TaxTMI 
TaxTMI 
2021 (6) TMI 1179
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....re foundational and fundamental concepts. Law is now well settled that the principles of natural justice are part of legal and judicial proceedings. [Rattan Lal Sharma vs. Managing Committee, Dr. Hari Ram Higher Secondary School AIR [1993] SC 2155 para 9] 3 We are tempted to preface our judgement with the aforenoted observations of the Supreme Court as in the case on hand the writ applicant has been very badly condemned and that too unheard. 4 The Special Civil Application No.7342 of 2021 is treated as the lead matter. 5 By this writ application under Article 226 of the Constitution of India, the writ applicants have prayed for the following reliefs: "(a) This Hon'ble Court may be pleased to issue a writ of mandamus or any other writ, order or direction of petitioner No.1 as statutory Auditor effected for F.Y. 2020-21 and be pleased to grant consequential relief of reinstatement. (b) This Hon'ble Court may be pleased to issue a writ of mandamus or any other writ, order or direction directing respondents to produce on record the letter dated 05.12.2020, in the event respondent No.1 or respondent No.3 has relied on the said letter before taking the illeg....
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....lation to the accounts of the Union and the State. 11 The appointments to carry out either the statutory audit or internal audit of a Public Sector Undertaking (PSUs), such as the respondent No.1 is done through the respondent No.3 - C&AG. In accordance with the procedure prescribed, a Chartered Accountant firm like the writ applicant No.1 herein would apply to the C&AG for empanelment. After due verification and checks and balances, the said firm would get empanelled with the C&AG, who, thereafter, would recommend appointment of the said firm to the various PSUs, depending on the scale of work vis-a-vis the size of the firm. 12 In the case on hand, the writ applicant got empanelled with the C&AG for the financial year 2020-21. The writ applicant firm was also empanelled with the C&AG for the previous years and was already appointed as the statutory authority for the respondent NO.1 for the F.Y. 2019-20. 13 Post empanelment, under the email dated 24th August 2020, the C&AG informed the respondent No.1 that the writ applicant No.1 has been appointed as the statutory auditor for the respondent No.1 for the F.Y. 2020-21. The same email was forwarded by the respondent No.1 to ....
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....ated by the learned Senior Counsel Mr. Manish Bhatt for the petitioners that petitioner no.1 is a Chartered Accountant LLP empaneled with Indian Banking Association for forensic audit of Major Frauds and is also one of the 10 firms empaneled with SEBI as Forensic Auditors. It is stated that the petitioner no.2 is a partner of Pipara & Co., LLP and operates out of New Delhi. It is stated that the petitioner no.1 got empaneled with C&AG for the Financial Year 2020-21. It is stated that post empanelment, by email dated 24.08.2020, C&AG informed respondent no.1 that the petitioner no.1 is being appointed as Statutory Auditor for respondent no.1 for Financial Year 2020-21. It is stated that the respondent no.1 suddenly stopped imparting work to the petitioner from January-2021. It is stated that the petitioner no.1 checked the C&AG portal on 22.04.2021 to check the status of their appointments and it came to notice that the portal displayed 'Nil' appointments in the name of petitioner, which meant that respondent no.1 had technically terminated petitioner no.1's appointment without informing them. The screen shot is annexed at Annexure-C to this petition. It is stated that n....
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....thority like the Comptroller and Auditor General of India to act in such a highhanded manner. 22 Mr. Bhatt would submit that in response to the notice issued by this Court, the respondent No.1 has filed an affidavit in which there is a reference of a letter dated 5th December 2020 addressed by the respondent No.2 (State of Gujarat, Finance Department) to few PSUs including the respondent No.1 herein informing that the writ applicants - firm shall not be engaged to act as the Auditor in public. Mr. Bhatt would submit that the respondent No.1 blindfoldedly followed the letter addressed by the respondent No.2 and proceeded to appoint a new statutory Auditor i.e. the newly impleaded respondent No.4 - B. P. Bang and Company. 23 Mr. Bhatt, thereafter, invited the attention of this Court to the letter dated 5th January 2021 addressed by the office of the C&AG to the respondent No.1 herein informing that a new Chartered Accountant firm has been appointed as the new Auditor in the wake of the appointment of the writ applicant being terminated. This, according to Mr. Bhatt, was in gross violation of the principles of natural justice, as, at no point of time, the respondent No.3 - C&AG ....
