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TaxTMI 
TaxTMI 
2026 (4) TMI 1753
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....r of Companies under Section 217(3) of the Companies Act, 1956 ('the said Act', for short) for an offence punishable under Section 217(5) of the said Act. The contesting Respondent, i.e. Respondent No. 2, is the Registrar of Companies of Goa, Daman and Diu. 3. The chronology of events necessary to determine the issue arising from the present Petition is summarised as under: (i) The Petitioners herein were the Directors of the Company registered under the name and style of 'M/s. Timblo Frivate Limited', a private limited Company registered at Panaji, Goa, under the said Act. (ii) The Respondent No. 2, vide private complaint bearing Labour Case No. 54/2014/A, dated 11.12.2014, filed before the learned JMFC, 'D' Court, Panaji, sought to initiate criminal proceedings against the Petitioners under Section 217(5) of the said Act. (iii) The allegation against the Petitioners is that the Petitioners failed to furnish the fullest information or explanation in respect of the remark in the Auditor's report stating that "the Company has an internal audit system, which needs to be strengthened". (iv) The genesis of the aforesaid accusation against the Peti....
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....e learned Counsel for the parties. 6. With the assistance of the learned Counsel for the parties, I have perused the record. 7. The Petitioners have challenged the summoning order and the order taking cognizance and the consequential proceedings arising out of the impugned private complaint on several grounds. Firstly, that no offence is made out under Section 217 of the said Act. On behalf of the Petitioners it was urged that the provision mandates that the Board shall furnish fullest information and explanations only in respect of a reservation, qualification or adverse remark contained in the Auditor's report. However, the remark complained of by the Respondent No. 2 to which the Petitioners allegedly failed to give the fullest information is "the Company has an internal audit system which needs to be strengthened". It was strenuously urged on behalf of the Petitioners that the aforesaid remark, cannot, by any stretch of interpretation be construed as a "reservation", "qualification" or "adverse remark" within the meaning of Section 217(3) of the said Act. At the highest, the said remark is in the nature of a general observation or recommendation made by the Auditors for i....
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....lation of Section 217(3) of the said Act) the complaint came to be filed only on 11.12.2014, i.e. after a delay of more than two and a half years, which is well beyond the prescribed period of limitation. 10. Lastly, it was also argued on behalf of the Petitioners that the order taking cognizance being the substratum of the initiation of criminal proceedings against the Petitioners, must reveal some application of mind. However, the said order is not only cryptic and unreasoned but also demonstrates non-application of mind by the learned JMFC. 11. Countering these submissions, on behalf of Respondent No. 2, it was submitted that the order taking cognizance and consequent proceedings initiated at the instance of Respondent No. 2 require no interference. Firstly, it was submitted that the observation in the Auditor's report that the Company has an internal audit system which needs to be strengthened fulfils the ingredients set out in Section 217(3) of the said Act. The aforesaid observation constitutes a qualification/reservation and cannot be brushed aside as a routine or innocuous remark. It was also argued that the aforesaid observation is consistent across multiple years, t....
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....ct, 1956 that from the para 7 of the annexure to the Auditor's Report to the Balance Sheet as on 31.03.2007, 31.03.2008 and 31.03.2009 that company is required to strengthen its internal audit system. In this regard Board failed to furnish fullest information/ explanation on the said remarks pursuant to requirements of sub-section 3 of section 217 of the Companies Act, 1956. Thereby the directors have violated the said provisions and are liable for penal action under sub-section 5 of section 217 of the Companies Act, 1956. Copy of the above Auditor's Report are enclosed as Annexure "A" (for financial year ended on 31 March, 2007), Annexure "B" (for financial year ended on 31 March, 2008) and Annexure "C" (for financial year ended on 31 March, 2009) respectively. 6. That the complainant issued Show Cause Notice No. ROCGDD/SCN/217(3)/Timblo/P3/21/1333, 34, 35, 36, 37 on 09/09/2014 to the Managing Director/ Directors/Officers of the company being accused No.01 to 05 for violation of the provisions of Section 217(3) of the Companies Act, 1956. Reply dated 18/09/2014 is received from the Director of the Company is not found to be satisfactory. Copy of above show cause n....
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....nd are liable for penal action under sub-section 5 of section 217 of the Companies Act, 1956." 17. Firstly, save and except for the aforesaid reference to para 7 of the annexure to the Auditor's report, there is no other basis for attracting the offence defined under Section 217(3) of the said Act and made punishable under Section 217(5). It would not be out of place, therefore, to reproduce Section 217 of the said Act. "217. Board's report.- (1) There shall be attached to every balance-sheet laid before a company in general meeting, a report by its Board of directors, with respect to- (a) the state of the company's affairs; (b) the amounts, if any, which it proposes to carry to any reserves in such balance-sheet; (c) the amount, if any, which it recommends should be paid by way of dividend; [(d) material changes and commitments, if any; affecting the financial position of the company which have occurred between the end of the financial year of the company to which the balance-sheet relates and the date of report;] [(e) the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such man....
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....s to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit or loss of the company for that period; (iii) that the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities; (iv) that the directors had prepared the annual accounts on a going concern basis.] [(2B) The Board's report shall also specify the reasons for the failure, if any, to complete the buy-back within the time specified in sub-section (4) of section 77A.] (3) The Board shall also be bound to give the fullest information and explanations in its report aforesaid, or in cases falling under the proviso to section 222, in an addendum to that report, on every reservation, qualification or adverse remark contained in the auditors' report. (4) The Board's report and any addendum thereto shall be signed by its chairman if he is authorised in that behalf by the Board; and where he is not so authorised, shall be signed b....
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....atisfaction of the Respondent No. 2 with the reply of the Petitioners to the show cause notice. Criminal liability can only be fastened against the Petitioners if they are independently found to be in violation of Section 217(3) of the said Act. 19. Thus, the core issue that arises is whether paragraph 7 of the annexure to the Auditor's report can, by any stretch of interpretation, be construed to mean a "reservation", "qualification" or "adverse remark". Even a liberal construction of para 7 as reproduced hereinabove would reveal that the remark which forms part of the Auditor's report addressed by internal Auditors to the Company and states that the Company has an internal audit system, which needs to be strengthened. The first part of the remark, thus, is a positive statement that the Company has an internal audit system. The second part is, at best, a general observation or recommendation made by the Auditors for improvement of internal processes. I find force in the submission of the Petitioners that the aforesaid remark is generic and advisory in nature. Such remarks are routinely made by Auditors as part of best governance practices and do not, by themselves, indicate any....
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....ory requirement for obtaining 'sanction' to launch prosecution under Section 217 of the Companies Act, 1956 and hence, there would be no question of the delay in obtaining 'sanction' to launch prosecution. Even otherwise, the documents relied upon on behalf of the Respondents seem to be Circulars/Notifications/internal communications at the highest. It is evident from a bare perusal of these documents that by no stretch of interpretation can they be termed as any 'sanction'. There is no reference either of the Petitioners nor any provision of law granting 'sanction' in the aforesaid documents. Thus, the argument on behalf of the Respondents that the delay was occasioned on account of the requirement to obtain 'sanction' and that the 'sanction' was received on 16.06.2016, is not legally tenable and hence, must fail. Even otherwise, the reliance placed by the learned Advocate for the Respondents on Section 470(3) of Cr.P.C. for exclusion of time is misconceived and inapplicable to the facts of the present case. It is further pertinent to note that the complaint was filed in the year 2014. The present Petition was filed in the year 2021. However, there was no attempt or effort on the ....