Dhanesh Gupta & Co. vs Commissioner Of Income Tax(C) & ...
2010 Latest Caselaw 2766 Del

              THE HIGH COURT OF DELHI AT NEW DELHI

%                               Judgment Reserved on: 13.05.2010
                                Judgment Delivered on: 25.05.2010

+            WP.(C).2560/2008

DHANESH GUPTA & CO.                                           ... Petitioner

                                    - versus -

COMMISSIONER OF INCOME TAX(C) & ORS.                              .... Respondents

Advocates who appeared in this case:
For the Petitioner  : Mr.U.N.Bachawat, Sr.Advocate, Mr.P.D.Gupta,
                      Mr.A.K.Tiwari, Mr.JainulAbdin & Mr.Manu K.Giri, Adv.
For the Respondents : Mr.Percy J.Pardiwala, Sr.Advocate, Mr.Satyen Sethi,
                      and Mr. Arta Tarana Panda, Adv.

CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE V.K. JAIN

     1.    Whether Reporters of local papers may be allowed to
           see the judgment?                                                    Yes
     2.    To be referred to the Reporter or not?                               Yes

     3.    Whether the judgment should be reported in Digest?                   Yes

V.K. JAIN, J.

1. The petitioner before this Court is a firm of Chartered

Accountants. The Assessing Officer of respondent No.3,

Sahara India Financial Corporation Limited, in the course of

assessment proceedings, sought approval of respondent No.1,

Commissioner of Income Tax, to get the accounts of

respondent No.3 audited under Section 142(2A) of Income Tax

Act, for the Financial Years 2002-03 and 2003-04. While

granting requisite permission, respondent No.2 determined the

fee, payable to the petitioner on the basis of the scale

prescribed by the Institute of Chartered Accountants of India

(hereinafter called "the Institute") for such work. According to

the petitioner, before nominating it as the Special Auditor,

respondent No.1 called its Senior Partner, Shri Dhanesh

Chand, sought acceptance of the assignment and fixed

remuneration at the scale prescribed by the Institute.

However, in the Appointment Letters issued to the petitioner

there was no mention of the remuneration payable to it. The

petitioner, therefore, accepted the assignment, subject to the

condition that the remuneration would be paid to it as per the

scale prescribed by the Institute. It is also the case of the

petitioner that soon after receipt of the acceptance letter sent

by it, a meeting of respondents 1 to 3 was convened in the

Chamber of respondent No.1 which was attended by one Shri

R.S. Dubey, on behalf of respondent No.3, and the

remuneration, payable to the petitioner at the scale prescribed

by the institute was fixed in that meeting. The petitioner

completed the assignment for the Financial Year 2002-03 and

raised a bill of Rs.49,94,419/-, based upon the scale

prescribed by the Institute. The bill was duly paid by

respondent No.3 and the petitioner also paid the service tax,

which it had recovered from respondent No.3 in respect of that

bill. The petitioner was, thereafter, asked to give justification

for the bill raised by it. The petitioner furnished justification

stating therein that the fee was to be charged as per the scale

approved by the Institute and that the Commissioner of Income

Tax had also confirmed payment of fee at that scale. A meeting

was then held in the office of respondent No.1 on 10 th April,

2007, which was attended by Shri K.G.Somani, Special Auditor

of Sahara India, and Mr.R.K.Nahata, Special Auditor of Sahara

Airlines Limited, who had no concern with the audit of

respondent No.3 Sahara India Financial Corporation Limited.

Respondent No.1 left the meeting at about 1.00 p.m. saying

that the meeting should continue in his presence. In the

meeting Mr.Somani and Mr.Nahata, who were the Special

Auditors for Sahara India and Sahara Airlines Limited

respectively, agreed to accept fee of Rs.20 lakhs each for each

financial year that were assigned to them for special audit.

The representative of the petitioner, however, did not agree to

that figure. However, in the minutes drawn by the, Additional

Commissioner of Income Tax, it was mentioned that the

petitioner had also agreed to fee of Rs.20 lakhs for each

financial year. Since the petitioner was practicing in taxation,

he could not refuse to sign the minutes drawn up by the

Additional Commissioner, though he had not agreed to accept

fee of Rs.20 lakhs for each financial year. The petitioner,

thereafter, wrote a letter to respondent No.1 informing him that

its representative Shri Dhanesh Chander was not comfortable

with the figures mentioned in the minutes. The petitioner,

however, did not commence work for the Financial Year 2003-

04 awaiting response to the letter sent by him to respondent

No.1. He, however, was called by respondent No.2, the

Assessing Officer of respondent No.3 and asked to start the

work since he had already written to the Department about the

fee that would acceptable to him. The petitioner, thereafter,

completed the assignment in respect of the financial year

2003-04 and submitted a bill for Rs.44,69,447/- for that year.

