Full Judgment Text
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment reserved on: 22 July, 2024
Judgment pronounced on: 07 February, 2025
+ W.P.(C) 1065/2021 & CM APPL. 9896/2021 (Direction)
DELOITTE HASKINS & SELLS LLP ..... Petitioner
Through: Mr. Kapil Sibal, Sr. Adv. with
Ms. Prachi Dhanani, Mr. Rohini
Jaiswal, Mr. Pratham Vir
Agarwal, Mr. Rahul Dwarkadas
& Ms. Niyati Kohli, Advs.
versus
UNION OF INDIA & ANR. ..... Respondents
Through : Ms. Shiva Lakshmi, CGSC
Mr. Zoheb Hossain, Mr. Vivek
Gurnani, Ms. Abhipriya Rai, Mr.
Vivek Gaurav, Mr. Kartik
Sabharwal, Mr. Pranjal Tripathi,
Mr. Suradish Vats, Mr. Kunal
Kochhar & Ms. Radhika Puri,
Advs. for NFRA.
Mr. Kirtiman Singh, CGSC
along with Mr. Waize Ali Noor,
Mr. Varun Rajawat, Mr. Ranjeev
Khatana and Mr. Varun P. Singh,
Advs.
+ W.P.(C) 12096/2019 & CM APPL. 49556/2019 (Stay)
FEDERATION OF CHARTERED ACCOUNTANTS
ASSOCIATION ..... Petitioner
Through: Ms. Manasi Bhushan, Ms.
Sanjana Patel, Ms. Khyati
Chhabra, Mr. Vikrant Sharma
and Ms. Sakshi Sharma, Advs.
versus
UNION OF INDIA AND ORS. ..... Respondents
W.P.(C) 1065/2021 & other connected matters Page 1 of 476
Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
Through: Ms. Shiva Lakshmi, CGSC.
Mr. Kirtiman Singh, CGSC along
with Mr. Waize Ali Noor, Mr.
Varun Rajawat, Mr. Ranjeev
Khatana and Mr. Varun P. Singh,
Advs.
Ms. Pooja Mehra Saigal, Adv. for
Mr. Jatin Dua and Mr. Kaveri
Rawal, Advs. for R-3.
+ W.P.(C) 1522/2020 & CM APPL. Nos.17186/2020, 30096/2023
RUKSHAD DARUVALA ..... Petitioner
Through: Mr. Arun Kathpalia, Sr. Adv.
with Ms. Aayushi S. Khazanchi,
Mr. Aditya Dhupar, Ms. Bani
Brar, Ms. Pooja Deepak and Mr.
Vinayak Chawla, Advs.
versus
UNION OF INDIA & ANR. ..... Respondents
Through: Ms. Shiva Lakshmi, CGSC.
Mr. Zoheb Hossain, Mr. Vivek
Gurnani, Ms. Abhipriya Rai, Mr.
Vivek Gaurav, Mr. Kartik
Sabharwal & Ms. Radhika Puri,
Advs. for NFRA.
Mr. Kirtiman Singh, CGSC
along with Mr. Waize Ali Noor,
Mr. Varun Rajawat, Mr. Ranjeev
Khatana and Mr. Varun P. Singh,
Advs.
+ W.P.(C) 1524/2020 & CM APPL. Nos. 7533/2020, 10777/2020
17184/2020, 30095/2023
UDAYAN SEN ..... Petitioner
W.P.(C) 1065/2021 & other connected matters Page 2 of 476
Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
Through: Mr. Arun Kathpalia, Sr. Adv.
with Ms. Aayushi S. Khazanchi,
Mr. Aditya Dhupar, Ms. Bani
Brar, Ms. Pooja Deepak and Mr.
Vinayak Chawla, Advs.
versus
UNION OF INDIA & ANR ..... Respondents
Through: Ms. Shiva Lakshmi, CGSC.
Mr. Zoheb Hossain, Mr. Vivek
Gurnani, Ms. Abhipriya Rai, Mr.
Vivek Gaurav, Mr. Kartik
Sabharwal & Ms. Radhika Puri,
Advs. for NFRA.
Mr. Kirtiman Singh, CGSC along
with Mr. Waize Ali Noor, Mr.
Varun Rajawat, Mr. Ranjeev
Khatana and Mr. Varun P. Singh,
Advs.
+ W.P.(C) 11737/2021
S R B C AND CO LLP ..... Petitioner
Through: Mr. Jayant K. Mehta, Sr. Adv.
with Ms. Nikita Sethi, Ms.
Aayushi Kumar, Mr. Prateek
Khanna, Mr. Ravneet Kaur
Malik and Ms. Rumella Jain,
Advs.
versus
UNION OF INDIA AND ANR ..... Respondents
Through: Ms. Shiva Lakshmi, CGSC
Mr. Zoheb Hossain, Mr. Vivek
Gurnani, Ms. Abhipriya Rai, Mr.
Vivek Gaurav, Mr. Kartik
Sabharwal & Ms. Radhika Puri,
Advs. for NFRA.
Mr. Kirtiman Singh, CGSC along
with Mr. Waize Ali Noor, Mr.
Varun Rajawat, Mr. Ranjeev
W.P.(C) 1065/2021 & other connected matters Page 3 of 476
Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
Khatana and Mr. Varun P. Singh,
Advs.
+ W.P.(C) 11738/2021
VINAYAK PUJARE ..... Petitioner
Through: Mr. Jayant K. Mehta, Sr. Adv.
with Ms. Nikita Sethi, Ms.
Aayushi Kumar, Mr. Prateek
Khanna, Mr. Ravneet Kaur
Malik and Ms. Rumella Jain,
Advs.
versus
UNION OF INDIA & ANR. ..... Respondents
Through: Ms. Shiva Lakshmi, CGSC.
Mr. Zoheb Hossain, Mr. Vivek
Gurnani, Ms. Abhipriya Rai, Mr.
Vivek Gaurav, Mr. Kartik
Sabharwal & Ms. Radhika Puri,
Advs. for NFRA.
Mr. Kirtiman Singh, CGSC
along with Mr. Waize Ali Noor,
Mr. Varun Rajawat, Mr. Ranjeev
Khatana and Mr. Varun P. Singh,
Advs.
+ W.P.(C) 11739/2021
RAVI BANSAL ..... Petitioner
Through: Mr. Jayant K. Mehta, Sr. Adv.
with Ms. Nikita Sethi, Ms.
Aayushi Kumar, Mr. Prateek
Khanna, Mr. Ravneet Kaur
Malik and Ms. Rumella Jain,
Advs.
versus
UNION OF INDIA & ANR. ..... Respondents
Through: Ms. Shiva Lakshmi, CGSC.
Mr. Zoheb Hossain, Mr. Vivek
Gurnani, Ms. Abhipriya Rai, Mr.
Vivek Gaurav, Mr. Kartik
W.P.(C) 1065/2021 & other connected matters Page 4 of 476
Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
Sabharwal & Ms. Radhika Puri,
Advs. for NFRA.
Mr. Kirtiman Singh, CGSC
along with Mr. Waize Ali Noor,
Mr. Varun Rajawat, Mr. Ranjeev
Khatana and Mr. Varun P. Singh,
Advs.
Mr. Vikram Jetly, CGSC along
with Mr. Abhigyan Siddhant,
GP.
+ W.P.(C) 11987/2022 & CM APPL. 35778/2022 (Interim
Direction)
JAYESH GANDHI ..... Petitioner
Through: Mr. Jayant K. Mehta, Sr. Adv.
with Ms. Nikita Sethi, Ms.
Aayushi Kumar, Mr. Prateek
Khanna, Mr. Ravneet Kaur
Malik and Ms. Rumella Jain,
Advs.
versus
UNION OF INDIA & ANR. ..... Respondents
Through: Mr. Vikram Jetly, CGSC along
with, Mr. Abhigyam Siddhant,
GP & Mr. Shreya Jetly, Adv. for
UOI.
Mr. Zoheb Hossain, Mr. Vivek
Gurnani, Ms. Abhipriya Rai, Mr.
Vivek Gaurav, Mr. Kartik
Sabharwal & Ms. Radhika Puri,
Advs. for NFRA.
+ W.P.(C) 1525/2020 & CM APPL. Nos. 10765/2020, 17182/2020
& 30097/2023
SHRENIK BAID ..... Petitioner
Through: Mr. Arun Kathpalia, Sr. Adv.
with Ms. Misha Rohatgi Mohta
W.P.(C) 1065/2021 & other connected matters Page 5 of 476
Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
and Mr. Amulya Upadhyay,
Advs.
versus
UNION OF INDIA AND ANR ..... Respondents
Through: Ms. Shiva Lakshmi, CGSC.
Mr. Zoheb Hossain, Mr. Vivek
Gurnani, Ms. Abhipriya Rai, Mr.
Vivek Gaurav, Mr. Kartik
Sabharwal & Ms. Radhika Puri,
Advs. for NFRA.
+ W.P.(C) 1650/2023 & CM APPL. 6296/2023 (Interim Direction)
NATRAJAN RAMKRISHNA ..... Petitioner
Through: Mr. Jayant K. Mehta, Sr. Adv.
with Ms. Nikita Sethi, Ms.
Aayushi Kumar, Mr. Prateek
Khanna, Mr. Ravneet Kaur
Malik and Ms. Rumella Jain,
Advs.
versus
UNION OF INDIA & ANR. ..... Respondents
Through: Mr. Ravi Prakash, CGSC along
with Ms. Astu Khandelwal, Mr.
Taha Yasin, Mr. Ali Khan, Mr.
Yasharth Shukla, Mr. Tarveen
Singh Nanda, GP & Mr.
Ayushman Kishore, Advs.
Mr. Zoheb Hossain, Mr. Vivek
Gurnani, Ms. Abhipriya Rai, Mr.
Vivek Gaurav, Mr. Kartik
Sabharwal & Ms. Radhika Puri,
Advs. for NFRA.
+ W.P.(C) 2194/2023 & CM APPL. 8353/2023, 39638/2023
(Interim Direction)
ADARSH RANKA ..... Petitioner
W.P.(C) 1065/2021 & other connected matters Page 6 of 476
Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
Through: Mr. Jayant K. Mehta, Sr. Adv.
with Ms. Nikita Sethi, Ms.
Aayushi Kumar, Mr. Prateek
Khanna, Mr. Ravneet Kaur
Malik and Ms. Rumella Jain,
Advs.
versus
UNION OF INDIA & ORS. ..... Respondents
Through: Mr. Ravi Prakash, CGSC with
Mr. Tarveen Singh Nanda, Adv.
for Resp./ UOI
Mr. Zoheb Hossain, Mr. Vivek
Gurnani, Ms. Abhipriya Rai, Mr.
Vivek Gaurav, Mr. Kartik
Sabharwal & Ms. Radhika Puri,
Advs. for NFRA.
+ W.P.(C) 5842/2023 & CM APPL. 22884/2023 (Stay),
40762/2023 (30 Days Delay in C.A.), CM No.63005/2023
SNEHAL N MUZOOMDAR ..... Petitioner
Through: Mr. Shivam Shukla & Ms. Anjali
Upadhyay, Advs.
versus
UNION OF INDIA & ANR. ..... Respondents
Through: Ms. Shiva Lakshmi, CGSC for R-
1.
Mr. Zoheb Hossain, Mr. Vivek
Gurnani, Ms. Abhipriya Rai, Mr.
Vivek Gaurav, Mr. Kartik
Sabharwal & Ms. Radhika Puri,
Advs. for NFRA.
Mr. Prashant Rawat, GP and Mr.
Kabir Singh, Adv.
CORAM:
HON'BLE MR. JUSTICE YASHWANT VARMA
HON'BLE MR. JUSTICE DHARMESH SHARMA
W.P.(C) 1065/2021 & other connected matters Page 7 of 476
Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
J U D G M E N T
YASHWANT VARMA, J.
T ABLE OF C ONTENTS
Preface .................................................................................................... 8
Disciplinary Procedure as per the CA Act ....................................... 12
Section 132 : A Legislative History .................................................... 31
Broad Structure under the CA Act ................................................... 96
NFRA Rules ....................................................................................... 109
Additional Disclosures by NFRA ..................................................... 116
Auditing Industry : Executive Deliberations .................................. 150
The Vicarious Liability Argument .................................................. 171
Section 132 and its retroactive operation ........................................ 232
NFRA Rules : Lack of Procedural Safeguards .............................. 322
Divisions : Separation of Functions ................................................. 384
SCNs: The Scar of Pre-determination ............................................ 437
Peripheral Issues ............................................................................... 456
Statement of Conclusions ................................................................. 457
Disposition .......................................................................................... 474
REFACE
P
1. This batch of writ petitions instituted by individual Chartered
W.P.(C) 1065/2021 & other connected matters Page 8 of 476
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Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
1
Accountants as well as auditing firms assail the validity of Section
2
132(4) of the Companies Act, 2013 . A challenge is additionally raised
to Rules 3, 8, 10 and 11 of the
National Financial Reporting
3
Authority Rules , 2018
.
2. For the purposes of the challenge which stands raised to the
statutory provisions aforenoted, the petitioners seek a declaration that
those provisions be struck down as being unconstitutional on the
ground of being arbitrary and ultra vires. In the alternative, the
petitioners seek an appropriate declaration to the effect that Section
132(4) of the Companies Act as well as Rules 3, 8 10 and 11 of the
NFRA Rules be held not to apply to any audit completed before 01
October 2018. The prayer in the alternative essentially calls upon the
Court to read down those provisions as being inapplicable to audits that
may have been completed prior to the introduction of Section 132 in the
Companies Act and thus avoid a declaration of invalidity being
rendered.
3. The petitioners in this batch have individually impugned the
4
notices issued by the National Financial Regulatory Authority
in
terms of which proceedings were sought to be initiated by the
respondent for commencement of disciplinary action in respect of
perceived acts of “professional or other misconduct” and for
consequential imposition of penalties. In some of the writ petitions,
final orders of punishment including that of debarment had also come
to be passed and which too have been impugned in the instant writ
1
CAs
2
Companies Act
3
NFRA Rules
4
NFRA
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By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
petitions.
4. The challenge on the basis of constitutional invalidity is founded
on a retroactive operation of Section 132 of the Companies Act and
which is viewed as empowering the NFRA to initiate disciplinary
proceedings not just against individual partners and CAs’ but also
auditing firms in respect of any audit that may have been conducted
including those commenced and concluded prior to the introduction of
that provision in the Companies Act.
5. Section 132 came to be incorporated in the Companies Act by
virtue of Act 18 of 2013 and came to be operationalized in terms of a
notification issued on 01 October 2018. In terms of that notification, the
Union Government designated the said date as the point of
commencement as well as the date of constitution of the NFRA. It is in
the aforesaid backdrop that the petitioners contend that Section 132 and
its retrospective operation would be rendered unconstitutional and
invalid since it contemplates the imposition of penalties as well as
disciplinary action in terms which were not contemplated by the statute
prior to 01 October 2018. The challenge to Section 132 also proceeds
on the ground of an alleged lack of procedural due process as well as
the deprivation of rights and safeguards which were conferred upon a
CA or a firm while facing disciplinary action under the Chartered
5
Accountants Act, 1949 read along with the Chartered Accountants
6
Regulations, 1988
and the Chartered Accountants
(Procedure of Investigations of Professional and Other
5
CA Act.
6
1988 Regulations
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Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
7
Misconduct and Conduct of Cases) Rules, 2007
.
6. The action of the respondents which stands impugned in this
batch is also based on the various provisions contained in Section 132
itself as well as the NFRA Rules. This facet of the challenge is based on
the petitioners arguing that in terms of the statutory provisions
aforenoted, the NFRA is envisaged to discharge its functions and duties
through various independent and separate “divisions”. According to the
writ petitioners, the statute itself envisages the functions of monitoring
and enforcement of accounting standards, overseeing quality of service,
suggesting measures, the power to investigate as well as to undertake
disciplinary action is contemplated to be discharged by separate
divisions of the NFRA. According to the writ petitioners, in the facts of
these cases it is apparent that the body which oversaw the audits in
question was the same which came to the conclusion that there was a
failure to comply with accounting standards itself and initiated
proceedings for taking disciplinary action. They thus contend that the
very same body that had drawn a report on the basis of which the
disciplinary proceedings are sought to be initiated and undertaken has
essentially donned the role of both prosecutor and judge. This,
according to the petitioners, is sufficient to hold the initiation of action
as being in clear violation of fair and due process and in breach of
Article 14 of the Constitution.
7. While we had concluded the hearing on this batch of writ
petitions on 22 July 2024, the pronouncement of the present judgment
was delayed primarily on account of written submissions being
7
Rules 2007.
W.P.(C) 1065/2021 & other connected matters Page 11 of 476
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Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
tendered by NFRA only on 06 October 2024. The Court was thereafter
constrained to await any response that the petitioners may have wished
to submit since those submissions were circulated amongst learned
counsels for the petitioners only around that time.
D ISCIPLINARY P ROCEDURE AS PER THE CA A CT
8. Having noticed the principal grounds of challenge, it becomes
appropriate to note that prior to the introduction of Section 132 of the
2013 Act, disciplinary proceedings against a CA was regulated by the
provisions contained in the CA Act read along with the 1988
Regulations and the Misconduct Rules 2007. The CA Act incorporated
provisions in Chapter V for the purposes of undertaking disciplinary
proceedings against a member or a firm. Prior to certain amendments
which were introduced in the CA Act in 2006 and 2022, disciplinary
proceedings against a member of a firm were to be undertaken by a
Disciplinary Directorate which was a body charged with undertaking a
preliminary examination of a complaint, a Board of Discipline which
was to try cases of professional or other misconduct specified in the
First Schedule of the CA Act and the Disciplinary Committee in respect
of members found to be guilty of professional or other misconduct
mentioned in either the Second Schedule or both the First and the
Second Schedules forming part of the CA Act, 1949.
9. By virtue of amendments which came to be ushered by Act 12 of
2022, various amendments came to be introduced in Sections 2 which
also and alongside saw the introduction of Sections 21A and 21B in the
CA Act. Act 12 of 2022 also introduced provisions pertaining to the
registration of firms. As the provisions stood in the CA Act around the
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Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
time when Section 132 came to be introduced, the Council as
contemplated under Section 9 of the CA Act, stood empowered to
establish a Disciplinary Directorate headed by an officer designated as
the Director Discipline for undertaking investigations in respect of any
information or complaint received by the Council. In terms of Section
21, the Director Discipline was firstly charged with analyzing the
information or complaint and arrive at a prima facie opinion with
respect to the alleged misconduct. Wherever a Director Discipline were
to form the opinion that a member was guilty of any professional or
other misconduct specified in the First Schedule, it was required to
place the matter before the Board of Discipline. If the Director
Discipline were to be of the opinion that the misconduct would be
classifiable either in the Second Schedule or both the Schedules, it was
obliged to place the matter before the Disciplinary Committee.
10. The Board of Discipline by virtue of Section 21A of the CA Act
was to comprise of persons with experience in law and having
knowledge of disciplinary matters, two members of which one would
be a member of the Council elected by the said body itself and the other
being a member nominated by the Union Government from amongst
persons of eminence having experience in the field of law, economics,
business, finance or accountancy. The Director Discipline in terms of
Section 21A was to function as the Secretary of the Board of Discipline.
By virtue of Section 21A(3), the Board of Discipline upon coming to
the conclusion that a member was guilty of professional or other
misconduct mentioned in the First Schedule, could impose one or more
of the following punishments:-
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By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
A. Reprimand the member
B. Remove the name of the member from the Register
C. Impose such fine as it may think fit subject to the prescription
of the fine not exceeding INR 1 lakh.
11. The Disciplinary Committee in terms of Section 21B was
comprised of the President or the Vice President of the Council to act as
the Presiding Officer and two members to be elected from amongst the
members of the Council. The Disciplinary Committee was also
envisaged to comprise of two members nominated by the Union
Government from amongst persons of eminence having experience in
the field of law, economics, business, finance or accountancy. It thus
became a five-member body which upon coming to the conclusion that
a member was guilty of professional or a misconduct mentioned in the
Second Schedule or both the Schedules could proceed to take any one
or more of the following actions namely:-
A. Reprimand the member
B. Remove the name of the member from the Register
permanently or for such period as it may think fit
C. Impose such fine as deemed appropriate and which could
extend to INR 5 lakhs.
12. Post promulgation of Act 12 of 2022, the Director Discipline
came to be empowered by statute to undertake an investigation either
suo moto or on receipt of information or complaint. In the course of
undertaking that investigation, where the Director Discipline were to
find that the case merited further inquiry, it was obliged to provide an
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Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
opportunity to the member or the firm as the case may be, to submit a
written statement. Upon the Director Discipline finding prima facie that
a case for professional or other misconduct mentioned in the First
Schedule was made out, it was required to submit a preliminary
examination report to the Board of Discipline. Similarly, if it came to
the prima facie conclusion that a professional or other misconduct was
found to be established and would fall either in the Second Schedule or
both the Schedules, it was required to transmit its preliminary
examination report to the Disciplinary Committee.
13. Section 21 further contemplated that if a Director Discipline
were to come to form the opinion that no prima facie case was made
out either against the member or the firm, it was required to transmit
the complaint along with all relevant documents to the Board of
Discipline and if that body were to concur with the findings of the
Director Discipline, it could direct a closure of the proceedings. If it
were to disagree and continue action upon the complaint itself, it could
refer the matter either to the Disciplinary Committee or even advise the
Director Discipline to undertake a further investigation. Sections 21A
and 21B thus encapsulated the procedure which was liable to be
adhered to by the Board of Discipline and the Disciplinary Committee
while exercising their respective powers to undertake disciplinary
action against a member of the firm.
14. Professional or other misconduct was defined in Section 22 of
the CA Act which in turn bids one to proceed to the First and the
Second Schedules which set out the various acts or omissions which
would amount to misconduct. For purposes of lucidity, we deem it
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Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
appropriate to extract Sections 21, 21A and 21B in the form of a
comparative table and which captures how those set of provisions read
prior to and after their substitution by Act 12 of 2022:-
Post-Amendment
Section Pre-Amendment
S. 21 21. Disciplinary Directorate
Disciplinary Directorate.
(1) The Council shall, by
notification, establish a
Disciplinary Directorate headed by
an officer of the Institute
designated as Director (Discipline)
and such other employees for
making investigations in respect of
any information or complaint
received by it.
(1) The Council shall, by
notification, establish a
Disciplinary Directorate
consisting of a Director
(Discipline), at least two Joint
Directors (Discipline) not below
the rank of Deputy Secretary of
the Institute and such other
employees appointed under
Section 16, for making
investigations either suo motu,
or on receipt of an information
or a complaint, in such form,
along with such fees as may be
specified.
(2) On receipt of any information
or complaint along with the
prescribed fee, the Director
(Discipline) shall arrive at a prima
facie opinion on the occurrence of
the alleged misconduct.
(2) Within thirty days of receipt
of an information or a complaint,
the Director (Discipline) shall
decide in such manner as may be
specified, whether a complaint
or information is actionable or is
liable to be closed as non-
actionable:
(3) Where the Director
(Discipline) is of the opinion that a
member is guilty of any
professional or other misconduct
mentioned in the First Schedule*,
he shall place the matter before the
Board of Discipline and where the
Director (Discipline) is of the
opinion that a member is guilty of
any professional or other
misconduct mentioned in the
Second Schedule or in both the
Schedules, he shall place the
matter before the Disciplinary
Committee.
Provided that the Director
(Discipline) may call for
additional information from the
complainant or the informant, as
the case may be, by giving
fifteen days time before deciding
whether the case is actionable or
non-actionable:
(4) In order to make investigations
under the provisions of this Act,
the Disciplinary Directorate shall
follow such procedure as may be
specified.
Provided further that the
recommendations of the Director
(Discipline) on nonactionable
complaints or information shall
be submitted to the Board of
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By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
(5) Where a complainant
withdraws the complaint, the
Director (Discipline) shall place
such withdrawal before the Board
of Discipline or, as the case may
be, the
Discipline within sixty days of
its receipt and the Board of
Discipline may, after looking
into its merits refer such
complaint or information to the
Director (Discipline) for
conducting further investigation.
Disciplinary Committee, and the
said Board or Committee may, if it
is of the view that the
circumstances so warrant, permit
the withdrawal at any stage.]
(3) While making investigation
into a case which is found to be
actionable, the Director
(Discipline) shall give an
opportunity to the member or the
firm, as the case may be, to
submit a written statement
within twenty-one days which
may further be extended by
another twenty-one days, for
reasons to be recorded in
writing.
(4) Upon receipt of the written
statement under sub-section (3),
if any, the Director (Discipline)
shall send a copy thereof to the
complainant or the informant, as
the case may be, and the
complainant or the informant
shall, within twenty-one days of
the receipt of such written
statement, submit his rejoinder.
(5) Upon receipt of the written
statement under sub-section (3)
and rejoinder under sub-section
(4), the Director (Discipline)
shall submit a preliminary
examination report within thirty
days, if a prima facie case is
made out against a member or a
firm, as the case may be.
(6) In case a prima facie case is
made out for any professional or
other misconduct mentioned in
the First Schedule, the Director
(Discipline) shall submit the
preliminary examination report
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to the Board of Discipline and
where prima facie case is made
out for any professional or other
misconduct mentioned in the
Second Schedule or in both the
First Schedule and the Second
Schedule, he shall submit a
preliminary examination report
to the Disciplinary Committee:
Provided that a complaint or
information filed by any
authorised officer of the Central
Government or a State
Government or any statutory
authority duly supported by an
investigation report or relevant
extract of the investigation report
along with supporting evidence,
shall be treated as preliminary
examination report:
Provided further that where no
prima facie case is made out
against the member or the firm,
the Director (Discipline) shall
submit such information or
complaint with relevant
documents to the Board of
Discipline and the Board of
Discipline may, if it agrees with
the findings of the Director
(Discipline), close the matter or
in case of disagreement, itself
proceed further or refer the
matter to the Disciplinary
Committee or advise the
Director (Discipline) to further
investigate the matter.
(7) For the purpose of
investigation under this Act, the
Disciplinary Directorate shall
follow such procedure as may be
specified.
(8) A complaint filed with the
Disciplinary Directorate shall
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not be withdrawn under any
circumstances.
(9) The status of actionable
information and complaints
pending before the Disciplinary
Directorate, Boards of Discipline
and Disciplinary Committees
and the orders passed by the
Boards of Discipline under
Section 21-A and by the
Disciplinary
Committees under Section 21-B
shall be made available in the
public domain by the
Disciplinary Directorate in such
manner as may be prescribed.]
S.21A 1) The Council shall constitute a
Board of Discipline consisting of −
Board of Discipline.—(1) The
Council shall, by notification,
constitute one or more Boards of
Discipline, each consisting of—
(a) a person with experience in
law and having knowledge of
disciplinary matters and the
profession, to be its presiding
officer;
(a) a person, not being a member
of the Institute, with experience
in law and having knowledge of
disciplinary matters and the
profession, to be nominated by
the Central Government as its
Presiding Officer, from out of a
panel of persons prepared and
provided by the Council in such
manner as may be prescribed;
(b) two members one of whom
shall be a member of the Council
elected by the Council and the
other member shall be nominated
by the Central Government from
amongst the persons of eminence
having experience in the field of
law, economics, business, finance
or accountancy;
(b) one member, who is a person
of eminence having experience
in the field of law, economics,
business, finance or accountancy
and not being a member of the
Institute, to be nominated by the
Central Government from out of
a panel of persons prepared and
provided by the Council in such
manner as may be prescribed;
(c) the Director (Discipline) shall
function as the Secretary of the
Board.
(2) The Board of Discipline shall
follow summary disposal
procedure in dealing with all cases
before it.
(3) Where the Board of Discipline
is of the opinion that a member is
guilty of a professional or other
misconduct mentioned in the First
(c) one member to be nominated
by the Council from out of a
panel of members of the Institute
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Schedule, it shall afford to the
member an opportunity of being
heard before making any order
against him and may thereafter
take any one or more of the
following actions, namely : −
to be prepared by the Council, in
such manner as may be
prescribed;
(d) an officer of the Institute not
below the rank of a Deputy
Secretary shall function as the
Secretary of the Board of
Discipline:
(a) reprimand the member;
(b) remove the name of the
member from the Register up to a
period of three months;
Provided that the Presiding
Officer nominated under clause
(a) and the member nominated
under clause (b) may be the
same for different Boards of
Discipline constituted under this
sub-section.
(c) impose such fine as it may
think fit which may extend to
rupees one lakh.
(4) The Director (Discipline) shall
submit before the Board of
Discipline all information and
complaints where he is of the
opinion that there is no prima facie
case and the Board of Discipline
may, if it agrees with the opinion
of the Director (Discipline), close
the matter or in case of
disagreement, may advise the
Director (Discipline) to further
investigate the matter.
(2) The Board of Discipline
shall, while considering the
cases placed before it, follow
such procedure including
faceless proceedings and virtual
hearings as may be specified.
(3) The Board of Discipline
shall, on receipt of preliminary
examination report from
Director (Discipline), require the
member or the firm, as the case
may be, against whom such
preliminary examination report
has been filed, to submit a
written statement within twenty-
one days which may further be
extended by another twenty one
days, in exceptional
circumstances, for reasons to be
recorded in writing.
(4) The Board of Discipline shall
conclude its inquiry within
ninety days of the receipt of
preliminary examination report
from the Director (Discipline).
(5) Upon inquiry, if the Board of
Discipline finds that such
member is guilty of a
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professional or other misconduct
mentioned in the First Schedule,
it may pass an order within thirty
days of such finding, after
providing an opportunity of
being heard to the member,
taking any one or more of the
following actions, namely—
(a) reprimand the member and
record it in the Register of
members;
(b) remove the name of the
member or members from the
Register of members up to a
period of six months;
(c) impose such fine as it may
think fit which may extend to
two lakh rupees.
(6) Where on the basis of
evidence brought on record or
during the course of an inquiry
pertaining to a member, the
Board of Discipline is of the
opinion that any such member
who is a partner or owner of a
firm, has been repeatedly found
guilty of misconduct mentioned
in the First Schedule during the
last five years, the following
action may also be taken against
such firm, namely—
(a) prohibit the firm from
undertaking any activity or
activities relating to the
profession of a chartered
accountant in practice for such
period not exceeding one year;
or
(b) impose such fine as it may
think fit, which may extend to
twenty-five lakh rupees.
(7) Where a member or a firm
fails to pay the fine imposed
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under sub-section (5) or sub-
section (6) within such time as
may be specified, the Council
shall remove the name of such
member or firm from the
Register of members or Register
of firms, as the case may be, for
such period as it may think fit.
(8) The Presiding Officer and
members of the Board of
Discipline shall be paid such
allowances as may be
prescribed.]
S. 21B (1) The Council shall constitute a
Disciplinary Committee consisting
of the President or the Vice-
President of the Council as the
Presiding Officer and two
members to be elected from
amongst the members of the
Council and two members to be
nominated by the Central
Government from amongst the
persons of eminence having
experience in the field of law,
economics, business, finance or
accountancy:
(1) The Council shall, by
notification, constitute one or
more Disciplinary Committees,
each consisting of—
(a) a person, not being a member
of the Institute, with experience
in law and having knowledge of
disciplinary matters and the
profession, to be nominated by
the Central Government as its
Presiding Officer, from out of a
panel of persons prepared and
provided by the Council in such
manner as may be prescribed;
Provided that the Council may
constitute more Disciplinary
Committees as and when it
considers necessary.
(b) two members, who are
persons of eminence having
experience in the field of law,
economics, business, finance or
accountancy and not being a
member of the Institute, to be
nominated by the Central
Government from out of a panel
of persons prepared and
provided by the Council in such
manner as may be prescribed;
(2) The Disciplinary Committee,
while considering the cases placed
before it shall follow such
procedure as may be specified.
(3) Where the Disciplinary
Committee is of the opinion that a
member is guilty of a professional
or other misconduct mentioned in
the Second Schedule or both the
First Schedule and the Second
Schedule, it shall afford to the
(c) two members to be
nominated by the Council from
out of a panel of members of the
Institute to be prepared by the
Council in such manner as may
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member an opportunity of being
heard before making any order
against him and may thereafter
take any one or more of the
following actions, namely : −
be prescribed:
Provided that the Presiding
Officer nominated under clause
(a) and the members nominated
under clause (b) may be the
same for different Disciplinary
Committees constituted under
this sub-section.
(a) reprimand the member;
(b) remove the name of the
member from the Register
permanently or for such period, as
it thinks fit;
(2) The Disciplinary Committee
shall, while considering the
cases placed before it, follow
such procedure including
faceless proceedings and virtual
hearings as may be specified.
(c) impose such fine as it may
think fit, which may extend to
rupees five lakhs.
(4) The allowances payable to the
members nominated by the
Central Government shall be such
as may be specified.
(3) The Disciplinary Committee
shall, on receipt of preliminary
examination report from
Director (Discipline), require the
member or the firm, as the case
may be, against whom such
preliminary examination report
has been filed, to submit a
written statement within twenty-
one days, which may further be
extended by another twenty-one
days in exceptional
circumstances, for reasons to be
recorded in writing.
(4) The Disciplinary Committee
shall conclude its inquiry within
one hundred and eighty days of
receipt of the preliminary
examination report from the
Director (Discipline).
(5) Upon inquiry, if the
Disciplinary Committee finds
that a member is guilty of a
professional or other misconduct
mentioned in the Second
Schedule or in both the First
Schedule and the Second
Schedule, it may pass an order
within thirty days of such a
finding, after providing an
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opportunity of being heard to the
member, taking any one or more
of the following actions,
namely—
(a) reprimand the member and
record it in the Register of
members; or
(b) remove the name of the
member from the Register of
members permanently or for
such period, as it may think fit;
or
(c) impose such fine as it may
think fit, which may extend to
ten lakh rupees.
(6) Where on the basis of
evidence brought on record or
during the course of an inquiry
pertaining to a member, the
Disciplinary Committee is of the
opinion that any such member,
who is a partner or owner of a
firm has been repeatedly found
guilty of misconduct mentioned
in the Second Schedule or in
both the First Schedule and the
Second Schedule, during the last
five years, the following actions
may also be taken against such
firm, namely—
(a) prohibit the firm from
undertaking any activity or
activities relating to the
profession of a chartered
accountant in practice for such
period not exceeding two years;
or
(b) suspend or cancel the
registration of the firm and
remove its name from the
Register of firms permanently or
for such period as it may think
fit; or
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(c) impose such fine as it may
think fit, which may extend to
fifty lakh rupees.
(7) Where a member or a firm
fails to pay the fine imposed
under sub-section (5) or sub-
section (6) within the specified
time, the Council shall remove
the name of such member or
firm from the Register of
members or Register of firms, as
the case may be, for such period,
as it may think fit.
(8) The Presiding Officer and
members of the Disciplinary
Committee shall be paid such
allowances as may be
prescribed.]
15. At this juncture we deem it apposite to note that even though the
amendments came to be introduced vide Sections 21, 22 and 23 of the
Act No. 12 of 2022, however the same have not been notified till date.
In this regard, reference may be made to Notification dated 10 May
2022 and which reads as under:-
“ S.O. 2184(E).— In exercise of the powers conferred by sub-
section (2) of section 1 of the Chartered Accountants, the Cost and
Works Accountants and the Company Secretaries (Amendment)
Act, 2022 (12 of 2022), the Central Government hereby appoints
th
the 10 day of May, 2022, as the date on which the following
provisions of the said Act shall come into force, namely:-
SI. No. Provisions
1. Sections 1 to 15 (both inclusive).
Section 16 [except clause (i)].
2.
3. Sections 17 to 19 (both inclusive).
Section 24.
4.
5. Sections 28 to 35 (both inclusive).
6. Section 36 [except clause (i)].
7. Section 37 [except clause (i) & (ii)].
8. Sections 38 to 50 (both inclusive).
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Section 51 [except clause (i)].
9.
10. Sections 52 to 54 (both inclusive).
Sections 59.
11.
12. Sections 63 to 71 (both inclusive).
13. Sections 74 to 83 (both inclusive).
14. Section 84 [except clause (i)].
15. Sections 85 to 87 (both inclusive).
Sections 92.
16.
17. Sections 96 to 104 (both inclusive).
[F. No. 12/11/2019-PI]
INDER DEEP SINGH DHARIWAL,
Jt. Secy.
A look at the official website of the Ministry of Corporate Affairs
shows that no further notifications have been issued with respect to Act
No. 12 of 2022.
16. Of equal significance are the First and Second Schedules of the
CA Act which specify with sufficient clarity and precision acts that
would amount to professional or other misconduct. Those Schedules
are reproduced hereinbelow: -
“ SCHEDULE I
Part I
Professional misconduct in relation to chartered accountants in
practice
A chartered accountant in practice shall be deemed to be guilty of
professional misconduct, if he—
(1) allows any person to practice in his name as a chartered
accountant unless such person is also a chartered accountant in
practice and is in partnership with or employed by him;
(2) pays or allows or agrees to pay or allow, directly or indirectly,
any share, commission or brokerage in the fees or profits of his
professional business, to any person other than a member of the
Institute or a partner or a retired partner or the legal representative
of a deceased partner, or a member of any other professional body
or with such other persons having such qualifications as may be
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prescribed, for the purpose of rendering such professional services
from time to time in or outside India.
Explanation.—In this item, “partner” includes a person residing
outside India with whom a chartered accountant in practice has
entered into partnership which is not in contravention of Item (4) of
this Part;
(3) accepts or agrees to accept any part of the profits of the
professional work of a person who is not a member of the Institute:
Provided that nothing herein contained shall be construed as
prohibiting a member from entering into profit sharing or other
similar arrangements, including receiving any share, commission or
brokerage in the fees, with a member of such professional body or
other person having qualifications, as is referred to in Item (2) of
this Part;
(4) enters into partnership, in or outside India, with any person
other than a chartered accountant in practice or such other person
who is a member of any other professional body having such
qualifications as may be prescribed, including a resident who but
for his residence abroad would be entitled to be registered as a
member under clause (v) of sub-section (1) of Section 4 or whose
qualifications are recognised by the Central Government or the
Council for the purpose of permitting such partnerships;
(5) secures, either through the services of a person who is not an
employee of such chartered accountant or who is not his partner or
by means which are not open to a chartered accountant, any
professional business:
Provided that nothing herein contained shall be construed as
prohibiting any arrangement permitted in terms of Items (2), (3)
and (4) of this Part;
(6) solicits clients or professional work either directly or indirectly
by circular, advertisement, personal communication or interview or
by any other means:
Provided that nothing herein contained shall be construed as
preventing or prohibiting—
(i) any chartered accountant from applying or requesting for or
inviting or securing professional work from another chartered
accountant in practice; or
(ii) a member from responding to tenders or enquiries issued by
various users of professional services or organisations from time to
time and securing professional work as a consequence;
(7) advertises his professional attainments or services, or uses any
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designation or expressions other than chartered accountant on
professional documents, visiting cards, letter heads or sign boards,
unless it be a degree of a University established by law in India or
recognised by the Central Government or a title indicating
membership of the Institute of Chartered Accountants of India or of
any other institution that has been recognised by the Central
Government or may be recognised by the Council:
Provided that a member in practice may advertise through a write
up, setting out the services provided by him or his firm and
particulars of his firm subject to such guidelines as may be issued
by the Council;
(8) accepts a position as auditor previously held by another
chartered accountant or a certified auditor who has been issued
certificate under the Restricted Certificate Rules, 1932 without first
communicating with him in writing;
(9) accepts an appointment an auditor of a company without first
ascertaining from it whether the requirements of Section 225 of the
Companies Act, 1956 (1 of 1956) [or Sections 139 to 141 of the
Companies Act, 2013 (18 of 2013) or any other law pertaining to
appointment of auditors for the time being in force] in respect of
such appointment have been duly complied with;
(10) charges or offers to charge, accepts or offers to accept in
respect of any professional employment, fees which are based on a
percentage of profits or which are contingent upon the findings, or
results of such employment, except as permitted under any
regulation made under this Act;
(11) engages in any business or occupation other than the
profession of chartered accountant unless permitted by the Council
so to engage:
Provided that nothing contained herein shall disentitle a chartered
accountant from being a director of a company (not being a
managing director or a wholetime director) unless he or any of his
partners is interested in such company as an auditor;
(12) allows a person not being a member of the Institute in practice,
or a member not being his partner to sign on his behalf or on behalf
of his firm, any balance-sheet, profit and loss account, report or
financial statements.
Part II
Professional misconduct in relation to members of the Institute in
service
A member of the Institute (other than a member in practice) shall
be deemed to be guilty of professional misconduct, if he being an
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employee of any company, firm or person—
(1) pays or allows or agrees to pay directly or indirectly to any
person any share in the emoluments of the employment undertaken
by him;
(2) accepts or agrees to accept any part of fees, profits or gains
from a lawyer, a chartered accountant or broker engaged by such
company, firm or person or agent or customer of such company,
firm or person by way of commission or gratification.
Part III
Professional misconduct in relation to members of the Institute
generally
A member of the Institute, whether in practice or not, shall be
deemed to be guilty of professional misconduct, if he—
(1) not being a fellow of the Institute, acts as a fellow of the
Institute;
(2) does not supply the information called for, or does not comply
with the requirements asked for, by the Institute, Council or any of
its Committees, Director (Discipline), Board of Discipline,
Disciplinary Committee, Quality Review Board or the Appellate
Authority;
(3) while inviting professional work from another chartered
accountant or while responding to tenders or enquiries or while
advertising through a write up or anything as provided for in Items
(6) and (7) of Part I of this Schedule, gives information knowing it
to be false.
