TaxTMI 
TaxTMI 
2026 (8) TMI 25
X X X X Extracts X X X X
X X X X Extracts X X X X
.... prosecuted for the offences under Section 628 r/w 211 and Section 227 r/w 233 of the Act. 2. The gist of the prosecution case is that that petitioner was the statutory Auditor for the Company by the name 'Subhiksha Trading Services Limited [STSL]'; that the said company along with its Managing Director [A1] was involved in financial irregularities, mismanagement and syphoning of funds; that the Company was engaged in the business of organized retailing by establishing chain stores with the brand name 'Subhiksha' and the said company was promoted by A1; that investigation revealed that the name of the company was changed to 'Subhiksha Trading Services Limited [STSL]', arraigned as A11 in the complaint, [hereinafter referred to as 'the Company']; that A1 had obtained loan from various financial institutions; that the affairs of the Company was conducted in a fraudulent manner with the help of 42 entities to defraud the creditors; that for that purpose, A1 did not maintain proper books of accounts, had made false statements in the Balance Sheet and therefore, the Balance Sheets for the Assessment years 2004-05, 2005-06 and 2006-07 of the Company did not reflect the true and fair v....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Court and notice has been issued; that the very fact that the notice has been issued by the Hon'ble Supreme Court would show that the respondent has made out a prima facie case in the challenge to the orders of this Court; that the complaint cannot be said to be barred by limitation, as the delay was due to the interim orders passed in various writ petitions challenging the action taken by the respondent; that as soon as all the interim orders were vacated, the impugned complaint was lodged; that even assuming that the complaint was filed in the Court having no jurisdiction, it is curable and they can seek transfer of the complaint; that the general public have been duped by A1 and the other Directors; that in view of serious fraudulent activities committed by the Company, its Managing Director and the Auditors including the petitioner, the question as to whether the noncompliance with petitioner's statutory duty is wilful or not would be a matter for the trial and cannot be adjudicated in this quash petition. (ii) The learned Additional Solicitor General also pointed out to the averments in the complaint in support of his submission. 5. This Court has carefully considered th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he statutory auditor in his statement under section 240 of the Companies Act, 1956 made during the course of the investigation. 43. That further it is found that purchases of the financial year 2006-07 were deliberately inflated by the Management of 'STSL'. The 'STSL' availed post-harvest loans (Agriculture produce marketing loan) from banks intended for the use of genuine farmers by falsely declaring the employees of 'STSL' as farmers and diverted the loan amount to the controlled entities. The 'STSL' showed these farmers as suppliers of agriculture produce to 'STSL' for direct procurement of farm produce-Chillies and Tamarind. By this fraudulent conduct of business/activity, 'STSL' inflated purchase of raw material during the month of March 2007 and thereby for the financial year 2006-07. The statutory auditors also failed in their duty to verify the basic records, particulars as per established audit procedure. 44. That it is also corroborated that the 'STSL' availed loan from Bank of Baroda by deliberately concealing materials facts. The company apparently maintained different sets of books of accounts and documents to fraudulently obtain 'end use certificate'....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s Act, 1956 for the reasons as afore stated herein." 9. The highlighted portions in the above extract would show that the gravamen of the charge against the petitioner is that he had failed in his duty to verify the basic records and particulars, as per the established audit procedures, had failed to make enquiries about certain high-value transactions and failed to make observations in the audit report with regard to non-compliance with prescribed accounting standards. 10. In fact, to charge the petitioner for the offence under Section 628 r/w 211 of the Act, in paragraph 46, the respondent had stated that the Company and its Directors are liable, as the books of accounts do not reflect the true and fair view of the state of affairs of the Company and the petitioner is jointly and severally liable along with the other accused for not presenting the true and fair view of the state of affairs of the Company. 11. Firstly, this Court is unable to comprehend as to what the respondent means by stating that the petitioner is liable for the offences under Section 628 r/w 211 of the Act. They are both distinct offences and one offence is not dependent on the other. In fact, the ma....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ccount and balance sheet of the company shall comply with the accounting standards. (3B) Where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and balance sheet, the following, namely:- (a) the deviation from the accounting standards ; (b) the reasons for such deviation ; and (c) the financial effect, if any, arising due to such deviation. (3C) For the purposes of this section, the expression "accounting standards" means the standards of accounting recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of section 210A : Provided that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the Accounting Standards until the accounting standards are prescribed by the Central Government under this sub-section. (4) The ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r with both : Provided that in any proceedings against a person in respect of an offence under this section, it shall be a defence to prove that a competent and reliable person was charged with the duty of seeing that the provisions of this section and the other requirements aforesaid were complied with and was in a position to discharge that duty : Provided further that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully. (8) If any person, not being a person referred to in sub-section (6) of section 209, having been charged by the managing director or manager, or Board of directors, as the case may be, with the duty of seeing that the provisions of this section and the other requirements aforesaid are complied with, makes default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend of six months or with fine which ma extend to ten thousand rupees, or with both: Provided that no person shall be sentenced to imprisonment for any such offence unless it was committed willfully." (ii) This provision deals with the Form and Contents of Balance ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....provided in this Act, be punishable with imprisonment for a term which may extend to two years, and shall also be liable to fine." 16. The above provision deals with Penalty for False Statements in any Balance Sheet, report or other documents required for the purposes of any of the provisions of the Act. As could be seen from paragraph 46 of the complaint, which is extracted above, it is the case of the respondent that the petitioner and some of the other accused are liable to be prosecuted under Section 628 of the Act as the books of accounts did not reflect a true and fair view of the state of affairs of the company since false financial statements were made for the accounting years mentioned above. It is the case of the respondent that the petitioner is also liable for the offence under Section 628 of the Act for failure to make observations in Audit Report of the Company regarding non-compliance with prescribed accounting standards. It is not the case of the respondent that the petitioner had made any false statement in his Audit Report. The alleged failure of the petitioner to refer to the non-compliance by the Company of the prescribed accounting standards would not amount....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rofit and loss account, of the profit or loss for its financial year. 227 (3) The auditors' report shall also state- (a) whether he has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purposes of his audit; (b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books, and proper returns adequate for the purposes of his audit have been received from branches not visited by him; (bb) whether the report on the accounts of any branch office audited under section 228 by a person other than the company's auditor has been forwarded to him as required by clause (c) of sub-section (3) of that section and how he has dealt with the same in preparing the auditor's report ; (c) whether the company's balance sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns. (d) whether, in his opinion, the profit and loss account and balance sheet comply with the accounting standards referred to in sub-section (3C) of section 211. ....