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....ctions issued by the respondent No.2 - State of Gujarat (Finance Department). Mr. Patel would submit that his client is in no way concerned with the cause or reason for the termination of the writ applicants as the statutory Auditor. The respondent No.1 is only concerned with the work of audit. He would submit that the C&AG, by letter dated 5th January 2021, has appointed the respondent No.4 as the statutory Auditor of the respondent No.1 - Corporation for F.Y. 2020-21. Mr. Patel would submit that although the writ applicant was appointed as the Auditor to undertake the audit work of the respondent No.1 - Corporation, yet nothing substantial was done by the writ applicant or in other words, the writ applicant had yet to commence with the work of statutory audit and by that time, the respondent No.4 came to be appointed as the Auditor. Mr. Patel would submit that the respondent No.4 has commenced the work of audit. 28 Mr. Patel would submit that Section 140 of the companies Act, which is sought to be relied upon, has no application in the present case as Section 140 talks about removal of Auditor from his office by the company and that too, after obtaining the prior approval of t....
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....so badly without giving any opportunity of hearing. He would submit that his client i.e. the respondent No.3 would abide by whatever order this Court may deem fit to pass in the larger interest of justice. • SUBMISSIONS ON BEHALF OF THE RESPONDENT NO.2 - STATE OF GUJARAT: 31 Mr. Chintan Dave, the learned A.G.P. appearing for the State would submit that this Court may not entertain this writ application and reject the same. He would submit that the decision to remove the writ applicant as the Auditor has been taken in the larger public interest. • SUBMISSIONS ON BEHALF OF THE RESPONDENT NO.4: 32 Mr. Vishal Dave, the learned counsel appearing for the respondent No.4 - newly appointed Auditor submitted that his client has already undertaken the work of statutory audit and would be filing his report in the near future. Even otherwise, the last date is 31st August 2021 and therefore, before 31st August 2021, the respondent No.4 will have to file the audit report. The learned counsel would submit that having undertaken the substantial work, the respondent No.4 may be permitted to complete the audit and file its report. 33 In such circumstances referred ....
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....33. (2) The auditor of a Government company shall be appointed or re- appointed by the Comptroller and Auditor-General of India: Provided that the limits specified in sub-sections (1-B) and (1-C) of section 224 shall apply in relation to the appointment or re- appointment of an auditor under this sub-section. (3) The Comptroller and Auditor-General of India shall have power- (a) to direct the manner in which the company's accounts shall be audited by the auditor appointed in pursuance of sub-section (2) and to give such auditor instructions in regard to any matter relating to the performance of his functions as such; (b) to conduct a supplementary or test audit of the company's accounts by such person or persons as he may authorise in this behalf; and for the purposes of such audit, to require information or additional information to be furnished to any person or persons, so authorised, on such matters, by such person or persons, and in such form, as the Comptroller and Auditor-General may, by general or special order, direct. (4) The auditor aforesaid shall submit a copy of his audit report to the Comptroller and Audito....
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....and Auditor- General of India exercises full control over the auditors of Government company. The powers and duties of auditors in respect of companies other than Government companies are laid down in s. 227 of the Act but by virtue of sub-s. (1) of section 619 of the Act, the provisions in s. 227 of the Act do not apply to a Government company because a Government company is subject to the provisions of s. 619 of the Act. Under s. 619-A of the Act, where the Central Government is a member of a Government company, an annual report of the working and affairs of the company has to be prepared and laid before both Houses of Parliament with a copy of the audit reports and the comments made by the Comptroller and Auditor-general. Under s. 620 of the Act the Central Government may by notification direct that any of the provisions of the Act, other than Sections 618, 619 and 639, shall not apply to any Government company. 9. The net result of the aforesaid provisions is that so far as the Durgapur Projects Ltd. and the Hindustan Steel Ltd. are concerned, the appellant was appointed an auditor by the Central Government; he is removable by the Central Government and the Comptroller....
