2025 (12) TMI 212 - HC - Indian Laws

Disciplinary report under s.21 and Reg.16 set aside as non-speaking; matter remitted for fresh consideration

Council of Institute of Chartered Accountants of India Versus S.N. Valera, FCA M/s. S.N. Valera & Co.

HC held that, although the disciplinary committee had proved eight charges of professional misconduct against the respondent-auditor, the Council failed ... Disciplinary proceedings against the Auditor (CA) - Scope and validity of the misconduct, which has been proved by the disciplinary committee and affirmed by the Council - Gross negligence in performing professional duties - the respondent failed to report material misstatements known to him to appear in the financial statements of the Bank - HELD THAT:- Chapter 5 of Chartered Accountants Act, 1949 prescribes the procedure in inquiries relating to the misconduct of the Members of the Institute. It is not in dispute that the respondent was subjected to the disciplinary proceedings and 16 charges for irregularities were framed by the disciplinary committee. However, the disciplinary committee has submitted its report to the applicant-Council on 16. 11. 2004 holding 08 charges as proved, and holding him guilty for the misconduct, as enumerated in the 2nd Schedule of the Act. The intention of section 21 is to investigate the professional and other misconducts of a Chartered Accountant. The provisions of section 21 (3) of the Act read with Regulation 16(2) and (4) of the Regulations mandate the Council to record its findings, after considering the representation and the report of the disciplinary committee. The term “finding” used in section 21 (3) and Regulation 16(4) cannot be an empty formality and there has to be an application of mind by the Council to the findings recorded by the disciplinary committee in its report and it has to arrive at its independent finding; after considering the defence/representation of the respondent and ultimately, prepare the report and send the same with recommendation to the High Court. The provision of section 21 and Regulation 16 provides four tier exercise to be undertaken in case of misconduct by a Chartered Accountant. The first stage is prima facie opinion under section 21( 1) by the Council, the second stage is by the disciplinary authority which has to prepare a report, the third stage is the findings of Council on the disciplinary committees report and the defence or representation of the member, and the fourth stage is consideration of the recommendation sent by the Council along with the report by the High Court in case the member is recommended to be removed from the Register for more than five years or permanently. The powers of the High Court under section 21(5) are wide enough to enable the High Court to adopt any course to do complete justice - there are two stages of recording the findings of guilt of the respondent, (i) by the disciplinary committee in its report and (ii) by the Council however, the Council is also further required to consider the defence or the points raised by the respondent in his representation presented before it. In the present case, all the facets of the application of mind and consideration of all the relevant aspects are missing in the report of the Council. Thus, only on this sole ground, the report and the recommendation of Council does not qualify to be accepted. The decision, in the case of Council of Institute of Chartered Accountants of India vs Arun Purushottam Kapadia, [2013 (12) TMI 1769 - GUJARAT HIGH COURT] on which the reliance is placed by learned advocate Mr. Soparkar will also not come to rescue as the same also does not deal with the issues raised in the present reference, and the points canvased by the respondent. Moreover, in that case, nobody appeared on behalf the respondent and the proceedings were further conducted ex-parte by the High Court. So far as the case of C A Rajesh [2012 (12) TMI 510 - GUJARAT HIGH COURT] is concerned, the same also does not deal with the contentions raised with regard to non-speaking order and non-application of mind by the applicant-Council as mandated under the Provisions of section 21 of the Act read with the Regulation 16 of the Regulations. Thus, while invoking the power under section 21(5) of the Act, the report and recommendation of the Council is not worthy of acceptance. The same is set aside and the matter is remitted back to the Council for fresh consideration and disposal in accordance with law. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether, under section 21 of the Chartered Accountants Act, 1949 read with Regulation 16 of the Chartered Accountants Regulations, 1988, the Council is required to record an independent, reasoned finding on guilt or non-guilt after receiving the report of the Disciplinary Committee and the member's representation. 1.2 Whether the Council's report in the present matter satisfies the statutory requirement of 'finding' and 'consideration' or is vitiated by non-application of mind and absence of independent reasons. 