#Applicability of CARO for FY 2014-15 audits

Applicability of CARO 2003

Confusion exists amongst auditing fraternity as to applicability of CARO 2003 for audits for Financial Year 2014-15. The confusion arose because of notification of certain provisions of Companies Act 2013 effective 1st April 2014.

The confusion stems from the presumption that with Companies Act 2013 notified w.e.f 1.4.2014, the corresponding provisions of Companies Act 1956 and rules/orders made/issued thereunder stand repealed. Let us examine whether this premise is correct.

There is a specific section in Companies Act 2013 dealing with repeal of Companies Act 1956 – Section 465. The repeal section has not yet been notified by the Central Government. This means that the Companies Act 1956 and rules/orders made/issued under it continue to be valid. It is not correct to say that Companies Act 1956 is not effective from 1st April, 2014.

Legally, we would examine this in the light of ‘doctrine of implied repeal’. The doctrine of implied repeal suggests that with new enactment coming into effect on the same subject, the previous enactment stands repealed. The Courts are, however, slow in applying this doctrine. The first attempt of the courts is to apply both the provisions by applying the principles of harmonious construction unless the provisions are so repugnant to each other that both of them cannot be applied simultaneously. The repugnancy test assumes significance. We should also not lose sight of the fact that all the rulings in which doctrine of implied repeal was applied had a situation where there was no express provision of repeal in the new enactment/statute.

In the present case, the test of repugnancy fails, as the Central Government has not notified any Order similar to CARO 2003 under Companies Act 2013. There being no repugnancy, CARO 2003 continues to be applicable.

Even otherwise, there is express repeal provision in Companies Act 2013 and the same is yet to be notified. Under such circumstances, in my opinion, there is no question of considering or applying ‘Doctrine of Implied Repeal’.

It can thus be concluded that CARO 2003 continues to apply for audits for FY 2014-15 and beyond till such time the Central Government exercises its powers under Section 143(11) and issues any new Order.

The Central Government would do well to issue a clarificatory circular on these lines and not spend its precious time in issuing a hurried up Order at this stage. The new Companies Act contains various stringent provisions and unless they are taken into account carefully, any Order prepared or assimilated in a hurry will create more confusion.

Unless the Central Government notifies a new Order under section 143(11), CARO 2003 continues to apply for all audits conducted even under Companies Act, 2013.

Does this compounds the confusion already existing?

The last word is yet to be written on this.


Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

#Wake-up MCA – Who gets Immunity for filing 23 B under CLSS 2014?

A new amnesty scheme – CLSS 2014 has been introduced by MCA. It is open until 15th October 2014.

The Scheme offers lower additional fee and also immunity from prosecution to the company and officers in default. This scheme is valid for filing of 8 forms – Form 20B, 21A, 23AC, 23ACA, 23AC-XBRL, 23ACA-XBRL, 23B and 66. These documents can be filed under the Scheme provided their due date was upto 30th June, 2014. CLSS 2014 is attractive particularly considering the benefits. The most important benefit it offers to directors is non-applicability of disqualification under section 164(2) for past defaults provided the defaults are made good by filing the documents under the Scheme.

Who gets Immunity for filing Form 23B?

Form 23B was to be filed by an auditor under the previous regime – Companies Act, 1956. Under the Companies Act, 2013, the responsibility of filing intimation of appointment of auditor has now shifted to the company and this intimation is to be in Form ADT-1. Form 23B was accordingly withdrawn effective 1st April, 2014.

Inclusion of this Form in the Scheme forced MCA to bring back this form on MCA portal for filing. There is no quarrel till this point.

The uncertainty relates to its filing and consequential immunity. The Scheme applies only to ‘defaulting companies’ and not to auditor. This raises a pertinent question that if the Scheme is not extended to auditors, how this form could be included in the Scheme.

Secondly, the immunity has to be applied by filing eForm CLSS and this form can only be filed by a company. This cannot be filed by the auditor.

Who gets Immunity under such a case?

Wake-up MCA and clarify this aspect!

Ashish Makhija: ashish@ashishmakhija.com

 Disclaimer: The views expressed here are views based on my personal interpretation and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.




# Is Filing of Form ADT-1 Mandatory For Appointment Of Auditor Under Section 139(6) & (8)?

CA Gopal ji Aggarwal raised an interesting query relating to filing of Form ADT-1

We want to seek your opinion whether the fourth proviso to Section 139(1) for filing the notice of the appointment of auditor is required to be filed with ROC for the First auditors appointed u/s 139( 6) and appointment u/s 139(8) as the said proviso has been made applicable for the auditors appointed in AGM u/s 139(1) only.


If one examines Section 139(1), fourth proviso mandates the companies to intimate RoC about auditor’s appointment and the Form is ADT-1. Similar proviso is absent in Section 139(6) and 139(8).

Technically, since similar proviso is not present in Section 139(6) and 139(8), one can conclude that there is no requirement to intimate RoC about appointment of Auditor. This logic also gets strength from Form ADT-1, which refers to Rule 4(2) of Companies (Audit & Auditors) Rules, 2014. Rule 4(2) relates back to fourth proviso to Section 139(1). This means legally Form ADT-1 is required to be filed for appointment of auditor under Section 139(1) and not under Sections 139(6) and 139(8).

