By TIOL News Service

KOLKATA, JAN 16, 2013: THIS writ application has been filed inter alia challenging a Notice No. RA/ST/Prog/D/18/131 dated 3rd November, 2011 issued by the Office of the Principal Director of Audit, Central Kolkata for audit, by the Central Excise Revenue Audit (CERA) team, an audit team under the Comptroller and Auditor General of India, of the service tax records, accounts and other related documents of the petitioner company. The audit was proposed to be held between 12th December, 2011 and 16th December, 2011 and the petitioner company was required to provide suitable accommodation for the audit team.

The short question involved in this writ application is whether CERA, an audit wing of the Principal Director of Audit (Central), Kolkata under the Comptroller and Auditor General of India, has power and/or authority and/or jurisdiction to audit the accounts, service tax records or other documents of the petitioner company, which is not an undertaking of the Central Government or any State Government.

Scope and extend of various Audits:

The High Court noted that:

Under the Companies Act and/or rules or regulations framed thereunder, the accounts maintained are required to be audited by a Chartered Account and presented in the manner prescribed in the Companies Act.

In addition, the petitioner company is also required to have its accounts audited in terms of Section 44A B of the Income Tax Act.

Under Section 233A of the Companies Act, 1956, where the Central Government is of the opinion that the affairs of the company are not being managed in accordance with sound business principles or prudent commercial practices, the Central Government might direct that a special audit of the company's accounts shall be conducted and may appoint either a Chartered Accountant or the company s auditor himself to conduct such special audit.

Section 233B of the Companies Act provides that where in the opinion of the Central Government it is necessary so to do in relation to any company required under Section 209 to include in its books of account the particulars referred to therein, the Central Government might by order direct that an audit of cost accounts of the company shall be conducted in such manner as may be specified in the order by an auditor who shall be a Cost Accountant.

The Income Tax Act 1961 and the Central Excise Act 1944 also contain provisions for special audit. Section 142(2A) of the Income Tax Act provides as follows :

"If, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below sub-section (2) OF Section 288, nominated by the Chief Commissioner or Commissioner in this behalf. "

Similarly, Section 14A of the Central Excise Act, 1944 provides as follows :

"(1) If at any stage of enquiry, investigation or any other proceedings before him, any Central Excise Officer not below the rank of an Assistant Commissioner or Deputy Commissioner of Central Excise, having regard to the nature and complexity of the case and the interest of revenue, is of the opinion that the value has not been correctly declared or determined by a manufacturer or any person, he may, with the previous approval of the Chief Commissioner of Central Excise, direct such manufacturer or such person to get the accounts of his factory, office, depots, distributors or any other place, as may be specified by the said Central Excise Officer, audited by a cost accountant or chartered accountant, nominated by the Chief Commissioner of Central Excise in this behalf. "

Section 72A of the Finance Act 1994, also provides for getting the accounts of a service tax assesse audited by a chartered accountant or cost accountant nominated by the Commissioner.

Principles of Natural Justice before Audit? The High Court observed that it is now well settled by judicial pronouncements that an order for special audit is required to be made upon compliance with principles of natural justice. Reference may in this context be made to the judgment of the Supreme Court in Sahara India (Firm), Lucknow Vs. Commissioner of Income Tax, Central-I and Another reported in 2008-TIOL-73-S.C-IT-LB. The Supreme Court held that the expression 'civil consequences' encompasses infraction of not merely property or personal rights but of civil liberties, material deprivations and non-pecuniary damages. Anything which affects a citizen in his civil life comes under its wide umbrella.

Of course, in these proceedings, the petitioner has not questioned special audit under the Finance Act, 1944 or under the Central Excise Act, 1944.

The impugned notice in the instant case has been issued by the Office of the Principal Director of Audit (Central) Kolkata for audit by CERA of the service tax records, accounts and other related documents of the petitioner company.

No provision for Audit by CAG : The High Court observed, "None of the statutes referred to above, namely, the Companies Act, 1956, the Income Tax Act, 1961, the Central Excise Act, 1944 or the Finance Act, 1994 as amended from time to time contain any provision for audit by the Comptroller and Auditor General of India or any audit team subordinate to the Comptroller and Auditor General of India, of any company incorporated or existing under the Companies Act 1956, except a government company within the meaning of Section 619 of the said Act" .

Mr. J. K. Mittal appearing for the petitioner submitted, and in the Court's view, rightly that there is no provision in the CAG Act which enables the Comptroller and Auditor General of India to audit the accounts of a non government company which is not operated out of the funds of the Union of India or any State Government or any Union Territory or any entity owned and/or financed by them.

The Court accepted the submission of Mr. Mittal that Section 16 of the CAG Act does not authorize the Comptroller and Auditor General of India or any audit team under the control of the Comptroller and Auditor General of India to audit the accounts of a non-government company and that too in the absence of any request either from the President of India or the Governor of the State.