1.3 Whether precedents involving another chartered accountant connected with the same bank and other disciplinary cases under the Act justify acceptance of the present Council recommendation despite the challenge based on lack of reasons. 1.4 Appropriate consequential order to be passed by the High Court under section 21(6) in light of the defects, if any, in the Council's report and recommendation. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Requirement of independent, reasoned finding by the Council under section 21 and Regulation 16 Legal framework 2.1 Section 21(1)-(3) of the Act provides that, upon receiving a complaint and forming a prima facie opinion, the Council must refer the case to the Disciplinary Committee, which conducts an inquiry and reports its result to the Council; upon receipt of such report, if the Council finds the member guilty, 'it shall record a finding accordingly and shall proceed in the manner laid down in the succeeding sub-sections'. 2.2 Regulation 16(2)-(4) mandates that where the Disciplinary Committee finds the respondent guilty, its report shall be furnished to the respondent who may make a written representation to the Council; the Council 'shall consider' the report and the representation and, if necessary, order further inquiry; thereafter, the Council 'shall ... record its findings' on consideration of the report, any further report, and the respondent's representation. 2.3 The Court referred to the meaning of 'finding' as explained by the Supreme Court, holding that a legal conclusion is a 'finding' only when it is supported by reasons and reflects application of mind, and to decisions emphasising that recording of reasons by quasi-judicial authorities is a facet of natural justice, and that 'consider' implies active, intensive application of mind to all relevant aspects. Interpretation and reasoning 2.4 The Court held that section 21 and Regulation 16 contemplate a four-stage process: (i) prima facie opinion by the Council; (ii) inquiry and report by the Disciplinary Committee; (iii) independent consideration of that report and of the member's representation by the Council, culminating in the Council's own 'finding'; and (iv) consideration by the High Court when removal in excess of five years or permanent removal is proposed, or where the misconduct falls under the Second Schedule. 2.5 The statutory scheme thus creates two distinct adjudicatory stages of determining guilt: first by the Disciplinary Committee, and then by the Council. The Council cannot function merely as a forwarding authority; it must itself assess the evidence, the Disciplinary Committee's reasoning, and the member's defence, and then record its own findings. 2.6 The expressions 'it shall record a finding accordingly' in section 21(3) and 'record its findings' in Regulation 16(4) were construed as imposing a mandatory duty on the Council to give a reasoned, independent decision. A 'finding' cannot be an empty formality; it must disclose the Council's application of mind to the report and to the defence/representation of the member. 2.7 Relying on prior Supreme Court authority, the Court reiterated that: (i) the Council acts as a quasi-judicial authority; (ii) the Disciplinary Committee is only a fact-finding body whose report is not conclusive; (iii) the Council is required to independently consider the explanation of the member, the evidence adduced before the Committee, and the Committee's report; and (iv) recommendations unsupported by independent reasons and made mechanically do not satisfy the statutory mandate. Conclusions 2.8 The Council is statutorily obliged under section 21(3) and Regulation 16(2) and (4) to independently consider the Disciplinary Committee's report and the member's written/oral submissions, and to record its own reasoned findings on guilt or non-guilt. Mere adoption of the Committee's report, without reasoned dealing with the member's representation, does not meet this requirement. Issue 2: Validity of the Council's report and recommendation in the present matter Interpretation and reasoning 2.9 It was undisputed that: (i) the Disciplinary Committee found several charges proved and held the respondent guilty of professional misconduct under specified clauses of Part I of the Second Schedule; (ii) the Committee's report was furnished to the respondent; (iii) the respondent submitted a written representation and made oral submissions before the Council; and (iv) the Council thereafter forwarded a report and recommendation to the High Court under section 21(5). 2.10 The Court examined the Council's report and noted that, after reciting the procedural history and reproducing the Disciplinary Committee's report verbatim (running from page 308 to 361), the Council's 'findings' were confined essentially to paragraph 9, where it stated that it had considered the Committee's report, the written representations of the complainant and the respondent, and the oral submissions on behalf of the respondent, and then 'decided' to accept the Committee's conclusions as to guilt and non-guilt on the various charges. 