Tax Hotline October 21, 2009

Client confidentiality privilege: Only for lawyers and not for accountants

The High Court of Justice (Queen’s Bench Division) of England, in the recent case of Prudential PLCv. Special Commissioner of Income Tax 1, refused to extend the professional confidentiality privilege to accountants and held that it applies only to the lawyers. Therefore, the communication between an accountant and client can be compelled to be disclosed to any competent authority. Unlike the UK, where confidentiality of client communication is recognized under common law, the position in India goes a step ahead as the confidentiality is also granted statutory protection under section 126 of the Evidence Act, 1872. However, such protection extends only to information shared with lawyers and their employees, and no other professionals.

Fact and arguments advanced

Special Commissioner of Income tax (“Defendants”) permitted the Revenue to issue notices to Prudential PLC (“Claimants”) under sections 20(1) and 20(3) of the Taxes Management Act, 1970, respectively. The said notices compel the recipient to furnish documents, particulars and information or make the same available for the inspector’s inspection. More specifically, this could allow the Revenue to investigate a tax avoidance scheme promoted by the Claimant and to compel it to produce all such documents that the tax inspectors would reasonably believe to be relevant for their consideration. The Claimant challenged the notices on grounds that, inter alia, the said notices sought disclosure of material that were covered by legal professional privilege. The material and documents in question, were prepared by Claimants’ accountants.

The counsel on behalf of the Claimants, stressed in his submission that in the modern context, where professional advice on tax matters is increasingly being obtained from accountants, the common law principles regarding legal professional privilege should extend to communications between client and the accountants. The Revenue asserted that the Claimant was in fact seeking an expansion of the privilege rule as the disclosure sought were not protected by legal professional privilege when “properly so described”.


The court, in arriving at its decision, relied largely on the established tenets of common law. Full disclosure of documents enabling the courts to have all relevant material before it for consideration, is essential in administration of justice. However, the other competing aspect of administration of justice is affording a degree of privilege to encourage professional confidences from being broken and that the communications in a client- attorney setting are open and honest. This despite the cost of such communications becoming unavailable from being produced in court proceedings. The court then analysed the genesis of the law on legal privilege by taking one of the earlier decisions on the subject, in Greenough v. Gaskell 2 where Lord Brougham observed that it would amount to violation of professional confidence if counsels and attorneys were compelled to disclose matter shared with them in their professional capacity which there would not have otherwise been made conscious of.

His Lordship, Charles J, hearing the matter, then set out his reason on why only legal profession was so linked with the privilege. For doing so, he observes in paragraph 45: “A link to the legal profession was and remains a natural one given the necessary close relationship of lawyers with the administration of justice and their professional duties (which are also so linked)”. The said paragraph continues to explain as to why other professions are excluded from the privilege: “… The link is also one that sets a practical limit to the extent of the right to claim LPP [Legal Professional Privilege] which runs counter to the competing public interest of all relevant material being before a court or tribunal. I accept that it can be said with some force that that line is vulnerable to attack on the basis that it could logically and rationally have been drawn elsewhere, particularly in modern conditions, but historically this attack has much less force because of the historical connection between the legal profession and the administration of justice, and what the legal and other professions then did”.

The court further concluded that accountants did not come within the clients’ purview of privileged communications based on past precedents.3 The court however drew a distinction between legal advice privilege and litigation privilege which are the sub-headings of the overall privilege. The court observed that while legal advisory privilege extends only to advice given by lawyers, litigation privilege, in the court’s assumption, could extend to clients represented by persons other than lawyers.

Position of law in India

The position of law in India on privileged professional communications between clients and legal advisors are dealt under sections 126 to 129 of the Indian Evidence Act, 1872 (“Act”). Section 126 of the Act provides the scope of privilege attached to professional communications in a client attorney setting. It restricts attorneys from disclosing any communications exchanged with the client and stating the contents or conditions of documents in possession of the legal advisor in course of and for the purpose of the latter’s employment with the client. The section also provides certain exceptional grounds on which such privilege shall stand denied, being furtherance of any illegal purpose or facts coming to the awareness of the attorney showing that either crime or fraud have been committed since the commencement of the attorney’s employment on the concerned matter.

Privilege extends to all communications (including direct communications or through agents) and all documents generated for the purpose of rendering legal advice (including letters and instructions to legal advisers, opinions from legal advisers, all working papers and drafts).

Earlier this year, the Delhi High Court within its writ jurisdiction, examined a case 4 where the tax department had seized the laptops of the auditors and accountants while the latter were conducting an audit for their client. As observed in the case, the auditors agreed to provide the department all relevant data relating to the concerned client who was under department’s investigation. The department’s insistence on securing total and unrestricted access to the laptops was however rejected by the court on constitutional grounds and that allowing such access would tantamount to professional misconduct on the part of the auditors. Interestingly, no reference to the Evidence Act was made in the judgment.


Legal professional privilege has assumed much significance in recent times. As jurisdictions around the globe grapple for economic recovery, offshore structures are coming under increased scrutiny by the tax authorities as they attempt to access the information in the possession of chartered accountants and consultancy firms including their internal notes since they are not protected by ‘Client- Attorney Privilege'. The spate of accounting frauds in recent past has only augmented the concern. In transactions of considerable value, it is no longer uncommon for the tax authorities to demand offshore information. Considering the stance that regulators, tax departments and other authorities seem to be taking globally while scrutinizing transactions, one needs to be careful while sharing sensitive information with persons not having legal professional privilege.


Richie Sancheti & Gowree Gokhale




1 [2009] EWHC 2494 (Admin)

2 (1833) 1 My & K 98, 39 ER 618 (HL)

3 The court observed as follows: “It is quite clear that the reference to "professional advisers” is to be understood as meaning "legal advisers." That is made clear by the judgment of Sir George Jessel in Anderson v Bank or British Colombia (1876) 2 Ch D 644, especially at 651 where, after citing Lord Cottenham he says " professional men means members of the legal profession, and nothing else” and again by Sir George Jessel in Slade v Tucker (1880) 14 Ch D 824”.

4 [2009] 315 ITR 137 (Delhi)

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