2. Vide order dated 26.07.2007, respondent No.1

determined the remuneration of the petitioner for the financial

year 2002-03 at Rs.20 lakhs. A similar order was passed by

him on 18.09.2007 in respect of financial year 2003-04.

Consequent to the aforesaid orders being passed by respondent

No.1, respondent No.3 demanded refund of Rs.8,80,995/- from

the petitioner. Since respondent No.1, despite request of the

petitioner, has not recalled the orders passed by him fixing the

remuneration at Rs.20 lakhs each for the financial year 2002-

03 and 2003-04, the petitioner is seeking quashing of those

orders and payment of the balance amount to him, along with

interest thereon. He is also seeking a direction to respondent

No.1 to take steps in terms of Section141(2D) of the Act in case

of default by respondent No.3 in making payment to the

petitioner.

3. The petition has been contested by the respondents.

Respondents No.1 & 2 in an affidavit filed by Shri Rajesh

Kumar, Assistant Commissioner of Income Tax have stated

that the impugned order was passed in the presence of the

representative of the petitioner who had consented to the same

and the petitioner, is, therefore, estopped from challenging the

said order. They have denied that respondent No.1 had fixed

the remuneration payable to the petitioner at the scale

prescribed by the Institute, before nominating it as the Special

Auditor. It has also been claimed that the order was passed by

respondent No.1 having regard to the scale of fee prescribed by

the Institute in this regard.

4. In their counter-affidavit filed through one

Mr.J.B.Roy, respondent No.3 has stated that the noting made

by respondent No.1 in the order-sheet cannot be construed as

fixation of remuneration payable to the Special Auditor. As

regards the meeting alleged to have taken place in the office of

respondent No.1 shortly after acceptance of assignment by the

petitioner, it has been stated that in the meeting Mr.R.S.Dubey

was only introduced to Mr.Dinesh Chand, partner of the

petitioner firm and the remuneration was not discussed.

Respondent No.3 has denied any kind of pressure on the

petitioner in agreeing to the fee of Rs.20 lakhs in the meeting

held on 12.04.2007. Admitting payment of Rs.48,80,995/- to

the petitioner, the respondent No.3 has claimed that it was

entitled to refund of the excess payment made by it to the

petitioner.

5. Section 142(2D) of the Act provides that the expenses

of, and incidental to, any audit under sub-section (2A)

including the remuneration of the accountant shall be

determined by the Chief Commissioner of Income Tax, which

determination shall be final, and shall be paid by the assessee

and in default, such payment shall be recoverable from the

assessee in the manner provided in Chapter XVII-D for the

recovery of the tax.

6. Admittedly, the special audit of respondent No.3 was

directed under Section 142(2A) of the Act. Logically, the

remuneration payable to the Special Auditor or at least the

parameters on which such remuneration is to be determined

need to be fixed before the audit is assigned to him. The

auditor, to whom the work is assigned, is not under any

obligation to accept the assignment and is very much at

liberty, while making offer for appointing him as Special

Auditor or while accepting the assignment, to insist upon

payment of such fee as he may deem adequate for the work

assigned to him. Therefore, necessarily he needs to know,

what will be paid to him for the work proposed to be assigned

to him. If the remuneration demanded by the person

proposed to be appointed as Special Auditor is not acceptable

to the Chief Commissioner or the Commissioner, as the case

may be, he may not assign the work to him. But it would be

difficult to accept that the special audit can be assigned to a

person without fixing either the remuneration or the norms on

which the remuneration is to be calculated after the work is

completed and conveying the same to him. Taking such a view

would amount to giving an arbitrary power to the Chief

Commissioner or the Commissioner, as the case may be, to fix

any fee which he may decide to fix irrespective of the quantum

of the work and the scale on which the remuneration is to be

determined taking the quantum of work into consideration.

This, to our mind is not the scheme of Section 142(2D) of the

Act.

