TaxTMI 
TaxTMI 
2021 (6) TMI 1179
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....ll 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 illegal action of terminating the assignment given to petitioner No.1 and subsequ....
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....al 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 the writ applicant No.1, who confirmed the appointment on 24th August 2020 itself. 14 Immediately thereafter on the very next ....
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....iation 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 newly appointed appointee will be joined as party respondent. Let Notice be issued making it returnable on 17.05.2021. Learned AGP Mr. Dhawan Jayswal wai....
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....ence 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 gave any opportunity of hearing to the writ applicant. 24 Mr. Bhatt, thereafter, invited the attention of this Court to a letter dated 21st August 2020 addressed by the General Administrative Department, State of Gujarat to the Additional Chief ....
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....ncerned 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 the Central Government. Section 140 does not talk about removal of an Auditor appointed under Section 139 by the C&AG. According to Mr. Patel, if sub-section (1) of Section 140 is not applicable, then the proviso to the same, which provides for a reasonable opportuni....
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....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 to above, Mr. Dave submitted that there being no merit in this writ application, the same be rejected. 34 We also heard Mr. Keyur Gandhi, the learned counsel appearing for the respondent No.1 in the Special Civil Application No.7270 of 2021. * ANALYSIS: 35 Having heard the learned counsel appearing f....
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....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 Auditor-General of India who shall have the right to comment upon, or supplement, the audit report in such manner as he may think fit. (5) Any such comments upon, or supplement to, the audit report shall be placed before the annual general meeting of the company at the same time and in the same manner as the audit report. 37 The Supreme Court in Gurugobinda Basu vs. Sankari Prasad Ghosal and others reported in 1964 SC 254 had held in the context of a Government company that the statutory Auditor is removable by the Central Government and the Comptroller and....
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....ny 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 and Auditor-General of India exercise full control over him. His remuneration is fixed by the Central Government under sub s. (8) of s. 224 of the Act though it is paid by the company." 38 Comptroller and Auditor-General's (Duties, Powers and Conditions of Service) Act, 1971. * Section 19. Audit of Government companies and corporations. (1) The duties and powers of the Comptroller and Auditor General in relation to the audit of the accounts of Government companies shall be performed and exercised by him in accordance with the provisions of the Companies Act, 1956....
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....ll 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 auditor shall be appointed by the Comptroller and Auditor- General of India within sixty days from the date of registration of the company and in case the Comptroller and Auditor-General of India does not appoint such auditor within the said period, the Board of Directors of the company shall appoint such auditor within the next thirty days; and in the case of failure of the Board to appoint such auditor within the next thirty days, it shall inform the members of the company who shall appoint such auditor within the sixty days at an extraordinary general meeting, who shall hold office till the conclusion of the first annual general meeting." 42 Section 140 of the Companies....
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....on 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 report under sub-section (5) have a right to,- (a) conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorise in this behalf; and for the purposes of such audit, 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 of India may direct; and (b) comment upon or supplement such audit report: Provided that any comments given by the Comptroller and Auditor- General of India upon, or supplement to, the audit report shall be sent by the company to every person entitled to copies of audited financial statements under sub section (1) of sectio....
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....: [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 by the "Company". The Supreme Court in the Hindustan Construction Company Limited vs. Union of India (2019 SCC OnLine SC 1520) held as under: "....63. As correctly argued by the learned Solicitor General, Shri Tushar Mehta, the first part of 'corporate person', as defined in Section 3(7) of the Insolvency Code, means a company as defined in Clause 20 of Section 2 of the Companies Act 2013. Sections 2(20) and 2(45) of the Companies Act, 2013, which define 'company' and 'Government company' respectively, are set out hereinbelow: "2(20). "company" means a company incorporated under this Act or under any previous company law;" "2(45). "Government company" means any company in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by o....
