$~17
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgement delivered on: 28th February, 2017
+ W.P.(C) No.12305/2015
RAKESH RAJ AND ASSOCIATES ..... Petitioner
Through: Dr. Rakesh Gupta, Mr. Somit Agarwal
and Ms. Monika Ghai, Advocates.
Versus
COMMISSIONER OF INCOME TAX,
CENTRAL-II, & ANR. ..... Respondents
Through: Mr.Ashok K. Manchanda and
Mr. Raghvendra K. Singh, Advocates.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE NAJMI WAZIRI
NAJMI WAZIRI, J. (Oral):-
1. This petition under Article 226 of the Constitution of India seeks
quashing/modification of an order dated 07.11.2014 passed by the
respondent No.1/Commissioner of Income Tax, Central-II under Section
142(2D) of the Income Tax Act, 1961 (hereinafter to be referred as `the
Act') read with Rule 14B of the eponymous Rules of 1962.
2. The petitioner was engaged by the respondents to conduct a special
audit for seven years i.e. Assessment Years (AY) 2005-06 to 2011-12 of the
auditee company/ M/s Micromax Informatics Limited. Its report was
submitted in three volumes and an addition of over `720 crores was made to
the returns of the auditee/ assessee. It is not in dispute that the report was
termed as `very good' by the Assessing Officer (AO).
W.P.(C) No. 12305/2015 Page 1 of 6
3. For their professional services, the petitioner submitted a bill to the
respondents detailing 1078 hours as having been spent by its team at the
client's place i.e. the auditee/ M/s Micromax Informatics Limited.
Additionally, 237 hours were billed for time spent by the audit team at the
petitioner's office. The attendance sheets of the audit team specifying the
number of hours spent, duly counter-signed by the Chief Finance Officer of
the auditee were submitted in terms of the Notification No.20/2008 dated
05.02.2008, which prescribes the guidelines for the purposes of determining
expenses for audit under Rule 14B of the Income Tax Rules, 1962. A total
bill for `1,10,81,505/- inclusive of service tax of `12,19,005/- was raised.
This amount was not paid since the AO was of the view that the total of
1315 man hours multiplied by the maximum prescribed average rate of
`7,500/- per hour was not justified. He reasoned that all the members of the
team not being qualified personnel, some being semi qualified personnel, the
billing could not have been at the maximum prescribed rate. Furthermore,
he was of the view that time must have been spent on lunch, refreshments
etc, which should have been proportionately discounted from the bill.
Accordingly, 85% of the billed hours were considered by him as reasonable.
Resultantly, 709 hours were allowed and computed at an average rate of
`4,000/- per hour. An order for payment of `28,36,000/- plus service tax as
applicable was passed in favour of the petitioner by the Commissioner of
Income Tax. The petitioners have disputed the computation and
consequential order. However, pending the adjudication of their dispute,
they had agreed to accept the aforesaid amount without prejudice to their
rights and contentions.
W.P.(C) No. 12305/2015 Page 2 of 6
4. The petitioners contend that insofar as 1078 man hours were certified
by the clients/auditee, there was no plausible reason for respondent No.1 to
restrict it to only 709 hours. Furthermore, 237 hours were spent at the office
of the petitioner in analysing, compiling and preparing the three voluminous
report (compiled in three volumes). The petitioner contends that spending 9
to 10 hours on an average basis is not extraordinary and clubbing all the
billed hours to be payable at an average rate of `4,000/- is unreasonable and
unjustified. The petitioner relies upon an order dated 27.07.2016 passed in
its favour apropos its special audit of M/s.Naftogaz India Pvt. Ltd. under
Section 142(2D) of the Act., wherein remuneration was claimed for 268
hours at `6,000/- per hour but 205.65 hours were accepted by the Revenue at
an average rate of `5,000/- per hour.
5. The relevant portion of the impugned order dated 07.11.2014 read as
follows:-
"4. Special Audit has been conducted under the
guidance of Sh. Dinesh Aggarwal & Sh. Neeraj Arora
partners in the firm and experience of 27 years & 5 years
respectively and assisted by Sh. Kuldeep Singh, CA, Sh.
Abhishek Singhla, CA with a combined experience of 3
years only. However, the claim of rate of Rs.7500/- in
respect of the assistants and semi qualified assistants
appears to be on much higher side. The biodata of the
audit team was furnished vide their letter dated
06.01.2014.
5.1 With regard to the rates, the A.O. has submitted
that "the quality of the audit report in my opinion is "very
good. As per provisions of section 142(2D) read with
Rule 14B, the remuneration payable to the Auditor shall
be Rs.3750/- per hour to Rs. 7500/- per hour. However,
considering the quality of report, which is adjudged as
W.P.(C) No. 12305/2015 Page 3 of 6
'very good', I am of the considered view that the man
hour rate can be estimated at Rs.4,000/- per hour."