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....tor- General of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within a period of one hundred and eighty days from the commencement of the financial year, who shall hold office till the conclusion of the annual general meeting. (6) Notwithstanding anything contained in sub-section (1), the first auditor of a company, other than a Government company, shall be appointed by the Board of Directors within thirty days from the date of registration of the company and in the case of failure of the Board to appoint such auditor, it shall inform the members of the company, who shall within ninety days at an extraordinary general meeting appoint such auditor and such auditor shall hold office till the conclusion of the first annual general meeting. (7) Notwithstanding anything contained in sub-section (1) or sub- section (5), in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government, or Governments, or partly by the Central Government and partly by one or more State Governments, the first ....
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..... Explanation I. - It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its director or officers. Explanation II. - For the purposes of this Chapter the word "auditor" includes a firm of auditors." 43 Section 143 of the Companies Act, 2013 "... ... (5) In the case of a Government company, the Comptroller and Auditor- General of India shall appoint the auditor under sub-section (5) or sub- section (7) of section 139 and direct such auditor the manner in which the accounts of the Government company are required to be audited and thereupon the auditor so appointed shall submit a copy of the audit report to the Comptroller and Auditor-General of India which, among other things, include the directions, if any, issued by the Comptroller and Auditor-General of India, the action taken thereon and its impact on the accounts and financial statement of the company. (6) The Comptroller and Auditor-General of India shall within sixty days from the date of receipt of the audit....
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.... held that the CG and CAG retained the power to appoint and remove the auditor for the Government Companies. [C] It appears that under Section 140(5) of Companies Act, 2013, the power is now with the NCLT. 45 The scope and ambit of Section 139 (5)- 139(7) under the Companies Act, 2013 is wider than the Companies Act, 1956. [A] Earlier phrase under Section 619 was "Government Companies". [B] While in the 2013 Act, Section 139(5)-(7) uses the phrase "in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments". • Section 140(1) is clear in it's language 46 Interpretation of "auditor appointed under Section 139": [A] CAG appoints auditors under Section 139(5) [B] Section 140(1) refers to the auditor appointed under the Section 139. [C] Section 139 includes Section 139(5) 47 Interpretation of "Government Company" and Authorised established by law by the Supreme Court: [A] "Government Company" would be subsumed....
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....ereliction of duty on the part of the Auditor, then, in such circumstances, the company can remove the Auditor appointed under Section 139 after passing a special resolution in that regard with the prior approval of the State Government. 49 In the aforesaid context, we shall now look into sub-section (5) of Section 140 referred to above. Sub-section (5) starts with a non obstante clause "without prejudice to any action under the provisions of this Act or any other law for the time being in force". Sub-section (5) of Section 140 would come into play if the Auditor appointed under Section 139 of the Act is found to have directly or indirectly, acted in a fraudulent manner or has abetted or colluded in any fraud by, or in relation to, the company or its Directors or officers. In such circumstances, the Tribunal either "suo motu" or on an application made to it by the "Central Government" or by "any person" concerned can direct the company to change its Auditor. Here, again, there is a grey area which needs to be looked into. A close reading of Sub-section (5) would indicate that the fraudulent act or any collusion of the Auditor concerned should be with respect to the company whose....
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....e discretion whether to pass that final order or not, even after reaching the "satisfaction" and legislative wisdom behind it will be lost. It will introduce a discordant note in the scheme of S. 140 itself. XXIII. Second proviso speaks of a "final order" and question is whether it needs to be construed in contradistinction with first proviso which contemplates passing of an urgent order within 15 days on application of Central Government prohibiting the "suspect auditor" to continue with audit work thereby enabling the Central Government to substitute him. This order under first proviso, according to the respondent Union of India is an interim order. According to UOI, the words "final order" in second proviso are to be understood with reference to this "interim" order. XXIV. We find that S.140(5) in its substantive part, does not envisage any such interim order. It only speaks of an order and direction to company to change its CA. Thus final order to be issued under substantive part is to a Company only. The CA to be changed who opposes that change, may also be required to be heard under this substantive part as he may point out the want of material to sustain th....
