Income Tax Act Prevails Over MSMED Act in Special Audit Fee Dispute: Delhi High Court

The Delhi High Court has ruled that the Income Tax Act takes precedence over the MSMED Act in a dispute regarding special audit fees between a Chartered Accountant (CA) firm and the Income Tax Department. The Revenue filed a writ petition challenging the directions for arbitration issued by the Micro and Small Enterprise Facilitation Council (MSEFC), which is an authority under the MSMED Act. The dispute arose when the CA firm was engaged to conduct a special audit for Oracle India, Sahara India Financial Corp., and Reverse Logistics. The CA firm raised an invoice of Rs. 6.44 crore for its services, while the Revenue determined and paid fees of Rs. 1.36 crore for only two of the audit assignments, despite the fees for all three assignments being determined at Rs. 1.6 crore.

The CA firm considered the outstanding fee as per the invoice to be the fee payable and approached the MSEFC for resolution. However, the High Court determined that the nature of special audits and the manner in which the fee is determined requires domain expertise and knowledge that the MSEFC does not possess. It stated that the function delegated to the audit firm falls under the purview of the Income Tax Act and is governed solely by that statute. The High Court categorically upheld the “statutory nature” of assessments in which the Special Auditor assists the Assessing Officer. Consequently, it ruled that the Income Tax Department cannot be considered a “buyer” of services from the CA firm, which in turn cannot be deemed a “supplier.” Therefore, invoking the MSMED Act in relation to the statutory duty of a special audit is not valid.

The High Court clarified that a CA firm may be registered as a micro or small enterprise and may be entitled to seek the jurisdiction of the MSMED Act for other purposes. However, the determination of the CA firm’s remuneration rests solely with the specified Revenue authorities and cannot be challenged in a commercial or civil suit for recovery of money. Additionally, the nomination of a CA firm as a Special Auditor is governed exclusively by the provisions of the Income Tax Act and Rules. Nevertheless, this does not prohibit the filing of a writ petition to seek legal recourse.

The High Court found a clear lack of jurisdiction in the MSEFC, which failed to consider whether the MSMED Act would be applicable in this case. It emphasized that for audits under Section 142(2A) of the Income Tax Act, the Income Tax Act should be regarded as the special act, while the MSMED Act should be seen as the general act dealing with MSME disputes. The remedies available to the CA firm to challenge the orders passed by the IT Department regarding the determination of remuneration were left open for consideration.

In summary, the Delhi High Court ruled that the Income Tax Act prevails over the MSMED Act in the dispute over special audit fees between a CA firm and the Income Tax Department. The High Court concluded that invoking the MSMED Act for a statutory duty like a special audit is not valid and clarified that the determination of remuneration lies within the purview of the Revenue authorities.

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