TaxTMI 
TaxTMI 
2020 (4) TMI 644
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.... Mr. Mustafa Doctor, Sr. counsel, Mr.Pranav Badheka, Ms.Rhishika Harish, Rahul Dwarkadas, Ms. Prachi Dhanani, Ms.Rohini Jaiswal, Ms. Juhi Bahirwani i/by Veritas Legal for the Petitioner in WP No.5023/2019. Mr. Robin Jaisinghani i/by Dastur Kalambi & Associates for the petitioner in WP No.5035/2019. Mr. Amit Desai, Sr. counsel & Mr. Gopalakrishna Shenoy i/b Dastur Kalambi & Associates for petitioner in WP 5036/2019. Adv.Aabad Ponda a/w Vikran Negi, Ekta Tyagi, Pratik Thakkar, Bhomesh & Anjali Shah i/b DSK Legal for petitioner in WP 5263/2019. Mr. Aspi Chinoy, Senior Advocate a/w Mr. Animesh Bisht, Mr.Aditya Sikka, Adv. Ashish Mehta Saloni Kapadia, Ms.Drishti Das, i/b Cyril Amarchand Mangaldas, for Respondent no.1 in WP Nos.4144/2019, 4145/2019, 5023/2019,5035/2019, 5036/2019 and 5263/2019. Shri H.S.Venegaokar a/w Sneha Prabhu and Ajay Bhise for TR.No. 2 SFIO. JUDGMENT (Per B.P. Dharmadhikari, CJ.): 1. A prayer made under S. 140(5) of the Companies Act,2013 or 2013 Act against the statutory auditors by the Union of India through Ministry of the Corporate Affairs (MCA) in an investigation/dispute regarding constant evergreening of debts extended to its subsidiary Com....
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.... order on Misc. Application No. 3254 of 2019 filed in connection with Company Petition No. 2062 of 2019 under section 140(5) of the Companies Act, 2013 for appointment of statutory auditors for IL & FS Financial Services Limited ("IFIN") under first proviso to section 140(5) of the Companies Act,2013. This application was moved by the Union of India through its Ministry of Corporate Affairs, the NCLT has found that under section 140(5) only, the Union of India is authorized to appoint or change the auditor. The auditor appointed by the Company IFIN namely Mukund M. Chitale & Co. (MMC) has been treated as appointment of statutory auditors under section 140(5) by NCLT on 18.10.2019. 4. The other order or direction challenged in this group of petitions is dated 29/5/2019. By this order, the Assistant Director, Legal and Prosecution has asked the SFIO to file complaint ie prosecution under S. 212(14) of 2013 Act by 30/05/2019 without fail and to submit compliance report. 5. In Criminal Writ Petition No. 5023 of 2017, the petitioner DeoLitte Haskins & Sells (LLP) has questioned the constitutionality of section 140(5) supra and also prays to quash and set aside the criminal complai....
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.... (I) that respondent no.1 in those proceedings namely Deloitte Haskins was not eligible to be appointed as an auditor of any company for the period of five years from the order passed by NCLT in view of serious fraud committed which required intervention of the MCA to prevent the destabilization impact on the company at the request of the department of Economic Affairs and sought debarment for the period of five years. Similar relief was sought for against the other respondents i.e. applicants mentioned supra. 13. The maintainability of these proceedings was questioned on various grounds including contention that when the statutory auditor had factually ceased to be company auditor ie CA of the particular company and another auditor namely M/s.M.M. Chitale & Co. had stepped into the shoes and assumed that responsibility, provisions of section 140(5) could not have been invoked. We are required to refer to this contention and other allied grounds little later in the body of this judgment. NCLT has by impugned order rejected these objections and held Company Petition No. 2062 of 2019 presented by Union of India to be maintainable. 14. In this connection only on 30/09/2018 the U....
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....as questioned by respondent nos. 3, 4 and 1 before NCLAT in Company Appeal No. 222 of 2019, Company Appeal No. 223 of 2019 and Company Appeal No. 224 of 2019. In those appeals, NCLAT permitted NCLT to proceed with the hearing of the petition to restrain it from passing any order against the appellants before it. 17. After filing of the Company Petition No.2062 of 2019, respondent no.2 therein viz. M/s. BSR and Associates who were statutory auditors for IFIN for the year 2019-20 resigned on 19/6/2019. Respondent nos. 2 and 5 in Company Petition No. 2062 of 2019 moved High Court in Criminal Writ Petition No.4144 of 2019 (present petition) as also Criminal Writ Petition No.4145 of 2019 challenging the vires of section 140(5). High Court on 4/9/2019 while issuing notice passed the following order : "14. In above circumstances, we defer the hearing on the writ petitions. Stand over to 3rd October, 2019. Till next date, by way of ad-interim relief we pass the following order : • The Respondents and/or their agents and/or their servants are restrained from continuing any further proceedings qua the petitioners under Section 140(5) of the Act in Company Petition No....
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....ave. Adv. Khambata submits that grant of this leave by the Hon'ble Apex Court and dismissal of the SLP cannot be construed as dilution of the High Court order dated 4/9/2019 and action of respondents in moving the application in very same proceedings which were stayed because of liberty given by the Hon'ble Apex Court is unwarranted. The NCLT could not have proceeded further and allowed that application. 21. Attention of the Court is invited to provisions of section 140 of 2013 Act to show that it appears in a chapter which does not deal with the discipline and therefore, punishment to be inflicted upon the auditors. Removal in the said chapter is termination simplicitor without casting any stigma and therefore, it cannot be seen as disqualification. Contention is disqualification envisaged under section 140(5) operates only against the recalcitrant auditors who do not abide by the orders passed by the NCLT or defy the procedure. It is therefore, a sanction to guarantee the procedural discipline thereunder or the orders passed by NCLT under that section. Second proviso to section 140(5) cannot be seen as 'stand alone' provision. Such treatment extended to that sub section would ....
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....under section 447 of the Companies Act can be initiated. Section 212(15) gives this investigation report status of report filed by police officer under S.173 of Cr.P.C. The provisions of section 212(11) contemplates even an interim report, but no prosecution can be initiated on the basis of such interim reports. 25. Provisions of section 223(4) and (5) are relied upon to show that these provisions which permit inspection of documents or accounts are not attracted where section 212 of Companies Act is invoked. Section 435(1) of the Companies Act prescribes prosecution before Special Court and under section 436 and 438(1), provisions of Cr.P.C. regulate that prosecution. 26. This elaborate procedure which results in conviction of the auditor and his disqualification for the period of two terms is relied upon to point out how section 140 cannot be understood to contain the scheme for disqualification or debarment of the auditor. Even sections 141 and 142 of the said Act are relied upon for this purpose. It is submitted that section 140 therefore is summary procedure which is not aimed at fastening any guilt upon the auditor but only for his removal during further proceedings so ....
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....mitted that this disqualification is civil death for the company auditor and this penalty which is mandatory penalty of debarment for 5 years, is bad. He has relied upon Modern Dental College and Research Centre and Ors. vs. State of Madhya Pradesh and Ors. : (2016) 7 Supreme Court Cases 353 paragraph 59 to 65 to point out the need of balancing rights & obligations and to adopt doctrine of proportionality in said matters. He contends that if only object behind enacting section 140(5) is removal of said company auditor, mandatory civil death becomes disproportionate and unwarranted. 30. He adds that it also constitutes double jeopardy. Gagan Harsh Sharma and Anr. vs. State of Maharashtra: 2019 Cri. L. J. 1398 is relied upon for this purpose. 31. He submits that when the petitioner applied for documents to find out truth in defence that the report submitted by the SFIO is not an interim report and that before directing him to institute prosecution, the Central Government had applied its mind duly on 29.5.2019 to the said report; those documents were not made available and they also did not get opportunity to cross examine. According to him in proceedings before NCLT there is no....
