Facts of the Case

The petitioner, Dhanesh Gupta & Co., a firm of Chartered Accountants, was appointed as a Special Auditor under Section 142(2A) of the Income Tax Act for conducting special audits of Sahara India Financial Corporation Limited for the Financial Years 2002-03 and 2003-04.

According to the petitioner, before accepting the assignment, discussions took place with the Commissioner of Income Tax, wherein it was indicated that the remuneration for the special audit would be calculated according to the fee structure prescribed by the Institute of Chartered Accountants of India (ICAI). The petitioner accepted the assignment on that basis.

After completion of the audit for Financial Year 2002-03, the petitioner raised a bill of approximately Rs.49.94 lakhs calculated according to the ICAI guidelines. The amount was initially paid by the assessee company.

Subsequently, the Income Tax Department questioned the fee claimed by the petitioner. During a meeting held on 10 April 2007, the Department recorded that all concerned parties had mutually agreed to remuneration of Rs.20 lakhs per year. The petitioner disputed this recording and immediately communicated that it had never consented to such reduced remuneration.

Despite the objection, the Commissioner passed orders dated 26.07.2007 and 18.09.2007 fixing the remuneration at Rs.20 lakhs for each financial year. Aggrieved by these orders, the petitioner approached the Delhi High Court seeking quashing of the orders and redetermination of remuneration.

Issues Involved

  1. Whether the Commissioner of Income Tax could determine the remuneration of a Special Auditor at Rs.20 lakhs solely on the basis of an alleged mutual agreement recorded during a meeting.
  2. Whether remuneration under Section 142(2D) must be determined according to the criteria and scale approved at the time of appointment of the Special Auditor.
  3. Whether the Commissioner could deviate from the ICAI fee structure after the audit assignment had already been accepted and completed.
  4. Whether the impugned orders suffered from non-application of mind and arbitrariness.

Petitioner’s Arguments

The petitioner contended that:

  • The special audit assignment was accepted only on the understanding that remuneration would be determined according to the ICAI-approved fee structure.
  • The Commissioner had already indicated that ICAI guidelines would govern the remuneration.
  • The petitioner had expressly communicated in its acceptance letters that its fees would be charged according to ICAI scales.
  • The Department never objected to this condition at the time of appointment.
  • The alleged consent recorded in the meeting dated 10 April 2007 was incorrect and was immediately disputed through a written communication dated 11 April 2007.
  • The Commissioner failed to consider the petitioner’s objections before passing the impugned orders.
  • The orders fixing remuneration at Rs.20 lakhs were arbitrary, unsupported by reasons, and contrary to Section 142(2D).
  • Once the audit work was assigned on the basis of ICAI norms, the remuneration could not be reduced below the minimum amount calculable under those norms.

Respondents’ Arguments

Income Tax Department

The Department argued that:

  • The petitioner had consented during the meeting dated 10 April 2007 to accept remuneration of Rs.20 lakhs per year.
  • Having consented to the amount, the petitioner was estopped from challenging the determination subsequently.
  • The Commissioner had considered the relevant factors, including ICAI guidelines, while determining the remuneration.

Assessee Company (Sahara India Financial Corporation Ltd.)

The assessee contended that:

  • No final determination of remuneration had been made at the time of appointment.
  • The petitioner had voluntarily agreed to accept remuneration of Rs.20 lakhs per year.
  • Any excess payment made to the petitioner was liable to be refunded.
  • The meeting relied upon by the petitioner did not involve any final determination of remuneration according to ICAI scales.

Court Findings and Observations

The Delhi High Court made several significant observations:

1. Remuneration Must Be Known Before Acceptance of Assignment

The Court held that a Special Auditor cannot reasonably be expected to undertake an audit assignment without knowing the remuneration or the basis on which remuneration will be calculated.

The scheme of Section 142(2D) necessarily requires that either the remuneration or the parameters for determining remuneration be fixed before the assignment is accepted.

2. ICAI Scale Had Already Been Accepted by the Department

The Court noted that while granting approval for the special audit, the Commissioner had recorded in departmental files that the audit charges would be based on ICAI guidelines.

The petitioner had also expressly accepted the assignment subject to ICAI fee scales and the Department never objected to that condition.

3. Assessee Has No Role in Determination of Remuneration

The Court clarified that under Section 142(2D), the determination of remuneration is exclusively within the authority of the Chief Commissioner or Commissioner.

The assessee’s consent is not a statutory requirement and cannot govern the determination process.

4. Alleged Mutual Agreement Could Not Be Sole Basis

The Court found that the impugned orders were based almost entirely on the alleged agreement reached during the meeting dated 10 April 2007.

The Commissioner failed to independently determine remuneration by applying the statutory criteria.

5. Non-Application of Mind by the Commissioner

The Court observed that the Commissioner:

  • Did not analyze the ICAI fee structure.
  • Did not examine the number of professionals engaged.
  • Did not evaluate the hours spent on the audit.
  • Did not consider the categories of personnel involved in the work.

The orders contained no reasoning explaining how Rs.20 lakhs had been determined.

6. Withdrawal of Alleged Consent

Even assuming consent had initially been given, the petitioner had withdrawn such consent through its letter dated 11 April 2007 before the impugned orders were passed.

Therefore, reliance upon the alleged agreement was legally unsustainable.

Important Clarifications by the Court

  • Section 142(2D) requires an independent determination of remuneration by the Commissioner.
  • The Commissioner cannot abdicate this statutory responsibility by merely accepting an amount allegedly agreed between the auditor and the assessee.
  • Any departure from the basis initially accepted for remuneration must be supported by valid reasons.
  • The determination must be based upon objective criteria and application of mind.
  • The assessee cannot dictate or control the remuneration payable to a Special Auditor appointed under Section 142(2A).

Court Order

The Delhi High Court:

  1. Quashed the orders dated 26.07.2007 and 18.09.2007 fixing remuneration at Rs.20 lakhs per year.
  2. Directed the Commissioner of Income Tax to re-determine the remuneration of the petitioner in accordance with the ICAI-approved fee structure applicable to the nature of work performed.
  3. Directed that if the remuneration calculated according to ICAI scales exceeded Rs.30 lakhs per year, the remuneration would stand restricted to Rs.30 lakhs per year.
  4. Directed the Commissioner to complete the exercise of redetermination within six weeks.
  5. Ordered the parties to bear their own costs.

Relevant Sections Involved

  • Section 142(2A), Income Tax Act, 1961 – Special Audit
  • Section 142(2D), Income Tax Act, 1961 – Determination and payment of remuneration of Special Auditor
  • Section 44AB, Income Tax Act, 1961 – Tax Audit (referred for comparison of audit fees)

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2010:DHC:2901-DB/VKJ25052010CW25602008.pdf

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