Will Department close down its Audit wing? No more Audit by Departmental Officers or CAG
‘AUDIT' is a very misunderstood word. For a long time, I used to believe that audit is in the exclusive domain of a qualified auditor like a Chartered Accountant. Then I saw officers of the Central Excise Department who did not know the difference between credit and debit 'auditing' the accounts of mega corporate entities. But 'Audit' remains a terror word among assessees and the visit of the Audit party either from the Central Excise Department or from the CAG, is not exactly welcomed by the assessee.
In recent times, writs have been filed in High Courts challenging the power of the CAG to visit the premises of the assessees and the High Courts have given favourable orders. Within the mortal limits of modesty, I would claim to be a pioneer of sorts on this issue, as I am the first person to raise this issue in an article in ELT 13 years ago - Can/should CAG's Audit visit factories for Excise Audit? I had jocularly mentioned that an "Accountant General" is an accountant getting the salary of a General. The CAG was so angry that I almost lost my job.
Till 2007, there was actually no provision to audit Service Tax assessees at their premises. By Notification No. 45/2007, a new Rule 5A was inserted in the Service Tax Rules. Rule 5A(2) mandated the assessees to make available the records to the audit party deputed by the Commissioner or the CAG.
The Board in F. No. 137/26/2007-CX.4 dated 1.1.2008 clarified that these amendments have been made in the service tax rules to enable the duly authorised officers to carry out audit or scrutiny as may be necessary to safeguard the interest of revenue.
But does the Government have the power to frame such rules or the Board the power to issue such instructions?
The Delhi High Court in the case of M/s Travelite (India) - , held that any attempt to include provision for such a general audit through the back-door, such as through the impugned rule, is ultra-vires the rule making power conferred under Section 94(1). Rule 5A(2) was consequently struck down.
To legitimise Rule 5A(2), Section 94 was amended to insert a new clause (k), by Finance Act 2014 with effect from 06.08.2014. So, now the Rule making power includes the power to make rules for imposition, on persons liable to pay service tax, for the proper levy and collection of tax, of duty of furnishing information, keeping records and the manner in which such records shall be verified.
But will this clause in Section 94 validate an already existing Rule 5A(2)?
By Notification no. 23/2014-Service Tax dated 5th December, 2014, the Government inserted a new and revised Rule 5A(2) (), obviously in exercise of the new clause (k) of Section 94. So the Delhi High Court order is UNDONE. The Board almost says so in Circular No. , Dated: December 10, 2014. Board clarifies, "the Hon'ble High Court of Delhi in the judgment dated 04.08.2014 in the case of M/s Travelite (India) - had quashed rule 5A(2) of the Service Tax Rules, 1994 on the ground that the powers to conduct audit envisaged in the rule did not have appropriate statutory backing. This judgment can now be distinguished as a clear statutory backing for the rule now exists in section 94(2)(k) of the said Act."
Board directed the Departmental Officers to audit the Service Tax assessees as provided in the departmental instructions in this regard.
Simultaneously, Board also took up the matter in appeal before the Supreme Court and got the Travelite order stayed. 2014-TIOL-101-SC-ST-LB.
The issue is again before the Delhi High Court.
The High Court on Friday:-
1. declared Rule 5A(2) as amended in terms of Notification No. 23/2014-Service Tax dated 5th December 2014 of the Central Government, to the extent that it authorises the officers of the Service Tax Department, the audit party deputed by a Commissioner or the CAG to seek production of the documents mentioned therein on demand is ultra vires the FA and, therefore, struck it down to that extent;
2. held that the expression 'verify' in Section 94 (2) (k) of the FA cannot be construed as audit of the accounts of an Assessee and, therefore, Rule 5A(2) cannot be sustained with reference to Section 94(2)(k) of the FA.
3. declared the Circular No. dated 10th December 2014 to be ultra vires the FA and struck it down as such.
Though this order pertains to Service Tax, it should be equally applicable to Central Excise. So, as of now, there should be no audit either by the Central Excise Officers or by the Officers of AG.
The Board must be busy preparing its appeal to the Supreme Court.
We carried the High Court order on Saturday. Please see 2016-TIOL-1061-HC-DEL-ST.
Please also see:
1. Should AG's Audit be allowed to visit factories and Premises of Service Tax Assessees? - (DDT 1298)
2. AG's Audit Visit to Factories and Premises of Assessees? - (DDT 1776)
3. CAG not authorised to visit factory of assessee in private sector
4. No Audit of Private Enterprises by AG's Audit - Calcutta High Court - (DDT 1951)
5. Karnataka High Court grants Interim Stay against CAG Audit of Service Tax Assessee - (DDT 2103)
6. Audit under Service Tax only by Chartered Accountants - not by officers of Department - High Court - (DDT 2283)
7. Even if Service Tax Audit cannot be done, there is no hurdle for Central Excise Audit - CBEC - (DDT 2453)
8. Service Tax - Audit by CAs - Solution worse than Problem - (DDT 2491)
9. Service Tax Audit - Cart Before Horse - (DDT 2494)
Until Tomorrow with more DDT
Have a nice day.
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