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....bmitted that respondents attempted to add words in proviso to this section in an effort to get rid of its unconstitutionality and said attempt is again bad in law. He relies upon sections 132 and 447 of 2013 Act to urge that section 140(5) must be understood in the light of this provision. 36. The procedure for dealing with the Company Auditor who has committed professional misconduct is relied upon by him with submission that National Financial Reporting Authority (NFRA for short) has a detailed procedure in this respect and therefore adequate safeguards for CA. He submits that there if misconduct is established and company auditor is punished, that order is stayed automatically for period of 30 days to enable him to avail remedy of appeal to NCLAT. 37. Rules framed under Chartered Accountancy Act 1949 are also relied upon for this purpose. He states that section 21(2) and section 21(A) (2) deal with minor as also major professional misconducts and lay down the procedure therefor. He has invited our attention to section 21 (A) (3), 21(B) and section 22 to show that there is uniformity and established procedure to deal with such misconduct. Rule 9 of Rules framed under Charte....
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.... 212 of the Companies Act. He also invites attention to the stand in reply and contends that the MCA has shown undue haste with a view to defeat the statutory right of bail which might have accrued to one of the directors. 44. Rakesh Kumar Paul vs. State of Assam (2017) 15 SCC 67. paragraphs 11, 16, 28, 29, 32,38 and 39 are relied upon by him to submit that the steps hurriedly taken to defeat the provisions regarding default bail are mala fide and illegal. Kamlapati Trivedi vs. State of West Bengal: (1980) 2 SCC 91, paragraph 50 and 52 are relied upon to state that the cognizance can be taken only of complete investigation. 45. Advocate Desai while advancing the arguments on 17/12/2019 stated that the sanction granted on 29/5/2019 to launch prosecution is vitiated. He handed over to court a copy of Company Application No.2017/2019 moved before the NCLT by the Union of India to show that there in paragraph 15, the Union of India (MCA) has submitted on 8/6/2019 that the investigation was incomplete. Because respondents realized the impact of section 4(2) of Cr.P.C. on their action and on section 212 of the Companies Act, they have taken a plea that the investigation is co....
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....SCC 409 paragraph 40 is relied upon to buttress this submission and to demonstrate how the punishment of cancelling the licence of an advocate in contempt-action has been viewed. Institute of Chartered Accountants Of India vs. L.K. Ratna & Others. (1986) 4 SCC 537 para 18 is also cited by him to point out how it considers the case of damage of reputation. 51. The Judgment of Supreme Court of United States in the case of Hudsun Vs. United States followed by the Supreme Court of India is also relied upon by him to urge that article 20 of the Constitution or section 26 of the General Clauses Act does not require that both actions must be under the criminal law. To support this, he also relies upon the history and object behind section 140(5) explained by respondent no.1 in paragraph 5 of its reply affidavit. 52. On 18/12/2019, Advocate Desai submitted that the question whether such debarment of company auditor constitutes penalty or not is answered by the United States Supreme Court in Hudsun Vs. United States (supra) and he also points out the reply affidavit in Writ Petition No. 4145 of 2019 particularly paragraph 17 to 19. 53. To stress the Indian Law on the point, he draw....
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....relied upon to urge that only purpose was to defeat statutory bail which the other directors were entitled to in default. 59. Advocate Desai has relied upon judgment reported at Ramesh Kumar Paul vs. State of Assam:(2017) 15 SCC 67 to show how the provision in relation to default bail is dealt by Hon'ble Apex Court. He claims that it is important part of right of liberty and has highlighted its breach in the present matter by acting upon the interim report. Kamlapati Trivedi vs. State of West Bengal: (1980) 2 SCC 91 is also strongly relied upon by him to urge that law permits cognizance to be taken only if investigation is complete and not before that. 60. Our attention is invited to Company Application No. 2070/2019 preferred by Union of India before NCLT to point out that on 8/6/2019 also the fact that investigation is not complete, has been accepted. 61. Respondent realized impact of section 4(ii) of Cr.P.C. on section 212 of Companies Act,2013 and special provision therein regarding completion of investigation and therefore in order to defeat it, they have decided to act upon interim report. He contends that section 212 (12) also envisages final report only. It is furt....
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....eaning under section 140. State of Bombay vs. S. L. Apte and Another: AIR 1961 SC 578 is relied upon for this purpose. 66. The basis for initiation of action under section 447 and under section 140(5) is the same. It is based on same report, application of mind thereafter, same witnesses and same evidence. 67. Learned Senior Advocate states that while examining the concept of double jeopardy, punishments under both these provisions are not required to be same. Section 141 (1) (h) prescribes debarment for 10 years while punishment under section 140(5) is of debarment for 5 years. 68. Practitioners like auditor, Chartered Accountant, advocate and professionals constitute a class by themselves. Hon'ble Apex Court has considered the civil death which they suffer because of debarment and has prescribed the standard or requirement of proof beyond reasonable doubt in disciplinary matters. Proceedings for debarment are therefore criminal in nature. 69. An Advocate vs. Bar Council of India -1989 (supp) 2 SCC 25 is relied upon to show that proceedings are quasi criminal in nature and accordingly standards and procedure relevant in criminal jurisprudence are required to be used wh....
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....ple criminal proceedings. Principle akin to double jeopardy has been used by the Hon'ble Apex Court to quash the second FIR at the initial stages. According to him section 210 CrP.C. also adopts the same principle. The Division Bench judgment of this court reported at (2017) 3 Mah.L.J. 929 : Tulsi Dass S/O. Suraj Prakash Vs. Union OF India and Ors. para 29 is relied upon to show that even in departmental enquiries, because of Article 21, this principle has been extended. 75. With the leave of the Court, Advocate Dwarkadas submits that the debarment under section 140(5) cannot be seen as interim or protem measure because there is no power to pass final orders in relation to it in the scheme of section 140. He submits that the auditor needs to be removed by the company while debarment as the punishment is to be imposed by some other authority. 76. Appearing for the petitioners in WP No. 5035 of 2019 Advocate Robin Jaisinghani submitted that the petitioners are partners in the firm Deloite which has independently filed another petition. 77. He adopted the arguments advanced by others but clarified that this partner has also questioned the order of NCLT before the appellate tr....
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....scribes opportunity of hearing before the punishment. He then points out the amendments made recently to first schedule and second schedule of the said Act to introduce the concept of deemed conviction. He contends that CA (company auditor) visited with debarment under section 140(5) suffers deemed convict under these schedules and therefore, can be punished directly by the Institute of the Chartered Accountants. He argues that this amendment is high handed and unconstitutional. Rule 34 and rule 51 of the NCLT Rules is relied upon to show that while proceeding against the company auditor, NCLT has been permitted to evolve its own procedure. Thus there is no pre-set or well established procedure and company auditors can be subjected to different procedures as per its whim by NCLT. Such a provision needs to be struck down on account of procedural inequality. He draws support from AIR 1952 SC 75 : The State of West Bengal Vs. Anwar Ali Sarkar and another, paragraph nos. 20(1), 38 and para 45. To explain the importance of the procedure in such matters and relevance of Article 21 of the Constitution of India, he draws support from the observations of the Hon'ble Apex Court in paragraph ....
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....re, there is no application of mind. Our attention is invited to the mention of fact in the said direction dated 28/5/2019 that if the complaint is not filed before 31/5/2019, the petitioner Director would get a default bail. Learned counsel submits that thus power is being abused to illegally detain the petitioner Director in Jail. 86. Adv. Ponda has taken us through various judgments to substantiate his contentions. 87. For the convenience of the Court learned Senior Advocate Chinoy handed over written submission. Orally he has submitted that second proviso to section 140(5) is not intended to prompt or aimed at inducing the CA-company auditor to resign. It is a substantive provision essentially intended to see that said auditor who is found involved in fraud or has colluded for that purpose with directors or officers of company, should not continue to monitor accounts of any company atleast for next 5 years. He submits that first proviso to that section can be seen as an interim measure because there action is envisaged within 15 days of receipt of application and hence, consequential final order is also envisaged in second proviso. Said auditor against whom final order ha....
