TaxTMI 
TaxTMI 
2016 (12) TMI 185
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....and Exchange Board of India (hereinafter, for short, referred to as SEBI) addressed a letter to the President, Institute of Chartered Accountants of India (hereinafter, for short, referred to as the Institute) stating that it had conducted an investigation in the primary market and secondary market transactions in the scrip of the company which had come out with a public issue in 1995. During the course of investigation, it was found that the respondent, as the statutory auditor of the company, had given a certificate dated 09.06.1995 certifying that the entire promoters contribution had been received by the company. The certificate of the Auditor is as under: We the statutory Auditors of Ritesh Polysters Limited, Secunderabad, hereby certify and confirm that as per the books of accounts maintained by the company, the company has received Rs. 225 lakhs (Rupees Two crores twenty five lakhs only) as share application money towards 15,00,000/- equity shares of Rs. 10/- each at a premium of Rs. 5/- per share from the promoters, directors, their friends and associates as on 9th June 1995. The details of promotes contribution of Rs. 225 lakhs (Rupees two hundered and twenty five la....
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....s, the respondent had failed to take due care while issuing the certificate, and had failed to comply with the requirement of the SEBI Circular and, while issuing the certificate, the respondent did not disclose transfer of money from M/s Pratha Investments to the promoters Sri Deepak Agarwal and Sri Ritesh Agarwal. On receipt of the above said letter from SEBI, the Institute addressed letter dated 28.07.2005 to the respondent alleging that the amount received towards contribution was only Rs. 35 lakhs, but the respondent had certified that Rs. 225 lakhs was received by the company towards promoters contribution, and the cheques issued against the balance amount had bounced. However, shares for Rs. 225 lakhs were allotted to the promoters by the company. The respondent was called upon to disclose the name(s) of the member (s), answerable to the charge of misconduct, as per Regulation 12 (6) of the Chartered Accounts Regulations, 1988 (for short, hereinafter referred to as Regulations), and to forward the letter to him/them with a request to submit his/their written statement (s) in his/their defence, in triplicate, as required under Regulation 12(7) read with Regulation 13 of th....
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....dure prescribed under the Act and the Regulations, found the respondent guilty of misconduct under Clause (7) of Part I of the Second Schedule read with Sections 21 and 22 of the Chartered Accountants Act, 1949. The disciplinary committee forwarded its report to the Council to take appropriate action and, accordingly, the Council of the Institute accepted the findings of the disciplinary committee and recommended that this Court impose the punishment of removal of his name from the Register of Members, for a period of 3 years, on the respondent, after following the procedure prescribed under the Act and the Regulations. During hearing, Sri C.V. Rajeeva Reddy, learned counsel for the Institute, while stating the facts of the case, contended that the misconduct attributed against the respondent is serious in nature, and is against public interest, since M/s Ritesh Polyster Limited had invited applications, for allotment of shares to the public, for several crores of rupees, but only Rs. 35,00,000/- was received by the Company towards promoters contribution, as against Rs. 225 lakhs. Though the promoters did not contribute the amount, they were allotted shares for Rs. 225 Lakhs.....
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....require this Court to take a lenient view in view of the law declared by various courts. While placing reliance on several judgments, which we will refer to at the appropriate stage in the order, he requested this Court to exonerate the respondent for the alleged acts of misconduct, after finding him not guilty. The points which arise for consideration are as follows: (1) Whether in a reference made to this Court, and in exercise of the powers conferred by Section 21 (5) and (6) of the Chartered Accountants Act, 1949, the High Court can re- appreciate the evidence on record, and re-examine the conclusions arrived at by the Institute? (2) Whether the Institute has violated Regulations 16(2) and 16(5) of the Regulations and, if so, whether the entire proceedings are vitiated? (3) Whether these disciplinary proceedings are quasi- judicial and quasi criminal in nature and, if so, what is the standard of proof applicable to such disciplinary proceedings against a professional? (4) Whether the act attributed to the respondent, of having issued a certificate confirming receipt of contribution of Rs. 225.00 lakhs from the promoters, amounts to gross negligence; if so, whe....
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....tion 21(5) and (6) read as under: Section 21(5) of the Act: Where the misconduct in respect of which the Council has found any member of the Institute guilty is misconduct other than any such misconduct as is referred to in sub-section (4), it shall forward the case to the High Court with its recommendations thereon. Section 21(6) of the Act: On receipt of any case under sub- section (4) or sub-section (5), the High Court shall fix a date for the hearing of the case and shall cause notice of the date so fixed to be given to the member of the Institute concerned, the Council and to the Central Government, and shall afford such member, the Council and the Central Government an opportunity of being heard, and may thereafter make any of the following orders, namely:- (a) direct that the proceedings be filed, or dismiss the complaint, as the case may be; (b) reprimand the member; (c) remove him from membership of the Institute either permanently or for such period as the High Court thinks fit; (d) refer the case to the Council for further inquiry and report. The power conferred on this Court, by Section 21(6) of the Act, enables it to direct the proceedings to be fi....
