Facts of the Case

A search action under Section 132 of the Income Tax Act, 1961 was conducted on 23.12.2014 in the case of M/s Kaygee Investments Private Limited. During the search, it was noticed that the company had received share capital with premium from two Kolkata-based companies, namely M/s Apsara Trex Private Limited and M/s Shreya Tieup Private Limited. The Income Tax Department alleged that these investor companies lacked financial credentials to justify such high premiums.

During the search proceedings, a statement of the respondent, CA Atul Jain, was recorded on oath under Section 132(4) of the Income Tax Act. Based on certain answers given in response to Question No. 43, the Department treated the matter as “Information” under Rule 7 of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007, alleging that the respondent facilitated routing of unaccounted money through share premium transactions.

Issues Involved

Whether the respondent Chartered Accountant was guilty of “Other Misconduct” under Item (2) of Part IV of the First Schedule to the Chartered Accountants Act, 1949 for allegedly facilitating receipt of share capital with premium through companies purportedly lacking financial credentials.

Petitioner’s Arguments

The Income Tax Department relied upon the respondent’s statement recorded under Section 132(4), particularly Question No. 43, to contend that the respondent facilitated transactions involving compensation outside the books in connection with the acquisition of shares and subsequent investment by the investor companies. It was alleged that the respondent, being a director of one of the investor companies during the relevant period, remained a mute spectator to illegal transactions and thereby facilitated routing of unaccounted funds.

Respondent’s Arguments

The respondent submitted that the allegation was misconceived and unsupported by findings of the Income Tax authorities. It was contended that both investor companies had sufficient net worth much prior to the investment and that the investments were based on proper valuation reports prepared by Chartered Accountants. The respondent relied upon orders of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, which categorically deleted additions under Section 68 and held the share capital transactions to be genuine.

The respondent further submitted that he was neither a shareholder nor beneficiary of the investee company, that his role was limited, and that the statement relied upon was selective, incomplete and recorded under undue pressure. It was also argued that Question No. 43 pertained to a personal transaction between shareholders and not to the investment made by the companies, and therefore could not be treated as evidence of professional misconduct.

Court Order / Findings

The Board of Discipline examined the statement recorded under Section 132(4), the submissions of the respondent, and the findings of the Income Tax appellate authorities. The Board noted that although the respondent was a director of one investor company during the relevant period, there was no specific finding or evidence establishing that he was complicit in any illegal routing of funds.

The Board placed significant reliance on the appellate orders of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, which deleted the additions made under Section 68 and held that the investments were sourced from share capital and reserves of the investor companies and were genuine. The Board also observed that no addition was ever made in the hands of the respondent in any assessment year.

The Board further noted that the statement relied upon was self-contradictory, selective and uncorroborated, and that the Income Tax Department itself had not initiated any action against the respondent nor lodged any complaint with ICAI earlier.

Important Clarification

The Board clarified that mere reference to a Chartered Accountant in a statement recorded during income tax search proceedings, without corroborative findings or adverse orders against him, does not constitute Other Misconduct. Professional misconduct must be established through cogent evidence and cannot rest solely on isolated or ambiguous statements.

Final Outcome

The Board of Discipline, ICAI, held that CA Atul Jain was NOT GUILTY of Other Misconduct under Item (2) of Part IV of the First Schedule to the Chartered Accountants Act, 1949. The proceedings were ordered to be closed under Rule 15(2) of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007, by order dated 27.08.2024.

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