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....elies upon Union of India vs. R. Gandhi, Madras Bar Association. (2010) 11 SCC 1 to show the higher position at which NCLT has been placed. NCLT therefore exercises powers and jurisdiction vested earlier in High Court under old Companies Act. 92. The proceedings before High Court under Companies Act 1950 were essentially civil in nature and proceedings before NCLT are also civil proceedings. They are distinct from trial of offence under section 435 and 436 of the Companies Act 2013. He contends that merely because the company auditor cannot be reappointed for period of 5 years, the proceedings under section 140(5) do not become either criminal or quasi criminal. He states that judgment of Hon'ble Apex Court in An Advocate vs. Bar Council of India -1989 (supp) 2 SCC 25 considers proceeding under section 35 of Advocates Act where right to practice the profession as advocate is taken away. He claims that barring Chartered Accountant from acting and practicing for short duration does not make proceedings in NCLT, a criminal proceeding. He relies upon Director of Enforcement vs. M.C.T.M. Corp. (P) Ltd. - (1996) 2 Supreme Court Cases 471 for this purpose. 93. Sr. Advocate also stat....
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.... or an offence. 99. He submits that role of Company Auditor or Chartered Accountant is independent and they are representatives who have to protect interest of shareholders. They are not employees of company or subordinates of directors of company. He has explained their role by inviting our attention to judgment of Bombay High Court reported in the case of Sales Tax Practioners Association of Maharashtra and ors. vs. State of Maharashtra. 2008 SCC Online Bom 337, paragraph 12 and Deputy Secretary to the Government Vs. S.N. Das Gupta -AIR 1956 CAL 4. Thus, according to him, stand that role of Company Auditor must be seen as subordinate or secondary to role of Director of Company or Officers of Company is itself erroneous. He also invited our attention to provisions contained in Section 243 (1) (A) and 242 (4) (A) to show that in similar circumstances, the Director of the company also cannot hold office. 100. While dealing with the challenge in Writ Petition No. 4145 of 2019 to order dated 9/8/2019 passed by the NCLT, learned senior counsel points out that the petitioner has resigned as an auditor 9 days after the NCLT issued notice to it. The Union of India filed Company Peti....
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.... Union Umbrella Manufacturing Co. and Ors. Vs. Bhagabandel Agarwalla and Ors., (2006) 2 SCC 724 : Mohinder Prasad Jain Vs. Manohar Lal Jain and (2003) 1 SCC 726 : Beg Raj Singh Vs. State of U.P. and Ors. 104. Without prejudice to this preliminary objection, learned counsel has submitted that the order of NCLT dated 09/08/2019 is just and valid. It has given appropriate reasons for holding that the resignation submitted after filing of the proceedings by UOI cannot be used to defeat the scheme of section 140(5) which is preventive as also remedial in nature. The purpose of the said provision is to deny to the company auditor involved in fraud or collusion, further participation in the affairs of company or in audit work. This object would be defeated if by submitting resignation such auditor is permitted to continue with that work. He further submits that after passing of the final order, as envisaged in second proviso, the company auditor cannot be reappointed to undertake audit work of any company. This object also will be defeated if the interpretation of petitioner is accepted. The strategy adopted by the petitioners is against the public interest and should not be countenanc....
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....4/30 hours. The requirement of a valid sanction needs to be looked into by finding out whether the authority granting the sanction had before it relevant material justifying the grant and whether it has been looked into. The order dated 29/05/2019 does not disclose any non-application of mind. Petitioners have not pointed out to this court lack of material before the first respondent so as to vitiate the order dated 29/05/2019. He contends that this mere hypothetical contention that the report could not have been looked into within 30 hours, is liable to be rejected. 109. Shri Chinoy adds that even otherwise, no Government sanction is as such required to initiate action under section 140(5) of the Companies Act, 2013. 110. Advocate Venegaonkar, appearing for SFIO who is respondent no. 2 in all the writ petitions, invites attention to the prayer clause (iic) added by amendment in WP No. 4145 of 2019 to urge that there prayer is to quash and set aside the Criminal Case No.20 of 2019 instituted by SFIO before the competent court. 111. According to him, this prayer and writ petition is not maintainable to that extent as that court ie trial court has still not taken cogni....
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....and cross linkages which need to be looked into, and a separate report in relation to said connections can be filed after the investigation into their affairs. 114. Learned advocate has invited our attention to his brief written note on point no. 4 to contend that the report dated 28/5/2019 is complete and it is in relation to IFIN only. He placed heavy reliance on certain paragraphs in the said report for this purposes. He further adds that this report has been prepared on "stand alone" basis and needs to be appreciated accordingly. Learned counsel states that the effort to demonstrate that the report is interim or incomplete, cannot succeed. Nine points identified by investigation in paragraph 1 and 4 of the said report are also read out to the court. 115. In this backdrop, he submits that the said report is not under section 173 of Cr.P.C. and the deeming fiction under section 212(15) in 2013 Act is only for the limited purpose i.e. for the purposes of framing of the charge. This limited fiction cannot be enlarged further. He draws support from (1998) 6 SCC 183 : State Bank of India Vs. D. Hanumantha Rao and another paragraph 5. 116. Dealing with the issue of sanction/d....
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.... the leave of the court, senior advocate Mr. Chinoy submitted that the contention about the accused requiring to disclose his defence in the enquiry under section 140(5) of 2013 Act and suffering a prejudice in trial, is misconceived. He relies upon (1981) 2 SCC 277 : Capt. Dushyant Somal Vs. Smt. Sushma Somal and another, paragraphs 1, 2 and 5 thereof. 121. Advocate Khambata has in rejoinder submitted that the efforts made by the petitioner BSR to procure the directions under section 212(14) have not succeeded and despite directions of this Court, the SFIO has not filed any affidavit asserting that his report is a final report. The assertion of the petitioner on oath therefore has not been rebutted. He submits that the negligence even of the highest degree does not tantamount to fraud under section 447 of 2013 Act and this aspect has been lost sight by SFIO as also by the Central Government. Petitioner, therefore, demanded email dated 07/03/2019 but it has not been supplied. Hence, the adverse inference that it contains direction of central Government to SFIO as per section 212(11) needs to be drawn. He relies upon (1973) 3 SCC 581 : Union of India and Ors. Vs. Messrs. Rai Sing....
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....to the relevant extracts to show that the RBI itself on 01/11/2017 gave time to IFIN to give roadmap by 31/3/2019. Learned counsel adds that in this situation, the grievance of fraud against the petitioner BSR which has acted only for four months is misconceived. 126. Mr. Khambata has drawn our attention to explanation to section 447 of the Companies Act 2013 to urge that ingredients of fraud as specified therein are not even examined by respondents. The report submitted by SFIO contains some exculpatory material that has not been perused. Annual report on IFIN itself shows that it was given time till 31/3/2019. In this situation neither SFIO nor the Central Government has considered its impact. Processing note as alleged therefore becomes important. He also invited our attention to reply filed by respondents to show that there is no inference of collusion in it and above aspects have been overlooked. The fact that SFIO asked RBI to hold internal inquiry has also been ignored. According to him, this implies some participation in collusion even by RBI officers. In this situation, the petitioner who worked as Chartered Accountant for about 4 months could not have been seen as invo....
