Rakesh Raj And Associates v. Commissioner Of Income Tax

$~17 *IN THE HIGH COURT OF DELHI AT NEW DELHI %Judgement delivered on: 28[th]February, 2017 +W.P.(C) No.12305/2015 RAKESH RAJ AND ASSOCIATES..... PetitionerThrough:Dr. Rakesh Gupta, Mr. Somit Agarwaland Ms. Monika Ghai, Advocates. Versus COMMISSIONER OF INCOME TAX, CENTRAL-II, & ANR. ..... Respondents Through:Mr.Ashok K. Manchanda andMr. Raghvendra K. Singh, Advocates. CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE NAJMI WAZIRI NAJMI WAZIRI, J. (Oral):- 1.This petition under Article 226 of the Constitution of India seeksquashing/modification of an order dated 07.11.2014 passed by therespondent No.1/Commissioner of Income Tax, Central-II under Section142(2D) of the Income Tax Act, 1961 (hereinafter to be referred as ‘theAct’) read with Rule 14B of the eponymous Rules of 1962. 2.The petitioner was engaged by the respondents to conduct a specialaudit for seven years i.e. Assessment Years (AY) 2005-06 to 2011-12 of theauditee company/ M/s Micromax Informatics Limited.Its report wassubmitted in three volumes and an addition of over `720 crores was made tothe returns of the auditee/ assessee. It is not in dispute that the report wastermed as ‘very good’ by the Assessing Officer (AO). 3.For their professional services, the petitioner submitted a bill to therespondents detailing 1078 hours as having been spent by its team at theclient’s place i.e. the auditee/ M/s Micromax Informatics Limited.Additionally, 237 hours were billed for time spent by the audit team at thepetitioner’s office. The attendance sheets of the audit team specifying thenumber of hours spent, duly counter-signed by the Chief Finance Officer ofthe auditee were submitted in terms of the Notification No.20/2008 dated05.02.2008, which prescribes the guidelines for the purposes of determiningexpenses for audit under Rule 14B of the Income Tax Rules, 1962. A totalbill 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 of1315 man hours multiplied by the maximum prescribed average rate of`7,500/- per hour was not justified. He reasoned that all the members of theteam not being qualified personnel, some being semi qualified personnel, thebilling could not have been at the maximum prescribed rate. Furthermore,he was of the view that time must have been spent on lunch, refreshmentsetc, 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 asapplicable was passed in favour of the petitioner by the Commissioner ofIncomeTax.Thepetitionershavedisputedthecomputationandconsequential order.However, pending the adjudication of their dispute,they had agreed to accept the aforesaid amount without prejudice to theirrights and contentions. 4.The petitioners contend that insofar as 1078 man hours were certifiedby the clients/auditee, there was no plausible reason for respondent No.1 torestrict it to only 709 hours. Furthermore, 237 hours were spent at the officeof the petitioner in analysing, compiling and preparing the three voluminousreport (compiled in three volumes). The petitioner contends that spending 9to 10 hours on an average basis is not extraordinary and clubbing all thebilled hours to be payable at an average rate of `4,000/- is unreasonable andunjustified. The petitioner relies upon an order dated 27.07.2016 passed inits favour apropos its special audit of M/s.Naftogaz India Pvt. Ltd. underSection 142(2D) of the Act., wherein remuneration was claimed for 268hours at `6,000/- per hour but 205.65 hours were accepted by the Revenue atan average rate of `5,000/- per hour. 5.The relevant portion of the impugned order dated 07.11.2014 read asfollows:- 5.The relevant portion of the impugned order dated 07.11.2014 read asfollows:- “4.Special Audit has been conducted under theguidance of Sh. Dinesh Aggarwal & Sh. Neeraj Arorapartners in the firm and experience of 27 years & 5 yearsrespectively and assisted by Sh. Kuldeep Singh, CA, Sh.Abhishek Singhla, CA with a combined experience of 3years only. However, the claim of rate of Rs.7500/- inrespect of the assistants and semi qualified assistantsappears to be on much higher side. The biodata of theauditteamwasfurnishedvidetheirletterdated06.01.2014. 