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.... as stipulated in second proviso. 51 We are of the view that the phrase "any person concerned" for the purpose of sub-section (5) of Section 140 would include the C&AG. We are persuaded to take the view that the C&AG can approach the NCLT for the removal of the Auditor if the C&AG is of the view that the Auditor has acted fraudulently. However, as discussed above, the only grey area is whether such fraudulent act should be with respect to that particular company only or any other company whose audit work the Auditor might have undertaken in the past. 52 The Supreme Court in the case of Bar Council of Maharashtra vs. M. V. Dabholkar reported in 1975(2) SCC 702 had the occasion to interpret the phrase "person aggrieved". We quote the relevant observations: "28. ...... The meaning of the words "a person aggrieved" may vary according to the context of the statute. One of the meanings is that a person will be held to be aggrieved by a decision if that decision is materially adverse to him. Normally, one is required to establish that one has been denied or deprived of something to which one is legally entitled in order to make one "a person aggrieved". Again a person is ag....
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....intiffs claim interest. 54 The Supreme Court in AIR 1966 SC 955 (Sachidananda Banerjee, Assistant Collector of Customs, Calcutta vs. Sitaram Agarwal) has held the word "concerned" to be of wide import. 55 The NCLT is required to decide within 15 days. (See the 1st unnumbered proviso sub-section (5) of Section 140 of the Companies Act, 2013) 56 If the Tribunal is approached either by the Central Government or by any person concerned which includes the C&AG, then the NCLT has to decide such an application within 15 days as prescribed under the first proviso to sub-section (5) of Section 140 of the Act, 2013. 57 The Supreme Court in the case of Leelabai Gajanan Pansare vs. Oriental Insurance Co. Ltd (2008) 9 SCC 720, speaking through Kapadia, J. (as His Lordship then was) held that the "Public Sector Undertakings" are in the form of statutory corporations, public sector companies, government companies and companies in which the public are substantially interested. The litigation before the Supreme Court was one in context of the Income Tax Act, 1961 vis-a-vis the provisions of the Maharashtra Rent Control Act, 1999. We quote the relevant observations: "62. The wor....
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....mmittees on administrative reforms so that in financial, employment and in policy matters, the Central/State Government could evolve norms/standards. ..... 73. Moreover, if we are to hold that PSUs do not include government companies, as held by the High Court, we would be disturbing the package offered by the legislature of allowing increase of rent annually at 5%, allowing the landlords to accept premium and exclusion of certain entities from the protection of the Rent Act under Section 3(1) (b). On the other hand, acceptance of the arguments advanced on behalf of the respondents on the interpretation of Section 3(1)(b) would make the Act vulnerable to challenge as violative of Article 14 of the Constitution. Therefore, we are of the view that on a plain meaning of the word "PSUs" as understood by the legislature, it is clear that, India's PSUs are in the form of statutory corporations, public sector companies, government companies and companies in which the public are substantially interested (see the Income Tax Act, 1961). When the word PSU is mentioned in Section 3(1)(b), the State Legislature is presumed to know the recommendations of the variou....
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....ars' audit being adjudged as satisfactory by the DG/PAG/AG /MAB concerned. 3. The appointment/re-appointment of the auditors is subject to the Auditors making the following declarations/undertakings: (i) That the firm/LLP is not disqualified under section 141 of the Companies Act, 2013 (ii) That no unreasonable TA/DA, out of pocket expenses will be claimed from the company. In case where audits are allotted to the Branch office of the Firm no TA/DA should be claimed by the firm from the company for the audit of the Company/Units located at the same station of the branch. (iii) That during the year of audit, and for one year (to be counted from the date of conclusion of the relevant Annual General Meeting of the Company) after the Firm/LLP ceases to be Auditor, the Firm/LLP or its partner, cannot accept Directorship or any assignment for consultancy or other services including those specified in section 144 of the Companies Act, 2013 and non-audit assignments that involve performing management functions or making management decisions, directly or indirectly (as per explanation given under section 144 of the Companies Act, 2013), of the company or ....