Part IV
Other misconduct in relation to members of the Institute generally
A member of the Institute, whether in practice or not, shall be
deemed to be guilty of other misconduct, if he—
(1) is held guilty by any civil or criminal court for an offence which
is punishable with imprisonment for a term not exceeding six
months;
(2) in the opinion of the Council, brings disrepute to the profession
or the Institute as a result of his action whether or not related to his
professional work.]
SCHEDULE II
Part I
Professional misconduct in relation to chartered accountants in
practice
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A chartered accountant in practice shall be deemed to be guilty of
professional misconduct, if he—
(1) discloses information acquired in the course of his professional
engagement to any person other than his client so engaging him,
without the consent of his client or otherwise than as required by
any law for the time being in force;
(2) certifies or submits in his name, or in the name of his firm, a
report of an examination of financial statements unless the
examination of such statements and the related records has been
made by him or by a partner or an employee in his firm or by
another chartered accountant in practice;
(3) permits his name or the name of his firm to be used in
connection with an estimate of earnings contingent upon future
transactions in a manner which may lead to the [belief that he or his
firm] vouches for the accuracy of the forecast;
(4) expresses his opinion on financial statements of any business or
enterprise in which he, his firm, or a partner in his firm has a
substantial interest;
(5) fails to disclose a material fact known to him which is not
disclosed in a financial statement, but disclosure of which is
necessary in making such financial statement where he is
concerned with that financial statement in a professional capacity;
(6) fails to report a material misstatement known to him to appear
in a financial statement with which he is concerned in a
professional capacity;
(7) does not exercise due diligence, or is grossly negligent in the
conduct of his professional duties;
(8) fails to obtain sufficient information which is necessary for
expression of an opinion or its exceptions are sufficiently material
to negate the expression of an opinion;
(9) fails to invite attention to any material departure from the
generally accepted procedure of audit applicable to the
circumstances;
(10) fails to keep moneys of his client other than fees or
remuneration or money meant to be expended in a separate banking
account or to use such moneys for purposes for which they are
intended within a reasonable time.
Part II
Professional misconduct in relation to members of the Institute
generally
A member of the Institute, whether in practice or not, shall be
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deemed to be guilty of professional misconduct, if he—
(1) contravenes any of the provisions of this Act or the regulations
made thereunder or any guidelines issued by the Council;
(2) being an employee of any company, firm or person, discloses
confidential information acquired in the course of his employment
except as and when required by any law for the time being in force
or except as permitted by the employer;
(3) includes in any information, statement, return or form to be
submitted to the Institute, Council or any of its Committees,
Director (Discipline), Board of Discipline, Disciplinary Committee,
Quality Review Board or the Appellate Authority any particulars
knowing them to be false;
(4) defalcates or embezzles moneys received in his professional
capacity.
[(5) acts as an auditor of the company in contravention of the
provisions of the Companies Act, 2013 (18 of 2013).]
Part III
Other misconduct in relation to members of the Institute generally
A member of the Institute, whether in practice or not, shall be
deemed to be guilty of professional other misconduct, if he is held
guilty by any civil or criminal court for an offence which is
punishable with imprisonment for a term exceeding six months.”
ECTION EGISLATIVE ISTORY
S 132 : A L H
17. For the purposes of appreciating the challenge that stands raised
as also to understand the imperatives which informed the introduction
of Section 132, it would be apposite to step back in point of time and
refer to some of the executive and legislative deliberations which
preceded the incorporation of that section in the statute book. In terms
of the disclosures that are made by NFRA in these proceedings, it
would appear that the Union Government had for some time been
contemplating the setting up and establishment of an appropriate
regulatory mechanism to ensure monitoring and compliance of
accounting and auditing standards as well as to oversee the quality of
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service rendered by professionals associated with compliance.
18. The first of those steps can be traced back to the introduction of
Section 210A in the Companies Act, 1956 which empowered the Union
Government to constitute the National Advisory Committee on
8
Accounting Standards
to advise it on the formulation and laying
down of accounting policies and standards for companies or classes of
companies. Section 210A as it stood in the erstwhile companies
legislation is reproduced hereinbelow: -
“210A - Constitution of National Advisory Committee on
Accounting Standards
(1) The Central Government may, by notification in the Official
Gazette, constitute an Advisory Committee to be called the
National Advisory Committee on Accounting Standards (hereafter
in this section referred to as the "Advisory Committee") to advise
the Central Government on the formulation and laying down of
accounting policies and accounting standards for adoption by
companies or class of companies under this Act.
(2) The Advisory Committee shall consist of the following
members, namely:-
(a) a Chairperson who shall be a person of eminence well-versed in
accountancy, finance, business administration, business law,
economics or similar discipline;
(b) one member each nominated by the Institute of Chartered
Accountants of India constituted under the Chartered Accountants
Act, 1949 (38 of 1949), the Institute of Cost and Works
Accountants of India constituted under the Cost and Works
Accountants Act, 1959 (23 of 1959) and the Institute of Company
Secretaries of India constituted under the Company Secretaries Act,
1980 (56 of 1980);
(c) one representative of the Central Government to be nominated
by it;
(d) one representative of the Reserve Bank of India to be
nominated by it;
(e) one representative of the Comptroller and Auditor-General of
8
NACAS
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India to be nominated by him;
(f) a person who holds or has held the office of professor in
accountancy, finance or business management in any university or
deemed university;
(g) the Chairman of the Central Board of Direct Taxes constituted
under the Central Boards of Revenue Act, 1963 (54 of 1963) or his
nominee;
(h) two members to represent the chambers of commerce and
industry to be nominated by the Central Government; and
(i) one representative of the Securities and Exchange Board of
India to be nominated by it.
(3) The Advisory Committee shall give its recommendations to the
Central Government on such matters of accounting policies and
standards and auditing as may be referred to it for advice from time
to time.
(4) The members of the Advisory Committee shall hold office for
such term as may be determined by the Central Government at the
time of their appointment and any vacancy in the membership in
the Committee shall be filled by the Central Government in the
same manner as the member whose vacancy occurred was filled.
(5) The non-official member of the Advisory Committee shall be
entitled to such fees, travelling, conveyance and other allowances
as are admissible to the officers of the Central Government of the
highest rank.]”
19. The Standing Committee of Parliament on Finance in its 21st
Report while commenting upon the Companies Bill, 2009 made the
following significant recommendations:-
“(F) Role of Auditors :-
34. Suggestions have been received by the Committee that there is
a need to make provisions relating to Audit and Auditors more
stringent such as following :-
(a) The clause should specifically prohibit offer of non-audit
services both ‘directly as well as indirectly’. The term ‘directly as
well as indirectly’ may also be suitably defined in the Bill
(b) The prohibition proposed in the clause should be not only for
the audit client company but also for the holding company,
subsidiary company and associate company of the audit client
company
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(c) A residual clause may be inserted to provide ‘any other kind of
consultancy services’ to take care of any non-audit services not
covered in already provided clauses.
(d) Suitable penalty may be provided in case of contravention of
these provisions.
(e) (i) Clause 123(10) of the Bill empowers the Tribunal, if it is
satisfied that the auditor of a company has acted in a fraudulent
manner or abetted/colluded in any fraud, to direct the company to
change its auditors. Suggestions have been made that these
provisions should be modified to clarify to cover act of fraud or
abetment by auditor whether directly or indirectly. It has also been
suggested that the Bill may provide that if auditor, whether
individual or firm, against whom an order has been passed by the
Tribunal under this clause should not be eligible to be appointed as
an auditor of any company for a period of five years.
(f) (i) This clause provides for disqualification of an auditor in case
he has business relationship with the company, or its subsidiary, or
its holding or associate company or subsidiary of such holding
company or associate company of such nature as may be
prescribed. Suggestions have been received that this clause may
also be modified to cover such relationship whether ‘directly or
indirectly’ to prevent any misuse of these provisions by the
auditors.
(g) (i) At present as per provisions of section 210A of the
Companies Act, 1956, the National Advisory Committee on
Accounting Standards (NACAS) has the mandate to
recommend/advise the Central Government on the formulation and
laying down of accounting policies and accounting standards for
adoption by companies or class of companies.
(ii) The Companies Bill, 2009 has sought to enhance the role of
NACAS. The Bill (Clause 118) empowers NACAS to make
recommendations to the Central Government both on accounting
standards as well as auditing standards. It has also been proposed in
the Bill to change the title of this Committee to National Advisory
Committee on Accounting and Auditing Standards (NACAAS).
(iii) Suggestions have been received expressing that in view of
economic challenges being faced by many countries across the
globe and failure of some of big companies in recent past casting a
doubt on the role of management and auditors, there is a need to
promote an independent regulatory regime which may have the
power to:-
(a) recommend the standards to the Government for:
(A) corporate financial reporting,
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(B) corporate audit and
(C) quality of service of professionals associated with ensuring
compliance with such
standards;
(b) oversee, monitor and supervise the bodies involved in setting
standards mentioned in (a) above;
(iv) It has also been suggested that the responsibility for setting
financial reporting standards and auditing standards and monitoring
their strict compliance should rest with the Government or a
statutory authority set up by the Government. It has been expressed
that setting up of such a regulatory Body would ensure healthy
functioning of corporate sector, particularly in respect of financial
reporting, audit and quality of service by the relevant professionals,
eventually benefitting the business, investors, employees, and other
stakeholders and enhance the country’s economic strength in
competitive international markets.”
35. On being asked, the Ministry examined the afore-said
suggestions in detail, particularly in the light of provisions of
clause 118 of the Bill, which seeks to provide for widening the role
of NACAAS (established at present under section 210A of the
Companies Act) to recommend both accounting as well as auditing
standards. The Ministry, while agreeing to the different
suggestions, have submitted as follows :
“It may also be useful to consider giving of regulatory powers to
NACAAS at appropriate stage to enforce the compliance with
standards in respect of matters, after they are notified under the
Companies Bill/Act and also for overseeing and monitoring the
bodies involved in setting relevant standards, including on the
quality of services of members of such bodies.”
36. The Ministry have also suggested in this regard that :
“The Central Government should have the power to constitute the
NACAAS, provide for manner of appointment, selection and
nomination etc of members of NACAAS by way of making
suitable rules.”
37. The Committee acknowledge the Ministry’s acceptance of
the Committee’s views and suggestions for ensuring
independence of auditors, providing safeguards to retain
credibility of the audit process and creation of a supervisory
mechanism for this purpose. The Committee would recommend
that the proposed body namely, NACAAS would be given
sufficient mandate not only to set and oversee auditing and
accounting standards, but also to monitor the quality of audit
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undertaken across the corporate sector. It should, therefore, be
manned by professionals. Its role may be expanded depending
upon experience gained. ”
20. The need to sufficiently empower the NACAS also appears to
have formed the subject matter of consideration of that Committee as
would be evident from the following extracts of the 57th Report of the
Standing Committee on Finance (2011-12):-
“(c) National Advisory Committee on Accounting and Auditing
Standards (NACAAS) proposed to be renamed as National
Financial Reporting Authority (NFRA) with a mandate to ensure
monitoring and compliance of accounting and auditing standards
and to oversee quality of service of professionals associated with
compliance.
The Authority shall consider the International Financial Reporting
Standards and other internationally accepted accounting and
auditing policies and standards while making recommendations on
such matters to the Central Government which will improve the
competitiveness of our companies with other companies. The
Authority is also proposed to be empowered with quasi judicial
powers to ensure independent oversight over professionals.”
21. The then Hon’ble Minister of State in the Ministry of Corporate
Affairs in the course of discussion which ensued in the Lok Sabha,
which was considering the motion for passing of the Companies Bill,
2011, explained the proposed mandate of the NFRA as follows:-
“NFRA is the authority that will have foresight over the
monitoring, quality and service of Chartered Accountants and will
take strict action against professional misconduct. NFRA will be a
quasi-judicial body and the purpose will be to harmonize the global
best practices so that people have confidence in the accounting
systems and accounting standards in India. NFRA, I hope, will also
go a long way and make assure that there is transparency in all the
accounting work that we do here.”
22. However, the NFRA as a regulatory body, did not come into
being until much later. From the material that has been placed for our
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consideration, it further transpires that comments with respect to the
proposed conferment of disciplinary power upon the NFRA were also
9
sought from the
Institute of Chartered Accountants of India
. The
ICAI appears to have expressed various reservations with respect to
such a power being vested in the NFRA. The comments of the ICAI
appear to have been duly examined by the Companies Law Committee
which had been set up by the Ministry of Corporate Affairs in June
2015 and which in its report submitted on 1 February 2016 observed as
under:-
“3.19. The Institute of Chartered Accountants of India (ICAI) have
expressed their reservations over the constitution of NFRA as
follows:
a) Multiple Regulatory Bodies : Creating NFRA would result in
two regulatory bodies (ICAI and NFRA) governing the same audit
profession. This would result in duplication of efforts, added huge
costs with no significant incremental benefits. This would also
change the self-regulated profession to an externally regulated
body.
b) The ICAI Context : NFRA might seem necessary to ensure that
standard setting and enforcement are not carried out by the same
body (ICAI). However, it would be pertinent to mention that the
ICAI, has been created by an Act of Parliament for this specific
dual role (like SEBI).
The constitution of NFRA needs to be re-examined in the
mentioned contexts where relevant mechanisms and units have
been enabled by and/or within the ICAI organisation to deliver the
twin objectives of robust policy making and unbiased enforcement
in a timely manner.
c) Relevance of NFRA in the context of the Companies Act
2013 : The objective of NFRA is to regulate audit quality and
protect public interest. These, in any case, are also the main
objectives of ICAI which strives to be a world class regulator. It is
pertinent to note that the new Companies Act 2013 has
significantly enhanced provisions, pertaining to Accounts, Audit
and Corporate Governance which can deliver the above objectives
very well.
9
ICAI
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Specific aspects to regulate audit quality include integration of
financial statement reporting with Internal Financial Controls,
restrictions on auditors rendering conflicting services, audit
rotation, audit limits and penalties on the audit profession have
been included in the new Act. Similarly entity level discipline is
sought to be enhanced by significant controls over related party
transactions, acceptance of deposits, code of independent directors,
mandatory internal audits for large enterprises, enhanced board
responsibility etc. These controls enshrined in the Act, in addition
to the efforts of ICAI will enable higher audit quality especially for
public interest entities. Incremental benefits by creating NFRA
need to be reexamined before notification of Section 132.
d) Auditing Standards : ICAI as a world class regulator would be
more aligned to market needs, international practices and risks to
be able to define and improve Auditing standards rather than
NFRA.
: The Disciplinary Committee of ICAI
e) Disciplinary Mechanism
normally completes the process in a reasonable period of about
three to four years.
f) International benchmarks : The Public Companies Accounting
Oversight Board (PCAOB) of the US may be regarded as a
possible closely comparable body to NFRA, if notified. It is
relevant to note that PCAOB has evoked mixed responses in its
ability to improve audit quality. The PCAOB budget for 2016 is
estimated at $250 million and is enabled by 750 audit staff. The
Challenges of availability of trained and qualified audit staff and
the cost thereof may need to be appreciated ahead of the decision to
notify NFRA.
g) NFRA reporting and market perception : As a regulatory
oversight body, it would be incumbent on NFRA to share their
findings, at least in part, on their audits to the public. A particular
issue would be on the ability and maturity of stakeholders and
markets to distinguish between audit defects as identified by NFRA
(highly likely) and a total audit failures (less likely).
h) Uniform administration : Scale based differentiation of
regulating authority may result in conflicting judgements on the
same issue. Seamless coordination may always not be possible
between NFRA and ICAI due to the multiplicity of disciplinary
issues that may be handled by both agencies.
i) Challenges in adjudication : The setting up and managing a
standard setting, review and quasi-judicial authority requires
sustained effort on timely availability of adequate competent
personnel which may be a challenge for NFRA.
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3.20. Further ICAI offered their following suggestions on the
above:-
"The years commencing 2015 are vastly different for the auditing
profession in terms of the perception of the auditor’s roles and
responsibilities. Additionally, the CA fraternity is in the process of
coping with new changes such as penalties, rotation, restricted
services, Internal Financial Controls over Financial Reporting and
other aspects imposed by the Companies Act. The profession
would, rightly, need some more time to understand and assess the
expectations of a NFRA regime which, in our view shall not be
notified.
The ICAI has sufficient regulatory, supervisory, organisational and
budgetary independence as regards the audit profession although
we both a standard setter and a regulator. We would continue to
discharge our obligations to ensure the highest standards of audit
quality as well as to protect public interest."
23. The proposed introduction of Section 132 again formed subject
matter of consideration of the Standing Committee on Finance which in
its 37th Report observed as follows:-
“ 3.18. Sec 132 of the Act provides for the creation of National
Financial Reporting Authority (NFRI) for matters relating to
accounting and auditing standards under the Act. However this
section is yet to be notified
The key functions of NFRA as envisaged by the Act include:
• Recommendations to the Central Government on the formulation
and laying down of accounting and auditing policies and standards
for adoption by companies or their auditors.
• Monitor and enforce the compliance with accounting standards
and auditing standards in such manner as may be prescribed.
• 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.
• Have the power to investigate, either suo motu or on a reference
made to it by the Central Government, for specified class of bodies
corporate or persons, into the matters of professional or other
misconduct committed by any member or firm of Chartered
accountants.”
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24. In terms of a Press Release which thereafter came to be issued on
01 March 2018, the Union Cabinet is stated to have approved the
establishment of the NFRA. This was followed by a notification dated
21 March 2018 in terms of which sub-section (3) and (11) of Section
132 came to be enforced. The delay in the constitution of the NFRA
also appears to have formed the subject matter of debate and discussion
in the Lok Sabha in its proceedings which were held on 23 March 2018.
This becomes apparent from the consideration of the discussion
surrounding question no. 4799. Similar queries were raised in the Rajya
Sabha on 03 April 2018. Responding to the questions so raised, the
then Minister of Corporate Affairs made the following statement:-
“(a) to (c):- Section 132 of the Companies Act, 2013 (Act) provides
for setting up of National Financial Reporting Authority (NFRA).
The draft rules w.r.t. such section were prepared and public
consultation was done during 2013-14 alongwith various other rules
being considered under Companies Act, 2013 at that stage. In view
of reservations and apprehensions expressed by the Institute of
Chartered Accountants of India (ICAI), it was decided to establish
such body after examining/addressing relevant issues including
through consultation with ICAI. The matter was also considered by
Companies Law Committee set up during June 2015 which
submitted its report in February 2016 and The Hon’ble Standing
Committee on finance (which examined the Companies
(Amendment) Bill, 2016). After due examination and necessary
approvals, the Government has approved the proposal for
establishment of National Financial Reporting Authority (NFRA)
and creation of one post of Chairperson, three posts of full-time
Members and one post of Secretary for NFRA on 28th February,
2018. The Provisions of subsection (3) and (11) of section 132 of the
Act have been brought into force w.e.f. 21.03.2018 alongwith NFRA
(Manner of appointment and other Terms and Conditions of Service
of Chairperson and Members) Rules, 2018.”
It was thereafter on 01 October 2018 that the NFRA came to be finally
constituted.
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25. Of significant importance is the judgment rendered by the
Supreme Court in S. Sukumar vs. The Secretary, Institute of
10
Chartered Accountants of India
wherein the following directions
were passed: -
“The Union of India may constitute a three-member Committee of
experts to look into the question whether and to what extent the
statutory framework to enforce the letter and spirit of Sections 25
and 29 of the CA Act and the statutory Code of Conduct for the
CAs requires revisit so as to appropriately discipline and regulate
MAFs. The Committee may also consider the need for an
appropriate legislation on the pattern of Sarbanes Oxley Act, 2002
and Dodd Frank Wall Street Reform and Consumer Protection Act,
2010 in US or any other appropriate mechanism for oversight of
profession of the auditors. Question whether on account of conflict
of interest of auditors with consultants, the auditors profession may
need an exclusive oversight body may be examined. The
Committee may examine the Study Group and the Expert Group
Reports referred to above, apart from any other material. It may
also consider steps for effective enforcement of the provisions of
the FDI policy and the FEMA Regulations referred to above. It may
identify the remedial measures which may then be considered by
appropriate authorities. The Committee may call for suggestions
from all concerned. Such Committee may be constituted within two
months. Report of the Committee may be submitted within three
months thereafter. The UOI may take further action after due
consideration of such report.”
11
26. That takes us to the report of the Committee of Experts
which
came to be constituted by the Ministry of Finance pursuant to the
aforenoted direction in S. Sukumar. That report which came to be
submitted on 25 October 2018 includes the following instructive
passages with respect to the imperative need for the constitution of an
independent audit regulator as well as the global trend of audit
regulation and oversight being no longer tethered to peer review: -
Auditors are to resolve agency problems. Moreover, independent
“
10
(2018) 14 SCC 360
11
COE
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audits are fundamental to taking informed and correct investment
decisions. Availability of trustworthy financial information on the
performance of companies is important to proper functioning of
market economy. Serious concerns arise if auditors' independence
is compromised, or the trust reposed on them is betrayed.
Determining whether an auditor is independent in fact as well as in
appearance is complex. This is especially so because audit firms
across jurisdictions often provide services as part of one common
`network'. Consequently, separate firms belonging to the same
network could provide audit as well as non-audit services to the
same audit client or its holding company or subsidiaries across the
same or different countries. This can give rise to the problem of
conflict of interest where independence of the auditor may be
compromised. Therefore, measures like sufficient disclosure on
total fees, imposing cap on non-audit fees from the audit client,
revisiting the scope of prohibited non-audit services are needed to
address the issue of conflict of interest, especially at the network
level.
These networking arrangements also create an impression that the
Indian audit firms which are affiliated with these international
networks constitute Multi- national Accounting Firms (MAFs).
However, on closer scrutiny it turns out that these Indian audit
firms are set up as partnerships or Limited Liability Partnerships
(LLPs) under Indian laws and all their partners are members of the
ICAI. Therefore, there is neither any violation of section 29
(reciprocity) nor any violation of section 25 (companies not to
engage in accountancy) of the Chartered Accountants Act, 1949.
Neither can such Indian audit firms simply be equated to multi-
national corporations. Consequently, the term `MAF' is a
misnomer.
However, such Indian audit firms admittedly follow various
internal processes, policies and methodology adopted by their
respective networks internationally. This is aimed at maintaining
consistent standards in audit quality globally within a network.
While such networks bring better business opportunities in a global
economy, they should be subject to necessary checks and balances.
Legal measures need to be supplemented with adequate
institutional reforms. Time and again corporate scandals and
accounting frauds have nudged institutional reforms across
jurisdictions. One such fundamental reform that has happened
globally in the last two decades is a shift away from the Self-
Regulatory Organisation (SRO) model towards an independent
regulatory structure for the audit profession.
In the aftermath of Enron , the U.S. enacted the Sarbanes Oxley Act ,
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2002. The Supreme Court in its judgment dated February 23, 2018
has referred to this statute to examine the need of an oversight
mechanism for the audit profession. This law inter alia provided for
the setting up of the Public Company Accounting Oversight Board
(PCAOB) as an independent audit regulator to oversee the audits of
public companies. Similarly, U.K., also has a two-tier structure,
where the Financial Reporting Council (FRC) is the independent
regulator for the audit profession.
In the Indian context, the Satyam incident has been a wake-up call
for policy- makers. Pursuant to the global trend of shift from SRO
model to an independent regulatory model for audit profession, the
Companies Act, 2013 provided for the setting up of the National
Financial Reporting Authority (NFRA).
However, the continued opposition to the establishment of NFRA
has delayed the implementation of this critical reform.
Consequently, although Companies Act, 2013 was enacted in
August 2013, the section establishing NFRA was notified only on
March 21, 2018 along with the NFRA Chairperson and Members
Appointment Rules, 2018. Once NFRA becomes fully operational,
it will be adequately equipped to handle the contemporary
challenges in relation to auditors, audit firms and networks
operating in India.
Finally, it is important to facilitate a business-friendly environment
for corporates as well as professionals in India. It is therefore vital
that Indian laws and regulations on professional services keep pace
with changing market dynamics. Opening up professional services
to competition is necessary and therefore, audit firms should be
allowed to advertise with some restrictions. Further, in a global
economy use of international brand names for audit firms must be
allowed. Laws must be rationalised to promote Multi-Disciplinary
Practices (MDPs) to allow firms to offer a bouquet of high quality
professional services at par with international standards. The
Advocates Act, 1961 needs to be rationalised to facilitate
development of Indian law firms as well as Indian audit firms into
MDPs. Adopting these three measures i.e., advertising, branding
and MDPs will not only enhance the standards of services offered
to corporates, but also facilitate the audit firms to expand in
size/operation enabling them to compete internationally.”
27. It is the aforesaid legislative interventions which ultimately led to
the NFRA coming to be established with the avowed objective of
monitoring and enforcing compliance of companies auditing standards,
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reviewing quality of service, suggesting measures required for
improvement in the quality of service rendered by persons associated
with the audit profession, the framing of recommendations pertaining to
formulation and laying down of accounting and auditing policies,
standards connected therewith and additionally being empowered to
investigate either suo motu or on a reference made by the Union
Government and to take and draw such proceedings as may be
warranted to examine matters pertaining to professional or other
misconduct.
28. In order to holistically examine the challenge which stands
raised, we place hereinbelow a table which captures the various
amendments which came to be made to Section 132 over the course of
time and commencing from the introduction of Act 18 of 2013: -
“SECTION 132 – LIST OF AMENDMENTS
As introduced by
Act No. 18 of 2013
As amended by
Companies Act
2017
[Act No. 1 of
2018]
As amended by
Companies Act
2019
[Act No. 22 of
2019]
The Section as it
reads currently
In section 132
of the principal
Act,—
a ) after sub-
section (1), the
following sub-
section shall
be inserted ,
namely—
132.Constitution
of Natural
Financial
Reporting
Authority .— (1)
The Central
Government may,
by notification,
constitute a
National Financial
Reporting
Authority to
provide for matters
relating to
accounting and
auditing standards
132. Constitution of
National Financial
Reporting Authority.
(1) The Central
Government may,
by notification,
constitute a National
Financial Reporting
Authority to provide
for matters relating to
accounting
and auditing
standards under this
Act.
(i) in sub-
section (4), in
clause (c), in
sub-clause (A),
in item (II), for
the words
“(1-A) The
National
Financial
Reporting
Authority shall
perform its
functions through
such divisions as
may be
"ten lakh
rupees", the
words "five lakh
rupees" shall be
substituted;
( The National
1A)
(ii) in sub-
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under this Act.
section (5), for
the words,
brackets and
figure "the
Appellate
Authority
prescribed.”;
Financial Reporting
Authority shall
perform its functions
through such
divisions as may be
prescribed.]
( b ) after sub-
section (3), the
following sub-
sections shall
be inserted ,
namely—
(2)
Notwithstanding
anything contained
in any other law for
the time being in
force, the National
(2) Notwithstanding
anything contained in
any other law for the
time being in force,
the National Financial
Reporting Authority
shall—
constituted
under sub-
section (6) in
such manner as
may be
prescribed", the
words
Financial
Reporting
Authority shall—
“(3-A) Each
division of the
National
Financial
Reporting
Authority shall be
presided over by
the Chairperson
or a full-time
Member
authorised by the
Chairperson.
(a) make
recommendations
to the Central
Government on the
formulation and
laying down of
"the Appellate
Tribunal in such
manner and on
payment of such
fee as may be
(a) make
recommendations to
the Central
Government on the
formulation and laying
down of accounting
and auditing policies
and standards for
adoption by
companies or class of
companies or their
auditors, as the case
may be;
accounting and
auditing policies
and standards for
adoption by
companies or class
of companies or
prescribed"
shall be
substituted;
(3-B) There shall
be an executive
body of the
National
Financial
Reporting
Authority
consisting of the
Chairperson and
full-time
Members of such
Authority for
efficient
discharge of its
functions under
sub-section (2)
[other than clause
( a )] and sub-
section (4).”;
(iii) sub-
sections (6), (7),
(8) and (9) shall
be omitted.
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;
(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
(c) oversee the
quality of service
of the professions
associated with
ensuring
compliance with
( c ) in sub-section
(4), in clause ( c ),
for sub-clause
(B), the following
sub-clause shall
such standards, and
suggest measures
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required for
improvement in
quality of service
and such other
be substituted ,
namely—
matters as may be
prescribed; and
“(B) debarring the
member or the
firm from—
(d) perform such other
functions relating to
clauses (a), (b) and
(c) as may be
prescribed.
related matters as
may be prescribed;
and
I. being appointed
as an auditor or
internal auditor or
undertaking any
audit in respect of
financial
statements or
internal audit of
the functions and
activities of any
company or body
corporate; or
(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:
(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
II. performing any
valuation as
provided under
Section 247, for a
minimum period
of six months or
such higher
period not
exceeding ten
years as may be
determined by the
National
Financial
Reporting
Authority.”.
of eminence and
having expertise in
accountancy,
auditing, finance or
law to be appointed
by the Central
[( 3A) Each division of
the National Financial
Reporting Authority
shall be presided over
by the Chairperson or
a full-time Member
authorised by the
Chairperson.
Government and
such other
members not
exceeding fifteen
consisting of part-
time and full-time
members
(3B) There shall be an
executive body of the
National Financial
Reporting Authority
consisting of the
Chairperson and full-
time Members of such
Authority for efficient
discharge of its
functions under sub-
section (2) [other than
as may be
prescribed:
Provided that the
terms and
conditions and the
manner of
appointment of the
chairperson and
members shall be
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such as may be
prescribed:
clause (a)] and sub-
section (4).]
Provided further
that the chairperson
and members shall
make a declaration
to the Central
Provided that the
terms and conditions
and the manner of
appointment of the
chairperson
and members shall be
such as may be
prescribed:
Government in the
prescribed form
regarding no
conflict of interest
or lack of
independence in
respect of
Provided further that
the chairperson
and members shall
make a declaration to
the Central
Government in
the prescribed form
regarding no conflict
of interest or lack of
independence in
respect of his or their
appointment:
his or their
appointment:
Provided also that
the chairperson and
members, who are
in full-time
employment with
National
Provided also that the
chairperson
and members, who are
in full-time
employment with
National Financial
Reporting Authority
shall not be associated
with any audit firm
( including related
consultancy firms )
during the course of
their appointment and
two years after ceasing
to hold such
appointment.
Financial
Reporting
Authority shall not
be associated with
any audit firm
(including related
consultancy
firms) during the
course of their
appointment and
two years after
ceasing to hold
such appointment.
(4)
Notwithstanding
anything contained
in any other law for
the time being in
force, the National
Notwithstanding
(4)
anything contained in
any other law for the
time being in force,
the National Financial
Reporting Authority
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Financial
Reporting
Authority shall—
shall—
(a) have the power to
investigate, either suo
moto or on a reference
made to it by the
Central Government,
for such class of
bodies corporate or
persons, in such
manner as may be
prescribed into the
matters of professional
or other misconduct
committed by any
member or firm of
chartered accountants,
registered under the
Chartered Accountants
Act, 1949:
(a) have the power
to investigate,
either suo motu or
on a reference
made to it by the
Central
Government, for
such class of
bodies corporate or
persons, in such
manner as may be
prescribed into
the matters of
professional or
other misconduct
committed by any
member or firm of
chartered
Provided that no other
institute or body shall
initiate or continue any
proceedings in such
matters of misconduct
where the National
Financial Reporting
Authority has initiated
an investigation under
this section;
accountants,
registered under the
Chartered
Accountants Act,
1949 ( 38 of 1949):
Provided that no
other institute or
body shall initiate
or continue any
proceedings in such
matters
(b) have the same
powers as are vested
in a civil court under
the Code of Civil
Procedure, 1908,
while trying a suit, in
respect of the
following matters,
namely:-
of misconduct
where the National
Financial
Reporting
Authority has
initiated an
investigation under
(i) discovery and
production of books of
account and
other documents, at
such place and at such
time as may be
this section;
(b) have the same
powers as are
vested in a civil
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court under the
Code of Civil
Procedure, 1908 (
specified by the
National Financial
Reporting Authority;
5 of 1908), while
trying a suit, in
respect of the
following matters,
namely:—
(ii) summoning and
enforcing the
attendance of persons
and examining them
on oath;
(i) discovery and
production of
books of account
and other
documents, at such
place and at
(iii) inspection of any
books, registers and
other documents of
any person referred to
in clause (b) at any
place;
such time as may
be specified by the
National Financial
Reporting
Authority;
(iv) issuing
commissions for
examination of
witnesses
or documents;
(ii) summoning and
enforcing the
attendance of
persons and
examining them on
oath;
(c) where professional
or other misconduct is
proved, have the
power to make order
for—
(A) imposing penalty
of—
(iii) inspection of
any books,
registers and other
documents of any
person referred to
in
(I) not less than one
lakh rupees, but which
may extend to five
times of the fees
received, in case of
individuals; and not
1
less than [five lakh
rupees], but which
may extend to ten
times of the fees
received, in case of
firms;
clause (b) at any
place;
(iv) issuing
commissions for
examination of
witnesses or
documents;
[(B) debarring the
member or the firm
from—
(c) where
professional or
other misconduct is
proved, have the
power to make
I. being appointed as
an auditor or internal
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order for—
auditor or undertaking
any audit in respect of
financial statements or
internal audit of the
functions and
activities of
any company or body
corporate; or
(A) imposing
penalty of—
(I) not less than one
lakh rupees, but
which may extend
to five times of the
fees received,
II. performing any
valuation as provided
under section 247, for
a minimum period of
six months or such
higher period not
exceeding ten years as
may be determined by
the National Financial
Reporting Authority.]
in case of
individuals; and
(II) not less than
ten lakh rupees, but
which may extend
to ten times of the
fees received,
in case of firms;
(B) debarring the
member or the firm
from engaging
himself or itself
from practice as
Explanation.-For the
purposes of his 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.
member of the
Institute of
Chartered
Accountant of
India referred to in
clause (e) of sub-
section
Any person
(5)
aggrieved by any order
of the National
Financial Reporting
Authority issued under
clause (c) of sub-
section (4), may prefer
an appeal
before [the Appellate
Tribunal in such
manner and on
payment of such fee as
may be prescribed].
(1) of section 2 of
the Chartered
Accountants Act,
1949 (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
(6)[Omitted]
Financial
Reporting
(7)[Omitted]
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Authority.
(8)[Omitted]
Explanation.—For
the purposes of this
sub-section, the
expression
"professional or
other misconduct"
(9)[Omitted]
(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.
shall have the same
meaning assigned
to it under section
22 of the Chartered
Accountants Act,
1949 ( 38
(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
terms and conditions
of service of the
secretary and
employees shall be
such as may be
prescribed.
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 the
Appellate
Authority
constituted under
sub-
(12) The head office
of the National
Financial Reporting
Authority shall be at
New Delhi and the
National Financial
Reporting Authority
may, meet at such
other places in India as
it deems fit.
section (6) in such
manner as may be
prescribed.
(6) The Central
Government may,
by notification,
constitute, with
effect from such
date as may be
(13) The National
Financial Reporting
Authority shall cause
to be maintained
specified therein,
an Appellate
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Authority
consisting of a
chairperson and not
more then two
other
such books of
account and other
books in relation to its
accounts in such form
and in such manner as
the Central
Government may, in
consultation with the
Comptroller and
Auditor-General of
India prescribe.
members, to be
appointed by the
Central
Government, for
hearing appeals
arising out of the
orders of the
(14) The accounts of
the National Financial
Reporting Authority
shall be audited by the
Comptroller and
Auditor-General of
India at such intervals
as may be specified by
him and such accounts
as certified by the
Comptroller and
Auditor-General of
India together with the
audit report thereon
shall be forwarded
annually to the Central
Government by the
National Financial
Reporting Authority.
National Financial
Reporting
Authority.
( 7) The
qualifications for
appointment of the
chairperson and
members of the
Appellate
Authority,
the manner of
selection, the terms
and conditions of
their service and
the requirement of
the supporting
(15) The National
Financial Reporting
Authority shall
prepare in such form
and at such time for
each financial year as
may be prescribed its
annual report giving a
full account of its
activities during
the financial year and
forward a copy thereof
to the Central
Government and the
Central Government
staff and procedure
(including places of
hearing the
appeals, form and
manner in which
the appeals shall
be filed) to be
followed by the
Appellate
Authority shall be
such as may be
prescribed.
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(8) The fee for
filing the appeal
shall be such as
may be prescribed.
shall cause the annual
report and the audit
report given by the
Comptroller and
Auditor-General of
India to be laid before
each House of
Parliament.
(9) The officer
authorised by the
Appellate
Authority shall
prepare in such
form and at such
time as
may be prescribed
its annual report
giving a full
account of its
activities and
forward a copy
thereof to the
Central
Government and
the Central
Government shall
cause the annual
report to be laid
before each
House of
Parliament.
(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
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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
terms and
conditions of
service of the
secretary and
employees shall be
such as may be
prescribed.
(12) The head
office of the
National Financial
Reporting
Authority shall be
at New Delhi and
the
National Financial
Reporting
Authority may,
meet at such other
places in India as it
deems fit.
(13) The National
Financial
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Reporting
Authority shall
cause to be
maintained such
books of account
and other books in
relation to its
accounts in such
form and in such
manner as the
Central
Government
may, in
consultation with
the Comptroller
and Auditor-
General of India
prescribe.
(14) The accounts
of the National
Financial
Reporting
Authority shall be
audited by the
Comptroller and
Auditor-General of
India at such
intervals as may be
specified by him
and such accounts
as certified by the
Comptroller and
Auditor-General of
India together with
the audit report
thereon shall be
forwarded annually
to the Central
Government by the
National Financial
Reporting
Authority.
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(15) The National
Financial
Reporting
Authority shall
prepare in such
form and at such
time for each
financial year as
may be prescribed
its annual report
giving a full
account of its
activities during the
financial year and
forward a copy
thereof to the
Central
Government and
the Central
Government shall
cause the annual
report and the audit
report given by the
Comptroller and
Auditor-General of
India to be laid
before each House
of Parliament
29. The power which stands conferred on the NFRA to investigate in
terms of Section 132(4) is, however, restricted to such class of bodies
corporate or persons as may be prescribed. The classes of companies
and bodies corporate which are subject to the regulation of the NFRA is
prescribed by Rule 3 of the NFRA Rules and which reads as follows:-
“3. Classes of companies and bodies corporate governed by the
Authority. ─ (1) The Authority shall have power to monitor and
enforce compliance with accounting standards and auditing
standards, oversee the quality of service under sub-section (2) of
section 132 or undertake investigation under sub-section (4) of
such section of the auditors of the following class of companies and
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bodies corporate, namely:-
(a) companies whose securities are listed on any stock exchange in
India or outside India;
(b) unlisted public companies having paid-up capital of not less
than rupees five hundred crores or having annual turnover of not
less than rupees one thousand crores or having, in aggregate,
outstanding loans, debentures and deposits of not less than rupees
five hundred crores as on the 31st March of immediately preceding
financial year;
(c) insurance companies, banking companies, companies engaged
in the generation or supply of electricity, companies governed by
any special Act for the time being in force or bodies corporate
incorporated by an Act in accordance with clauses (b), (c), (d), (e)
and (f) of sub-section (4) of section 1 of the Act;
(d) any body corporate or company or person, or any class of
bodies corporate or companies or persons, on a reference made to
the Authority by the Central Government in public interest; and
(e) a body corporate incorporated or registered outside India, which
is a subsidiary or associate company of any company or body
corporate incorporated or registered in India as referred to in
clauses (a) to (d), if the income or net worth of such subsidiary or
associate company exceeds twenty per cent. of the consolidated
income or consolidated net worth of such company or the body
corporate, as the case may be, referred to in clauses (a) to (d).
(2) Every existing body corporate other than a company governed
by these rules, shall inform the Authority within thirty days of the
commencement of these rules, in Form NFRA-1, the particulars of
the auditor as on the date of commencement of these rules.
(3) Every body corporate, other than a company as defined in
clause (20) of section 2, formed in India and governed under this
rule shall, within fifteen days of appointment of an auditor under
sub-section (1) of section 139, inform the Authority in Form
NFRA-1, the particulars of the auditor appointed by such body
corporate:
Provided that a body corporate governed under clause (e) of sub-
rule (1) shall provide details of appointment of its auditor in Form
NFRA-1.
(4) A company or a body corporate other than a company governed
under this rule shall continue to be governed by the Authority for a
period of three years after it ceases to be listed or its paid-up capital
or turnover or aggregate of loans, debentures and deposits falls
below the limit stated therein.”
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30. As is evident from Rule 3 extracted hereinabove, the NFRA
stands empowered to monitor and enforce compliance with accounting
and auditing standards, overseeing the quality of service which is a
function envisaged under Section 132(2) or undertake an investigation
in terms of sub-section (4) of that provision and exercise regulatory
powers on the following five classes of companies and bodies:-
(a) Companies whose securities are listed on any stock exchange in
India or abroad.
(b) Unlisted public companies having a paid-up capital of not less
than INR 1500 Crores or having an annual turnover of not less
than INR 1000 Crores or in aggregate having outstanding loans,
debentures and deposits of not less than INR 1500 Crores;
(c) Insurance and banking companies as also those engaged in the
generation or supply of electricity as well as bodies corporate or
companies governed by any special Act;
(d) Any body, corporate or company or person in respect of which a
reference may be made to the NFRA by the Union Government
in public interest; and
(e) A body corporate incorporated or registered outside India and
which may be a subsidiary or associate of any company or body
corporate falling within the ambit of classes (a) to (d) referred to
above. Such a body corporate is further qualified by the
condition that it’s income or net worth would exceed 20% of the
consolidated income or net worth of an entity which could fall
within the classes (a) to (d) specified above.
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31. Pursuant to the provisions contained in clauses (2) and (3) of
Rule 3, every existing body corporate other than a company governed
by that Rule is obliged to furnish the particulars of its auditors in Form
NFRA-I.
