Case: Kiran Gems Private Limited Vs. Union of India and Others

5. Before we advert to the submissions made by learned counsel for the parties, it will be apposite to briefly refer to the relevant facts:-5.1. Petitioner is engaged in manufacture and export of cut and polished diamonds and is registered as service provider under the provisions of Finance Act, 1994 bearing service tax registration No.AADCK1665MST001.5.2. Petitioner had been paying service tax diligently and had been filing ST-3 returns periodically as required.5.3. By email dated 10.01.2019, office of respondent No.3 i.e. Assistant Commissioner of Central Tax, intimated the petitioner that CERA audit was being conducted for the period from January 2019 to March 2019 and that petitioners case was selected for scrutiny / audit by LAP-XII CERA (GSTA). Petitioner was called upon to submit information / records for the period 2015-16 to 2017-18 as per annexure attached to the letter directly to the officers of CERA. It may be mentioned that from July, 2017 the Goods and Services Tax (GST) regime came into force and the erstwhile service tax stood subsumed in GST.5.4. Annexure to the impugned letter called upon petitioner to produce the following record for the period 2015-16 to 2017-18:(i) Annual financial statement viz. Profit & Loss Account, Balance Sheet, Trial Balance;(ii) Tax Audit Report, Cost Audit Report;(iii) Cenvat register containing details of Cenvat credit availed and utilised;(iv) List of MOUs, contract / agreements signed with other companies to whom services have been provided / received from which is having its office outside India;(v) Copies of ST / Excise returns of the period covered by Audit;(vi) List of running projects / lease agreements;(vii) List of purchase orders / contracts;(viii) Internal Audit Report (EA 2000), SCN and any other communication from the Department;(ix) All ledger accounts in respect of related party transactions;(x) List of fire cases / theft, cases / destroyed, goods / records ceased by the department along with related correspondences with the department and insurance companies;(xi) Job work register;(xii) Cost sheet for goods captively consumed(xiii) List of exempted goods / services option exercised, value and notification under which exemption claimed (Rule 6 of Cenvat Credit Rules, 2004);(xiv) Tran–1 return and list of invoices on which transitional credit claimed;(xv) GSTR-3B of July 17 to March 18.5.5. By letter dated 20.02.2019 petitioner sent a reply, inter alia, stating that CERA audit cannot be conducted for the period prior to introduction of GST. Rule 5A of the Service Tax Rules did not apply to the petitioners case and that audit being a special function cannot be carried out by officers of the Department and required appointment of Chartered Accountant or Cost Accountant. However, it was not responded5.6. Aggrieved, the present writ petition has been filed to challenge the impugned notice / intimation and annexure, both dated 10.01.2019, as ex facie illegal and without jurisdiction.

Court's reasoning:
11.1. The above-mentioned section is applicable, where the assessee is not maintaining the books of account properly to ascertain the liability of service tax. To determine the correct tax, books will have to be examined and if need be, audited by a qualified Chartered Accountant.11.2. It may be mentioned that the accounts will be audited by a Chartered Accountant or a Cost Accountant to be appointed by the Commissioner. In Clause (2) to Section 72A, it is stated that the Chartered Accountant or Cost Accountant will submit a report duly signed and certified by him to the Commissioner. In Clause (4), it is stated that the person liable to pay tax shall be given an opportunity of being heard in respect of any material gathered on the basis of the audit under sub-section (1) and proposed to be utilized in any proceeding. Copy of the audit report may be made available to the assessee and a proper opportunity will also be provided to him, as per law.12.1. Rule 5A sub-rule (2) states that every assessee shall, on demand, make available to the officer authorised or the audit party, records, trial balance and income-tax audit report, if any. The officer may demand the documents to ensure correctness of the books of accounts and ultimately, the audit will be conducted by the audit party headed by the Chartered Accountant/Cost Accountant, as the case may be, deputed by the Commissioner. It is Commissioner on whose behalf the officer will collect the material and the auditor will perform the audit. In any case, the final report duly signed by the Chartered Accountant will be submitted to the Commissioner. In case of government autonomous bodies, the function of audit has been assigned to CAG.13. From the above, it is crystal clear that in case of a private assessee, Commissioner will refer the matter to an officer to collect the material or Chartered Accountant for the purpose of audit. Thus, for the purpose of audit, material can be collected either by the officer authorized by the Commissioner or by the auditor himself. But, audit will be performed only by the Chartered Accountant. It is the pious duty of the assessee to make available the record as mentioned in Rule 5A i.e. trial balance or its equivalent; and the Income-tax audit report, if any, under Section 142(2A) of the Income Tax Act, 1961, for the scrutiny of the officer or the audit