TaxTMI 
TaxTMI 
2002 (4) TMI 795
X X X X Extracts X X X X
X X X X Extracts X X X X
....spondent No. 6 ('the Oriental Bank'); Chairman & MD, Bank of India is respondent No. 7; Chairman & MD, IDBI is respondent No. 8; Chairman & MD, IIBI is respondent No. 9; Chairman & MD, ICICI is respondent No. 10; Chairman & MD, IFCI is respondent No. 11; Chairman GIIC is respondent No. 12; Chairman & MD, SICOM is respondent No. 13; Manager, Vysya Bank Ltd. is respondent No. 14; Director General, ESIC is respondent No. 15; Central Provident Fund Commissioner is respondent No. 16; President, Bhartiya Kamgar Sena is respondent No. 17; and President, Gujarat Rajya Kamgar Sabha is respondent No. 18. Respondents 3 to 14 are the financial institutions and banks, who are the petitioners' creditors. Respondents 15 to 16 are statutory creditors of the company and respondents 17 to 18 are the workers union of the company. The petitioners were permitted to file an amended writ petition by this Court's order dated 25-7-2000 in view of the passing of a reasoned order dated 13-3-2000 by AAIFR by which they sought to challenge the impugned said order dated 13-6-2000 apart from challenging the impugned orders dated 20-12-1999 and 6-6-2000. 2. The brief facts averred by the petitioners are as under....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The company was not called for the said joint meeting to present its case before the Consortium. (v)On 22-9-1999, the company filed its replies to the report and observations made by the ICICI before the BIFR. On 12-11-1999, the ICICI filed their sur-rejoinder, containing new facts and pleas before the BIFR. The company was not given an opportunity to file any reply to the sur-rejoinder. (vi)On 20-12-1999 the BIFR dismissed the petitioners' reference in total disregard of the principles of natural justice. Accordingly, the company challenged before the AAIFR, the appellate authority under section 25 of SICA, the impugned order dated 20-12-1999, passed by the BIFR on the following grounds : (a)it was passed without holding a hearing; (b)it was passed without getting the opinion of an independent Chartered Accountant; (c)it was passed without holding an enquiry in terms of section 16(2) of the Act; (d)it was passed without considering the contention of the petitioner company that losses sustained in the subsequent years have also to be taken into account as per the judgment of AAIFR in the matter of Shrishma Fine; (e)it was passed in violation of regulations 21 and 40 of BIF....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mpugned orders dated 20-12-1999, passed by the BIFR and 6-6-2000 and 13-6-2000, passed by the AAIFR. 6. By the impugned order dated 20-12-1999, the BIFR while rejecting the petitioner-company's reference under section 15(1) of SICA found as follows : (a)that the company/promoters had no regard to the directions issued by the Board and did not appear to be serious in the revival of the company; (b)that there was no justifiable or convincing reason for changing the accounting year as in the director's report dated 24-9-1998 no reason was given for reducing the accounting period from the previous accounts period of 18 months up to a mere 6 months; * c. that the company's plea that the accepted depreciation was provided for due to the changed accounting policy and consequently the company made the provision for arrears for depreciation while finalizing the accounts for the year ended 30-6-1998 in order to reflect the true and fair view of the state of affairs of the company was rejected by the BIFR as there was no reason given to change the accounting policy except to suggest that this was done to reflect the true and fair state of affairs of the company; (d)that in the matter of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of capital reserve leading to the conclusion that this was a unique manipulation of final accounts solely with the intention of avoiding legal and financial liabilities by seeking to take protection under SICA and no justification was shown for overstating losses in 1997-98. In respect of a prior period adjustment of Rs. 3,579.29 lakhs also, the Board came to a conclusion that the details submitted by the company in respect of sundry debts written off is a classic example of the worst form of manipulation of accounts by any company. The company was in the habit of taking credit for the income of a fictitious nature for huge amounts and later on reversing them as unrealizable. The company's loans to group companies engaged in the business of finance have not been explained properly. The ICICI's submission that promoters have siphoned away funds to group companies by issuing debt receivable and later on writing off the same as doubtful debts is correct. The company has been manipulating its accounts for several years including the period ended 30-6-1998 and also indulged in booking fictitious income; (h)that there was no explanation for the disproportionate increase in the cost of i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and charges of these expenses to the profit and loss account for financial year 1998 (by reversing earlier entries as capital work-in-progress) as 'prior period adjustments' is an accounting manipulation contrary to the stipulations of AS-5. 2.Finance charges of Rs. 1,120.82 lakhs as prior period adjustments is also not a case of any error or omission in the financial statements for financial year 1997 as it is not the case of the SIL that the expenditure of Rs. 1,120.82 lakhs have been actually incurred during financial year 1998 by way of payment of overdue interest to the financial institutions/banks. Consequently provision of Rs. 1,120.82 lakhs (finance charges) as 'prior period adjustments' in financial year 1998 is an accounting manipulation and not consistent with the stipulations of AS-5. 3.Rs. 1767.76 lakhs, which were sundry debts written off as prior period adjustments was a clear case of malfeasance. The promoter directors of the company have caused loss to the company by siphoning away company's funds to their private limited group companies and then writing these off. The promoter directors should not have participated in the Board of Director's meeting for approvin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nored. Furthermore, the loss of Rs. 225 lakhs by allowing forfeiture of this amount by TIPL is without any justification and is an act of misfeasance because the amount could have been recovered by SIL from TIPF in accordance with the terms of the contract. 