MSMED Act Would Not Be Applicable To CA Firms Appointed As ‘Special Auditors’ Under Section 142(2A) Of The Income Tax Act, 1961: Delhi High Court

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. Facts 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 appointed of the ‘special auditor’ under the Act is in the nature of a ‘statutory obligation’. The responsibility being given to the Special Auditor is not a contractual relationship. The conduct of Special Audit is a statutory duty cast upon the Special Auditor and there is a statutory determination of the fee in terms of the provisions of the IT Act. There is no contractual relationship between the IT Department and the Special Auditor.The assignment, being ‘statutory’ in nature, the only remedy is under the Income Tax Act, 1961 or by way of a writ petition. Such an audit can never be described as a ‘commercial contract’ or an ‘agreement’ where the word ‘consideration’ is used.The applicability of the MSMED Act, requires the existence of a buyer and supplier relationship and agreement between the parties, there is no ‘consideration’ which is paid in terms of the Indian Contract Act,1872 and therefore, it cannot be held that the relationship is a contractual relationship.The Petitioner/IT Department cannot be termed as a ‘buyer’ within the meaning of the MSMED Act as there is no ‘consideration’ which has been paid. There is also no agreement but a ‘nomination’ which has been made by the IT Department. Since the MSMED Act itself is not attracted in the present case, Section 24 of the said Act would have no application.Any orders made under the IT Act cannot challenged in any civil proceedings and arbitration proceedings are akin to civil proceedings, therefore, the arbitration proceedings sought to conducted are barred by the application of Section 293 of the IT Act. The respondent made the following submissions in support of the jurisdiction of the tribunal to decide its claim: That where there is a relationship of ‘buyer’ and ‘supplier’ and there is ‘consideration’ involved under an agreement /contract, the MSMED Act would be attracted. Reference is made to Section 18(1) as also Section 2(n) and 2(d) of the MSMED Act to argue that in terms of the definitions of ‘buyer’ and ‘supplier’, respectively, the Respondent is the ‘supplier’, and the IT Department is the ‘buyer’ of the Special Audit ‘services’ supplied by the former to the latter in terms of an ‘agreement/contract’. Thus, all the necessary trappings of a commercial contract exist in this regard. The exact nature of the appointment is also clearly prescribed in the nomination letter. Thus, the MSMED Act would be applicable.That in terms of the procedure for the appointment of a Special Auditor under Section 142(2A) of the IT Act, it is the discretion of the CA Firm so appointed to accept or decline such offer before the nomination of the CA Firm by the IT Department.That the reports which were submitted by the CA Firm, were fully accepted by the IT Department and no deficiencies were raised. All the Special Audit...

MSMED Act Would Not Be Applicable To CA Firms Appointed As ‘Special Auditors’ Under Section 142(2A) Of The Income Tax Act, 1961: Delhi High Court

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