On Friday, May 17, the Supreme Court upheld a rule issued by the Institute of Chartered Accountants of India (ICAI) that limits Chartered Accountants to a maximum of 60 tax audit assignments per financial year.
The bench, comprising Justices BV Nagarathna and Augustine George Masih, ruled that the regulation (paragraph 6.0 of Chapter VI of the Council Guidelines No. 1-CA(7)/02/2008 dated August 8, 2008, and subsequent amendments) does not violate the fundamental right to practice a profession under Article 19(1)(g) of the Constitution.
The primary argument against the guidelines was that they infringed on the fundamental right to practice a profession under Article 19(1)(g) and the right to equality under Article 14. The petitioners also questioned the ICAI’s authority to impose such a restriction. Senior Advocate Paramjit Singh Patwalia represented the petitioners.
Senior Advocate Arvind P. Datar, representing the ICAI, provided a historical overview of the compulsory audit requirements under the Income-tax Act, 1961.
The Court decided that this rule will be effective from April 1, 2024, and annulled the disciplinary proceedings against members who breached this limit prior to the effective date. “We quash the disciplinary proceedings initiated against the petitioners on the basis of the doctrine of legal uncertainty,” the bench declared.
Additionally, the Court affirmed that the ICAI may increase the audit limit if deemed necessary.
In their judgment, the justices praised the ICAI for its high standards and significant contributions to the accounting profession, both nationally and internationally. “ICAI has, over time, received recognition as a premier accounting body domestically and globally for maintaining the highest standards…the ICAI has also played a significant role in ensuring the dynamism of the CA course and the credibility of the examination. We commend that the ICAI must be committed towards the convergence of accounting and ethical standards with international standards…the true test, however, lies in enforcement of these standards,” the Court noted.
The key conclusions of the judgment were summarized as follows:
1. Clause 6 of Chapter VI and its subsequent amendment are reasonable restrictions under Article 19(1)(g).
2. This clause is effective from April 1, 2024, nullifying any related disciplinary actions taken before this date.
3. The ICAI has the liberty to adjust the number of audits a CA can undertake.
The compulsory tax audit regime was introduced by Section 44AB of the Income-tax Act, 1961, effective April 1, 1985. This section mandates that individuals with business or professional income exceeding a certain threshold must have their accounts audited by a Chartered Accountant.
Before this, only companies and cooperative societies were required to have their accounts audited under the Companies Act, 1956, and the Co-operative Societies Act, 1912, respectively. Section 44AB was aimed at reducing tax evasion and fraudulent practices.
In 1988, the ICAI set a limit on the number of tax audit assignments a Chartered Accountant could accept in a financial year, a restriction extended to each partner in CA firms. Violating this limit constituted professional misconduct. The Chartered Accountants Act, 1949, was amended in 2006, and the current guidelines were issued in 2008.
These guidelines faced multiple legal challenges across various High Courts, resulting in conflicting judgments. In 2020, the Supreme Court consolidated these cases for a final decision.
A copy of the decision is awaited.
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