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.... jurisdictional challenge being looked into by this Court. Whirlpool Corporation vs. Registrar of Trade Marks, Mumbai and Ors. :(1998) 8 Supreme Court Cases 1, (paragraph 15); Maharashtra Chess Association vs. Union of India and Others: 2019 SCC Online SC 932, (paragraph 20 to 24) and Division Bench Judgment of this Court in Writ Petition (L) No.3250/2019 dated 29/11/2019 are pressed into service for this purpose. He also adds that since writ of prohibition has been sought the said objection is relevant. He cites Isha Beevi on behalf of the minor Umaiben Beevi and Others vs. The Tax Recovery Officer and Addl. P.A. to Collector, Quilon and Ors.:(1976) 1 Supreme Court Cases 70, (paragraph 5) in support. Lastly, he relies upon Bengal Immunity Company Limited vs. State of Bihar and Ors.: AIR 1955 SC 661, (paragraph 8) to urge that all orders passed in said matters by NCLT can be assailed before this Court since constitutional validity has been questioned. 132. He submits that before the petitioner became auditor, RBI had already entered into correspondence with IFIN and this correspondence was going on for 2 years. Annual report contains necessary disclosures and as such; taking act....
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....ocedure to be followed by NCLT, section 140(5) is rendered arbitrary and violative of Article 14. He also states that Rule 34 of NCLT Rules does not contain any settled procedure and contention that NCLT has substituted High Court and therefore, must be seen as equally competent and responsible body, is not legally sound for this purpose. Provisions of Appellate Side Rules, Company Court Rules and NCLT Rules guided High Court while functioning under Companies Act,1956 and as such, there was established procedure. 136. He further added that first proviso to section 140(5) cannot be seen as an interim measure. He has pointed out object which prompted the parliament to incorporate section 140(5) and relies upon the discussion on purpose of criminal justice, punishments in chapter dealing with administration of justice, contained in SALMOND on Jurisprudence. 137. According to him proviso to 140(5) militates with Limited Liability Partnership Act and therefore it needs to be construed properly in the wake of substantive provision in S. 140(5). 138. He further argues that the contention that second proviso is lenient since the CA is not debarred from continuing with ongoing work....
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....section 140(5) thereof deal with fraud and as NCLT is performing adjudicatory function, ingredients of Article 20 are satisfied. Proceedings before NCLT are also therefore affected by principle of double jeopardy. He has drawn support from L. D. Jaisinghani vs. Naraindas N. Punjabi: (1976) 1 Supreme Court Cases 354 and R. D. Bhatia (Mrs.) vs. Rajinder Kaur (Smt.) and Ors.: (1996) 6 Supreme Court Cases 627 to demonstrate that in such matters before NCLT, required standard of proof is beyond reasonable doubt only. These standards are applicable even in matters pertaining to professional misconduct. 145. Advocate Desai has cited Prahlad Saran Gupta vs. Bar Council of India and Another: (1997) 3 Supreme Court Cases 585, paragraph 9); Pawan Kumar Sharma vs. Gurdial Singh:(1998) 7 Supreme Court Cases 24, (paragraph 7); H.V. Panchaksharappa vs. K. G. Eshwar: (2000) 6 Supreme Court Cases 721, (paragraph 6), Bhupinder Kumar Sharma vs. Bar Association, Pathankot: (2002) 1 Supreme Court Cases 470, State of Punjab vs. Davinder Pal Singh Bhullar and Ors.: (2011) 14 Supreme Court Cases, paragraph Nos.107 to 111 and Nirmala J. Jhala vs. State of Gujrat and Another:(2013) 4 Supreme Court ....
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....tion 140(5) can be seen as remedial but then debarment ordered by second proviso is a punishment. Final order against Chartered Accountant springs from the finding of involvement in fraud. 148. 1966 edition of Salmond is cited to explain what is civil and criminal justice. Debarment of Chartered Accountant from all companies cannot be seen as remedial at all. He also invited our attention to section 22 and Schedule III of the Chartered Accountants Act 1949 with its section 8 to show that removal of name of Chartered Accountant from roll of Chartered Accountant is nothing but death penalty. 149. He has relied upon K.C. Sareen vs. CBI, Chandigarh (2001) 6 SCC 584 (paragraph 12 to 14) to show that Hon'ble Apex Court does not stay conviction and how conviction affects carrier of a person. For latter proposition, he also takes help of Sanjay Dutt vs. State Of Maharashtra (2009) 5 SCC 787. 150. To explain what constitutes prejudice, he takes help of M.S. Sheriff vs. State of Madra AIR 1954 SC 397 He submits that in such matters under section 140(5) issue of embarrassment to Chartered Accountant proceeded against definitely arises. He draws support from Capt. M. Paul Anthony vs. ....
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....t power to remand, he draws support from (1975) 2 SCC 220 : Natabar Parida Vs. State of Orissa (paragraph 5 and 8) as also (1995) 4 SCC 190 : Union of India Vs. Thamisharasi (paragraph 16). (1972) 3 SCC 141 : CBI Vs. Anupam Kulkarni (paragraph 9) is also relied upon. 154. He also tendered written submissions in rejoinder on behalf of Petitioner Harishankaran in Writ Petition No.5263 of 2019. 155. Advocate Khambata in Criminal Writ Petition No. 4145 of 2019 also submitted brief written note to distinguish the judgment reported at (2007) 8 SCC 559. Carona Ltd. vs. Parvthy Swaminathan & Sons relied upon by the MCA and to urge that events like resignation subsequent to filing of S. 140(5) proceedings must be taken note of. 156. Senior Advocate Mr. Seerwai also gave brief note in Criminal Writ Petition No. 4144 of 2019 in rejoinder. 157. Because some judgments were cited while advancing arguments in rejoinder, Advocate Chinoy has also submitted written submissions in rejoinder. He has explained the same in brief and contended that the steps taken need to be understood in the context in which the same became necessary. He also explained the purpose and object of the proceedin....
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....action contemplated against the Directors and officers by section 241(3(a), 242(4A) and 243(1A) need to be appreciated in the mode & manner as approved by the Statute. The directors and officers of a company stand on the different footing and therefore, the Chartered Accountant opting to work as company auditor cannot compare or equate himself with them. He has also again pointed out how second proviso to section 140(5) cannot be eclipsed by substantive part of section 140(5). He adds that the NCLT Rules 2016 contain sufficient procedure for conducting the matter against the auditor/company under section 140(5). 163. Lastly he has relied upon some judgments in effort to show how Article 20(2) of the Constitution of India is not relevant in the present matter. At the end of his written note, he has again reiterated the defences in brief. 164. Before proceeding with the discussion, we find it suitable to enumerate the questions which arise for determination. Those questions are. A. Whether S. 140(5) of 2013 Act is unconstitutional? --. Whether it is bad as it singles out only the Company Auditors and excludes the directors or the office bearers of the companie....
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....ompanies or class of companies or their auditors, as the case may be; (b) monitor and enforce the compliance with accounting standards and auditing standards in such manner as may be prescribed; (c) oversee the quality of service of the professions associated with ensuring compliance with such standards, and suggest measures required for improvement in quality of service and such other related matters as may be prescribed; and (d) perform such other functions relating to clauses (a), (b) and (c) as may be prescribed. (3) The National Financial Reporting Authority shall consist of a chairperson, who shall be a person of eminence and having expertise in accountancy, auditing, finance or law to be appointed by the Central Government and such other members not exceeding fifteen consisting of part-time and full-time members as may be prescribed: Provided that the terms and conditions and the manner of appointment of the chairperson and members shall be such as may be prescribed: Provided further that the chairperson and members shall make a declaration to the Central Government in the prescribed form regarding no conflict of interest....
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.... (38 of 1949) for a minimum period of six months or for such higher period not exceeding ten years as may be decided by the National Financial Reporting Authority. Explanation.-For the purposes of his (sic this) sub-section, the expression "professional or other misconduct" shall have the same meaning assigned to it under Section 22 of the Chartered Accountants Act, 1949 (38 of 1949). (5) Any person aggrieved by any order of the National Financial Reporting Authority issued under clause (c) of sub-section (4), may prefer an appeal before 2 [the Appellate Tribunal in such manner and on payment of such fee as may be prescribed]. (6) 3[* * *] (7) 3[* * *] (8) 3[* * *] (9) 3[* * *] (10) The National Financial Reporting Authority shall meet at such times and places and shall observe such rules of procedure in regard to the transaction of business at its meetings in such manner as may be prescribed. (11) The Central Government may appoint a secretary and such other employees as it may consider necessary for the efficient performance of functions by the National Financial Reporting Authority under this Act and the ter....
