional work
in a few hands, to ensure which is also a duty cast upon the
Council in furtherance of its regulatory functions under the said
Act. As per the respondent-Institute, the Council is in the best
position to have definite information about deterioration in the
quality of work, as also monopolization – both relevant factors
[2024] 6 S.C.R. 817
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
in taking a decision on the maximum number of tax audits to
be accepted.
5.8 It was also contended that a reduction in income and/or client
base is not a ground in itself to say that fundamental rights of
a professional are affected. Nor can there by a comparison with
the Advocate’s profession.
5.9 To contravene the contention raised by petitioners that neither
does the 1949 Act contemplate distribution of available work
amongst Chartered Accountants, nor is there any obligation
to provide work for young Chartered Accountants, it was
contended that under the 1949 Act, the respondent-Institute
has a responsibility to regulate the profession and hence, the
Guidelines have been made to ensure quality work and equitable
distribution of work amongst Chartered Accountants which
objects are indisputably in furtherance of that statutory duty.
It was also submitted that the Division Bench of Madras High Court
did not consider the judgment of the learned Single Judge of the
Kerala High Court in B.K. Kamath vs. The Institute of Chartered
Accountants, (2003) 2 KLJ 21, (“B.K. Kamath”). However, the
judgment of learned Single Judge of the Madras High Court was
considered and dealt with by the Kerala High Court.
5.10 Learned senior counsel, Sri Datar placed reliance on a judgment
of this court in Pathumma vs. State of Kerala, (1978) 2 SCC
1, (“Pathumma”), in support of his contention that a just
balance between the fundamental rights and the larger and
broader interest of society must be struck by this Court while
trying to protect fundamental rights. Furthermore, it was argued
that this Court should defer to the Legislature in appreciating
the needs of the people and interfere only when the statute
is clearly violative of the right conferred on the citizens under
Part III of the Constitution. In addition to the foregoing, reliance
was also placed on M/s Laxmi Khandsari vs. State of U.P.,
(1981) 2 SCC 600, (“M/s Laxmi Khandsari”), to submit that
if the restrictions imposed appear to be consistent with the
Directive Principles of State Policy in Part IV of the Constitution
they would have to be upheld as the same would be in public
interest and reasonable. Further, according to learned senior
counsel, in judging the reasonableness, this Court should bear
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in mind that the present restriction is imposed in furtherance of
Part IV of the Constitution.
5.11 Further reliance was also placed on Minerva Talkies,
Bangalore vs. State of Karnataka, AIR 1988 SC 526
(“Minerva Talkies”), in support of the contention that Chartered
Accountants have no unrestricted fundamental right to carry
on the profession unregulated by the provisions of the the
1949 Act, including the regulations made and the Guidelines
issued thereunder in the interest of general public and the
society at large. In Minerva Talkies, this Court had upheld
the restriction to limit the number of cinema shows to four in
a day. This Court had further held that no law can be held to
be unreasonable merely because it results in reduction in the
income of the citizen.
5.12 Learned senior counsel, Sri Datar, also argued that the power
to regulate a particular business or profession implies the power
to prescribe and enforce all such just and reasonable rules
and regulations, as may be deemed necessary for conduct of
business or profession in a proper and orderly manner vide
Deepak Theatre, Dhuri vs. State of Punjab, 1992 Suppl. (1)
SCC 684, (“Deepak Theatre”). Reliance was further placed by
the respondents on T. Velayudhan Achari vs. Union of India,
(1993) 2 SCC 582, (“T. Velayudhan Achari”), wherein it was
held that limiting the number of depositors that can be accepted
by an individual, firm or unincorporated associations under
Section 45S(1) of the Banking Laws (Amendment) Act, 1983
is not violative of Article 19(1)(g) of the Constitution, as it is in
public interest that larger interests of the depositors are protected.
5.13 The judgment of Delhi High Court in Shri R. Nanabhoy, was
sought to be distinguished from the present case by citing the
presence of both legislative sanction and expert opinion, vide
CBDT Letter dated 19.01.1988 and CAG Report No.32 of 2014,
supporting the utility of the measure in achieving the objects
sought, namely, quality and accuracy in such audits.
5.14 Therefore, it was prayed by the respondent-Institute that all
the writ petitions/transferred cases filed before various High
Courts and this Court challenging the validity of Chapter VI of
the Council Guidelines No.1-CA(7)/02/2008 dated 08.08.2008
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Shaji Poulose v.
Institute of Chartered Accountants of India & Others
issued by the respondent-Institute be held to be devoid of any
merits and thereby dismissed.
Points for Consideration:
6. Having heard learned senior counsel and learned counsel appearing
for the respective parties and upon perusal of the record, the following
points would arise for our consideration:
(i) Whether the Council of the respondent-Institute, under the 1949
Act, was competent to impose, by way of Guidelines, a numerical
restriction on the maximum number of tax audits that could be
accepted by a Chartered Accountant, under Section 44AB of
the IT Act, 1961, in a Financial Year by way of a Guideline?
(ii) Whether the restrictions imposed are unreasonable and
therefore, violative of the right guaranteed to Chartered
Accountants under Article 19(1)(g) of the Constitution?
(iii) Whether the restrictions imposed are arbitrary and illegal and
therefore, impermissible under Article 14 of the Constitution?
(iv) Whether exceeding such specified number of tax audits can
be deemed to be ‘professional misconduct’?
(v) What order?
Legal Framework:
7. At this stage, the relevant provisions of the 1949 Act must be perused.
The Government of India framed the Auditors Certificate Rules in
1932 in exercise of the powers conferred by Section 144 of the Indian
Companies Act, 1913. While the accountancy profession in India was
regulated under those Rules, in order to have a permanent regulation
of accountancy profession, it was found necessary to have a body
to secure and maintain all the requisite standards of professional
qualifications, discipline and conduct of the accountancy.
7.1 In the above context, of particular relevance is the Statement
of Objects and Reasons of the 1949 Act (see Gazette of India,
11-09-1948, Pt. V, p. 709), which is reproduced hereunder:-
“STATEMENT OF OBJECTS AND REASONS
1. The accountancy profession in India is at present
regulated by the Auditors Certificates Rules framed
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in 1932 in exercise of the powers conferred on the
Government of India by Section 144 of the Indian
Companies Act, 1913, and the Indian Accountancy
Board advises Government in all matters relating
to the profession and assists it in maintaining the
standards of the professional qualifications and
conduct required of the members of the profession.
The majority of the Board’s members are elected by
Registered Accountants members of the profession
from all parts of India. These arrangements have,
however, all long been intended to be only transitional,
to lead up to a system in which such accountants
will, in autonomous association of themselves,
largely assume the responsibilities involved
in the discharge of their public duties by
securing maintenance of the requisite standard
of professional qualifications, discipline and
conduct, the control of the Central Government being
confined to a very few specified matters.
2. The Bill seeks to authorise the incorporation by
statute of such an autonomous professional body
and embodies a scheme which is largely the result
of a detailed examination of the whole position by an
ad hoc expert body constituted for the purpose, after
taking into account the views expressed by the various
Provincial Governments and public bodies concerned.”
(emphasis supplied)
Therefore, the 1949 Act was enacted with the object of incorporating an
autonomous professional body of accountants that would, in respect
of discharge of their public duties, provide for uniform regulation
of the profession. Thereby, it is apparent that the relationship of
the profession to public duty is closely present even in the earliest
statutory prescription.
7.2 It is pertinent to note that the long title and preamble of the
1949 Act was amended, w.e.f. 10.05.2022, vide the Chartered
Accountants, the Cost and Works Accountants and the Company
Secretaries (Amendment) Act, 2022, to substitute “regulation
and development” instead of the extant “regulation”.
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The amended long title and preamble of the 1949 Act reads as under:
“An Act to make provision for the regulation and
development of the profession of Chartered Accountants.”
(emphasis supplied)
7.3 Section 2 of the 1949 Act deals with interpretation and the
relevant clauses of Section 2 are extracted as under:
“2. Interpretation.- (1) In this Act, unless there is
anything repugnant in the subject or context,−
xxx
(b) “chartered accountant” means a person who is a
member of the Institute;
(c) “Council” means the Council of the Institute;
xxx
(e) “Institute” means the Institute of Chartered
Accountants of India constituted under this Act;
xxx
(2) A member of the Institute shall be deemed “to be
in practice”, when individually or in partnership with
chartered accountants in practice, or in partnership
with members of such other recognised professions
as may be prescribed, he, in consideration of
remuneration received or to be received,−
(i) engages himself in the practice of accountancy;
or
(ii) offers to perform or performs services involving
the auditing or verification of financial transactions,
books, accounts or records, or the preparation,
verification or certification of financial accounting
and related statements or holds himself out to
the public as an accountant; or
(iii) renders professional services or assistance in
or about matters of principle or detail relating
to accounting procedure or the recording,
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presentation or certification of financial facts
or data: or
(iv) renders such other services as, in the opinion
of the Council are or may be rendered by a
chartered accountant in practice;
and the words “to be in practice” with their
grammatical variations and cognate expressions
shall be construed accordingly.
Explanation.− An associate or a fellow of the Institute
who is a salaried employee of a chartered accountant
in practice or a firm of such chartered accountants or
firm consisting of one or more chartered accountants
and members of any other professional body having
prescribed qualifications shall, notwithstanding such
employment, be deemed to be in practice for the
limited purpose of the training of articled assistants.”
7.4 Section 3 deals with incorporation of Institute of Chartered
Accountants of India while Section 7 states that every member
of the Institute is to be known as Chartered Accountant. Vide
Section 9, the Council of the Institute is constituted for the
management of the affairs of the Institute and for discharging
the functions assigned to it under the Act and its functions are
delineated in Section 15. The above-mentioned Sections are
extracted as under:
“3. Incorporation of the Institute.-
(1) All persons whose names are entered in the
Register at the commencement of this Act and all
persons who may hereafter have their names entered
in the Register under the provisions of this Act, so
long as they continue to have their names borne
on the said Register, are hereby constituted a body
corporate by the name of the Institute of Chartered
Accountants of India, and all such persons shall be
known as members of the Institute.