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....hedule so fixed may be sent to the concerned DG/PAG/AG/MAB so that they may also draw their time schedule for supplementary audit. 6 The Firm/LLP must complete the audit of the units/branches allotted to them within the time schedule stipulated by the management so that the statutory time schedule for placing the accounts in the AGM could be adhered to. 7 Record of audit work done in the form of working papers should be retained with sufficient information so as to support the auditors' significant conclusions and judgments. 8 The Auditors shall have to comply with the directions issued by this office under 143(5) of the Companies Act, 2013. The remuneration is inclusive of the fee on account of the additional work involved in this regard. Directions under section 143(5) is available at this office's official website i.e. www. saiindia.gov.in (CA Empanelment) 9. Statutory auditors of the companies who have adopted SAP should deploy at least one partner/employee having ISA/CISA qualification to conduct the audit. Auditors appointed for Listed PSU should have a valid peer review certificate issued by Peer Review Board of ICAI. 10. The Comp....
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.... Dear Mr., With reference to the subject noted above, I am to inform you that a copy of the letter dated 7/2/2020 of the Director, Anti Corruption Bureau, Ahmedabad is annexed herewith for your information. By his aforesaid letter, the Director, Anti Corruption Bureau, ACB Police Station, Ahmedabad has recommended to take legal action against the Auditor Pipara & Company in connection with the case registered with Gandhinagar ACB Police Station vide its CR No.6/2018 for the offences punishable u/s.8, 10 and 13(2) of the Prohibition of Corruption Act came to be lodged against the accused persons, (1) K.C.Parmar, Joint Director and (2) K.S. Detroja, Managing Director, Gujarat State Land Development Corporation Limited, Gandhinagar as the cash of Rs.56,50,500/was seized during the course of search operation against them. Looking to the details of the letter of ACB, some recommendations have been made by the ACB for prevention of misappropriation of government money. Moreover, ACB has also requested to launch Ideal guidelines for all Audit Agencies to bring purity and transparency in the financial administration in the Corporations and Public Sector offi....
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....partment and as mentioned in the letter dated 7/2/2020 of the office of ACB which is enclosed in the above letter, it is recommended to take up necessary procedure for the Audit Inspection and other concerning matters in respect of various Public Sector Offices and Corporations. As mentioned at the Point No.12 of the letter dated 7/2/2020 of the ACB (Copy of the letter is enclosed herewith), Pipara & Company, LLP is carrying out Audit work of more than 10 Public Sector Offices/ Corporations of the State Government. If the Pipara & Company would have performed their Audit Work according to the terms and conditions of the work-order and with total devotion, commitment and loyalty, then they would have been able to bring such huge irregularities and misappropriation to the notice of Government and the Government could prevent misappropriation of government money but Pipara & Company has shown quite negligence and carelessness in its audit work. It clearly appears that there is breach of Chartered Accounts Ethics. You are further informed that the audit work of your office has been carrying out or was carried out by Pipara & Company since last some years. In ....
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....as Section 140 does not talk about removal of the Auditor by the C&AG and talks about removal of the Auditor by the company with the prior approval of the Central Government, even in such circumstances, the natural justice principle is implicit. It need not be expressly provided for in the statute. Where there is nothing in the statute to actually prohibit the giving of an opportunity of being heard, then having regard to the nature of the statutory duty imposed the decision maker itself implies an obligation to hear before deciding. Whenever an action of a public body results in civil consequences for the person against whom the action is directed, the duty to act fairly can be presumed and in such a case, the administrative authority must give an appropriate opportunity of hearing to the affected person. [See Prakash vs. State of Bihar, (2009) 4 SCC 690 paras 13 and 14]. 68 If there is a power to decide and decide detrimentally to the prejudice of a person, the duty to act judicially is implicit in exercise of such a power and the rule of natural justice operates in areas not covered by any law validly made. The criteria for an adequate notice is that the Court's conscienc....