7. It is not in dispute that while granting approval to the

Assessing Officer for conducting special audit for respondent

No.3 for the assessment year 2003-04, Mr.S.Pradhan

Commissioner of Income Tax, (Central)-1, New Delhi, had, in

the file of the department, directed that the charges of the

audit would be based on the guidelines of the ICAI with regard

to the audit. Admittedly, a similar direction was given by him

on 26.12.2009 while granting approval for special audit in

respect of the assessment year 2004-05.

8. It was not disputed before us by respondents No.1 &

2 that the petitioner had conveyed formal acceptance to its

appointment as Special Auditor for the Financial Year 2002-

2003 vide letter dated 20.03.2006 which was duly received in

the office of Assistant Commissioner of Income Tax, (Central)-1

on 21.03.2006. Similarly, formal acceptance for the

appointment as Special Auditor for the Financial Year 2003-04

was conveyed to the Commissioner vide letter dated

29.12.2006 which was received in the office of Deputy

Commissioner of Income Tax, Central Circle-6 on 03.01.2007.

Admittedly, the petitioner submitted its bill amounting to

Rs.49,44,419/- in respect of the special audit for the Financial

Year 2002-03. Admittedly, on being asked to justify the

amount claimed in the bill, the petitioner wrote a letter dated

03.04.2007 to Deputy Commissioner of Income Tax Central

Circle-6 stating therein that the scale of fee for the audit work

was discussed with him, CIT (Central)-I, Additional CIT and

Mr.R.S.Dubey where it was confirmed by the CIT that the fee

would be in accordance with the scale prescribed by the

Institute and the same was duly informed to Mr.R.S.Dubey in

that meeting. It was clarified that the fee had been charged

accordingly on the basis of that scale.

9. In case the remuneration of the petitioner had not

been fixed as per the scales of the Institute, respondents No.1

& 2 would have withdrawn the assignment from the petitioner

when it wrote the letters dated 20.03.2006 and 29.12.2006

stating therein that their fee for the assignment shall be in

accordance with the scale of fee prescribed by the Institute.

Alternatively, respondents No.1 & 2 would have written back to

the petitioner informing it that no decision had been taken in

respect of the remuneration payable to it and that it will have

to accept such remuneration as may be fixed by the Chief

Commissioner/Commissioner after the audit had been

completed. The failure of respondents No.1 & 2 to take either

of these courses of action clearly shows that the Commissioner

had actually taken a decision to pay the remuneration at the

scale prescribed by the Institute as he had noted in the file of

the department and that precisely was the reason that the

department did not raise any objection to the stipulation

contained in the acceptance letter sent by the petitioner to the

department. The case of respondent No.3 in this regard is that

the decision of the Commissioner, to fix remuneration of the

petitioner at the scale prescribed by the Institute, was not

conveyed to it. The scheme of the Act, in our view, does not

envisage any consent being obtained from the assessee in

respect of the remuneration payable to the Special Auditor nor

does it envisage any consultation with him before determining

the said remuneration. The decision of the Chief

Commissioner/Commissioner, with respect to the

remuneration payable to the Special Auditor is final and

binding upon the assessee.

10. The case of the petitioner in this regard is that in a

meeting, held in the chamber of respondent No.1, Mr. R.S.

Dubey, representative of respondent No.3 was informed not

only of the appointment of the petitioner as Special Auditor,

but also that the remuneration will be payable to it, at the

scale prescribed by the Institute. Respondent No.3 has not filed

the affidavit of Shri R.S. Dubey to controvert the averment

made by the petitioner in this regard. This averment has not

been made for the first time in the writ petition. As noted

earlier in its letter dated 03rd April, 2007, the petitioner

specifically averred that in the meeting held in the office of

respondent No.1, Mr R.S. Dubey was informed that the fee

would be paid to it in accordance with the scale prescribed by

the Institute. No other officer of respondent No.3 can be in a

position to deny this factual averment made by the petitioner.

Respondents 1 and 2 have also not filed an affidavit of any

officer present in that meeting to controvert this averment. In

its counter-affidavit, respondent No.3 has not disputed the

meeting, claimed by the petitioner. The plea taken by

respondent No.3 in this regard is that in the meeting, Mr R.S.