(2) The Institute shall have perpetual succession and
a common seal and shall have power to acquire,
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hold and dispose of property, both movable and
immovable, and shall by its name sue or be sued.
xxx
7. Members to be known as Chartered
Accountants. - Every member of the Institute in
practice shall, and any other member may, use
the designation of a chartered accountant and
no member using such designation shall use any
other description, whether in addition thereto or in
substitution therefor:
Provided that nothing contained in this Section shall
be deemed to prohibit any such person from adding
any other description or letters to his name, if entitled
thereto, to indicate membership of such other Institute
of accountancy, whether in India or elsewhere, as
may be recognised in this behalf by the Council, or
any other qualification that he may possess, or to
prohibit a firm, all the partners of which are members
of the Institute and in practice, from being known by
its firm name as Chartered Accountants.
xxx
9. Constitution of the Council of the Institute.-
(1) There shall be a Council of the Institute for the
management of the affairs of the Institute and for
discharging the functions assigned to it under this Act.
(2) The Council shall be composed of the following
persons, namely :−
(a) not more than thirty-two persons elected by
the members of the Institute from amongst the
fellows of the Institute chosen in such manner
and from such regional constituencies as may
be specified:
Provided that a fellow of the Institute, who has been
found guilty of any professional or other misconduct
and whose name is removed from the Register or has
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been awarded penalty of fine, shall not be eligible to
contest the election,−
(i) in case of misconduct falling under the First
Schedule of this Act, for a period of three years;
(ii) in case of misconduct falling under the Second
Schedule of this Act, for a period of six years,
from the completion of the period of removal of
name from the Register or payment of fine, as
the case may be;
(b) not more than eight persons to be nominated in
the specified manner, by the Central Government.
(3) No person holding a post under the Central
Government or a State Government shall be eligible
for election to the Council under clause (a) of sub-
section (2).
(4) No person who has been auditor of the Institute
shall be eligible for election to the Council under
clause (a) of sub-section (2), for a period of three
years after he ceases to be an auditor.
xxx
15. Functions of Council.-
(1) The Institute shall function under the overall
control, guidance and supervision of the Council and
the duty of carrying out the provisions of this Act shall
be vested in the Council.
(2) In particular, and without prejudice to the generality
of the foregoing powers, the duties of the Council
shall include –
(a) to approve academic courses and their contents;
(b) the examination of candidates for enrolment
and the prescribing of fees therefor;
(c) the regulation of the engagement and training
of articled and audit assistants;
(d) the prescribing of qualifications for entry in the
Register;
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(e) the recognition of foreign qualifications and
training for the purposes of enrolment;
(f) the granting or refusal of certificates of practice
under this Act;
(g) the maintenance and publication of a Register
of persons qualified to practice as chartered
accountants;
(h) the levy and collection of fees from members,
examinees and other persons;
(i) subject to the orders of the appropriate authorities
under the Act, the removal of names from the
Register and the restoration to the Register of
names which have been removed;
(j) the regulation and maintenance of the status
and standard of professional qualifications of
members of the Institute;
(k) the carrying out, by granting financial assistance
to persons other than members of the Council or
in any other manner, of research in accountancy;
(l) the maintenance of a library and publication of
books and periodicals relating to accountancy;
(m) to enable functioning of the Director (Discipline),
the Board of Discipline, the Disciplinary Committee
and the Appellate Authority constituted under the
provisions of this Act;
(n) to enable functioning of the Quality Review
Board;
(o) consideration of the recommendations of the
Quality Review Board made under clause (a)
of Section 28B and the details of action taken
thereon in its annual report; and
(p) to ensure the functioning of the Institute in
accordance with the provisions of this Act and
in performance of other statutory duties as may
be entrusted to the Institute from time to time.”
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7.5 Clause (fa) was inserted by the ‘Chartered Accountants, the
Cost and Works Accountants and the Company Secretaries
(Amendment) Act, 2022’ and the same reads as under:
“15. Functions of Council.-
(2) In particular, and without prejudice to the generality
of the foregoing powers, the duties of the Council
shall include –
xxx
(fa) to issue guidelines for the purpose of carrying
out the objects of this Act;”
7.6 Chapter V of the 1949 Act deals with Misconduct. Section 22
defines professional or other misconduct as under:
“22. Professional or other misconduct defined.-
For the purposes of this Act, the expression
“professional or other misconduct” shall be deemed
to include any act or omission provided in any of
the Schedules, but nothing in this Section shall be
construed to limit or abridge in any way the power
conferred or duty cast on the Director (Discipline)
under sub-section (1) of Section 21 to inquire into
the conduct of any member of the Institute under any
other circumstances.”
Section 22 of the 1949 Act defines “professional or other misconduct”
to include any act or omission provided in any of the Schedules
to the Act. Clause (1) of Part II of the Second Schedule to the
Act stipulates that 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 the Act or the regulations
made thereunder or any Guidelines issued by the Council of the
respondent-Institute. For immediate reference the same reads as
under:
“PART II: Professional misconduct in relation to
members of the Institute generally
A member of the Institute, whether in practice or not, shall
be deemed to be guilty of professional misconduct, if he –
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(1) contravenes any of the provisions of this Act or the
regulations made thereunder or any guidelines issued
by the Council;”
Therefore, if a member of the Institute contravenes the provisions
of the aforesaid Chapter VI of the Guidelines dated 08.08.2008, he
shall be deemed to be guilty of professional misconduct under the
1949 Act. Clause 6 is extracted as under:
“Chapter VI
Tax Audit assignments under Section 44AB of the
Income-tax Act, 1961
6.0. A member of the Institute in practice shall not accept,
in a financial year, more than the “specified number
of tax audit assignments” under Section 44AB of the
Income-tax Act, 1961.
Provided that in the case of a firm of Chartered
Accountants in practice, the “specified number of
tax audit assignments” shall be construed as the
specified number of tax audit assignments for every
partner of the firm.
Provided further that where any partner of the firm is
also a partner of any other firm or firms of Chartered
Accountants in practice, the number of tax audit
assignments which may be taken for all the firms
together in relation to such partner shall not exceed
the “specified number of tax audit assignments” in
the aggregate.
Provided further that where any partner of a firm
of Chartered Accountants in practice accepts one
or more tax audit assignments in his individual
capacity, the total number of such assignments
which may be accepted by him shall not exceed
the “specified number of tax audit assignments” in
the aggregate.
Provided also that the audits conducted under
Section 44AD, 44AE and 44AF of the Income-tax
Act, 1961 shall not be taken into account for the
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purpose of reckoning the “specified number of tax
audit assignments”.
6.1. Explanation:
For the above purpose, “the specified number of tax
audit assignments” means –
(a) in the case of a Chartered Accountant in
practice or a proprietary firm of Chartered
Accountant, 45 tax audit assignments, in a
financial year, whether in respect of corporate
or non-corporate assesses.
(b) in the case of firm of Chartered Accountants in
practice, 45 tax audit assignments per partner in
the firm, in a financial year, whether in respect
of corporate or non-corporate assesses.
6.1.1 In computing the “specified number of tax audit
assignments” each year’s audit would be taken
as a separate assignment.
6.1.2 In computing the “specified number of tax audit
assignments”, the number of such assignments,
which he or any partner of his firm has accepted
whether singly or in combination with any other
Chartered Accountant in practice or firm of
such Chartered Accountants, shall be taken
into account.
6.1.3 The audit of the head office and branch offices
of a concern shall be regarded as one tax audit
assignment.
6.1.4 The audit of one or more branches of the
same concern by one Chartered Accountant
in practice shall be construed as only one tax
audit assignment.
6.1.5 A Chartered Accountant being a part time
practicing partner of a firm shall not be taken
into account for the purpose of reckoning the
tax audit assignments of the firm.
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6.1.6 A Chartered Accountant in practice shall
maintain a record of the tax audit assignments
accepted by him relating to each financial
year in the format as may be prescribed by
the Council.”
The Council at its 331st meeting held from 10th to 12th February, 2014
decided to increase the “specified number of tax audit assignments”
for practicing Chartered Accountants, as an individual or as a partner
in a firm, from forty-five to sixty. The said limit will be effective for the
audits conducted during the financial year 2014-15 and onwards.
7.7 Section 21 refers to Disciplinary Directorate, while Section
21A deals with Board of Discipline and Section 21B deals
with Disciplinary Committee. Section 21C states that the
Authority, the Disciplinary Committee, Board of Discipline
and the Director (Discipline) shall have the powers of a Civil
Court. These provisions have to be read with the Schedules
to the 1949 Act. The First Schedule of the 1949 Act deals with
professional misconduct in relation to Chartered Accountants
in practice and it enumerates various types of misconduct. It
has four Parts. Part I deals with professional misconduct in
relation to Chartered Accountants in practice. Part II deals with
professional misconduct in relation to members of the Institute
in service. Part III deals with professional misconduct in relation
to members of the Institute generally. Part IV deals with other
misconduct in relation to members of the Institute generally. Part
I of the Second Schedule speaks about professional misconduct
in relation to Chartered Accountants in practice while Part II
deals with professional misconduct in relation to members of
the Institute generally. Part III thereof refers to other misconduct
in relation to members of the Institute generally.
7.8 The First Schedule has to be read as part of Sections 21(3),
21A(3) and 22, while the Second Schedule has to be read as
part of Sections 21(3), 21B(3) and 22.
In particular, what is relevant is with regard to a member of the
Institute, whether in practice or not, contravening any of the
provisions of the Act or the regulations made thereunder or any
Guideline issued by the Council, who shall be deemed to be guilty
of professional misconduct. What falls for interpretation in this batch
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of cases is the expression “any Guidelines issued by the Council”.
The Institute issued, inter alia, the Guidelines by Notification dated
08.08.2008.
7.9 According to the petitioners, the object of ensuring quality of
audits would be served better by frequent reviews by the Quality
Review Board established under Section 28A. The said section
is reproduced as under:
“28A. Establishment of Quality Review Board
(1) The Central Government shall, by notification,
constitute a Quality Review Board consisting of
a Chairperson and ten other members.
(2) The Chairperson and members of the Board
shall be appointed from amongst the persons of
eminence having experience in the field of law,
economics, business, finance or accountancy.
(3) Five members of the Board shall be nominated
by the Council and other five members shall be
nominated by the Central Government.”