32. Apart from the various functions and obligations which have
been placed upon the NFRA by virtue of Section 132(2), one of its
principal statutory responsibilities is to undertake an investigation and
inquiry in respect of professional or other misconduct. This power
flows from sub-section (4) of Section 132 which empowers the NFRA
to undertake disciplinary action against a member or firm of chartered
accountants registered under the CA Act. By virtue of the Proviso
appended to Section 132(4), no institute or body is entitled to initiate or
continue proceedings in respect of misconduct once the NFRA has
commenced an investigation in terms of that Section. Section 132(4)
thus confers a power upon the NFRA to initiate an investigation either
suo moto or on a reference made to it by the Union Government. The
penalties which it could impose, in case where professional or other
misconduct is proved, is set out in Section 132(4)(c). As is manifest
from a reading of that provision, the NFRA stands empowered to
impose not just monetary penalties but also debar a member or the firm
from being appointed as an auditor, internal auditor or undertaking an
audit in respect of financial statements of any company or body
corporate for a minimum period of six months or such larger period not
exceeding 10 years as may be determined by the NFRA.
33. It becomes pertinent to note that the expression “professional or
other misconduct” is not separately or independently defined or
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explained by Section 132. In terms of the Explanation appearing at the
end of sub-section (4), the said expression is to be understood and draw
meaning from Section 22 of the CA Act. By virtue of Section 132(5) a
person aggrieved by any order passed by the NFRA and traceable to
Section 132(4)(c) is entitled to institute an appeal before the appellate
tribunal.
34. It would be relevant to note that post amendments which had
come to be introduced in Sections 21, 21A and 21B of the CA Act, the
said statute enabled the Director (Discipline) as well as the Board of
Discipline and the Disciplinary Committee to require the member or the
firm as the case may be to participate in proceedings that those
authorities would have commenced in the course of investigation and
inquiry. This is evident from a reading of Section 21(3), 21A (3) and
21B(3) of the CA Act. Although and by virtue of Act 12 of 2022,
Chapter IVA came to be incorporated in the CA Act which required
every firm to be registered with the Council and for a register of firms
to be maintained, the CA Act did not independently incorporate any
provision in terms of which a firm could be prohibited or debarred from
undertaking an audit or be subjected to penalties that are envisaged
under Section 132(4)(c).
35. Section 20C of the CA Act, while stipulating situations where a
name of a firm could be removed from the register did not envisage that
power to be exercised basis a decision that may have been taken by
either the Board of Discipline or the Disciplinary Committee. The only
contingencies in which a firm could be prohibited or be subjected to a
fine were those which find mention in Sections 21A(6) and 21B(6). As
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is manifest from a reading of those provisions, a firm could be visited
with those penalties in case where it were found that a member who
was a partner or owner of a firm had been repeatedly found guilty of
misconduct.
FACTUAL MATRIX
36. Having broadly sketched out the statutory scheme which
prevails, this would constitute an appropriate juncture to notice some of
the salient facts which preceded the institution of the present writ
petitions.
12
37. Deloitte Haskins & Sells LLP had issued an audit report for
13 14
IL & SL Finance Service Limited for Financial Year 2017-18 on
28 May 2018. The audit of IFIN was stated to be a joint audit which it
15
conducted along with BSR and Associates LLP
and the audit report
itself being jointly signed by DHS and BSR. On 12 February 2019,
NFRA addressed an email to DHS requiring it to submit the audit file
and audit report drawn by it in respect of IFIN for FY 2017-18. In
terms of a subsequent mail, the aforesaid request was reiterated by
NFRA with it being observed that the aforesaid audit file was required
to enable it to perform and undertake an initial review of the
compliance by DHS with the applicable auditing standards. The audit
record is stated to have been submitted by DHS to NFRA on 11 March
2019. On 28 June 2019, NFRA conveyed its prima facie observations
and conclusions to DHS. DHS submitted a response dated 03 August
12
DHS
13
IFIN
14
FY
15
BSR
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2019 refuting the various prima facie observations which had been
conveyed by NFRA.
38. Post the exchange of the aforesaid communications, the NFRA
16
furnished the Draft Audit Quality Review Report on 25 September
2019. It was in this report that NFRA asserted that it had on due
consideration come to form the opinion that acts of professional and
other misconduct stood committed by DHS, Mr. Udayan Sen, an
erstwhile partner of the firm and who was the engagement and signing
partner, Mr. Shrenik Baid, the additional partner on the IFIN Audit and
17
Mr. Rukshad Daruvala, the Engagement Quality Control Review
Partner. On the very same date, the Union Government is stated to
have issued an order referring to various aspects relating to the affairs
of IFIN as well as its subsidiary and associate companies for
investigation by the NFRA in terms as contemplated under Section
132(4) of the 2013 Act.
39. On 30 October 2019 some of the engagement team members who
had performed the IFIN audit for FY 2017-18 made a representation
before the NFRA. This was followed by written submissions being
tendered by DHS to the NFRA in response to the various observations,
comments and conclusions appearing in the DAQRR. NFRA,
18
thereafter, circulated the Audit Quality Review Report
where
significant conclusions relating to fraud and collusion with IFIN
management came to be alleged. On 17 January 2020, based on the
conclusions contained in the aforenoted AQRR, NFRA issued a Show
16
DAQRR
17
EQCR
18
AQRR
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19
Cause Notice
under Section 132(4) upon Mr. Udayan Sen. Separate
SCNs dated 24 and 28 January 2020 came to be issued against Mr.
Shrenik Baid and Mr. Rukshad Daruvala, respectively. The aforenoted
partners of DHS assailed the validity of the SCNs by filing writ
petitions before this Court. Those writ petitions also questioned the
constitutional validity of Section 132(4) of the Companies Act as well
as the jurisdiction of NFRA to investigate matters of professional and
other misconduct in respect of audits which had come to be concluded
prior to Section 132 coming into force.
40. On 01 May 2020, NFRA furnished a Draft Supplementary
20
to Mr. Udayan Sen pertaining to the
Audit Quality Review Report
audit conducted in respect of IFIN where additional allegations came to
be levelled. A copy of the DSAQRR was also forwarded to DHS on 14
May 2020. DHS on receipt of DSAQRR filed its reply on 25 July 2022.
This was followed by NFRA issuing yet another
Supplementary Audit
21
Quality Review Report
in which it alleged that the appointment of
DHS as the statutory auditor of IFIN was void. It was further alleged
that the writ petitioner was not only guilty of professional and other
misconduct but also that it had colluded with IFIN management. This
was followed by the issuance of the notice dated 06 January 2021 under
Section 132(4) in terms of which investigation was commenced.
41. The aforesaid action came to be assailed by way of a CM filed in
the pending writ petition on which the following order came to be
passed on 12 March 2021:-
19
SCN
20
DSAQRR
21
SAQRR
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“ CM APPL. 9896/2021 (of petitioner for directions)
1. This matter has been listed on urgent mentioning and the file has
been received by us post Court commencement hours.
2. We have heard the senior counsels for the petitioner/applicant
and the counsel for the respondents.”
3. While the senior counsels for the petitioner applicant seeks a
direction to the respondent no. 2/ National Financial Reporting
Authority (NFRA) to not act in furtherance of the impugned notice
dated 6th January, 2021 and the e-mails dated 5th March, 2021 and
9th March, 2021 (received after filing of this application) till such
time as this Court finally hears and decides the petition, the counsel
for the respondents draws attention to the earlier orders passed in
this petition on the application for interim relief, to the effect that
the steps taken by the respondents shall be subject to the final
outcome of the petition.
4. Having considered the application and finding that the petition is
listed for final hearing on 24th March, 2021 and considering the
professional reputation of the petitioner/applicant is at stake and
irreparable injury which the petitioner/applicant is likely to suffer
in the event of any action taken and/or being publicised, we are of
the view that the respondents should restrain themselves from
precipitating the matter till 24th March, 2021. We order
accordingly.
5. The counsel for the respondents, without prejudice to his right
and conditions, contends that though the petitioners has been given
sufficient time to file its reply to the impugned notice but at best
are entitled to further reasonable time and not to stay of any further
proceedings, since the said relief has already been declined.
6. We are today concerned only with this application and deem it
appropriate that the matter otherwise, whether to grant time or not
and/or what orders are to be finally passed on this application, be
left to the Bench before which the matter comes up on 24th March,
2021.
7. Thus, directing as aforesaid, list on 24th March, 2021, as already
scheduled.”
42. The same was made absolute in terms of our order passed on 14
November 2022 as seen hereinbelow:-
“1. We are informed that the pleadings are complete.
2. Counsel for the parties will file their written submissions, not
exceeding five pages each, at least three days before the next date
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of hearing.
3. List the matter on 25.01.2023.
4. Interim orders dated 28.01.2021 and 12.03.2021 are made
absolute during the pendency of the writ petition. CM
No.2979/2021 and CM No.9896/2021 shall, accordingly, stand
disposed of.”
43. It is apposite to note that the original DAQRR and which
culminated in the issuance of the AQRR dated 12 December 2019 apart
from laying allegations pertaining to violation of SA570 and the issues
emanating from the treatment of the audit of that entity as a going
concern, additional allegations pertaining to the independence of the
audit firm also came to be levelled. This becomes evident from a
reading of the following parts of the AQRR:-
“2.2 SQC 1 Compliance: Policies & Procedures
2.2.3 NFRA has closely examined all the documents and
information submitted by the Audit Firm. The information
submitted has been provided over 396 pages covering the basic
information. Many documents have further references to many
other documents. As explained by the Audit Firm itself, the basic
structure seems to have been obtained from their Global Network
Office. This is itself in the form of numerous documents with a
large number of inter-references. All this is to be supplemented by
the Level 3 India Specific Policies. Besides a perusal of the
documents clearly shows that it is only a portion of the total QC
documentation that has been provided and that there are numerous
other documents which are all said to be a part of policy
documentation. Overall, it is clear that the total QC policy
documentation will be considerably in excess of the approximately
500 pages that has been referred to in part 2.5 of the Audit Firm’s
letter dated 03rd August 2019.
2.2.4 The documentation of the Quality Control Policies and
Procedures of an Audit Firm should be in the form of a single
document that is both comprehensive and concise, and contains, in
a systematic, structured and coherent manner, all the dos and don’ts
that need to be adhered to by employees of the Audit Firm.
2.2.5 On the contrary, the policy documentation now provided by
the Audit Firm, which is admittedly only partial since the numerous
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other documents that have been referred to at various places therein
have not been provided, is clearly unstructured and unsystematic,
and put together by the assembling of a wide range of documents.
Most of the documents seem to be from the Global Network Entity
and has not been developed with reference to Indian laws, rules and
regulations.
2.2.6 Clearly there is a surfeit of information relating to laws and
regulations in foreign countries which the majority of the
workforce of the Audit Firm in India will have no occasion
whatsoever to deal with in the course of their employment.
2.2.7 In response to the prima facie conclusions of the NFRA that
the policies and procedures relating to independence, which are
required to be an integral part of the QC Manual, are not present in
the section titled “Independence” in Annexure 2, the Audit Firm
has stated that the policies and procedures for independence,
including threats to independence, are covered by DPM 1420-
Independence. The said document (DPM 1420-Independence),
which runs to 150 pages, has been carefully gone through. It is seen
that this document is based completely on US laws; it has no
reference whatsoever to Indian laws.
2.2.8 NFRA is reinforced in its conclusion that the Audit Firm does
not have a policy document as required by SQC1. Such documents
as have now been produced to the Authority do not conform, for
the reasons already made clear, to the requirements of SQC1. These
documents also have a very substantial part completely unrelated to
any operations in India. The sheer volume of the documents, and
their substantial irrelevance to Indian conditions, laws and
operations, will make it a certainty that the employees of the Audit
Firm will be left completely without any guidance about what
exactly is to be understood as the approved policy in any situation.
The absence of a policy document as required by SQC1 is a serious
non-compliance with the SAs.
2.2.9 NFRA concludes that the Audit Firm should, without any
further delay, prepare a comprehensive, concise and systematically
structured policy document to confirm to SQC1 and provide the
same to the Authority for its perusal at the earliest.
2.3 Compliance with Independence Requirements
2.3.8 The Audit Firm’s submission to the NFRA vide letter dated
July 17, 2019 confirms using the same senior personnel, i.e. CA.
Nishit Udani and CA. Rakesh Jain, on the audit engagement since
2008-09. Paras 25-27 of SQC1 requires the audit firm to establish
criteria for determining the need for safeguards to reduce this
familiarity threat. Since the SQC clearly restricts an EP on an
engagement for maximum of seven years, the engagement of senior
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personnel who contribute significant duration of time on audit
cannot override this time limit. Clearly, the Audit Firm has failed to
counter the familiarity threat or impairment of quality of
performance of audit due to using the same senior personnel over a
prolonged period.
2.3.9 WP 11104 says that “the visibility of Deloitte leadership with
the Senior Management of the company and IL&FS Group is
extremely strong. Our partners and directors, who have industry
experience of more than 15 years, have access to the Senior
Management of the Company. Udayan Sen (Lead Client Service
partner), Shrenik Baid (Engagement Partner) and Nishit Udani
(Engagement Director) have direct access to the Chairman,
Managing Director and CFO of the Company. Hence there is a
regular communication with the Senior Management on one to one
basis” (emphasis added). Ironically, this statement has been made
to support the Audit Firm’s assessment that there is no ROMM due
to fraud. However, this clearly indicates a familiarity threat to
independence that was not properly and adequately dealt with.
2.3.10 In situations where no safeguards are available to reduce the
threat to an acceptable level, the Code of Ethics says that the only
possible actions are to eliminate the activities or interest creating
the threat, or to refuse to accept or continue the assurance
engagement. (Section 290.24).
2.3.11 On a consideration of all the above evidence, NFRA
concludes that:
a) The Audit Firm has grossly violated the provisions of Section
144 of the Companies Act, 2013;
(b) The Audit Firm has been in serious breach of the Code of
Ethics;
(c) These violations have continued over several years;
(d) The violations have undoubtedly fatally compromised the
independence in mind required of the Audit Firm;
2.4 Role of Engagement Partner (EP)
2.4.1 The prima facie conclusion of the NFRA, on the above
matter, vide its communication dated 28th June, 2019, was that the
Engagement Partner, CA. Udayan Sen, being the Engagement
Partner as defined by para 6(b) of SQC1, had signed the audit
report notwithstanding the documented facts that he had completely
failed in discharging his obligations as Engagement Partner.
2.4.2 This prima facie conclusion of the NFRA was based on the
list of work papers reviewed by CA. Udayan Sen, which clearly
shows that almost all the important work of audit, i.e.,
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independence evaluation, risk assessment, audit plan, audit
procedures, audit evidence, communications with management or
those charged with governance (TCWG) was not
directed/supervised/reviewed by CA. Sen.
2.4.3 Further, the date-wise schedule of hours charged by CA.
Udayan Sen to the engagement as Engagement Partner was not
provided, nor was any reference in the Audit File provided in
support thereof. The NFRA further noted that the Audit Firm’s
statement that “Udayan Sen has spent about 180 hours (though
manually noted as 80 hours in the Audit File)” was self-
contradictory and therefore, bereft of any meaning.
xxxx xxxx xxxx
2.4.5 NFRA has examined the above contentions of the Audit Firm
and has concluded as follows:
(a) It would be a facetious argument to say that neither SQC1 nor
the SAs prohibit more than one partner of the firm from being
assigned to be the Engagement Partner. Not only is no support for
such an interpretation provided from anywhere within SQC1 or the
SAs, but also no such position is supported by any part of the
firm’s own SQC1 compliant policy manual. Furthermore, the
logical question that this position/argument would lead to is the
maximum number of such Engagement Partners that could be
permitted in a specific engagement. Could it then be 5 or 10, or
even more? Clearly, the absurdity of this argument need not be
explained further.
(b) Contrary to the assertion of the Audit Firm, SQC1 clearly
provides for only one Engagement Partner for an Engagement. Para
42 of SQC1 says that “The firm should assign responsibility for
each engagement to an engagement partner” (emphasis added).
(c) Para 42(a) of SQC1 provides that policies and procedures
should ensure that “the identity and role of the engagement partner
are communicated to key members of the client’s management and
those charged with governance”. Para 42(c) says procedures should
ensure that “the responsibilities of the engagement partner are
clearly defined and communicated to that partner”. Assuming only
for the sake of argument, and not in any way accepting the stand of
the Audit Firm that there can be more than one Engagement Partner
for an engagement in view of its patent illegality, the Audit Firm
has not been able to show any provision in its policies relating to
para 42(a) and 42(c) quoted above, or communications to TCWG,
or the partners concerned, pursuant to these paras, in the Audit File
that support its stand that there could be more than one
Engagement Partner for any Engagement.
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(d) The definition of Engagement Partner clearly refers to a single
individual (this is so in all the cases where SQC1 or SAs use this
term) who bears ultimate responsibility for the performance of the
engagement and the report that is issued on behalf of the firm. SA
220 clearly provides that the Engagement Partner shall take
responsibility for the overall quality on each audit engagement to
which the partner is assigned (para 8). Further paras in the same SA
elaborate on the responsibilities of the Engagement Partner. Having
more than one Engagement Partner may or may not enhance audit
quality. In the present case, the failure to discharge the role of
Engagement Partner by CA. Udayan Sen clearly shows that audit
quality has badly suffered.
(e) The “integral” designation of Shrenik Baid as the
engagement/review partner also discloses a great confusion and
lack of clarity about the respective roles of an Engagement Partner
and a review partner.
(f) For all the above reasons, NFRA considers that CA. Udayan
Sen alone can be accepted as Engagement Partner for this
engagement in terms of the definition provided in SQC1 and the
SAs.
2.4.6 NFRA has further examined the matter relating to aspects of
the engagement that were directed/supervised/reviewed by CA.
Udayan Sen in his capacity as Engagement Partner. Contrary to the
statement made at document 5/page 10 of the Audit Firm’s
response, WP No. 29702 (Manual) Closing Procedures Check list
has not been initialed by CA. Udayan Sen. CA. Udayan Sen’s
initials are seen only in that part of the WP No. 29702 which is
designated as the closing memorandum. This is in the form of a
report sent by CA. Shrenik. Baid to CA. Udayan Sen. This paper is
a summary of the procedures adopted during the course of the
audit. The very fact that CA. Shrenik Baid had to send such a
memorandum to CA. Udayan Sen is itself proof that CA. Udayan
Sen had not participated in any of the audit processes listed therein.
This is for reason that if CA. Sen had indeed participated in the
listed procedures etc., his presence there would have been
automatically recorded and the need for such a closing procedures
memorandum would not have arisen. No further evidence has been
provided by the Audit Firm to counter the conclusions of the
NFRA that CA. Udayan Sen was not involved with almost all the
important work of the audit engagement.
2.4.7 Also, the Audit Firm’s submission to the NFRA vide letter
dated July 17, 2019 states that CA. Udayan Sen was not using the
time recording system and hence his time spent on this assignment
is not available. No estimate of the same was given as it was said to
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relate to a period many years back. Hence, the Audit Firm and the
Engagement Partner are found noncompliant with requirement of
keeping records for minimum seven years as per paras 82- 83 of
SQC1, and monitoring the workload and availability of the EP as
per para 43. Further, the familiarity threat and violation of para 27
of SQC1 cannot be ruled out based on the submitted responses.
2.4.8 On consideration of all the above facts, the NFRA
(a) is reinforced in its conclusion that CA. Udayan Sen, being the
Engagement Partner as defined in para 6(b) of SQC1, had signed
the audit report notwithstanding the documented facts that he had
completely failed in discharging his obligations as Engagement
Partner;
(b) Concludes that the Audit Firm committed a grievous violation
of SQC1 and SA 220 in naming two partners as Engagement
Partners for this Engagement, thereby leading to disastrous loss of
accountability and total disregard of all principles of Quality
Control.
2.5 Communication with Those Charged With Governance
(TCWG)
2.5.1 The prima facie conclusion of the NFRA on the above matter,
vide its communication dated 28th June, 2019 was that:
(a) No evidence has been produced from the Audit File to show
what was discussed with the management/TCWG prior to the date
of the audit report and the financial statement signing date.
(b) There is no record of any communication addressed to the
Audit Committee/Management/TCWG by the ET.
xxxx xxxx xxxx
2.5.3 NFRA has examined the above contentions of the Audit Firm
and has concluded as follows:
(a) Clearly the Audit Firm has admitted that except the engagement
letter given to the company before commencement of the statutory
audit, and final presentation made to the Committee on 28th May,
2018, there was no other communication that was made to the
Audit Committee/Management/TCWG. The presentation made at
the time of the half yearly review represents action on a different
engagement.
(b) The Audit Firm’s contention that discussions with the
management are embedded within each work paper, as prima facie,
all information obtained by them from company are provided by
the management, and hence would not require separate
documentation is not acceptable, since this is a clear admission that
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nothing really was communicated to TCWG. This argument
completely ignores the requirement of SA 260 which is about
communication FROM the Audit Firm to the company on all
important and serious issues arising from the audit and which is
distinct from the documentation and evidence provided by the
company to the Audit Firm.
(c) The Audit Firm has also disregarded and violated the
requirements of para 49 (read with para A49) of SA 260 which
provides that “where matters required by this SA to be
communicated are communicated orally, the auditor shall
document them, and when and to whom they were communicated.
Where matters have been communicated in writing, the auditor
shall retain a copy of the communication as part of the audit
documentation. Documentation of oral communication may include
a copy of the minutes prepared by the entity retained as part of the
audit documentation where those minutes are an appropriate record
of the communication”.
(d) Apart from the fact that matters that were required to be
communicated (para 10 to 13 of SA 260) had not, in fact, been
communicated, this was also a case where there were serious issues
arising out of the RBI’s inspection report that needed to be brought
to the attention of TCWG and discussed with them before final
decisions on audit evidence, presentation and disclosure in the
financial statement etc. were taken. No facts have been provided by
the Audit Firm that the requirements of SA 260 and other relevant
SAs have been complied with by the Audit Firm.
(e) Similarly, as regards the argument that all work was done in the
company’s office, and hence communication with the management
was on a daily basis, is concerned, this argument, logically, would
mean that no documentation at all would be required.
Hence, the unacceptability of such an argument is obvious.
2.5.4 NFRA is, therefore, reinforced in its conclusion that the Audit
Firm has grossly failed in complying with the Requirements of the
SAs pertaining to communications with TCWG and the
management.
2.6 Evaluation of Risk of Material Misstatement (ROMM)
Matters
2.6.1 In its prima facie conclusions dated 28th June, 2019, NFRA
had, inter-alia, stated that:
(a) WP No.13501 indicates that in contradiction to the requirement
of Section 143(9) read with Section 2(7) and Section 143(10) of the
Companies Act 2013, the Audit Firm has made references to
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certain other International Standards instead of compliance to
Auditing Standards prescribed u/s 143(9).
(b) WP No. 13501 Minutes of the Engagement Team discussion
does not disclose participation of the Engagement Partner CA.
Udayan Sen.
(c) The Audit Firm in their WP No.13501 have mentioned different
statements with reference to the assessment of fraud risk factors.
There are significant contradictions in the assessment of ROMM
which lead to the conclusion that the assessment has been carried
out in a very casual manner as to result in a complete sham.
(d) WP No.13501 on ROMM provides a staggering conclusion “No
fraud risk factors or engagement risk have been identified”.
(e) Evidence of mismatch in the date of meeting and the date of
communication between the Engagement Team and Engagement
Partner has proved that assessment of ROMM is a complete sham.
Study of WP No.13501 shows that while the meeting for discussion
took place on 13th October 2017, the matters were already
communicated to all concerned in September 2017.
(f) Based upon the analysis of the working papers, it was observed
that certain important issues having been identified from the
whistle blower complaints and RBI inspection reports have not
been evaluated at all for the purpose of evaluation of ROMM.
(g) The Audit Firm has changed the risk assessment of the audit
assignment from “Normal” to “Greater than Normal” (GTN)
through a memo for change in engagement risk to GTN, taking into
consideration four factors. Considering the sequence of events
relating to the RBI inspections, it must have been assessed as
“Much Greater Than Normal” (MGTN) in the previous FY 2016-
17 itself.
(h) It was observed that the audit responses planned to reduce or
mitigate the identified risks and the actions taken based on the audit
responses to such identified risks are insufficient, improper and
inadequately carried out.
(i) Numerous details from the working papers have been provided
to substantiate the above conclusions of the NFRA. For the sake of
brevity and avoiding unnecessary repetition, the details of the same
are not extracted and re-produced here.
xxxx xxxx xxxx
2.6.14 To summarise,
(a) The Audit Firm has clearly indulged in a deliberate
misrepresentation of a material fact;
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(b) There has been a complete lack of clarity, and utter confusion
has prevailed, in the ROMM assessment;
(c) Important aspects of the auditee company’s situation, such as its
SI-NBFC status, the very disturbing RBI Inspection Reports on the
company, the wide discrepancies in reporting of NPAs, etc., have
not been given adequate importance in the ROMM assessment;
(d) Accordingly, the audit responses have been grossly inadequate;
(e) Such procedures as have been performed have had no link to the
real ROMM;
(f) In crucial matters, the Audit Firm has relied completely on the
management’s representations;
(g) The Audit Firm has totally failed in communicating to
TCWG/the management the key issues arising out of the audit.
2.7 RBI Inspection Matters – TTSL Shares and Derivatives
Assets
2.7.1 With regard to the above matter, the NFRA had
communicated the following prima facie
observations/comments/conclusions in its letter dated 28th June,
2019:
(a) The Engagement Team (ET) had not obtained any
justification/explanation as to how the company had accepted the
transfer of unquoted shares of TTSL whose valuation even on the
date of transfer was only zero as settlement as against Rs. 323.15
Crores loans outstanding from the Siva Group. Clearly, 100%
provision, if not write off, against the said loans was due to be
made even on 31st March, 2015, in line with RBI directions.
(b) The so called put option backing the shares was not even a fig
leaf for the reasons detailed therein.
(c) The Siva Group, as a counter party was completely un-
creditworthy.
(d) The Shareholder’s and Option Agreements does not form part
of the Audit File. There is, hence, no evidence that the Auditor has
verified or checked the agreement.
(e) The Guidelines on Derivatives Contracts do not apply to the put
option.
(f) The requirements of Section 143((1)(a) of the Companies Act,
2013 had not been complied with.
(g) The Black Scholes Option Pricing Model was inapplicable in
the present case.
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(h) The worksheet supporting the option valuation as per the Black
Scholes Model appears to be a calculated fraudulent work paper
having no audit substance. The calculations seem, for reasons spelt
out in detail, to have been made in order to support the company
management’s attempt to bypass the RBI directions to provide for
100% of the value of the TTSL shares.
(i) There is a clear conflict of interest in engaging DTTI LLP to
verify the valuation of the derivative assets.
(j) As a consequence of all the above, the valuation of the
derivative assets (in the form of the put option) of Rs. 184.31 crores
is completely unjustified and not based on any objective evidence
and appears to be a calculated fraud in support of the management
to inflate the profit.
(k) Further, there is no disclosure about the details of the valuation
of the derivative assets in the financial statements. Note 9 (f)
forming part of the financial statements is completely inadequate
and misleading.
(l) Financial statements of the counter party i.e. Shanmugha Real
Estate and Properties Private Limited (SREPPL) is not in the Audit
File. There is no evidence that this has been examined. There is
also no evidence regarding valuation of the land parcel of Hill
County Properties Limited (HCPL).
xxxx xxxx xxxx
2.7.6 After considering all the above matters, NFRA concludes as
follows:
(a) The Audit Firm did not obtain sufficient, appropriate audit
evidence to support the value of the derivative asset included in the
Balance Sheet as at 31st March, 2018;
(b) The Audit Firm did not do the due diligence necessary to obtain
and critically evaluate such evidence as was provided to it by the
management;
(c) Accounting guidelines that are clearly inapplicable have been
used to justify the treatment given;
(d) In order to offset the impact of provisioning that could not be
deferred any more, on account of RBI insistence, the Audit Firm
went along with the management in including a derivative asset of
zero value in the Balance Sheet at over Rs 180 crores, and taking
credit in the Profit and Loss Account. This resulted in a very
material misstatement of the financial statements.
2.8 RBI Inspection Matters : NOF – CRAR
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2.8.1 With regard to the above matter, the NFRA had
communicated the following prima facie
observations/comments/conclusions in its letter dated 28th June,
2019:
(a) The minutes/decisions of the Board of Directors taken in 2007
was not available in the Audit File.
(b) The Engagement Team (ET) had not evaluated the
management’s stand based on the applicable law, or the
Regulator’s directions. The ET has not displayed the professional
skepticism required by the SAs.
(c) The ET had accepted the management’s internal documentation
of matters discussed in RBI office without asking for or obtaining
any confirmation from the RBI about the same.
(d) The ET had failed to take note of the definition of “companies
in the same group” as mentioned by the Regulator in its inspection
report. This definition is what is given according to para II of the
explanation to Section 45 IA of the RBI Act, 1934. The ET had
unquestioningly accepted the management’s position on this matter
that there was no clarity in the definition of “companies in the same
group” in the Act and that there were multiple interpretations
possible.
xxxx xxxx xxxx
2.8.3 The NFRA has closely gone through all the points made by
the Audit Firm and its conclusions are as follows:
(a) As to the value of the minutes of discussions with the officers of
the RBI relating to the disclosure to be made under the accounts,
and the extent to which credibility can be given to such a “written
representation”, the detailed conclusions of the Authority have
already been provided in Section 2.9 below.
(b) As far as Annexures 4.9A and 4.9B are concerned, these
documents cannot be accepted as evidence of due performance of
audit procedures by the Audit Firm since they do not form part of
the Audit File. There is nothing in the Audit File, or in the
submissions made by the Audit Firm, to corroborate the claim
made that these documents had been taken into consideration in the
audit process. Even if these two documents were taken into
consideration, without any in way conceding any status to them as
admissible audit evidence, it is clear that are of absolutely no value
whatsoever for the following reasons:
(i) The notification bearing reference DNBR.009/CGM(CDS)2015
dated March 27, 2015, that has been referred to in the company’s
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letter dated March 31, 2015, was superseded by Master Directions
DNBR.PD.008/03.10.119/2016- 17 dated 1st September, 2016.
(ii) The reply from the RBI dated 5th May, 2015, has no bearing on
the definition of calculation of Net Owned Funds (NOF).
(iii) As has been pointed out by NFRA even initially, NOF has
been defined by RBI Act, 1934. There is no warrant, therefore, for
trying to look for definitions of NOF in other documents.
(c) The contention of the Audit Firm that “companies in the same
group” have not been defined by the Companies Act, 1956, is
clearly incorrect. The Audit Firm has referred to Section 370(1B)
of the Companies Act, 1956 which defines “companies under the
same management”. However, the Audit Firm has ignored the
definition of “companies under the same group” as provided in
Section 372(11) of the Companies Act, 1956.
(d) For reasons explained at length under the NFRA prima facie
th
conclusions dated 28 June, 2019, the stand taken by the company
about the continuing applicability of the relevant provisions of the
Companies Act, 1956, was clearly wrong under law.
(e) Given the above situation it is clear that the Audit Firm has
failed to comply with the SA 250 relating to Consideration of Laws
and Regulations.
(f) As already explained in the prima facie conclusions, this is also
not a situation that comes within the scope of SA 705 relating to
Emphasis of Matter since the matter was NOT appropriately
presented or disclosed in the financial statements.
2.9 Management’s Written Representations relating to RBI
Inspections
2.9.1 In its prima facie conclusions dated 28th June, 2019, the
NFRA has stated that:
There is no sufficient evidence available in the Audit File to show
that the Audit Firm has complied with the requirements of para 9 of
SA 500 in the case of the matter of RBI’s approval for the
disclosure to be made in the accounts.
xxxx xxxx xxxx
2.9.3 NFRA has considered the above responses in detail and its
conclusions are as follows:
(a) Admittedly, the issue relating to calculation of NOF and CRAR
was a very serious issue about which there had been protracted
correspondence between the management and the RBI. Admittedly
also, the RBI had not changed its stand on the matter, or in any way
accepted the company’s position notwithstanding the company’s
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efforts over a long period of time. This background and context
should have informed the Audit Firm’s evaluation of any evidence,
including management representations, that had been provided to it.
(b) The Audit Firm has quoted para 15 of SA 580 and has said that
ET did not come across any information that should have caused it
to have any concern about management competence, integrity etc.
However, at the same time, they have failed to take note of other
requirements of SA 580 as follows:
(i) Although written representations provide necessary audit
evidence, they do not provide sufficient appropriate audit evidence
on their own about any of the matters with which they deal.
Furthermore, the fact that the management has provided reliable
written representations does not affect the nature or extent of other
audit evidence that the auditor obtains about the fulfilment of
management’s responsibilities, or about specific assertions (para 3).
(ii) In particular, if written representations are inconsistent with
other audit evidence, the auditor shall perform audit procedures to
attempt to resolve the matter (para 16).
(iii) The Auditor shall disclaim an opinion on the financial
statements in accordance with SA 705, if there is sufficient doubt
that the written representations are not reliable (para 19).
(c) Clearly, the requirements of SA 580 needed the Auditor to
obtain corroborating evidence for the matters covered by the
written representation before accepting the same. Clearly, the
claims of the management about the outcomes of the meetings that
they had with RBI were completely inconsistent with the stand of
the RBI that had been in evidence throughout the period when this
matter was under discussion. In other words, the written
representation forwarding the unacknowledged minutes of the
meetings with the RBI officers was inconsistent with this
overwhelming past evidence, and the Auditor was duty bound in
terms of para 3 and para 16 of SA 580 to perform other audit
procedures to attempt to resolve the matter. And in the event of
being unable to resolve the matter, a disclaimer of opinion needed
to have been made in line with para 19 of SA 580.
2.9.4 The Audit Firm has said that the Audit Committee had
considered the management update on their meetings with RBI
officials and as such, the Audit Firm is entitled to rely on the
information provided to them. It is seen that the said Audit
Committee meeting was held on 28.05.2018, the date on which the
financial statements were approved by the Audit Committee and
the Board and also communicated to the Stock Exchange (after
having duly notified the Stock Exchange in advance about the date
and agenda of such meetings). Clearly, no significance can be
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attached to the supposed “ratification” by the Audit Committee of
the management update as at this stage.
2.10 Evaluation of the work of Management’s Expert
2.10.1In its prima facie conclusions dated 28th June, 2019, NFRA
had, inter-alia, stated that:
(a) The Audit Firm has failed to present their responses specifically
against the questions asked by the authority.
(b) WP No.22006.01 reveals that that evaluation of the work of a
Management Expert is based upon ISA 500.A38 and not SA-500
which is not in compliance with Section 143(9) read with section
2(7) of the Companies Act, 2013.
(c) Further the said WP ought to evaluate the competence of BDO
India LLP, whereas the document includes evaluation of Knight
Frank at various places and not of BDO.
(d) The Engagement team has not evaluated the work of the experts
or obtained understanding of the work of such expert. The auditor
is grossly negligent in performing his obligation in this regard since
the engagement team has not performed the actual audit procedures
in accordance with the prevailing law and standards.
(e) Having examined WP 13305, the procedures performed on IPE
are unclear. With reference to “Manual Approvals” and other IPEs
in the nature of “validating” the Audit Firm has failed to fulfill the
requirement of Para 9 of SA 500.
2.10.3The NFRA has examined the above contentions of the Audit
Firm and has concluded as follows:
(a) The company has been incorporated in India. Reference to
global standards for any reason does not meet the essence of the
engagement and is not in compliance with the section 143(9) of the
Act.
(b) Repetition of a typographical error in the same document
reduces the reliability of the audit work paper. Quoting the name of
“Knight Frank” in a working paper for evaluation of competence of
“BDO India LLP” makes it totally null and void.
2.10.4 With reference to the compliance with the requirements of
SA 500 in relation to using the work of a management’s expert,
NFRA has examined the working papers referred in the response of
the Audit Firm. The Audit Firm has provided the memos prepared
by the Internal Fair Value Specialists of the Firm or Associate
Concern of the firm as well the valuation report provided by the
various valuation experts.
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2.10.5 On a consideration of all the above, NFRA does not wish to
pursue this matter further at this stage. However, if, on a further
examination of the matter, it becomes necessary to take any action,
the matter will be considered at that stage.
2.11 Evaluation of the Going Concern Assumption :
2.11.1 In its prima facie conclusions dated 28th June, 2019, NFRA
stated as follows:
(a) The Audit Firm had not made the relevant enquiries of the
management as required by para 10 of SA 570.
(b) The Audit Firm had failed to capture the significance of the RBI
Inspection Report and the non-compliance with the minimum NOF
and CRAR requirements to continue the NBFC business and, in
doing so, paras 16 onwards of SA 570 had not been complied with.
(c) The Audit Firm had admitted that the company had not made
any assessment of the going concern assumptions. Also that the
company had not forecasted any future cash flows nor was any
future action plan drafted. However, the Audit Firm had concluded
that considering the Indian bullish market and past trend of the
performance of the company, it was of the view that the going
concern assumption was appropriate. This audit procedure and
conclusion was in gross violation of SA 570.
(d) The assertion by the Audit Firm that they had discussed with
the management and understood the plans they had proposed to
st
comply with the RBI requirements by 31 March, 2019, was false
since no such plans were available in the Audit File.
xxxx xxxx xxxx
2.11.3NFRA has considered the response of the Audit Firm and has
concluded as follows:
(a) The Audit Firm has not provided any evidence whatsoever to
contradict their own admission that company had not made any
assessment of the company’s ability to continue as a going concern
and that the company had not forecasted any future cash flows nor
was any future action plan drafted. However, the Audit Firm has
asserted that, attempting to draw authority from para A9 of SA 570,
that it is not the auditor’s responsibility to rectify the lack of
analysis by management. They have also quoted the same
paragraph to say that the auditor’s evaluation of the appropriateness
of the management’s assessment may be made without performing
detailed evaluation procedures if the auditor’s other procedures are
sufficient to enable the auditor to conclude about the management’s
use of the going concern assumption.
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(b) The above stated argument of the Audit Firm is not only
violative of the spirit but also the very letter of SA 570. As clearly
provided by para 10(b) of SA 570, the auditor was duty bound to
discuss with the management the basis for the intended use of the
going concern assumption in a situation where the management had
itself not performed such an assessment, as was the admitted
situation in this case.
(c) Para 10(b) of SA 570 is under the Requirement portion of the
SA. As is the convention relating to the Requirements portion, all
such Requirements are made Unconditional and Mandatory by the
use of the word “shall”. Given the situation described in the
paragraph, the Audit Firm did not have any discretion in the matter.
The discussion with the management and enquiry with them by the
SA required, had to be complied with and the same had to be
documented as per the requirements of the SA relating to
documentation. By their own admission, the Audit Firm has not
conducted any such discussions and enquiry, neither is any proof of
such discussion and enquiry available in the Audit File.
(d) The attempt to draw support for what the Audit Firm has done
from para A8 of SA 570 (the para stands renumbered as A9 in The
Revised SA 570 only) it itself a gross distortion of what is
contemplated and permitted by that paragraph. The context referred
to is only a situation where management has not made any detailed
analysis. It does not cover a situation as this where, admittedly, no
analysis at all was available.
(e) The contention of the Audit Firm that the Independent Directors
of the company were, by all, by all accounts knowledgeable in
financial and accounting matters, and that the Audit Firm had the
right to rely on them and that it was, in any case, their (Independent
Directors) responsibility to alert the auditors in case they had any
doubt about the going concern assumptions is clearly evidence of
the Audit Firm’s gross dereliction of duty. Taken to its logical
conclusion, this argument can be used to support a complete
abdication of its prescribed duties by Audit Firm.
2.11.4 As far as action plan for compliance with the RBI guidelines
on NOF is concerned, the Audit Firm had initially informed the
NFRA that they had discussed with the management and
understood the plans. They (the Management) had proposed to
comply with the RBI Requirements by March 31st, 2019. Since no
such plan is available in the Audit File, this claim of the Audit Firm
was dismissed by NFRA as being false. The Audit Firm has replied
saying that the said plan was placed before the Audit Committee
and approved by them and thereafter placed before the Board on
May 28, 2018. However, since the Board wanted to submit a more
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detailed plan to the RBI, they had sought time till June 30, 2018.
The Audit Firm contends that this cannot be construed to imply that
the plan did not exist on May 28, 2018. In this connection, it is
being clarified (though a plain reading of NFRA’s earlier
contention should not require any clarification at all) that it was
never contended by NFRA that a plan did not exist on May 28,
2018. This issue had not come up for NFRA’s consideration at all.
What was instead asserted by NFRA is that no such plan was found
in the Audit File and therefore could not have been discussed with
the management on the grounds that any discussion about such a
plan between the Audit Firm and the management would also have
had to be documented appropriately in the Audit File and the Audit
Firm’s conclusion thereon also duly recorded. Since no such
evidence was available in the Audit File, NFRA had concluded that
the Audit Firm’s claim that they had discussed the plans with the
management and understood the same, was patently false. Some
details of the alleged plan have been placed at pages 51 and 52 in
response to para 11 and repeated again at pages 68 to 69 of the
same response. Both these references and details have to be
considered only as an afterthought and a subsequent creation of
audit evidence since there is no substance of these matters in the
Audit File. The NFRA, therefore, is reinforced in its conclusion
that the statement about discussions with the management on the
compliance plan is false.
2.11.5 On a consideration of all the above, NFRA concludes that
the Audit Firm has completely failed to obtain sufficient,
appropriate audit evidence to assess the management’s use of the
going concern assumption.
2.12 Documentation of EQCR Processes
2.12.1 The prima facie conclusions of the NFRA on the above
matter vide its communication dated 28th June, 2019, inter-alia,
were that
(a) The work papers do not identify or document any discussion
about significant matters between EQCR team and the Engagement
Partner.
