Misconduct of CA found in SUO MOTO verification by Income Tax
Court /Authority Name- NEFRA (National Financial Reporting Authority) vide
Order No-001/2024 ,U/s 132(4) (C ) of The Company Act 2013
Key Issue- Procedural Misconduct (Income Tax Act & Company Act)
Subject- Misconduct of CA found in SUO MOTO verification by Income Tax
Department (Investigation)
Adjudicated by- Mr Ajay Bhushan Prasad Pandey, Chairman NEFRA
Acts Involve;
1) Section 132(4) (Company Act)- Constitution of National Financial
Reporting Authority ( NEFRA)
2) Section 80JJAA of Income Tax Acts- Deduction in respect of
employment of new workmen.
Facts of the matter;
➢ NEFRA is a statutory authority set up under section 132 of the
Companies Act 2013 , to monitor implementation of the auditing and
accounting standards and oversee the quality of service of the
professional associated with ensuring compliance with such
standards.
➢ In August 2022 the Director General of Income Tax (Investigation)
Bengaluru (IT Department) shared information about claim of
deduction u/s 80 JJAA of Income Tax Act totaling Rs 1135.41 Crores
by “Quess” (company) based on FORM 10DA issued by two Chartered
Accountants (CA) for financial year 2016-17, 2017 -18, 2018-19,2019-
20 & 2020-21
➢ NEFRA suo moto initiated action u/s 132(4) of the Companies Act
2013 and on 23.09.2022 the CA was advised to submit the working
files relating to deduction claimed by Quess. CA submitted the files
on 29.09.2022 and 11.10.2022. Based on their examination , NEFRA,
after observing prima facie professional misconduct, issued a show
cause notice(SCN) dated 21.06.2023 u/s 132(4) of the Company
Act,2013, for ;
(a) failure to exercise due diligence and being grossly negligent in
the conduct of professional duties, and
(b) failure to obtain an appropriate information necessary for
expression of an opinion or its exceptions to negate the
expression of an opinion.
➢ According to investigation , CA failed to apply the necessary checks;
e.g., (a) verify reorganization of business with various parties
(b) exclude employees whose EPS contribution was paid by the
Government.
( c) correctly report the number of Additional employees during FY
2020-21
(d) verify that payment of additional employee cost was made by
account payee cheque/draft/electronic means and ( e) verify salary
limit of Rs 25000/- Per Month for new employees etc
➢ Based on investigation and proceedings u/s 13294) of the Companies
Act 2013 and after giving the CA an opportunity to present their case,
NEFRA found CA, who issued reports under Income Tax Act, Quess
Corp. Ltd , guilty of professional misconduct and imposes through
this order a monetary penalty of Rs Fifty (50) lakhs which take effect
from a period of 30 days from issuance of this order.
Authority Finding Under Section 80JJAA of the Income Tax Act
➢ Lapses in Issue of ReportSection 80JJAA of the Income Tax Act provides for deduction of an
amount equal to 30% of additional employee cost incurred in the
course of such business in the previous year.
➢ The basic preconditions to this deduction is that the business should
not be formed as per “Sub section 2 of section 80JJAA is quoted
below;
a) if the business is formed by splitting up, or the reconstruction ,of
an existing business;
Provided that nothing contained in this clause shall apply in respect
of a business which is formed as a result of re-establishment,
reconstruction or revival by the assessee of the business in the
circumstances and within the period specified in section 33B
b) if the business is acquired by the assessee by way of transfer from
any other person or as result of any business reorganization;
c) unless the assessee furnished along with the return of income the
report of the accountant, as defined in the Explanation to section 288
giving such particulars in the report as may be prescribed.”
➢ Following are lapses;
A) Failure to verify reorganization of business with various parties
B) Failure to exclude employees whose contribution was paid by the
Government
C) Failure to verify payment of additional employee cost by account
payee cheque/draft/electronic means
D) Failure to verify salary limit of Rs 25000/- per month for new
employees
E) Lapses in reporting additional employees during FY 2020-21
Findings on the Articles of Charges of Professional Misconduct
a) Failure to exercise due diligence in the conduct of professional
duties (clause 7 of part -I of second schedule of the Chartered
Accountants 1949
b) Failure to obtain sufficient information which is necessary for
expression of an opinion or its exceptions are sufficiently material
to negate the expression of an opinion.
Considering the proved professional misconduct and keeping in
mind the nature of violations, their impact on revenue and
deterrence against future professional misconduct, we, in exercise
of powers u/s 132(4) ( c ) of the companies Act ,2013, hereby
impose a monetary penalty of Rs fifty(50) Lakhs upon CA.
Thanks……
DISCLAIMER:
i)This opinion/clarification note is based on the facts provided to us and the same is
being issued without any knowledge of intent, prejudice, non-disclosure,
misrepresentation, or concealment of facts if any.
ii)We have not done investigation of correctness of facts and the limited opinion
represents our understanding of the provisions of the law on the matter. The
compliance mentioned above is not exhaustive and other compliance may also be
involved depending on case to case basis.
iii)The conclusions reached and views expressed are matters of opinion based on
our understanding of the related laws, rules, notifications, Citations, circulars, etc.
iv)Pranav Kumar & Associates, Company Secretaries, its partners, associates,
employees or staff shall not be held liable for any action/ consequence arising out
of any contrary view(s) taken by any other party or statutory authority