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....(3) If the auditor does not comply with sub-section (2), he or it shall be punishable with fine which shall not be less than 1[fifty thousand rupees or the remuneration of the auditor, whichever is less,] but which may extend to five lakh rupees. (4)(i) Special notice shall be required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be reappointed, except where the retiring auditor has completed a consecutive tenure of five years or, as the case may be, ten years, as provided under sub-section (2) of Section 139. (ii) On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor. (iii) Where notice is given of such a resolution and the retiring auditor makes with respect thereto representation in writing to the company (not exceeding a reasonable length) and requests its notification to members of the company, the company shall, unless the representation is received by it too late for it to do so,- (a) in any notice of the resolution given to members of the company, state the fac....
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....or its director or officers. Explanation II.-For the purposes of this Chapter the word "auditor" includes a firm of auditors. 141. Eligibility, qualifications and disqualifications of auditors.. (1).- (2).- (3) The following persons shall not be eligible for appointment as anaudit or of a company, namely- (h) a person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction; (4) Where a person appointed as an auditor of a company incurs any of the disqualifications mentioned in sub-section (3) after his appointment, he shall vacate his office as such auditor and such vacation shall be deemed to be a casual vacancy in the office of the auditor. 167. Respondent MCA has raised a preliminary objection about tenability of the instant challenge in the writ-petitions. They submit that if the S. 140(5) is held constitutional, the other prayers must be allowed to be looked into by the NCLAT where one of the petitioners has already approached. In Whirlpool Corporation vs. Registrar of Trade Marks, Mumbai and Ors. (supra) Hon. Apex Court in para 1....
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....roversy. We can revert back to challenge on merits. Hon. Apex Court in Swiss Ribbons P ltd. vs. UOI (supra) in para 38 holds that the legislation can be struck down on the ground that it is manifestly arbitrary. Modern Dental College and Research Centre and Ors. vs. State of Madhya Pradesh and Ors.: (supra) is relied upon to point out the need of balancing fundamental right of CA to practice & limitations on it. We have noted that the change of auditor as directed by NCLT is after its satisfaction about it. The debarment or disqualification is not only due to that satisfaction. Effort of the Parliament appears to elevate the noble profession of company auditor still higher. We find that the measure of debarment can not be seen as disproportionate in the scheme of S. 140(5) of 2013 Act. 170. Adv. Seervai relied upon State of Rajasthan v. Mukan Chand, (1964) 6 SCR 903 : AIR 1964 SC 1633 where in paragraph 8, the Constitution Bench points out that in order to pass the test of permissible classification, two conditions must be fulfilled, namely, (1) that the classification must be founded on an intelligible differentia which distinguishes persons or things that are put toge....
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....on to show that when the law prescribes the mode/manner in which a thing is to be done it must be done that way or then not at all and, when the one section in same Act deals with a general power while the other deals with a specific power, the specific power can not be utilized via such general provision. We find that in present facts, the S. 132, S. 447 and S. 140(5) do not militate with each other at all & hence, recourse to these principles is not necessary. Discussion little later in the body of this judgment will bring on record our reasons in support. 173. (2017) 5 SCC 598 -Bhuwalika Steel Industries ltd. Vs, Union of India, supports the argument that NCLT has erred in resorting to the deeming fiction as it is the prerogative of the Legislature only. (2010) 13 SCC 336 - Sant lal Gupta vs. Modern Cooperative Group Hsg. Ltd. shows that deeming fiction can not be resorted to even by a court of law. 174. We also note that Hon. Apex Court in Nathi Devi vs. Radha Devi Gupta. (2005) 2 SCC 271 para 13 & 14, states that the Legislature inserts every part of statute with a purpose & the legislative intention is that every part thereof should be given effect to. If the words used....
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....ind it necessary to refer to Union of India vs. Sanjay Kumar Jain. (2004) 6 SCC 708 para 11 which states that normally a proviso excepts or qualifies something form an enactment or to the discussion in paragraphs 15 to 17 in Binani Industries Ltd. vs. Assistant Commissioner of Commercial Taxes - (2007) 15 SCC 435, relied upon by Adv. Dwarakadas. 178. Before applying the above dogmas to the present facts, we also consider it convenient to look into the scheme of S.140(5) and whether it allows a punishment to be imposed for any offence. It will also throw light on the issue of double jeopardy. 179. In Rajesh Awasthi v. Nand Lal Jaiswal, (2013) 1 SCC 501 at page 522, it is observed : "48 In the present context, it has become necessitous to dwell upon the role of the Selection Committee. Section 85(1) of the Act provides for the constitution of the Selection Committee to select Members of the State Commission. The said Committee, as the composition would show, is a High-Powered Committee, which has been authorised to adjudge all aspects. I may hasten to add that I am not at all delving into the sphere of suitability of a candidate or the eligibility, for in the case at h....
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....ion, the Central Government is satisfied , in relation to an industrial undertaking, that- (a) the persons incharge of such industrial undertaking have, by reckless investments or creation of encumbrances on the assets of the industrial undertaking, or by diversion of funds, brought about a situation which is likely to affect the production of articles manufactured or produced in the industrial undertaking, and that immediate action is necessary to prevent such a situation; or (b) it has been closed for a period of not less than three months(whether by reason of the voluntary winding up of the Company owning the industrial undertaking or for any other reason) and such closure is prejudicial to the concerned scheduled industry and that the financial condition of the Company owning the industrial undertaking and the condition of the plant and machinery of such undertaking are such that it is possible to re-start the undertaking and such re-starting is necessary in the interests of the general public, .....-. 60. Section 18-AA(1)(a), in terms, requires that the satisfaction of the Government in regard to the existence of the circumstances or conditions prece....
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....s that no reasonable man could reasonably reach that conclusion, the court is entitled to examine the validity of the formation of that opinion by the Government in the context and to the extent of that issue." 181. Maneka Gandhi vs. Union Of India. (1978) 1 SCC 248, at page 386, shows : "186. On a consideration of various authorities it is clear that where the decision of the authority entails civil consequences and the petition is prejudicially affected he must be given an opportunity to be heard and present his case. This Court in Barium Chemicals Ltd. v. Company Law Board 134 and Rohtas Industries Ltd. v. S.D. Agarwal 135 has held that a limited judicial scrutiny of the impugned decision on the point of rational and reasonable nexus was open to a court of law. An order passed by an authority based on subjective satisfaction is liable to judicial scrutiny to a limited extent has been laid down in Western U.P. Electric Power & Supply Co. v. State of U.P.136 wherein construing the provisions of Section 3(2)(e) of the Indian Electricity Act 9 of 1910 as amended by the U.P. Act 30 of 1961, where the language used is similar to Section 10(3)(c) of the Passports Act, this ....
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....dd that I am not one of those who feel that a Legislative Assembly cannot be trusted with an absolute power of committing for contempt. The legislatures have by the Constitution been expressly entrusted with much more important things. During the fourteen years that the Constitution has been in operation, the legislatures have not done anything to justify the view that they do not deserve to be trusted with power. I would point out that though Article 211 is not enforceable, the legislatures have shown an admirable spirit of restraint and have not even once in all these years discussed the conduct of Judges. We must not lose faith in our people, we must not think that the legislatures would misuse the powers given to them by the Constitution or that safety lay only in judicial correction. Such correction may produce friction and cause more harm than good. In a modern State it is often necessary for the good of the country that parallel powers should exist in different authorities. It is not inevitable that such powers will clash. It would be defeatism to take the view that in our country men would not be available to work these powers smoothly and in the best interests of the peopl....