7.10 Section 30 gives the Council of respondent-Institute the power
to make regulations to fulfil its functions and duties. For ease
of reference, relevant portions of Section 30 read as under:
“30. Power to make regulations
(1) The Council may, by notification in the “Gazette
of India”, make regulations for the purpose of
carrying out the objects of this Act.
(2) In particular, and without prejudice to the
generality of the foregoing power, such
regulations may provide for all or any of the
following matters :−
(a) the standard and conduct of examinations
under this Act;
(b) the qualifications for the entry of the name
of any person in the Register as a member
of the Institute;
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(c) the conditions under which any examination
or training may be treated as equivalent
to the examination and training prescribed
for members of the Institute;
(d) the conditions under which any foreign
qualification may be recognised;
(e) the manner in which and the conditions
subject to which applications for entry in
the Register may be made;
(f) the fees payable for membership of the
Institute and the annual fees payable by
associates and fellows of the Institute in
respect of their certificates;
xxx
(k) the regulation and maintenance of the
status and standard of professional
qualifications of members of the Institute;
xxx
(t) any other matter which is required to be or
may be prescribed under this Act.
(3) All regulations made by the Council under this
Act shall be subject to the condition of previous
publication and to the approval of the Central
Government.
(4) Notwithstanding anything contained in sub-
sections (1) and (2) the Central Government
may frame the first regulations for the purposes
mentioned in this Section, and such regulations
shall be deemed to have been made by the
Council, and shall remain in force from the
date of the coming into force of this Act, until
they are amended, altered or revoked by the
Council.”
7.11 Section 30B deals with laying procedure before the Parliament
and the same is extracted as under:
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“30B. Rules, regulations and notifications to be
laid before Parliament
Every rule and every regulation made and every
notification issued under this Act shall be laid, as soon
as may be after it is made or issued, before each
House of Parliament, while it is in session, for a total
period of thirty days which may be comprised in one
session or in two or more successive sessions, and if,
before the expiry of the session immediately following
the session or the successive sessions aforesaid,
both Houses agree in making any modification in the
rule, regulation or notification, or both Houses agree
that the rule, regulation or notification should not be
made or issued, the rule, regulation or notification,
shall thereafter have effect only in such modified form
or be of no effect, as the case may be; so, however,
that any such modification or annulment shall be
without prejudice to the validity of anything previously
done under that rule, regulation or notification.”
7.12 Chapter VIII of the Chartered Accountants Regulations, 1988,
framed under the provisions of the 1949 Act, relates to ‘Meetings
and Proceedings of the Council’. Regulation 163 provides
that the President of the respondent-Institute will assume the
Chairmanship of the Council. Regulation 166 prescribes the
manner of passing of resolution at a meeting. The aforesaid
regulations are reproduced as under:
“163. Chairman of meeting
At a meeting of the Council, the President, or in his
absence the Vice-President, shall preside, or in the
absence of both, a member elected from among the
members who are present, shall preside.
xxx
166. Passing of resolution at a meeting
At a meeting of the Council, a resolution shall be
passed by a majority of the members present unless
otherwise require by the Act or these Regulations,
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and in the case of equality of votes, the Chairman
of the meeting shall have a casting vote.”
7.13 The Council of the respondent-Institute, in exercise of its
powers conferred by clause (ii) of Part II of the Second
Schedule of the 1949 Act, issued a Notification bearing
No.1/CA(7)/3/88 dated 13.01.1989 specifying that a member
of the Institute in practice shall be deemed to be guilty of
professional misconduct, if he accepts in a financial year,
more than specified number of tax audit assignments under
Section 44AB of the IT Act, 1961, the specified number being
thirty (now sixty) in a financial year, whether in respect of
corporate or non-corporate assesses.
7.14 As for relevant provisions of the IT Act, 1961 is concerned,
Section 44AB of the IT Act, 1961 was inserted in the statute
book by the Finance Act, 1984 and the same came into force
with effect from 01.04.1985. Presently, Section 44AB provides
that every person carrying on business, whose total sale,
turnover or gross receipts exceed Rs.10 crore, and every person
carrying on a profession, if his gross receipts exceed Rs.50
lakhs, in any previous year, is required to get his accounts of
such previous year audited by a Chartered Accountant, and
obtain before the specified date, a report of the audit in the
prescribed form duly signed and verified by such Chartered
Accountant. The said provision is popularly called “compulsory
tax audits”. The object and purpose of Section 44AB is to prevent
evasion of taxes, plug loopholes enabling tax avoidance and
also facilitate tax administration, which would ensure that the
economic system does not result in concentration of wealth to
the common detriment. For immediate reference, Section 44AB
of the IT Act, 1961 as it stands presently is extracted as under:
“44AB. 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;
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Provided that in the case of a person whose-
(a) aggregate of all amounts received including
amount received for sales, turnover or gross
receipts during the previous year, in cash,
does not exceed five per cent of the said
amount; and
(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,
this clause shall have effect as if for the words “one
crore rupees”, the words ten crore rupees had been
substituted; or
Provided further that for the purposes of this clause,
the payment or receipt, as the case may be, by a
cheque drawn on a bank or by a bank draft, which
is not account payee, shall be deemed to be the
payment or receipt, as the case may be, in cash.
(b) carrying on profession shall, if his gross receipts
in profession exceed fifty lakh rupees in any
previous year; or
(c) carrying on the business shall, if the profits and
gains from the business are deemed to be the
profits and gains of such person under section
44AE or section 44BB or section 44BBB, as the
case may be, and he has claimed his income
to be lower than the profits or gains so deemed
to be the profits and gains of his business, as
the case may be, in any previous year; or
(d) carrying on the profession shall, if the profits and
gains from the profession are deemed to be the
profits and gains of such person under section
44ADA and he has claimed such income to be
lower than the profits and gains so deemed to
be the profits and gains of his profession and
his income exceeds the maximum amount
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Institute of Chartered Accountants of India & Others
which is not chargeable to income-tax in any
previous year; or
(e) carrying on the business shall, if the provisions of
sub-section (4) of section 44AD are applicable in
his case and his income exceeds the maximum
amount which is not chargeable to income-tax
in any previous year,
get his accounts of such previous year audited by an
accountant before the specified date and furnish by
that date the report of such audit in the prescribed
form duly signed and verified by such accountant and
setting forth such particulars as may be prescribed:
Provided that this section shall not apply to a person,
who declares profits and gains for the previous year
in accordance with the provisions of sub-section (1)
of section 44AD or sub-section (1) of Section 44ADA:
Provided further that this section shall not apply to
the person, who derives income of the nature referred
to in section 44B or section 44BBA, on and from the
1st day of April, 1985, or, as the case may be, the
date on which the relevant section came into force,
whichever is later:
Provided also that in a case where such person is
required by or under any other law to get his accounts
audited, it shall be sufficient compliance with the
provisions of this section if such person gets the
accounts of such business or profession audited under
such law before the specified date and furnishes by
that date the report of the audit as required under
such other law and a further report by an accountant
in the form prescribed under this section.
Explanation.—For the purposes of this section,—
(i) “accountant” shall have the same meaning as
in the Explanation below sub-section (2) of
section 288;
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(ii) “specified date”, in relation to the accounts of
the assessee of the previous year relevant to
an assessment year, means date one month
prior to the due date for furnishing the return of
income under sub-section (1) of section 139.”
Discussion:
8. We have heard the matter at length and perused the compilations
submitted by learned senior counsel and learned counsel and perused
the material on record.
9. During the course of submissions, we observed that the catalyst for
filing these writ petitions was the issuance of the communications/
notices to the petitioners herein pursuant to the Guideline dated
08.08.2008, violation of which is a misconduct. Although by an
amendment made to the said Guidelines, a new type of misconduct
was envisaged, since the respondent-Institute had initially not taken
any steps vis-à-vis the said misconduct, there was no challenge as
such to the Guideline as well as amendment thereto in question by
any of the petitioners herein. Admittedly, the writ petitioners have
undertaken audits under Section 44AB of the IT Act, 1961 over and
above the number of tax audits specified as per the Guidelines
dated 08.08.2008. Thereby, it is in the guise of challenging the
disciplinary proceedings initiated by the respondent-Institute against
the petitioners herein for conducting the audits over and above the
specified number of tax audits that has led to the constitutional
challenge to the Guidelines as well as to the disciplinary proceedings.
10. This challenge is on three grounds: first, the manner in which the
Guideline was brought about was not in accordance with law; second,
that the Guideline is violative of Article 19(1)(g) of the Constitution
of India and not protected by Article 19(6) thereof and third, the
Guideline which constitutes a misconduct within Clause (c) of Part II
of the Second Schedule to the 1949 Act has not at all been enforced
until very recently and it has been enforced only selectively, and
therefore, there is non-compliance of the equality clause envisaged
under Article 14 of the Constitution of India.
11. During the course of submissions, learned senior counsel Sri
Datar submitted that although a little over ten thousand Chartered
Accountants had violated the Guideline in question, notices for
[2024] 6 S.C.R. 837
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
initiation of disciplinary proceedings were at first issued only in
respect of a few of them, including writ petitioners herein and those
who had undertaken more than two hundred tax audits. In regard
to others, who had exceeded the specified number of tax audits, no
disciplinary proceedings have been initiated as yet.
12. At the outset, we consider it useful to examine the privilege conferred
under the 1949 Act to practise the profession of a Chartered
Accountant. Reference to the observation of this Court in All-India
Federation of Tax Practitioners vs. Union of India, (2007) 7 SCC
527, (“All-India Federation of Tax Practitioners”), is helpful in this
regard. In answering the question of whether the Parliament was
competent to levy service tax on services rendered by Chartered
Accountants, this Court observed at para 34 that a Chartered
Accountant or a Cost Accountant obtains a license or a privilege from
the competent body to practise. We find ourselves in agreement with
this observation. Reading along with Section 2(1)(b) of the 1949 Act
which defines a Chartered Accountant as a person who is a member
of the respondent-Institute, we find it right to infer that a member of
the respondent-Institute is conferred with the privilege of being able
to practise as a Chartered Accountant.