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....an enquiry. If the disciplinary committee finds the member of the Institute guilty, it is required to submit a report to the Council. The Council is required to follow the procedure prescribed under Regulation 16, and if it finds that the matter falls exclusively within the ambit of Section 21(5) of the Act, it should then refer the matter to this Court for a penalty to be imposed. On a reference made by the Institute, this Court can exercise the power conferred under Section 21(6) of the Act. In such a reference, the jurisdiction and powers of the High Court, while dealing with cases under sub-sections (2) (3) and (4) of Section 21 of the Act, are limited. The Calcutta High Court took the view that, even if a wider construction is put on the material words used in Sections 21 and 22, they would not be justified in passing any orders against the respondent in the proceedings, because the finding which had been referred to the High Court was only one, and that was that the respondent was guilty of professional misconduct in the narrow sense of the term. In other words, the High Court was of the view that, if a wider construction is placed on the material words of the Section, it ....
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....rs the case to the Disciplinary Committee. The Disciplinary Committee plays a subordinate role. It conducts an inquiry into the allegations. Since the inquiry is into the allegations of misconduct by the member, it possesses the character of a quasi-judicial proceeding. The Disciplinary Committee, thereafter, submits a report of the result of the inquiry to the Council. The Disciplinary Committee is merely a Committee of the Institute, with its functions specifically limited by the provisions of the Act. As a subordinate body, it reports to the Council, the governing body. The report will contain a statement of the allegations, the defence entered by the member, a record of evidence and the conclusions upon that material. The conclusions are the conclusions of the Committee. They are only tentative. They cannot be regarded as 'findings'. The Disciplinary Committee is not vested by the Act with power to render any findings. It is the Council which is empowered to find whether the member is guilty of misconduct. Both Section 21(2) and Section 21(3) are clear as to that. If, on receipt of the report, the Council finds that the member is not guilty of misconduct, Section 21(2) ....
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....a finding of guilt or non- guilt by the Council was mandatory to take further action or to dismiss the complaint or for further process. The Council was required to consider independently the explanation submitted by the member and the evidence adduced in the enquiry before the Disciplinary Committee, and the report of the Disciplinary Committee. It provided an in-built mechanism under which the Council itself was required to examine the case of the professional or other misconduct of a member of the Institute or associate member, taking the aid of the report submitted by the Disciplinary Committee, the evidence adduced before the Committee, and the explanation offered by the delinquent member. The entire material constitutes the record of the proceeding before the Council to reach a finding whether or not the delinquent member had committed professional or other misconduct. Otherwise, the primacy accorded to the report of the Disciplinary Committee would attain finality, denuding the Council of the power of discipline over the members of the Institute, and that would have a deleterious effect on the maintenance of discipline among the members or associate members of the Institute.....
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....o such other conditions, if any, as it thought fit to impose, to another High Court if it appeared to it that the transfer of a pending case will promote the ends of justice or tend to the general convenience of the parties; the powers in a reference under Section 21 (5) of the Act are wider; and the Court can come to any independent conclusion based on the material notwithstanding the findings recorded by the Council and the recommendations made for imposing penalty or punishment. In The Council of the Institute of Chartered Accountants of India v. Shri Dilip Kumar De the High Court of Calcutta, while deciding the case of misconduct of a Chartered Accountant, considered the scope of a reference, and the powers vested in the Court in a reference made to it. The Calcutta High Court concluded that the powers of the High Court are wider in view of the scheme for disposal of cases relating to misconduct, and it was apparent that, even in cases of misconduct of a lesser degree specified in the First Schedule to the Act, once a member was found guilty by the Council, based on an enquiry by the Disciplinary Committee, the law did not authorize the Council to totally exonerate such a pe....
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....ope of interference by the High Court with the findings recorded by the disciplinary committee, held that the High Court has been entrusted an important function in the context of the behaviour of the members of this noble profession in the disciplinary matters which come up before it. It has wide powers extending to removal from membership of the institute either permanently or for a specified period. It may direct the proceedings to be filed or dismiss the complaint. This enables the Court to examine the nature of misconduct alleged, and the facts and circumstances brought on record in connection therewith against the delinquent. There is a serious responsibility on the Court, a duty to itself, to the profession, and to the whole of the community to be careful not to accredit any person as worthy of the public confidence who cannot establish his right to that credential. However, when an important statutory body like the Council finds a member of the institute guilty of misconduct, and forwards the case to the High Court with its recommendation under Section 21(5) of the Act, its findings, based on the material on record, would ordinarily not be disturbed unless found to be unjus....