5.1With regard to the rates, the A.O. has submittedthat "the quality of the audit report in my opinion is "verygood. As per provisions of section 142(2D) read withRule 14B, the remuneration payable to the Auditor shallbe Rs.3750/- per hour to Rs. 7500/- per hour. However,considering the quality of report, which is adjudged as 'very good’, I am of the considered view that the manhour rate can be estimated at Rs.4,000/- per hour." 5.2About the number of man hours involved in auditwork, the A.O. has submitted that 'from the perusal ofbills submitted by the auditor, it has been noticed thatauditors have spent 1070 hours in tax payer’s premisesand 237 hours in their own office. They have not takeninto account the time spent on lunches, refreshments etc.,which should have been discounted from bill. The billssubmitted are on estimated basis only. It is also a factthat special auditing is a team work lead by one of themain partner. Accordingly, I am of the considered viewthat the man hours for which team was wholly andexclusively working for audit work can reasonably beestimated at 85% of the time spent by the main partnerand all other persons are assisting him in completing theaudit work. So the estimated time is computed at 709hours (i.e. 85% of 834 hours.)" 6.The Assessing Officer has also not submitted anybasis of estimation of man hours apart from the billssubmitted by the Special Auditor which was verified bythe assessee company. Separate register regarding thedeployment of man power is also not maintained whichshows that only one team was doing the special audit andthe time keeping cannot be precisely ascertained. Theaudit also involved common areas of work in respect ofvarious assessment years. The excel sheet shows that1078 hours were spent in the assessee's company officeand 237 hours at the special auditor's office. The averagegroup hours shown per day are 9 to 10 hours which alsoappears to be on higher side. Hence, in my consideredview the man hours are on a much higher side.Accordingly, I am in agreement with A.O. about workingof estimation of time for completing the audit work at 709hours (i.e. 85% of 834 hours).” 6.Having considered the submissions made by the learned counsel for 6.Having considered the submissions made by the learned counsel for the parties, the Court is of the view that spending 9 to 10 hours a day for aspecial audit would include the time spent on basic necessities, food andrefreshments etc. Unlike employees, professionals do spend 9 to 10 hours aday on their work, even at odd hours, and attend to their basic necessities inthe remaining hours of the day.Exclusion of such necessary recess forconsumption of food and refreshment, etc. for a person to render qualitywork is illogical. In any case, the billing is not for 24 hours a day but for apart thereof. Therefore, to assume that the time billed was not exclusivelyfor the professional work is without basis and untenable.CharteredAccountants are not automatons who, without having access to food orbeing able to attend to all other necessities, would churn out good qualityreports after analysing voluminous records. It is noteworthy that the qualityof the report has been assessed as ‘very good’ by the AO. An addition ofover `720 crores has been made to the income tax of the auditee. The workwas rendered by the petitioner’s four partners, Chartered Accountantsand other personnel i.e. by qualified assistants and semi-qualified assistants,however, the impugned order questions the billing only on the basis of theirexperience and number of years in the profession and not on the quality ofthe work. This reasoning is questionable. Notably, the work experience ofthe partners ranges from 3 to 27 years while the range permissible billingrate is between `3,500/- to `7,500/- and the rate of sitting could have beencorrespondingly adjusted as per their regular sitting hours or accepteddegree of competence; instead it has arbitrarily been reduced to an averagerate of `4,000/- per hour. The disallowance of certain hours based on theassumption that the auditors would have spent some time on lunches,refreshments etc. is erroneous. If such disallowance is permitted then the corollary argument would be that some members of the audit team or theentire team was not adequately focussed on the special audit. This kind ofreasoning assumes thought-control or thought-intensity monitoring.Suchnature of control is neither envisaged under the Rules nor is it reasonable.Whatthe Revenue isto assess insuch circumstancesis whether thespecial audit report was (i) within time, (ii) of the desired quality (iii) thebilling is commensurate to the nature of inquiry and the quantum of therecords to be looked into; etc. If the audit report is of good quality and interalia, authored by a qualified professional having a fair number of years ofexperience then he/she may well be entitled to ask for the highest prescribedbilling rate. The Revenue should have kept in mind the rate of ` 5000/- perhour accepted for the petitioner in the special audit for M/s.Naftogaz IndiaPvt. Ltd. (supra). 7.In the circumstances, the Court is of the view that the bill submittedby the petitioner needs a fresh look.Accordingly, the impugned orderdated 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 thepetitioner 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