12.1 As held by this Court in Kerala Ayurveda Paramparya Vaidya
Forum vs. State of Kerala, (2018) 6 SCC 648, (“Kerala
Ayurveda Paramparya Vaidya Forum”) a right to practice a
profession is indeed an acknowledged fundamental right, but
not unrestricted and is subject to any law imposing regulatory
measures aiming to ensure standards of the profession and
nature of public interest involved in the practice of the profession.
Re: Point No.1: Whether the Council of the respondent-Institute,
under the 1949 Act, was competent to impose, by way of
Guidelines, a numerical restriction on the maximum number of
tax audits that could be accepted by a Chartered Accountant,
under Section 44AB of the IT Act, 1961, in a Financial Year by
way of a Guideline?
13. We have perused the impugned Guideline dated 08.08.2008 which
is extracted above. The same has to be read in the context of the
respondent-Institute functioning under the overall control, guidance
and supervision of the Council which means the Council of the
Institute has to carry out the duties so as to achieve the objects of
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the Act as delineated in its various provisions of the 1949 Act, vide
Section 15. The power vested in the Council is general insofar as the
carrying out the provision of the Act is concerned and in particular
and without prejudice to the generality of the aforesaid powers,
certain duties have been specifically delineated. This is evident on
a reading of sub-sections (1) and (2) of Section 15 of the 1949 Act.
One of the objects of the 1949 Act is to ensure that the profession of
the Chartered Accountant in the country maintains high professional
ethics and renders quality service inasmuch as Chartered Accountants
are absolutely necessary for the efficient tax administration in the
country. That on account of their services, the onerous duties cast
on the assessing officer as well as the ITD is reduced. This would
however depend upon the quality of service that is rendered by
the Chartered Accountant as a professional for which regulation of
the profession is necessary and the respondent-Institute has been
established for, inter alia, such regulation of the profession.
13.1 In this context, Chapter V of the 1949 Act assumes importance.
The said Chapter deals with misconduct. Section 22 of the Act
defines “professional or other misconduct” to deem to include
any act or omission provided in any of the Schedules. However,
nothing in Section 22 shall be construed to limit or abridge
in any way the power conferred or duty cast on the Director
(Discipline) under sub-section (1) of Section 21 to inquire into
the conduct of any member of the Institute under any other
circumstances. The two prongs of Section 22 are expansive
and wide inasmuch as there is no limitation in any way on the
power conferred or duty cast on the Director (Discipline) under
Sub-section (1) of Section 21 to inquire into the conduct of
any member of the Institute under circumstances other than
what is stated in the Schedules. Also, professional or other
misconduct is defined by a deeming provision which implies
that the Schedules which have enumerated various kinds of
misconducts are not exhaustive or static. With the passage of
decades and with the emerging varieties of misdemeanour,
omissions or commissions of Chartered Accountants which
are not in consonance with professional ethics and would
amount to misconduct can be defined under the Schedules so
as to ensure quality service being rendered by the Chartered
Accountants as professionals. Therefore, the deeming provision
[2024] 6 S.C.R. 839
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
would imply that with the passage of time, there could be newer
misconducts which could be included in the Schedules in the
form of regulations or Guidelines. The Schedules are a part of
the 1949 Act which has been passed by the Parliament. But
bearing in mind the fact that in future, it may not always be
possible for the Parliament to go on amending the Schedules
to the Act so as to incorporate newer professional misconducts
particularly with emerging technology and its applicability to the
profession of Chartered Accountancy in India, Part II of Second
Schedule by way of a foresight has delegated the power to the
Council to make any regulation or Guideline, the breach of which
would amount to a misconduct. This delegation to define and
enumerate a misconduct by way of a regulation or a Guideline
is a legislative device adopted by the Parliament so as to leave
it to the discretion of the Council of the respondent-Institute to
incorporate, define and insert a Guideline or a regulation, the
breach of which would result in a misconduct committed by a
Chartered Accountant.
13.2 The delegation of this power under Part II of the Second
Schedule of the 1949 Act made by Parliament in favour of the
Council of the respondent-Institute cannot be faulted with. This
is on account of the fact that the 1949 Act itself defines certain
types of misconduct vis-à-vis a Chartered Accountant. But in
the year 1949, the Parliament could not have envisaged every
possible variety or type of commission or omission which could
be a misconduct by a Chartered Accountant. Therefore, the
delegation has been made by the Parliament to the Council
of the respondent-Institute to make regulations or Guidelines,
the breach of which would result in a professional misconduct.
The aforesaid delegation of the Parliament to the Council of
the respondent-Institute is clearly to define possible types
of misdemeanours in the Second Schedule in the form of a
regulation or a Guideline, the breach of which would result in
a misconduct in futuro. This is in order to avoid the Parliament
itself amending the Schedules to the 1949 Act every time a
different type of misconduct is to be inserted to the Schedules
by way of an amendment to the Act. Therefore, the regulation
or Guideline issued by the Council, the breach of which would
result in a professional misconduct, being a part of clause 1 of
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Part II of the Second Schedule have to be read as part and parcel
of the 1949 Act itself. The delegation of powers to add newer
types of misconducts by way of a regulation or a Guideline is
neither excessive nor ultra vires under Section 22 of the 1949
Act which deems any breach of a regulation or Guideline as
a misconduct as per Clause 1 of part II of Schedule II to the
1949 Act.
13.3 In the circumstances, we hold that the Council of the respondent-
Institute had the legal competence to frame the impugned
Guideline restricting the number of tax audits that a Chartered
Accountant could carry out which was initially thirty and later
raised to forty-five and thereafter to sixty in an assessment
year. Therefore, the Council of the respondent-Institute having
the legal competence to frame the Guidelines, the breach of
which would result in professional misconduct, in terms of
clause 1 of Part II of the Second Schedule of the 1949 Act
cannot be held to be vitiated on account of there being lack of
competency or powers to frame the impugned Guideline by the
Council of the respondent-Institute. The argument advanced by
the petitioners regarding the issuance of the Guidelines dated
08.08.2008 by the respondent-Institute is hit by the vice of
excessive delegation, is hence without substance. Accordingly,
we answered the point No.1.
Re: Point No. 2: Whether the restrictions imposed are
unreasonable and therefore, violative of the right guaranteed to
Chartered Accountants under Article 19(1)(g) of the Constitution?
And,
Re: Point No.3: Whether the restrictions imposed are arbitrary
and illegal and therefore, impermissible under Article 14 of the
Constitution?
14. Before answering these points for ready reference and convenience,
Article 19(1)(g) and (6) are reproduced as under:
“19. Protection of certain rights regarding freedom of
speech, etc.—
(1) All citizens shall have the right—
xxx
[2024] 6 S.C.R. 841
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
(g) to practise any profession, or to carry on any
occupation, trade or business.
xxx
6) Nothing in sub-clause (g) of the said clause shall affect
the operation of any existing law in so far as it imposes,
or prevent the State from making any law imposing, in the
interests of the general public, reasonable restrictions on
the exercise of the right conferred by the said sub-clause,
and, in particular,
nothing in the said sub-clause shall affect the operation
of any existing law in so far as it relates to, or prevent the
State from making any law relating to,—
(i) the professional or technical qualifications necessary for
practising any profession or carrying on any occupation,
trade or business, or
(ii) the carrying on by the State, or by a corporation owned
or controlled by the State, of any trade, business, industry
or service, whether to the exclusion, complete or partial,
of citizens or otherwise.”
15. Firstly, Article 19(6) of the Constitution empowers the State to
impose reasonable restrictions upon the freedom of trade, business,
occupation or profession in the interest of the general public, which
freedom is recognised under Article 19(1)(g). Secondly, it empowers the
State to prescribe professional and technical qualifications necessary
for practising any profession or carrying on any occupation, trade
or business. Thirdly, pursuant to the enactment of the Constitution
(First) Amendment Act, 1951 — it enables the State to carry on any
trade or business, either by itself or through a corporation owned
or controlled by the State, to the exclusion of private citizens wholly
or in part. It is trite law that restrictions imposed by the State upon
the freedom guaranteed by Article 19(1)(g) cannot be justified on
any ground outside Article 19(6) vide Nagar Rice and Flour Mills
vs. N. Teekappa Gowda and Bros., (1970) 1 SCC 575, (“Nagar
Rice Milling”).
16. The ambit of reasonable restrictions on the exercise of rights under
Article 19(1)(g) in the interest of the general public under Article
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19(6) was further explained in Hathising Manufacturing Co. Ltd.
vs. Union of India, (1960) 3 SCR 528 (“Hathising Manufacturing
Co. Ltd.”), which concerned the challenge to the validity of Section
25FFF(1) of the Industrial Disputes Act, 1947, which required the
industries to pay compensation on closure of their undertakings:
“10. …Whether an impugned provision imposing a fetter on
the exercise of the fundamental right guaranteed by Article
19(1)(g) amounts to a reasonable restriction imposed in
the interest of the general public must be adjudged not
in the background of any theoretical standards or pre-
determinate patterns, but in the light of the nature and
incidents of the right the interest of the general public
sought to be secured by imposing the restriction and the
reasonableness of the quality and extent of the fetter
upon the right.”
17. On the scope of restrictions that may be imposed on fundamental
rights, it is apposite to refer to Justice Holmes in Stephen Otis &
Joseph F. Gassman vs. E. A. Parker, 187 U.S. 606 (1903); 1903
SCC OnLine US SC 22, (“Stephen Otis & Joseph F. Gassman”),
wherein it was held that if the State thinks that an admitted evil
cannot be prevented except by prohibiting a calling or transaction
not in itself necessarily objectionable, the courts cannot interfere,
unless in looking at the substance of the matter they can see that
it ‘is a clear, unmistakeable infringement of rights secured by the
fundamental law.’
18. The respondent-Institute has placed reliance on the letter of CBDT
and the CAG Report No. 32/2014 in order to satisfy us of the
overwhelming need and appropriateness of the decision to place
a ceiling limit as the best conceivable and practical measure at
rectifying the targeted mischief. A perusal of the material on record
reflects that the respondent-Institute’s assertion that there is a
probable link between the number of tax audits undertaken and the
quality thereof is supported by concerns and suggestions shared by
experts and practitioners over a span of time extending over thirty
years. In fact, the preceding sentiment is evidenced by both CBDT’s
letter dated 19.01.1988 seeking views of the respondent-Institute
on the imposition of a limit and the CAG’s Report presented to the
Parliament on 19.12.2014 discussed above.