(b) The EQCR was not carried out in a timely manner at
appropriate stages during the engagement.
(c) The EQCR required an in-depth examination to be made of the
issues arising out of the RBI inspection and directions.
Documenting the EQCR process in this connection, and the
conclusions arrived at could not be reduced to mere check box
“Yes” or “No” responses.
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(d) Modification carried out in the RoMM mentioning the same as
both “adverse” and “EOM” is internally inconsistent and self-
contradictory.
(e) The EQCR has not noted the absence of any communication at
all between the ET and TCWG.
(f) A major inconsistency between the time said to have been spent
on the EQCR by the partner and the Director compared with the
dates of the EQCR indent and the documents said to have been
reviewed by them.
xxxx xxxx xxxx
2.12.3 The NFRA has examined the above contentions of the Audit
Firm and has concluded as follows:
(a) The mandatory requirements of the SAs have to be considered
holistically and harmoniously. It would not be acceptable to look at
any single extract from the SAs that ignores the overall context. It
would be, therefore, necessary to consider the “Nature and Purpose
of Audit Documentation” (paras 2 and 3 of SA 230) as providing
the overall context for audit documentation.
(b) Furthermore, paras 8 to 11 of SA 230 dealing with the Form,
Content and Extent of Audit Documentation will also have to be
considered.
(c) Going by the above, it can hardly be contended, as Audit Firm
has sought to do, that mere check box “Yes” or “No” responses are
sufficient to “enable experienced auditor expert having no previous
connection with the audit to understand” the work that has been
performed by the EQCR Team.
(d) Both paras 24 and 25 of SA 220 lay down what information
needs to be documented. The word “document” cannot be
interpreted to mean mere ‘yes’ or ‘no’ responses to a set of
standard questions prepared as a general all purposes template. The
documentation needs to have specific reference to the facts of the
case in question and must provide the evidence as required by the
SAs all taken together.
(e) Therefore, the documentation of the EQCR processes does not
provide any evidence of the proper and complete performance of
the EQCR work by the EQCR Team.
2.12.4 NFRA, therefore, concludes that the Engagement Quality
Control Review was not carried out in the manner stipulated by
SQC1 and other applicable SAs.”
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44. The DSAQRR which thereafter came to be issued on 01 May
2020 proceeded to lay various allegations with respect to the treatment
of investments and a purported violation of the obligations flowing
from SA500 and SA200. These allegations pertained to the valuation
ascribed to investments and related party transactions as well the
acceptance of those declarations in the course of an audit.
45. The writ petitions which initially came to be preferred before this
Court were those instituted by Mr. Udayan Sen and Mr. Shrenik Baid,
who were Engagement Partners in DHS in respect of the audit and Mr.
Rukhsad Daruvala who was the EQCR Partner in respect of the said
audit. When those writ petitions were initially entertained by the Court,
on 21 May 2020 interim orders were passed to the effect that if any
final orders come to be framed by the NFRA pursuant to the SCNs
under Section 132(4) of the 2013 Act, the same would not be given
effect to till the next date. On 26 June 2020 the order of 21 May 2020
thereafter came to be extended further.
46. On the writ petition preferred by DHS, the Court on 28 January
2021 had initially provided that any action that may be taken by the
respondents would be subject to the outcome of the writ petition. On 12
March 2021 while considering CM No. 9896/2021, however, the Court
provided that the respondents would stand restrained from precipitating
the matter till the next date of listing. It is these interim orders which
have continued on the writ petition.
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47. It would also be apposite to briefly take note of the facts as they
22
obtain in WP(C) 11737/2021. SRBC & Co LLP , the writ petitioner,
is a firm of CAs which was appointed as the joint auditor of
IN&FS
23
Transportation Networks Limited
for FY 2017-18. It is its case, that
since certain other entities stood appointed as statutory auditors, a
limited review alone for the quarter ending 30 June 2018 was
performed by it jointly with those auditors. It is further disclosed that in
the Annual General Meeting held on 29 August 2017 the other joint
auditor rotated out and as a result of which SRBC came to be appointed
as the statutory auditor for FY 2017-18.
48. It is its case that in the course of undertaking the limited review
for the quarter ending 30 June 2018, SRBC had observed that ITNL had
incurred losses with no significant progress being made with respect to
re-financing of loans, realization of claims and monetization of assets.
It had also alluded to the subsidiaries of ITNL who had filed notices of
cure before relevant authorities and being unable to service their debt
resulting in defaults and which in turn had led to the credit rating of the
company being downgraded by ICRA. It further asserts that it had in its
limited review report itself included a paragraph highlighting material
uncertainties relating to ITNL’s ability to continue as a going concern
and was one of the first auditing firms to highlight this issue. SRBC
then alludes to the audit quality review which was initiated by the
NFRA in February 2019.
49. Pursuant to the initiation of that review, the petitioner is stated to
have submitted the audit file and records to NFRA on 22 March 2019.
22
SRBC
23
ITNL
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This was followed by communications of 17 May 2019 and 03 July
2019 by NFRA calling upon SRBC to respond to the various queries
raised therein. After a detailed exchange of correspondence in the
course of that audit quality review the NFRA issued its Prima Facie
Conclusions on 24 March 2020. This was followed by Supplementary
Prima Facie Conclusions which were issued on 17 April 2020. The
summary of the Prima Facie Conclusions are reproduced hereinbelow:-
“ 5. Summary of PFC
The following is a summary of the most important of the PFC.
Details of the evidence in support of these PFCs, and the reasoning
leading thereto, are provided in the subsequent Sections of this PFC
Report.
(a) The initial appointment of SRBC & Co LLP, and the
continuation of SRBC & Co LLP, as statutory auditor of ITNL was
prima facie illegal and void. Nevertheless, NFRA has proceeded to
examine compliance by the Audit Firm with the SAs, in their
performance of this Engagement, without prejudice to this prima
facie finding.
(b) The Audit Firm has failed to appropriately and sufficiently
evaluate the use of the going concern basis of accounting by the
Management and has thus failed to note the implications thereof in
the Auditor’s Report.
(c) In assessing the Risks of Material Misstatements (ROMM), the
Audit Firm did not discuss the susceptibility of the financial
statements to material misstatement due to fraud, did not identify
and assess revenue recognition and management override of
controls as presumed risk, which ultimately resulted in several
violations of applicable Ind AS and SAs, as highlighted in the PFC
Report, thus making the Financial Statements subject to serious
material misstatements and therefore unreliable.
(d) ITNL’s financial exposure to its subsidiaries, associates and
joint ventures amounting to Rs.10,805.15 crore was not properly
valued as per the applicable Accounting Standards because the
Audit Firm had failed to obtain sufficient appropriate evidence to
justify the valuation of ITNL’s investment and loans to these
entities.
(e) The Company’s losses during 2017-18 were understated by at
least Rs.1138.1 crore on account of unjustified reversal of ECL on
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loans given to the SPVs, and on trade receivables. NFRA further
concludes that there is a clear attempt to obscure material
information in the Financial Statements by vague and misleading
disclosures by the management regarding ECL reversal.
(f) The Audit Firm has not evaluated the work done by
Management’s Expert while adopting the Expert’s opinion, and
thus the Auditor’s opinion expressed under the Companies’
(Auditor’s Report) Order, 2019 (CARO) clause (iii) stating that the
terms and conditions of the Company’s loans of Rs. 111.20 crore to
joint ventures and to the not-fully owned subsidiaries at zero
interest rate are not prejudicial to the company’s interest, is not
supported by sufficient appropriate evidence and is in violation of
requirements of SA 500.
(g) The Audit Firm’s EQC partner has failed to report material
misstatements known to him to appear in a financial statement with
which he is concerned in his professional capacity and has not
exercised due diligence to obtain sufficient information to
objectively evaluate the significant judgements of the Engagement
Team and conclusions reached by them.
(h) The Audit Firm has not determined the persons comprising
TCWG. Further, NFRA has not found any communication to
TCWG relating to Auditor’s independence, and the relationships
and other matters between the firm, network firms.
(i) The Audit Firm has failed to maintain documents as per SA 230.
The integrity of the Audit File is questionable due to tampering and
inconsistency pointed out at several places in the PFC Report.”
50. The Supplementary Prima Facie Conclusions then proceeded to
observe as under:-
“INTEGRITY OF AUDIT FILE AND AUDIT FIRM’S IT
CONTROLS REVIEW
4. To assess the extent of compliance with SQC 1 and SA 230 for
the requirements discussed above, NFRA wrote to the Audit Firm
on 17-Oct-2019 seeking clarifications and proof of authenticity of
date of preparation of WPs. The Audit Firm was asked to provide
NFRA the following:
a. The Audit firm’s administrative procedures/instructions
relating to building up/organizing/closing the Audit File and
the safeguards incorporated therein to ensure the integrity of
the said Audit File, and to prevent any tampering thereof; and
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b. Details of the IT systems and processes that are designed by
the Audit Firm to ensure tracking of all
additions/deletions/modifications of the electronic portion of
the Audit File so as to obtain verifiable and tamper proof time
logs of all such actions.
5. The Audit Firm responded to NFRA’s letter dated 17-Oct-2019
vide their letter dated 21-
Oct-2019. Following are the key responses:
•
“These are complex IT related matters for which we are
seeking suggestions from the Information and Technology
team and also from the global teams dealing in IT, as we use
the online audit documentation tool, Canvas, under licence
from Ernst & Young Global.”
• “ Our documentation and archival policy clearly
demonstrates the minimum requirement documentation and
archival of the audit file. Please refer to documentation and
archival policy document.”
•
“Key points from document and archival policy shared are as
follows:
•
We prepare our documentation using our electronic
documentation tool.
• Paper documentation is signed off as reviewed and prepared
on the paper documentation , in accordance with the
requirements of SUP-RVW. Whenever possible, we convert
paper documentation into electronic form via a scanning
device (e.g., into a PDF document) or via an EY approved
’app’ (e.g., using the camera feature in the EY Engage app)
to include in our electronic documentation tool . We apply
procedures to generate an electronic version that is faithful
in form and content to the original paper document.
•
Unless prohibited by auditing standards, laws or regulations,
or a document preservation order, we destroy the paper
documentation when the electronically converted document
is included in our electronic documentation tool.
•
We date documentation as of the actual date that the
documentation is signed, and not as of an earlier date, even
when the work or review was partially or completely
performed earlier.
•
Signing off on an audit procedure or task may not be
sufficient documentation that a procedure was performed,
evidence was obtained or a conclusion was reached. As we
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prepare our documentation, we choose our words carefully
and ask ourselves whether what we write would be clear to
an auditor who has no previous connection to the audit.
• We sign off and date our documentation only when it is
sufficiently complete to be able to conclude on the procedures
performed. When sign-offs are made after the auditor’s report
date, but before the documentation completion date, we add a
memo or other documentation explaining the difference in
sign-off dates in accordance with DOC+ARC 4.3.
•
We archive our documentation on a timely basis after the
date of the auditor’s report and when our procedures and
documentation are complete. The documentation completion
date is no later than 21 days after the date of our auditor’s
report / other deliverables. The electronic i.e., CANVAS
archival to be commenced after the paper documentation is
submitted to the Admin teams.
•
When finalizing our documentation, we review the electronic
and paper documentation to determine that we have a
complete and final set of documentation to support our
opinion. Administrative changes that may be made to
documentation during the assembly or finalization process
include:
•
Documenting audit evidence that we obtained, discussed
and agreed with
• relevant members of the audit team prior to the date of
our auditor’s report
•
Adding an original confirmation response previously
received via fax or email (although we also retain the
faxed/email copy as it evidences the original work
performed)
•
Clearing minor review notes (e.g., those that involve
cosmetic changes or cross-references to evidence that
already exists)
• Accepting revisions in Word documents where the track
changes functionality was used
•
Performing routine file-assembling procedures such as:
•
Deleting or discarding superseded documentation
•
Sorting, collating and cross-referencing final documents
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• Signing off on completion checklists relating to the
archive process
•
Preparing the management letter
•
After the documentation completion date (after
archiving our documentation), we do not delete or
discard our documentation of any nature before the end
of its retention period, even if the documentation has
been archived in error.”
6. Contrary to the policies quoted in the response of the Audit Firm,
NFRA has observed:
a. instances of audit evidence dated after the date of
Auditor’s Report . Two such instances from the audit file
have been laid out in Annexure I;
b . mismatches between soft copy (EY Canvas files) and hard
copies of WPs provided by the Audit Firm. For example, the
copies of WP ‘ITNL TPE Minutes March 2018’ and WP
‘ITNL TPE M18(ppt)’ made available in the hard file
(Hardcopy File-1, pages A1-86 to A1-88 and A1-90 to A1-
123) are not identical to the copies in EY Canvas. Eleven
such instances from WP ‘ITNL TPE Minutes March 2018’
have been laid out in Annexure II; and
c. mismatch between the signoff dates mentioned in EY
Canvas File with workpaper document properties and the
dates mentioned within the documents. Four such cases have
been laid out in Annexure III.
7. Further, NFRA observed the following from examination of the
Audit Firm’s working papers in CANVAS, and the Audit File :
a. The Audit Firm maintains separate ‘Engagement Codes’ for
each audit engagement and every audit team member has to
submit time-sheet for number of hours worked on respective
engagement. However, the same does not happen in practice
and no control or monitoring is found in the system of the
firm. Therefore, NFRA could not satisfy itself that the audit
procedures had been performed, documented and reviewed
before the date of Audit Report from an inspection and
comparison of the audit file logs of signoff dates with
document properties and time-sheets,.
b. Any audit team member can edit a document in electronic
audit file at any time before or after review signoff by the
EP. There is neither any log of when the changes are made
nor to what extent changes are made. Therefore, NFRA
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concludes that the Audit documentation cannot identify,
beyond doubt, about who has performed the audit work and
the date such work was completed, and who has reviewed the
audit work performed and the date and extent of such review.
c. There is no monitoring or control over the policy of
modifications that can be made to audit documentation. There
is no track of what has been modified in the audit file
documentation post the audit report signoff. Practically, an
entirely new documentation of audit can be created with
no logging or monitoring or control over the same.
Therefore, NFRA concludes that the audit firm has no
controls that can ensure that the audit documentation has
been completed in a timely manner without performing any
further audit procedures or changes, other than administrative
changes, after the audit report date.
d. No review takes place for the files modified after a review by
the designated reviewer of the audit team. Therefore, there is
sufficient reason to believe that the audit firm’s SQC policy
is not practiced and adhered to.
8. Based on the above-mentioned observations, NFRA
communicated to the Audit Firm vide letter dated 24-Jan-2020, that
NFRA would be engaging NFRA’s IT consultants to examine the
Audit firm’s IT systems, and processes related thereto, to verify the
integrity of the electronic portion of Audit File. NFRA, through its
IT consultants, conducted an in-person review of the Audit Firm’s
IT systems and procedures of Audit File documentation and
archival, along with the respective controls and monitoring
procedures. The Audit Firm’s IT experts as well as Audit Partner
were present to demonstrate and respond to NFRA’s queries. The
Audit Firm’s team was asked the queries as listed in Annexure IV,
for which the Audit Firm’s team requested time to come back
stating the following reasons:
a. The Audit Firm uses the proprietary audit application and audit
methodology licensed from Ernst & Young Global Limited
(EYG).
b. The Audit Firm requires time to consult with the global IT
team, in order to respond to NFRA’s queries. Subsequently the
Audit Firm had provided replies to the queries vide their
emails dated 25- Feb-2020 and 13-Mar-2020.
9. During the in-person review, and after examining the replies
furnished, the NFRA’s IT consultants observed following
vulnerabilities in the electronic platform (EY Canvas Application)
with respect to the attributes mentioned in the aforesaid Para 3:
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a. The details of changes made within a document/ form in the
Audit Application are not captured and logged for the
application, and since the older versions of the
document/form are not available either, it is not possible to
track the changes made to a document. All the logs and
related reports, including the "Review Notes" added to the
Audit File, from the start of the Audit are wiped off by the
application before Archival of the Audit File, and therefore
the logs and reports are not available for future inspection.
[Indicating absence of attributes mentioned in Para 3(a),
version history and security and 3(b) system logs and its
monitoring]
b. No logging and monitoring of EY Canvas server and
database (DB) events. The Audit Firm has not clearly
answered how access was limited to ensure segregation and
access only on a as per need basis, what is the process of
maintaining generic IDs, can the server/DB administrators
access EY Canvas Audit Files, etc. The Security testing
reports, specific to EY Canvas and archival applications and
servers, have not been shared. Further, the supporting process
documentation has also not been shared so that it is not
possible to understand the scope and frequency of security
assessments. [Indicating absence of attribute mentioned in
Para 3(a), version history and security, and 3(b) system logs
and its monitoring]
c. Based on the input received from the Audit Firm, EY
development team follows ITIL processes for development
and maintains a change management process for all changes
to the EY infrastructure globally. The change management
process uses a controlled release process with appropriate
testing and validation processes. However, the SDLC Process
document was not shared for review to sufficiently conclude
if security tests such as secure code review and dynamic
testing were part of the SDLC process. Further, infrastructure
change management process document was also not shared
for review. Not building security controls into the design of
the application as part of Software Development Life Cycle,
while designing upgrades, could lead to an application
vulnerable to intentional/unintentional modifications.
[Indicating absence of attribute mentioned in Para 3(a),
version history and security]
d. An uploaded document, which has been marked as
"Prepared" and "Reviewed" by someone, can be replaced
with another document not necessarily prepared and reviewed
by the same person, without affecting the Sign-offs in the
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original document. Further, as the details of changes made to
a document are not captured, this activity does not get
flagged in the application for mandatory review. Also, once a
team member has uploaded/ created a document and marked
it as "Prepared", the same can be marked to a selected person/
manager for review. Post completion of the review the
document is to be Signed-off as "Reviewed".
However,
technically it is feasible for the document preparer to
mark the document as "Reviewed", bypassing the maker
checker authorisations altogether. A reviewed document
can be edited at any time but such a change does not
mandate a "Re-Review" of the document and capturing
of the changes made within the same. The issues under the
abovementioned categories are not addressed, and archival
can be completed without performing the above reviews.
[Indicating absence of attribute mentioned in Para 3(c)
authentication and access control protocols].
e. Audit Files within EY Canvas Application, and their
contents, can be modified post release of Audit Report till
the Audit File is Archived. There is no record of the
changes made to the audit documents i.e. document
modification post sign-off, and no version control for the
documents, therefore there is no way to assess if the
changes made were authorised or not. There is no
monitoring on the time period till which an Audit File can
be accessible or editable. ETs can reopen the files and
modify the file for additional documentation without any
logging or traceability. This overlooks compliance with
requirements of SA 230 as detailed in Para 2. [Indicating
absence of attribute mentioned in Para 3(a), version history
and security]
f. No logging and monitoring of end user or administrator
activities in the Audit Application, to detect and prevent
unauthorized activities is inbuilt into the system. Concurrent
logins, using same user credentials on different systems, are
possible and there is no mechanism in place to detect, alert or
prevent such events, leading to serious accountability issues.
In case of an incident, root cause analysis (RCA) may lead to
inappropriate results, since there would be no IP/Unique
system ID logged-in along with user identifier [Indicating
absence of attribute mentioned in Para 3(c) authentication
and access control protocols]
g. Roles and responsibility matrix for all roles of ET members,
including access and the level of access, is not defined
completely, such as right to operations
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add/delete/modify/sign-off/ archive/ retrieve from archive
etc. audit documents, for individual roles. [Indicating absence
of attribute mentioned in Para 3(c) authentication and access
control protocols].
h. Above all, there is no mechanism to scan and sync the
hard copy files to prevent or track any changes made to
hard copy files post the archival date. This vulnerability
alone is sufficient to totally compromise the entire
objective of audit file integrity.
10. It is, therefore, evident from the above that EY Canvas
application, which is the only audit documentation system used by
the Audit Firm, completely fails to ensure even the minimum
controls essential to meet the requirements of SQC 1 and SA 230 as
detailed in Para 1 above. The fundamental aspects of integrity of
Audit Files, accountability of the firm and its personnel,
maintaining sufficient appropriate audit evidence for the audit
planning, performance and basis for conclusions for achieving
audit objectives are seriously compromised as a result.
11. As discussed above, NFRA had pointed out several
discrepancies in audit documentation that raised doubts about the
authenticity and reliability of the audit documentation. The details
given above show that the deficiencies are systemic and structural
in nature and arise substantially from a complete disregard for basic
principles of IT security in the software used. This renders the audit
documentation completely unfit for the intended purpose
12. NFRA, further, concludes that there is a complete failure of
the Audit Firm’s SQC policy to monitor and control the
integrity of the audit files . Consequently, the audit files
maintained by the auditor are not found to meet the compliance
requirements of SA 230. In having not rectified these deficiencies,
the Audit firm is guilty of serious professional misconduct.”
51. This led to the issuance of the DAQRR on 08 March 2021. The
petitioner is stated to have submitted response to the DAQRR on 10
July 2021. An oral hearing in connection with the above is stated to
have been held on 08 September 2021 and whereafter the AQRR came
to be published on 23 September 2021. The summary of the AQRR is,
as captured in para 1.8, extracted hereinbelow:-
“Summary of AQRR
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1.8. The following is a summary of the most important
observations of the AQRR. Details of the evidence in support of
these observations, and the reasoning leading thereto, are provided
in the subsequent Sections of this DAQRR.
1.8.1. The initial appointment of SRBC & Co LLP, and the
continuation of SRBC & Co LLP, as statutory auditor of ITNL, was
prima facie illegal and void. Nevertheless, NFRA has proceeded to
examine compliance by the Audit Firm with the SAs, in their
performance of this Engagement, without prejudice to this finding.
1.8.2. The Audit Firm has failed to appropriately and sufficiently
evaluate the use of the going concern basis of accounting by the
Management and has thus failed to note the implications thereof in
the Auditor’s Report.
1.8.3. In assessing the Risks of Material Misstatements (ROMM),
the Audit Firm did not discuss the susceptibility of the financial
statements to material misstatement due to fraud, did not identify
and assess revenue recognition and management override of
controls as serious potential risks, which ultimately resulted in
several violations of applicable Ind AS and SAs, as highlighted in
the AQRR, thus making the Financial Statements subject to serious
material misstatements and therefore unreliable.
1.8.4. ITNL’s financial exposure to its subsidiaries, associates and
joint ventures amounting to Rs. 3,346 crore was not properly
valued as per the applicable Accounting Standards because the
Audit Firm had failed to obtain sufficient appropriate evidence to
justify the valuation of ITNL’s investment and loans to these
entities.
1.8.5. The Company’s losses during 2017-18 were understated by
at least Rs. 2021 crore on account of unjustified reversal of
Expected Credit Loss (ECL) on loans given to the SPV and on
trade receivables, and due to incorrect impairment valuation. This
is excluding the impact due to incorrect treatment of the letter of
comforts amounting to Rs 2654 crore, which should have been
correctly treated as financial guarantees as per the accounting
standards, the effect of which on profit/loss is not quantified.
NFRA further concludes that there is a clear attempt to obscure
material information in the Financial Statements by vague and
misleading disclosures by the management regarding ECL reversal.
1.8.6. The Audit Firm has not evaluated the work done by
Management’s Expert while adopting the Expert’s opinion, and
thus the Auditor’s opinion expressed under the Companies’
(Auditor’s Report) Order, 2019 (CARO) clause (iii) stating that the
terms and conditions of the Company’s loans of Rs. 111.20 crore to
joint ventures and to the not-fully owned subsidiaries at zero
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interest rate are not prejudicial to the company’s interest, is not
supported by sufficient appropriate evidence and is in violation of
requirements of SA 500.
1.8.7. The Audit Firm’s EQC partner has failed to report material
misstatements known to him to appear in a financial statement with
which he is concerned in his professional capacity and has not
exercised due diligence to obtain sufficient information to
objectively evaluate the significant judgements of the Engagement
Team and conclusions reached by them.
1.8.8. The Audit Firm has not determined the persons comprising
TCWG. Further, NFRA has not found any communication to
TCWG relating to Auditor’s independence, and the relationships
and other matters between the firm, network firms.
1.8.9. The Audit Firm has failed to maintain documents as per SA
230. The integrity of the Audit File is questionable due to
tampering and inconsistency pointed out at several places in the
AQRR.
1.9. While reference has been made in most cases to SAs which
have a direct bearing on the issues under consideration, it needs to
be borne in mind that certain generally applicable requirements of
the SAs, such as the need to exercise professional scepticism, the
need to obtain sufficient appropriate evidence, performance of
procedures to address the assessed risks, etc., are integral in all
individual cases discussed in the AQRR even if they are not
specifically included in individual paragraphs of the Report.
1.10. Based on the conclusions in the AQRR, it appears that the
Audit Firm has failed to meet the requirements of SA 700, para 11
while forming their opinion on the Company’s Financial
Statements for FY 2017-18. The instances discussed in this Report
are of such significance that, in NFRA’s view, the Audit Firm did
not have any justification for issuing the Audit Report asserting that
the audit was conducted in accordance with the SAs. NFRA draws
attention to Response 12 in the ICAI’s Implementation Guide on
Reporting Standards (November 2010 edition) that says that “a key
assertion that is made in this paragraph is that the audit was
conducted in accordance with the SAs”; and that “If during a
subsequent review of the audit process, it is found that some of the
audit procedures detailed in the SAs were not in fact complied
with, it may tantamount to the auditor making a deliberately false
declaration in his report and the consequences for the auditor could
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be very serious indeed” (emphasis added). Failure to comply with
any of the requirements of applicable SAs indicates that the Audit
Firm has failed to achieve the central purpose of audit, and that
there was not an adequate justification for issuing the Audit
Report.”
52. Since the facts which formed the subject matter of the writ
petition preferred by Rukshad Daruvala have been taken note of while
dealing with the writ petition preferred by DHS, we do not propose to
reiterate the chronology of events preceding the issuance of the SCN
under Section 132(4) of the 2013 Act.
B ROAD S TRUCTURE UNDER THE CA A CT
53. Before we proceed to chronicle the rival submissions which were
addressed before us, it would perhaps be apposite to take note of the
salient statutory provisions in the context of which the challenge stands
raised. We had in the preceding parts of this decision noticed the
relevant provisions of the CA Act which are concerned with the subject
of misconduct and the procedure for taking disciplinary action against a
member of the Council. Although we had an occasion to notice the
existence of the Misconduct Rules, 2007 and the 1988 Regulations, this
would appear to be an appropriate juncture to notice some of the
provisions incorporated in those statutory instruments. The Misconduct
Rules, 2007 define a “firm” to be one registered with the ICAI under
the relevant 1988 Regulations. As was noticed by us hereinabove, the
Chapter pertaining to registration of firms had come to be introduced in
the CA Act by virtue of Act 12 of 2022. In terms of Rule 3 of the
Misconduct Rules, 2007 a complaint referable to Section 21 of the CA
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Act was to be filed and presented before the Director (Discipline) in
Form I. Rule 3 reads as follows:-
“3. Procedure for filing complaint
(1) A complaint under section 21 of the Act against a member or a
firm shall be filed in Form I, in triplicate before the Director in
person or by post or courier:
that the complaint sent by post or courier under this sub-
Provided
rule shall be deemed to have been presented to the Director on the
day on which it is received in the Directorate.
(2) A complaint filed by or on behalf of the Central Government or
any State Government, shall be authorized by an officer holding a
post not below the rank of a Joint Secretary or equivalent and shall
be signed by an officer holding a post not below the rank of an
Under Secretary or equivalent in the Central or State Government,
as the case may be.
(3) A complaint filed by or on behalf of any statutory authority,
such as Reserve Bank of India or Securities and Exchange Board of
India, shall be authorised by an officer holding a post equivalent to
the post of Joint Secretary in the Government of India and shall be
signed by an officer holding a post not below the rank of an Under
Secretary or equivalent in the Central or State Government, as the
case may be.
(4) A complaint filed by or on behalf of a company or a firm, shall
be accompanied by a resolution, duly passed by the Board of
Directors of the company or the partners of the firm, as the case
may be, specifically authorizing an officer or a person to make the
complaint on behalf of the company or the firm.
Explanation . − In the case of a bank or financial institution, the
general resolution or power of attorney authorizing an officer
holding a particular position to file complaints on behalf of the
bank or financial institution, shall be deemed to be the specific
resolution passed by the bank or financial institution concerned, for
the purposes of these rules.
(5) In case of complaints filed by any Government, statutory
authority, bank or financial institution, a change in the name of
complainant at any later stage, shall be duly supported by a specific
authorization made by an officer holding a post equivalent to that
of the original complainant.
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(6) Every complaint received by the Directorate shall be
acknowledged by ordinary post together with an acknowledgement
number.”
54. As is evident from a reading of Rule 3(1) a complaint under
Section 21 of CA Act was envisaged to be one directed against the
conduct of either a member or a firm. In terms of sub-rule (2) and (3) of
Rule 3, a complaint could also be preferred by the Union or State
Governments or even by a statutory authority, such as, the Reserve
Bank of India or the Securities and Exchange Board of India.
55. Rule 5 of the Misconduct Rules, 2007 proceeds to spell out the
requirements for registration of the complaint and a preliminary
examination thereof by the Director (Discipline). Apart from a written
complaint, which could be entertained by the Director (Discipline),
Rule 7 also expanded the scope of the investigation or inquiry that
could be undertaken by providing for any written information
containing allegations against a member or a firm being treated as
information received under Section 21 of the CA Act and consequently
liable to be processed accordingly.
56. The procedure of investigation was set out in Chapter 3 of the
Misconduct Rules, 2007. Rule 8 made the following pertinent
provisions guiding the consideration of a complaint by the Director
(Discipline) either against an individual member or a firm:-
“8. Procedure to be followed by Director on a complaint
(1) The Director or an officer or officers authorized by the Director,
within sixty days of the receipt of a complaint under rule 3, shall, −
(a) if the complaint is against an individual member, send
particulars of the acts of commission or omission alleged or a
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copy of the complaint, as the case may be, to that member at
his professional address;
(b) if the complaint is against a firm, send particulars of the acts of
commission or omission alleged or a copy of the complaint, as
the case may be, to the firm at the address of its head office, as
entered last in the Register of Offices and Firms maintained by
the Institute, with a notice calling upon the firm to disclose the
name or names of the member or members concerned and to
send particulars of acts of commission or omission or a copy of
the complaint, as the case may be, to such members:
Provided that while disclosing the name or names of the member or
members, the firm shall also send a declaration signed or, as the case
may be, jointly signed by the member or members concerned to the
effect that he or she or they shall be responsible for answering the
complaint and that the particulars of acts of commission or omission
or the copy of the complaint sent to the firm by the Director had
been duly received by him, her or them.
Explanation − A notice to the firm shall be deemed to be a notice to
all the members who are partners or employees of that firm as on the
date of registration of the complaint.
(2) A member whose name is disclosed by the firm shall be
responsible for answering the complaint, provided such a member
was associated, either as partner or employee, with the firm, against
which the complaint has been filed, at the time of occurrence of the
alleged misconduct:
Provided that if no member, whether erstwhile or present, of the
firm, own responsibility for the allegation or allegations made
against the firm, then the firm as a whole shall be responsible for
answering the allegation or allegations and, as such, all the members
who were partners or employees of that firm, as on the date of
occurrence of the alleged misconduct, shall be responsible for
answering the allegation or allegations as contained in the complaint.
(3) A member who has been informed of the complaint filed against
him (hereinafter referred to as the respondent) shall, within 21 days
of the service of a copy of the complaint, or within such additional
time, not exceeding thirty days, as may be allowed by the Director,
forward to the Director, a written statement in his defence.
(4) On receipt of the written statement, if any, the Director may send
a copy thereof to the complainant and the complainant shall, within
21 days of the service of a copy of the written statement, or within
such additional time, not exceeding thirty days, as may be allowed
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by the Director, forward to the Director, his rejoinder on the written
statement.
(5) On perusal of the complaint, the respondent's written statement,
if any, and rejoinder of the complainant, if any, the Director may call
for such additional particulars or documents connected therewith
either from the complainant or the respondent or any third party or
parties, as he may consider appropriate:
Provided that if no reply is sent by the respondent within the time
allowed under sub-rule (3) or by the complainant within the time
allowed under sub-rule (4), the Director shall presume that the
respondent or the complainant, as the case may be, have nothing
further to state and take further action as provided under this
Chapter.”
57. Upon conclusion of examination of the complaint the Director
(Discipline) was enjoined to follow the procedure as stipulated in Rule
9. The said provision is extracted hereinbelow:-
“ 9. Examination of the Complaint
(1) The Director shall examine the complaint, written statement, if
any, rejoinder, if any, and other additional particulars or documents,
if any, and form his prima facie opinion as to whether the member or
the firm is guilty or not of any professional or other misconduct or
both under the First Schedule or the Second Schedule or both.
(2) (a) Where the Director is of the prima facie opinion that, −
(i) the member or the firm is guilty of any misconduct under the
First Schedule, he shall place his opinion along with the
complaint and all other relevant papers before the Board of
Discipline;
(ii) the member or the firm is guilty of misconduct under the
Second Schedule or both the First and Second Schedules, he
shall place his opinion along with the complaint and all other
relevant papers before the Committee.
(b) If the Board of Discipline or the Committee, as the case may be,
agrees with the prima facie opinion of the Director under clause
(a) above, then the Board of Discipline or the Committee may
proceed further under Chapter IV or V respectively.
(c) If the Board of Discipline or the Committee, as the case may be,
disagrees with the prima facie opinion of the Director under
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clause (a) above, it shall either close the matter or advise the
Director to further investigate the matter.
(3) Where the Director is of the prima facie opinion that the member
or the firm is not guilty of any misconduct either under the First
Schedule or the Second Schedule, he shall place the matter before
the Board of Discipline, and the Board of Discipline, −
(a) if it agrees with such opinion of the Director, shall pass order,
for closure.
(b) if it disagrees with such opinion of the Director, then it may
either proceed under chapter IV of these rules, if the matter
pertains to the First Schedule, or refer the matter to the
Committee to proceed under Chapter V of these rules, if the
matter pertains to the Second Schedule or both the Schedules, or
may advise the Director to further investigate the matter.
(4) The Director shall, after making further investigation as advised
by the Board of Discipline under sub-rule (2) or (3) of this rule or by
the Committee under sub-rule (2), shall further proceed under this
rule.”
58. In terms of Rule 14 the Board of Discipline was required to
follow a summary procedure for disposal of cases as is evident from the
following:-
“ 14. Procedure to be followed by the Board of Discipline
(1) The Board of Discipline shall follow summary disposal
procedure in dealing with all cases before it, as laid down in this
Chapter.
(2) If the Board of Discipline decides to proceed further under
clause (b) of sub-rule (2) of rule 9 or under clause (b) of sub-rule
(3) of rule 9, it shall expeditiously cause to deliver to the
respondent and the complainant, a copy each of the following: −
(a) prima facie opinion formed by the Director; and
(b) particulars or documents relied upon by the Director, if any,
during the course of formulation of prima facie opinion.
(3) The Board of Discipline shall inform the respondent to file a
written statement, within such time as may be specified:
Provided that the Board of Discipline may give him additional
time for submitting his written statement on application by the
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respondent on his adducing sufficient reasons to the satisfaction of
the Board of Discipline for seeking additional time:
Provided further that such additional time shall not be given more
than once and if the respondent still does not submit a written
statement, the Board of Discipline shall presume that he has no
further submissions to make and shall proceed to decide the case on
merits.
(4) The respondent shall send a copy of his written statement, along
with supporting documents, to the Director and the complainant
within the stipulated time.
(5) The complainant or the Director may, after receipt of the
written statement, submit a rejoinder to the Board of Discipline,
with a copy to the respondent, along with supporting documents, if
any.
(6) The Presiding Officer of the Board of Discipline shall fix a
date, hour and place of hearing, which shall not ordinarily be later
than 45 days from the date of receipt of prima facie opinion and the
Board of Discipline shall cause a notice to be sent of such date,
hour and place to the Director, respondent and complainant and
require them to appear before it in person to make oral
submissions, if any.
Explanation 1. − For the purpose of this rule, the appearance
includes, unless and otherwise directed, appearance by an advocate
or through any authorized representative, who may be a Chartered
Accountant, Cost Accountant or Company Secretary.
[ Explanation 2 - For the purpose of this rule, the appearance also
includes the appearance through video-conference, modalities for
which may be as formulated by the Institute from time to time .]
(7) On the date of hearing, if the respondent, in spite of the service
of notice, under sub-rule (6), does not appear either in person 1 [or
through video conference in terms of the modalities formulated
under these Rules] or through his authorized representative, the
Board of Discipline may proceed ex-parte and pass such orders as
it may think fit or direct fresh notice to be served.
(8) The Board of Discipline may, on such terms as it thinks fit, and
at any stage of the proceedings, adjourn the hearing:
that such adjournment shall not be given more than once
Provided
at any stage of the proceedings.
(9) The Board of Discipline shall consider the written
representations, including the written statements, rejoinder and
supporting documents, and the oral submissions, if any made by the
Director, the complainant and the respondent and arrive at a finding
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on whether the respondent is guilty or not of any professional or
other misconduct.”
59. By virtue of Rule 15, once the Board of Discipline had come to
arrive at a finding of guilt in terms contemplated under Rule 14(9), the
said authority was obligated to afford an opportunity of hearing to the
respondent before proceeding to pass an order of punishment as
contemplated under Section 21A(3) of the CA Act. The functioning of
the Disciplinary Committee was regulated by similar provisions
enshrined in the Misconduct Rules, 2007. Since it would be Rule 18
which would be pertinent for our purposes, the same is extracted
hereunder:-
“18. Procedure to be followed by the Committee
(1) The Committee shall be guided by the principles of natural
justice and shall follow the procedure in dealing with all cases
before it, as laid down in this Chapter (2) If the Committee decides
to proceed further under clause (b) of sub-rule (2) of rule 9 or if it
receives a reference from Board of Discipline under clause (b) of
sub-rule (3) of rule 9, it shall expeditiously cause to deliver to the
respondent and the complainant, a copy each of the following, −
(a) prima facie opinion formed by the Director, and
(b) particulars or documents relied upon by the Director, if any,
during the course of formulation of prima facie opinion.
(3) The Committee shall inform the respondent, as the case may be
to file a written statement, within such time as may be specified:
Provided that the Committee may give him additional time for
submitting his written statement, on application by the respondent
on his adducing sufficient reasons to the satisfaction of the
Committee for seeking additional time:
Provided further that such additional time shall not be given more
than once and if the respondent still does not submit a written
statement, the Committee shall presume that he has no further
submissions to make and shall proceed to decide the case on merits.
(4) The respondent shall send a copy of his written statement, along
with supporting documents and a list of witnesses, to the Director
and the complainant within the stipulated time.
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(5) The complainant or the Director may, after receipt of the
written statement, submit a rejoinder to the Committee, with a copy
to the respondent, along with supporting documents, if any.
(6) The Presiding Officer of the Committee shall fix a date, hour
and place of hearing, which shall not ordinarily be later than 45
days from the date of receipt of prima facie opinion and the
committee shall cause a notice to be sent of such date, hour and
place to the Director, respondent and complainant and require them
to appear before it in person to make oral submissions, if any.
[Explanation 1 . – For the purpose of this rule, the appearance
includes, unless and otherwise directed, appearance by an advocate
or through any authorized representative, who may be a Chartered
Accountant, Cost Accountant or Company Secretary.
[ Explanation 2. - For the purpose of this rule, the appearance also
includes the appearances through video-conference, modalities for
which may be as formulated by the Institute from time to time .]
(7) During the first hearing, the Committee shall read out the
charge or charges to the respondent along with the summary of
prima facie opinion arrived at by the Director, and ask the
respondent whether he pleads guilty to the charge or charges made
against him:
Provided that if the respondent does not appear for the first hearing
even after one adjournment, the reading out of charge or charges
along with the summary of prima facie opinion shall be made in his
absence and the case proceeded with in accordance with the
provisions of this Chapter.
(8) If the respondent pleads guilty, the Committee shall record the
plea and take action as per provisions under rule 19.
(9) If the respondent does not plead guilty, then the Committee
shall fix a date for examination of witnesses and production of
documents.
(10) The Committee may, on application of the Director, issue
notice for appearance to any of his witnesses directing him to
attend or to produce any other document or material evidence.
(11) On the date so fixed, the Committee shall proceed to take all
such evidence as may be produced by the Director, including oral
examination of witnesses and production of documents:
Provided that the Committee may permit the cross- examination of
any witness to be deferred until any other witness or witnesses have
been examined or recall any witness for further cross-examination.
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(12) After the presenting of evidence by the Director is over, the
complainant shall be given an opportunity, if present during the
hearing, to present any additional evidence after satisfying the
Committee that such evidence is relevant and has not been brought
forward during the presentation by the Director.
(13) The respondent shall be then called upon to enter upon his
defence and produce his evidence.
(14) If the respondent applies to the Committee to issue any notice
for compelling attendance of any witness for the purpose of
examination or cross-examination, or the production of any
document or any material object, the Committee shall issue such
notice unless it considers that such application should be refused on
the ground that it is made for the purpose of vexation or delay or
for defeating the ends of justice and such ground shall be recorded
by it in writing.
(15) The witnesses summoned at the instance of the complainant
under sub-rule (12) or the respondent under sub-rule (14) shall not
be eligible for reimbursement of expenses incurred for attending
the hearing.
(16) After evidences have been presented, the Director and the
respondent shall present their arguments before the Committee:
Provided that after the Director has presented his argument, if the
complainant, provided he is present during the hearing, feels that
any vital argument has been left out by the Director, may present
the argument, after convincing the Committee of the same.
(17) The Committee shall consider the evidences and arguments
produced before it and arrive at a finding on whether the
respondent is guilty or not of any professional or other misconduct.
