In a unique case, the Delhi High Court adjudicated that a Chartered Accountancy firm (‘CA firm’) cannot invoke the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSME Act’) for fees payable to it for Special Audits conducted by it under Section 142(2A), IT Act, 1961. While the High Court provided a detailed history of the rationale and objective of the MSME Act, its conclusion was based primarily on the fact that the Revenue Department was not a buyer nor was the CA firm a seller of services. As per the High Court, the Special Audit conducted by the CA firm was a statutory duty and not a commercial service thereby invocation of the MSME Act was misplaced.
The impugned writ petitions resulted from four nominations made by the Income Tax Department of the concerned CA firm for conducting Special Audits of assessees under Section 142(2A), IT Act, 1961. The nomination letters so issued do not typically state the remuneration payable for the Special Audits; the amount payable is determined under the IT Act, 1961 and its relevant Rules. The dispute was not regarding the content of the reports prepared by the CA firm instead the grievance of the CA firm was about the quantum of amount payable for the work done by it in pursuance of the nomination. The Income Tax Department approved an amount that was below the amount claimed by the CA firm.
To secure the remaining amount, the CA firm initiated two arbitration proceedings against the Income Tax Department, and both were stayed. The impugned writ petitions before the Delhi High Court were because of these arbitration proceedings. The issues before the Delhi High Court were mainly about the applicability of the MSME Act in the payment dispute between the CA firm and the Income Tax Department.
Delhi High Court Elaborates on Rationale of MSME Act and Section 142(2A), IT Act, 1961
The Delhi High Court reproduced the Statement of Objects of the MSME Act and the provided a brief history of the legislation to emphasize that the various legal options envisaged under the MSME Act are available only to a supplier against a buyer. And a buyer under Section 2(d), MSME Act buyer is someone who buys any goods or receives any service from a supplier for consideration. Simultaneously, under Section 2(n), MSME Act defines a supplier to inter alia include micro or small enterprises and any trust or body supplying goods manufactured by a micro or small enterprise. For the impugned case, it is relevant that the CA firm was validly registered under the MSME Act, and its status under the MSME Act was not under scrutiny. The issue was if the CA firm could invoke the MSME Act against the Income Tax Department.
Under Section 142(2A), IT Act, 1961, the Income Tax Department, through the Commissioner or other high-ranking officer – if the Assessing Officer is of the opinion that the complexity of the case so requires – require an assessee to get their accounts audited from an accountant. The expenses of such audit are determined by the Principal Chief Commissioner or other such high ranking official, whose determination is final under Section 142(2D), IT Act, 1961. The approval of such remuneration may not be the exact amount stated in the invoice by the accountant, it may be lower.
The crucial question that the High Court had to decide was if the CA firm could qualify as a supplier given the nature of its relationship and function envisaged under Section 142(2A), IT Act, 1961. And the High Court answered in the negative.
High Court Decides Against the CA Firm
After a detailed extract of the relevant provisions of the MSME Act and the IT Act, 1961, the Delhi High Court decided against the CA firm and held that the invocation of the MSME Act for the impugned dispute was misplaced. As per the High Court the special audit conduct by an account under Section 142(2A) was to assist the Assessing Officer in a complex case to arrive at a proper determination of the tax liability. Also, the invoice generated by the accountant for the said work was not always accepted, as the decision of the Principal Chief Commissioner or other authorized official was final. And the said decision on appropriate remuneration was taken based on the nature and complexity of the work performed by the accountant. Based on the above, the High Court concluded that:
The nature of the Audit and the manner in which remuneration is to be determined would require domain expertise and knowledge which the MSEFC cannot possess. Moreover, the function which is in effect delegated to the Audit firm is one which is exercised under the Income Tax Act and would be purely governed by the said statute. Payment of remuneration is also based on the factors prescribed in the Rules as discussed above. (para 96)
The High Court added that the ‘nature of assessment is not commercial but statutory’ and for assistance of the Assessing Officer and the Income Tax Department. Thus, the latter cannot be termed as a buyer nor the CA firm as a supplier and payment made to the CA firm cannot be termed as consideration since it is for performance a statutory function. (para 97) The limitation of this conclusion by the High Court is that while it is premised on the accountant performing/assisting in a statutory function, it does not clarify if the invocation of MSME Act is misplaced only due to that reason or whether the CA firm does not qualify as a supplier per se for this transaction. The High Court though add later that while the CA firm may be registered under the MSME Act and can invoke it for other purposes, it cannot invoke for assignment emanating from a statute, i.e., IT Act, 1961, and whose remuneration is determined solely by the concerned officials. Thus, for the High Court, the statutory nature of the work performed by the CA firm overpowered its status under the MSME Act.
The impugned judgment addresses a unique and novel issue and adopts a conservative approach towards the CA firm’s ability to invoke MSME Act against the Income Tax Department. The central point of the High Court’s conclusion is based on the CA firm performing a statutory function whose remuneration is determined by the statutory bodies, thereby carving the said relationship outside of the purview of a typical commercial transaction. And since as per the Delhi High Court, the MSME Act concerns itself only with commercial transactions, statutory functions cannot be subject of arbitration proceedings under the said Act. The conclusion, while seems correct in the context and facts of the case, may invite a different interpretation if another function or another statute is in question.
 Principal Commissioner of Income Tax v Micro and Small Facilitation Council and Anr (2023) TAXSCAN HC 1067.