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....ssess on behalf of the Institute, and they did not afford any opportunity to the respondent to adduce evidence; and, therefore, the enquiry conducted by the disciplinary committee, as confirmed by the Council, is vitiated by illegalities. Whereas, Sri C.V. Rajeeva Reddy, learned counsel for the Institute, contended that, in the absence of a prescribed procedure to be followed by the disciplinary committee, the Institute can adopt its own procedure and, accordingly, they followed a fair procedure, and recorded their findings mostly based on the admissions made by the respondent in the questionnaire. Therefore, on this ground, the disciplinary proceedings cannot be set at naught. It is apposite to extract Regulation Nos. 16(2) and (5) for better appreciation. Regulation 16: (1).. (2) Where the finding of the Disciplinary Committee is that the respondent is guilty of professional and or other misconduct, a copy of the report of the Disciplinary Committee shall be furnished to the respondent and he shall be given the opportunity of making a representation in writing to the Council. (3).. (4).. (5) The finding of the Council shall be communicated to the complainant and....
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....volving its own procedure in conducting an enquiry into the misconduct alleged to have been committed by a member of the Institute. A questionnaire was sent, during the enquiry, eliciting answers from the respondent on 29.11.2008 at 10.10 a.m. in the office of the Institute at Chennai, and an opportunity was given to the respondent to explain the circumstances in which the certificate was issued by him. During questioning, the President of the Committee put a specific question What do you want to say in your defence?, then the respondent gave the following answer: I gave a certificate on 9th June, 1995 and on that date the cheques were deposited and because the cheques could not cleared on that day and subsequently I appeared before the SEBI they told me that you should have subsequently withdrawn the certificate if you had come to know that the cheques are not cleared. I told them that is the work of Merchant Bank and they are monitoring the day to day movement of the funds. I cannot go and monitor the day to day movement of the funds in their Company and based on their track record whatever cheques they have earlier deposited got cleared that is only one time that Rs. 37 lacs ....
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....er in a Common law or a Civil law jurisdiction. It refers to a courts right to punish for actions or omissions as if they were criminal. The origins of the phrase comes from the Latin word, quasi, meaning somewhat, sort-of, alike or akin to criminal law, as in Quasi-contract. The word Quasi is used to indicate that one subject resembles another, with which it is compared, in certain characteristics, but there are intrinsic and material differences between them. During a civil or equity trial, a court may act as if it were a criminal case to punish a person for contempt of court. In some cases, a court may impose asset forfeiture or another penalty. For example, a court has the right to punish actions or omissions of a party in a child support case as if they were a criminal, penalizing the parent with a sentence of jail term. Quasi-criminal proceedings include a wide variety of matters, including prosecution for a violation of the law or ordinance, psychiatric matters, motor vehicle law, status offences, family court actions, and equity proceedings such as a Writ. In criminal cases, generally, Courts try cases following the prescribed procedure, and impose punishment either of a....
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....f proof lies in the present case. The guide line and the clue to answer this question lies upon the nature and character of the proceedings initiated against the respondent Chartered Accountant. The scheme, intendment and object of section 21 referred to earlier when read with the use of the expressions "complaint", "guilty of any professional or other misconduct", "Disciplinary Committee", "inquiry and the nature of the punishment provided to be imposed by the Council or the High Court as the case may be against a member who is found to be guilty of any professional or other misconduct" would indicate and leave no doubt in our minds that the proceeding initiated against a member in inquiries relating to misconduct is akin to though not in fact a criminal prosecution. At every stage, the statute provides for a reasonable opportunity of being heard to the delinquent member of the Institute against whom disciplinary proceedings have been initiated. Principles of natural justice must be followed by the Inquiry Authority, the Council as well as the High Court and the evidence has to be recorded by the Disciplinary Committee. The Council and the Disciplinary Committee are empowered with....
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....he Calcutta High Court held that mental condition of the professional is to be established to hold him guilty of misconduct. The Supreme Court in Pandurang Dattatraya Khandekar v. The Bar Council of Maharashtra AIR 1984 SC 110 and H.V. Panchaksharappa v. K.G. Eshwar AIR 2000 SC 3344, considered a charge of professional misconduct against Advocate under the Advocates Act. It is not in dispute that, even in disciplinary proceedings, there should be some evidence to prove the charge. Although the charges in a departmental proceedings are not required to be proved like a criminal trial, i.e., beyond reasonable doubt, the enquiry officer should, after analysing the evidence on record, determine whether, on the preponderance of probabilities, the charge is proved. While doing so, he cannot take into consideration irrelevant facts, and refuse to consider relevant facts, and shift the burden of proof on to the charged officer. The Enquiry Officer cannot also reject relevant testimony of witnesses on the basis of surmises and conjectures. A charge in a departmental proceedings, as held in M.V.Bijlani v. Union of India AIR 2006 SC 3475, is not required to be proved beyond reasonable doubt....