(18) The Committee may, at the request of any of the parties before
it or due to other reasons, and on such terms as it thinks fit, and at
any stage of the proceedings, adjourn the hearing:
Provided that such adjournment shall not be given more than once
at any stage of the proceedings.
Explanation . - For the purpose of this rule, inability of the
complainant, advocate, authorized representative or witness, to
appear shall not be treated as a valid reason for adjournment of a
hearing.”
60. Proceeding on lines akin to Rule 15 the Disciplinary Committee,
upon arriving at a finding of guilt, was enjoined to follow the procedure
as prescribed in Rule 19 and which reads as under: -
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“ 19. Orders of the Committee
(1) On arriving at a finding under sub-rule (8) or sub-rule (17) of
rule 18 that the respondent is guilty of professional or other
misconduct, the Committee shall give the respondent an
opportunity to be heard before passing any order under sub- section
(3) of section 21B of the Act:
that if the respondent does not appear before the
Provided
Committee at the time directed to do so when given such an
opportunity to be heard, the Committee shall presume that he has
nothing more to represent before it and shall pass orders under sub-
section (3) of section 21B of the Act.
(2) On arriving at a finding under sub-rule (17) of rule 18 that the
respondent is not guilty of professional or other misconduct, the
Committee shall pass orders closing the case.
(3) The Committee shall send, free of charge, to the Director,
respondent and the complainant, a certified copy of the final order.”
61. Turning then to the 1988 Regulations, of relevance would be
Regulation 12 and which was concerned with the complaints and
inquiries relating to misconduct pertaining to proceedings initiated or
pending prior to 17 November 2006. Regulation 12 is extracted
hereinbelow:-
“ 12. Complaints and enquiries relating to misconduct of
members
[Applicable to a complaint or information pending before the
Council or any inquiry initiated by the Disciplinary Committee or
any reference or appeal made to a High Court prior to 17.11.2006]
(1) Subject to the provisions of this regulation, a complaint against
a member under Section 21 shall be investigated and all other
enquiries relating to misconduct of such member shall be held by
the Disciplinary Committee:
Provided that if the subject matter of a complaint is, in the opinion
of the President, substantially the same as or has been covered by
any previous complaint or information received, the Secretary shall
file the said complaint without any further action and inform the
Complainant accordingly.
(2) A complaint under Section 21 shall be in the appropriate Form*
duly verified and shall be in triplicate.
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(3) Such complaint shall contain the following particulars
namely:—
(a) the acts and omission which, if proved, would render the
person complained against guilty of professional or other
misconduct;
(b) the oral and or documentary evidence relied upon in support
of the allegations made in the complaint.
(4) Every complaint, other than a complaint made by or on behalf
of the Central or any State Government, shall be accompanied by a
deposit of one hundred rupees which will be forfeited if the
Council, after considering the complaint, comes to the conclusion
that no prima facie case is made out and moreover that the
complaint is either a frivolous one or is made with malafide
intention.
(5) The Secretary shall return a complaint, which is not in the
appropriate Form or which does not contain the aforesaid
particulars, to the Complainant for representation after removing
the objections thereto and within such time as the Secretary may
specify.
(6) Ordinarily within sixty days of the receipt of a complaint under
Section 21, the Secretary shall:—
(a) if the complaint is against a member, send a copy thereof to
such member at his professional address as entered in the
Register;
(b) if the complaint is against a firm, send a copy thereof to the
firm at the address of its head office, as entered in the register
of offices and firms, with a notice calling upon the firm to
disclose the name of the member who is answerable to the
charge of misconduct and requiring it to send a copy of the
complaint to him.
Explanation - A notice to the firm shall be deemed to be a notice to
all the members who are partners or employees of that firm.
(7) A member against whom the complaint is made (hereinafter
referred to as the Respondent) may, within fourteen days of the
service of a copy of the complaint under sub-regulation (6), or
within such time as may be extended by the Secretary, forward to
the Secretary in triplicate, a written statement in his defence
verified in the same manner as the complaint.
(8) On receipt of the written statement, if any, the Secretary shall
send a copy thereof to the Complainant and the Complainant may,
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within 14 days of the service of a copy of the written statement, or
within such time as may be extended by the Secretary, forward to
the Secretary, in triplicate, his rejoinder on the written statement,
duly verified in the same manner as the complaint.
(9) On receipt of the Complainant's rejoinder, if any, the Secretary
shall send a copy thereof to the Respondent and the Respondent
may within 14 days of the service of a copy of the rejoinder, or
within such time as may be extended by the Secretary, forward to
the Secretary, in triplicate, his comments on the rejoinder, duly
verified in the same manner as the complaint.
(10) On a perusal of the complaint, the written statement, if any, the
Complainant's rejoinder on the written statement, if any, and the
Respondent's comments on the Complainant's rejoinder, if any, the
President may call for such additional particulars or documents
connected therewith either from the complainant or the Respondent
as he may consider expedient.
(11) (i) If on a perusal of the complaint, the written statement, if
any, the Complainant's rejoinder to the written statement, if any,
and the Respondent's comments on the Complainant's rejoinder, if
any, and other relevant documents, the Council is prima facie of
opinion that the Respondent is guilty of professional and or other
misconduct, the Council shall cause an enquiry to be made in the
matter by the Disciplinary Committee.
(ii) If, on the other hand, the Council is prima facie of opinion that
the Respondent is not guilty of any professional or other
misconduct, the complaint shall be filed and the Complainant and
the Respondent shall be informed accordingly.
(12) (i) Any notice issued by the Secretary under this regulation
shall be sent to the member or the firm, as the case may be, by
registered post with acknowledgement due.
(ii) If any such notice is returned unserved with an endorsement to
the effect that the addressee had refused to accept the notice, the
notice shall be deemed to have been served.
(iii) If the notice is returned with an endorsement to the effect that
the addressee cannot be found at the address given, the Secretary
shall ask the Complainant to supply to him the correct address of
the member or the firm, as the case may be.
(iv) A fresh notice shall be issued to the member or the firm at the
correct address.
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(13) The provision relating to a notice shall apply ‘mutatis
mutandis’ to a letter.”
62. Although supplementary and additional provisions pertaining to
inquiries and disciplinary action stood embodied in Regulations 15, 16
& 17, we do not deem it appropriate to extract those provisions here
since those too were confined to proceedings initiated or pending prior
to 17 November 2006.
ULES
NFRA R
63. While we had an occasion to notice Section 132 as embodied in
the Companies Act in the earlier parts of this decision, for purposes of
completeness we now turn our gaze upon the NFRA Rules and to the
salient provisions contained therein. Rule 2 which constitutes the
definition clause defines the word “division” in clause (g) as under:-
“2. Definitions. (1) In these rules, unless the context otherwise
requires,-
xxxx xxxx xxxx
g) “Division” means a division established by the Authority for the
purpose of organising and carrying out its functions and duties;”
64. The functions and duties of the NFRA are elaborated upon and
spelt out in Rule 4 which reads as follows:-
“4. Functions and duties of the Authority . (1) The Authority
shall protect the public interest and the interests of investors,
creditors and others associated with the companies or bodies
corporate governed under rule 3 by establishing high quality
standards of accounting and auditing and exercising effective
oversight of accounting functions performed by the companies and
bodies corporate and auditing functions performed by auditors.
(2) In particular, and without prejudice to the generality of the
foregoing, the Authority shall:
(a) maintain details of particulars of auditors appointed in the
companies and bodies corporate specified in rule 3;
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(b) recommend accounting standards and auditing standards for
approval by the Central Government;
(c) monitor and enforce compliance with accounting standards and
auditing standards;
(d) oversee the quality of service of the professions associated with
ensuring compliance with such standards and suggest measures for
improvement in the quality of service;
(e) promote awareness in relation to the compliance of accounting
standards and auditing standards;
(f) co-operate with national and international organisations of
independent audit regulators in establishing and overseeing
adherence to accounting standards and auditing standards; and
(g) perform such other functions and duties as may be necessary or
incidental to the aforesaid functions and duties.
(3) The Central Government may, by notification, and subject to
such conditions, limitations and restrictions as may be specified
therein delegate any of its powers or functions under the Act, other
than the power to make rules, to the Authority.”
65. Rule 7 speaks of the functions which the authority is obliged to
discharge for the purposes of monitoring and enforcing compliance
with Accounting Standards. That provision reads as under:-
“7. Monitoring and enforcing compliance with accounting
standards . (1) For the purpose of monitoring and enforcing
compliance with accounting standards under the Act by a company
or a body corporate governed under rule 3, the Authority may
review the financial statements of such company or body corporate,
as the case may be, and if so required, direct such company or body
corporate or its auditor by a written notice, to provide further
information or explanation or any relevant documents relating to
such company or body corporate, within such reasonable time as
may be specified in the notice.
(2) The Authority may require the personal presence of the officers
of the company or body corporate and its auditor for seeking
additional information or explanation in connection with the review
of the financial statements of such company or body corporate.
(3) The Authority shall publish its findings relating to non-
compliances on its website and in such other manner as it considers
fit, unless it has reasons not to do so in the public interest and it
records the reasons in writing.
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(4) Where the Authority finds or has reason to believe that any
accounting standard has or may have been violated, it may decide
on the further course of investigation or enforcement action
through its concerned Division.”
66. As an extension of the power that stands conferred upon the
NFRA by virtue of Section 132(2)(b) of the Companies Act which is
concerned with the monitoring and enforcement of compliance with
Accounting Standards, Rule 8 makes the following provisions:-
“8. Monitoring and enforcing compliance with auditing
standards . (1) For the purpose of monitoring and enforcing
compliance with auditing standards under the Act by a company or
a body corporate governed under rule 3, the Authority may: –
(a) review working papers (including audit plan and other audit
documents) and communications related to the audit;
(b) evaluate the sufficiency of the quality control system of the
auditor and the manner of documentation of the system by the
auditor; and
(c) perform such other testing of the audit, supervisory, and quality
control procedures of the auditor as may be considered necessary or
appropriate.
(2) The Authority may require an auditor to report on its
governance practices and internal processes designed to promote
audit quality, protect its reputation and reduce risks including risk
of failure of the auditor and may take such action on the report as
may be necessary.
(3) The Authority may seek additional information or may require
the personal presence of the auditor for seeking additional
information or explanation in connection with the conduct of an
audit.
(4) The Authority shall perform its monitoring and enforcement
activities through its officers or experts with sufficient experience
in audit of the relevant industry.
(5) The Authority shall publish its findings relating to non-
complainces on its website and in such other manner as it considers
fit, unless it has reasons not to do so in the public interest and it
records the reasons in writing.
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(6) The Authority shall not publish proprietary or confidential
information, unless it has reasons to do so in the public interest and
it records the reasons in writing.
(7) The Authority may send a separate report containing proprietary
or confidential information to the Central Government for its
information.
(8) Where the Authority finds or has reason to believe that any law
or professional or other standard has or may have been violated by
an auditor, it may decide on the further course of investigation or
enforcement action through its concerned Division.”
67. Similarly, with regard to the statutory obligation of the NFRA to
oversee the quality of service rendered by professionals associated with
auditing, Rule 9 provides as follows:-
“9. Overseeing the quality of service and suggesting measures
for improvement.
(1) On the basis of its review, the Authority may direct an auditor
to take measures for improvement of audit quality including
changes in their audit processes, quality control, and audit reports
and specify a detailed plan with time-limits.
(2) It shall be the duty of the auditor to make the required
improvements and send a report to the Authority explaining how it
has complied with the directions made by the Authority.
(3) The Authority shall monitor the improvements made by the
auditor and take such action as it deems fit depending on the
progress made by the auditor.
(4) The Authority may refer cases with regard to overseeing the
quality of service of auditors of companies or bodies corporate
referred to in rule 3 to the Quality Review Board constituted under
the Chartered Accountants Act, 1949 (38 of 1949) or call for
any report or information in respect of such auditors or companies
or bodies corporate from such Board as it may deem appropriate.
(5) The Authority may take the assistance of experts for its
oversight and monitoring activities.”
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68. The power of investigation and the conduct of disciplinary
proceedings are regulated by Rules 10 and 11, which are reproduced
hereinbelow:-
“10. Power to investigate . (1) Where the Authority has -
(a) received any reference from the Central Government for
investigation into any matter of professional or other misconduct
under sub-section (4) of section 132 of the Act;
(b) decided to undertake investigation into any matter on the basis
of its compliance or oversight activities; or
(c) decided to undertake suo motu investigation into any matter of
professional or other misconduct, after recording reasons in writing
for this purpose, it shall forward the matter to its Division dealing
with enforcement for carrying out investigation and other action.
(2) If, during the investigation, the Authority has evidence to
believe that any company or body corporate has not complied with
the requirements under the Act or rules which involves or may
involve fraud amounting to rupees one crore or more, it shall report
its findings to the Central Government.
(3) On the commencement of these rules-
(a) the action in respect of cases of professional or other
misconduct against auditors of companies referred to in rule 3
shall be initiated by Authority and no other institute or body
shall initiate any such proceedings against such auditors:
Provided that no other institute or body shall initiate or
continue any proceedings in such matters of misconduct
where the Authority has initiated an investigation under this
rule;
(b) the action in respect of cases of professional or other
misconduct against auditors of companies or bodies corporate
other than those referred to in rule 3 shall continue to be
proceeded with by the Institute of Chartered Accountants of
India as per provisions of the Chartered Accountants Act,
1949 and the regulations made thereunder.
11. Disciplinary proceedings. (1) Based on the reference
received from the Central Government or findings of its monitoring
or enforcement or oversight activities, or on the basis of material
otherwise available on record, if the Authority believes that
sufficient cause exists to take actions permissible under sub-section
(4) of section 132, it shall refer the matter to the concerned
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division, which shall cause a show-cause notice to be issued to the
auditor.
(2) The show-cause notice shall be in writing, and shall, inter alia,
state-
(a) the provisions of the Act or rules under which it has been
issued;
(b) the details of the alleged facts;
(c) the details of the evidence in support of the alleged facts;
(d) the provisions of the Act, rules or the accounting standards or
auditing standards thereunder allegedly violated, or the
manner in which the public interest is allegedly affected;
(e) the actions that the Authority proposes to take or the
directions it proposes to issue if the allegations are
established;
(f) the time limit and the manner in which the auditor is required
to respond to the show-cause notice;
(g) the consequences of failure to respond to the show-cause
notice; and
(h) the procedure to be followed for disposal of the show-cause
notice.
(3) The show-cause notice shall enclose copies of documents relied
upon and extracts of relevant portions from the report of
investigation or other records.
(4) The show-cause notice shall be served on the auditor in the
following manner, namely -
(a) by sending it to the auditor at the address provided by him or
provided by the Institute of Chartered Accountants of India
(if required by the Authority) by registered post with
acknowledgement due; or
(b) by an appropriate electronic means to the email address of the
auditor provided by him or it or provided by the Institute of
Chartered Accountants of India (if required by the
Authority):
Provided that where the auditor is a firm -
(a) a notice to a firm shall be deemed to be a notice to all the
partners or employees of that firm as on the date of service of
notice;
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(b) the notice shall call upon the firm to disclose the name or
names of the partner or partners concerned who shall be
responsible for answering the allegations;
(c) the partner whose name is disclosed by the firm shall be
responsible for answering the notice against the firm, and if
no partner, whether erstwhile or present, of the firm owns
responsibility for the allegations made against the firm, then
the firm as a whole shall be responsible for answering the
allegations, and all the partners and employees of that firm as
on the date of occurrence of alleged misconduct, shall be
responsible for answering the allegations.
(5) The Division shall dispose of the show-cause notice within a
period of ninety days of the assignment through a summary
procedure as may be specified by the Authority, by a reasoned
order in adherence to the principles of natural justice including
where necessary or appropriate an opportunity of being heard in
person, and after considering the submissions, if any, made by the
auditor, the relevant facts and circumstances, and the material on
record.
(6) The order disposing of a show-cause notice may provide for-
(a) no action;
(b) caution;
(c) action for imposing penalty against auditor under sub-clause
(A) of clause (c) of sub-section (4) of section 132 or for
debarring the auditor from engaging as such under sub-clause
(B) of clause (c) of sub-section (4) of section 132 or both.
(7) The order passed under sub-rule (6) shall not become effective
until thirty days have elapsed from the date of issue of the order
unless the Division states otherwise in the order along with the
reason for the same.
(8) The order passed under sub-rule (6) shall be served on the
auditor in the manner specified in sub-rule (3) and a copy of the
same shall be sent
(i) in all cases to - (a) the Central Government; and (b) the
Institute of Chartered Accountants of India;
(ii) in the case of a company referred to in sub-section (5) of
section 139 to the Comptroller and Auditor General of India;
(iii) in the case of a listed company to the Securities and
Exchange Board of India; (iv) in the case of a bank or a non-
banking finance company to the Reserve Bank of India;
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(iv) in the case of a bank or a non-banking finance company to
the Reserve Bank of India;
(v) in the case of an insurance company to the Insurance
Regulatory and Development Authority of India;
(vi) in case the auditor is resident outside India to concerned
regulator of such country; and the same shall be published on
the website of the Authority.”
DDITIONAL ISCLOSURES BY
A D NFRA
69. Pausing here, we also take note of a salient aspect which was
noticed by us in our order of 12 September 2023. It becomes pertinent
to note that during the course of hearing of this batch of writ petitions it
had been alleged by the petitioners that the complement of persons
which had formed the opinion that disciplinary proceedings were liable
to be initiated against the petitioners was the same or identical to that
which had authored the AQRR. The petitioners had in that context laid
stress upon the expression “division” as it occurs in various parts of
Section 132 of the Companies Act as well as the NFRA Rules to
contend that the statute clearly contemplated a division of functions
between the review of an audit and the formation of opinion to initiate
disciplinary proceedings.
70. The respondents, on the other hand, had contended that the
executive body of the NFRA was clearly entitled in law to discharge all
functions and duties as placed upon the NFRA as a whole. It was in the
aforesaid context that we had called upon the respondents to file an
additional affidavit and to disclose complete details of the personnel
who had penned the AQRR in each case as well as the complement of
persons who had initiated action under Section 132(4).
71. The order dated 12 September 2023 is reproduced hereinbelow:-
W.P.(C) 1065/2021 & other connected matters Page 116 of 476
Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
“1. One of the issues which had arisen in the course of hearing
submissions addressed on behalf of the petitioners was of the
Audit Quality Review Report [AQRR] and the ultimate initiation
of disciplinary proceedings being regulated and controlled by the
same authority.
2. Our attention was drawn to the provisions of Section 132 of the
Companies Act, 2013 [the Act] as well as the National Financial
Reporting Authority Rules 2018 [“2018 Rules”] and which allude
to Divisions of the Authority carrying out investigation, inquiry
and disciplinary proceedings. In order to obtain clarity on the
factual position as it existed at the time when the impugned Show
Cause Notices had been issued, we had invited Mr. Hossain,
learned counsel to obtain instructions.
3. Mr. Hossain, on instructions, apprises us today that as
contemplated under Section 132 of the Act, all functions relating
to auditors falling under the purview of the National Financial
Reporting Authority [“the Authority”] and which include
monitoring, enforcement, investigation, disciplinary action are
carried out by or on behalf of the Authority by the Executive
Body. Mr. Hossain further submitted that it would be the
contention of the Authority that the Executive Body stands duly
empowered to take appropriate measures as contemplated under
Section 132(4) of the Act.
4. In fact, and according to Mr. Hossain, the Executive Body
would in itself constitute a Division as defined and contemplated
under the Act and the 2018 Rules. It was further contended that
neither Section 132 nor the 2018 Rules contemplates a strict
“separation of powers” or a bifurcation of functions relating to
investigation, inquiry and conduct of disciplinary proceedings.
5. On facts, it was stated that the body which drew up the AQRR
is the one which initiated proceedings under Section 132(4) of the
Act.
6. Mr. Hossain, in light of the submissions aforenoted, is accorded
liberty to file an additional affidavit placing on the record the
details with respect to proceedings drawn and initiated by the
Authority and drawn against the petitioners here. That affidavit
shall place on the record complete details of the personnel who
penned the AQRR in each particular case as well as the
complement of persons who initiated action under Section 132(4)
and ultimately passed the orders impugned.
7. Mr. Kathpalia, learned senior counsel is continuing with his
submissions. Let the matter be called again on 09.10.2023 as part
heard in the category of “End of Board” matters.”
W.P.(C) 1065/2021 & other connected matters Page 117 of 476
Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
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72. Pursuant to the aforesaid order an additional affidavit came to be
filed by the NFRA and where the following disclosures are made:-
“ 1. One of the issues which had arisen in the course of hearing
submissions addressed on behalf of the petitioners was of the Audit
Quality Review Report [AQRR] and the ultimate initiation of
disciplinary proceedings being regulated and controlled by the
same authority.
2. Our attention was drawn to the provisions of Section 132 of the
Companies Act, 2013 [the Act] as well as the National Financial
Reporting Authority Rules 2018 [“2018 Rules”] and which allude
to Divisions of the Authority carrying out investigation, inquiry and
disciplinary proceedings. In order to obtain clarity on the factual
position as it existed at the time when the impugned Show Cause
Notices had been issued, we had invited Mr. Hossain, learned
counsel to obtain instructions.
3. Mr. Hossain, on instructions, apprises us today that as
contemplated under Section 132 of the Act, all functions relating to
auditors falling under the purview of the National Financial
Reporting Authority [“the Authority”] and which include
monitoring, enforcement, investigation, disciplinary action are
carried out by or on behalf of the Authority by the Executive Body.
Mr. Hossain further submitted that it would be the contention of the
Authority that the Executive Body stands duly empowered to take
appropriate measures as contemplated under Section 132(4) of the
Act.
4. In fact, and according to Mr. Hossain, the Executive Body would
in itself constitute a Division as defined and contemplated under
the Act and the 2018 Rules. It was further contended that neither
Section 132 nor the 2018 Rules contemplates a strict “separation of
powers” or a bifurcation of functions relating to investigation,
inquiry and conduct of disciplinary proceedings.
5. On facts, it was stated that the body which drew up the AQRR is
the one which initiated proceedings under Section 132(4) of the
Act.
6. Mr. Hossain, in light of the submissions aforenoted, is accorded
liberty to file an additional affidavit placing on the record the
details with respect to proceedings drawn and initiated by the
Authority and drawn against the petitioners here. That affidavit
shall place on the record complete details of the personnel who
penned the AQRR in each particular case as well as the
W.P.(C) 1065/2021 & other connected matters Page 118 of 476
Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
complement of persons who initiated action under Section 132(4)
and ultimately passed the orders impugned.
7. Mr. Kathpalia, learned senior counsel is continuing with his
submissions. Let the matter be called again on 09.10.2023 as part
heard in the category of “End of Board” matters.
SI
No.
Question Answer
1 By whom AQR
was prepared
The AQR report was prepared by the
Executive Body (EB) NFRA. A team
of Staff in NFRA, consisting of the
Secretary, one Executive Director,
and three Chartered Accountants
(Professionals) assisted the EB in
scrutiny of the Audit file, however
EB has examined all the relevant
documents contained in the audit file
and after consideration of all relevant
legal conditions, prepared and signed
the AQRR, which was finally, with
the approval of EB, issued by the
Secretary, NFRA. The chronology of
preparing the AQRR is as follows:
a) NFRA letter dated 25.02.2019 was
sent to the Engagement Partner (EP)
requesting for the Audit file of
IL&FS Financial Services Ltd for the
Financial Year 2017-18.
b) EP submitted the Audit File on
11.03.2019.
c) NFRA's letter dated 25.04.2019
was sent to the Engagement Partner
seeking a list of related parties and
Audit/Non-Audit revenue m
stipulated format on Affidavit.
d) NFRA's letter dated 02.05.2019,
containing a Questionnaire on
matters observed in the Audit File,
was sent via email on 02.05.2019 to
the Engagement Partner seeking
replies to the same.
e) Reply of the Engagement Partner
dated 08.05.2019 to NFRA letter
dated 25.04.2019 was received on
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Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
affidavit and also received via email
from CA Shrenik Baid, Partner DHS.
f) Reply by the Engagement Partner
to NFRA's Letter dated 02.05.2019
received on 13.05.2019.
g) NFRA issued a letter dated
28.06.2019 to the Engagement
Partner conveying its prima facie
observations/comments/conclusions
(PFC) on the various issues in the
Questionnaire. Also, NFRA
requested that the Engagement
Partner, Sh. Udayan Sen, and the
EQCR Partner, Sh. Rukshad
Daruvala, or their respective
authorised representative from the
Engagement Team and the EQCR
Team respectively, be present in
person in the NFRA office to explain
replies to PFC.
h) Auditor requested NFRA through
his letter dated 02.07.2019 to grant
time till 30.07.2019 to provide
comprehensive responses, after
which to provide a date for an in-
person meeting at which they may
assist with any further clarifications
if required.
i) NFRA issued a letter dated
05.07.2019 granting time up to
5.8.2019 and the opportunity to
explain the issues in person.
j) Through letter dated 02.08.2019,
Engagement Partner replied to
NFRA's prima facie observations in
its letter dated 28.06.2019.
k) Draft AQRR Note was initiated by
Secretary-NFRA on 25.09.2019 and
put up for approval of EB.
l) The EB NFRA granted approval
vta notes dated 25.09.2019 for Draft
AQRR and approval of providing an
opportunity to the Engagement
W.P.(C) 1065/2021 & other connected matters Page 120 of 476
Signature Not Verified
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By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
Partner to appear in person before
the Authority.
m) Draft AQR Report (DAQRR) of
NFRA dated 25.9.2019 sent to the
Engagement Partner via email dated
25.9.19.
n) NFRA issued letter dated
17.10.2019 to DHS seeking
clarification regarding Audit
documentation and IT ISSUEs.
o) NFRA's letter dated 21.10.2019
containing additional Questionnaire,
sent via email on 21.10.2019 to CA
Udayan Sen seeking replies to the
same.
p) On 23.10.2019 DHS requested for
extension of time up to 4.11.2020 for
submission of response of NFRA's
Letter dated 21.10.2019.
q) NFRA emailed on 24.10.2019
granting extension of time up to
4.11.2020 as requested by DHS.
r) In person Presentation to NFRA
was made by the Engagement Team
members from DHS on 30.10.19.
s) Written replies were furnished by
the Engagement Partner vide letter
dated 4.11.19 to NFRA's
observations in the DAQRR.
t) On 15.11.2019 DHS provided its
Reply to NFRA letter dated
17.10.2019 and 21.10.2019 w.r.t
Audit Documentation/ IT issues and
additional questionnaire.
u) AQR Note was initiated by
Secretary-NFRA on 11.12.2019 and
put up for approval of EB.
v) It was then approved by the EB
for the issue vide note dated
11.12.2019. w) AQR Report,
approved by the EB, was issued by
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Digitally Signed
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Signing Date:07.02.2025
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the Secretary NFRA on 12.12.2019.
x) On 23.01.2020, NFRA issued a
letter to DHS for scheduling a
meeting on 27.01.2020 regarding the
IT application used for maintaining
Audit Files.
y) Presentation was given by the
DHS team on 28.01.2020 regarding
the IT application used for
maintaining Audit Files at NFRA
office and email sent by DHS
regarding points to be clarified by
DHS on IT related issues.
z) NFRA Team with IT consultants
visited office of Deloitte Haskins &
Sells LLP (Auditor) at Gurugram on
29.01.2020 for further detailed
understanding of their IT platform
used for audit documentation.
aa)Email of NFRA dated 07.02.2020
was sent to CA Udayan Sen seeking
reply to additional requirements/
queries. The same were related to IT
aspects of audit documentation.
Reply was sought by 11.2.2020.
bb )DHS emailed NFRA on
10.02.2020 seeking time to reply
NFRA's letter dated 7.2.2020 by
21.2.2020.
cc) Reply on the additional
requirements from DHS received via
letter dated 21.02.2020.
dd)Draft Supplementary Audit
Quality Review Report (DSAQRR)
was issued to DHS on 01.05.2020.
ee) On 23.05.2020, DHS requested
NFRA to permit the filing of an
interim reply to the DSAQRR by
25th June, 2020 and a supplemental
reply to the DSAQRR within a
reasonably practicable time from the
date the lockdown is lifted in
W.P.(C) 1065/2021 & other connected matters Page 122 of 476
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Signing Date:07.02.2025
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Mumbai.
ff) NFRA's letter dated 2.06.2020
was issued to DHS for filing of Final
Reply to Draft Supplementary Audit
Quality Review Report (DSAQRR)
by 25.06.2020.
gg)On 23.06.2020, DHS requested
NFRA to file comprehensive reply to
DSAQRR by 25.07.2020. DHS also
offered to alternatively, file their
responses to the DSAQRR in a
fragmented manner dealing with the
issues covered therein in several
parts and to file the first of such
responses on 25th June, 2020 and the
final one no later than 25th July,
2020.
hh)On 26.06.2020, Part Reply was
furnished by DHS in respect of the
DSAQRR. ii) NFRA emailed on
27.06.2020 for granting extension of
time upto 25.07.2020 to DHS for
submission of consolidated response
to the DSAQRR.
jj) In respect of DSAQRR, Final
Reply was furnished by DHS on
25.07.2020.
kk)On 01.09.2020, NFRA sent a
letter to DHS for oral hearing on
09.09.2020 regarding DSAQRR.
ll.) On 03.09.2020, DHS sent a letter
requesting for the date of hearing for
any time after 2.10.2020.
mm) On 05.10.2020, NFRA granted
the request for extension of time.
nn) On 28.10.2020 – Oral hearing
was conducted on DSAQRR.
oo )On 20.11.2020, DHS provided
written clarifications after Oral
hearing on DSAQRR.
pp)On 07.12.2020, EB approved for
issue of Supplementary AQRR
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Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
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covering IT related control
deficiencies in audit documentation
by DHS and this was issued by the
Secretary NFRA.
As decided by the EB, the SCN
followed the detailed AQR process
as detailed above. The chronology
is as follows: -
2 Who has
conducted the
investigation?
After the issuing the AQRR, EB with
the assistance of a team under a
Chief General Manager, NFRA
("CGM"), who was not part of the
AQR team, examined the
observations in the AQRR and
prepared draft SCN to the Audit
Firm and Partners. The SCNs were
approved for issue by the EB.
a) On 02.01.2021, CGM initiated a
note for EB's approval for issue of
SCN to DHS.
b) On 03.01.2021, EB approved to
issue the SCN.
c) On 06.01.2021, SCN issued to
DHS. d) After that the DHS
approached the court and matter is
pending before the Hon'ble Delhi
High Court.
3 Which
authority/official
has authorized
the initiation of
action?
The AQR of the ILPS groups was
started suo-motu as decided by the
EB. Later, a reference from the
central Government was also
received by NFRA on the same
matter.
4 Who had heard
and conducted
the proceedings?
SCN was issued to DHS on
06.01.2021. After that the DHS
approached the Court and matter is
pending before the Hon’ble Delhi
High Court.
Hence, further proceedings are at
hold.
2. WP(C) No. 1524 of2020 (Udayan Sen),
W.P.(C) 1065/2021 & other connected matters Page 124 of 476
Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
3. WP(C) No. 1522 of 2020 (Rukshad Daruvala),
4. WP(C) No. 1525 of 2020 (Shrenik Baid)
SI No. Question Answer
1 By whom AQR
was prepared
The AQR report was prepared by the
Executive Body (EB) NFRA. A team
of Staff in NFRA, consisting of the
Secretary, one Executive Director,
and three Chartered Accountants
(Professionals) assisted EB in
scrutiny of Audit file however EB
examined all the relevant documents
contained in the audit file and after
consideration of all relevant legal
conditions, prepared and signed the
AQRR, which was finally, with the
approval of EB, issued by Secretary
NFRA. The chronology of preparing
the AQRR is as follows:
a) NFRA letter dated 25.02.2019
was sent to the Engagement Partner
(EP) requesting for the Audit file of
IL&FS Financial Services Ltd for the
Financial Year 2017-18.
b) EP submitted the Audit File on
11.03.2019.
c) NFRA's letter dated 25.04.2019
was sent to the Engagement Partner
seeking a list of related parties and
Audit/Non-Audit revenue in
stipulated format on Affidavit.
d) NFRA's letter dated 02.05.2019,
containing a Questionnaire on
matters observed in the Audit File,
was sent via email on 02.05.2019 to
the Engagement Partner seeking
replies to the same.
e) Reply of the Engagement Partner
dated 08.05.2019 to NFRA letter
dated 25.04.2019 was received on
affidavit and also received via email
from CA Shrenik Baid, Partner DHS.
f) Reply by the Engagement Partner
W.P.(C) 1065/2021 & other connected matters Page 125 of 476
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Signing Date:07.02.2025
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to NFRA's Letter dated 02.05.2019
received on 13.05.2019.
g) NFRA issued a letter dated
28.06.2019 to the Engagement
Partner conveying its prima facie
observations/comments/conclusions
(PFC) on the various issues in the
Questionnaire. Also, NFRA
requested that the Engagement
Partner, Sh. Udayan Sen, and the
EQCR Partner, Sh. Rukshad
Daruvala, or their respective
authorised representative from the
Engagement Team and the EQCR
Team respectively, be present in
person in the NFRA office to explain
replies toPFC.
h) Auditor requested NFRA through
his letter dated 02.07.2019 to grant
time till 30.07.2019 to provide
comprehensive responses, after
which to provide a date for an in-
person meeting at which they may
assist with any further clarifications
if required.
i) NFRA issued a letter dated
05.07.2019 granting time up to
5.8.2019 and the opportunity to
explain the issues in person.
j) Through letter dated 02.08.2019,
Engagement Partner replied to
NFRA's prima facie observations in
its letter dated 28.06.2019.
k) Draft AQRR Note was initiated by
Secretary-NFRA on 25.09.2019 and
put up for approval ofEB.
1) The EB NFRA granted approval
via notes dated 25.09.2019 for Draft
AQRR and approval of providing an
opportunity to the Engagement
Partner to appear in person before
the Authority.
m) Draft AQR Report (DAQRR) of
W.P.(C) 1065/2021 & other connected matters Page 126 of 476
Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
NFRA dated 25.9.2019 sent to the
Engagement Partner via email dated
25.9.19.
n) NFRA issued letter dated
17.10.2019 to DHS seeking
clarification regarding Audit
documentation and IT issues.
o) NFRA's letter dated 21.10.2019
containing additional Questionnaire,
was sent via email on 21.10.2019 to
CA Udayan Sen seeking replies to
the same. p) On 23.10.2019 DHS
requested for extension of time up to
4.11.2020 for submission of response
of NFRA's Letter dated 21.10.2019.
q) NFRA emailed on 24.10.2019
granting extension of time up to
4.11.2020 as requested by DHS.
r) In person Presentation to NFRA
was made by the Engagement Team
members from DHS on 30.10.19.
s) Written replies were furnished by
the Engagement Partner vide letter
dated 4.11.19 to NFRA's
observations in the DAQRR.
t) AQR Note was initiated by
secretary-NFRA on 11.12.2019 and
put up for approval of EB.
u) It was then approved by the EB
for the issue vide note dated
11.12.2019.
v) AQR Report, approved by the EB,
was issued by the Secretary NFRA
on 12.12.2019.
2. Who has
conducted the
investigation?
As decided by the EB, the SCN
followed the detailed AQR process
as detailed above. The chronology is
as follows: - After the issuing the
AQRR, EB with the assistance of a
team under a CGM, who was not
part of the AQR team, examined the
observations in the AQRR and
prepared draft SCN to the Audit
W.P.(C) 1065/2021 & other connected matters Page 127 of 476
Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
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Firm and Partners. The SCNs were
approved for issue by the EB.
a) On 28-01-20, NFRA issued the
Show cause Notice (SCN) to
Rukshad Daruwala, wherein the last
date for replying to the SCN was
mentioned as 29-02-2020.
b) On 07-02-20, a Writ Petition was
filed by Rukshad Daruvala in Delhi
High Court.
c) On 14-02-20, a Letter was sent by
R Daruvala informing NFRA that he
will not be filing the reply to SCN,
owing to the WP filed.
d) On18-03-20, NFRA issued a letter
to Rukshad Daruvala regarding filing
of reply to SCN as there is no stay on
NFRA proceeding by the Court.
e) On 20-03-20, Reply from R
Daruvala was received by NFRA that
he shall not be filing a reply to the
SCN due to the pendency of
proceeding in Delhi High Court.
f) On 29-04-20, NFRA sent a letter
to R Daruvala, giving him time up to
1Oth May 2020 to file the reply.
g) On 13-05-20, NFRA wrote a letter
to R Daruvala, granting him
additional time upto 20-05-2020 and
also offering an opportunity of
personal hearing.
h) On 17-05-20, R Daruvala
requested NFRA that he will file
interim reply by 10-06-20.
i) On 18-05-20, NFRA rejected R
Daruvala's request for extension of
time as a considerable time had
already passed and there was no stay
granted by the Delhi High Court.
j) On 21-05-20, Delhi High Court
granted R Daruvala time upto 10-06-
W.P.(C) 1065/2021 & other connected matters Page 128 of 476
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Signing Date:07.02.2025
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20 to file reply to the SCN.
k) On 27-05-20, NFRA sent a letter
for rescheduling oral hearing on 11-
06-20.
1) On 10-06-20, R Daruvala
submitted Interim Reply to the SCN.
m) On 11-06-20, Oral hearing was
conducted before EB.
n) On 13-06-20, R Daruvala
provided his written submissions
post oral hearing.
o) On 20-07-20, R Daruvala
submitted supplemental reply to the
SCN.
p) On 23-07-20, EB signed the order
and approved for issue of same under
the signature of Secretary NFRA.
*Identical process for AQRR and
Investigation (SCN) was followed
for Shrenik Baid and Udayan Sen
as well.
3 Which
authority/official
has authorized
the initiation of
action?
The AQR of the ILFS group was
started suo-motu as decided by the
EB. Later, a reference from the
central government was also
received by NFRA on the same
matter.
4 Who had heard
and conducted
the proceedings?
The oral hearing was before the EB
(the Chairperson and Full-time
Member).
Thereafter, the EB signed the orders
and approved for issue of same under
the signature of Secretary NFRA and
the Secretary issued the orders.
5. W.P.(C) 11737/2021- SRBC Vs. UNION OF INDIA & ANR,
6. W.P.(C) 11738/2021- Vinayak Pujare Vs. UNION OF INDIA &
ANR.
7. W.P.(C) 11739/2021- Ravi Bansal Vs. UNION OF INDIA & ANR
SI
NO.
Question Answer
W.P.(C) 1065/2021 & other connected matters Page 129 of 476
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Signing Date:07.02.2025
18:46:26
1 By whom AQR
was protected
The AQR report was prepared by the
Executive Body (EB) was prepared
NFRA. A team of Staff in NFRA,
consisting of the Secretary, one
Executive Director, one CGM and
three Chartered Accountants
(Professionals) assisted EB in
scrutiny of Audit file, however EB
examined all the relevant documents
contained in the audit file and after
consideration of all relevant legal
conditions, prepared and signed the
AQRR, which was finally, with the
approval of EB, issued by Secretary
NFRA. The chronology of preparing
the AQRR is as follows:
a) On 22.02.2019, NFRA sent an
email to the Audit firm requesting
for the Audit file of ILF &S
Transportation Networks Limited
(ITNL) for the Financial Year 2017-
18.
b) On 22.03.2019, the Audit firm
submitted Audit Files of ITNL vide
letter dated 22 March 20 19.
c) On 17.05.2019, NFRA sent an
email to SRBC seeking details of:
1. List of Related Parties of ITNL;
2. List of Related Parties of M/s
SRBC & Co LLP;
3. Details of audit and non-audit fee
received from the auditee.
d) On 14.06.2019, SRBC sent a letter
to NFRA providing details sought by
NFRA vide its email dated
17.05.2019.
e) On 03.07.2019, NFRA sent its pt
Questionnaire to SRBC.
f) On 17.07.2019, NFRA sent an
email seeking Affidavit w.r.t the
information received by NFRA
on14.06.2019.
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Signing Date:07.02.2025
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g) On 19.07.2019, NFRA sent its 2nd
Questionnaire to SRBC.
h) On 22.07.2019, SRBC provided
its response to NFRA's 1st
Questionnaire.
i) On 23.07.2019, SRBC submitted
Affidavit dated 23.07.2019 in
support of information sent on
14.6.2019.
j) On 29.07.2019, SRBC provided its
response to NFRA's 2nd
Questionnaire.
k) On 09.08.2019, NFRA sent an
email to SRBC, seeking audit file
references and page numbers for
hard files.
l) On 19.09.2019, SRBC sent a letter,
providing details as sought by NFRA
in its email dated 09.08.2019
alongwith SQC-1 Policy, 3 Limited
Review Files.
m) On 17.10.2019, NFRA sent a
letter to SRBC for verifying dates of
audit files and procedures pertaining
to integrity of dating.
n) On 23.12.2019, NFRA sent a
letter seeking engagement letters for
audit and non-audit services to ITNL
for the FYs 2014-15 to 2018-19.
o) On 10.01.2020, SRBC sent a letter
providing the details sought by
NFRA on 23.12.2019.
p) On 22.01.2020, NFRA requested
the Audit firm for submission of
Memorandum, analysis,
presentations, and other material
incorporating the impact of transition
from IGAAP to lnd AS.
q) On 29.01.2020, SRBC submitted
details as requested by NFRA on
22.01.2020.
