TaxTMI 
TaxTMI 
2016 (12) TMI 185
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....ed 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 lakhs only), as per the books of accounts maintained by the compa....
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....ith 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 the Regulations specifying the manner in which they had to submit their defence. In response to the letter....
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....f 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. The certificate issued by the respondent made the public believe that the promoters had contributed Rs. 225 lakhs ....
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....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, whether such an act would fall within the ambit of Clause (7) of Part 1 of the Second Schedule read with Sections 21 and 22 of the Chartered Accountan....
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.... 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 filed, or to dismiss the complaint, as the case may be; reprimand the member; remove him from the membership of the Institute either permanently or for such period as it thinks ....
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.... 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 would be making out a new case on the reference, and the Court would not be justified in adopting such a course. The Apex Court, in B. Mukherjea (referred supra), held that the view o....
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.... 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) requires it to record its finding accordingly, and to direct that the proceedings shall be filed or the complaint shall be dismissed. If, on the other hand, the Council finds that the m....
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....he 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. The Division Bench of this Court in Council of the Institute of Chartered Accountants of India v. G.Pattabhi Rama Charya held that, in exercise of the jurisdiction under Section 21 of the....
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....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 person, and at least a penalty in the form of "reprimand" must be imposed as provided in Sub-section (4) of Section 21 of the Act. If the member is found to be not guilty on enquiry, even in cases of m....
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....mbers 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 unjust, unwarranted or contrary to law. The Gujarat High Court further held that the Council is one such representative body charged with the responsibility of ensuring discipline and ethical conduct amongst....
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....ated 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 the respondent. Clause (2) of Regulation 16 obligated the Disciplinary Committee to furnish a copy of its report to the respondent to enable him to submit a representation in writing to the Council. Though the learned counsel f....
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....0 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 cheques not cleared. That was the only plea which I took before the SEBI and I also taking before the Disciplinary Committee. Similarly several questions were put to the respondent who answered all the questions put to him. As questions w....
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....aw, 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 sentence or a fine or both, but in disciplinary proceedings, more particularly under the Act, the punishment which may be imposed is not a jail term or fine like any other criminal proceeding. The punishment which may be imposed under Section 21 of the....
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....r 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 the same powers as are vested in the Civil Court for summoning and enforcing the attendance of any person and examining him on oath, the discovery and production of any document, and receiving evidence on affidavit. The member against whom a complaint is lodge....
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....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 like in a criminal trial, but should be proved on a preponderance of probabilities. In A, pleader v. Judges of the High Court of Madras AIR 1930 PC 144 the Privy Council held that the evidence should be carefully taken and judged according to the ordinary standards o....
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....y (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 on 9th June 1995. Hence it has been wrongly alleged by SEBI that we have given a false certificate and aided and abetted the Promoters in fraudulent activities by giving a false certificate. It has been wrongly alleged by SEBI that Promoters Contribution only Rs. 35 Lakhs was received as o....
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.... 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 issued a certificate without qualifying it as subject to realisation of the Cheques deposited. These admissions suffice to show the lapses on the part of the respondent. Though the amount received towards the capital contribution of the promoters was only Rs. 35,00,000/-, the respondent had certified that Rs. 2,25,....
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.... 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 evidentiary admission. Admissions are not conclusive proof, but the admissions estop the person who made such admission. When a judicial admission is made in the pleadings or in any document regarding a particular fact in issue, such fact need not be proved by adducing evidence in view of Section 58 of the Indian Evidence Act. It is ....
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....ary 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 to conduct an enquiry against the respondent, is the investigation report of SEBI in relation to the certificate attached to the prospectus, wherein the respondent had certified that the promoters had contributed Rs. 225 lakhs towards their share capital, and 15,00,000 shares were allotted to the promoters and their friends, though an amount of ....
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....tribution, 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 9/6/95 State Bank of Patiala 441816 450000 9/6/95 State Bank of Patiala 441817 450000 9/6/95 State Bank of Patiala 441818 450000 9/6/95 State Bank of Patiala 441819 450000 9/6/95 State Bank of Patiala 441820 450000 9/6/95 State Bank of Patiala 441821 450000 9/6/95 State Bank of Patiala 441822 450000 9/6/95 State Bank of Patiala &nb....