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....ed a certificate dated 9th June 1995 stating that Promoters Contribution of Rs. 225 lakhs has been received as per the books of Accountants Maintained by the Company. This certificate was issued after verifying the Share Application Account maintained in the General Ledger of the Company (Xerox Enclosed), the bank book showing receipt of the payments (in the form of Cheques deposited) into the State Bank of Mysore & State Bank of Mysore And the bank deposit slip counterfoils duly bearing the bank acknowledgments of the cheques deposited. As alleged by SEBI as to why we have not verified the Bank Statement Regarding Realization of the cheques we once again reiterate that as upto 9th June 1995 no cheques of the promoters had bounced and hence we had no reason to believe that any cheques issued by the promoters could bounce. As you will be aware that the certificate issued by us clearly states as under:- We the Statutory Auditors of Ritesh Polyesters Limited, Secunderabad, hereby certify and confirm that as per books of Accounts maintained by the Company the Company has received Rs. 2,25,00,00 as share application money from promoters, directors, their friends and Associates as ....
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....ing answer: I gave a certificate on 9th June, 1995 and on that date the cheques were deposited and because the cheques could not cleared on that day and subsequently I appeared before the SEBI they told me that you should have subsequently withdrawn the certificate if you had come to know that the cheques are not cleared. I told them that is the work of Merchant Bank and they are monitoring the day to day movement of the funds. I cannot go and monitor the day to day movement of the funds in their Company and based on their track record whatever cheques they have earlier deposited got cleared that is only one time that Rs. 37 lacs cheques not cleared. That was the only plea which I took before the SEBI and I also taking before the Disciplinary Committee. Both during investigation by SEBI, and in the enquiry by the Committee, there are clear and unequivocal admissions by the respondent regarding his professional lapse in issuing a certificate certifying that the Promoters had contributed Rs. 2,25,00,000/- for allotment of shares, and to have confirmed receipt of money towards 15,00,000 equity shares of Rs. 10/- each at a premium of Rs. 5/- per share. He also admitted to have is....
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....onfirm that as per the books of accounts maintained by the company, the company has received Rs. 225 lakhs (Rupees Two crores twenty five lakhs only) as share application money towards 15,00,000/- equity shares of Rs. 10/- each at a premium of Rs. 5/- per share from the promoters, directors, their friends and associates as on 9th June 1995. The respondent certified that an amount of Rs . 2,25,00,000/- was received by the company towards promoters contribution, though the amount received towards promoters contribution was only Rs. 35,00,000/- and the cheques issued against the balance amount had bounced. However, shares worth Rs. 2,25,00,000/- was allotted to the promoters by the company. On being asked by SEBI of the basis on which he had given the certificate regarding receipt of promoters contribution in full, the respondent replied that he had verified the bank book maintained by the Company, wherein they had shown receipt of the above cheques, he did not expect that the cheques issued by the promoters would bounce, and he had issued the certificate keeping in view the track record of the promoters. Admissions are of two types, one is judicial admission and another is evid....
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....best piece of evidence and can be relied on by the Courts in deciding any issue. In Amba Lal v. Union of India AIR 1961 SC 234 the Constitution Bench of the Supreme Court held that for a decision to be based on admission, it must be in writing; and the admission is more satisfactory if a body entrusted with statutory functions takes necessary precautions when its decision is mainly to depend upon such admission. If the above principle, laid down by the Supreme Court, is applied to the facts of the present case, the admissions made by the respondent, which are extracted in the earlier paragraphs, suffice to conclude that there is a clear professional lapse on the respondents part as he failed to issue a qualified certificate that receipt of the amount was subject to realisation of the cheques. In view of the law declared by the Supreme Court in the decisions referred supra, we have no hesitation to hold that admission is the best piece of evidence since the respondent failed to explain under what circumstances such admission was made. Accordingly, the point is held in favour of the Institute, and against the respondent. POINT Nos: 4, 5 and 7: The genesis, for the Institute ....
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..... The respondent, M/s Gang and Company, was the statutory Auditor. After the public issue, SEBI conducted investigation and found that, as per the prospectus dated 30.03.1995, 15,00,000 shares were reserved for promoters, their relatives and friends on a firm allotment basis at Rs. 10/- per share with a premium of Rs. 5/- per share; the total contribution, by the promoters, was Rs . 2,25,00,000/- which was required to be credited before the opening of public issue; and the respondent had certified receipt of the same. SEBI addressed a letter dated 28.06.2000 to the Company to furnish details of the promoters contribution. In response thereto, vide letter dated 05.07.2000, the Company submitted details of the promoters contribution as follows: Name of the Promoter Cheque No. Contribution Date Drawn on Ritesh Exports Ltd 441810 400000 8/6/95 State Bank of Patiala 441811 450000 8/6/95 State Bank of Patiala 441812 450000 8/6/95 State Bank of Patiala 441813 450000 8/6/95 State Bank of Patiala 441814 450000 8/6/95 State Bank of Patiala 441815 450000 ....
