Shaji Poulose v. Institute of Chartered Accountants of India & Others

Judgment / Order of the Supreme Court

Judgment Nagarathna, J. Table of Contents*

S.No. Particulars Page No.

* Ed. Note: Pagination as per the original Judgment.

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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:

2Copy pinpoint2. 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

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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:

3Copy pinpoint3. 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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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,

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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

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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.

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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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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

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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”

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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.

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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.

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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,

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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.

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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.

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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:

4Copy pinpoint4. 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

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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

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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).

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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:

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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

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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

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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

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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:

5Copy pinpoint5. 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

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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

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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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issued by the respondent-Institute be held to be devoid of any merits and thereby dismissed. Points for Consideration:

6Copy pinpoint6. 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:

7Copy pinpoint7. 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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