To answer this question in a reasonable manner, we have to refer similar provisions of Companies Act, 1956. Section 224(1) was similar to Section 139(1). Sub-section (1A) stated that “Every auditor appointed under sub-section (1) shall within thirty days of the receipt from the company of the intimation of his appointment, inform the Registrar in writing that he has accepted, or refused to accept, the appointment.” Section 224(5) was similar to Section 139(6) and Section 225(6) was similar to Section 139(8).

Sub-section (1A) of Section 224 dealt with filing of intimation with RoC but it only covered the situations under sub-section (1). This means even earlier Form 23B was to be filed for appointments taking place under Section 224(1) and not under Section 224(5) or 224(6).

Now the pertinent question – Whether the auditors were filing Form 23-B for appointments under 224(5) and 224(6)? The answer is yes as filing of Form 23B became mandatory due to its linking with 23AC and 23ACA. In an indirect way, this became essential in all circumstances i.e. appointment under Section 224(1), 224(5) and 224(6).

The MCA has again linked quoting of SRN for auditor’s appointment in Form AOC-4 (see Col. 10). And this Form does not distinguish between appointments under 139(1) or 139(6) or 139(8). Thus, in an indirect manner,  appointment of an auditor in any situation needs to be intimated to RoC or else the company will not be in a position to quote SRN, which is a mandatory field.

To conclude, law does not mandate filing of ADT-1 in situations under 139(6) and 139(8) but looking at overall conspectus of CA 2013, it seems filing of ADT-1 in all circumstances becomes essential (I have deliberately not used the words ‘mandatory’). 

We await MCA to correct the situation.

 Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

Prohibited Non-audit services by an Auditor under CA 2013 – Can the auditor prepare and file tax returns of the same company?

Traditionally companies have engaged auditors to provide a range of non-audit services. This is because an auditor, due to his continuous engagement with the company, is in a better position to provide these services. Currently, whether non-audit services can be rendered to an audit client is determined by the Code of Ethics and the Guidance Note on Independence of Auditors issued by ICAI. Unlike 1956 Act, the 2013 Act contains specific provisions that prohibit auditors of a company to render non-audit services to an audit client (or its holding company or its subsidiary company).

Prohibited non-audit service includes:

  • accounting and book keeping services;
  • internal audit;
  • design and implementation of any financial information system;
  • actuarial services;
  • investment advisory services;
  • investment banking services;
  • rendering of outsourced financial services;
  • management services; and
  • any other kind of services as may be prescribed

The list of the prohibited services is quite wide and not happily worded. A major difficulty has arisen in the interpretation of following clauses:

a)     Rendering of outsourced financial services

b)     Management Services

a)     “Rendering of Financial Services” is no where defined in the Act or the Rules made thereunder. Any of the Services and products provided to consumers and businesses by financial institutions such as banksinsurance companiesbrokerage firmsconsumer finance companies, and investment companies all of which comprise the financial services industry shall be construed as financial services. Though nowhere defined in the Act the term financial services can in no manner be construed in a wider manner and has to be considered in a very stricter sense, as otherwise it would imbibe in its purview every services rendered by a Chartered Accountant.

(b)   “Management Services” –The word management means activities which influence policy or decisions of managerial nature affecting the company as a whole or substantially as a whole. [Commissioner for Corporate Affairs (Vic) v Bracht (1988) 14 ACLR 728 (Aust)]. Broadly the services in relation to  facility, equipment, staffing, contract negotiation, administration, and marketing shall be deemed to be included under the purview of management services. Thus services related with the day to day managerial activities of the Company shall be included under the definition of management services.

But in any case the approval of Board or Audit Committee will be required for engaging statutory auditor for any permitted services. The Section 144 amply clarifies this fact and it will be mandatory for the Company to get the services approved by the Board or its Audit Committee before engaging the statutory auditors for providing any services.

Status of Services Allowed to be rendered by an Auditor under Companies Act, 2013

S.No Services along with Statutory Audit Whether allowed or not Basis
1. Tax Audit , MAT, VAT , Service Tax Allowed Since not included in any of the aforesaid prohibited services hence permitted.Further the code of ethics specifically allows the performance of tax audit alongwith statutory audit as it does not hinders with the independence of the auditor
2. Certification in respect of  say- TUNOVER Certificate, Shareholding, Business running, net worth , 43 B Payment under Income Tax, Debtors agencing to Bank , Assets liability statement  etc  ( or in other words what are not permitted under service tax Allowed Issue of certificate does not fall under any of the prohibited services. 
3. Filling of various returns  (Only filling not preparation) Allowed Since not included in any of the aforesaid prohibited services hence permitted and in no manner be treated as a hindrance to the independence of the statutory auditor.
4. Representation before various Statutory  / Tax authorities in response to notice or for procedural work Allowed As not covered in any of the aforesaid prohibited services and in no manner enters within the bracket of independence of auditor.
5. Filling of correction, revision etc before tax & statutory authority Allowed As not covered in any of the aforesaid prohibited services and in no manner enters within the bracket of independence of auditor
6. Valuation of shares Allowed Valuation of shares does not falls under the list of prohibited services. However the provisions of the Code of ethics have to be followed before undertaking any assignment of valuation of shares if also engaged as a statutory auditor.