party, as the case may be.14. Admittedly, in the present case the impugned notice / intimation dated 10.01.2019 seeking audit of petitioners accounts is not contemplated under the provisions of Rule 5A of the Service Tax Rules, 1994. On the contrary, it is the assertion of the respondents that these have been issued under section 16 of CAGs (DPC) Act.18. From the above it is clearly discernible that the power of the CAG under Chapter III extends to any office or department of the Government and cannot be construed to extend to a private entity. The provisions of Chapter III envisage that for the purpose of audit it shall be the duty of the CAG to conduct audit of the receipts payable into the Consolidated Fund of India of the Union or a State as applicable and to put such questions or make such observances as the CAG may consider necessary to the person in-charge of the office or to call for such information as required for preparation of any account or report pertaining to the concerned Government office or department. This scheme clearly concludes that the CAG cannot have jurisdiction to audit the accounts of a private entity directly18.1. However there is one exception to the above power and duty of the CAG which is contemplated under Section 20 of the CAGs (DPC) Act. Section 20 states that if the CAG is requested by the President of India or by the Governor of a State or by the Administrator of an Union Territory, as the case may be, to undertake the audit of accounts of any body or authority on such terms and conditions as may be agreed upon, then the CAG shall undertake such an exercise. This special power of audit of any body or authority which has not been entrusted in the CAG by or by any law made by Parliament is the only provision under which the CAG is empowered either by the President or by the Governor or by the Administrator to undertake the exercise of audit of accounts of any body or authority. But on a reading of this provision it is quite evident that even this provision would extend to a body or authority which undertakes the functions of the Government.We find sufficient force in the assertion of the petitioner keeping in mind provisions of Chapter III of the CAGs (DPC) Act.19. Further submission of learned counsel for the petitioner that the Central Goods and Services Tax Act, 2017 has no provision empowering CERA to conduct audit of the petitioners records also merits acceptance. Brief perusal of the annexure to the impugned communication reveals that detailed audit of the petitioners accounts and records is sought for the period 2015-16 to 2017-18 i.e. for a period of three years by respondent No.3. Such a detailed audit can only be called for under relevant and specific statutes. It is settled law that jurisdiction goes to the root of a matter and power of any authority invoking such jurisdiction to call for special audit needs to be traceable to the relevant statutory provision. In the absence of statutory backing, such an exercise of power would be invalid and nonest. In the present case, the impugned notice / letter dated 10.01.2019 calls for CERA audit and respondents in their affidavit-inreply have relied on the provisions of Section 16 of the CAGs (DPC) Act to justify the impugned communication. If that be the case then as discussed hereinabove, the respondents action is wholly without jurisdiction and unconstitutional.20. In the case of SKP Securities Ltd Vs. Deputy Director (Ra-IDT)4 , a single Judge of the Calcutta High Court was considering a challenge to a notice issued by the office of the Principal Director of Audit, Central Kolkata, for audit, by the Central Excise Revenue Audit (CERA) team, an audit team under the Comptroller and AuditorGeneral of India, of the service tax records, accounts and other related documents of the petitioner company. The question framed in the said writ petition was whether CERA, an audit wing of the Principal Director of Audit (Central), Kolkata under the Comptroller and Auditor-General of India, had the power and / or authority and / or jurisdiction to audit the accounts, service tax records or other documents of the petitioner company therein, which was not an undertaking of the Central Government or any State Government. It was an admitted position in that case that the petitioner company was not run out of funds or loans provided by the Central Government or by any State Government or by any other Government Undertaking or organization. In this backdrop, after considering governance of the petitioner company by the provisions of the Companies Act, 1956 containing provisions for special audit, the learned Single Judge in paragraphs 47 to 49 of the said decision made the following observations:-47. In the absence of any provision in Chapter V of the Finance Act, 1994 for audit of the accounts of a nongovernment company by the Comptroller and Auditor General of India or any team under him, the Central Government could not have framed, and has not framed any rules which provide for audit by the Comptroller and Auditor General of India or any audit team under his control of an assessee which is not a government company48. It is well settled principle of interpretation that statutory rules must be construed in harmony with the rule making power, in exercise of which, the statutory rule has been made. If it were possible to interpret the statutory rule in more ways than one, the Courts