Dubey was only introduced to Mr. Dinesh Chander Gupta,

partner of the petitioner and that the issue of remuneration

was not discussed in that meeting. Considering that the

factum of such a meeting having taken place has been

admitted by respondent No.3, no affidavit of Mr. R.S. Dubey

has been filed in reply to the averments made by the petitioner

and this averment also finds mention in the letter written by

the petitioner to the Department on 03rd April, 2007, we are of

the view that Respondent No.3 was, in fact, informed through

Mr. R.S. Dubey that the remuneration payable to the petitioner

would be calculated in terms of the scale approved by the

Institute in this regard. That, to our minds, was the reason

why respondent No.3 paid the bill raised by the petitioner in

respect of Special Auditor for the financial year 2002-03,

without making any deduction and without lodging any

protest. Once respondent No.1 had decided to fix remuneration

of the petitioner at the scale approved by the institute or had

agreed to the demand of the petitioner for payment of

remuneration to be calculated on that scale, it was not open to

respondent No.1 to fix remuneration of the petitioner at an

amount lower than the minimum amount, calculated in terms

of the scale approved by the Institute for this purpose. During

the course of the arguments, we were informed that the scale,

approved by the Institute for such work w.e.f. 12th May, 2006,

envisages payment (i) to the Principal between Rs 2250/- to Rs

4500/- per hour, (ii) to Qualified Assistants between Rs 1125/-

to Rs 2250/- per hour and (iii) to Semi Qualified/other

Assistants Rs 375/- to 750/- per hour. While determining

remuneration of the petitioner, respondent No.1 could have

adopted any rate per hour between the lower slab and the

higher slab, but he could not have fixed any remuneration

lower than that calculated on the basis of the lower slab.

11. The main contention of the respondents is that in the

meeting held on 10th April, 2007, the petitioner had agreed to

accept the fee at Rs 20 lakhs per year. A perusal of the minutes

of that meeting would show that it was a joint meeting to

consider remuneration of the Special Auditors for three

assessees, namely, Sahara India (Firm), Sahara Airlines

Limited and respondent No.3 Sahara India Financial

Corporation Limited and the Special Auditors, appointed for all

the three companies, were present in the meeting. As per the

minutes of the meeting, after taking into consideration various

factors, including the guidelines, issued by the Institute

relating to fee structure, payment made by the assessee for the

regular audit under Section 44(AB) or statutory orders, nature

of the work and fee paid in the past, the fee of Rs 20 lakhs for

each year was mutually agreed upon and Mr. R.S. Dubey gave

his consent for that fee. What these minutes imply is that the

amount of Rs 20 lakhs for each year was mutually agreed

between the petitioner and the assessee. The case of the

petitioner is that no such consent was actually given by its

representative Mr. Dinesh Chand Gupta who attended the

meeting on its behalf and that Mr. Gupta, who is a Chartered

Accountant, had to sign the minutes at the request of those

who attended the meeting. As noted earlier, the petitioner

wrote a letter dated 11th April, 2007 to respondent No.1,

informing him that the fee, based on minimum scale approved

by the institute, would be around Rs 35 lakhs and there was

no question of accepting the fee below Rs 30 lakhs. It was

further stated in the letter that the average of audit fee paid by

the assessee-company to its Statutory Auditors during the

financial years 2002-03 and 2003-04 was Rs 30,59,125/- and

they were agreeable that for the special audit done by them,

the fee should not be less than Rs 30 lakhs for each of the two

years. The respondents 1 and 2 have not filed affidavits of any

of the officers, who were present in the meeting held on 10th

April, 2007. Respondent No.3 has also not filed the affidavit of

Mr R.S. Dubey, who attended the meeting on its behalf. Hence,

the averment of the petitioner in this regard, which is

supported by an affidavit of Mr Dinesh Chander Gupta, who

was present in the meeting on behalf of the petitioner firm,

remains unrebutted. Moreover, despite the petitioner's letter

dated 11th April, 2007, which was received in the office of the

Deputy Commissioner of Income Tax, Central Circle-6, New

Delhi on 20th April, 2007 on account of Commissioner of

Income Tax, Central-I having left for Orissa in the meanwhile,

no communication was sent to the petitioner, by respondents 1

and 2, disputing the averment made in the letter dated 11th

April, 2007. Admittedly, the audit work for the financial year

2003-04 was completed by the petitioner, after it had delivered

the letter dated 11th April, 2007 in the office of Deputy

Commissioner, Central Circle -6, New Delhi. No attempt was

made by respondents 1 and 2 to withdraw the work for the

financial year 2003-04 from the petitioner, despite its taking a

categorical stand that its representative had not given consent

to accept remuneration at Rs 20 lakhs per year and that the

minimum fee, acceptable to it, would be Rs 30 lakhs per year.

We, therefore, see no reason to reject the plea taken by the

petitioner in this regard.