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....e cheques mentioned above. By its letter 05.09.2000, State Bank of Patiala informed that the cheques were returned unpaid, and the details of the unpaid cheques were as follows. Name of the Promoter Cheque No. Date Amount Sh.Surender Kumar 508990 9/6/95 3,00,000 508983 9/6/95 5,50,000 508985 9/6/95 4,50,000 508988-89 9/6/95 9,00,000 508995 9/6/95 4,50,000 508986-87 9/6/95 7,80,000 508991-94 9/6/95 15,60,000 Smt.Roop Rekha Agarwal 417280 9/6/95 27,39,500 Total amount unpaid 77,29,500 On receipt of the above details from State Bank of Patiala, SEBI again addressed a letter to Company to clarify how the promoters had contributed money for allotment of 15,00,000 shares. By letter dated 17.06.2002, the Company submitted that three cheques worth Rs. 71,79,500/- were returned unpaid for certain reasons, but the company received the amount thereafter on different dates during 1995-96. From the details furnished by Company, it came to light that cheques worth Rs. 49,90,000/-, issued by Sh.Surendra Agarwal....
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....dly contributed Rs. 10,50,000/- each towards promoters contribution on 09.06.1995, the bank statements showed that the Company had advanced Rs. 10,50,000/- each to these two persons, having routed it through the account of M/s. Pratha Investments. In short, the Company itself gave Rs. 22,00,000/- to M/s. Pratha Investments, which, in turn, paid Rs. 10,50,000/- each to Shri Deepak Agarwal and Shri Ritesh Agarwal on the same day i.e. 09.06.1995. Subsequently, Shri Deepak Agarwal and Shri Ritesh Agarwal gave this money back to the Company as promoters contribution. The payments made by the promoters were only book entries, and no amount was actually paid by the promoters towards their contribution to the capital of the Company. SEBI addressed a letter to Shri Lohia to submit the bank statement of Shri Surendra Kumar Agarwal to find out the truth regarding the alleged contribution made by Shri Surendra Kumar Agarwal, but to no avail. The investigation by SEBI disclosed that only Rs. 22,00,000/- was received from Ritesh Exports and Rs . 13,00,000/- from Shri Surendra Kumar Agarwal, as promoters contribution, one day prior to the issue, instead of the Rs. 2,25,00,000/- shown to have b....
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....l was collected from Rajashree Fiscal Services Limited, State Bank of Patiala and the Company. The respondent submitted his explanations vide letters dated 29.02.2004 and 05.08.2005 that it was merely a professional lapse on his part in not qualifying the certificate with the caption cheques are subject to realisation. While admitting his professional lapse in issuing such a certificate, the respondent contended that he did not indulge in any fraudulent transactions, and requested that his professional lapse be ignored, and all further proceedings be dropped. In this context it is necessary to note that SEBI issued a circular directing companies to annex a certificate, either from a Chartered Accountant or a Company Secretary in practice, to the effect that the promoters contribution, including premium, had been brought in its entirety, in advance before the public issue opened; the certificate should be forwarded to SEBI at least one day prior to the date of opening of the issue; and the certificate should be accompanied by a list of names and addresses of friends, relatives and associates who have contributed to the promoters quota, along with the amount of subscription made b....
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....d Construction & Engineering Co Ltd, In re [1932] Acct. LR 38 the issue of inflated profit figures in audited accounts, and payment of tax on the inflated profit figures fell for consideration, and it was held that the auditors were liable to the company towards dividends, cost of recovering the excess tax, and any tax not recovered. London General Bank (No. 2), In re [1895] 2 Ch. 673 a similar question regarding the Auditors liability came up for consideration, and the Court concluded that, although it was not the duty of the Auditors of a company appointed under the Companies Act, 1879 to consider whether its business is prudently or imprudently conducted, it is their duty to consider and report to the shareholders whether the balance-sheet exhibits a correct view of the state of the companys affairs, and the true financial position of the company at the time of the audit. They must ascertain this by examining the books of the company, and must take reasonable care that what they certify as to the companys financial position is true. And except in very special cases it is their duty to place before the shareholders the necessary information as to the true financial position of....
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.... the subscribers of the Provident Fund who were in the position of beneficiaries. It is not correct to say that respondent No. 1 owed a duty only to the Company which had appointed him to perform the auditing. The contributors to the Provident Fund had a beneficial interest in the Fund and the primary object of auditing the Fund was to appraise them of the true financial position of the accounts and investments made from time to time. Respondent No. 1 therefore owed a duty to the contributors to the Provident Fund for making a true report to them of the financial position. In other words, the auditing was intended for protection of the beneficiaries and the Auditor was expected to examine the accounts maintained by the trustees with a view to inform the beneficiaries of the true financial position. The Auditor is, in such a case, under a clear duty towards the beneficiaries "to probe into the transactions" and to report on their true character. In our opinion, the legal position of the Auditor in the present case is similar to that of the Auditor under the Indian Companies Act, 1956. In such a case the audit is intended for the protection of the shareholders and the Auditor is expe....