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....ent 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 towards promoters contribution, had bounced. Against this an amount of Rs. 44,65,000/- was stated to have been brought on different dates between 14.06.1995 and 26.03.1996. Similarly, Ms.Roop Rekha Agarwal had issued a cheque for Rs. 27,39,500/- towards promoters contribution, which was also dishonoured by the payee bank. Against this an amount of Rs .27,67,750/- was stated to have been brought on different dates between 02.08.1995 and 31.01.1996. Thus, the Company is stated to have received Rs. 31,50,000/- as investments before 01.06.1995 from Ritesh Exports Limited, Rs. 18,97,500/- from Sh.Surendra Kumar Agarwal and Rs. 8,23,000/- from Smt.Roop Rekha Agarwal, but the certificate issued by the respondent herein, annexed to the prospectus, is silent about the said investments. Entries were made in the accounts to justify the d....
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....ng 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 been received by the company in the certificate issued by the respondent. It is evident that the company had allotted shares worth Rs. 2,25,00,000/- to the promoters when it has actually received only Rs. 35,00,000/-. In the prospectus of the company, it is specifically mentioned that the amount mentioned in D above will be brought in by the promoters before the date of opening of the public issue, and the same shall be certified with a certificate from the Auditors. Later, the Auditor issued a certificate certifying that the promoters had contributed Rs. 2,25,00,000/- furnishing the following details indicating the allotment of shares proportionate to their contribution. Name of the Share Holder No. of shares Amount Ritesh Exports Ltd. 6,00,000 90,00,000 Surender Kumar Agarwal 5,22,500 78,37,500 Roop Rekha Agarwal 2,37,500 35,62,500 Deepak....
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....ld 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 by each of them. It is in compliance with the circular instructions issued by SEBI, that the respondent issued the certificate certifying that the promoters contribution of Rs. 2,25,00,000/- was received, without qualifying that it was subject to realisation of the cheques. The main contention of Sri C.V. Rajeeva Reddy, learned counsel for the Institute, is that the duty of the Auditor is to verify each and every account, and certify the truth or otherwise in the entries made in the accounts; the respondent failed to discharge his duties as a Statutory Auditor of the company; he had issued a certificate to the effect that the company had received Rs . 2,25,00,000/- before opening of the public issue, and before contribution was invited from the public for allotment of shares; and, thereby, the respondent was guilty of gross negligence in issuing the certificate. Per contra, Sri Ashok Anand Kumar, lear....
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....ining 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 the company, and not merely to indicate the means of acquiring it. Similarly In Re Kingston Cotton Mills Co. (No. 2), In re [1896] 2 Ch. 279, the Court held that, where an officer of a company has committed a breach of his duty to the company, the direct consequence of which has been a misapplication of its assets, for which he could be made responsible in an action, such breach of duty is a misfeasance for which he may be summarily proceeded against under the Companies Act, and it is not necessary that an action should be brought. The Auditors relied on certificates, wilfully false, given by J., one of the directors who was also the manager, as to the value of the stock-in-trade. Dividends were paid for some years on the footing that the balance-sheets were correct; but if the stock-in- trade had been stated at its true values it would have appeared that there were no profits out of which dividend could be ....
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....port 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 expected to examine the accounts maintained by the Directors with a view to inform the shareholders of the true financial position of the Company. The Directors occupy a fiduciary position in relation to the shareholders and in auditing the accounts maintained by the Directors the Auditor acts in the interest of the shareholders who are in the position of beneficiaries. In London Oil Storage Co. Ltd. v. Seear, Hasluck & Co., (Dicksee on Auditing., 17th Edn., p. 632.) Lord Alverstone stated as follows : "He must exercise such reasonable care as would satisfy a man that the accounts are genuine, assuming that there is nothing to arouse his suspicion of honesty and if he does that he fulfils his duty; if his suspicion is aroused, his duty is to 'probe the thing to the bottom' and tell the directors of it and get what information he can. " It was therefore no defence for respondent No. 1 in this case to say that h....