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....Ltd. vs. Needle Industries Newly (India) -(1981) 3 SCC 333 in paragraph 63 & 65, Hon. Apex Court points out the risk in relying upon solely on documents and importance of process of cross-examination. In A. Ayyasamy vs. A. Paramsivam and others -(2016) 10 SCC 386, in paragraph 25, the Hon. Apex Court points out how the allegations of fraud may raise complex questions of law & facts. Thus it holds that to decide such questions, the civil court is the appropriate forum and not the arbitrator. According to petitioners NCLT can not be said to be the apt forum for considering alleged fraud on part of CA. Discussion undertaken by us (below) shows that NCLT is not recording any finding to prejudice any legal right of CA in S. 132 or S. 447 proceedings. In AIR 1965 SC 1518. Ram Dial vs. State of Punjab, the Constitution bench of Hon. Apex Court examines possibility of pick & choose because of two identical remedies but with different procedures. Those section are S. 14(e), S.16(1) & S. 16(3) of the Punjab Municipalities Act,3 of 1911. In matter before us, the object of S. 140(5) is not the same as in S. 132 of the 2013 Act. 186. We find the arguments by the petitioners on classification....
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....nnuation, or other judgments cited by the respondents to counter it, need not be dealt with. Considering the language & scheme of S. 140(5) which we are mentioning little later in the body of this judgment, it is not necessary to dwell more on these precedents. 189. While considering the need of importance of a fair procedure, we find it appropriate to begin with precedents cited by the parties. In Institute of Chartered Accountants Of India vs. L.K. Ratna & Others. (1986) 4 SCC 537, in para 18, the Hon. Apex Court points out that another way of looking at the matter is examining the consequences of the initial order as soon as it is passed. Such an order may cause serious injury as soon as it is made, an injury not capable of being entirely erased when the error is corrected on subsequent appeal. It points out that the damage to CA's professional reputation can be immediate and far-reaching. "Not all the King's horses and all the King's men" can ever salvage the situation completely, notwithstanding the widest scope provided to an appeal. In such a case, after the blow suffered by the initial decision, it is difficult to contemplate complete restitution through an appellate....
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.... National level, Medical Council of India, Institute of the Chartered Accountants etc. Inquiry Officer or Authority has the discretion in the matter of choice of punishments. Strict rules of law of evidence do not apply to it. Punishment after such inquiry does not always result in disqualification of a servant or a workman. 192. Disqualification under second proviso to S. 140(5) of the 2013 Act springs into life automatically after the order thereunder is passed by the NCLT against the Chartered Accountant. The legislation make provisions for disqualifications for the aspirants of the elective public offices or office bearers of the bodies like the cooperative societies. The disqualification is either fastened at the threshold or during the tenure of the incumbent on such body. Accordingly, it cuts short his tenure or then prohibits him from contesting or continuing in the office. The object obviously is to maintain purity of administration of such artificial bodies either public or private like cooperative societies. Prosecution for the conduct leading to such disqualification may also be additionally provided for in same law or other law. 193. We find that the Companies Ac....
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....not obviously cast stigma on either Company or concerned CA. If the change as desired takes place & further manipulation (as suspected) of the accounts or further deterioration of the situation is avoided, the NCLT is not required to pass the final order. When final order is not passed, the statutorily mandated disqualification does not come into force at all. 196. The addition of section like S.140(5) in 2013 Act is only to prohibit the perpetration of apprehended mischief further and it is not to find guilt of or punish the company or its auditor. Therefore only NCLT is empowered to pass a final order against the CA which statutorily results in his disqualification. It has not been given any power to act against the Company which had hired such CA though it may have opposed the proceedings in NCLT. Purpose of S. 140(5) is only to inculcate more responsibility in the CA and law expects him to rise to the occasion by not opposing the proposed change by urging frivolous or roving grounds. He can resign though company hiring him may attempt to oppose NCLT thereby rendering the objections of the company in NCLT nugatory. Because of this salutary object in adding S. 140(5) to the 20....
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....onduct or prosecution for crime or any disability because of that removal or resignation. VIII. The law does not mandate any legal expert on NFRA. The composition of NCLT shows that it is better equipped than NFRA to adjudicate or to apply mind to legal aspects. IX. When NCLT comes across cases in which the company does not exercise its power under S. 140(1) or the CA does not resign and there is unholy collusion between them, it can order the company to change him. X. Functions of NFRA under 2013 Act are more regulatory or supervisory in nature than adjudicatory. Therefore this power to force change is given by parliament to NCLT. Functions entrusted to NCLT are dispute resolution & not governance. NCLT can also exercise contempt jurisdiction. XI. After NCLT issues the direction to company to change its CA, procedure under S. 140(1) need not be followed. Exercise of passing of special resolution which is contingent upon the desire of the majority is ruled out. CA against whom the company proposes to pass a special resolution is not prohibited from resigning after following the prescribed procedure. That option is not denied to & also available t....
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.... 132 deals with the departmental action after the professional misconduct. Same can not be said about the 2nd proviso to S. 140(5) as there NCLT has not been given power to punish & the debarment mandated by the Parliament attaches itself to the final order where the NCLT is forced to pass it. XIX. As disqualification for reappointment as CA of any company for 5 years is not a punishment for of fraud considered in substantive part of S. 140(5), the NFRA can still exercise the power to punish for professional misconduct of fraud. XX. As professional misconduct & offence are not dealt with by the NCLT, disqualification stipulated in second proviso to S. 140(5) can not be construed as a second punishment for same misconduct & it also does not attract the principle of double jeopardy. As legislative mandate of disqualification in second proviso to S. 140(5) is not a punishment either for the misconduct or the offence, obviously it is added as a measure to achieve a laudable goal stated supra. XXI. Respondents as also the Petitioners do not dispute that considering the consequences emanating from scheme of S. 140(5), it needs to be strictly construed. It conte....
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....ways displace an existing auditor. Therefore order asking the Company to change the auditor, alone needs to be treated as final order which will attract the above disqualification or debarment. Element of subjective satisfaction rules out the need of a full fledged inquiry or an exercise to prove it in each & every case. XXVIII. CAs who defrauded the Company but have completed their term & left can not be changed & therefore not amenable to S. 140(5). They can be tried for professional misconduct under S. 132 or under the Chartered Accountants Act. XXIX. Parliament has not vide S. 140(5) added NCLT as one more agency with same or overlapping powers. Concept like "subjective satisfaction" and despite reaching it, discretion available to NCLT whether to direct change of CA or not to direct it, leaves no manner of doubt that the Parliament has expected NCLT to change the doubtful CA who insists on continuing. This is to cater to the interest of shareholders. XXX. S. 140(5) operates in a limited situations, therefore only the power is given to body like NCLT with more legal or judicial expertise, and not to NFRA. While looking into other disputes relating to ....
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....pany to appoint CA of its choice. Hence, even after the central government appoints the CA, said Company can exercise its right, Not only this, but said Company or its CA can oppose the move, thereby necessitating the passing of final order. Power given to the Central Government is therefore by way of exception & hence, in emergent situations to avoid further perpetration of apprehended fraud. The NCLT after reaching the subjective satisfaction as warranted by substantive part of S.140(5), may pass an order restraining the suspect CA from further functioning in appropriate cases. Thereafter, the Central Government can be clothed with & gets the power to appoint CA in his place. XXXVI. Legislative wisdom behind this scheme or need felt by the Parliament for such a measure is not questioned before us. As the measure is unique and contingent upon the subjective satisfaction of the NCLT, the Parliament expected a higher moral response from the professional like CA and a CA who recuses or resigns, therefore is not subjected to any humiliation ie disqualification. This does not cast any stigma upon him. The scheme in substantive part of S. 140(5) does not imply that once the sat....