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....ncerned 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 audit work the Auditor has undertaken. Therefore, Sub-section (5) takes care of altogether a different contingency i.e. other than sub-section (1) of Section 140. For the purpose of sub-section (1), the power of removal is with the company, after following the procedure prescribed therein and for the purpose of sub-section (5), the power is with the Tribunal. 50 Section 140(5) of Companies Act, 2013 was considered by the Bombay High Court in N Sampath Ganesh vs Union of India (2020 SCC OnLine Bom 782). Key Findings of the Bombay High Court Para 204. In the light of the above, we find it appropriate to mention the relevant findings which crystalize out of our deliberations in the matter: ..... VII.S.140(5) is part of the provision (S.140) which deals with the removal of CA or his resignation. Need of special resolution to remove CA or grant of opportunity to him in that connection are part of ....
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....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 the subjective satisfaction. reached by NCLT...... XXVII. But as object of S. 140(5) is to change the suspect auditor, the final order will always 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. ...... XXXI. Threat of disqualification is only to expedite the change of CA as the "satisfaction" which triggers said jurisdiction is of a superior authority like NCLT. Intention is not to punish, but to prohibit a CA with prima facie dubious record to continue and to see that concerned Company appoints another CA of its choice as per law.... XXXV. Under first proviso to S. 140(5), in specified contingencies, due to urgency, NCLT has to pass order to change a CA within 15 days. There again the same procedure will be fo....
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.... 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 aggrieved if a legal burden is imposed on him. The meaning of the words "a person aggrieved" is sometimes given a restricted meaning in certain statutes which provide remedies for the protection of private legal rights. The restricted meaning requires denial or deprivation of legal rights. A more liberal approach is required in the background of statutes which do not deal with property rights but deal with professional conduct and morality. The role of the Bar Council under the Advocates Act is comparable to the role of a guardian in professional ethics. The words "persons aggrieved" in Sections 37 and 38 of the Act are of wide import and should not be subjected to a restricted interpretation of possession or denial of legal rights or burdens or financial interests. The test is whether the words "person aggrieved" include "a person who has a genuine grievance because an order has been made which prejudicially affects his interests". It has, therefore, to be found out whether the Bar Council has a grievance in respect of an ord....
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....t, 1961 vis-a-vis the provisions of the Maharashtra Rent Control Act, 1999. We quote the relevant observations: "62. The word "PSU" is not a term of art. It is not defined in the said Rent Act. It is not defined in the Companies Act. However, the said term finds place in the Report of the Study Team on Public Sector Undertakings. One such report of the Study Team is dated 10-6-1967. The Study Team was appointed on 20-5-1966. It submitted its report to the Chairman, Administrative Reforms Commission, Government of India. Under Chapter XIV, the committee has discussed the forms of organisation, namely, departmental undertaking, government company and PSU. It observed that departmental undertakings are unsuitable for industrial and commercial enterprises. It is further observed that, in India, the Government has adopted the method of running companies by directly holding shares in them. According to the committee, this is the pattern of public sector in India. This, according to the committee, is apart from statutory corporations which are set up or established under Central/State Acts. According to the committee, a public corporation as a form covers statutory corporation, governme....
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....tioned in Section 3(1)(b), the State Legislature is presumed to know the recommendations of the various Parliamentary Committees on PSUs. These entities are basically cash-rich entities. They have positive net asset value. They have positive net worths. They can afford to pay rents at the market rate. .... 81. Before concluding, we may note that we have interpreted the word "PSUs" in Section 3(1)(b) purely in the context of the provisions of the Maharashtra Rent Control Act, 1999. Our judgment is, therefore, confined strictly to the said provisions of the Rent Act. 82. For the aforestated reasons, we hold that OIC, UIC and BPCL and such other government companies as defined under Section 617 of the Companies Act are not entitled to protection of the Maharashtra Rent Control Act, 1999 in view of the provisions of Section 3(1)(b)." 58 The CAG has a limited control over the auditor of the Government Company appointed Section 139(5) of the Companies Act, 2013. [a] Section 143(5) - [A] direct such auditor the manner in which the accounts of the Government company are required to be audited and [b] thereupon the auditor so appointed shall submit a copy of the audit report....