[2024] 6 S.C.R. 843
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
19. Following the dicta of the Constitution Bench of this Court in Saghir
Ahmad vs. State of U.P., (1954) 2 SCC 399 (“Saghir Ahmad”), the
burden to establish that the instantiation of the specified number of
tax audit assignments was within the purview of the exception laid
down in Article 19(6) is on the respondent-Institute. We find that the
respondent-Institute has placed ample material before this Court to
establish that the legislation comes within the permissible limits of
clause (6). But the factual matrix herein is dissimilar to Saghir Ahmad,
wherein this Court had ‘absolutely no materials’ before it to say in
which way the establishment of State monopoly in road transport
service would be conducive to the general welfare of the public.
20. In this regard, we place reliance upon Sakhawant Ali vs. State of
Orissa, (1954) 2 SCC 758 (“Sakhawant Ali”), wherein this Court was
seized of a challenge to a disqualification from electoral candidature of
legal practitioners who were employed on payment, on behalf of the
municipality or to act against the municipality. This Court emphasised
upon the salutary object of the disqualification, i.e., the purity of public
life, which would invariably be thwarted if there arose a situation
where there was a conflict between interest and duty. This Court took
note of the possibility of a conflict of interest and duty of a municipal
councillor employed as a paid legal practitioner and was alive to the
possibility that such a councillor may misuse his position to obtain
municipal briefs, get unreasonable fees sanctioned or compromise the
interests of the municipality while acting on behalf of private parties.
What is of pertinence here is that this Court was alive to the fact that
cases of misuse may be an exception because lawyers would be
loathe to stoop to such tactics, yet, it upheld the restriction because
it sought to prevent a possible abhorrent misconduct and malpractice
that would be corrosive to public life. The reasoning in Sakhawant
Ali was to the effect that disqualification of a legal practitioner from
contesting elections did not prevent him from practising his profession
of law and as such, the right to practice the profession of law under
Article 19(1)(g) did not imply the existence of a fundamental right in
any person to stand as a candidate for election to the municipality.
21. Therefore, the present petitioners’ assertion that the undertaking of
more than a specified number of tax audit assignments would not
imperil the integrity and quality of the tax audit does not persuade
us because a reasonable possibility of the fall in quality owing to the
surfeit of tax audit assignments exists. Therefore, we find it proper to
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trust the wisdom of the respondent-Institute as it has acted on bona
fide and genuine recommendations of the CAG and the CBDT. We
find no fault in the endeavour of the respondent-Institute to eliminate
the possibility of the conduct of tax audits in an insincere, unethical
or unprofessional manner.
22. Keeping the aforesaid in mind, there is no difficulty in concluding that
by virtue of being a licensee, a privilege is conferred on Chartered
Accountants. An elaborate and extensive process of recommendations
and policy-making preceded the insertion of Section 44AB in order to
achieve the public interest of prevention of tax leakages and more
efficient tax administration. It is in pursuance of this primary goal
of public interest that a further privilege under Section 44AB was
extended to Chartered Accountants to conduct quality tax audits, so
as to enable the interest of the public exchequer.
23. The present discussion would be enriched by a comparative discourse
on State regulation of licensed professions as under:
(i) Justice Powell, in Ohralik vs. Ohio State Bar Association,
436 U.S. 447 (1978), (“Ohralik”), held that the State’s interests
implicated in the case of regulatory restriction on the practice of
a licensed profession are particularly strong. The case pertained
to the conviction of an attorney for misconduct on the basis of
his in-person solicitation from accident victims. Repelling the
attorney’s claims regarding the violation of the right to freedom,
Justice Powell laid stress on the need for prophylactic regulation
to safeguard the interests of the lay public. This is for the reason
that the State bears a special responsibility for maintaining
standards amongst members of the licensed professions. This
view is strengthened by the reasoning in Williamson vs. Lee
Optical Co., 348 U.S. 483 (1955), (“Williamson”) and Semler
vs. Oregon State Board of Dental Examiners, 294 U.S. 608
(1935), (“Semler”).
(ii) On this point, the dicta from Goldfarb vs. Virginia State Bar,
421 U.S. 773, 792, (1975), (“Goldfarb”) is also instructive and
the relevant portion of the judgment reads as follows:
“….The interest of the States in regulating
lawyers is especially great, since lawyers are
essential to the primary governmental function
[2024] 6 S.C.R. 845
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
of administering justice, and have historically
been ‘officers of the courts.’”
24. We now look at how this Court has understood public interest in
matters pertaining to abridgment of Article 19(1)(g).
(i) A Constitution Bench of this Court, through JC Shah J, in
Mohd. Faruk vs. State of M.P., (1969) 1 SCC 853, held that
the Notification issued by the State Government prohibiting the
slaughter of bulls and bullocks in premises maintained by a local
authority infringed upon the right to freedom of profession under
Article 19(1)(g) of the Constitution. This Court had emphasized
that even though such a Notification may be issued under the
authority of law that was enacted by a competent legislature,
it would nevertheless be liable for directly infringing the
fundamental right of the petitioner guaranteed by Article 19(1)
(g) unless it is established that it seeks to impose reasonable
restrictions in the interest of the general public and a less drastic
restriction will not ensure the interest of the general public. It
was reasoned that the judicial determination of the validity of
the law imposing a prohibition on the carrying on of a business
or profession should be informed by:
a. an evaluation of the direct and immediate impact of the
prohibition upon the fundamental rights of the citizens
affected thereby;
b. the larger public interest sought to be ensured in the light
of the object sought to be achieved;
c. the necessity to restrict the citizen’s freedom;
d. the inherently pernicious nature of the act prohibited or its
capacity or tendency to be harmful to the general public;
e. the possibility of achieving the object by imposing a less
drastic restraint; and
f. in the absence of exceptional exigent situations like the
prevalence of a state of emergency national or local, the
existence of a machinery to satisfy the administrative
authority that no case for imposing the restriction is made
out or that a less drastic restriction may ensure the object
intended to be achieved.
846 [2024] 6 S.C.R.
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(ii) A reasonable restriction, within the meaning of Article 19(6)
must also be ‘in the interests of the general public.’ Our
Constitution, by establishing a welfare State, emphasises a
fine balance between the public interest of the community and
the liberties of the individual. Indeed, this is not to say that
individual rights and liberties are not a matter of vital public
interest but any policy or law may not be struck down at the
instance of an individual alone. In other words, there is a basic
unity between fundamental rights and the public interest. The
public interest inherent in the said individual’s exercise of a
fundamental right under Part III would need to be delicately
balanced with the imminent constitutional imperative of the
‘ordered progress of society towards a welfare state,’ vide K.
K. Kochuni vs. States of Madras and Kerala, 1958 SCC
OnLine SC 12, Pr. 33.
(iii) In Krishnan Kakkanth vs. Govt. of Kerala, (1997) 9 SCC 495,
(“Krishnan Kakkanth”), this Court held as under:
“27. The reasonableness of restriction is to be
determined in an objective manner and from the
standpoint of the interests of general public and
not from the standpoint of the interests of the
persons upon whom the restrictions are imposed
or upon abstract consideration. A restriction cannot
be said to be unreasonable merely because in a
given case, it operates harshly and even if the
persons affected be petty traders (Mohd. Hanif v.
State of Bihar [AIR 1958 SC 731] ). In determining
the infringement of the right guaranteed under
Article 19(1), the nature of right alleged to have
been infringed, the underlying purpose of the
restriction imposed, the extent and urgency
of the evil sought to be remedied thereby, the
disproportion of the imposition, the prevailing
conditions at the time, enter into judicial verdict
(Laxmi Khandsari v. State of U.P. [(1981) 2 SCC 600
: AIR 1981 SC 873] ; D.K. Trivedi and Sons v. State
of Gujarat [1986 Supp SCC 20] and Harakchand
Ratanchand Banthia v. Union of India [(1969) 2 SCC
166 : AIR 1970 SC 1453] ).
[2024] 6 S.C.R. 847
Shaji Poulose v.
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28. Under clause (1)(g) of Article 19, every citizen has
a freedom and right to choose his own employment or
take up any trade or calling subject only to the limits
as may be imposed by the State in the interests of
public welfare and the other grounds mentioned
in clause (6) of Article 19. But it may be emphasised
that the Constitution does not recognise franchise or
rights to business which are dependent on grants
by the State or business affected by public interest
(Saghir Ahmad v. State of U.P. [(1955) 1 SCR 707 :
AIR 1954 SC 728] ).”
(emphasis by us)
Therefore, it follows that this Court must consider the public interest
involved not only from the perspective of the Chartered Accountants
but rather from the perspective of the general public. In the present
cases, it has been contended that public interest manifests as a
benefit to the public exchequer in terms of appropriate quality of tax
audit reports under Section 44AB.
25. At this juncture, it is useful to reiterate the thread of public interest
visible in the 1949 Act since its inception. The Statement of Objects
and Reasons of the 1949 Act makes it clear that the Act was brought in
to ensure that accountants all over the country, in discharge of their
public duties, are governed by a central body that is not transitional.
Our words should not be mistakenly understood to suggest that the
profession of Chartered Accountants is not a private enterprise and
is concerned solely with rendering of public duties. We rather only
highlight that it is a profession – licensed by the State – that also
discharges public duties crucial in public interest.
26. In our opinion, a perusal of the Wanchoo Committee Report, Finance
Bill, 1984 and the accompanying Memorandum makes it explicitly
clear that the intent of insertion of Section 44AB of the IT Act, 1961,
was to facilitate the process of tax administration to the benefit of
the public exchequer. The genesis of the opportunity to conduct tax
audits was not regulation of a practice essential to the Chartered
Accountant profession per se but rather to take assistance of auditors,
in discharge of their public duties, for plugging tax leakage and
thereby saving the time of the Assessment Officers on presentation
of quality tax audit reports in a prescribed format. Therefore, it is for
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these intents and purposes, the privilege of conducting tax audits
was extended to Chartered Accountants by creating a privilege to
conduct such audits subject to reasonable restrictions.
