For Chartered Accountants and Tax Professionals

For chartered accountants and tax professionals

Where the audit becomes a legal question.

A working reference for chartered accountants who advise commercial clients. Most legal questions in commercial life surface first at the CA’s desk — in the audit, in the tax return, in the diligence file. This page sets out the seven categories where the question is no longer accounting and a legal opinion or course of action is needed, with the controlling statute, the forum, and the procedural step.

1. Insolvency triggers under IBC 2016

The financial-creditor and operational-creditor admission tests under sections 7 and 9 of the Insolvency and Bankruptcy Code 2016 are commonly first identified by the auditor reading the books. The threshold (INR 1 crore for corporate insolvency, since the 2020 notification under s 4) and the default-event analysis sit squarely in the auditor’s field of view.

When to flag for legal review

  • The client’s receivables show an operational debt above INR 1 crore overdue beyond 90 days, with no documented dispute on record
  • A creditor of the client has issued a section 8 demand notice; the response window is 10 days
  • The client has guaranteed a borrower whose default is now triggering insolvency; personal-guarantor proceedings under Part III may follow
  • A resolution plan is being considered for a stressed asset and Section 29A eligibility analysis is needed before bidding
Procedural note: Section 8 of the IBC requires a 10-day window between demand notice and section 9 application. A delay in legal response in this window often forfeits the dispute defence.

2. Companies Act 2013 board-level transactions

Section 188 of the Companies Act 2013 requires Board, and in some cases shareholder, approval for related-party transactions above prescribed thresholds. The auditor reading the related-party ledger is the first to see whether a transaction has been brought to the Board with the required disclosures.

When to flag for legal review

  • A related-party transaction is recorded above the threshold without Board minutes evidencing prior approval
  • A loan to a director or to an entity in which a director is interested under section 185 is detected
  • A scheme of arrangement, demerger, or amalgamation is being structured and Companies Act 2013, ss 230–232 procedural compliance is needed
  • A buy-back of shares under section 68 is contemplated and the financial conditions (debt-equity ratio, free reserves) require certification

3. SEBI compliance for listed and unlisted public companies

For listed entities, the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 carry continuous disclosure obligations. The CA reviewing quarterly results is often the first to identify a reportable event.

When to flag for legal review

  • A material event has occurred that may require disclosure under the LODR Regulations
  • A related-party transaction approaches the materiality threshold under regulation 23 of the LODR Regulations
  • An insider-trading concern arises in connection with the timing of a material event and trading by designated persons
  • A SEBI examination or show-cause notice has been received

4. RBI / FEMA on cross-border transactions

FEMA filings — Form FC-GPR (allotment to non-resident), Form FC-TRS (transfer between resident and non-resident), Annual Return on Foreign Liabilities and Assets — are typically the CA’s desk. The pricing-guideline compliance under FEMA (Non-Debt Instruments) Rules 2019 is where most disputes later arise.

When to flag for legal review

  • A pricing-guideline violation is detected; compounding under FEMA s 15 may be required
  • An ECB drawdown or repayment is non-compliant with the ECB framework under the FEMA (Borrowing or Lending) Regulations 2018
  • An ODI structure is being considered and prior approval may be needed under the FEMA (Overseas Investment) Rules 2022
  • An FDI inflow falls into a sector with sectoral caps, government route, or critical-sector restrictions

5. Direct-tax and indirect-tax disputes

Tax disputes commonly originate in the auditor’s response to a notice under section 142(1) or 143(2) of the Income-tax Act 1961, or a show-cause under the GST framework. The line between accounting representation and legal representation depends on the forum.

When to flag for legal review

  • A notice under section 148 of the Income-tax Act 1961 (reassessment) has been issued
  • An order has been received from the Commissioner (Appeals) and an appeal to the Income Tax Appellate Tribunal is contemplated
  • A GST show-cause has implications for ITC reversal of material amount
  • A transfer-pricing adjustment has been proposed and DRP / ITAT representation is needed
  • A tax demand has been raised against an entity in CIRP or post-resolution; the IBC clean-slate framework needs to be invoked (cf Sundaresh Bhatt, Liquidator of ABG Shipyard v CBIC (2023) 1 SCC 472 (SC))

6. Real-estate transactions and RERA

The CA reviewing a real-estate transaction often surfaces title and registration anomalies. Where the transaction is over INR 30 lakh, the source-of-funds question and the stamp-and-registration framework intersect with anti-money-laundering compliance.

When to flag for legal review

  • Title due diligence has surfaced encumbrances, attachments, or pending litigation that affect transferability
  • The developer’s RERA registration is lapsed, or the project has structural defects under the Real Estate (Regulation and Development) Act 2016
  • An allottee dispute is brewing and the choice between RERA, NCDRC, IBC, and civil-court forums is open
  • The transaction triggers section 50C of the Income-tax Act and the stamp value is materially higher than the agreed consideration

7. M&A diligence and post-closing integration

The CA conducting financial diligence on an M&A target identifies most legal issues before they appear in the Sale and Purchase Agreement. The framing of representations and warranties depends materially on what diligence found.

When to flag for legal review

  • A material contract carries a change-of-control clause that requires consent
  • An IP asset is registered in a different group entity and an assignment is needed pre-closing
  • A pending litigation against the target carries a quantum that exceeds materiality
  • A regulatory licence is non-transferable and a fresh application is needed; closing conditions need to reflect this
  • The target’s holding-company structure carries a Section 29A or Section 188 implication

Working references on this site

The following pages are calibrated for the questions a CA most commonly faces:

This page is informational and is not advertisement or solicitation under Bar Council of India Rule 36. Statutory references are to the bare Acts as in force at the time of writing. Citations follow OSCOLA.