5.2 About the number of man hours involved in audit
work, the A.O. has submitted that 'from the perusal of
bills submitted by the auditor, it has been noticed that
auditors have spent 1070 hours in tax payer's premises
and 237 hours in their own office. They have not taken
into account the time spent on lunches, refreshments etc.,
which should have been discounted from bill. The bills
submitted are on estimated basis only. It is also a fact
that special auditing is a team work lead by one of the
main partner. Accordingly, I am of the considered view
that the man hours for which team was wholly and
exclusively working for audit work can reasonably be
estimated at 85% of the time spent by the main partner
and all other persons are assisting him in completing the
audit work. So the estimated time is computed at 709
hours (i.e. 85% of 834 hours.)"
6. The Assessing Officer has also not submitted any
basis of estimation of man hours apart from the bills
submitted by the Special Auditor which was verified by
the assessee company. Separate register regarding the
deployment of man power is also not maintained which
shows that only one team was doing the special audit and
the time keeping cannot be precisely ascertained. The
audit also involved common areas of work in respect of
various assessment years. The excel sheet shows that
1078 hours were spent in the assessee's company office
and 237 hours at the special auditor's office. The average
group hours shown per day are 9 to 10 hours which also
appears to be on higher side. Hence, in my considered
view the man hours are on a much higher side.
Accordingly, I am in agreement with A.O. about working
of estimation of time for completing the audit work at 709
hours (i.e. 85% of 834 hours)."
6. Having considered the submissions made by the learned counsel for
W.P.(C) No. 12305/2015 Page 4 of 6
the parties, the Court is of the view that spending 9 to 10 hours a day for a
special audit would include the time spent on basic necessities, food and
refreshments etc. Unlike employees, professionals do spend 9 to 10 hours a
day on their work, even at odd hours, and attend to their basic necessities in
the remaining hours of the day. Exclusion of such necessary recess for
consumption of food and refreshment, etc. for a person to render quality
work is illogical. In any case, the billing is not for 24 hours a day but for a
part thereof. Therefore, to assume that the time billed was not exclusively
for the professional work is without basis and untenable. Chartered
Accountants are not automatons who, without having access to food or
being able to attend to all other necessities, would churn out good quality
reports after analysing voluminous records. It is noteworthy that the quality
of the report has been assessed as `very good' by the AO. An addition of
over `720 crores has been made to the income tax of the auditee. The work
was rendered by the petitioner's four partners, Chartered Accountants
and other personnel i.e. by qualified assistants and semi-qualified assistants,
however, the impugned order questions the billing only on the basis of their
experience and number of years in the profession and not on the quality of
the work. This reasoning is questionable. Notably, the work experience of
the partners ranges from 3 to 27 years while the range permissible billing
rate is between `3,500/- to `7,500/- and the rate of sitting could have been
correspondingly adjusted as per their regular sitting hours or accepted
degree of competence; instead it has arbitrarily been reduced to an average
rate of `4,000/- per hour. The disallowance of certain hours based on the
assumption that the auditors would have spent some time on lunches,
refreshments etc. is erroneous. If such disallowance is permitted then the
W.P.(C) No. 12305/2015 Page 5 of 6
corollary argument would be that some members of the audit team or the
entire team was not adequately focussed on the special audit. This kind of
reasoning assumes thought-control or thought-intensity monitoring. Such
nature of control is neither envisaged under the Rules nor is it reasonable.
What the Revenue is to assess in such circumstances is whether the
special audit report was (i) within time, (ii) of the desired quality (iii) the
billing is commensurate to the nature of inquiry and the quantum of the
records to be looked into; etc. If the audit report is of good quality and inter
alia, authored by a qualified professional having a fair number of years of
experience then he/she may well be entitled to ask for the highest prescribed
billing rate. The Revenue should have kept in mind the rate of ` 5000/- per
hour accepted for the petitioner in the special audit for M/s.Naftogaz India
Pvt. Ltd. (supra).
7. In the circumstances, the Court is of the view that the bill submitted
by the petitioner needs a fresh look. Accordingly, the impugned order
dated 07.11.2014 is hereby set aside. The Commissioner of Income Tax
(Central-II), Delhi is hereby directed to re-determine the fee payable to the
petitioner in light of the above observations and directions.
8. The writ petition is disposed off in the above terms.
NAJMI WAZIRI, J.
S. RAVINDRA BHAT, J.
FEBRUARY 28, 2017/sb
W.P.(C) No. 12305/2015 Page 6 of 6
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