27. We must be careful in our delineation between a right and a privilege.
As discussed above, the idea of compulsory tax audits was neither an
inherent part of the practice of a Chartered Accountant nor an essential
function which could be claimed as a fundamental right under Article
19(1)(g). Furthermore, an examination of the nature of the supposed
right that was being enjoyed by Chartered Accountants reflects that
in practice, an assessee, seeking to comply with the requirements
of Section 44AB, would approach a Chartered Accountant to obtain
a certificate of audit. We have already observed and noted that
Section 44AB, IT Act, 1961 was inserted to assist the Revenue
Department in public. Thereby, it is only through the extension of
statutory privilege by the presence of Section 44AB, IT Act, 1961,
that a Chartered Accountant gets the opportunity to undertake tax
audits under the said section. If the Parliament, in its wisdom, at a
certain future date, due to technological developments or any other
reason, finds that expeditious and accurate assessments can be
ensured without imposing on assessees the burden of additional
requirement of tax audit report and thereby deletes Section 44AB
from the IT Act, 1961, it could not be possibly argued that the right
under Article 19(1)(g) has been abridged. What follows is that when
a privilege is being granted, as a privilege by statute, which could be
effaced completely, a reasonable restriction could also be imposed,
the latter being a restriction of a lesser degree than a complete ban
on an activity.
28. On the scope of restrictions imposed to maintain quality of service
where a privilege had been extended by the Government to medical
officers, this Court, in Sukumar Mukherjee vs. State of W.B., (1993)
3 SCC 723, (“Sukumar Mukherjee”), held that the restriction was
reasonable where the State of West Bengal had, vide Section 9 of
the West Bengal State Health Service Act, 1990, prohibited private
practice by members of W.B. Medical Education Service who were
also teaching in medical institutions. It was held that where the State
Government had concluded that the regime of permitting private
practice of those teaching in medical institutions led to a considerable
decline in quality of teaching, such restriction was reasonable and
in the interest of general public as the ban on private-practice would
[2024] 6 S.C.R. 849
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
make available to the teachers-doctors the time required for reading
and research which was absolutely essential for maintaining quality
in their main profession as teachers in medicine. Furthermore,
where for a brief period, in the facts of that case, private practice
by teaching post-holders was also permitted and then withdrawn,
this Court held that such an extension was only a privilege extended
on people who were regulated by the relevant Act and rules made
thereunder and therefore, the revocation of that privilege was not
the violation of any right.
29. Where public interest was the genesis of a privilege being extended
to Chartered Accountants and not a right, it is reasonable that the
respondent-Institute, an expert body, would have the authority
to regulate the privilege extended to Chartered Accountants in a
reasonable manner deemed appropriate to serve public interest. That
the public interest involved in the present petitions being pervasive
is evidenced through CAG’s recommendation to the Government to
insert a provision in the statute book putting a cap on the number of
tax audits permissible. According to the CAG, in the matter of revenue,
the IT Act, 1961 should have provision to prescribe for quality of tax
audit assignments rather than relying on respondent-Institute.
30. It would be apposite at this juncture to refer to the judgment in P.V.
Sivarajan vs. Union of India, AIR 1959 SC 556, (“P.V. Sivarajan”),
delivered by a Constitution Bench of this Court. Petitioner therein was
aggrieved by the rejection of his application as a registered exporter
of coir products, on the ground that he had not already exported
the minimum specified quantity of 500 Cwts. It was observed by
this Court that Parliament had enacted the Coir Industry Act, 1953,
finding it expedient in public interest that the Union should take under
its control the coir industry as several malpractices had crept in the
export trade such as non-fulfilment of contracts, supplying goods of
inferior quality in an industry crucial to the repute of India’s products
and national economy. With the intent of limiting these losses due to
qualitative underperformance, the Central Government, under powers
conferred by the statute, framed Rules in 1958. The Rules were
assailed by the petitioner therein, contending that they erroneously
prescribed a quantitative test for registration of established exporters,
when in fact, a qualitative test would be more suitable. This argument
was rejected, holding that once it is accepted that regulation of coir
industry is in public interest, then it would be erroneous to assert that
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regulation must be introduced only on the basis of a qualitative test.
This Court was mindful of the potential difficulties in introducing and
effectively enforcing a qualitative test and thereby held that it would
be for the rule-making authority to decide as to which test would
meet the requirements of public interest and what method would
be most expedient in controlling the industry for national good. This
Court noted as under:
“7. If it is conceded that the regulation of the coir industry
is in the public interest, then it would be difficult to entertain
the argument that the regulation or control must be
introduced only on the basis of a qualitative test. It may
well be that there are several difficulties in introducing
and effectively enforcing the qualitative test. It is well
known that granting permits or licences to export or import
dealers on the basis of a quantitative test is not unknown
in regard to export and import of essential commodities. It
would obviously be for the rule-making authority to decide
which test would meet the requirements of public
interest and what method would be most expedient
in controlling the industry for the national good.
Besides, even the adoption of a qualitative test may tend
to extinguish the trade of those who do not satisfy the
said test; but such a result cannot obviously be treated
as contravening the fundamental rights under Article 19.
Control and regulation of any trade, though reasonable
within the meaning of Article 19, sub-Article (6), may
in some cases lead to hardship to some persons
carrying on the said trade or business if they are
unable to satisfy the requirements of the regulatory
rules or provisions validly introduced; but once it is
conceded that regulation of the trade and its control
are justified in the public interest, it would not be open
to a person who fails to satisfy the rules or regulations
to invoke his fundamental right under Article 19(g)
and challenge the validity of the regulation or rule in
question. In our opinion, therefore, the challenge to the
validity of the rules on the ground of Article 19 must fail.
8. The challenge to the validity of the said rules on the
ground of Article 14 must also fail, because the classification
[2024] 6 S.C.R. 851
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
of traders made by Rules 18 and 19 is clearly rational
and is founded on an intelligible differentia distinguishing
persons falling under one class from those falling under
the other. It is also clear that the differentia has a rational
relation to the object sought to be achieved by the Act.
As we have already pointed out, the export trade in
coir commodities disclosed the existence of many
malpractices which not only affected the volume of
trade but also the reputation of Indian traders; and one
of the main reasons which led to this unfortunate result
was that exporters sometimes accepted orders far beyond
their capacity and that inevitably led to non-fulfilment of
contracts or to supply of inferior commodities. In order
to remedy this position the trade had to be regulated
and so the intending exporter was required to satisfy the
test of the prescribed minimum capacity and to establish
the prescribed minimum status before his application for
registration is granted. In this connection it may also be
relevant to point out that the rules seem to contemplate
the granting of exemption from the operation of some of
the relevant tests to cooperative societies; and that shows
that the intention of the legislature is to encourage small
traders to form co-operative societies and carry on export
trade on behalf of such societies; and so it would not be
possible to accept the argument that the impugned rules
would lead to a monopoly in the trade. It is thus clear that
the main object which the rules propose to achieve is
to improve the anomalies and malpractices prevailing
in the export trade of coir commodities and to put the
said trade on a firm and enduring basis in the interest
of national economy. We are, therefore, satisfied that
the challenge to the impugned rules on the ground of
infringement of Article 14 of the Constitution must also fail.”
(emphasis supplied)
31. The further contention that a quantitative test discriminates between
persons carrying on business on a large scale and those who carry
on business on a small scale as even the prescription of a qualitative
test would also lead to hardship on those who cannot satisfy the
test was rejected.
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32. We must also now consider further arguments advanced by learned
senior counsel and counsel for the petitioners. Heavy reliance
placed on Institute of Chartered Financial Analysts of India, in
our considered opinion, is misplaced. This case concerned whether
acquisition of an additional qualification of Chartered Financial Analyst
(“CFA”) by a Chartered Accountant could be termed as professional
misconduct under Section 22 of the 1949 Act. Holding in the negative,
this Court found that enhancement of knowledge, training and ability
should be encouraged in an emerging economy and to term the same
as professional misconduct would be violative of Articles 14 and
19(1)(g). That case is clearly distinguishable. Neither did this Court
find that the restriction placed was in public interest, nor that the
acquisition of an additional qualification hurt the quality of statutory
responsibilities attributed to a Chartered Accountant.
33. The argument advanced by learned counsel for the petitioners is that
as a direct consequence and effect of the ceiling limit, an anomalous
situation of discrimination between qualified professionals practicing
in metropolitan cities as against those in mofussil areas, or those
catering to small assessees as against those catering to bigger
assessees, must be categorically rejected. The potential effect of the
concerned restriction is that practitioners dealing in mofussil areas
or catering to small assessees will face a reduction in their income
which is violative of their right to freely engage in their profession.
We find ourselves unable to agree with this contention. There is no
material to suggest that this partial limitation on the practise of the
profession would lead to a significant reduction in income. In any
case, it is trite law that reduction of income cannot be a ground for
holding a reasonable restriction unreasonable vide Minerva Talkies
which we shall discuss later. Where the devolution of a privilege
is justifiably restricted in public interest and such restriction has a
rational nexus with the objects sought to be achieved, the restriction
cannot be held unreasonable due to hardship faced by a certain
section of professionals.
34. The following judgments of this Court are also apposite:
(a) In B.P. Sharma, clause 17 of the instructions issued in 1979 by
the Ministry of Tourism and Civil Aviation, Department of Tourism,
Government of India prohibiting the renewal of identity cards
to guides who were carrying on the job of conducting tourists
[2024] 6 S.C.R. 853
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
to historical monuments and other places of interest and to
explain the background and importance of such places as well
as acquaint the tourists with the historical facts relating to the
monuments and landmarks of the area after they attained the
age of sixty years, was assailed. Clause 17 stated that “when
a guide attains the age of 60 years the identity card issued to
him or her will not be renewed further”. This was unsuccessfully
challenged by way of a writ petition under Article 226 of the
Constitution before the Allahabad High Court. But, this Court
observed that the freedom guaranteed under Article 19(1)(g) of
the Constitution is valuable and cannot be violated on grounds
which are not established to be in public interest or just on the
basis that it is permissible to do so. For placing a complete
prohibition on any professional activity, there must exist some
strong reason for the same with a view to attain some legitimate
object and non-imposition of such prohibition might result in
jeopardizing or seriously affecting the interest of the people in
general. Otherwise, it would not be a reasonable restriction. We
do not have any contrary opinion to what has been observed
by this Court in the aforesaid judgment but the facts of each
case would ultimately decide whether, a complete prohibition,
ban or restriction is a reasonable one or not depending upon
the public interest it would seek to achieve. In the aforesaid
case clause 17 of the instructions was held to be ultra vires
Article 19(1)(g) and hence, quashed by this Court.