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....e 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 order, their character is above board, and their integrity beyond reproach. Chartered Accountants are responsible to the public for their actions, as heavy reliance is placed on their credibility by the general public consisting of investors, banks, financial institutions, governments etc. The Chartered Accountants duty is not merely to his client, but extends to various segments of society, more particularly in the commercial field, on whose expertise, integrity and impartiality they rely on in taking various decisions. Larger public interest would be served only if Chartered Accountants maintain high ethical standards apart from her standards of expertise in accountancy and related fields. In the rare instances where Auditors are found to lack integrity, objectivity, professional competence, and to have failed to exercise due care and caution in issuing certificates, larger public interest would be served only if they are ster....
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....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 general public, who reposed faith on his statement, being mislead into subscribing to the shares of the company placing faith on such a certificate. The facts before us are that the respondent is a statutory auditor of Ritesh Polyster Limited, which was registered under the Companies Act as a private limited company and was later converted into a public company. The company invited subscription of capital from the public for allotment of shares by way of public issue, annexing a certificate from the statutory auditor regarding receipt of money towards the promoters contribution. The auditor confirmed receipt of Rs. 2.25 crores, and allotment of 15,00,000 shares to the promoters, their friends and relatives. It is on the faith of the certification, and confirmation, that the public invested money in the company for allotment of shares. In fact, the company did not receive Rs. 2,25,00,000/- but was only received Rs . 35,00,000/- towa....
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....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 Second Schedule specifically refers to professional misconduct, in relation to members of the Institute, generally requiring action by a High Court. Thereunder a member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct, if he contravenes any of the provisions of the Act or the regulations made thereunder; and is guilty of such other act or omission as may be specified by the Council in this behalf, by notification in the Gazette of India. The contravention, attributed to the respondent, is violation of Clause (7) of Part- I of Schedule II, i.e., grossly negligent in the conduct of his professional duties. As discussed above, the duty of a professional Auditor, among others, is to ascertain the truth, and disclose true facts to the public in the certificate of confirmation issued by him along with the prospectus. In the present case, the respondent confirmed and certified that the company has received Rs. 2,25,0....
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....es. 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; Council of the Institute of Chartered Accountants of India v. V.I.Oommen AIR 1996 AP 254; Council of the Institute of Chartered Accountants of India v. Shri Gyan Prakash Agarwal, (unreported judgment of the Delhi High Court in C.A. Reference No.1/2014 and CM No.3363/2014 dated 30.04.2015) and Chartered Accountants of India v. S.Giridharan, Chartered Accountant, (unreported judgment of High Court of Karnataka at Bengaluru in [Civil Petition No.191 of 2012]. Sri Ashok Anand Kumar, learned counsel for the respondent, would submit that mere negligence does not constitute misconduct to hold a member guilty under Section 21 (5) read with clause (7) of Part I of Second Schedule, and it is only gross negligence in discharging his duties by a professional Chartered Accountant which attracts the penal clause; and, unless, the Court records a finding that the negligence held established amounts to gross negligence, the respondent is not liable for any punishment. He has also ....
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....otal 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, or wilful or voluntary or wanton omission. Negligence is the failure to take reasonable care as an ordinary prudent man, depending upon the circumstances of the case, would take. As seen from the definition of gross negligence, even an act of omission, or reckless disregard of a legal duty, by a statutory Auditor amounts to gross negligence. In the present facts, the Auditor issued a certificate confirming receipt of Rs .2,25,00,000/- towards promoters contribution, and that 15,00,000 shares, at Rs. 10/- per share with premium of Rs. 5/-, was allotted though only Rs .35,00,000/- was actually received by the company towards promoters contribution, that too just one day prior to opening of the public issue. The certificate was issued by the respondent without even verifying actual receipt of cash for such allotment, and without qualifying the certificate to the effect that the consideration received was subject to realisation of the cheque amount. This act of certification by the responde....
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....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, and they were found not guilty. In the same judgment the Chancery Division observed that the Director could reasonably be expected to be an honest man and he is not liable for errors of judgment if he committed any. Further, if Meiters report was true, and the directors bona fide believed it to be true, the contract was a good bargain for the company. The promoters were making only a cash profit of 4000/- out of the 30,000/- and all the rest of the purchase price, 1,20,000/- in shares was paper. Was it therefore such an exorbitant price? Moreover, the prospectus was so framed and the contracts were so disclosed as to conceal the fact that Meiter was one of the sub-vendors. In the same judgment, the duty and obligations of the Directors towards their company was highlighted, and it was laid down that so long as they act honestly they cannot be made responsible in damages unless guilty of gross negligence. There is admittedly a want of precision in this statement of a directors liability. In tr....
