Negligence in reporting 40A(3) & 40(a)(ia) violation is Professional Negligence – CA awarded punishment of removal of his name from the Register of Members

1. The Reporting Auditor (CA) stated NIL in the column  “amount admissible u/s 40A (3) read with rule 6DD and computation thereof”
2. The error was deducted in scrutiny assessment for AY 2007-08, when it was found that the assessee has made payment of consultancy charges amounting to Rs.5,45,715/- to various Doctor which exceeds Rs.20,000/-. The assessee has made this payment in cash which is exceeding Rs.20,000/– and no tax has been deducted which is required u/s 194J of the Income Tax Act, 1961. These facts have not been mentioned in the Tax Audit Report certified by the CA.
3. The matter was reported to the Disciplinary Committee of the ICAI which that on perusal of Profit & Loss Account of the Hospital vis-à-vis working papers of the Respondent, it has been noted that consultancy charges were shown as expenses in the Profit & Loss Account of the Hospital.
   1. The CA submitted
   2. “……since the Doctors did not provide any professional service to the Hospital, the provisions of Section 194J would not be attracted.
   3. As per the judgment passed by the Special Bench in case of “Merilyn Shipping and Transports-vs ACIT, Section 40 (a) (ia) is applicable only to the amounts of expenditure which are payable as on 31st March of every year and it cannot be invoked to disallow the amounts which have been actually paid during the previous year, without deduction of tax at source. Further, all payments were made to the respective doctors before 31st March, 2007. As per his belief, the payment made to the Doctors by way of reimbursement of the fees does not fall under the TDS Act and even if it falls, these payments would not be disallowable u/s 194J of the Income Tax Act.
4. However the Committee was of the view that it is for the assessee to reply on any judgment for making deduction of TDS on payment of consultancy fees u/s 194J. As per provision of the Income Tax Act, 1961 and Guidance notes on Tax Audit issued by the Institute, the Auditor is required to report as to whether any amount is inadmissible under Section 40 (a) the Income Tax Act, 1961. If the Assessee did not deduct TDS based on a judgment given in a particular case, the Respondent being a Statutory Tax Auditor was required to disclose the same in his report so as to enable the Income Tax Department to know the reason as to why TDS was not deducted by the Assessee u/s 194J of the Income Tax, 1961.
5. On appeal against the order of the disciplinary committee of ICAI, the Appellate Authority – ICAI the CA further added that as he has  passed Chartered Accountancy only in 2005, he was very new in the profession and it is possible that he did not understand the proper interpretation of Section 194J of the Income Tax Act 1961. Therefore he prayed that his mistake may be condoned and lenient view may be taken.
6. The Appellate Authority – ICAI held as under:
   1. Held that CA did not exercise due diligence in carrying out his professional duties, which is expected from him.
   2. The CA being new in the profession and not being able to understand properly the ambit of section 194J of the Income Tax Act, can’t be a ground to completely ignore the new reporting requirements imposed by the CBDT from 10th August, 2006. (Ignorance of Law in No EXCUSE- supplied)
   3. As regards to the issue of quantum of punishment, the CA prayed for taking lenient view and explained that he was very new in the profession and he might not have been fully aware of the recent amendments in the law, and he also pleaded that the default was for a very small quantum.
   4. It is very clear that the CA was required to report instances where tax was deductible by the auditee but not deducted by him. The CBDT vide Notification No. 208/2006 dated 10th August, 2006 had widened reporting requirements of Form 3CD and thus it was the duty of the CA  to report such transactions in the Form 3CD, which he failed to do.
   5. Looking to all the facts involved and the fact that the Appellant fully co-operated in all proceedings at every level of enquiry, we feel that the “ends of justice” would meet, if the Appellant is awarded punishment to “Reprimand”. We, accordingly modify the Impugned Order of the Disciplinary Committee to this extent. Though, *further, we direct the Appellant to be more cautious in future while dealing with such situations.