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....is acknowledged. He is a member of an expert body and of a premier institute in India. The certificate issued by an Auditor has its own impact on the public at large, as it is largely on the basis of this certificate that the general public subscribe to the shares of the company. Reckless certification by an Auditor, which has resulted in the public being misled into subscribing to the shares of the company in the public issue, would undoubtedly amount to gross negligence. Large sections of society rely on the certification by the Chartered Accountants for taking many vital decisions. It is imperative that utmost care and caution is exercised in issuing such certificates, and the objectivity, integrity, reliability and credibility of the information therein is ensured. Of late, several instances have come to light where, due to the erroneous/ambiguous advice tendered by Chartered Accountants, borrowal accounts have had to face quick mortality resulting in huge losses for banks and financial institutions. To ensure public faith and protect gullible small investors from being cheated of their life savings, the Institute should ensure that its members possess competence of a high orde....
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....ading the general public to subscribe to the shares of the company in the public offer of a huge sum of Rs .4,50,00,000/- (Rupees four crores fifty lakhs). As per Section 65 of the Companies Act, 1956, a statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in the form and context in which it is included inter alia in the prospectus itself, or is contained in any report or memorandum appearing on the face thereof or by reference incorporated therein or issued therewith and where the omission from a prospectus of any matter is calculated to mislead, the prospectus shall be deemed, in respect of such omission, to be a prospectus in which an untrue statement is included. The liability accrues where any person subscribes for any shares or debentures on the faith of the prospectus for any loss or damage he may have sustained by reason of an untrue statement included therein. A representation in the prospectus regarding contribution of the promoters, if found untrue, may well result in the general public being mislead into seeking allotment shares based on such misrepresentation. The certification by the statutory auditor has resulted in the g....
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....include any act or omission specified in any of the Schedules, but nothing in this Section shall be construed to limit or abridge in any way the power conferred or duty cast on the Council under sub-section (1) of Section 21 to inquire into the conduct of any member of the Institute under any other circumstances. Thus, the definition of professional misconduct is wider. The Second Schedule, read with Section 21(5) and 22 of the Act, prescribes several acts which would fall within the ambit of professional misconduct. They are: (1) (2) (3) (4) . (5) fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary to make the financial statement not misleading; (6) fails to report a material mis-statement known to him to appear in a financial statement with which he is concerned in a professional capacity; (7) is grossly negligent in the conduct of his professional duties; (8) fails to obtain sufficient information to warrant the expression of an opinion or his exceptions are sufficiently material to negate the expression of an opinion; (9) (10) Part II of the Se....
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....tion based on the alleged reputation of the promoters, and it was his obligation to verify whether payment was actually received. Though he was required to verify receipt of payment for allotment of shares to the promoters, the respondent disowned his responsibility, and blindly certified and confirmed receipt of Rs. 2,25,00,000/- towards promoters contribution. The respondent, as a statutory Auditor of the company, must be presumed to aware of his obligations to the general public who, relying on his certification, had invested in the share capital of the company despite which he issued the certificate based on the alleged reputation of the promoters, a factor wholly irrelevant for issuing such a certificate. Sri C.V. Rajeeva Reddy, learned counsel for the Institute, would contend that issue of such certificate directly attracts Clause (7) of Part I of the Second Schedule i.e. gross negligence of a member of the Institute in the conduct of his professional duties. He relied on several judgments of various High Courts, and the Supreme Court, in Deputy Secretary to the Government of India, Ministry of Finance (Department of Economic affairs), v. S.N.Das Gupta AIR 1956 Cal. 414; C....
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....trued gross negligence as requiring wilful, wanton, or reckless misconduct, or such utter lack of all care as will be evidence thereof.. But it is still true that most courts consider that gross negligence falls short of a reckless disregard of the consequences, and differs from ordinary negligence only in degree, and not in kind. Similarly, in Law Lexicon by P.Ramanatha Aiyar the word gross negligence is defined as follows: Gross negligence, sometimes called wilful blindness is the same thing as negligence, with the additional of a vituperative epithet. The term gross neglect means and involves a failure on the part of a person to take such reasonable precautions against the risk of an innocent person being deceived in the circumstances of the particular case. Gross negligence means some culpable default, not arising merely from want of foresight or mistake of judgment. Negligence marked by total or nearly total disregard for the rights of others and by total or nearly total indifference to the consequences of an act. For an act of negligence to constitute gross negligence, it must be in reckless disregard of a legal duty and of the consequences to another party,....
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....es on the faith of the statement in the prospectus, had the same knowledge as the directors. All of them knew of the inflation in the price, but had no notice of the dishonesty of Meiters report. He committed a great fraud, but how could the directors find that out? He had a good position in the city and had been abroad. In March,Hoffman was sent out, with a marked prospectus to report critically on the property, and in April he cabled very satisfactory and his letter, received on May 31,said get transfer through, and the board could not then repudiate or refuse to make further payments. Where a company is formed, as here, to carry out a particular contract, and they carry it out without knowledge of any wrong, they are not guilty of negligence. The principle of Overend & Gurney Co. v. Gibb [1872] LR 5 and New Mashonaland Exploration Co., In re [1892] 3 Ch. 577 applies, and the 1st case shows that the company in this case had notice from the prospectus of the increase in price. The Directors had acted based only on Meiters report, they had given the statement in the prospectus inviting subscription of capital to the company. Therefore, no knowledge was attributable to the Directors....