2.11 The Court found that, apart from the bare statement that the Council had 'considered' the representations and submissions, there was no discussion of the respondent's defence, no articulation of reasons, and no indication of any independent evaluation of the material. The report was characterised as a mere 'cut-paste job' of the Disciplinary Committee's report, with the Council simply recording agreement without any supporting reasoning. 2.12 Applying the principles that: (i) a 'finding' presupposes application of mind and reasons; (ii) the word 'consider' requires active assessment of relevant material; and (iii) recording of reasons is a requirement of natural justice in quasi-judicial decision-making, the Court held that the Council had failed to discharge its statutory duty. The Council's assertion that it had considered the material, without dealing with the contents of the respondent's representation or giving reasons, revealed non-application of mind. 2.13 The Court also noted that the Council's role under section 21 is not analogous to that of an appellate authority in service jurisprudence, and therefore decisions governing limited judicial review of disciplinary findings in employment matters were inapposite; the Council has an original quasi-judicial duty to form and record its own conclusions on misconduct. Conclusions 2.14 The Council's report and recommendation did not amount to a 'finding' within the meaning of section 21(3) and Regulation 16(4), as they lacked independent reasons and did not demonstrate consideration of the respondent's representation and submissions. 2.15 The report and recommendation were thus vitiated by non-application of mind and failure to comply with the mandatory statutory requirements, and could not be accepted. Issue 3: Relevance of earlier disciplinary precedents involving another chartered accountant and other cases under the Act Interpretation and reasoning 2.16 The Council relied on a prior disciplinary case relating to another chartered accountant connected with the same bank, in which the High Court had accepted the Council's recommendation and the Supreme Court had dismissed a challenge. The Court examined that earlier decision and found that the specific issue raised here-non-speaking nature of the Council's order and lack of independent application of mind to the member's representation-had neither been raised nor adjudicated in that case. 2.17 Consequently, the Court held that the earlier acceptance of the Council's recommendation in that matter, and the dismissal of the special leave petition, did not answer or foreclose the present challenge based on statutory non-compliance by the Council. 2.18 The Court further held that other decisions cited on behalf of the Council, including those under the Act where the respondent had not appeared or where the specific issue of lack of reasons was not examined, were distinguishable and did not govern the question at hand. 2.19 The Court also held that decisions dealing with the limited scope of judicial review in service disciplinary matters were not applicable, as they did not concern the statutory scheme of section 21 and Regulation 16 or any pari materia framework, and the Council's role under section 21 is different from that of a conventional appellate authority in employment cases. Conclusions 2.20 Earlier disciplinary precedents under the Act, including those involving another member connected with the same bank, did not validate the present Council recommendation, as they did not address the specific statutory requirement of independent, reasoned findings by the Council or the defect of a non-speaking, mechanical adoption of the Disciplinary Committee's report. Issue 4: Appropriate consequential order under section 21(6) Interpretation and reasoning 2.21 Having found that the Council's report and recommendation were not in conformity with section 21(3) and Regulation 16, the Court considered the course open to it under section 21(6), which empowers the High Court to, inter alia, dismiss the complaint, reprimand the member, remove him from membership, or 'refer the case to the Council for further inquiry and report'. 2.22 The Court reiterated that the statutory process contemplates that the Council must first comply with its quasi-judicial duty to consider the Disciplinary Committee's report and the member's representation, and to record its own findings. Since this foundational step was defective, the High Court could not proceed to finally adjudicate guilt and punishment on the present recommendation. 2.23 In view of the age of the reference, the Court also considered the need for expeditious resolution, while ensuring observance of statutory procedure and principles of natural justice. Conclusions 2.24 The report and recommendation of the Council were set aside. 2.25 The matter was remitted to the Council for fresh consideration and disposal in accordance with law and in light of the Court's observations, with a direction that the Council complete the exercise as expeditiously as possible and in any case within three months from receipt of the order. All contentions of the parties were left open.