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r) On 24.03.2020, NFRA issued its
Prima-Facie Conclusions (PFC) on
AQR of Statutory audit of ITNL.
s) On 17.04.2020, NFRA issued
Supplementary PFC (SPFC) on
Integrity of audit file and Audit
Firm's IT Controls Review.
t) On 03.07.2020, SRBC submitted
its response to PFC and SPFC.
u) On 28.12.2020, NFRA asked the
Audit Firm for additional documents
- copy of audit committee and Board
Meeting minutes for appointment of
SRBC & Co LLP for FY 2016-17,
Audit Engagement Acceptance
Letter 20 16-17, Minutes of Audit
committee 29 May 2018, Underlying
agreement 2012-13.
v) On 02.01.2021, SRBC provided
its response to information sought by
NFRA on 28.12.2020 with five
annexures.
w) On 08.03.2021, NFRA issued the
Draft Audit Quality Review Report
(DAQRR).
x) On 10.07.2021, Written replies
were furnished by SRBC, w.r.t
NFRA's observations in the DAQRR.
y) On 08.09.2021, Engagement team
members of SRBC made a
presentation to NFRA.
z) On 23.09.2021, the EB approved
the issue of AQR.
aa) On 23.09.2021, as authorised by
EB, the Secretary NFRA issued
AQR Report for ITNL's audit done
by SRBC for the Financial Year
2017-18.
2 Who had
conducted the
investigation?
As decided by the EB, the SCN
followed the detailed AQR process
as detailed above:
After the issuing the AQRR, EB with
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the assistance of a team under a
CGM, examined the observations in
the AQRR and prepared draft SCN
to the Audit Firm and Partners. The
SCNs were approved for issue by the
EB.
The chronology is as follows:
a) On 27.09.2021, EB approved the
issue of SCN to CA Vinayak Pujare
,EQCR.
b) On 28.09.2021, As approved by
the EB, the Secretary NFRA issued
the SCN to CA Vinayak Pujare.
c) On 28.09.2021, EB approved the
issue of SCN to CA Ravi Bansal, EP
and SRBC & Co. LLP, Audit Firm.
d) On 28.09.2021, As approved by
the EB, the SecretaryNFRA issued
the SCN to EP and Audit Firm.
e) On 18.11.2021, Ravi Bansal and
Vinayak Pujare submitted their reply
to the SCN issued by NFRA.
f) On 19.11.2021, SRBC submitted
its reply to SCN issued by NFRA.
g) On 17.08.2023, Oral hearing for
SRBC, Ravi Bansal and Vinayak
Pujare was conducted before EB.
h) Orders are yet to be issued.
3 Which
authority/official
the initiation of
action?
The AQR of the ILFS group was
started suo-motu as decided by the
EB. Later, a reference from the
Central Government was also
received by NFRA on the same
matter.
4 Who had heard
and conducted
the proceedings?
The oral hearing was before the EB (
the Chairperson and Full-time
Member).
Orders are yet to be issued.
8. W.P.(C) 11987/2022 Jayesh Gandhi Vs. UNION OF INDIA &
ANR
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SI.
NO
Question Answer
1 By whom AQR
was prepared
The AQR report was prepared by the
Executive Body (EB) NFRA. A team
of Staff in NFRA, consisting of the
Secretary, one Executive Director,
one CGM and four Chartered
Accountants (Professionals) assisted
EB in scrutiny of Audit file, however
EB examined all the relevant
documents contained in the audit file
and after consideration of all relevant
legal conditions, prepared and signed
the AQRR, which was finally, with
the approval of EB, issued by
Secretary NFRA. The chronology of
preparing the AQRR is as follows:
a) On 12.02.2019, NFRA sent an
email to Auditors of ILF &S Limited
requesting for the Audit file of
ILF&S Limited for the Financial
Year 2017-18.
b) On 25.03.2019, Auditors of
IL&FS Limited submitted the Audit
File. c) On 1.10.2019, NFRA
requested SRBC to submit separate
laptop for audit file of FY 17-18.
d) On 1.10.2019 and 6.10.2019,
NFRA requested IL&FS Limited to
submit documents.
e) On 7.10.2019, IL&FS Limited
submitted the requested documents
to NFRA.
f) On 11.10.2019, NFRA requested
SRBC to submit an Affidavit
regarding list of related parties, audit
& non-audit fees, peer review report,
hours logged for FY 17-18latest by
25th Oct 2019.
g) On 17.10.2019, NFRA requested
SRBC to verify the dates of the audit
file and procedures/IT safeguards
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pertaining to the integrity of dates.
h) On 26.10.2019, NFRA received
the response from SRBC for its
email dated 11.10.2019.
i) On 31.10.2019, NFRA requested
IL&FS Limited to submit certain
Investigation reports, RBI Inspection
reports, Forensic audit reports.
j) On 2.11.2019, NFRA received the
RBI Inspection Reports from IL&FS
Limited.
k) On 5.10.2019, NFRA received a
response for email dated 17.10.2019
regarding the date of the audit file
and procedures/IT safeguards
pertaining to the integrity of dates.
1) On 19.11.2019, NFRA issued a
Questionnaire to SRBC.
m) On 30.12.2019, SRBC provided
its response to Questionnaire issued
on 19.11.2019 by NFRA.
n) On 26.08.2020, NFRA issued a
Supplementary questionnaire.
o) On 6.9.2020, NFRA received a
response to the supplementary
questionnaire issued by it on
26.8.2020.
p) On 16.10.2020, NFRA requested
IL&FS Limited to confirm whether
SRBC was appointed as concurrent
auditor of the company?
q) On 19.10.2020, NFRA received a
response from IL&FS Limited to its
communication dated 16.10.2020.
r) On 2.12.2020, NFRA requested
clarification from SRBC regarding
General Contingency Provision
(GCP).
s) On 2.12.2020, NFRA requested
IL&FS Limited for certain
information w.r.t.- Board Meeting
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for FY17, FY18, FY19 and Audit
Committee Meeting for FY19.
t) On 10.12.2020, NFRA received
information from IL&FS Limited
regarding BM and ACM as requested
on 2.12.2020.
u) On 12.12.2020, NFRA received a
response from SRBC w.r.t.
clarification on GCP sought by
NFRA on 2.12.2020.
v) On 21.12.2020, NFRA issued its
Prima Facie
Conclusions/Observations (PFC).
w) 14.4.2021, NFRA received
SRBC's response to the PFC
x) On 23.07.2021, NFRA issued its
Draft AQRR.
y) On 27.9.2021, NFRA received
SRBC's reply to the DAQRR.
z) On 17.5.2022, NFRA conducted
an Oral hearing for SRBC Team to
present Its submissions w.r.t
DAQRR.
aa) On 22.6.2022, as authorised by
EB, the Secretary NFRA issued
AQR Report for the Financial Year
2017-18.
2 Who has
conducted the
investigation?
As decided by the EB, the SCN
followed the detailed AQR process
as detailed above.
After the issuing the AQRR, EB with
the assistance of a team under a
CGM, examined the observation in
the AQRR and prepared draft SCN
to the Partners. The SCNs were
approved for issue by the EB.
The chronology is as follows: -
a) On 27.6.2022, as approved by the
EB, the Secretary-NFRA issued the
SCN to EP, CA Jayesh Gandhi.
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b) On 20.9.2022, the EP submitted
his Reply to SCN issued by NFRA.
c) On 5.7.2023, an Oral hearing,
before EB, was conducted w.r.t SCN
dated 27.06.22, attended by the legal
counsels and the EP.
d) On 10.07.2023, the EP submitted
his written summary of submissions
after the oral hearing.
e) Final order by EB, yet to be
issued.
3 Which
authority/official
has authorized
the initiation of
action?
The AQR of the ILFS group was
started suo-motu as decided by the
EB. Later, a reference from the
central Government was also
received by NFRA on the same
matter.
4 Who had heard
and conducted
the proceedings?
The oral hearing was before the EB
(the Chairperson and Two Full-Time
Members).
Final Orders are yet to be issued.
9. W.P.(C) 5842/2023 SNEHAL N MUZOOMDAR Vs. UNION
OF INDIA&ANR
SI.
NO
Question Answer
1 By whom AQR
was prepared
No AQRR is this case.
2 Who has
conducted the
investigation?
At the time of carrying out an Audit
Quality Review (AQR) of the
statutory audit of Dewan Housing
Finance Corporation Limited
(DHFL) for FY 2017-18 conducted
by Chaturvedi & Shah LLP (C&S) ,
a Mumbai based Audit Firm, the EB
noticed that 33 Engagement Partners
(EPs) or branch auditors had signed
the "Independent Branch Auditors'
Report" for nearly 250 branches,
without a valid appointment. The
Statutory Auditor of the Company
viz. M/s Chaturvedi and Shah LLP
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had referred to these so called
Branch Audit reports in its
Independent Audit report of DHFL.
The EB examined the work of these
33 EPs, including Snehal
Muzoomdar, under section 132 ( 4)
of the Companies Act, 2013 and
observed non compliances in the
acceptance of Audit engagement by
the Branch Auditors and non-
compliance of Standards on Auditing
(SAs) in conducting the audit by
them. Thereafter, the SCNs were
approved for issue by the EB.
a) On 10.08.2022, EB approved for
initiation of action under Section 13
2( 4) of the Companies Act, 2013.
b) On 10.08.2022, as approved by
the EB, the Secretary-NFRA sent
letters and emails to Snehal
Muzoomdar ,EP for submission of
audit file.
c) On 25.08.2022, EP submitted the
audit file and EB examined the audit
file.
d) On 16.11.2022, EB approved for
the issue of the SCN to CA Snehal
Muzoomdar ,EP.
e) On 21.11.2022, as approved by the
EB, the secretary-NFRA issued the
SCN.
3 Which
authority/official
has authorized
the initiation of
action?
The action against the EP was
initiated suo-motu by the EB.
a) On 21.11.2022, as approved by the
EB, the secretary-NFRA issued the
SCN giving 30 days time for reply.
b) On 19.12.2022, EP requested for
extension of time for submitting
reply to the SCN.
c) On 26.12.2022, on behalf of EB,
the Chairperson approved the
extension of time.
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d) On 27.12.2022, email was sent to
EP granting extension of time.
e) On 18.01.2023, EP submitted his
reply to the SCN dated 21.11.2022.
f) On 10.02.2023, a letter was sent to
EP conveying the date and time for
oral hearing on 17.02.2023 but this
date was rescheduled by EB for
07.03.2023.
g) On 06.03.2023, EP requested for
reschedule of the oral hearing due to
his mother's demise.
h) The EB rescheduled the hearing
on 27.03.2023.
i) EB again, on EP's request,
rescheduled the hearing on
10.04.2023.
j) On 10.04.2023, first oral hearing
ofEP was held.
k) On 14.04.2023, EP submitted
additional written submissions
subsequent to the 1st oral hearing.
1) On 19.05.2023, email was sent to
EP for intimating his willingness to
avail the additional oral hearing
along with his legal counsel.
m) On 23.05.2023, EP confirmed his
willingness for additional hearing.
n) The hearing was scheduled on
02.06.2023.
o) On 29.05.2023, EP requested for
rescheduling of personal hearing due
to his hearing in Supreme Court.
p) On 31.05.2023, EB approved for
rescheduling the personal hearing. q)
On 06.06.2023, the oral hearing was
adjourned after its commencement
since the EP was not accompanied
by a legal counsel. r) On 12.06.2023,
personal hearing, before EB, was
held along with his legal
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representative.
s) On 15.06.2023, EP submitted
additional written submissions
subsequent to the hearing.
t) On 29.09.2023, EB signed the
Order and authorised Secretary
NFRA to issue the same. The
Secretary NFRA issued the Order.
4 Who had heard
and conducted
the proceedings?
The oral hearing was before the EB (
the Chairperson and Two Full-time
Members).
10. W.P. (C) No. 1650 of 2023 Natrajan Ram Krishna v/s UOI &
NFRA
SI.
NO
Question Answer
1 By whom AQR
was prepared
The AQR report was prepared by the
Executive Body was prepared (EB)
NFRA. A team of Staff in NFRA,
consisting of the Secretary, one
Executive Director, one CGM and
four Chartered Accountants
(Professionals) assisted EB in
scrutiny of Audit file, however EB
examined all the relevant documents
contained in the audit file and after
consideration of all relevant legal
conditions, prepared and signed the
AQRR, which was finally, with the
approval of EB, issued by Secretary
NFRA. The chronology of preparing
the AQRR is as follows:
a) On 12.02.2019, NFRA sent an
email to Auditors of ILF &S Limited
requesting for the Audit file of ILF
&S Limited for the Financial Year
2017-18. ) On 25.03.2019, Auditors
of IL&FS Limited submitted the
Audit File.
b) On 25.03.2019, Auditors of
IL&FS Limited submitted the Audit
File.
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c) On 1.10.2019 and 6.10.2019,
NFRA requested IL&FS Limited to
submit documents.
e) On 7.10.2019, IL&FS Limited
submitted the requested documents
to NFRA.
f) On 11.10.2019, NFRA requested
SRBC to submit an Affidavit
regarding list of related parties, audit
& non-audit fees, peer review report,
hours logged for FY 17-18latest by
25th Oct 2019.
g) On 17.10.2019, NFRA requested
SRBC to verity the dates of the audit
file and procedures/IT safeguards
pertaining to the integrity of dates.
h) On 26.10.2019, NFRA received
the response from SRBC for its
email dated 11.10.2019.
i) On 31.10.2019, NFRA requested
IL&FS Limited to submit certain
Investigation reports, RBI Inspection
reports, Forensic audit reports.
j) On 2.11.2019, NFRA received the
RBI Inspection Reports from IL&FS
Limited.
k) On 5.10.20 19, NFRA received a
response for email dated 17.10.20 19
regarding the date of the audit file
and procedures/IT safeguards
pertaining to the integrity of dates.
1) On 19.11.2019, NFRA issued a
Questionnaire to SRBC.
m) On 30.12.2019, SRBC provided
its response to Questionnaire issued
on 19.11.20 19 by NFRA.
n) On 26.8.2020, NFRA issued a
Supplementary questionnaire.
o) On 6.9 .2020, NFRA received a
response to the supplementary
questionnaire issued by it on
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26.8.2020.
p) On 16.10.2020, NFRA requested
IL&FS Limited to confirm whether
SRBC was appointed as concurrent
auditor of the company?
q) On 19.10.2020, NFRA received a
response from IL&FS Limited to its
communication dated 16.10.2020.
r) On 2.12.2020, NFRA requested
clarification from SRBC regarding
General Contingency Provision
(GCP).
s) On 2.12.2020, NFRA requested
IL&FS Limited for certain
information w.r.t.- Borad Meeting
for FY17, FY18, FY19 and Audit
Committee Meeting for FY19.
t) On 10.12.2020, NFRA received
information from IL&FS Limited
regarding BM and ACM as requested
on 2.12.2020.
u) On 12.12.2020, NFRA received a
response from SRBC w.r.t.
clarification on GCP sought by
NFRA on 2.12.2020.
v) On 21.12.2020, NFRA issued its
Prima Facie
Conclusions/Observations (PFC).
w)14.4.2021, NFRA received
SRBC's response to the PFC.
x) On 23.07.2021, NFRA issued its
Draft AQRR. )
y)On 27.9.2021, NFRA received
SRBC's reply to the DAQRR.
On 22.6.2022, as authorised by EB,
the Secretary NFRA issued AQR
Report for the Financial Year 2017-
18.
2 Who has
conducted the
investigation?
As decided by the EB, the SCN
followed the detailed AQR process
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as detailed above:
After the issuing the AQRR, EB with
the assistance of a team under a
CGM, examined the observations in
the AQRR and prepared draft SCN
to the Partners. The SCN s were
approved for issue by the EB.
The chronology is as follows: -
a) On 27.6.2022, as approved by the
EB, the Secretary-NFRA issued the
SCN to CA Natrajan Ramkrishna,
EQCR, giving him 30 days' time to
reply.
b) He did not respond to the SCN in-
time, so, on 25.08.2022, NFRA
requested CA Natrajan Ramkrishna
to submit his reply to the SCN on or
before 11.09.2022.
c) On 12.09.2022, CA Natrajan
Ramkrishna stated that he had retired
from SRBC & Co. LLP three years
ago and does not have any access to
the audit file - as such, he is unable
to submit his reply to the SCN. He
also requested NFRA to make
available him the audit file to submit
his reply to the SCN.
d) On 15.09.2022, NFRA allowed
CA Natrajan Ramkrishna to visit the
office of NFRA to collect the audit
file.
e) On 24.09.2022, CA Natrajan
Ramkrishna stated that he is not in
position to visit the office of NFRA
due to bad health and requested
NFRA to allow his authorized
representative to visit on his behalf
to collect all the relevant files and
documents in relation to the SCN.
f) On 12.10.2022, NFRA allowed
CA Natrajan Ramkrishna to send his
authorised representative to office of
NFRA any day between 17th
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October, 2022 to 201h October,
2022, with prior intimation to NFRA,
to collect the copy of the documents
relating to SCN.
g) On 19.10.2022, one person
claiming to be the authorised
representative of CA Natrajan
Ramkrishna came to NFRA asking
for the copy of the documents.
However, that person came without
any prior intimation and valid
authorisation and affidavit from CA
Natrajan Ramkrishna, requirement of
which was specifically mentioned by
NFRA in email dated 12.10.2022. In
the absence of proper authorisation
and identity, relevant documents
could not be provided.
h) On 3.11.2022, NFRA sent a
reminder to CA Natrajan
Ramkrishna to submit his response to
the SCN on or before 18.11.2022. In
response to the said email, CA
Natrajan Ramkrishna attached a copy
of signed affidavit and letter of
authorisation in his email to allow
his representative Ms. Saumya Kaul
to visit the office of NFRA to collect
files and documents in relation to the
SCN.
i) On 21.11.2022, Ms. Saumya Kaul,
the authorised representative of CA
Natrajan Ramkrishna visited the
office of NFRA and she was
provided with the following
documents:
1. Audit File pertaining to Statutory
Audit of IL&FS Limited for FY18
2. Questionnaire
3. Response of SRBC to the
Questionnaire
4.PFC
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5. Response of SRBC to the PFC
6. DAQRR
7. Response of SRBC to the DAQRR
j) On 13.12.2022, CA Natrajan
Ramkrishna requested NFRA to
share Appendix to the response of
SRBC to PFC.
k) On 27.12.2022, NFRA shared the
said Appendix with CA Natrajan
Ramkrishna and extended the time to
submit the response to SCN by
11.01.2023.
1) On 11.01.2023, CA Natrajan
Ramkrishna submitted his reply to
SCN. m) On 21-09-2023, CAN
Ramakrishna requested for
rescheduling the hearing due to the
inconvenience of his legal counsel.
n) On 25-09-2023, the EB
rescheduled the oral hearing to 11-
10-2023 as requested by CA N
Ramakrishna.
3 Which
authority/official
has authorized
the initiation of
action?
The AQR of the ILFS group was
started suo-motu as decided by the
EB. Later, a reference from the
central government was also
received by NFRA on the same the
initiation of matter.
The oral hearing, before EB (
(The
Chairperson & 02 Full-Time
11.1
Members) is scheduled on
0.2023.
4 Who had heard
and conducted
the proceedings?
11. W.P. (C) No. 10303 of2023- CA Vinay Aggarwal
SI
NO.
Question Reply
1 By whom the
Audit Quality
Review Report
No Audit Quality Review Report
was prepared in this case.
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was prepared?
2 Who had
conducted the
investigation?
a) On 30.05.2022, NFRA received
SEBI's letter dated 19.05.2022
regarding report on examination/
analysis of Annual Reports of
Magnum Ventures Ltd (Magnum).
b) On 02.06.2022, the Secretary
NFRA submitted this matter to EB
through Chairperson NFRA and on
03.06.2022, EB initiated the
examination in this case. For scrutiny
of the documents, the EB was
assisted by an Executive Director &
his team.
c) On 16.06.2022, the Executive
Director submitted the file to EB
through Chairperson with a proposal
to call audit files and other records
from the Auditor and Magnum for
investigation u/s 132(4) of the
Companies Act 2013 (Act).
d) On 20.06.2022, EB through
Chairperson approved the proposal
and Auditor was advised to submit
audit files within 30 days.
e) On 14.07.2022 Auditor sought
extension of time till 30.09.2022.
f) On 26.07.2022, NFRA allowed
extension of 15 days' time i.e., till
05.08.2022.
g) On 02.08.2022, Auditor sought
extension of time till 31.10.2022.
NFRA allowed extension of 15 days'
time i.e., till 20.08.2022.
h) On 19.08.2022, Auditor submitted
audit files after 60 days.
i) Thereafter, the EB, with the
assistance of an Executive Director
& his team examined the financial
statements of Magnum ventures Ltd
and audit files of M/s Aggarwal and
Rampal for the relevant period.
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Based on such examination,
sufficient cause existed to initiate
action u/s 132( 4) of the Companies
Act, 2013 against CA Vinay
Aggarwal, engagement partner of
M/s Aggarwal and Rampal.
3 Which
authority/official
had authorized
the initiation of
action?
a) The EB through the Chairperson,
NFRA authorized initiation of action
on 20.06.2022 (for calling audit files)
under section 132( 4) of the
Companies Act the initiation of
b) The Executive Body (Chairperson
and two full time action? members)
of NFRA authorised issue of two
Show Cause Notices to CA Vinay
Aggarwal on 15.06.2023 with the
advice to submit reply within 30
days' time.
c) On 10.07.2023, Auditor sought
extension of time till 05.08.2023 for
submission of reply to SCN. NFRA
allowed time till 25.07.2023.
d) On 20.07.2023, Auditor sought
extension of time till 05.08.2023 for
submission of reply to SCN, which
was allowed.
e) On 05.08.2023, Auditor submitted
reply to one SCN and sought 10
days' time for submission of reply to
second SCN. Reply to 2nd SCN has
also been submitted by him.
4 Who had heard
and conducted
the proceedings?
CA Vinay Aggarwal has submitted
reply to one SCN and requested for
Personal Hearing. Reply to second
SCN has also been received. The
Executive Body (EB) of NFRA will
hear CA Vinay Aggarwal and
advocate, if any, and conduct the
proceedings.
12. W.P. (C) No . 2194 of2023: CA Adarsh Ranka
Sr No Question Reply
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1 By whom the
Audit Quality
Review Report
was prepared?
No Audit Quality Review Report
was prepared in this case.
2 Who had
conducted the
investigation?
a) A letter dated 11.05.2021 from
SEBI was received by NFRA
regarding the irregularities in the
financial statements of Sobha
Limited.
b) On 31.05.2021, matter was
submitted to the EB through
Chairperson.
c) On 04.06.2021, the Executive
Body (EB), through chairperson,
approved for calling of Audit File. In
this case, the EB is assisted by an ED
& him team.
d) On 09.08.2021, Auditor was asked
to submit the audit file.
e) On 23.08.2021, Auditor sought 06
weeks extension of time till
05.10.2021.
f) Extension as sought was granted
by NFRA.
g) On 04.10.2021, Auditor submitted
audit files after 57 days of initial
notice to submit the audit file
(Whereas SAs mandates freezing of
audit file within 60 days of signing
of the audit report)
h) On 10.02.2022, NFRA sought
comments on the SEBI observations
from the auditor and requested to
submit the reply within 15 days.
i) On 21.02.2022, Auditor sought
extension for additional 01 month to
submit his comments.
j) Extension as sought was again
granted by NFRA.
k) On 24.03.2022, Auditor submitted
his comments.
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I) Comments of the auditor was
considered by the EB and on
completion of the examination by the
EB, there were reasons to believe
that sufficient cause existed to
initiate action u/s 132(4) of the
Companies Act, 2013 against CA
Adarsh Ranka, Engagement Partner
(EP) of S. R. Batliboi & Associates
LLP.
3 Which
authority/official
had authorized
the initiation of
action?
f) On 04.06.2021, the Executive
Body (EB) NFRA, through its
Chairperson, authorised calling audit
files and on 09.08.2021, under
Section 132 of the Companies Act,
20 13 read with NFRA Rules asked
the auditor to submit the audit file.
g) On 05.01.2023, EB (Chairperson
and two full time members), after
due application of mind, approved
for issue of a Show Cause Notice
(SCN) to CA Adarsh Ranka, asking
him to submit reply to the SCN
within 30 days' time and he was also
offered to avail opportunity of
personal hearing.
h) On 07.02.2023, Auditor submitted
reply to SCN i.e., after 33 days of
issue of SCN.
4 Who had heard
and conducted
the proceedings?
a) On 07.02.2023, CA Adarsh Ranka
submitted reply to SCN and
requested for Personal Hearing.
b) NFRA considered his request for
personal hearing and
c) On 02.06.202, NFRA issued a
communication to the auditor
intimating the date of personal
hearing scheduled to be held on
26.06.2023. Initially 24 days' time
was granted, in addition to the time
granted to reply the SCN, to the
auditor for preparation of personal
hearing.
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d) On 12.06.2023, Auditor sought 3
weeks extension from the date of this
communication.
e) On 22.06.2023, NFRA granted 18
days extension rescheduling the
hearing on 14.07.2023. So, total42
days were granted to the auditor for
the preparation of / Personal
Hearing.
f) On 14.07.2023, Personal Hearing
was held before the EB.
g) Final order is yet to be issued.
A UDITING I NDUSTRY : E XECUTIVE D ELIBERATIONS
73. Before we proceed further to chronicle and record the erudite
submissions which were addressed by learned senior counsels
appearing for respective sides, it would be appropriate to briefly pause
and take note of the salient and significant events which appear to have
led to Section 132 of the Companies Act being introduced in the statute
book.
74. As was noticed in the preceding parts of this decision, the
provision itself came to be introduced in the Act by virtue of Act No. 18
of 2013. The provision, however, came to be energized only on 01
October 2018. The proposed structure of Section 132 also formed the
subject matter of consideration of the Standing Committee on Finance
and stands noted in its Thirty Seventh report. The subject of regulation
of audit firms and networks also formed part of deliberations of prior
Standing Committees and some of which have been noticed in the
former parts of this judgment . While the imperative need to regulate
auditing firms and to align auditing norms with global standards formed
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subject matter of discussion of constituents of the Union Government at
different points of time, concrete steps in that direction appear to have
been prompted by the direction issued by the Supreme Court on 23
February 2018 in S. Sukumar.
75. The direction which the Supreme Court framed on that occasion
read thus :-
“The Union of India may constitute a three member Committee of
experts to look into the question whether and to what extent the
statutory framework to enforce the letter and spirit of Sections 25
and 29 of the CA Act and the statutory Code of Conduct for the
CAs requires revisit so as to appropriately discipline and regulate
MAFs. The Committee may also consider the need for an
appropriate legislation on the pattern of Sarbanes Oxley Act, 2002
and Dodd Frank Wall Street Reform and Consumer Protection Act,
2010 in US or any other appropriate mechanism for oversight of
profession of the auditors. Question whether on account of conflict
of interest of auditors with consultants, the auditors profession may
need an exclusive oversight body may be examined. The
Committee may examine the Study Group and the Expert Group
Reports referred to above, apart from any other material. It may
also consider steps for effective enforcement of the provisions of
the FDI policy and the FEMA Regulations referred to above. It may
identify the remedial measures which may then be considered by
appropriate authorities. The Committee may call for suggestions
from all concerned. Such Committee may be constituted within two
months. Report of the Committee may be submitted within three
months thereafter. The UOI may take further action after due
consideration of such report.”
76. Pursuant to the aforesaid directive, a three-member expert
committee came to be constituted. The remit of that committee can be
gathered from the terms of reference which is extracted below:-
“No. 1/4/2018- PI
GOVERNMENT OF INDIA
MINISTRY OF CORPORATE AFFAIRS
5TH Floor, ‘A’ Wing, Shastri Bhawan
Dr. Rajendra Prasad Road,
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New Delhi-110001
Dated: 20-04-2018
OFFICE MEMORANDUM
Sub: Constitution of three (3) member Committee of Experts as
per directions of Hon’ble Supreme Court of India vide order
dated 23.02.2018 in Civil Appeal No. 2422 of 2018 (Arising
out of Special Leave Petition)(Civil) no. 1808 of 2016 to look
into the regulatory and other issues related to Multi-National
Accounting Firms (MAF)
The Hon’ble Supreme Court in Civil Appeal No. 2422 of 2018 has
vide Order dated 23.02.2018 in Civil Appeal No. 2422 of 2018
(Arising out of Special Leave Petition)(Civil) no. 1808 of 2016 has
directed Union of India to constitute a three member Committee of
Experts to look into the regulatory and other issues related to Multi-
National Accounting Firms (MAFs). Accordingly, three member
Committee of Experts consisting of the following members is hereby
constituted:-
(i) Shri Anurag Agarwal,
Chairperson
Joint Secretary,
Ministry of Corporate Affairs
(ii) Shri Sudhanshu Pandey,
Member
Joint Secretary,
Department of Commerce
(iii) Shri Ravinder,
Member
Joint Secretary,
Department of Industry
2 The terms of reference of the Committee of Experts are as
follows:
(i) The Committee of Experts will look into the question whether
and to what extent the statutory framework to enforce the letter
and spirit of Sections 25 and 29 of the CA Act and the statutory
Code of Conduct for the CAs requires revisit so as to
appropriately discipline and regulate MAFs.
(ii) The Committee may also consider the need for an appropriate
legislation on the pattern of Sarbanes Oxley Act, 2002 and
Dodd Frank Wall Street Reform and Consumer Protection Act,
2010 in US or any other appropriate mechanism for oversight
of profession of the auditors
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(iii) The issue regarding conflict of interest of auditors with
consultants, the auditors' profession may need an exclusive
oversight body may be examined.
(iv) The Committee may examine the Study Group and the Expert
Group Reports referred to in the order 23.2.2018 of Hon'ble
Supreme Court apart from any other material.
(v) The Committee may also consider the steps for effective
enforcement of the provisions of the FDI policy and the FEMA
Regulations.
(vi) The Committee of Experts may identify the remedial measures
which may then be considered by appropriate authorities. The
Committee may call for suggestions from all concerned.
(vii) Any other matter to be considered the Committee of Experts.
3. The Committee of Experts shall complete its work and
submit its report within three months of its constitution.
4. This issues with the approval of Competent Authority.
(G. Vaidheeswaran)
Deputy Secretary to the Govt, of India”
77. By the time the COE came to be constituted, markets as well as
regulatory authorities across the globe had come to adequately
acknowledge the necessity of financial information being accurate and
trustworthy. In fact, as the COE itself recognized the availability of
trustworthy financial information on the performance of companies had
come to be accepted as a necessary requirement of the efficiency of the
securities markets itself. By this time, markets as well as regulatory
authorities across the globe had come to accept the imperatives of
financial information being accurate, trustworthy and for a more
effective and robust regulatory regime being created. This was
essentially prompted by major financial scams which had occurred in
various parts of the world including India and which had seen corporate
behemoths imploding overnight wiping away the savings and
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investments of billions. In fact, as the COE itself acknowledged the
availability of trustworthy financial information on the performance of
companies had come to be accepted as a necessary requirement of the
efficiency of the securities markets itself.
78. We would be justified in acknowledging the fact that by this time
markets as well as regulatory authorities had come to accept that
corporate entities no longer remained the fiefdom of individual groups
of private investors. Companies in today’s time, undisputedly, survive
and prosper also on the basis of investments made by members of the
general public. Private equity investment has thus come to constitute an
important component of the capital which drives modern corporate
entities and enables them to thrive. They have thus become vehicles
which carry the savings and dreams of billions. It is these amongst
various other imperatives which appears to have driven the need for the
creation of a more robust audit regulatory framework.
79. As the COE records, the earliest of the regulatory measures
relating to the field of financial reports was prompted by the stock
24
market crash of 1929 in the United States of America
and the Great
Depression which followed in its wake. The USA thereafter constituted
specialized bodies such as the Stock Exchange Commission, the
Financial Accounting Standards Board and the Commission on
Accounting Procedures thereafter. This system held the field till the
self-regulatory model itself came to be doubted after the Enron scandal
which broke out in the early 2000s. It was this and the felt need to
rebuild investor confidence which led to the US Congress enacting the
24
USA
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Sarbanes-Oxley Act in 2002. This significant legislation marked the
first transition from self- regulation to the creation of an independent
body which would exercise oversight over the auditing profession. The
25
Public Company Accounting Oversight Board
owes its genesis to
this seminal legislation.
80. While we shall have an occasion to contrast the powers vested
and exercisable by the PCAOB alongside those conferred on the NFRA
in the subsequent segments of our decision, suffice it to note that the
said regulatory body is placed under a statutory obligation to assess
degree of compliance by each auditing firm with applicable laws and
professional standards. It is also enabled by that legislation to inspect
auditing firms and the reports of its inspection being placed in the
public domain in case deficiencies are not addressed within 12 months.
The PCAOB also stands empowered to inspect registered public
accounting firms located in foreign jurisdictions.
81. The Sarbanes-Oxley legislation was followed by the Dodd-Frank
Wall Street Reform and Consumer Protection Act, 2010 and which in
turn armed the PCAOB with powers which expanded its regulatory
control and oversight over brokers and dealers registered with the SEC.
82. The tremors of Enron were not confined to the American
continent alone. Taking a cue from the steps which were taken in the
26
United States, in 2002 the Government of the United Kingdom
also
undertook a detailed review of its regulatory regime. This saw the
setting up of the Financial Regulatory Commission in April 2004 and
25
PCAOB
26
UK
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which was conferred the status of an independent regulator in respect of
corporate reporting and governance. As the COE records, the UK today
follows a two-tier structure, comprising of an independent audit
regulator assisted by multiple front line self regulatory organizations.
Insofar as regulation of auditors is concerned, the same stands vested in
27
the Financial Reporting Council principally, whilst some tasks stand
delegated to multiple recognized supervisory and qualification bodies.
28
While a Recognised Supervisory Body supervises certain aspects of
29
auditors, the Recognised Qualification Body
formulates appropriate
audit qualifications.
83. The Companies Act, 2006 as prevalent in the UK, the COE
report records, prohibits a person from acting as an auditor unless it
satisfies the independence requirements statutorily put in place. In
terms of Section 125 of that statute, violation of independence
requirements also exposes an auditor to criminal sanction. The COE
significantly takes note of the legal position with respect to civil
liability of an auditor as being one which is well established and
accepted in English law. A similar exercise to revamp the regulatory
mechanism pertaining to auditing firms also appears to have been
undertaken by the People’s Republic of China and which is noticed in
paragraph 3.3 of the report of the COE.
84. Insofar as developments closer to home are concerned, the need
and compulsion to review our own regulatory scheme appears to have
been prompted by the Satyam Scam which shocked the nation in 2009.
27
FRC
28
RSB
29
RQB
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It was around this time that the Union Government constituted a high-
level committee on corporate audit and governance and which is more
popularly known as the Naresh Chandra Committee. It is this
Committee which undertook a comprehensive evaluation of all aspects
pertaining to corporate governance. The Council itself appears to have
woken up to the new challenges pursuant to the recommendations made
by a study group constituted by it and which had submitted a report in
2005. It was the recommendations made by the Naresh Chandra
Committee which also prompted the insertion of Section 28A in the CA
Act and which for the first time mandated the establishment of a
30
Quality Review Board
.
85. While Section 210A had existed in the erstwhile company law
statute and provided for the constitution of the NACAS, the Standing
Committee on Finance reviewing the Companies Bill, 2009 for the first
time in its 21st report recommended that NACAS should act as a quasi
regulator to monitor the quality of audits undertaken. It was these
developments which set the stage for the various amendments which
came to be introduced in the Companies Act between 2013 to 2018.
86. However, and as was noted in the previous sections of this
decision, the apprehensions of a perceived conflict between the CA Act
and the role envisaged to be discharged by the NFRA arose for
discussion on more than one occasion. Dealing with these aspects, the
COE observed: -
“4.1. Whether India has an appropriate mechanism for
oversight of the audit profession?
30
QRB
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1.The COE is of the view that establishment of NFRA creates no
inconsistency between the provisions of the Companies Act, 2013
and the Chartered Accountants Act, 1949.
2.The COE observes that with the recent move towards
establishment of NFRA, India has adopted the current global best
practice in this regard which can address the problems experienced
with self-regulation of the audit profession.
3.The COE observes that NFRA has been structured on the lines of
international best practices followed by other independent audit
regulators in advanced jurisdictions.
4.The COE recommends that NFRA could be further strengthened
and therefore, the rules which are presently being formulated, must
provide powers to NFRA to publish audit inspection results, subject
to necessary checks and balances. This will strengthen NFRA
further and will provide an effective tool of deterrence for better
compliance by the auditors of public companies with the applicable
laws and professional standards.
5.The COE observed that there are benefits of having multiple
competing SROs under one independent regulator like in UK as
well as in the new insolvency profession in India. The COE is of
the view that a similar model may be considered for the Indian
audit profession.
The COE observed that traditionally, professions have been self-
regulated. In a self-regulatory model, members of the profession
undertake to be a guarantor for competence and conduct of its
members. For instance, professions like auditing have been self-
regulated where its members established and monitored
professional standards, set entry and ongoing education standards
and conducted disciplinary actions. Under the self-regulatory
model, rules are drafted by the market practitioners/participants
using their expert knowledge. Further, the administrative costs of
regulation are borne by the professional members which reduces
the regulatory overheads like inspection and enforcement of the
government.
However, the global trend indicates decline in self-regulatory
model and shift towards independent regulatory oversight model in
the auditing profession. For instance, independent audit oversight
regulation exists in countries representing approximately 80% of
global stock market capitalisation. As discussed in Chapter 3, both
U.S. and U.K. have moved towards independent regulatory model.
For instance, in U.K., FRC is an independent body that regulates
auditors of public companies, and has delegated certain tasks
related to auditors of private entities to SROs. These powers can be
revoked by FRC. FRC can also impose penalty on SROs, if they
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fail to meet their duties. U.S. follows a model where SEC along
with PCAOB regulates auditor of public companies, whereas
professional bodies continue to regulate auditors of the private
entities. Under this model, a regulatory body comprising of
appointed members (independent of the practitioners) regulate the
profession. In other words, unlike in SROs, members are not
appointed from the profession through an electoral process. As
shown in box 3, this feature of independent regulatory oversight of
audit regulators has been internationally recognised.
There are numerous reasons behind this shift towards independent
oversight like, financial frauds, trust deficit arising out of auditor's
failure to act as gate-keepers and lack of accountability. For
instance, after the Enron and WorldCom frauds in U.S., several
jurisdictions gradually shifted towards an independent regulator for
auditors. Further, the globalisation of economy fuelled demand for
standardisation of financial reporting to protect the interest of
global investors.”
87. Speaking on the subject of consistency between legislations, the
report of the COE observed: -
“The COE has noted that creation of independent regulatory
oversight through NFRA is in addition to the existing tier of SRO
and does not contradict the Chartered Accountants Act, 1949. From
the information available in the public domain, the COE noted that
under the framework of Companies Act, 2013, NFRA would regulate
auditors of only listed companies, and public companies beyond a
certain threshold. On the other hand, ICAI as SRO under the
Chartered Accountants Act, 1949 would continue to regulate the
auditors of public companies below a certain threshold and private
companies. Further, the Companies Act, 2013 regulates the auditors
of a company appointed for the limited purpose of statutory audit, on
the other hand, the Chartered Accountants Act, 1949 is a legislation
which governs the overall chartered accountancy profession. Also,
the powers vested with NFRA under the Companies Act, 2013 would
not exclude the jurisdiction of ICAI under the Chartered Accountants
Act, 1949, unless when NFRA initiates an investigation into matters
of professional misconduct of auditors of only listed companies and
public companies beyond a certain threshold. The COE also
considered the findings of Standing Committee on Finance 21st
Report on The Companies Bill, 2009 which strongly recommended
the need for an independent body to monitor the quality of audit
undertaken across the corporate sector.
The COE also noted other sectoral developments in the domain of
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regulating auditors which have been discussed in Chapter 3. For
instance, the RBI has issued an enforcement action framework for
actions to be taken by RBI against the statutory auditors of banks for
lapses observed in conducting a banks statutory audit. Similarly,
SEBI is considering amendments to several regulations to include
CAs as well as statutory auditor within the scope of fiduciary to
initiate necessary actions against them for breaching the securities
laws.19 This growing inclination of other regulators to initiate action
against auditors in the event of lapses, could be an indication of
challenges in the current SRO structure of ICAI.
Further, the COE studied the international experience which suggests
that, regulators like PCAOB and FRC already follow the two-tier
structure which consists of both independent audit regulator and
SRO. For instance, in U.S., the SEC and PCAOB regulates auditors
of public companies registered with SEC, whereas AICPAs is a SRO
for the accounting profession. Similarly, in U.K., the FRC is the
independent regulator for the audit profession and there are four
RSBs under it, which function as SROs. Further, the global literature
also states that in this model, the threat of enforcement by the
independent audit regulator may lead to more enforcement by the
SRO and thereby improve its regulatory efforts.
For the reasons discussed above, the COE is of the view that
establishment of NFRA is an insightful regulatory development and
it creates no inconsistency between the provisions of the Companies
Act, 2013 and Chartered Accountants Act, 1949. The COE believes
that creation of NFRA would have dual benefits. First, NFRA would
align the Indian regulatory architecture in the auditing landscape
with the global trend; and second, it is expected to address the
problems associated with the current SRO mechanism under ICAI”
88. The COE in unambiguous terms recommended that there was
sufficient justification for strengthening the NFRA. This becomes
apparent from a reading of the following passages of its report:-
“The COE observed that globally there has been a growing
acceptance of independent audit regulators, because they are
expected to restore investor's confidence and bring more
transparency and accountability in the auditing profession. In light of
this, creation of NFRA is a positive development. While NFRA as an
audit regulator has been vested with necessary powers, drawing
inferences from global best practices may help in creating a more
robust regulator.
