Conduct of an audit of a concern in which near relatives of

the auditor are interested as partners/proprietors

The querist has sought the opinion of the Expert Advisory Committee on:

(i) Whether a chartered accountant in practice can audit the books of account, as required under section 44 AB of the Income-tax Act, 1961, of a concern in which his near relatives like father, brother, wife, uncle etc. are interested as partner/proprietor.

(ii) If the answer to (i) above is in the affirmative, is it advisable that the member concerned should disclose in his report that his near relative is a partner/proprietor of the concern?

(iii) In case the answer to (ii) also is in the affirmative, suggest a specimen of the manner of disclosure.

Opinion February 13, 1985

1.The Committee notes that the Council of the Institute has issued the following Notification, which appears at page 57 of the ‘The Chartered Accountants Act, 1949,’ published by the Institute:

“No. 1-CA(44)71 : In exercise of the powers conferred by clause (ii) of Part II of the Second Schedule to the Chartered Accountants Act, 1949, the Council of the Institute of Chartered Accountants of India specifies that a member of the Institute shall be deemed to be guilty of professional misconduct, if he expresses his opinion on financial statement of any business or enterprise in which one or more persons who are his “relatives” within the meaning of Section 6 of the Companies Act, 1956 have either by themselves or in conjunction with such member a substantial interest unless he discloses the interest also in his report. Explanation: For this purpose the expression “substantial interest” shall have the same meaning as is assigned thereto under Explanation 3 to Section 13 of the Income Tax Act, 1961”.

2. The Committee also notes that father, brother and wife are specifically covered by the term ‘relative’ as per section 6 of the Companies Act, 1956. However, ‘uncle’ will be considered a relative as per that definition only if he happens to be a member of the Hindu Undivided Family of which the auditor is also a member.

3.The Committee further notes that in the case of a concern other than a company ‘substantial interest’ has been assigned the following meaning under explanation 3 to Section 13 of the Income-tax Act, 1961:

“……a person shall be deemed to have special interest……

(ii)….if such person is entitled, or such person and one or more or the other persons……..are entitled in the aggregate, at any time during the previous year, to not less than twenty per cent of the profits of such concern.”

4. On the basis of the above, the opinion of the Committee on the issues raised by the querist is as below:

(i) A chartered accountant in practice can audit the books of account, under section 44 AB of the Income-tax Act, 1961, of a concern in which his near relatives like father, brother, wife, uncle etc. are interested as partner/proprietor, provided he discloses in his report the interest of his relative, i.e. father, brother, wife, uncle (in case he is a member of the HUF of which the auditor is also a member) in a concern.

a) if the said relative is a proprietor of the concern; or

b) if the said relative(s) is/are partner(s) of the concern and either by himself/themselves or in conjunction with the auditor is/are entitled to not less than 20 per cent of the profits of the concern.

(iii) An illustration of the manner of disclosure is given as follows:

“I hereby confirm that my father/brother/wife etc. is/are proprietor/partner(s) of M/s_______________, who has/have substantial interest in the said concern”.

The Committee wishes to state that the above opinion is subject to any specific provision on the matter to the contrary in the relevant Income-tax Rules.

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