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....ment 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, but not gross negligence. He would draw the attention of this court to Institute of Chartered Financial Analysts of India, (referred supra), wherein the Supreme Court examined the word misconduct in paragraph No.28 relying a judgment of Calcutta High Court rendered in Probodh Kumar Bhowmick v. University of Calcutta [1994] 2 Cal. LJ 456 as follows: Misconduct, inter alia, envisages breach of discipline, although it would not be possible to lay down exhaustively as to what would constitute conduct and indiscipline, which, however, wide enough to include wrongful omission or commission whether done or omitted to be done intentionally or unintentionally. It means, 'improper behaviour; intentional wrong doing on deliberate violation of a rule of standard or behaviour. In The Institute of Chartered Accountants of India v. V.K. Madhava Rao AIR 1956 Hyd. 205 an identical question came up for consideration, and a Division Bench of this Court held that a statement, in the respondents letter, that he had examine....
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....t, 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 such failure as a negligent act in the conduct of professional duties. It is not the case of the Institute that the respondent failed to rise to the expected standards of his professional duties, but that he had issued the certificate on the basis of the track record and reputation of the promoters, though, the sum of Rs. 2,25,00,000/- which he had certified to have been received was, in fact, not received by the date of certification dated 09.06.1995 i.e. one day prior to opening of public issue. Issue of such a certificate is not an innocent omission, or failure to rise to the professional standards required of a Chartered Accountant, but amounts to gross negligence on the part of the respondent in the discharge of his duties as the statutory auditor of the company. It is also contended that to impose penalty or punishment against a professional for his misconduct, the act of such professional must be deliberate and intentional. While an intentional omission would certainly amount to gross negligence, even failure t....
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....f 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 honestly and reasonably either according to the ordinary and natural standard, or according to the standard of a particular profession. Chartered Accountants' profession occupies a place of pride amongst various professions of the world. That makes observance of the professional duties and propriety more imperative. When conduct of a member of the profession is contrary to honesty, or opposed to good morals, or is unethical, it is misconduct-warranting consequences indicated in the Statute. An Auditor holds a position of trust. That is why disclosure of information has been made a ground for imputing misconduct. By betrayal of the trust, the conduct becomes one which is unbecoming of the professional. In the aforesaid judgment, the Delhi High Court relied on Pandurang Dattatraya Khandekar (supra) Bombay, and held that the misconduct alleged against the Chartered Accountant was established, and imposed on him the punishment of reprimand. In State of Punjab v. Ram Singh Ex.Constable [1992] 4 SCC 54 the Supreme Court relie....
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....mination, would amount to conduct unbecoming of a constable, and that meant that he was unsuitable to discharge his duties as a police constable. In S.N.Das Gupta (referred supra) the Supreme Court, after considering the duties of an auditor, held that the duty of an auditor is to make a report to the share-holders, but doubted if the Act intended that a report may be a mere certificate to the effect that the Auditor was satisfied as to the particular matters specified in Section 145(2) of Companies Act, 1913. Such a certificate conveyed nothing to the share-holders beyond an assurance that, in the opinion of the Auditor, the books of the company were in order, and the position of the company was as stated in the balance-sheet. Such an assurance could hardly serve the purpose of giving adequate information to the share- holders as to the state of the company's affairs, because most of the items in a balance-sheet are generally of an omnibus character - large sums being shown under a general or composite heading. Unless the composition of those sums is explained by the Auditor's report, and where the sums are 'sums of loans or liabilities, and the nature of the investme....
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.... negligence would cause no damage to anyone, such negligence cannot be termed as gross negligence within the definition of Section 22 of the Act. The law declared in the above judgment cannot be applied to the present facts of the case since the respondent, in utter disregard of his professional duties, issued a certificate containing a false statement regarding receipt of Rs. 2,25,00,000/- towards contribution by the promoters for allotment of 15,00,000 shares, though he was well aware that the promoters had all issued cheques just one day prior to opening of public issue, all of which were later dishonoured on presentation. The word neglect is defined both as a noun and as a verb in terms of failure or omission to discharge or perform a duty; but one cannot be charged with failure to perform a duty unless he knows, or ought to know, that there is a duty incumbent on him to be performed. However, the word may import something more than a mere omission, something more than a failure without fault; it may import an omission accompanied by some kind of culpability in the conduct of the person, and it embraces wilful as well as unintentional disregard of duty. Neglect of duty means....