(b) In Minerva Talkies, Rule 41-A of Karnataka Cinemas
(Regulations) Rules, 1971 made under Section 19 of the
Karnataka Cinemas (Regulation) Act, 1964 limiting the cinema
shows to four per day was held to be neither ultra vires the said
Act nor violative of Article 19(1)(g) of the Constitution. It was
observed that no licensee can claim to have an unrestricted right
to exhibit cinematograph films for all the twenty-four hours of the
day. Such a claim would obviously be against public interest.
The right to exhibit cinematograph films is regulated by the
provisions of the Act in the interest of the general public. The
restriction to limit the number of shows to four in a day placed
by Rule 41-A is regulatory in nature which clearly carries out
the purposes of the Act. In the context of Article 19(1)(g), it was
observed that the law placing restrictions on the citizens’ right
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to do business must satisfy two conditions set out in clause (6)
of Article 19: firstly, the restrictions imposed by the law must
be reasonable, and secondly, the restrictions must be in the
interests of the general public. If these two tests are satisfied,
the law placing restriction on the citizens’ right guaranteed
under Article 19(1)(g) must be upheld. While considering the
validity of Rule 41-A which had limited the number of films to
be exhibit in a day to four shows, it was noted that holding of
continuous five shows from 10 am in the morning caused great
inconvenience to the incoming and outgoing cine-goers and
endangered public safety. A short interval of fifteen minutes
between two shows is too little time for cleaning the cinema
halls and there was also rush by the cine-goers to occupy the
seats. Moreover, licensees would start exhibiting approved
films and slides before the cine-goers could occupy their seats,
with the result they would not have the benefit of the same.
The absence of interval between the shows resulted in denial
of fresh air, ventilation and cleanliness in the cinema halls. In
order to remove these maladies, the restriction on the number
of shows to four per day was introduced. After analysing the
inconvenience that would be caused to the cine-goers and also
the fact that if the five shows were exhibited from 10 am to 1 am
the next day, there would be great inconvenience caused to the
public, the State Government had promulgated the restriction
to only four shows in a day. Consequently, the said Rule was
upheld by this Court by observing that it was intra vires the Act
as it carried out the purposes of the Act and it did not place any
unreasonable restriction in violation of Article 19(1)(g) of the
Constitution. Consequently, this Court dismissed the appeals
as well as the writ petitions.
(c) In T. Velayudhan Achari, Section 45-S (1) as introduced by
Banking Laws (Amendment) Act, 1983 limiting the number
of depositors that can be accepted by individual, firm or
unincorporated association, was held to be not violative of
Article 19(1)(g) of the Constitution as the said limitation protected
larger interest of depositors. It was observed that a ceiling for
acceptance of deposits and to require maintenance of certain
liquidity of funds as well as not to exceed borrowings beyond a
particular percentage of the net-owned funds had been provided
[2024] 6 S.C.R. 855
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
in the corporate sector. But for these safeguards, the depositors
would be left high and dry without any remedy. It was held that
the restrictions were reasonable and were in the public interest.
(d) In B.K. Kamath, Kurian Joseph J. (as a Judge of the Kerala High
Court), observed that the Chartered Accountants Act was enacted
for regulating the profession and in the process regulating and
maintaining the status of the Chartered Accountants. Therefore,
the measures taken, intended to maintain and improve the quality
of work and ensure equitable distribution of work among the
Chartered Accountants could not be held to be an unreasonable
restriction since such restrictions are necessary for maintaining
the status of the Chartered Accountants and also for ensuring
the quality of the work by them. Comparing the said restriction
to Section 224 of the Companies Act, 1956 wherein a Chartered
Accountant is permitted to audit only twenty companies in a
financial year since the introduction of the said provision in the
year 1974, it was observed that such regulatory measures are
provided in view of the onerous and time-consuming nature of
the work of the Chartered Accountant requiring accuracy and
perfection. The Income Tax Act attributes much importance to the
certificate of audit by the Chartered Accountant and therefore,
it is in public interest also to introduce certain restrictions on
the volume of work lest it would affect professional standards
apart from affecting the professional status. We are in complete
agreement with the aforesaid observations. In our view,
the comparison made between Chartered Accountants and
Advocates by the petitioners is also inappropriate.
35. It is also noted that under Section 224 of the Companies Act, 1956
which deals with appointment and remuneration of auditors, there is
a bar with regard to appointment or reappointment of any person as
an auditor of a company, if such person or firm of auditors is, at the
date of such appointment or reappointment, holding appointment as
auditor of specified number of companies or more than the specified
number of companies. Explanation (1) to Section 224 defines
specified number to mean (a) in the case of a person or firm holding
appointment as auditor of a number of companies each of which has
paid-up share capital of less than rupees twenty-five lakh, twenty such
companies; and (b) in any other case, twenty companies, out of which
not more than ten shall be companies each of which has paid-up
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share capital of rupees twenty-five lakh or more. Explanation-II states
that in computing the specified number, the number of companies in
respect of which or any part of which any person or firm has been
appointed as an auditor, whether singly or in combination with any
other person or firm, shall be taken into account.
36. The restriction placed under Section 224 of the Companies Act, 1956
with regard to the number of companies which could be audited by
an auditor or firm of auditors is also an instance of regulation of the
profession of Chartered Accountants intended by the Parliament
so as to ensure that standard and quality in the audit of accounts
of companies as defined under Section 3 of the Companies Act,
1956 are maintained. This is to protect the rights and interest of
the shareholders as well as the investors in the companies. Any
omission or inadvertence in the auditing of such company accounts
would inevitably have an adverse impact not only on the balance-
sheets of the companies but also on the potential investments and
growth of the companies. There has not been any challenge to the
said regulation which is in the form of a restriction. Any breach of
the restriction placed on the Chartered Accountants under Section
224 may lead to misconduct under the provision of 1949 Act.
37. It is for the foregoing reasons that we find that questions (i), (ii) and
(iii) ought to be held in favour of the respondent-Institute.
Re: Point No.4: Whether exceeding such specified number of
tax audits can be deemed to be ‘professional misconduct’?
38. During the course of submissions, an alternative plea raised by
learned senior counsel and learned counsel for the petitioners was
that the respondent-Institute initiated disciplinary proceedings only
against a few Chartered Accountants, including petitioners herein,
while a majority of the Chartered Accountants who had breached the
Guideline are not facing any disciplinary proceeding and have not
been proceeded against. Secondly, it was contended that it was only
recently that notices have been issued to the writ petitioners herein
to respond to the same and for conducting disciplinary proceedings.
That there cannot be a discrimination, so to say, by the respondent-
Institute in the matter. That, the impugned Guideline dated 08.08.2008
has been on the statute book, the disciplinary proceedings have
been initiated only recently. The impugned Guideline has not been
effectively given effect to. Therefore, the disciplinary proceeding
[2024] 6 S.C.R. 857
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
may be quashed for the aforesaid reasons. In this regard, it was
contended that when the respondent-Institute has remained silent
and not acted upon the Guideline, since it was issued on 08.08.2008,
all of a sudden there could not have been initiation of disciplinary
proceedings only against the petitioners herein and possibly others
who may not have approached any court of law, whereas many other
Chartered Accountants have not been proceeded against and are
virtually scot-free. Therefore, there is discrimination and violation of
Article 14 of the Constitution of India herein in the implementation of
the Guideline vide Notification dated 08.08.2008. Therefore, pending
full and effective implementation of the Guideline impugned herein of
the impugned proceedings against the petitioners herein for the alleged
misconduct on their part for violating the Guideline may be dropped.
39. It is observed that there has been an uncertainty in law due to a similar
Guideline being successfully assailed and during the pendency of
the matter before this Court the impugned Guideline being enforced
and selective implementation of the same by the respondent-Institute.
Relying on the dictum of this Court in Chamundi Mopeds, the
petitioners contended that a stay on the judgment of Madras High
Court was only on the operation of the judgment and not a declaration
that the judgment was bad in law. As the special leave petition
impugning the judgment of Madras High Court was dismissed as
infructuous and any action taken by the respondent-Institute on the
superseding Guideline dated 08.08.2008 was taken only belatedly,
we find force in the submission that there was uncertainty in law
only in the context of the pendency of the matter before this Court
on there being quashing of the Guideline by the Madras High Court
and an interim stay of the said judgment by this Court.
40. In this regard, we may refer to Halsbury Laws of England, [5th
Edn. Volume 96 (2018)] dealing with the principle against doubtful
penalisation:
“774. Principle Against Doubtful Penalisation
“It is a principle of legal policy that a person should not
be penalised except under clear law, …”
41. Francis Bennion on Statutory Interpretation (8th Edn, 2020 at Section
26.4) deals with principle against doubtful penalisation in the following
words:
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“It is a principle of legal policy that a person should not be
penalised except under clear law. This principle forms
part of the context against which legislation is enacted
and, when interpreting legislation, a court should take it
into account.”
42. It was borne out during the course of arguments and through the
submissions made in the Counter Affidavit that the tax audit monitoring
mechanism was firstly, self-regulatory, wherein the disciplinary
mechanism would kick in only on a complaint made/information
received and not otherwise. Furthermore, the Tax Audit Monitoring
Cell was created only after the CAG Report No. 32/2014, and even
after that, initially notices were sent only selectively to Chartered
Accountants who had completed more than two hundred audits not
to all who had breached the impugned Guideline.
43. As a rule of statutory interpretation, we find that the aforesaid
principles, in an equitable legal system, should be applicable to the
present circumstances. Thereby, for the limited period of uncertainty,
the rule against doubtful penalization as a principle could, in the
interest of justice and equity, be made applicable and the benefit of
uncertainty be given to those subjected to misconduct proceedings
in the instant writ petitions and to also those Chartered Accountants
who may have received notices from the respondent-Institute and
who may not have approached any court of law or to other similarly
situated Chartered Accountants who may not have been proceeded
against.