The COE noted that independent audit regulators in other
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jurisdictions have been empowered to publish the results of audit
inspection. For instance, the Sarbanes Oxley Act, 2002 authorises
PCAOB to inspect registered firms and publish the results. Further,
if such inspection reveals any deficiency or defect which are not
remedied within 12 months by the audit firm to the satisfaction of
PCAOB, it can publish that portion of the inspection report which
deals with criticism and defects. The public copy is redacted
accordingly to protect the confidential and proprietary information of
the inspected firms. Other audit regulators like FRC in UK also
publishes individual reports of their audit quality inspections of each
major audit firms. Such publication is subject to necessary
confidentiality obligations.
Empowering NFRA on similar lines can have dual benefits. First,
reputation is a critical capital for audit firms to generate business.
Fear of loss of reputation can be an effective deterrence for firms to
build better internal checks and balances. Second, investors in the
capital market can be expected to make more informed choices if
they are supplied better quality of information about the performance
of auditors of listed entities. Section 132 of the Companies Act, 2013
already vests NFRA with the powers to monitor/inspect the quality
of services provided by auditors to ensure compliance with the
standards. Therefore, the NFRA rules which are being drafted must
include the power to publish inspection results.”
89. The COE also appears to have deliberated upon the issue of a
conflict of interest when viewed in light of non-audit services that may
be undertaken by auditing firms. It proceeded to formulate the
following recommendations in this respect:-
“The COE recommends the following measures to address the
problem of conflict of interest in providing non-audit services to an
auditee company or its holding company or subsidiary company:
1.If the auditor is a part/member of an international network, the
non-audit fees earned by such network from a listed auditee
company or its holding company or subsidiary companies in a
financial year shall be maximum 50% of the statutory audit fee
earned by that network from that auditee company or its holding
company or subsidiary companies in a financial year.
2.Such auditor must separately disclose to NFRA the audit as well as
non-audit fees earned by its network from each of its listed auditee
company or its holding or subsidiary companies. The auditor shall
also _le a declaration with NFRA stating that revenue earned from
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non-audit services is not in excess of 50% of the statutory audit fee
earned by its network from that listed auditee company or its holding
company or subsidiary companies in a financial year.
3.The prohibited list of non-audit services under section 144 of the
Companies Act, 2013 must include all kinds of taxation, valuation
and restructuring services provided to the auditee company or its
holding company or subsidiary companies. For this, the appropriate
rules should be made.
4.Details of approval given by audit committee or the board of
directors to auditors for providing non-audit services should be
separately disclosed in the board report of the auditee company or its
holding company or subsidiary companies. The board report should
also contain a description of the necessary safe-guards in place to
protect the independence and objectivity of such auditors providing
non-audit services to the auditee company or its holding company or
subsidiary companies. This will require necessary rules under
section 134 of the Companies Act, 2013.
Explanation: Entities in the network should include:
•
Entities covered in Explanation (i) and (ii) of section 144 of
the Companies Act, 2013 depending on whether the auditor is an
individual or firm.
•
Entities covered within the meaning of `network' under the
Revised Guidelines of Network, 2011 whether registered with ICAI
or not.
•
Affiliates which, regardless of its legal form, are connected
to a network firm by means of common ownership, control or
management.
Explanation: NFRA would regulate auditors of all listed companies,
and unlisted public companies beyond a certain threshold, as
prescribed by the government.
Since the collapse of Enron and the demise of Arthur Andersen,
there has been public concern about the extent to which audit firms
are providing non-audit services to their audit clients. Such non-
audit services could range from system design to compliance related
services like taxation and accounting. The concerns regarding such
non-audit services are two-fold: first, auditors may not stand up the
management of the auditee company because the auditors wish to
retain the additional income from non-audit services to the company;
second, providing a range of services to the management may lead to
the auditor identifying too closely with the management's interests
and lose their professional scepticism. For instance, in the Enron
case, it has been widely reported that Andersen received $25 million
in audit fees and $27 million for non-audit services. These
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developments fuelled concerns that provision of non-audit services
compromise auditor independence and nudged the legislative
changes.
Policymakers globally have responded by prohibiting auditors from
performing some specific non-audit functions. For instance,
Sarbanes Oxley Act, 2002 in U.S. prohibited auditors from providing
eight specific categories of non-audit services to their auditee
companies. A similar list was also introduced in 2016 in the
European Union for auditors of public listed companies. This
prohibits eleven category of services comprising of further sub-
categories. Auditors were prohibited from providing non-audit
services like tax, consultancy, and advisory services to the audited
entity; services that involve playing any part in the management or
decision-making of the audited entity; services linked to the
financing, capital structure and allocation, and investment strategy of
the audited entity. Similar position has been adopted in jurisdictions
like U.K. and Australia.
Policymakers globally have also intensely debated the need to
impose a cap on the non-audit fees of audit firms. For instance, the
SEC has long been concerned about the potential impact of audit and
non-audit fees on auditor independence. It has repeatedly asserted
that auditors must be independent in fact and in appearance.
Independence-in-fact is defined by SEC as the auditor's mental state
lacking any bias, while independence-in-appearance is a public
perception that the auditor is objective and unaffected by a financial
interest in the client. However, a recent study has argued that
auditors' independence-in-appearance is related to client importance
(total fees from a client as a percentage of the total revenues of the
audit firm) rather than non-audit fee ratio (non-audit to total fees
from a client).
The Indian debate on conflict of interest related to non-audit services
was triggered immediately after the Enron scandal. In 2002, the
committee headed by Naresh Chandra deliberated over the issue of
non-audit services and recommended the position adopted in U.S.
under the Sarbanes Oxley Act, 2002. Consequently, India adopted a
similar approach by prohibiting auditors from performing specific
non-audit services in the new Companies Act, 2013 (see, table 4.1).
If the auditor is a firm, this prohibition is applicable to its associated
entity or any entity whatsoever in which the firm has significant
influence or control or whose brand name is used by such audit firm
or its partners.
Companies Act,
2013
Sarbanes Oxley,
2002
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Book-keeping Book-keeping
Internal Audit Internal Audit
Financial
information
systems
Financial
information
systems
Actuarial services Actuarial services
Investment and
banking Advisory
Investment and
banking Advisory
Outsourced
financial services
Appraisal or
valuation services,
fairness opinion
Management
function
Management or
human resource
Function
Any other
services
Legal/expert
services unrelated
to audit
Table 4.1.: Comparison of prohibited non-audit services
While section 144 of the Companies Act, 2013 provides an
exhaustive list of prohibited non-audit services, it also authorises the
government to prescribe any other kind of services in this list. The
COE has noted that there could be a case of self-review risk if
certain services are allowed to be provided by the auditor. Therefore,
there is a need to revisit the list keeping in view the various kinds of
services rendered by auditors which can possibly result in conflict of
interest. The international practice (EU, Australia, U.K.) shows
prohibition on non-audit services like taxation, restructuring and
valuation since they are likely to influence the objectivity and
independence of auditors. Presently, these services are permitted in
India. Therefore, the COE is of the view that the list prescribed
under section 144 of the Companies Act, 2013 needs to be expanded.
Presently, there is a cap which requires that non-audit services fee
earned by statutory auditor along with its associate concern or
corporate bodies must not exceed the aggregate statutory audit fee.
However, this cap was set in 2002 by ICAI and since then the market
of non-audit services has evolved. Therefore, the COE is of the view
that this cap on non-audit services needs to be reviewed. Taking into
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account, the international position, especially in European Union and
U.K., the COE recommends a cap on fee earned from non-audit
services which shall not be more than 50% of the audit fee paid to
the auditor by the listed auditee company or its holding or subsidiary
company.
Further, there is no provision in the Companies Act, 2013 which
mandates disclosure of non-audit fee earned by the auditor in the
financial statements of the auditee company. Recently in 2018, SEBI
amended regulations which would now require a listed company to
disclose total fees for all services paid by the listed entity and its
subsidiaries, on a consolidated basis, to the statutory auditor and all
entities in the network firm/network entity of which the statutory
auditor is a part. However, this disclosure obligation is on the listed
entity. The COE recommends that a statutory auditor must separately
disclose to NFRA the audit as well as non-audit fees earned from
each of its auditee company or its holding or subsidiary companies.
From the information available in the public domain, the COE noted
that under the current Indian framework, NFRA would regulate
auditors of all listed companies, and public companies beyond a
certain threshold, as prescribed by the government.
The COE noted that under the Companies Act, 2013, an auditor has
to obtain prior approval of the audit committee or board of the
directors for providing non-audit services. Similar approvals are
required in other jurisdictions also. For instance, in U.S. under the
Sarbanes Oxley Act, 2002, audit committee approves the types of
non-audit services which can be provided to the auditee company.
Further, such approval has to be disclosed by the auditee company to
investors in periodic reports. Similar practice is also followed in
U.K. where The UK Corporate Governance Code, 2016 requires
audit committee to develop and implement the policy on engagement
of external auditor to supply non-audit services. Further, the annual
report must contain a separate section describing how the audit
committee has safeguarded the objectivity and independence of
auditors providing non-audit services. Therefore, keeping in view the
best international practices, the COE recommends that the approval
of audit committee or board of directors given to auditors to provide
non-audit services should be separately disclosed in the annual
report of the auditee company along with a description of the
necessary safeguards in place to protect the independence and
objectivity of the auditors.
The Enron scandal lead to Sarbanes Oxley Act, 2002 which reduced
the scope of non-audit services to address the issue of conflict of
interest. This nudged several international audit firms to sell off their
consultancy venture. However, over the years, they have re-
established their presence in this domain. These consulting entities
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are members of the global network. The COE after examining inputs
from various stakeholders observed that there is a likelihood that
substantial amount of non-audit services are provided to an auditee
company by network entities belonging to the same network of
which the auditor is also a member/part. The COE is of the view that
such a likelihood of serious conflict of interest within a network
compromises the independence - in-fact as well as in-appearance - of
auditors/audit firms within that network.
Further, the government may consider placing a cap on the
maximum number of statutory audit of public companies by an audit
firm.”
90. While speaking on the adequacy of the regulatory mechanism in
respect of liability of auditors in audit firms, the COE observed:-
“1. The COE concludes that the current Indian legal regime on
liability of individual auditors and audit firms is adequate.
2. The COE on the issue of network liability recommends that
NFRA should be explicitly empowered by law to impose civil
liability in the form of monetary penalties on the international
network/entity with whom/which the Indian audit firm has entered
into networking/membership, if any audit failure or fraud is found to
have been caused due to any faulty methodology being followed by
that particular network.
Explanation: The amount of penalty to be imposed on such
international network/entity shall be upto five (5) times the amount
of penalty imposed on the audit firm.
3. To enable NFRA to perform this function, every auditor and audit
firm, which is operating in India as a part/member of an international
network, must submit an Annual Transparency Report to NFRA,
disclosing the following:
•
A description of the network, its legal and structural
arrangements, including payment of any fees, costs, grants, etc
between the Indian audit firm and its network entities, directly or
indirectly;
•
Details of ownership and management structure of the out-
side entity or entities constituting the network;
• The name and registered office, central administration or
principal place of business, of each network member operating in
India as a sole practitioner or audit firm;
• The name and registered office, central administration or
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principal place of business, of each affiliate of the network operating
in India;
• The total turnover achieved by network members operating
as sole practitioners and audit firms as well as network affiliates
operating in India; and
• The internal standard audit methodology followed by all the
network firms globally and in India.
For these disclosure requirements, the COE recommends necessary
provision in the NFRA rules which are presently under
consideration.
Explanation I: NFRA would regulate auditors of all listed
companies, and public companies beyond a certain threshold, as
noticed by the government.
Explanation II: ‘Affiliate’ means any entity, regardless of its legal
form, which is connected to a firm by means of common ownership,
control or management.
Legal liability on auditors for an audit failure or fraud is necessary
mainly for three reasons. First , legal liability on auditors is necessary
to deter any intentional breach of duties or fraudulent behaviour.
Second , legal liability is necessary to disgorge any unlawful gains
made by an auditor. However, it not enough to merely restore the
auditor back to the position it was before committing a breach or
fraud. Third , it is important to ensure that direct victims of an audit
failure or fraud are also compensated by the auditor. Such
compensation by the auditor for audit failure or fraud represents a
form of implicit insurance to outside investors. Such an insurance
provided by the auditor enables the entrepreneur to raise capital from
such investors at lower cost.
However, excessive imposition of liability on auditors could be
counterproductive. First, excessive legal liability could drive auditors
out of the market, making it more concentrated with fewer auditors.
Second, a higher risk of legal liability on auditors could drive up
their audit fees, making mandatory audit costly for all companies.
Third, auditors may refuse to audit riskier companies, making it
difficult for such companies to raise capital. Recent research shows
that the relationship between the strength of the legal liability regime
and the client rejection rate is U-shaped. In other words, clients are
less likely to be rejected in environments with moderate legal
regime, as compared to environments with relatively strong or
relatively weak legal regime.
Taking into account the pros and cons of legal liability on auditors,
the COE is of the view that it is important that the Indian legal
regime on auditors' liability should take a balanced approach. From
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this perspective, the COE analysed the current Indian legal regime
on auditors' liability to identify the nature of sanctions that could be
imposed against individual auditors as well as audit firms in case of
a fraud. The COE reviewed the relevant provision under Chartered
Accountants Act, 1949 as shown in Table 4.3 and those under
Companies Act, 2013 as shown in Table 4.4.
Sections Applicatio
n
Criminal
Sanction
Civil
sanction
21A CA found guilty
of professional
or other
misconduct
under Schedule
I
NA Board of
Discipline can
reprimand the CA,
remove the name
of the CA from the
register up to a
period of 3
months, and/or
impose fine up to
Rs. 1 lakh
21B CA found guilty
of professional
or other
misconduct
under Schedule
II or both
Schedules I and
II
N
A
Disciplinary
Committee can
reprimand the CA,
remove the name
of the CA from the
register
permanently or
temporarily, and/or
impose fine up to
Rs. 5 lakhs
Table 4.3.: Chartered Accountants Act 1949
As is evident from these tables there are various criminal sanctions
that could be imposed on individual auditors as well as audit firms
involved in any audit failure or fraud. It is important to note that the
amount levied in the form of `fine' goes to the consolidated fund of
India and not to the investors of the company. Therefore, these
criminal sanctions can only have a deterrence function and do not
serve any indemnification function.
In contrast, there are three provisions on civil sanctions that provide
for indemnification to users of the faulty audited financial
statements. These are section 132(4)(c), section 147(3)(ii) and
section 245(1)(g)(ii) under the Companies Act, 2013 as shown in
Table 4.4. The COE noted that section 132(4)(c) empowers NFRA to
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impose monetary penalty on auditors as well as audit firms including
debarment. Under section 147(3)(ii) an auditor or audit firm which is
convicted under section 147(2), is liable to pay damages to the
potential users of its audited financial statements. Finally, section
245(1) could be used by NCLT to award damages or compensation
against auditor including audit firms for improper or misleading
statements made in audit report or for any fraudulent, unlawful or
wrongful act or conduct.
On review of the above provisions, the COE is of the view that the
current Indian regime on auditor liability provides for all three
functions - deterrence, disgorgement as well as indemnification.
Accordingly, the COE concludes that the current Indian legal regime
on liability of individual auditors and audit firms is adequate.
The COE noted that an audit failure or fraud could happen because
of two reasons. First, it could be due to lapses on the part of the
auditor or audit firm because of which proper audit methodology is
not followed or observed. As discussed earlier, there are various
provisions in the law to hold the auditor or audit firm liable for such
a lapse being a fault on the part of the auditor or the audit firm.
Second, an audit failure or fraud could also happen because the audit
method followed by auditor or audit firm as part of a network is
itself awed. Since this is a fault of the method being followed by the
network itself, in such cases, it is important that NFRA has the
power to extend the liability on the network. Therefore, the COE
recommends that NFRA should be explicitly empowered by law to
impose civil liability in the form of monetary penalties on the
international network/entity with who/which the Indian audit firm
has entered into networking/membership agreement, if any audit
failure or fraud is found to have been caused due to any faulty
methodology being followed by that particular network.
The COE observed that European Union has imposed a higher
liability on auditors of listed companies. To achieve this, the
Regulation (EU) No 537/2014 Of the European Parliament and of
the Council has imposed legal obligations on auditors and audit
firms to disclose financial information at the level of the network to
which such auditors belong. The COE is of the opinion that a similar
disclosure obligation has to be placed on all members of a network
operating in India to enable NFRA to impose monetary penalty on
such members in the event of a process failure at the network level
leading to an audit failure or fraud.
The COE recommends that every auditor and audit firm, which is
operating in India as a member/part of an international network,
must submit an Annual Transparency Report to NFRA, disclosing
the following:
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• A description of the network, its legal and structural
arrangements, including payment of any fees, costs, grants, etc
between the Indian audit firm and its network firms and affiliates,
directly or indirectly;
•
Details of ownership and management structure of the
outside entity or entities constituting the network;
•
The name and registered office, central administration or
principal place of business, of each network member operating in
India as a sole practitioner or audit firm;
•
The name and registered office, central administration or
principal place of business, of each affiliate of the network operating
in India;
•
The total turnover achieved by network members operating
as sole practitioners and audit firms as well as network affiliates
operating in India; and
• The internal standard audit methodology followed by all the
network firms globally and in India.
Explanation II: `Affiliate' means any entity, regardless of its legal
form, which is connected to a firm by means of common ownership,
control or management.
This information available from the Annual Transparency Report
will help NFRA keep track of the auditors and audit firms operating
in India as part of the same network so that in case any legal liability
needs to be imposed on that particular network for an audit failure or
fraud.”
91. It is the aforesaid considerations which appear to have weighed
upon Parliament while structuring Section 132 of the Companies Act
and the Union Government proceeding to frame supportive rules to
enable the NFRA to discharge its statutory obligations. Having set out
the essential matrix of facts, the legislative history and the broad ranged
debate and discussion which acted as the precursor to the insertion of
Section 132 in the Companies as well as the relevant statutory
provisions in the context of which the present challenge has come to be
laid before us, the stage is thus set to commence consideration of the
legal submissions which were addressed before us.
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HE ICARIOUS IABILITY RGUMENT
T V L A
92. Appearing from the side of the writ petitioners, arguments were
led by Mr. Kapil Sibal, Mr. Jayant Mehta and Mr. Girish Kathpalia,
learned senior counsels. Assailing the action initiated by the NFRA and
the validity of Section 132 of the Companies Act itself, it was firstly
contended that the provision is liable to be invalidated since it amounts
to the creation of a vicarious liability on audit firms as well and its
constituent partners who may have in no manner been connected with
the audit itself. The petitioners contended that Section 132 proceeds to
31
impose a liability upon Limited Liability Partnerships
and which
could themselves comprise of numerous partners and employees.
93. For instance, Mr. Sibal pointed out that DHS has approximately
139 partners and more than 3,900 employees across India. According to
learned senior counsels, holding a LLP liable for consequences flowing
from Section 132 would have the effect of imposing a liability upon
each partner of the firm irrespective of whether that partner was
involved in the concerned audit or had performed an audit function.
According to the petitioners, such partners would thus face liabilities
even though they may have had no participative role in the alleged
fraud, negligence or misconduct. It was thus argued that the affirmation
of such a liability not only amounts to the placement of an unreasonable
restriction on the fundamental right of the LLP and its partners to
practice their profession and which stands guaranteed and protected
under Article 19(1)(g) of the Constitution it would also amount to the
imposition of a disproportionate penalty which would clearly be
31
LLPs
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violative of Article 14.
94. It was argued that the principle of vicarious liability does not
permit an act of fraud to be attributed to either the partner of a
partnership firm or an LLP as the case may be, who are in no manner
involved in or had participated in the fraud which is alleged. Reliance
in this respect was also placed on Sections 27, 28 and 30 of the Limited
32
Liability Partnership Act, 2008
and which are extracted
hereinbelow: -
“ 27. Extent of liability of limited liability partnership .—(1) A
limited liability partnership is not bound by anything done by a
partner in dealing with a person if—
(a) the partner in fact has no authority to act for the limited liability
partnership in doing a particular act; and
(b) the person knows that he has no authority or does not know or
believe him to be a partner of the limited liability partnership.
(2) The limited liability partnership is liable if a partner of a limited
liability partnership is liable to any person as a result of a wrongful
act or omission on his part in the course of the business of the
limited liability partnership or with its authority.
(3) An obligation of the limited liability partnership whether arising
in contract or otherwise, shall be solely the obligation of the limited
liability partnership.
(4) The liabilities of the limited liability partnership shall
be met out of the property of the limited liability
partnership.
28. Extent of liability of partner .—(1) A partner is not personally
liable, directly or indirectly for an obligation referred to in sub-
section (3) of Section 27 solely by reason of being a partner of the
limited liability partnership.
32
LLP Act
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(2) The provisions of sub-section (3) of Section 27 and sub-section
(1) of this section shall not affect the personal liability of a partner
for his own wrongful act or omission, but a partner shall not be
personally liable for the wrongful act or omission of any other
partner of the limited liability partnership.
xxxx xxxx xxxx
.—(1) In the event of an act
30. Unlimited liability in case of fraud
carried out by a limited liability partnership, or any of its partners,
with intent to defraud creditors of the limited liability partnership or
any other person, or for any fraudulent purpose, the liability of the
limited liability partnership and partners who acted with intent to
defraud creditors or for any fraudulent purpose shall be unlimited for
all or any of the debts or other liabilities of the limited liability
partnership:
Provided that in case any such act is carried out by a partner, the
limited liability partnership is liable to the same extent as the partner
unless it is established by the limited liability partnership that such
act was without the knowledge or the authority of the limited
liability partnership.
(2) Where any business is carried on with such intent or for such
purpose as mentioned in sub-section (1), every person who was
knowingly a party to the carrying on of the business in the manner
aforesaid shall be punishable with imprisonment for a term which
may extend to 29[five years] and with fine which shall not be less
than fifty thousand rupees but which may extend to five lakh rupees.
(3) Where a limited liability partnership or any partner or designated
partner or employee of such limited liability partnership has
conducted the affairs of the limited liability partnership in a
fraudulent manner, then without prejudice to any criminal
proceedings which may arise under any law for the time being in
force, the limited liability partnership and any such partner or
designated partner or employee shall be liable to pay compensation
to any person who has suffered any loss or damage by reason of
such conduct:
Provided that such limited liability partnership shall not be liable if
any such partner or designated partner or employee has acted
fraudulently without knowledge of the limited liability partnership. ”
95. On the basis of the statutory provisions contained in the LLP Act,
the petitioners argued that no vicarious liability can possibly be
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fastened on the other partners of an LLP in case fraudulent acts are
committed by an individual member of that firm. According to learned
senior counsels, the imposition of such a penalty, in fact, clearly runs
contrary to the protection which stands accorded in terms of the LLP
Act and which clearly insulates non-participating partners from being
imposed with any liability.
96. Turning then to the provisions of the Companies Act itself, it was
submitted that Section 132 came to be enacted in 2013 and by which
time, the LLP Act had already come to be promulgated. It was argued
that Section 132 as framed cannot be read or construed as an essay of
Parliament seeking to take away, destroy, diminish or for that matter
altering or modifying the rights and protections conferred upon an LLP
or its partners by the former.
97. The manifest arbitrariness of the provision was further sought to
be underscored on the ground of Section 132 requiring no distinct proof
of involvement or even knowledge of either the firm or its other
partners. Leaned senior counsels in unison submitted that the
debarment of a practicing CA would virtually amount to the imposition
of a “death penalty” and deprive those professionals of their right of
livelihood quite apart from the constitutional right to pursue a
profession.
98. The petitioners also sought to sustain the challenge based on the
principle of vicarious liability by relying upon various decisions
rendered by the US Supreme Court and those judgments having
deprecated the principle of “guilt by association” . Our attention was
invited to the decision of the US Supreme Court in Elfbrandt vs. R
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33
Russell
and where the following principles came to be enunciated: -
“ 5. We recognized in Scales v. United States, 367 U.S. 203, 229,
81 S.Ct. 1469, 1486, 6 L.Ed.2d 782, that 'quasi-political parties or
other groups * may embrace both legal and illegal aims.' We
noted that a 'blanket prohibition of association with a group having
both legal and illegal aims' would pose 'a real danger that legitimate
political expression or association would be impaired.' The statute
with which we dealt in Scales the so-called 'membership clause' of
the Smith Act (18 U.S.C. § 2385), was found not to suffer from this
constitutional infirmity because, as the Court construed it, the
statute reached only 'active' membership (id., at 222, 81 S.Ct. at
1482) with the 'specific intent' of assisting in achieving the
unlawful ends of the organization (id., at 229—230, 81 S.Ct. at
1522). The importance of this limiting construction from a
constitutional stand-point was emphasized in Noto v. United States,
367 U.S. 290, 299—300, 81 S.Ct. 1517, 6 L.Ed.2d 836, decided the
same day:
'(It should also be said that this element of the
membership crime (the defendant's 'personal criminal
purpose to bring about the overthrow of the
Government by force and violence'), like its others,
must be judged strictissimi juris, for otherwise there is a
danger that one in sympathy with the legitimate aims of
such an organization, but not specifically intending to
accomplish them by resort to violence, might be
punished for his adherence to lawful and
constitutionally protected purposes, because of other
and unprotected purposes which he does not necessarily
share.' [ Cf. Rowoldt v. Perfetto, 355 U.S. 115, 120, 78
S.Ct. 180, 183, 2 L.Ed.2d 140; Gastelum-Quinones v.
Kennedy, 374 U.S. 469, 83 S.Ct. 1819, 10 L.Ed.2d
1013.]
6. Any lingering doubt that proscription of mere knowing
membership, without any showing of 'specific intent,' would run
afoul of the Constitution was set at rest by our decision in Aptheker
v. Secretary of State, 378 U.S. 500, 84 S.Ct. 1659, 12 L.Ed.2d 992.
We dealt there with a statute which provided that no member of a
Communist organization ordered by the Subversive Activities
Control Board to register shall apply for or use a passport. We
concluded that the statute would not permit a narrow reading of the
sort we gave § 2385 in Scales. See 378 U.S., at 511, n. 9, 84 S.Ct.
at 1666. The statute, as we read it, covered membership which was
33
1966 SCC OnLine US SC 66
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not accompanied by a specific intent to further the unlawful aims of
the organization, and we held it unconstitutional.
7. The oath and accompanying statutory gloss challenged here
suffer from an identical constitutional infirmity. One who
subscribes to this Arizona oath and who is, or thereafter becomes, a
knowing member of an organization which has as 'one of its
purposes' the violent overthrow of the government, is subject to
immediate discharge and criminal penalties. Nothing in the oath,
the statutory gloss, or the construction of the oath and statutes
given by the Arizona Supreme Court, purports to exclude
association by one who does not subscribe to the organization's
unlawful ends. Here as in Baggett v. Bullitt, supra, the 'hazard of
being prosecuted for knowing but guiltless behavior' (id., 377 U.S.
at 373, 84 S.Ct. at 1323) is a reality. People often label as
'communist' ideas which they oppose; and they often make up our
juries. '(P)rosecutors too are human.' Cramp v. Board of Public
Instruction, 368 U.S. 278, 287, 82 S.Ct. 275, 281, 7 L.Ed.2d 285.
Would a teacher be safe and secure in going to a Pugwash
Conference? [ The Pugwash Conferences, A Staff Analysis,
Subcommittee to Investigate the Administration of the Internal
Security Act, Senate Committee on the Judiciary, Committee Print,
87th Cong., 1st Sess. (1961); Rabinowitch, Pugwash—History and
Outlook, 13 Bull. Atomic Sci. 243 (1957); Topchiev, Comments on
Pugwash: From the East, 14 Bull. Atomic Sci. 118 (1958);
Thirring, Comments on Pugwash: From the West, id., at 121;
Rabinowitch, The Stowe Conferences, 17 Bull. Atomic Sci. 382
(1961); Statement of International Pugwash Continuing
Committee: Pugwash XIII, Bull. Atomic Sci. 43—45 (December
1964); Documents of Second Pugwash Conference of Nuclear
Scientists (March 31—April 11, 1958).] Would it be legal to join a
seminar group predominantly Communist and therefore subject to
control by those who are said to believe in the overthrow of the
Government by force and violence? Juries might convict though
the teacher did not subscribe to the wrongful aims of the
organization. And there is apparently no machinery provided for
getting clearance in advance. [ Petitioner would, of course, have a
hearing at a perjury trial, after the event. And one member of the
Arizona Supreme Court felt that petitioner, having tenure, would be
entitled to a hearing before she was discharged from her teaching
position. See Elfbrandt v. Russell, 94 Ariz. 1, 17—18, 381 P.2d
554, 565 (Bernstein, C.J., concurring). But even that is not
authoritatively decided by the court; indeed, another opinion states
this to be a minority view, 94 Ariz., at 18, 381 P.2d at 566 (separate
opinion of Jennings, J.).]
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8. Those who join an organization but do not share its unlawful
purposes and who do not participate in its unlawful activities surely
pose no threat, either as citizens or as public employees. Laws such
as this which are not restricted in scope to those who join with the
'specific intent' to further illegal action impose, in effect, a
conclusive presumption that the member shares the unlawful aims
of the organization. See Aptheker v. Secretary of State, supra, 378
U.S. at 511, 84 S.Ct. at 1666. The unconstitutionality of this Act
follows a fortiori from Speiser v. Randall, 357 U.S. 513, 78 S.Ct.
1332, 2 L.Ed.2d 1460, where we held that a State may not even
place on an applicant for a tax exemption the burden of proving
that he has not engaged in criminal advocacy. ”
99. Mr. Sibal then referred to the judgment of our Supreme Court in
34
Indra Das vs. State of Assam
which had cited the decision in
Elfbrandt as well as certain other judgments of the US Supreme Court
to hold that mere membership of an organization would not expose an
individual to penal consequences. Our attention was specifically drawn
to the following passages as appearing in Indra Das :-
5. In Arup Bhuyan case [(2011) 3 SCC 377] we have stated that
“
mere membership of a banned organisation cannot incriminate a
person unless he is proved to have resorted to acts of violence or
incited people to imminent violence, or does an act intended to
create disorder or disturbance of public peace by resort to imminent
violence. In the present case, even assuming that the appellant was
a member of ULFA which is a banned organisation, there is no
evidence to show that he did acts of the nature abovementioned.
Thus, even if he was a member of ULFA it has not been proved
that he was an active member and not merely a passive member.
Hence the decision in Arup Bhuyan case [(2011) 3 SCC 377]
squarely applies in this case.
In our judgment in State of Kerala v. Raneef [(2011) 1 SCC 784
6.
: (2011) 1 SCC (Cri) 409] we had referred to the judgment of the
US Supreme Court in Elfbrandt v. Russell [16 L Ed 2d 321 : 384
US 11 (1965)] which rejected the doctrine of “guilt by association”.
xxxx xxxx xxxx
34
(2011) 3 SCC 380
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8. In Scales case [6 L Ed 2d 782 : 367 US 203 (1960)] Mr Harlan,
J. of the US Supreme Court observed: (L Ed pp. 801-02)
“The clause [in the McCarran Act, 1950] does not make
criminal all association with an organisation which has
been shown to engage in illegal advocacy. There must
be clear proof that a defendant ‘specifically intend[s]
to accomplish [the aims of the organisation] by resort
to violence’ . … a person may be foolish, deluded, or
perhaps merely optimistic, but he is not by this statute
made a criminal.”
(emphasis supplied)
9. Elfbrandt case [16 L Ed 2d 321 : 384 US 11 (1965)] also relied
on the US Supreme Court decisions in Aptheker v. Secy. of
State [12 L Ed 2d 992 : 378 US 500 (1963)] , Baggett v. Bullitt [12
L Ed 2d 377 : 377 US 360 (1963)] , Cramp v. Board of Public
Instruction [7 L Ed 2d 285 : 368 US 278 (1961)]
, Gibson v. Florida Investigation Committee [9 L Ed 2d 929 : 372
US 539 (1962)] , etc.
10. In Noto v. United States [6 L Ed 2d 836 : 367 US 290 (1960)] ,
US at pp. 297-98 Mr Harlan, J. of the US Supreme Court observed:
(L Ed p. 841)
“… the mere abstract teaching of Communist theory,
including the teaching of the moral propriety or even
moral necessity for a resort to force and violence, is not
the same as preparing a group for violent action and
steeling it to such action. There must be some
substantial direct or circumstantial evidence of a call to
violence now or in the future which is both sufficiently
strong and sufficiently pervasive to lend colour to the
otherwise ambiguous theoretical material regarding
Communist Party teaching….”
11. In Noto case [6 L Ed 2d 836: 367 US 290 (1960)] Mr Hugo
Black, J. in a concurring judgment wrote: (L Ed p. 843)
“In 1799, the English Parliament passed a law
outlawing certain named societies on the ground that
they were engaged in ‘a traitorous conspiracy … in
conjunction with the persons from time to time
exercising the powers of Government in France….’
One of the many strong arguments made by those who
opposed the enactment of this law was stated by a
member of that body, Mr Tierney:
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‘The remedy proposed goes to the putting an
end to all these societies together. I object to
the system, of which this is only a branch; for
the right Hon'ble gentleman has told us he
intends to propose laws from time to time
upon this subject, as cases may arise to require
them. I say these attempts lead to
consequences of the most horrible kind. I see
that Governments are acting thus. Those
whom they cannot prove to be guilty, they will
punish for their suspicion. To support this
system, we must have a swarm of spies and
informers. They are the very pillars of such a
system of Government .’
The decision in this case, in my judgment, dramatically
illustrates the continuing vitality of this observation.
The conviction of the petitioner here is being reversed
because the Government has failed to produce evidence
the Court believes sufficient to prove that the
Communist Party presently advocates the overthrow of
the Government by force .”
(emphasis supplied)
xxxx xxxx xxxx
27. Similarly, we are of the opinion that the provisions in various
statutes i.e. Section 3(5) of TADA or Section 10 of the Unlawful
Activities (Prevention) Act which on their plain language make
mere membership of a banned organisation criminal have to be
read down and we have to depart from the literal rule of
interpretation in such cases, otherwise these provisions will become
unconstitutional as violative of Articles 19 and 21 of the
Constitution. It is true that ordinarily we should follow the literal
rule of interpretation while construing a statutory provision, but if
the literal interpretation makes the provision unconstitutional we
can depart from it so that the provision becomes constitutional. ”
100. Controverting those submissions, Mr. Hossain appearing for the
NFRA, firstly invited our attention to some of the relevant provisions
contained in the Companies Act to submit that the said statute itself
contemplates an auditor to be either an individual or a firm. According
to Mr. Hossain, a partner of a firm which has been appointed as an
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auditor acts as a representative and agent of such an entity. Mr. Hossain,
firstly cited Section 139 of the Companies Act and which provision
reads as under:-
“ 139. Appointment of auditors .—(1) Subject to the provisions of
this Chapter, every company shall, at the first annual general
meeting, appoint an individual or a firm as an auditor who shall
hold office from the conclusion of that meeting till the conclusion
of its sixth annual general meeting and thereafter till the conclusion
of every sixth meeting and the manner and procedure of selection
of auditors by the members of the company at such meeting shall
be such as may be prescribed:
[ *]
Provided further that before such appointment is made, the written
consent of the auditor to such appointment, and a certificate from
him or it that the appointment, if made, shall be in accordance with
the conditions as may be prescribed, shall be obtained from the
auditor:
Provided also that the certificate shall also indicate whether the
auditor satisfies the criteria provided in Section 141:
Provided also that the company shall inform the auditor concerned
of his or its appointment, and also file a notice of such appointment
with the Registrar within fifteen days of the meeting in which the
auditor is appointed.
Explanation .—For the purposes of this Chapter, “appointment”
includes reappointment.
(2) No listed company or a company belonging to such class or
classes of companies as may be prescribed, shall appoint or
reappoint—
( a ) an individual as auditor for more than one term of five
consecutive years; and
( b ) an audit firm as auditor for more than two terms of five
consecutive years:
Provided that—
( i ) an individual auditor who has completed his term under clause
( a ) shall not be eligible for reappointment as auditor in the same
company for five years from the completion of his term;
( ii ) an audit firm which has completed its term under clause ( b ),
shall not be eligible for reappointment as auditor in the same
company for five years from the completion of such term:
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Provided further that as on the date of appointment no audit firm
having a common partner or partners to the other audit firm, whose
tenure has expired in a company immediately preceding the
financial year, shall be appointed as auditor of the same company
for a period of five years:
[Provided also that every company, existing on or before the
commencement of this Act which is required to comply with the
provisions of this sub-section, shall comply with requirements of
this sub-section within a period which shall not be later than the
date of the first annual general meeting of the company held, within
the period specified under sub-section (1) of Section 96, after three
years from the date of commencement of this Act:]
Provided also that, nothing contained in this sub-section shall
prejudice the right of the company to remove an auditor or the right
of the auditor to resign from such office of the company.
(3) Subject to the provisions of this Act, members of a company
may resolve to provide that—
( a ) in the audit firm appointed by it, the auditing partner and his
team shall be rotated at such intervals as may be resolved by
members; or
( b ) the audit shall be conducted by more than one auditor.
(4) The Central Government may, by rules, prescribe the manner in
which the companies shall rotate their auditors in pursuance of sub-
section (2).
Explanation .—For the purposes of this Chapter, the word “firm”
shall include a limited liability partnership incorporated under
the Limited Liability Partnership Act, 2008 (6 of 2009).
(5) Notwithstanding anything contained in sub-section (1), 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
Comptroller and Auditor-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
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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.
(8) Any casual vacancy in the office of an auditor shall—
( i ) in the case of a company other than a company whose accounts
are subject to audit by an auditor appointed by the Comptroller and
Auditor-General of India, be filled by the Board of Directors within
thirty days, but if such casual vacancy is as a result of the
resignation of an auditor, such appointment shall also be approved
by the company at a general meeting convened within three months
of the recommendation of the Board and he shall hold the office till
the conclusion of the next annual general meeting;
( ii ) in the case of a company whose accounts are subject to audit by
an auditor appointed by the Comptroller and Auditor-General of
India, be filled by the Comptroller and Auditor-General of India
within thirty days:
Provided that in case the Comptroller and Auditor-General of India
does not fill the vacancy within the said period, the Board of
Directors shall fill the vacancy within next thirty days.
(9) Subject to the provisions of sub-section (1) and the rules made
thereunder, a retiring auditor may be reappointed at an annual
general meeting, if—
( a ) he is not disqualified for reappointment;
( b ) he has not given the company a notice in writing of his
unwillingness to be reappointed; and
( c ) a special resolution has not been passed at that meeting
appointing some other auditor or providing expressly that he shall
not be reappointed.
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(10) Where at any annual general meeting, no auditor is appointed
or reappointed, the existing auditor shall continue to be the auditor
of the company.
(11) Where a company is required to constitute an Audit Committee
under Section 177, all appointments, including the filling of a
casual vacancy of an auditor under this section shall be made after
taking into account the recommendations of such committee.
”
101. Mr. Hossain also took us through the various Accounting
35
Standards
in order to underscore his submission that a partner of an
audit firm appointed in terms of Section 139, owes his engagement and
involvement in the audit to the appointment of the firm itself. It was
submitted that the SAs’ require the appointed auditor to exercise,
control and oversight in respect of the functions discharged by its
individual partners in the course of an audit.
102. Mr. Hossain submitted that the auditor is required to exercise
quality control during the entire audit process in order to ensure that its
participating members discharge their functions and duties in
accordance with the statutory obligations which apply. Learned counsel
firstly referred us to SA 230 and which mandates the auditor to ensure
that the audit exercise is conducted in accordance with the stipulations
contained in SQC 1. Proceeding further, learned counsel placed for our
consideration SA 220 and where the following provisions stand
incorporated:-
“ Scope of this SA
1. This Standard on Auditing (SA) deals with the specific
responsibilities of the auditor regarding quality control procedures
for an audit of financial statements. It also addresses, where
applicable, the responsibilities of the engagement quality control
35
SAs
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reviewer. This SA is to be read in conjunction with relevant ethical
requirements.
System of Quality Control and Role of Engagement Teams
2. Quality control systems, policies and procedures are the
responsibility of the audit firm. Under SQC 1, the firm has an
obligation to establish and maintain a system of quality control to
provide it with reasonable assurance that:
(a) The firm and its personnel comply with professional standards
and regulatory and legal requirements; and
(b) The reports issued by the firm or engagement partners are
appropriate in the circumstances.
This SA is premised on the basis that the firm is subject to SQC 1.
(Ref: Para.A1)
3. Within the context of the firm’s system of quality control,
engagement teams have a responsibility to implement quality
control procedures that are applicable to the audit engagement and
provide the firm with relevant information to enable the
functioning of that part of the firm’s system of quality control
relating to independence.
4. Engagement teams are entitled to rely on the firm’s system of
quality control, unless information provided by the firm or other
parties suggests otherwise. (Ref: Para. A2)
xxxx xxxx xxxx
Monitoring
23. An effective system of quality control includes a monitoring
process designed to provide the firm with reasonable assurance that
its policies and procedures relating to the system of quality control
are relevant, adequate, and operating effectively. The engagement
partner shall consider the results of the firm’s monitoring process
as evidenced in the latest information circulated by the firm and, if
applicable, other network firms and whether deficiencies noted in
that information may affect the audit engagement. (Ref: Para A32-
A34)”
103. The obligation of the auditing firm to lay in place a system of
quality control so that it is reasonably assured that its members assigned
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to undertake the audit comply with professional standards as well as
regulatory requirements, Mr. Hossain pointed out, is a prescription
which also stands mirrored in SQC 1 and more particularly paragraphs
3, 4 and 5 thereof:-
3. The firm should establish a system of quality control designed
“
to provide it with reasonable assurance that the firm and its
personnel comply with professional standards and regulatory and
legal requirements, and that reports issued by the firm3 or
engagement partner(s) are appropriate in the circumstances.
4. A system of quality control consists of policies designed to
achieve the objectives set out in paragraph 3 and the procedures
necessary to implement and monitor compliance with those
policies.