The only provision of the CAG Act, under which the accounts of a non government company can be audited, is perhaps Sub-section 1 of Section 20. Audit cannot be undertaken under the aforesaid provision, unless the Comptroller and Auditor General is requested to do so by the President of India or the Governor of a State or the Administrator of Union Territory.

Mr. Hazra appearing on behalf of the respondent authorities submitted that rule 5A of the Service Tax Rules, 1994, which is almost in pari materia with Rule 173G(6)(c) of the Central Excise Rules, 1994 provides for audit by an audit team deputed by the Comptroller and Auditor General of India.

The Court held,

"The Central Government has no power and/or authority under Section 94 of the Finance Act, 1994 to frame rules for any purpose other than those specified in Sub-section (2) of Section 94 of the Finance Act or for any purpose other than carrying out the provisions of Chapter V of the said Act."

In this writ petition the petitioner has also challenged the vires of Rule 5A of the Service Tax Rules contending inter alia, that the said rule is in excess of the rule making power conferred under the Finance Act, 1994.

The Court held,

"There is no provision in Chapter V of the Finance Act, 1994 or for that matter in the CAG Act which empowers the CAG to audit the accounts of an assessee which is a nongovernment company, not in receipt of aid or assistance from any government or government entity. Sub-section (2) of Section 94 also does not empower the Central Government to frame rules for audit of the accounts of an assessee by any audit team under the Comptroller and Auditor General of India. There can be no doubt that statutory rules, framed in exercise of power conferred by statute cannot introduce something not contemplated in the statute, from which it derives its rule making power.

In the absence of any provision in Chapter V of the Finance Act, 1994 for audit of the accounts of a non government company by the Comptroller and Auditor General of India or any team under him, the Central Government could not have framed, and has not framed any rules which provide for audit by the Comptroller and Auditor General of India or any audit team under his control of an assessee which is not a government company.

It is well settled principle of interpretation that statutory rules must be construed in harmony with the rule making power, in exercise of which, the statutory rule has been made. If it were possible to interpret the statutory rule in more ways than one, the Courts would prefer that interpretation which would make the statutory rule workable and intra vires, to that interpretation which would render the rule untra vires and invalid.

On a plain reading of Rule 5A(2) of the Service Tax Rules, the said Rule does not empower the CAG to audit the accounts of any assessee. While Sub-rule (1) of Rule 5A provides for access of any officer authorized by the Commissioner to any premises registered under the service tax Rules, for carrying out any scrutiny, verification or check, as may be necessary to safeguard the interest of revenue, Sub-rule (2) of Rule 5A only casts an obligation on the assessee to make the records and documents as specified in the said Rule available to the officer authorized by the Commissioner, or the audit party deputed by the Commissioner or the Comptroller and Auditor General of India within a reasonable time not exceeding 15 working days from the date of demand."

Mr. Hazra referred to an unreported judgment and order passed by a Single Bench of this Court, (P.K. Ray, J.) in W.P. 2762 of 2000 (M/s. Berger Paints India Limited and Others Vs. Joint Commissioner (Audit) Central Excise, Calcutta-II Commissionerate, Calcutta & Ors., where the vires of Rule 173-G(6) (c) of the Central Excise Rules, 1944, which is similar to Rule 5A of the Service Tax Rule was under challenge. However, it appears that the challenge to the vires of the rule was not pressed at the time of hearing.

The Court observed,

"From the judgment in Berger Plaints (supra) it appears that the main thrust of the argument was that a Special Audit having been conducted under the Central Excise Act, further audit could not be conducted by the Office of the Comptroller and Auditor General. It was emphatically argued that the use of the word -or- should be construed disjunctively. The power of the Comptroller and Auditor General to conduct an audit of a non-government Company, in the absence of request from the President of India or the Governor of a State, was not questioned and hence not in issue. In the context of the arguments made by Counsel, the Court held that the expression -or- was to be construed conjunctively and not disjunctively as sought to be argued."

The Court held,

"The obligation to provide records to the audit party deputed by the Comptroller and Auditor General is to be construed as an obligation to provide documents and records, when those documents and records are necessary for audit is in accordance with law, subject to the provision of the CAG Act, for example, audit of the receipts of the Government meant for deposit in the Consolidated Fund of India or, may be, an audit on the request of the Governor or the President as indicated above.

The obligation under sub-rule 2 of Rule 5A is, to be construed harmoniously to cast an obligation in case of a lawful demand to produce requisite records and documents. The obligation to make records and documents available does not oblige an assessee to agree to unauthorized audit of its accounts by an audit team from the office of the Comptroller and Auditor General of India."

In the opinion of the Single Judge in this case, the impugned notice cannot be sustained and the same is liable to be set aside. However, in view of the judgment rendered by P. K. Ray, J in Berger Paints India Ltd. in the context of Rule 173-G(6)(c) which is in para materia with Rule 5A of the Service Tax Rules, the Court is of the view that judicial propriety demands that this writ application be referred to a Division Bench for adjudication.

(See 2013-TIOL-38-HC-KOL-ST)