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.... in the act, failure, or omission regardless of consequences. The word gross negligence, as defined in Great Western Railway Company (referred supra), is negligence which is far beyond any negligence or culpable negligence. In the present case the respondent, as the statutory Auditor, was under an obligation to ascertain actual receipt of cash for allotment of shares and, instead, he issued the certificate without qualifying that receipt of Rs. 2,25,00,000/- was by way of cheques and was subject to realisation. The respondent stated that he had issued the certificate without any qualification based on the track record and reputation of the promoters, though he was well aware that the certificate, was the basis on which contribution of capital was invited from the public at large. Such callousness of the respondent, in issuing the certificate, would undoubtedly amount to gross negligence or culpable negligence since the respondent as an Auditor could not be unaware of the consequences of such a mis-statement in the certificate issued by him. Sri Ashok Anand Kumar, Learned counsel for the respondent, would contend that the act of the respondent, at best, amounts to negligence, ....
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.... contemplation at the time when he made the statement. The principles laid down in the above judgment, in fact, supports the contention urged on behalf of the Institute. Sri Ashok Anand Kumar, learned counsel for the respondent, contends that failure to rise to the expected level of efficiency, in discharging professional duties, cannot be regarded as misconduct, treating such failure as gross negligence in the discharge of duty; at best, it is merely a failure of the respondent to qualify the certificate; in the facts of the present case, failure of the respondent to verify actual receipt of cash for allotment of shares is merely a failure to rise to the expected level of efficiency in the discharge of his professional duties; it does not amount to gross negligence; and is merely a bonafide mistake or error. In support of his contention, he placed reliance on the judgment of the Calcutta High Court in Council of the Institute of Chartered Accountants of India v. Somnath Basu AIR 2007 Cal. 29. In the said judgment, the Calcutta High Court held that failure to rise to the expected level of efficiency in discharging professional duties cannot be regarded as misconduct treating suc....
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.... ordinary and normal standard, or according to the standard of a particular profession. Authenticity and sanctity is attached to certification done by a Chartered Accountant. Hallmark of the profession is the expertise possessed by its members, in the matters of accountancy and auditing amongst others. Correctness is a matter of rule in a certificate issued by a Chartered Accountant. He is supposed to have tested correctness of the figures certified. If he puts his signature, without proper verification, in any certificate, it certainly is a serious matter. Such conduct does not befit a Chartered Accountant, and is unbecoming of him. In such a case, he fails to do what is the minimum required to be done by him. He does something in the pursuit of his profession which is not only unethical, but also disgraceful or dishonourable. In B. Ram Goel (supra) the Delhi High Court defined the expression professional misconduct as follows: "Professional misconduct" has been defined in Section 22 of the Act. Intendment and object of the Act is to maintain standard of the profession at a high level, and consequently a code of conduct has been prescribed. Misconduct implies failure to act ....
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....the scope of the Act or statute which is being construed. Misconduct literally means wrong conduct or improper conduct. In usual parlance, misconduct means a transgression of some established and definite rule of action, where no discretion if left, except what necessity may demand and carelessness, negligence and unskillfulness are transgressions of some established, but indefinite, rule of action, where some discretion is necessarily left to the actor. Misconduct is a violation of definite law; carelessness or abuse of discretion under an indefinite law. Misconduct is a forbidden act; carelessness, a forbidden quality of an act, and is necessarily indefinite. Misconduct in office may be defined as unlawful behaviour or neglect by a public officer, by which the rights of a party have been affected. In the aforesaid decision, the Supreme Court held that the conduct of a constable possessing a service revolver, found to be heavily drunk while roaming in the market on duty, and to have abused the medical officer at the time of medical examination, would amount to conduct unbecoming of a constable, and that meant that he was unsuitable to discharge his duties as a police constable.....
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....hat trust by being candid with the shareholders, and telling them frankly and fully everything with regard to the affairs of the company which has come to his knowledge and which it is material for the shareholders to know; if an Auditor does not do what it is his duty to do, it is no defence for him to say in a disciplinary proceeding, started under the Chartered Accountants Act, that he had told the shareholders that he had not done it. The lapse is constituted by his failure to perform a duty without which an audit is meaningless and it is not excused by giving information of the omission to the share-holders. The reason is that the object of the Act is to ensure in public interest that those who practise the profession of Auditors shall perform, in their actual practice, at least the essential duties of an audit and shall bring to bear on their work attention to matters to which their duty requires them to pay attention, and the examination of accounts involves thorough and exhaustive testing of every account in the general ledger. If such negligence would cause no damage to anyone, such negligence cannot be termed as gross negligence within the definition of Section 22 of the ....
