A contract stipulating a percentage as fees is not prohibited by law
The strict letter of the income-tax law can visit you with hefty compensatory interest and penalty if there is delay in compliance, non-payment of tax or failure to account for the entire income. There are cases where the interest levied has been much more than the tax demand, and there is nothing much that can be done about it.
Circulars of the Central Board of Direct Taxes (CBDT) seek to reduce the rigours of the law. Most writ petitions concern interest charges. The penalty for concealment is the entire tax amount. Violation of the law can mean huge costs for a company and prolonged litigation, as happened to the Himachal Pradesh State Forest Corporation.
The HP State Forest Corporation is a government company subject to statutory audit. For the assessment year (AY) 1992-93, the company's income was computed in the first instance at Rs 1,30,00,000. It was discovered that there was concealment. The assessable income was Rs 4,88,58,590. The assessment was reopened by the Department and the liability was found to be Rs 12,93,42,479.
The Corporation wanted to save penalty for concealment and engaged the services of a leading firm of chartered accountants. Fortunately for the Corporation, the Voluntary Disclosure of Income Scheme (VDIS) was in operation at that time. The chartered accountants advised the company to take advantage of VDIS 1997 and declare the income of Rs 4,88,58,590.
After deducting the tax on income admitted in the original return, the tax as per the VDIS 1997 was found to be Rs 1,25,50,510. The accountants wrote to the Corporation that by virtue of the VDIS 1997, the tax liability would come down from Rs 12,93,42,479 to Rs 1,25,50,510. The accountants stipulated professional charges at 1 per cent of the total liability. The Corporation agreed to pay the professional charges and the firm obtained the VDS certificate from the Commissioner of Income-tax (CIT). The Corporation got substantial relief and avoided litigation. The firm, as per the agreement, sent a bill for Rs 12,93,425 towards professional charges. The Corporation, however, paid only Rs 2,00,000 and refused to pay the balance. Strangely, having agreed to pay fees at 1 per cent, the Corporation backtracked, complaining that charging fees on percentage basis was prohibited under the provisions of the Chartered Accountants Act, 1949. The firm of chartered accountants filed a suit for recovery of the balance amount.
The matter reached the High Court of Himachal Pradesh (2006 193 Taxation 137 HP).
Going back on an agreement
The court examined in detail the Chartered Accountants Act. It pointed out that Section 15 of the Act vested the function of supervision with the Council of Chartered Accountants of India. The agreement between the firm of chartered accountants and the Corporation cannot be said to be per se illegal under Section 23 of the Contract Act.
The firm stipulated a fee of 1 per cent of the tax saved. The agreement did not say specifically that the fee was contingent upon the firm obtaining the Certificate of the Commissioner of Income-tax. The case was not covered by Clause 10 of the First Schedule. If the Corporation was aggrieved by the contract, it should have taken up the complaint before the Council of the CAs for appropriate proceedings, but it cannot be said that the contract stipulating a percentage as fees is prohibited by law.
The Chief Justice observed: "The prohibition for charging fees on percentage basis of profits or contingent upon the result of the case will not render the instant agreement either void or illegal." The Corporation was directed to pay the fees of the CA firm as demanded.
T. C. A. Ramanujam
(The author is a former Chief Commissioner of Income-Tax.)