4.Consequently from the foregoing discussion, it is clear that the provision of Rs. 3579.29 lakhs for prior period adjustments and 3744.85 for extraordinary items, aggregating Rs. 7324.14 lakhs in financial year 1998 profit and loss account is contrary to the accounting standards and losses in financial year 1998 are, therefore overstated to that extent and this figure ofRs. 7324.14 lakhs is to be ignored in computing the accumulated losses of the company at the end of financial year 1998. (E)Furthermore the following also show that the losses in financial year 1998 have further been over-stated through several other accounting manipulations detailed as under :-- (a)even the Company's own statutory auditors observed that the preliminary expenses of Rs. 44.99 lakhs cannot be accepted; (b)the figure of Rs. 1976.11 lakhs as interest on term loans from financial institutions and consequently treated as capital work- in-progress ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nfair practices." 10. The Board further affirmed the following finding of the BIFR : "The Board comes to the conclusion that M/s. Serene Industries Ltd. (SIL) and its promoters have indulged in very many highly serious and objectionable manipulations of accounts not only in the balance sheet for the period ended 30-6-1998 but also in the accounts of its earlier years. The company's explanations regarding the various objections have only gone to establish the serious manipulations of accounts over many years with a view to deliberately mislead and defraud the company's creditors - secured and unsecured, public shareholders. The Board, therefore, comes to the firm conclusion that the company's accounts are totally unreliable and the promoters have come to the Board with unclean hands; and as such it would not be possible to establish the eligibility of the company as sick under section 3(1)(o) of SICA. The Board also firmly believes that such unscrupulous promoters who approach the Board with unclean, nay, dirty hands deserve no protection under SICA. The Board, therefore, dismisses the company's reference under section 15(1) of SICA as non-maintainable." The aforesaid orders of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as to the financial condition of the company, the Board may-- (a)itself make such inquiry, as it may deem fit, for determining whether the industrial company has become a sick industrial company; or (b)if it deems necessary or expedient so to do, for the expeditious disposal of inquiry mentioned at (a) above, direct by an order, an operating agency, to be specified in the order, to enquire into and make a report with respect to such matters as may be specified in the order : Provided that, reasonable opportunity for making submissions shall be given by the informant, before deciding whether the said company has become a sick industrial company or not." The counsel has been unable to show how the above provision is violated or the prayer for appointment of an independent auditor flows from the above provision. The fact that serious anomalies were pointed out by the company's own auditors in any event militates against this plea of the company for seeking appointment of an independent auditor, particularly when no sustainable flaw has been pointed out about the defects in accounting procedure concurrently found by the BIFR and AAIFR. 14. The learned counsel for the petitioners ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is plea is indeed a plea of desperation and has no merits and is thus rejected. In this connection the reliance on regulation 21 already extracted above is misplaced as the said regulation permits even the BIFR to hold an enquiry and regulation 21 thus cannot come to the aid of the petitioners. 15. The other plea of the petitioners that natural justice was violated and the plea of siphoning off the funds of the company was raised only in the sub-rejoinder cannot be accepted because the ICICI's counsel has rightly pointed out that these objections were communicated to the petitioner company by letter dated 14th September, 1999 and have merely been restressed with reference to the company's rejoinder and thus contained an analysis of the balance sheet of the company. In paragraph 6 of the order, plea of natural justice violation has been rightly rejected by the AAIFR and I see no reason to differ in a writ petition under article 226 from the reasons contained in the said paragraph 6 of the AAIFR. Insofar as violation of natural justice is concerned, the plea is clearly governed by the principle of law laid down by the Hon'ble Supreme Court in State Bank of Patiala v. S.K. Sharma 199....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... does not give that opportunity in spite of the delinquent officer/employee asking for it. The prejudice is self-evident. No proof of prejudice as such need be called for in such a case. To repeat, the test is one of prejudice, i.e., whether the person has received a fair hearing considering all things. Now, this very aspect can also be looked at from the point of view of directory and mandatory provisions, if one is so inclined. The principle stated under (4) hereinbelow is only another way of looking at the same aspect as is dealt with herein and not a different or distinct principle. (4) (a) In the case of a procedural provision which is not of a mandatory character, the complaint of violation has to be examined from the standpoint of substantial compliance. Be that as it may, the order passed in violation of such a provision can be set aside only where such violation has occasioned prejudice to the delinquent employee. (b) In the case of violation of a procedural provision, which is of a mandatory character, it has to be ascertained whether the provision is conceived in the interest of the person proceeded against or in public interest. If it is found to be the former, then i....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., to ensure a fair hearing and to ensure that there is no failure of justice. It is this objective which should guide them in applying the rule to varying situation that arise before them. (7) There may be situations where the interest of State or public interest may call for a curtailing of the rule of audi alteram partem. In such situations, the Court may have to balance public/State interest with the requirement of natural justice and arrive at an appropriate decision." (p. 389) 16. In accordance with the position of law laid down above, I have no hesitation, after considering the findings of facts recorded by the BIFR and AAIFR, in coming to a conclusion, that any kind of prejudice has been caused to the petitioners and thus there is no failure of justice and there is no violation of the audi alteram partem rule in view of the above position of law laid down by the Hon'ble Supreme Court. The perusal of other proceedings before the BIFR and AAIFR clearly indicates that the petitioners received a fair hearing before both the said authorities. 17. The other legal plea, raised by the petitioners is that the order of the AAIFR seeks to debar the petitioners from filing further re....