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....pany or its holding company / subsidiaries (irrespective of the shareholding) / joint ventures of the Company whether under production sharing contract or otherwise. The above restriction would also be applicable to audit of annual accounts of subsidiary companies / Joint Ventures/Associates except where auditors of such subsidiary companies /Joint Ventures/Associates are appointed by CAG. This condition would not apply to assignments for the tax audit under Income Tax Act, VAT audit required under various State Legislations, review of Quarterly/half yearly accounts as per SEBI guidelines and other statutory certificates related to the audit assignment (iv) That no partner/chartered accountant employee of the firm /LLPs has been held guilty of professional misconduct by the Institute of Chartered Accountants of India during last year (in case any partner of the firm/LLP has been held guilty of professional misconduct by the Institute of Chartered Accountant of India, please furnish details thereof). (v) The audit should not be conducted by a person (i) who is not a CA partner /CA employee/ CA article of the firm/LLP to which the audit has been allotted; (ii) who was earlier a....
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....provisions of the Companies Act, 2013. as also all other applicable statutes including directions/guidelines issued by various Regulatory Bodies/ Authorities viz Securities & Exchange Board of India, Reserve Bank of India, Insurance Regulatory Development Authority etc. 11. In case of violation of any of the above conditions by the appointed auditor, this office reserves the right to withdraw the audit(s) allotted to the auditor at any point of time after following the due administrative process." 60 Thus, it is evident from the aforesaid that in case of violation of any of the aforesaid conditions by the appointed Auditor, the C&AG has the right to remove the Auditor at any point of time after following the due administrative process. What is this administrative process is not clear. Even while following the due administrative process, the opportunity of hearing has to be given to the concerned Auditor before his removal. The principles of natural justice are implicit in clause 11 referred to and highlighted. However, in the case on hand, it is not the stance of the C&AG that action against the writ applicant has been taken in terms of clause 11 referred to above. 61 Prima f....
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....for smooth' running of administration. After taking into consideration the recommendations of ACB, I am forwarding a copy of the letter of ACB with a request to take necessary action in the matter. Yours faithfully, sd/- A.H. Mansuri Deputy Secretary General Administrative Department, Govt. of Gujarat" 64 The aforesaid led to the letter dated 5th December 2020 of the Finance Department to the Managing Director of all the Corporations (PSUs) and it is this letter which created the controversy. The letter reads thus: "No.JNV-102020-361769-A Finance Department, Block No.4/9, Sachivalaya, Gandhinagar. date : 05/12/2020 To, 1. Managing Director, Gandinagar Urban Development Authority, Nr. Swagat Rain Forest, 'Kh' Road, Sargasan, Gandhinagar, Gujarat - 382423. 2. Managing Director, Gujarat State Police Housing Corporation Limited, B/h. Gujarat Lokayukt Office, 'Chh' Road, Sector-10B, Gandhinagar. 3. Managing Director, Tourism Corporation of Gujarat Limited, Block No.16/4, Udyog Bhavan, Sector -11, Gandhinagar - 382011. 4. State Project Director, Gujarat Council of Alimentary Education, Gandhinagar Office of the State Project Director, Sector - 17, Gand....
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....es which earlier have been performed by Pipara & Company so that irregularities and misappropriations of government money can be prevented. (2) It is also recommended to hold thorough verification of the terms and conditions of the appointment of Pipara & Company including detailed verification of bills etc. in respect of the Corporations and other offices and if found necessary, it is recommended to put the company in black-list as per the rules and regulations. (3) It is suggested to hold inquiry against Pipara & Company through Vigilance Commission. (4) It is desirable in the public interest that audit work of any Govt. public sector office and corporation should not be given to Pipara & Company in future." You are therefore, requested to consider the aforesaid facts and to take necessary steps at the earliest. Yours faithfully, sd/- illegible (Sapna V. Rana) Deputy Secretary (Public Sectors) Finance Department" 65 Although the contents of the letter dated 5th December 2020,prima facie, appear to be far fetched, yet we do not intend to get into any debate as regards the complaint of the State Government against the writ applicant for not bringing to its....