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....he prosecution under S. 447 is started, he can defend himself effectively and no adverse inference can be drawn against him for exhibiting the higher professional morals or adhering to better benchmark. XLI. Such CA can not also make grievance about this scheme of S. 140(5) since nobody compels him to be the Company CA & he opts to be so of his own. He also can not assail the higher moral values expected of him in the said role. XLII. Second proviso is therefore a notice in advance to such CA who has agreed to conduct himself with high moral values about the possible disqualification for raising the frivolous pleas in defence. NCLT may not be required to take recourse to this power in all cases & the responsible professional like CA is also made to respond with sincerity earnestly. The action when initiated, also need to be completed at the earliest. XLIII. S.140(5) is enacted to infuse confidence in the public in corporate sector & to prevent abuse of the position by company to the detriment of its share holders. Direction issued by NCLT thereunder does not result in any injury to Company. Still, it gives opportunity to company or CA to meet the subjecti....
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.... is bad. XLVII. It is obvious that the disqualification prescribed in second proviso to S. 140(5) is not for NCLT's satisfaction of involvement in fraud or offence of fraud or for professional misconduct. As only fact of final order of NCLT ie a direction to change is the triggering point, it can not attract the principles of double jeopardy at all. Such debarment is avoidable. XLVIII. It also follows that the CA in relation to whom the NCLT proposes to issue a direction to change, may therefore prefer to walk out by resigning thereby not taking the risk of a disqualification. He is expected to show a mature & neutral attitude. XLIX. Even when Company proposes to pass a special resolution for removing its CA under S.140(1), the CA can avoid it by putting in a resignation. The scheme of S. 140 itself interposes "resignation" procedure between the decision of Company to move such special resolution & further processing thereof. The Parliament has placed sub-sections (2) & (3) regarding the resignation between sub-sections (1) & (4) of S. 140 and there is nothing in law to demonstrate that the CA against whom the special resolution of "removal" is initiated,....
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....ice bearers on one hand & the CAs on the other hand are equally misconceived. Every chartered accountant need not be the company auditor(CA) but once he volunteers to be so, the higher standards and norms apply. His integrity & morals thereafter must be above other chartered accountants & also beyond any doubt. He assumes that role with open eyes & can not be permitted to turn back to challenge the higher moral standards & benchmark of conduct evolved by the Parliament for him. If he has breached it, he can not complain that other violators are not being proceeded against. All violators need to be dealt with as per law & if anybody is shown undue or misplaced sympathy, it can not be used to urge violation of Art. 14. LIV. Purpose of disciplinary or departmental action form is conduct against CA under S. 132 of 2013 Act or under the Chartered Accountants Act and object behind S. 140(5) of 2013 Act is clearly distinct. The Parliament has not proposed to punish the CA under S. 140(5), hence precedents like Mrs. Maneka Gandhi vs. Union of India - (1978) 1 SCC 248 to demonstrate need of an established procedure to deal with the professional misconducts or the criminal offences,....
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....at even in 2013 Act, NCLT is a judicial tribunal. LVI. State of Goa and another Vs. Colfax Laboratories Ltd. And another and H.V. Panchaksharappa vs. K. G. Eshwar, pressed to explain that allegation of collusion itself mandates the test of "beyond reasonable doubt" also need not be delved into. LVII. Supreme Court Bar Association vs. UOI -(1998) 4 SCC 409, Pawan Kumar Sharma vs. Gurudial Singh.(1998) 7 SCC 24, Pralhad Sarn Gupta vs. Bar Council of India-(1997) 3 SCC 585 which deal with the standard of proof or the concept of double jeopardy also do not call for independent appreciation. Few more judgments already referred to in written arguments are also pressed into service by Adv Dessai. However, as the very foundation of his arguments is not accepted by us and we have found recourse to Art. 20 by him unfounded, in order to avoid prolixity & reiteration, we do not consider those judgments. The changes in law in US (Hudson vs. United States) also are not relevant. LVIII. Sr. Adv. Dwarakadas has cited AIR 1961 SC 794-Jetahnanda & Sona vs. State of U.P. to explain what a phrase "final order" in second proviso to S. 140(5) of 2013 Act implies. There in para....
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....d not detain us here. Ram Singh and Ors. vs. Col. Ram Singh: 1985 (Supl) SC C 611, (paragraph Nos. 222, 223) and Ram Sharan Yadav vs. Thakur Muneshwar Nath Singh and Ors.: (1984) 4 SCC 649, (paragraph Nos.2 and 3) are relied upon to urge that proceedings under S. 140(5) are quasi criminal. Questions like whether the statutorily mandated disqualification in 2nd proviso to S. 140(5) attracts double jeopardy? Whether the heading of section 140 or case law explaining the role of a "proviso" has any relevance? Whether proceedings u/S. 140(5) are quasi-criminal? stand answered above. Whether the 1996 judgment in Director of Enforcement vs. M.C.T.M. Corp. (P) Ltd. (supra) had no occasion to consider constitutional Bench judgment in Shanti Prasad Jain vs. Director of Enforcement, FERA. AIR 62 SC 1754 where in para 35, Hon. Constitution Bench observes that the proceedings under the FERA are quasi-criminal in character & it is the duty of the respondents to prove violation of law beyond reasonable doubt, has no bearing in this case. Similarly, questions like Whether S. 140(5) is Unconstitutional? Does it violate Art. 14 by signaling out the CAs for a harsher treatment & leaving out the Direc....
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....e prescribed. 212. Investigation into affairs of Company by Serious Fraud Investigation Office.- (1) Without prejudice to the provisions of Section 210, where the Central Government is of the opinion, that it is necessary to investigate into the affairs of a company by the Serious Fraud Investigation Office- (a) on receipt of a report of the Registrar or inspector under Section208; (b) on intimation of a special resolution passed by a company that its affairs are required to be investigated; (c) in the public interest; or (d) on request from any Department of the Central Government or a State Government, the Central Government may, by order, assign the investigation into the affairs of the said company to the Serious Fraud Investigation Office and its Director, may designate such number of inspectors, as he may consider necessary for the purpose of such investigation. (2) Where any case has been assigned by the Central Government to the Serious Fraud Investigation Office for investigation under this Act, no other investigating agency of Central Government or any State Government shall proceed with investigation in such case in r....
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....itations under the Code of Criminal Procedure, 1973 (2 of 1974) or any other law for the time being in force on granting of bail. (8) If the Director, Additional Director or Assistant Director of Serious Fraud Investigation Office authorised in this behalf by the Central Government by general or special order, has on the basis of material in his possession reason to believe (the reason for such belief to be recorded in writing) that any person has been guilty of any offence punishable under sections referred to in sub-section (6), he may arrest such person and shall, as soon as may be, inform him of the grounds for such arrest. (9) The Director, Additional Director or Assistant Director of Serious Fraud Investigation Office shall, immediately after arrest of such person under sub-section (8), forward a copy of the order, along with the material in his possession, referred to in that sub-section, to the Serious Fraud Investigation Office in a sealed envelope, in such manner as may be prescribed and the Serious Fraud Investigation Office shall keep such order and material for such period as may be prescribed. (10) Every person arrested under sub-section (8)....
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....ate Government, police authority or income tax authorities, which may be relevant or useful for such investigating agency, State Government, police authority or income tax authorities in respect of any offence or matter being investigated or examined by it under any other law. 202. After due deliberations, we record our conclusions below on the relevant aspects having bearing on status of report under S. 212 submitted by SFIO. Where ever, we have found it necessary to leave the question open, we have mentioned accordingly. Relevant case law has been also looked into thereafter. I. S. 212(11) obliges SFIO to submit an interim report when so directed by the Central Government. S. 212(12) obliges him to submit the investigation report after completing the investigation. II. Thus, the section does not speak of said report as "final report". Parties have for convenience coined that phrase since S. 212 (11) uses the word "interim report". III. S. 212 itself mandates that after the investigation is "assigned" to SFIO by the Central Government, he has to conduct the investigation in the manner & follow the procedure as given in Chapter XIV of the 2013 Act. It ....