12. The impugned orders dated 26.07.2007 for the

financial year 2002-03 and dated 18.09.2007 for the financial

year 2003-04 were passed by respondent No.1 much after the

letter dated 11th April, 2007 had been received by the

Department from the petitioner. Presuming that the petitioner

had consented to respondent No.3, to accept remuneration at

Rs 20 lakhs each year, that consent was withdrawn by it much

before the orders in question were passed by respondent No.1.

Once the letter dated 11th April, 2007, denying the alleged

mutual consent, was received by the Department, it was not

permissible for respondent No.1 to act upon that

consent/mutual agreement for the purpose of determining the

remuneration in exercise of his power under Section 142(2D) of

the Act. He, in that case, was required to determine the

remuneration of the petitioner in terms of the scale approved

by the institute for such work, in view of the decision already

taken by him, while approving special audit of respondent No.3

and appointing the petitioner to undertake the special audit.

He could, at best, have fixed the charges at Rs 30 lakhs per

year in case the charges, if calculated on the basis of the scale

approved by the institute, came to more than Rs 30 lakhs per

year.

13. A perusal of the impugned orders dated 26.07.2007

and 18.09.2007 would show that it does not disclose any basis

for fixing the remuneration of the petitioner at Rs 20 lakhs per

year, except noting that in the meeting held on 10th April,

2007, the fee was mutually agreed at Rs 20 lakhs per year.

Strangely, there is no reference to the letter of the petitioner

dated 11th April, 2007 in these orders. We fail to appreciate

how respondent No.1 could have relied upon the minutes of

the meeting dated 10th April, 2007, without even adverting to

the averment made in that letter. Since the impugned orders

26.07.2007 and 18.09.2007 do not give any indication of the

norm or scale, adopted by respondent No.1 in determining the

remuneration payable to the petitioner, there is no escape from

the conclusion that neither did he apply his mind at all to the

scale approved by the Institute for such audit nor did he adopt

any other formula or criteria for fixing the remuneration. The

Commissioner of Income Tax simply adopted the sum alleged

to have been mutually agreed in the meeting held on 10th

April, 2007 which indicates lack of application of mind on his

part in determining the remuneration payable to the petitioner.

The Commissioner of Income Tax did not give any reason for

deviating from the norm fixed by him while granting approval

for special audit and appointing the petitioner as the Special

Auditor to undertake special audit for the financial year 2002-

03 and 2003-04. The order passed by him does not indicate

how many persons were deputed by the petitioner to carry out

the audit, whether they were Principals, Qualified Assistants or

Semi Qualified/other Assistants, how many hours of work were

put in by the persons engaged in the special audit and what

were the scales fixed by the Institute for such work.

14. The Commissioner of Income Tax, while determining

remuneration under Section 142(2D) of the Act could not have

abdicated his duty to determine the remuneration payable to

the Special Auditors, simply by accepting an amount mutually

agreed between the Auditor and assessee. Under the Scheme

of the Act, the assessee has no role to play in determination of

the remuneration by the Commissioner of Income Tax and it

has to pay, to the Special Auditor, whatever amount is

determined by the Commissioner. Hence, the mutual

agreement between the Auditor and the assessee in no case

could have been the sole basis of the order passed by him. Of

course, there could be no objection to the Commissioner

accepting any amount agreed to by the Special Auditor, in case

the amount otherwise determined by him was found to be

higher than the amount agreed to by the Auditor. But, before

doing that he must apply his mind to all the factors and

determine the amount which in his opinion should be paid to

the Auditor.

15. For the reasons given in the preceding paragraphs,

the impugned orders 26.07.2007 and 18.09.2007 passed by

respondent No.1 are hereby quashed. Respondent No.1 is

directed to re-determine the remuneration of the petitioner on

the basis of the scale approved by the Institute for the nature

of the work carried out by the petitioner. If, however, the

remuneration, payable to the petitioner in terms of the scale

approved by the Institute, is found to be more than Rs 30

lakhs either for the year 2002-03 or for the year 2003-04 or for

both, the remuneration will be restricted to Rs 30 lakhs for the

year(s) for which it is found to be more than Rs 30 lakhs. The

remuneration will be re-determined within six weeks from the

date of receipt of this order by respondent No.1. The writ

petition stands disposed of accordingly. The parties shall bear

their own costs.

(V.K. JAIN) JUDGE

(BADAR DURREZ AHMED) JUDGE MAY 25, 2010 bg/rs/sn