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....he must resort to certain acts knowing fully well that the same is contrary to law. As discussed in the earlier paragraphs, the respondent issued the certificate without ascertaining whether the cheques would be honoured on presentation, or with the qualification that payment was by cheques and was subject to realisation. Issue of the certificate by the respondent amounts to gross negligence in the discharge of his profession duties as a statutory auditor, and he is liable for punishment under Section 21(5) read with clause (7) of part I of Schedule II. Refuting the contentions of the learned counsel for the respondent, Sri C.V. Rajeeva Reddy, learned counsel for the Institute, has placed reliance on four judgments viz., S.N.Das Gupta (supra) V.I.Oommen (supra) Gyan Prakash Agarwal (supra) and Shri S.Giridharan (supra), to contend that the respondents failure to take reasonable care, and his failure to discharge his professional duties, amounts to gross negligence and he is liable for punishment on being found guilty of misconduct as defined under Section 22 of the Act. The consistent view expressed by various courts in the above judgments is that failure to take reasonable care ....
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....f the present case, it is evident that the allotment of shares of Rs. 2.25 crores to the promoters was fraudulent, and without receipt of contribution from them and, on the basis of the cheques issued by the promoters just one day prior to opening of the public issue, the certificate was issued. The Statutory Auditor was obligated to ascertain whether the company had received the consideration of Rs. 2.25 crores before certifying to the fact. As noted hereinabove, the promoters of the company resorted to jugglery of the figures in the books of accounts, transferring money from one person to another, or routing the money through M/s Pratha investment which was manned by the respondent, and belonged to his wife. The respondent has, in fact, assisted the promoters in playing fraud on the general public, in making them believe that the promoters had invested Rs. 2.25 crores in the share capital of the company as promoters contribution, and thereby inducing the general public to subscribe to the share capital of the company for Rs. 4.50 crores. It also appears that the respondent was hand-in-glove with the promoters of the company, and the certificate was issued by him to induce the gen....
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.... Agarwal was only a book entry without actual receipt of consideration. The companys money was divered and was brought back as contribution by the promoters. We have adverted to the omissions or commissions of the respondent in the earlier paragraphs while discussing point No.6. The respondent has also, during investigation by SEBI and the enquiry by the Disciplinary Committee appointed by the Council, admitted issue of a certificate confirming receipt of promoters contribution to a tune of Rs. 2,25,00,000/-, allotment of 15,00,000 shares without verifying actual receipt of cash for allotment of such shares to the promoters, and to have issued the certificate without qualifying that the allotment was subject to realisation of cheques. On this corporate fraud coming to light, SEBI instituted proceedings against the directors of the company, and the matter went upto the Supreme Court in Ritesh Agarwal. v. Securities and Exchange Board of India. The Supreme Court, while taking note of the corporate fraud played by the directors, exonerated Ritesh Agarwal and Deepak Agarwal on the ground that they were minors by the date of the public issue. Relying on BPL Limited v. Securities & Exc....
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....y opportunity to the respondent to defend himself by filing an appropriate reply; and, on the strength of such vague charges, the respondent cannot be found guilty. He has placed reliance on a judgment of this Court in W.P.No.28 of 2003 dated 29.09.2010 wherein the Division Bench of this Court, while placing reliance on M.V.Bijlani v. Union of India (referred supra), held that, when an appropriate charge is not framed or charges are vague, the employee cannot be found guilty of misconduct. This contention was neither urged before the Disciplinary Committee nor before the Council. On the other hand, the respondent appeared in person and defended himself. It is for the first time before this Court that this contention has been raised requesting this Court to exonerate him of the charges of misconduct. In any event, no prejudice has been caused to the delinquent thereby and, as held in UCO Bank v. M. Venuranganath [2002] SALT 162 (DB) and C. Pattabhirama Sastry v. Bank of Baroda [1998] 4 ALT 803, no interference is called for where procedural violations, if any, have not caused any prejudice to the delinquent. In Sarva Uttar Pradesh Gramin Bank v. Manoj Kumar Sinha (2010) 3 Supreme C....