44. Reference may also be made to judgment of this Court in Jindal
Paper & Plastics vs. Union of India, (1997) 10 SCC 536, (“Jindal
Paper & Plastics”) wherein the question on merits was settled by
a judgment of this Court in Kasinka Trading vs. Union of India,
(1995) 1 SCC 274, (“Kasinka Trading”), delivered on 18.10.1994
and a larger bench on 20.12.1996 concluded that the judgment dated
18.10.1994 was good law. This Court allowed the petitioner’s prayer
therein that for the period of uncertainty in law, i.e., until the law, on
merits, was settled by this Court on 18.10.1994, a lesser interest
rate of 12% be charged instead of 17.5%, as ordered by the High
Court. In these circumstances, this Court held as follows:
“4. We are of the view that there was uncertainty
about the law until the decision in the case of Kasinka
[2024] 6 S.C.R. 859
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
Trading [(1995) 1 SCC 274 : JT (1994) 7 SC 362] was
rendered on 18-10-1994, and that, therefore, interest from
the date it became payable until 18-10-1994, should be
payable at the rate of 12% per annum. Interest for the
further period should be at the rate of 17.5% per annum,
as ordered by the High Court. Calculations shall be made
accordingly and the balance and interest as aforesaid due
by the appellants shall be paid to the respondents within
8 weeks.”
(emphasis supplied)
45. We, therefore, find much force in the alternative plea made by the
petitioners herein. In these circumstances, due to the uncertainty in
law owing to quashing of the earlier Guideline and the pendency of
the Special Leave Petition filed by the respondent-Institute before
this Court and the enforcement of a fresh Guideline, we quash the
disciplinary proceedings initiated against the petitioners herein. This
is for the simple reason that only the writ petitioners have been
proceeded against, while even according to the respondent-Institute,
there were around twelve thousand Chartered Accountants who had
breached the Guideline and had undertaken tax audits over and
above the specified number but no action whatsoever was initiated
against of them.
46. In conclusion, we must also note the dictum in Malpe Vishwanath
Acharya vs. State of Maharashtra, (1998) 2 SCC 1, (“Malpe
Vishwanath Acharya”), wherein this Court, relying on Motor General
Traders vs. State of A.P., (1984) 1 SCC 222, (“Motor General
Traders”), reiterated that a provision which was/is reasonable may
with the passage of time become unreasonable. In the context of
restriction on the specified audits under Section 44AB of IT Act, 1961,
Minutes of the Council of the respondent-Institute reflect that with
the passage of time, the number of tax audits to be permitted have
been repeatedly deliberated, re-evaluated and increased, subject
to final decision taken by the Council. However, it also becomes
apparent that decisions of the Council on whether to increase or
maintain the status quo have been ad-hoc, influenced by several
factors such as technological development, number of practicing
Chartered Accountants, etc. Since the last revision to sixty tax audits
was made a decade ago, we direct the Council to consider if the
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time is ripe to enhance the specified number of tax audits and to
delineate the factors that it may consider in taking such a decision
47. In that view of the matter, the respondent-Institute is at liberty to
enhance the specified number of tax audits that could be undertaken
by practicing Chartered Accountants under Section 44AB of the IT
Act, 1961. For that purpose, liberty is reserved to the practising
Chartered Accountants to make their suggestions to the respondent.
48. We wish to make certain observations before parting with these
writ petitions. The Institute of Chartered Accountants of India over
a period of time, has received recognition as a premier accounting
body, domestically and globally, for maintaining highest standards
in technical, ethical areas and for sustaining stringent examination
and educational standards. Since its inception in the year 1949, the
profession of Chartered Accountancy and accounting has grown leaps
and bounds in terms of the number of members, which now stands at
over 3.5 lakhs. The respondent-Institute has also played a significant
role in ensuring the dynamism of the Chartered Accountancy course
curriculum and the credibility of the examinations. The financial skills
of the aspirants are fairly consolidated, at the time of joining the
profession itself- this is owing to the robust examination pattern. We
commend that the respondent-Institute must be committed towards
convergence of accounting, auditing and ethical standards with
international practices and for its endeavour towards securing the
highest standards of corporate governance. The true test however,
lies in application and enforcement of these standards in the Indian
context.
49. The power to control and impose taxes is a cornerstone of State
sovereignty. Welfare States impose taxes to generate revenue that
enables investment in human capital, infrastructure and services for
citizens and businesses. The Tax Law landscape in India has been one
of the most dynamic areas of law and has witnessed several changes
over the last few decades. The Taxation Systems in India have been
periodically assessed and several changes have been brought about
from time to time. Such changes have been introduced with a view
to either widen the tax base; to simplify and rationalise laws and
procedures; to bring about modernization through computerization
of tax returns; to enhance efficiency of the tax administration; or to
maintain progressivity at such levels as would not induce evasion.
[2024] 6 S.C.R. 861
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
49.1 In relation to direct taxation, we believe that the taxation
system must be one that not only incorporates the normative
and prescriptive considerations of neutrality, fairness, certainty,
efficiency etc. but one that also promotes the virtuous circle of
increased trust between tax payers and the tax administration.
We call this a “virtuous circle” because it seeks to achieve a dual
purpose: it reinforces voluntary compliance while at the same
time promoting good governance. Good governance is achieved
in an attempt to secure the confidence of the taxpayer. Once
a taxpayer is certain that tax revenue is being channelled in
an efficient manner, consistent with the objectives of a welfare
state, enhanced tax compliance is likely to follow. It is in this
context that we stress on the significance of the role played by
Chartered Accountants. They can serve as effective catalysts
in securing this circle of trust between the taxpayer and the
tax administration. This is because a large proportion of the
tax payers in India seek advice of Chartered Accountants to
understand the rules of the road. The integrity and standards of
Chartered Accountants determine the efficiency in the functioning
of the nation’s taxation system.
49.2 There are many concepts and processes in the present taxation
regime that rest, almost completely, on the vigilance of Chartered
Accountants and auditors. The very concept of self-assessment
carries with it the requirement of good faith practices. The most
recent tax reforms seek to achieve transparent taxation by
“Honouring the Honest taxpayer.” The success of such initiatives
depends, to a very large extent, on the vigilance demonstrated
by Chartered Accountants.
49.3 Transparency in accounting is imperative to the economy in
many ways. For instance, in the absence of accurate financial
reporting, it would become difficult for banks to make informed
decisions about credit allocation. It is the quality, reliability and
objectivity of this information which stakeholders rely upon to
make informed judgments and allocate resources efficiently.
The role of transparent accounting is critical in lending credibility
to the financial market transactions. Market participants,
investors and shareholders look towards this community for
accurate information, which ensures market discipline and
fosters confidence of various stakeholders. The onus is on
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Chartered Accountants to ensure that our Nation’s businesses
do indeed conform to high corporate governance standards.
Further, while the quality of information has immediate and far-
reaching implications for a particular enterprise, it eventually
permeates to the market and the economy as a whole. It is
therefore not surprising to find that the accounting profession
is being constantly challenged to meet the demands for quality
information. As key providers and verifiers of information,
the bottom-line is simple: the higher the quality and integrity
maintained by the profession, the stronger and more resilient
will our markets be. By providing the foundation for compilation
of credible financial statements, the accounting profession
facilitates market discipline, engenders confidence among
various stakeholders and reduces the possibility of misleading
information that can disrupt stability of financial systems.
Therefore, the need for quality assessments particularly under
Section 44AB of the IT Act, 1961.
49.4 In the public discourse on governance, we find that the corporate
governance agenda garners attention only during times when
the Country is faced with the most notorious corporate scams.
Shareholder democracy has come to stay and Chartered
Accountants are the gatekeepers of this new corporate world
which poses challenges as well as unprecedented opportunities.
Thus, the importance of integrity of auditing functions for
maintaining financial stability is now well-recognised.
49.5 More importantly, Chartered Accountants must themselves
comply with the relevant laws and regulations and avoid any
conduct that discredits the profession. Needless to specify that
Chartered Accountants must refuse to represent clients who
insist on resorting to unfair means. Chartered accountants
are relevant not only in securing corporate governance, but
governance in broader contexts too.
49.6 Chartered Accountants face many different responsibilities: to
the profession; to the tax administration; to the client and to the
economy at large. In that context, we stress on the importance of
preserving their independence of view and integrity; to separate
their client-advisory role from their role as public citizens seeking
to improve the functioning of the tax machinery of the Nation.
[2024] 6 S.C.R. 863
Shaji Poulose v.
Institute of Chartered Accountants of India & Others
Integrity, objectivity, professional competence and due care and
confidentiality must be the doctrines guiding their work ethic.
Conclusion:
50. In the circumstances, we dispose of the writ petitions in the following
manner:
a) Clause 6.0, Chapter VI of the Guidelines dated 08.08.2008 and
its subsequent amendment is valid and is not violative of Article
19(1)(g) of the Constitution as it is a reasonable restriction on the
right to practise the profession by a Chartered Accountant and
is protected or justifiable under Article 19(6) of the Constitution.
b) However, the said clause 6.0, Chapter VI of the Guidelines
dated 08.08.2008 and its subsequent amendment is deemed
not to be given effect to till 01.04.2024.
c) Consequently, all proceedings initiated pursuant to the impugned
Guideline in respect of the writ petitioners and other similarly
situated Chartered Accountants stand quashed.
d) Liberty is reserved to the respondent-Institute to enhance the
specified number of audits that a Chartered Accountant can
undertake under Section 44AB of the IT Act, 1961, if it deems fit.
e) Liberty is also reserved to the writ petitioners or any other
member of the respondent-Institute to make a representation
in the above context which may be taken into consideration in
the event respondent-Institute intends to amend the Guideline
as per point No.(d) above.
f) The writ petitions as well as all the transferred cases are
disposed of in the aforesaid terms.
g) The Registry to intimate the concerned High Courts regarding
disposal of the transferred cases accordingly.
h) No costs.
Headnotes prepared by: Nidhi Jain Result of the case:
Writ petitions and transferred
cases disposed of.
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