would prefer that interpretation which would make the statutory rule workable and intra vires, to that interpretation which would render the rule ultra vires and invalid.49. On a plain reading of Rule 5A(2) of the Service Tax Rules, the said Rule does not empower the CAG to audit the accounts of any assessee. While sub-rule (1) of Rule 5A provides for access of any officer authorized by the Commissioner to any premises registered under the Service Tax Rules, for carrying out any scrutiny, verification or check, as may be necessary to safeguard the interest of revenue, sub-rule (2) of Rule 5A only casts an obligation on the assessee to make the records and documents as specified in the said Rule available to the officer authorized by the Commissioner, or the audit party deputed by the Commissioner or the Comptroller and Auditor General of India within a reasonable time not exceeding 15 working days from the date of demand.20.1. In the above case, Court accepted the statement of the petitioner that Section 16 of the CAGs (DPC) Act does not authorize the CAG or any audit team under the control of CAG to audit the accounts of a non-government company, that too, in the absence of any request either from the President of India or Governor of the State in which the company is having its operation.21. In a subsequent decision in the case of A.C.L. Education Centre (P) Ltd Vs. Union of India & Ors.5 , a Division Bench of the Allahabad High Court considered the challenge to the vires of Rule 5A(2) of the Service Tax Rules, 1994, inter alia, on the ground that the said rule was contrary to the provisions of Section 72 of the Service Tax Act and rejected the said challenge. However, since in the facts of the said case, inquiry and investigation for special audit was specifically invoked under the provisions of Rule 5A of the Service Tax Rules, 1994 in the case of a private assessee i.e the petitioner therein, the Court in paragraphs 25, 26 and 27 held as under :25. From the above, it is crystal clear that in case of private assessee, the Commissioner will refer the matter to an officer to collect the material or Chartered Accountant for the purpose of audit. Thus, for the purpose of audit, the material can be collected either by the officer authorized by the Commissioner or by the Auditor himself. But, audit will be performed only by the Chartered Accountant26.It is pious duty of the assessee to make available the record as mentioned in Rule 5A i.e. trial balance or its equivalent; and the Income-tax audit report, if any, under Section 142(2A) of the Income Tax Act, 1961, for the scrutiny of the officer or the Audit Party, as the case may be.27.Thus, we find that there is no inconsistency in Rule 5A and Section 72A of the Finance Act, 1994. The said provision is not arbitrary. The manner for conducting the audit is as per the accounting standard provided by the Institute of Chartered Accountant of India. The audit report will be made available to the assessee, as per law.22. Petitioners submission that there are specific statutory provisions under which special audit of accounts of the petitioner company can be conducted by following the due process of law therefore needs to be accepted. Case of the respondents in the affidavit-in-reply that the impugned communication has been issued under the provisions of Section 16 of the CAGs (DPC) Act and that CERA is authorized to extend the audit exercise to the petitioners accounts therefore deserves to be rejected for want of jurisdiction and statutory authority. Case of the respondents that CERA is authorised to conduct the audit of the department and as part of the said audit examination of the records of the private company can be examined to ascertain whether the Government is getting its due share by way of indirect taxes deposited by the private company and therefore private company is bound to provide all records and documents called for by CERA deserves to be rejected looking at the scheme of Chapter III discussed above.23. In view of the above, it is clear that the statutory responsibility of the CAG is to audit receipts of the Union and States. These receipts include both direct and indirect taxes. It is duty of the Central Excise Revenue Audit (CERA) to see that sums due to the Government are properly assessed, realized and credited to the Government account. The scheme enacted and envisaged in Chapter III of the CAGs (DPC) Act, 1971 begins with the word Comptroller or Auditor General to compile accounts of Union and or States. The statutory scheme clearly states that the CAG shall from the accounts compiled by him or by the Government or any person responsible prepare in each year accounts showing under the respective heads, the annual receipts and disbursement for the purpose of the Union, each State or each Union Territory and shall submit the same to the President or the Governor or the Administrator, as the case may be. It is in such context that the provisions of Section 16 pertaining to audit of all receipts which are payable into the Consolidated Fund of India and each State and of each Union Territory is required to be construed with respect to the accounts maintained in the Government departments / Corporations belonging to the Government. In view of the mandate of Section 16 of the CAGS (DPC) Act, 1971, CERA audit cannot be extended to call for audit of a private entity such as the petitioner company