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....es to be a report filed by a police officer under Section 173 CrPC itself reveals that such report need not be identified as either interim one or then, in contrast to it, a final one. Distinction between report under S.212(11) & (12) is not relevant under S. 212(15). However said report has to be one on the strength of which the Central Government issues the direction to SFIO to file the prosecution. XII. Question whether said report is "final" or "interim" needs to be answered by reading the report & its title or nomenclature can not be decisive. If such report points out the possibility of change of conclusions therein due to subsequent investigation, it can not be seen as report filed for framing the charge as the definite charge can not be framed or founded on it. XIII. Direction issued by the central government under S.212(14) enables the SFIO to lodge the prosecution. Otherwise, after submitting the investigation report, he is helpless. If this direction is not in existence or is void, the prosecution has to fail. It is not the plea of the respondents that the officer who prepared the processing note had already worked on the case and as such, it was possib....
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....4) 1 SCC 242 Nagindas Ramdas vs. Dalpatram Ichharam, paragraph-27 to urge that admissions in reply by MCA and SFIO that SFIO report under S. 212 is an interim report are judicial admissions which stand on much higher footing and are binding on them. (2019) 5 SCC 266 : Serious Fraud Investigation Office Vs. Rahul Modi and another, paragraph 30 is relied upon to submit that prosecution can not be lodged on the strength of such interim report. Learned Single judge of Madras High Court has in PMC Mercantile Pvt. Ltd, vs. State - (2014) 3 MWN (Criminal) 454 (paragraph 11 and 18) found that report submitted before completion of investigation by SFIO is not a complete report under S. 173(2) CrPC and based on it, cognizance can not be taken by the Magistrate. Such report can not be used to defeat or deny the default bail under S. 167 (2) of CrPC. The Division Bench judgment of Andhra Pradesh High Court in 1966 Cr.L.J. 1377. Bandi Kotayya vs. The State, paragraphs 8 & 9 are also pressed into service for this purpose. 2011 SCC online All 641. Bhartendu Pratap Singh vs. State of U.P. delivered by learned Single Judge of Allahabad High Court is relied upon to urge that further investigation as....
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....n of India & Others vs. Messrs Rai Singh Dev Singh Bist. 206. Status of report under S. 173 and further course of action are explained in para 50 & 51 of Kamlapati Trivedi vs. State of West Bengal: (1980) 2 SCC 91, where the Hon. Court observes that sections 169 and 170 do not talk of the submission of any report by the police to the Magistrate, though they do state what the police has to do short of such submission when it finds at the conclusion of the investigation (1) that there is not sufficient evidence or reasonable ground of suspicion to justify the forwarding of the accused to a Magistrate (Section 169) or (2) that there is sufficient evidence or reasonable ground as aforesaid (Section 170). In either case, the final report of the police is to be submitted to the Magistrate under sub-section (1) of Section 173. Sub-section (3) of that section further provides that in the case of a report by the police that the accused has been released on his bond (which is the situation envisaged by Section 169), the Magistrate shall make "such order for the discharge of such bond or otherwise as he thinks fit". The courses open to the Magistrate in such a situation can be seen in judg....
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..... 173 CrPC on the strength of this deeming fiction. Though the term "interim report" is employed in S. 212(11), there is no word "final report" in entire S. 212 of 2013 Act. We therefore do not find it necessary to embark on exercise of evaluating the case-law cited by the respective learned Advocates. 210. The subject report runs into more than 730 pages and it has about 32,000/ pages as annextures. Parties have relied upon its portions to urge that it is not complete or it is complete. This report is on IFIN only and its transactions with other group companies or third parties have not been looked into. If this report is not on stand alone basis, the further investigation into affairs with others may have some effect on findings in interim report. Whether all conclusions in the report are therefore provisional or then, there are any or few findings which may not get eclipsed by such investigation into cross linkages or transactions interse, is the moot question. Parties have not invited our attention to any one transaction which has been investigated into fully & reveals some fraud or tampering. Admittedly, the report does not project itself as an interim report under S. 212(1....
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....prima-facie sufficient to sustain the charges for which the prosecution is directed. 214. Word "interim" may not imply always that the conclusions of SFIO are tentative or provisional and likely to change as the investigation progresses. Though the petitioners may not be wholly right in contending that the admissions on status of report are determinative; in these facts the burden was on the Respondents to demonstrate that there was atleast one final determination in said report of SFIO. If such conclusion is supported by investigation as done, the contentions about malafide use of power or colourable use to defeat S. 167 CrPC may not be sustainable. However, when there is no such effort & no material on record before respondent no. 1 or before this Court, the objection about the non-availabilty of the required report under S. 212(14) and also of non-application of mind needs to be upheld. 215. We have already reproduced supra Section 212 of 2013 Act. Under S. 212 (6), if the offence complained of to the Special Court is under S. 447 of 2013 Act, it is declared cognizable under S. 439. All other offences are declared to be not cognizable under S. 439. These sections are place....
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....to be not only in the offence which has surfaced but a deeper scrutiny of records of concerned company and several other companies/concerns to verify the cross-linkages & impacts becomes essential. Thus the extent of crime, its sweep and area occupied by it may be unfathomable. It may take considerable time. Grant of default bail in such situations or in circumstances like present one may tantamount to giving the accused benefit of his own wrongs. The power under S. 212(11) with Central Government to call for interim report from SFIO, no express bar to direct SFIO to initiate prosecution under S. 212(14) on its strength or over riding deeming fiction created under S. 212(15) all may require proper appreciation. We can not observe more on this aspect in absence of an occasion for proper assistance from the parties. With respect, we may note that Serious Fraud Investigation Office Vs. Rahul Modi and another (supra) also does not specifically deal with this issue. In present matter, we are not called upon to decide it. In any case, as will be seen little later since the direction dated 29/05/2019 issued to SFIO is void, we are not required to examine it. 218. The judgment in Rakesh....
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....d 199(4) CrPC, as expounded by Apex Court in Subramanian Swamy, has not been complied with. Hon. Court states that a Public Prosecutor filing a complaint under Section 199(2) CrPC without due satisfaction that the materials/allegations in complaint discloses an offence against an authority or against a public functionary which adversely affects the interests of the State would be abhorrent to the principles on the basis of which the special provision under Sections 199(2) and 199(4) CrPC has been structured as held by this Court in P.C. Josh and Subramanian Swamy. These observations also apply to requirement of application of mind in S. 212(14) of 2013 Act. The Public Prosecutor in terms of the statutory scheme under the Criminal Procedure Code plays an important role. He is supposed to be an independent person and apply his mind to the materials placed before him. In the case before Hon. Apex court, the press meet was convened by the appellant on 21-62014. The Government accorded sanction to the Public Prosecutor to file complaint under Section 500 IPC against the appellant on 24-6-2014 which was filed by the Public Prosecutor on the very same day i.e. 24-6-2014. The Apex Court fi....
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....since the report itself indicates need of further investigation into cross-linkages & cross-check of transactions with other companies. Absence of such a positive prima-facie finding in the impugned direction does not permit or require leading of any evidence to support the decision contained in said direction. The stand of the Respondents that the precedents cited need to be distinguished into two categories - one dealing with "no sanction" and the others dealing with "defective sanction", therefore, does not hold any water. The direction dated 29/05/2019 is therefore untenable in law. 223. Answer to question whether the Central Government could have moved application for change of auditor in the NCLT proceedings which are stayed by this Court on the liberty given by the Hon. Apex Court when it dismissed SLP need not detain us as all parties agree that the Companies Act, 2013 does not contain any other provision empowering the Central Government to move such request & no other forum except NCLT. Leave or liberty given by the Hon. Apex Court is not in dispute & the burden was therefore on the petitioners to explain how that liberty could have been used. Even otherwise, the order....