9 July 2023 8:30 AM GMT
The Delhi High Court has held that the provisions of MSMED Act, 2006 would not apply to a CA firm appointed as ‘Special Auditor’ under Section 142(2A) of the Income Tax Act (IT Act), 1961. The bench of Justice Prathiba M. Singh held that MSMED Act no applicability in cases of CA firms appointed under Section 142(2A) of the IT Act for the purpose of carrying out special audit as...
The Delhi High Court has held that the provisions of MSMED Act, 2006 would not apply to a CA firm appointed as ‘Special Auditor’ under Section 142(2A) of the Income Tax Act (IT Act), 1961.
The bench of Justice Prathiba M. Singh held that MSMED Act no applicability in cases of CA firms appointed under Section 142(2A) of the IT Act for the purpose of carrying out special audit as there is no relationship of buyer and seller between the parties. Moreover, the assignment under Section 142(2A) is a statutory assignment and not a contractual relationship between the parties, therefore, despite their registration under the MSMED Act, a special audit firm cannot invoke the provisions of the Act against the IT department qua the amount payable for carrying out such audit.
It held that the remuneration payable to the accountant cannot also be termed as ‘consideration’ as the Special Audit is a statutory duty being performed by the accountant for and on behalf of the Assessing Officer (AO). It further held that the determination of the remuneration payable under Section 142(2D) of the IT Act is the sole prerogative of the IT Commissioner.
In brief, the dispute essentially pertained to the determination of the remuneration payable to respondent no.2 (CA Firm) for rendering its auditing services for the petitioner (IT Department) as a ‘special auditor’ under Section 142(2A) of the IT Act.
Aggrieved by the remuneration received from the petitioner, the respondent no. 2 invoked the provisions of Section 18 of MSMED Act and referred the dispute to MSEF Council. On the failure of the conciliation proceedings, the Council referred the parties to arbitration under the aegis of DIAC. Notice for appearance was issued to the petitioner to appear before the arbitral tribunal, however, it filed the writ petition before the High Court challenging the applicability of the MSMED Act and the jurisdiction of the tribunal constituted thereunder.
Contention of the Parties
The petitioner challenged the impugned order on the following grounds:
The respondent made the following submissions in support of the jurisdiction of the tribunal to decide its claim:
Analysis by the Court
At the outset, the Court examined the issue of the maintainability of the petition. The Court held that it is a trite law that writ petition in arbitration can only be maintained in exceptional matters and not as a routine practice. The Court held that a situation where the applicability of the MSMED Act itself is questioned constitute an exceptional circumstance as if the MSMED Act is held to be non-maintainable, the petitioner cannot be subjected to the lengthy arbitral proceedings under the said Act which also entails various other consequences including extremely high rates of interest under Section 16 of the Act. In order to avoid further complications and delay in adjudication by the competent forum, the question as to jurisdiction thus deserves to be considered by the Court in the writ petition.
The Court held that under the IT Act, an individual or entity subject to assessment, referred to as the Assessee, is required to submit returns in accordance with the Act and its corresponding Rules. These returns must be verified in accordance with the provisions outlined in Section 140 of the IT Act. Additionally, the Assessee has the option to conduct self-assessment as per the guidelines laid out in Section 140A of the IT Act. Subsequently, it is the responsibility of the IT Department to carry out an assessment of the tax liability that needs to be paid.
It held that Section 142(2A) of the IT Act, contemplates the nomination of an accountant by the Commissioner or by other high-ranking officials of the IT Department, in a situation where the Assessing Officer is of the opinion that owing to the volume, nature and complexity of accounts, doubt regarding the correctness of the accounts, specialized nature of the business activity etc. of the Assessee and in the interest of Revenue, an audit of the accounts of the Assessee is required and In terms of Section 142(2D) of the IT Act, such accountant, who may be engaged for the purpose of audit, is to be paid “remuneration”. The said remuneration is to be determined by the Commissioner or the Principal Commissioner, Chief Commissioner or the Principal Chief Commissioner. Upon being determined, the said remuneration, shall be final, also, Rule 14B of the IT Rules provides for the manner in which the remuneration, payable to the auditor, is to be determined.
It held that the determination of the remuneration is a task, which is of a specialized nature, which only the Income Tax Department would be able to undertake as the department takes into consideration various aspects, as provided under rule 14B, to arrive at a remuneration to be paid to the special auditor.
The Court held that nature of the Audit and the manner in which remuneration is to be determined would require domain expertise and knowledge which the MSEFC cannot possess. Moreover, the function which is in effect delegated to the Audit firm is one which is exercised under the Income Tax Act and would be purely governed by the said statute. Payment of remuneration is also based on the factors prescribed in the Rules.
The Court held that insofar as Audits under Section 142(2A) are concerned, the IT Act would have to be reckoned as the Special Act and the MSMED Act as the general Act dealing with MSME disputes. Thus, in the facts and circumstances as discussed above, the Income Tax Act would thus prevail over the provisions of the MSMED Act.
Accordingly, the Court allowed the writ petition.
Case Title: PR. COMMISSIONER OF INCOME TAX v. MSECF and Anr, W.P.(C) 13754 of 2019
Citation: 2023 LiveLaw (Del) 568
Counsel for the Petitioner: Mr. Ruchir Bhatia, Sr. Standing Counsel, Mr. Shlok Chandra, Jr. Standing Counsel with Mr. Keshav Garg, Advocate
Counsel for the Respondents: Mr Avishkar Singhvi Advocate with Mr Naved and Mr Vivek Kumar Advocates for R-1. Mr. Jitendra Kumar Singh, Adv. for R-2. Mr. S.B. Gupta in person.
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