Accounting watchdog Institute of Chartered Accountants of India (ICAI), which regulates auditors, is currently facing the prospect of meeting an income tax penalty of Rs 16 crore, after the Income-Tax department withdrew tax exemptions on the institute.

It is also understood that the I-T department has written to the institutes banks to freeze the accounting regulators accounts till the institute pays the penalty, according to persons familiar with the development.

ICAIs newly-elected president, Amarjit Chopra, confirmed the tax, but played down the issue saying that the institute is contesting the I-T departments assessment. The move comes at a time when the government is exploring the feasibility of having an independent regulator for auditors, a proposal that has been opposed by ICAI as it could significantly prune the current role of the institute.

Under section 10 (23C) of the Income Tax Act of 1961, the ICAI, which was formed by an Act of Parliament, is exempted from paying income tax as it had been established for the purpose of education and for advancement of projects of general public utility.

The I-T departments contention is that the fee earned from training can be construed as business income. A tax assessment panel is also understood to have said that the ICAI allegedly failed to get accounts signed by auditors and of allegedly providing loans to partners without guarantee and interest, said people connected with the development.

ICAIs Mr Chopra said since the matter is sub-judice, he cant comment on the topic. RK Sinha, director exemptions at the I-T department, also declined to comment on the issue.

The I-T departments demand has come at a time when ICAI is struggling in the aftermath of the fraud at Satyam Computer, where apart from Satyams chairman and top management, two auditors from Price Waterhouse have been arrested for their alleged involvement.

The Satyam fraud raised concerns in government circles and among companies on whether ICAI has been lax in enforcing controls. The need for an independent regulator for auditors has been doing the rounds in the government, especially in the ministry of corporate affairs.