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....has acted in flagrant disregard of his duties as he has, without verifying the actual receipt of cash for allotment of shares to the promoters worth Rs. 2,25,00,000/-, issued the certificate confirming receipt of such amount. Such an act of the respondent would amount to gross negligence as held by the Division Bench of the Calcutta High Court (referred supra). Sri Ashok Anand Kumar, learned counsel for the respondent, has drawn our attention to The Council of Institute of Chartered Accountants of India v. Shrui K.Venkatacharyulu (unreported judgment of this Court in C.A. Referred Case No.123 of 2000 dated 03.09.2014) wherein the Division Bench of this Court held that misconduct can be attributed to a Chartered Accountant mostly when he has resorted to certain acts knowing fully well that the same is contrary to law. An opinion formed by him, which ultimately turns out to be not correct, cannot be treated as an act of misconduct. The law laid down by the Division Bench of this Court is that, in order to find a person guilty of professional misconduct, he must resort to certain acts knowing fully well that the same is contrary to law. As discussed in the earlier paragraphs, th....
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.... considered the scope of professional misconduct, and concluded that improper behaviour, intentional wrong doing or deliberate violation of a rule or standard of behaviour is nothing but transgression of a definite rule of action, which amounts to misconduct of a professional advocate. In Baldev Singh Gandhi v. State of Punjab (2002) 3 Supreme Court Cases 667 the Apex Court examined the scope of misconduct and held that misconduct has not been defined in the Act. The word misconduct is the antithesis of the word conduct. Thus, ordinarily, the expression misconduct means wrong or improper conduct, unlawful behaviour, misfeasance, wrong conduct and misdemeanour etc. There being different meanings of the definition of misconduct, the Court should consider the expression misconduct with reference to the subject and the context wherein the said expression occurs. Thus, from the principles laid down in the above judgment, misconduct has to be considered in the facts and circumstances of the case, and is not a principle of universal application. Coming back to the facts of the present case, it is evident that the allotment of shares of Rs. 2.25 crores to the promoters was fraudulent....
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....ing actual receipt of cash of Rs. 4.50 crores for allotment of 15,00,000 shares to the promoters worth Rs. 2,25,00,000/-, and the cheques issued by the promoters bounced later. (2) Respondent issued a certificate without qualifying that allotment of shares to the promoters was subject to realisation of cheques. (3) The respondent did not verify the individual bank accounts of the promoters to ascertain whether there was sufficient balance in their account to ensure that the cheques would be honoured, by the payee bank, on its presentation. (4) Respondent failed to verify actual receipt of cash while allotting shares. (5) Contribution of Rs. 2,25,00,000/- as promoters contribution by Ritesh Exports was not examined, similarly routing of Rs. 22,00,000/- through M/s Pratha Investments (owned by the wife of the respondent and being managed by the respondent himself) to the promoters Sri Deepak Agarwal and Sri Ritesh Agarwal, who allegedly contributed Rs. 10,50,000/- each was also not examined. Thus, the said investment of Rs . 22,00,000/- by Sri Deepak Agarwal and Sri Ritesh Agarwal was only a book entry without actual receipt of consideration. The companys money was divere....
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....law declared by various Courts including the Supreme Court, Chancery Division etc., and have held that issue of the certificate, confirming receipt of Rs. 2,25,00,000/- by the company towards promoters contribution just one day prior to opening of the public issue, without verifying actual receipt of consideration for such allotment of shares worth Rs . 2,25,00,000/- (15,00,000 shares), is in violation of the respondents professional duties as the Statutory Auditor of the company, and amounts to gross negligence and professional misconduct. Sri Ashok Anand Kumar, Learned Counsel for the respondent, would contend that principles of natural justice were not followed, and sufficient opportunity was not afforded to the respondent. We must express our inability to agree as we have perused the records and are satisfied that reasonable opportunity was afforded to the respondent, at every stage, strictly adhering to the procedural provions of the Statute and the Regulations. Sri Ashok Anand Kumar, Learned counsel for the respondent, would contend that the charges are vague, and do not afford any opportunity to the respondent to defend himself by filing an appropriate reply; and, on t....
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....ded by the Council of the Institute, should be imposed and this Court, while exercising power under Section 21(5) of the Act, should not take a lenient view against the statutory Auditor of the company who has indulged in a Corporate fraud to the detriment of the public at large. On the other hand, Sri Ashok Anand Kumar, Learned Counsel for the respondent, would submit that the incident took place in the year 1995, almost 21 years has since elapsed, and therefore a lenient view should be taken. The professional misconduct attributed to the respondent is grave and serious in nature which affects public confidence, and their faith in the integrity and impartiality of the Chartered Accountants and the Institute of which they are members. A false certification by the respondent has enabled the promoters of the company to squander public money, on inducing the general public to subscribe to the share capital of the company. Taking a lenient view, or exonerating such professionals, would encourage others to indulge in similar acts, and completely erode the faith of the general public in the impartiality and integrity of the members of the Institute, and bring the Institute itself into....