5. This SQC applies to all firms. The nature of the policies and
procedures developed by individual firms to comply with this SQC
will depend on various factors such as the size and operating
characteristics of the firm, and whether it is part of a network ”
104. We also deem it apposite to extract the following additional
Paragraphs from SQC 1:-
“ 7. The firm’s system of quality control should include policies and
procedures addressing each of the following elements:
(a) Leadership responsibilities for quality within the firm.
(b) Ethical requirements.
(c) Acceptance and continuance of client relationships and specific
engagements.
(d) Human resources.
(e) Engagement performance.
(f) Monitoring.
xxxx xxxx xxxx
9. The firm should establish policies and procedures designed to
promote an internal culture based on the recognition that quality is
essential in performing engagements. Such policies and procedures
should require the firm’s chief executive officer (or equivalent) or,
if appropriate, the firm’s managing partners (or equivalent), to
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assume ultimate responsibility for the firm’s system of quality
control.
10. The firm’s leadership and the examples it sets significantly
influence the internal culture of the firm. The promotion of a
quality-oriented internal culture depends on clear, consistent and
frequent actions and messages from all levels of the firm’s
management emphasizing the firm’s quality control policies and
procedures, and the requirement to:
(a) Perform work that complies with professional standards and
regulatory and legal requirements; and
(b) Issue reports that are appropriate in the circumstances. Such
actions and messages encourage a culture that recognizes and
rewards high quality work. They may be communicated by training
seminars, meetings, formal or informal dialogue, mission
statements, newsletters, or briefing memoranda. They are
incorporated in the firm’s internal documentation and training
materials, and in partner and staff appraisal procedures such that
they will support and reinforce the firm’s view on the importance
of quality and how, practically, it is to be achieved.
xxxx xxxx xxxx
14. The firm should establish policies and procedures designed to
provide it with reasonable assurance that the firm and its personnel
comply with relevant ethical requirements.
xxxx xxxx xxxx
23. At least annually, the firm should obtain written confirmation
of compliance with its policies and procedures on independence
from all firm personnel required to be independent in terms of the
requirements of the Code.
”
105. In view of the above, it was contended by Mr. Hossain that the
work of a constituent of an auditing firm is inextricably linked with the
policies laid in place by that firm pertaining to compliance with
auditing standards and standards of quality control. On a compendious
reading of the various SAs’, Mr. Hossain submitted, it would be
apparent that the discharge of functions by a member of an auditing
firm is not liable to be viewed as distinct or removed from the
engagement and appointment of the firm as an auditor itself.
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106. Mr. Hossain then took us through the provisions contained in
Section 147 of the Companies Act and which contemplates the
imposition of punishment upon a firm as well as its member. The
relevant parts of Section 147 are extracted hereinbelow:-
147. Punishment for contravention .—(1) If any of the
“
provisions of Sections 139 to 146 (both inclusive) is contravened,
the company shall be punishable with fine which shall not be less
than twenty-five thousand rupees but which may extend to five
lakh rupees and every officer of the company who is in default
shall be punishable 233[ *] with fine which shall not be less
than ten thousand rupees but which may extend to 234[one lakh
rupees].
(2) If an auditor of a company contravenes any of the provisions of
Section 139, 235[ *], Section 144 or Section 145, the auditor
shall be punishable with fine which shall not be less than twenty-
five thousand rupees but which may extend to five lakh rupees
236[or four times the remuneration of the auditor, whichever is
less]:
Provided that if an auditor has contravened such provisions
knowingly or wilfully with the intention to deceive the company or
its shareholders or creditors or tax authorities, he shall be
punishable with imprisonment for a term which may extend to one
year 237[and with fine which shall not be less than fifty thousand
rupees but which may extend to twenty-five lakh rupees or eight
times the remuneration of the auditor, whichever is less].
(3) Where an auditor has been convicted under sub-section (2), he
shall be liable to—
(i) refund the remuneration received by him to the company; and
(ii) pay for damages to the company, statutory bodies or authorities
238[or to members or creditors of the company] for loss arising out
of incorrect or misleading statements of particulars made in his
audit report.
(4) The Central Government shall, by notification, specify any
statutory body or authority or an officer for ensuring prompt
payment of damages to the company or the persons under clause
(ii) of sub-section (3) and such body, authority or officer shall after
payment of damages to such company or persons file a report with
the Central Government in respect of making such damages in such
manner as may be specified in the said notification.
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(5) Where, in case of audit of a company being conducted by an
audit firm, it is proved that the partner or partners of the audit firm
has or have acted in a fraudulent manner or abetted or colluded in
any fraud by, or in relation to or by, the company or its directors or
officers, the liability, whether civil or criminal as provided in this
Act or in any other law for the time being in force, for such act
shall be of the partner or partners concerned of the audit firm and
of the firm jointly and severally.
[Provided that in case of criminal liability of an audit firm, in
respect of liability other than fine, the concerned partner or
partners, who acted in a fraudulent manner or abetted or, as the
case may be, colluded in any fraud shall only be liable.] ”
107. In view of the aforesaid, learned counsel submitted that it would
be wholly incorrect for the petitioners to assert that the introduction of a
provision pertaining to disciplinary proceedings against a firm would
amount to the introduction of a liability which did not exist or could be
described to be vicarious in character.
108. More importantly, according to Mr. Hossain, one must also bear
in consideration the indisputable position of partnership firms not being
liable to be viewed as separate juristic entities. Although this position is
by now fairly well settled, in order to buttress his submissions, Mr.
Hossain firstly relied upon the following passages as appearing in
36
Commissioner of Income Tax vs. R.M. Chidambaram Pillai
:-
“ 15. Is the firm a person or a mere shorthand name for a collection
of persons, commercially convenient but not legally recognised?
Under Section 3 of the Partnership Act it is not a person, but a
relationship among persons. Lindley on Partnership [12th Edn., p.
28, Sweet & Maxwell] , has this:
“The firm is not recognised by English lawyers as distinct
from the members composing it. In taking partnership
accounts and in administering partnership assets, courts
have to some extent adopted the mercantile view, and
actions may now, speaking generally, be brought by or
36
(1977) 1 SCC 431
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against partners in the name of their firm, but, speaking
generally, the firm as such has no legal recognition. The
law, ignoring the firm, looks to the partners composing it;
any change amongst them destroys the identity of the firm;
what is called the property of the firm is their property,
and what are called the debts and liabilities of the firm are
their debts and their liabilities. In point of law, a partner
may be the debtor or the creditor of his co-partners, but he
cannot be either debtor or creditor of the firm of which he
is himself a member, nor can he be employed by his firm,
for a man cannot be his own employer.”
The Indian law of partnership is substantially the same and the
16.
reference in counsel's submissions to the Scottish view of a firm
being a legal entity is neither here nor there. Primarily our study
must zero on the Indian Partnership Act and not borrow courage
from foreign systems. In Bhagwanji Morarji Gokuldas [AIR 1948
PC 100 : (1948) 18 Comp Cas 205, 209] the Privy Council ruled
that the Indian Partnership Act went beyond the English
Partnership Act, 1890, the law in India attributing personality to a
partnership being more in accordance with the law of Scotland.
Even so, Sir John Beaumont, in that case, pointed out that the
Indian Act did not make a firm a corporate body. Moreover, we are
not persuaded by that ruling of the Privy Council, particularly since
a pronouncement of this Court in Dulichand [ Dulichand
Laksminarayan v. CIT , AIR 1956 SC 354 : 1956 SCR 154 : (1956)
2 ITR 535] strikes a contrary note. We quote:
“In some systems of law this separate personality of a firm
apart from its members has received full and formal
recognition as, for instance, in Scotland. That is, however,
not the English common law conception of a firm. English
lawyers do not recognise a firm as an entity distinct from
the members composing it. Our partnership law is based
on English law and we have also adopted the notions of
English lawyers as regards a partnership firm.”
The life of the Indian law of partnership depends on its own terms
although habitually courts, as a hangover of the past, have been
referring to the English law on the point. The matter is concluded
by the further observations of this Court:
“It is clear from the foregoing discussion that the law,
English as well as Indian, has, for some specific
purposes, some of which are referred to above, relaxed
its rigid notions and extended a limited personality to a
firm. Nevertheless, the general concept of a partnership,
firmly established in both systems of law, still is that a
firm is not an entity or ‘person’ in law but is merely an
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association of individuals and a firm name is only a
collective name of those individuals who constitute the
firm. In other words, a firm name is merely an
expression, only a compendious mode of designating
the persons who have agreed to carry on business in
partnership. According to the principles of English
jurisprudence, which we have adopted, for the purposes
of determining legal rights ‘there is no such thing as a
firm known to the law as was said by James, L.J., in Ex
parte Corbett : In re Shand [(1880) 14 Ch D 122, 126 :
42 LT 164 : 28 WR 569] . In these circumstances to
import the definition of the word ‘person’ occurring in
Section 3(42) of the General Clauses Act, 1897, into
Section 4 of the Indian Partnership Act will, according
to lawyers, English or Indian, be totally repugnant to
the subject of partnership law as they know and
understand it to be.”
In Narayanappa [ Addanki Narayanappa v. Bhaskara Krishtappa ,
AIR 1966 SC 1300, 1303 : (1966) 3 SCR 400] the view taken by
this Court accords with the position above stated.
17. The necessary inference from the premise that a partnership is
only a collective of separate persons and not a legal person in itself
leads to the further conclusion that the salary stipulated to be paid
to a partner from the firm is in reality a mode of division of the
firm's profits, no person being his own servant in law since a
contract of service postulates two different persons.
18. Counsel for the respondent cited the “ Australian Income Tax
Law and Practice by F.C. Bock and F.F. Mannix [ 1968 Edn, Vol.
3, p. 3092] in Support of the proposition that a partner's salary is
but a portion of the profits:
“It follows that where the partnership income consists
of income from property, the salary is also income from
property.”
19. In an early Madras case CIT v. B.S. Mines [(1922) 1 ITC 176,
177 (FB)(Mad)] the Madras High Court had held, with reference to
the 1918 Income Tax Act:
“We have no hesitation in answering that the drawings
of the partners, by whatever name they are described,
are part of the profits and therefore taxable, the
question raised being one with reference to the
character of salaries paid to partners.”
Other cases from Other High Courts have been brought to our
20.
notice but strong reliance was placed on Ramniklal
Kothari [ CIT v. Ramniklal Kothari , (1969) 1 SCC 757 : (1969) 74
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ITR 57] of this Court for reaching the conclusion that the business
of a firm was business of the partners, that the profits of the firm
were profits of the partners and that the expenditure incurred by
partners in earning such share was admissible for deduction in
arriving at the total income under Section 10(1).
21. Contrary views are not wanting in some rulings, but a catalogue
of cases on the other side may be productive of confusion and not
resolution of conflict. We abstain from that enterprise and confine
ourselves to the statement of the law that although, for purposes of
the Income Tax Act, a firm has certain attributes simulative of
personality, we have to take it that a partnership is not a person but
a plurality of persons.
22. Coming to basics over again, this Court, in Karimtharuvi Tea
Estates [ Karimtharuvi Tea Estates Ltd. v. State of Kerala , 1963
Supp 1 SCR 823 : (1963) 48 ITR 83 : AIR 1963 SC 760.] and
in Anglo-American Direct Tea Trading Co. [ Anglo American
Direct Tea Trading Co Ltd. v. CAg IT , AIR 1968 SC 1213 : (1968)
2 SCR 745 : (1968) 69 ITR 667, 671] has set out the nature of and
manner of assessment of composite income tax derived by the sale
of tea:
“In Karimtharuvi Tea Estates Ltd. v. State of
Kerala this Court held that Explanation 2 to Section 5
of the Kerala Agricultural Income Tax Act added in
1961 disallowing certain deductions in the computation
of agricultural income did not apply to computation of
agricultural income derived from tea plantations. The
reasons for this conclusion may be summarised thus :
The definition of agricultural income in the
Constitution and the Indian Income Tax Act, 1922, is
bound up with Rule 24 of the Income Tax Rules, 1922.
Income derived from the sale of tea grown and
manufactured by the seller is to be computed under
Rule 24 as if it were income derived from business in
accordance with the provisions of Section 10 of the
Indian Income Tax Act. The Explanation to Section
2( a )(2) of the Kerala Act adopts this rule of
computation. Of the income so computed, 40 per cent,
is treated as income liable to income tax and the other
60 per cent only is to be deemed to be agricultural
income within the meaning of that expression in the
Income Tax Act. The power of the State legislature to
make a law in respect of taxes on agricultural income
arising from tea plantations is limited to legislating with
respect to agricultural income so determined. The
legislature cannot add to the amount of the agricultural
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income so determined by disallowing any item of
deductions allowable under Rule 24 read with Section
10(2)( xv ) of the Indian Income Tax Act. Explanation 2
to Section 5 of the Kerala Act if applied to income from
tea plantations would create an agricultural income
which is not contemplated by the Income Tax Act and
the Constitution and would be void, and it should
therefore be construed not to apply to the computation
of income from tea plantations.”
In Tea Estates India [ Tea Estates India (P) Ltd v. CIT , (1976) 4
SCC 446: (1976) 103 ITR 785, 795] this Court summarised the
scope and implications of Rule 24:
“Income which is realised by sale of tea by a tea
company which grows tea on its land and thereafter
subjects it to manufacturing process in its factory is an
integrated income. Such income consists of two
elements or components. One element or component
consists of the agricultural income which is yielded in
the form of green leaves purely by the land over which
tea plants are grown. The second element or component
consists of non-agricultural income which is the result
of subjecting green leaves which plucked from the tea
plants grown on the land to a particular manufacturing
process in the factory of the tea company. Rule 24
prescribes the formula which should be adopted for
apportioning the income realised as a result of the sale
of tea after it is grown and subjected to the
manufacturing process in the factory. Sixty per cent is
taken to be agricultural income and the same consists of
the first element or component, while 40 per cent
represents non-agricultural income and the same
comprises the second element or component.”
We are fortified in the above conclusion by two decisions of this
Court in the cases of Karimtharuvi Tea Estates Ltd. v. State of
Kerala and Anglo-American Direct Tea Trading Co. Ltd .
v. Commissioner of Agricultural Income Tax . In the case of
Karimtharuvi Tea Estates Ltd. it was observed while dealing with
the income derived from the sale of tea grown and manufactured by
the seller in the context of Rule 24:
“Of the income so computed, 40 per cent is, under
Rule 24, to be treated as income liable to income tax
and it would follow that the other 60 per cent only
will be deemed to he ‘agricultural income’ within the
meaning of that expression in the Income Tax Act.”
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In the case of Anglo-American Direct Tea Trading Co. Ltd. the
Constitution Bench of this Court held that income from the sale of
tea grown and manufactured by the assessee is derived partly from
business and partly from agriculture. This income has to be
computed as if it were income from business under the Central
Income Tax Act and the Rules made thereunder. Forty per cent of
the income so computed is deemed to be income derived from
business and assessable to non-agricultural income tax. The
balance of 60 per cent of the income so computed is agricultural
income within the meaning of the Central Income Tax Act.
23. It follows that by statutory dichotomy, 60% of the tea income is
agricultural in character and central income tax cannot break into
its inviolability. This conceded, the flexible arrangement among
partners regarding distribution of this sum may take many forms
but the essential agricultural character and consequential legislative
immunity cannot be lost because of tags and labels:
That which we call a rose,
By any other name would smell as sweet.
Needless to say, the position is different if the situation is of a
stranger — not a partner — drawing a salary.
With ideological clarity, this legal position has been set forth by
24.
a learned Author whom we refer to [ Law of Income Tax by AC
Sampath Iyengar, 6th Edn, 1973, pp 1063-1064 (Vol II)] (by no
means, rely on) compendious as his summary is:
“Any interest, salary, bonus, commission or
remuneration paid by a firm to any of its partners
cannot be deducted by the firm as an expenditure in its
profit-computation. The reason is this : The partners in
a firm are ultimately entitled to the entire profits of the
firm, according to their shares in the business.
Therefore, the entirety of such profits should be
brought to charge and no portion be exempted by
giving the same away to a partner as his salary, bonus,
commission, remuneration or interest. A partner is
bound to find the necessary finances for the partnership
and hence any interest on capital supplied by the
partner is not deductible. A partner's rendering services
to the firm stands on the same footing as his providing
capital; only instead of in money, in kind. Further, no
remuneration is permissible to a partner for his
rendering services to the firm, since the carrying on of
the business of the partnership is a primary duty which
all the partners, or some of the partners acting for all,
are required to do by the law relating to partnership.
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The matter may be looked at another way too. In law, a
partner cannot be employed by his firm, for a man
cannot be his own employer. A contract can only be
bilateral and the same person cannot be a party on both
sides, particularly in a contract of personal
employment. A supposition that a partner is employed
by the firm would involve that the employee must be
looked upon as occupying the position of one of his
own employers, which is legally impossible.
Consequently, when an arrangement is made by which
a partner works and receives sums as wages for
services rendered, the agreement should in truth be
regarded as a mode of adjusting the amount that must
be taken to have been contributed to the partnership's
assets by a partner who has made what is really a
contribution in kind, instead of contribution in money.
Hence, all the aforesaid payments are non-deductible.”
The contrary view favoured by Mathew Abraham proceeds on the
reasoning:
“Though for purposes of computation of income his
share income of the firm is clubbed along with the
allowance and commission, it is obvious that the
character of the receipt of the latter amounts, though
related to the business, cannot be said to partake of the
same character of their receipt by the firm. The assessee
who is a managing partner was entitled to receive the
amount not by virtue of the relationship between him
and the other members of the firm as partners but by
virtue of the special agreement between the partners by
which his services to the partnership were agreed to be
remunerated.” (p. 471)
We regard this conclusion as unsound, the source of the error
25.
being a failure to appreciate that the salary of a partner is but an
alias for the return, by way of profits, for the human capital —
sweat, skill and toil are, in our socialist republic, productive
investment — he has brought in for common benefit. The
immediate reason for payment of salary was service contract but
the causa causans in partnership.”
109. The position in law so enunciated also finds resonance in
37
Dulichand Laxminarayan vs. Commissioner of Income Tax
and
where the Supreme Court had observed:-
37
1956 SCC OnLine SC 73
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“ 10. Turning, then, to the Indian Partnership Act, 1932 we come to
Section 4 which defines “partnership”, “partner”, “firm” and “firm
name” in the words following:
“4. Definition of ‘partnership’, ‘ partner ’,
‘ firm ’ and ‘ firm name ’.— ‘Partnership’ is the relation
between persons who have agreed to share the profits
of a business carried on by all or any of them acting for
all.
Persons who have entered into partnership with one
another are called individually ‘partners’ and
collectively ‘a firm’, and the name under which their
business is carried on is called the ‘firm name’.”
This section clearly requires the presence of three elements, namely
( 1 ) that there must be an agreement entered into by two or more
persons; ( 2 ) that the agreement must be to share the profits of a
business; and ( 3 ) that the business must be carried on by all or any
of those persons acting for all. According to this definition
“persons” who have entered into partnership with one another are
collectively called a “firm” and the name under which their
business is carried on is called the “firm name”. The first question
that arises is as to whether a firm as such can enter into an
agreement with another firm or individual. The answer to the
question would depend on whether a firm can be called a “person”.
11. There is no definition of the word “person” in the Partnership
Act. The General Clauses Act, 1897, however, by Section 3(42)
provides that “person shall include any company or association or
body of individuals whether incorporated or not”. The firm is not a
company but is certainly an association or body of individuals. The
argument is that applying that definition to the word “persons”
occurring in Section 4, one can at once say that an unincorporated
association or body of persons, like a firm, can enter into a
partnership just as by the application of that definition to Section 4
of the Indian Partnership Act a company can become a partner in a
firm. The definitions given in Section 3 of the General Clauses Act,
1897, however, apply when there is nothing repugnant in the
subject or context. It is difficult to say that there is anything
repugnant in the context of Section 4 itself which will exclude the
application of that definition to the word “persons” occurring in
Section 4. Is there, however, anything repugnant in the subject of
partnership law, which will exclude the application of that
definition to Section 4?
12. As pointed out in Lindley on Partnership , 11th Edn, at p. 153,
merchants and lawyers have different notions respecting the nature
of a firm. Commercial men and accountants are apt to look upon a
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firm in the light in which lawyers look upon a corporation i.e. as a
body distinct from the members composing it. In other words
merchants are used to regard a firm, for purposes of business, as
having a separate and independent existence apart from its partners.
In some systems of law this separate personality of a firm apart
from its members has received full and formal recognition, as, for
instance, in Scotland. That is, however, not the English Common
Law conception of a firm. English lawyers do not recognize a firm
as an entity distinct from the members composing it. Our
partnership law is based on English law and we have also adopted
the notions of English lawyers as regards a partnership firm.
Some of the mercantile usages relating to a firm have, however,
13.
found their way into the law of partnership. Thus in keeping
accounts, merchants habitually show a firm as a debtor to each
partner for what he brings into the common stock and each partner
is shown as a debtor to the firm for all that he takes out of that
stock. But under the English Common Law, a firm, not being a
legal entity, could not sue or be sued in the firm name or sue or be
sued by its own partner, for one cannot sue oneself. Later on this
rigid law of procedure, however, gave way to considerations of
commercial convenience and permitted a firm to sue or be sued in
the firm name, as if it were a corporate body (see Code of Civil
Procedure, Order 30 corresponding to rules of the English Supreme
Court Order 48-A). The law of procedure has gone to the length of
allowing a firm to sue or be sued by another firm having some
common partners or even to sue or be sued by one or more of its
own partners (see Order 30, Rule 9 of the Code of Civil Procedure),
as if the firm is an entity distinct from its partners. Again in taking
partnership accounts and in administering partnership assets, the
law has, to some extent, adopted the mercantile view and the
liabilities of the firm are regarded as the liabilities of the partners
only in case they cannot be met and discharged by the firm out of
its assets. The creditors of the firm are, in the first place, paid out of
the partnership assets and if there is any surplus then the share of
each partner in such surplus is applied in payment of his separate
debts, if any, or paid to him. Conversely, separate property of a
partner is applied first in the payment of his separate debts and the
surplus, if any is utilised in meeting the debts of the firm (see
Section 49 of the Indian Partnership Act, 1932). In the Indian
Income Tax Act itself a firm is, by Section 3, which is the charging
section, made a unit of assessment.
14. It is clear from the foregoing discussion that the law, English as
well as Indian, has, for some specific purposes, some of which are
referred to above, relaxed its rigid notions and extended a limited
personality to a firm. Nevertheless, the general concept of
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partnership, firmly established in both systems of law, still is that a
firm is not an entity or “person” in law but is merely an association
of individuals and a firm name is only a collective name of those
individuals who constitute the firm. In other words, a firm name is
merely an expression, only a compendious mode of designating the
persons who have agreed to carry on business in partnership.
According to the principles of English jurisprudence, which we
have adopted, for the purposes of determining legal rights “there is
no such thing as a firm known to the law” as was said by James
L.J. in Ex parte Corbett , In re Shand [(1880) LR 14 Ch 122, 126] .
In these circumstances to import the definition of the word
“person” occurring in Section 3(42) of the General Clauses Act,
1897 into Section 4 of the Indian Partnership Act will, according to
lawyers, English or Indian, be totally repugnant to the subject of
partnership law as they know and understand it to be. It is in this
view of the matter that it has been consistently held in this country
that a firm as such is not entitled to enter into partnership with
another firm or individuals. It is not necessary to refer in detail to
those decisions many of which will be found cited in Jabalpur Ice
Manufacturing Association v. CIT , Madhya Pradesh [(1955) 27
ITR 88] to which a reference has already been made. We need only
refer to the case of Bhagwanji Morarji Goculdas v. Alembic
Chemical Works Co. Ltd. [AIR 1948 PC 100] where it has been
laid down by the Privy Council that Indian Law has not given legal
personality to a firm apart from the partners. This view finds
support from and is implicit in the observations made by this Court
in the CIT v. A.V. Figgies & Co. [(1954) SCR 171 : 1953 ITR 405]
15. In Jai Dayal Madan Gopal [(1933) ITR 186] Sulaiman, C.J.
followed the Calcutta decisions and was not prepared to dissent
from the view that the word “person” in Section 239 of the Indian
Contract Act, 1872 should not be interpreted so as to include a
firm. The learned Chief Justice, however, expressed the view that it
was difficult to say that there was anything in Section 239 itself
which made the application to that section of the definition of
“person” as given in General Clauses Act in any way repugnant.
The learned Chief Justice, however, does not appear to have
considered whether there was anything repugnant in the subject of
partnership law, as it prevails in this country, which operates to
exclude the application of that definition to the word “person”
occurring in Section 239 of the Indian Contract Act. In our opinion,
the word “persons” in Section 4 of the Indian Partnership Act,
which has replaced Section 239 of the Indian Contract Act,
contemplates only natural or artificial i.e. legal persons and for the
reasons stated above, a firm is not a “person” and as such is not
entitled to enter into a partnership with another firm or Hindu
undivided family or individual. In this view of the matter there can
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arise no question of registration of a partnership purporting to be
one between three firms, a Hindu undivided family business and an
individual as a firm under Section 26-A of the Act.
16. The learned Advocate for the appellant then urges that, at any
rate, the partnership was not illegal, for there was no legal
impediment in the way of all the members of all the three
constituent firms and the karta of the Hindu undivided family and
the individual entering into an agreement and that, therefore, a
valid partnership was constituted by the deed of partnership under
consideration. Assuming that this contention is possible in view of
the language which has been used in this deed for describing the
parties, the position of the appellant will not improve, for in order
to be entitled to the benefit of registration under the Act, it will
have to be shown that the shares of all individual partners are
specified in the deed and that all the partners have personally
signed the application for registration as required by Section 26-A
of the Act read with Rule 2. The deed specifies that each of the five
constituent parties is entitled to an equal i.e. 1/5 share but it does
not specify the individual shares of each of the partners of each of
the three smaller constituent firms. Further all the members of
those three firms have not signed the application for registration
personally. It is said that each of the three persons who executed
the deed for the three smaller firms must be regarded as having the
authority of their co-partners in their respective firms to sign the
application for registration just as they had their authority to
execute the deed itself for them. Even if they had such authority —
as to which there is no evidence at all on the record — the section
and Rule 2 require that each partner (not being minors) must sign
personally. That admittedly has not been done, and, therefore, the
application was not in proper form. In our judgment the answer
given by the High Court to the question is correct. This appeal
must, therefore, be dismissed with costs.
”
110. Mr. Hossain also relied upon the provisions introduced by virtue
of Sections 25 and 26 of the Indian Partnership Act, 1932 and in terms
of which every partner is held liable jointly with all other partners as
also severally for all acts of the firm and the firm in turn being held
liable to the same extent as the partner. According to learned counsel,
the aforenoted provisions in clear and unambiguous terms provide for
the partner as well as the firm being equally liable for the wrongful acts
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or omission of either. According to Mr. Hossain, any doubt that could
have possibly been harboured stands laid to rest by Section 27(2) of the
LLP Act and which expressly holds an LLP to be liable in respect of
any wrongful act or omission of a partner. According to learned
counsel, the phrase “liable to any person” as appearing in Section 27(2)
would necessarily include the legal liability which comes to be incurred
under the LLP Act towards investor shareholders and other stakeholders
and thus the legal consequence of such liability being liable to be
suffered. In view of the aforesaid, Mr. Hossain submitted that the
argument of vicarious liability is clearly misconceived.
111. Having noticed the rival submissions which were addressed on
this score, we firstly turn our gaze on the principal provisions which are
contained in the Companies Act and deal with the appointment and
engagement of an auditor. As is manifest from a reading of Section 139
of the Companies Act, every company is entitled to appoint either an
individual or a firm as its auditor. By virtue of Section 141 of the said
enactment, the statute proceeds to prescribe conditions in respect of
eligibility and the qualifications which must be held by an auditor
appointed by a company. In terms of Section 141(1), a person would be
eligible to be appointed as an auditor of a company, if he be a CA. The
Proviso to Section 141(1) proceeds further to hold that a firm whose
majority of partners are also qualified for appointment, may be
appointed as an auditor in its own name. Similar prescriptions appear in
Section 141 (2) and which prescribes the condition subject to which an
LLP may be appointed as an auditor.
112. Section 141 is extracted hereunder:-
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“ 141. Eligibility, qualifications and disqualifications of
auditors .—(1) A person shall be eligible for appointment as an
auditor of a company only if he is a chartered accountant:
Provided that a firm whereof majority of partners practising in
India are qualified for appointment as aforesaid may be appointed
by its firm name to be auditor of a company.
(2) Where a firm including a limited liability partnership is
appointed as an auditor of a company, only the partners who are
chartered accountants shall be authorised to act and sign on behalf
of the firm.
(3) The following persons shall not be eligible for appointment as
an auditor of a company, namely—
( a ) a body corporate other than a limited liability partnership
registered under the Limited Liability Partnership Act, 2008 (6 of
2009);
( b ) an officer or employee of the company;
( c ) a person who is a partner, or who is in the employment, of an
officer or employee of the company;
( d ) a person who, or his relative or partner—
( i ) is holding any security of or interest in the company or its
subsidiary, or of its holding or associate company or a subsidiary of
such holding company:
Provided that the relative may hold security or interest in the
company of face value not exceeding one thousand rupees or such
sum as may be prescribed;
( ii ) is indebted to the company, or its subsidiary, or its holding or
associate company or a subsidiary of such holding company, in
excess of such amount as may be prescribed; or
( iii ) has given a guarantee or provided any security in connection
with the indebtedness of any third person to the company, or its
subsidiary, or its holding or associate company or a subsidiary of
such holding company, for such amount as may be prescribed;
( e ) a person or a firm who, whether directly or indirectly, has
business relationship with the company, or its subsidiary, or its
holding or associate company or subsidiary of such holding
company or associate company of such nature as may be
prescribed;
( f ) a person whose relative is a director or is in the employment of
the company as a director or key managerial personnel;
( g ) a person who is in full time employment elsewhere or a person
or a partner of a firm holding appointment as its auditor, if such
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persons or partner is at the date of such appointment or
reappointment holding appointment as auditor of more than twenty
companies;
( 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;
[( i ) a person who, directly or indirectly, renders any service
referred to in Section 144 to the company or its holding company
or its subsidiary company.
Explanation .—For the purposes of this clause, the term “directly or
indirectly” shall have the meaning assigned to it in the Explanation
to Section 144.]
(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.
”
113. It is thus evident that an individual, a partnership firm or an LLP
can be appointed as an auditor of a company. The appointment,
prescriptions and the nature of services which could be rendered by it
are further prescribed and regulated by Section 144 of the Companies
Act. The Explanation to Section 144 proceeds to explain and provide a
definition to the expression “directly or indirectly” as appearing
therein. Section 144 reads as follows:-
“ 144. Auditor not to render certain services .—An auditor
appointed under this Act shall provide to the company only such
other services as are approved by the Board of Directors or the
audit committee, as the case may be, but which shall not include
any of the following services (whether such services are rendered
directly or indirectly to the company or its holding company or
subsidiary company, namely:—
( a ) accounting and book keeping services;
( b ) internal audit;
( c ) design and implementation of any financial information system;
( d ) actuarial services;
( e ) investment advisory services;
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( f ) investment banking services;
( g ) rendering of outsourced financial services;
( h ) management services; and
( i ) any other kind of services as may be prescribed:
Provided that an auditor or audit firm who or which has been
performing any non-audit services on or before the commencement
of this Act shall comply with the provisions of this section before
the closure of the first financial year after the date of such
commencement.
Explanation .—For the purposes of this sub-section, the term
“directly or indirectly” shall include rendering of services by the
auditor,—
( i ) in case of auditor being an individual, either himself or through
his relative or any other person connected or associated with such
individual or through any other entity, whatsoever, in which such
individual has significant influence or control, or whose name or
trade mark or brand is used by such individual;
( ii ) in case of auditor being a firm, either itself or through any of its
partners or through its parent, subsidiary or associate entity or
through any other entity, whatsoever, in which the firm or any
partner of the firm has significant influence or control, or whose
name or trade mark or brand is used by the firm or any of its
partners.
”
114. As is manifest from the Explanation appended to that provision,
the statute makes appropriate provisions providing for both
contingencies, namely, where the auditor be an individual or a firm. A
firm when appointed as an auditor, cannot possibly be expected to act
otherwise than through its members and partners. It is perhaps
conscious of this facet concerning the engagement of a partnership firm
or an LLP which guides the provisions made in Section 147(2). Sub-
Section (2) firstly uses the word “auditor” and which must necessarily
be conferred a compendious meaning bearing in mind the indisputable
position of an auditor of a company being either an individual, a
partnership firm or an LLP. The Proviso thereto proceeds further to
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prescribe the punishments which could be imposed upon an auditor if it
were found to have contravened the law or knowingly or wilfully to
have acted with an intent to deceive the company or its shareholders.
Similar provisions are thereafter engrafted in sub-section (5) and which
in unambiguous terms stipulates that even in the case of an audit having
been undertaken by an audit firm, if it is proved that its partner or
partners had acted in a fraudulent manner, it would result in the
imposition of a civil or criminal liability upon such partner or partners
including the firm. The dual liability which would come to be attached
is further amplified when sub-section (5) employs the phrase “and of
the firm jointly and severally” . Of equal significance is the Proviso to
sub-section (5) and which declares that in case of criminal liability of
an audit firm and which be one other than that of a monetary fine, it
would be the concerned partner or partners who had acted in a
fraudulent manner or abetted in the commission of that crime, who
alone would be liable.
115. It is thus manifest that the Companies Act makes provisions in
terms of which both the firm as well as its engagement partners are held
liable and could face the spectre of incarceration as well as the
imposition of monetary fines. Section 147 existed on the statute book
even before the NFRA came to be operationalized. The validity of that
provision is not questioned before us. The said provision gets attracted
the moment the provisions of Sections 139 to 146 are found to have
been contravened. It is thus evident that the Act does not make any
distinction insofar as the issue of liability is concerned. A liability in
terms of the Companies Act could accrue or come to be suffered by
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both the firm as well as its partners.
116. It would thus be wholly incorrect to hold that Section 132 creates
a liability which is foreign to or uncontemplated by the various other
provisions forming part of that statute. The Companies Act clearly
contemplates a firm suffering a liability as a consequence of the action
of its Engagement Partners and constituents who may be involved in
the conduct of the audit. Thus, both the audit firm as well as its
individual partners would be exposed to a statutory liability if Sections
139 to 146 were found to have been violated.
117. Therefore, and in our considered opinion the liability which is
suffered by an audit firm by virtue of the actions of its partners engaged
in an audit can neither be said to be abhorrent to the constitutional
scheme or violative of Article 14. It would be wholly impermissible for
an audit firm to disavow or seek to distance itself from the actions of its
members. This we hold bearing in mind the indubitable fact that
members come to be engaged in the conduct of the audit solely on
account of the firm being appointed as an auditor of a company. The
appointment of those members is not an independent engagement for it
is the firm, be it a partnership or an LLP, which comes to be designated
as the auditor. The individual members of those firms discharge
functions and carry out duties in accordance with the directives issued
by the audit firm.
118. This reasoning aligns closely with the principles of the organic
theory which views the firm and its members as a single, inseparable
unit for the purposes of legal and professional obligations. This
indivisibility reflects the theory's premise that the firm and its members
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are one and their roles are interdependent and unified. Thus, the
appointment of the firm as an auditor naturally encompasses the actions
of its members. The engagement of members in the conduct of an audit
is not an independent or isolated act but is inherently derivative of the
firm's appointment as the auditor. The firm acts as the central organ,
and its members function as its limbs, carrying out its obligations and
responsibilities. The firm’s designation as the auditor inherently extends
to its members, who act on its behalf.
119. Since the overarching liability and indivisible accountability
vests upon the audit firm, the SAs’ place it under an obligation to
continually monitor, regulate and control the quality of the audit itself.
It would therefore be wholly untenable in law to hold that the firm
could shrug off the liability which would come to be attached
consequent to the acts of omission or commission of its individual
partners.
120. The fact that the audit firm is to act through its individual
members becomes further evident from the following provisions which
are made in the SAs:-
“ SQC 1
1. The purpose of this Standard on Quality Control (SQC) is to
establish standards and provide guidance regarding a firm’s
responsibilities for its system of quality control for audits and
reviews of historical financial information, and for other assurance
and related services engagements. This SQC is to be read in
conjunction with the requirements of the Chartered Accountants
Act, 1949, the Code of Ethics and other relevant pronouncements
of the Institute (hereinafter referred to as “the Code”).
xxxx xxxx xxxx
3. The firm should establish a system of quality control designed to
provide it with reasonable assurance that the firm and its personnel
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comply with professional standards and regulatory and legal
requirements, and that reports issued by the firm3 or engagement
partner(s) are appropriate in the circumstances.
xxxx xxxx xxxx
5. This SQC applies to all firms. The nature of the policies and
procedures developed by individual firms to comply with this SQC
will depend on various factors such as the size and operating
characteristics of the firm, and whether it is part of a network
6. In this SQC, the following terms have the meanings attributed
below:
(b) Engagement partner – the partner or other person in the firm
who is a member of the Institute of Chartered Accountants of India
and is in full time practice and is responsible for the engagement
and its performance, and for the report that is issued on behalf of
the firm, and who, where required, has the appropriate authority
from a professional, legal or regulatory body.
(f) Firm – a sole practitioner/proprietor, partnership, or any such
entity of professional accountants, as may be permitted by law.
(l) Partner – any individual with authority to bind the firm with
respect to the performance of a professional services engagement.
7. The firm’s system of quality control should include policies and
procedures addressing each of the following elements:
(a) Leadership responsibilities for quality within the firm.
(b) Ethical requirements
(c) Acceptance and continuance of client relationships and specific
engagements.
(d) Human resources.
(e) Engagement performance.
(f) Monitoring.
xxxx xxxx xxxx
14. The firm should establish policies and procedures designed to
provide it with reasonable assurance that the firm and its personnel
comply with relevant ethical requirements.
15. Ethical requirements relating to audits and reviews of historical
financial information, and other assurance and related services
engagements are contained in the Code. The Code establishes the
fundamental principles of professional ethics, which include:
(a) Integrity;
(b) Objectivity;
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(c) Professional competence and due care;
(d) Confidentiality; and
(e) Professional behavior
xxxx xxxx xxxx
Independence
18. The firm should establish policies and procedures designed to
provide it with reasonable assurance that the firm, its personnel
and, where applicable, others subject to independence requirements
(including experts contracted by the firm and network firm
personnel), maintain independence where required by the Code.
Such policies and procedures should enable the firm to:
(a) Communicate its independence requirements to its personnel
and, where applicable, to others subject to them; and
(b) Identify and evaluate circumstances and relationships that
create threats to independence, and to take appropriate action to
eliminate those threats or reduce them to an acceptable level by
applying safeguards, or, if considered appropriate, to withdraw
from the engagement.
19. Such policies and procedures should require:
(a) Engagement partners to provide the firm with relevant
information about client engagements, including the scope of
services, to enable the firm to evaluate the overall impact, if any,
on independence requirements;
(b) Personnel to promptly notify the firm of circumstances and
relationships that create a threat to independence so that
appropriate action can be taken; and
(c) The accumulation and communication of relevant information
to appropriate personnel so that:
(i) The firm and its personnel can readily determine whether they
satisfy independence requirements;
(ii) The firm can maintain and update its records relating to
independence; and
(iii) The firm can take appropriate action regarding identified
threats to independence
20. The firm should establish policies and procedures designed to
provide it with reasonable assurance that it is notified of breaches
of independence requirements, and to enable it to take appropriate
actions to resolve such situations. The policies and procedures
should include requirements for:
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(a) All who are subject to independence requirements to promptly
notify the firm of independence breaches of which they become
aware;
(b) The firm to promptly communicate identified breaches of these
policies and procedures to:
(i) The engagement partner who, with the firm, needs to address the
breach; and
(ii) Other relevant personnel in the firm and those subject to the
independence requirements who need to take appropriate action;
and
(c) Prompt communication to the firm, if necessary, by the
engagement partner and the other individuals referred to in
subparagraph (b)(ii) of the actions taken to resolve the matter, so
that the firm can determine whether it should take further action.
23. At least annually, the firm should obtain written confirmation
of compliance with its policies and procedures on independence
from all firm personnel required to be independent in terms of the
requirements of the Code.
xxxx xxxx xxxx
28. The firm should establish policies and procedures for the
acceptance and continuance of client relationships and specific
engagements, designed to provide it with reasonable assurance that
it will undertake or continue relationships and engagements only
where it:
(a) Has considered the integrity of the client and does not have
information that would lead it to conclude that the client lacks
integrity;
(b) Is competent to perform the engagement and has the
capabilities, time and resources to do so; and
(c) Can comply with the ethical requirements.
The firm should obtain such information as it considers necessary
in the circumstances before accepting an engagement with a new
client, when deciding whether to continue an existing engagement,
and when considering acceptance of a new engagement with an
existing client. Where issues have been identified, and the firm
decides to accept or continue the client relationship or a specific
engagement, it should document how the issues were resolved.
xxxx xxxx xxxx
Assignment of Engagement Teams
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42. The firm should assign responsibility for each engagement to
an engagement partner. The firm should establish policies and
procedures requiring that:
(a) The identity and role of the engagement partner are
communicated to key members of the client’s management and
those charged with governance;
(b) The engagement partner has the appropriate capabilities,
competence, authority and time to perform the role; and
(c) The responsibilities of the engagement partner are clearly
defined and communicated to that partner.
xxxx xxxx xxxx
44. The firm should also assign appropriate staff with the necessary
capabilities, competence and time to perform engagements in
accordance with professional standards and regulatory and legal
requirements, and to enable the firm or engagement partners to
issue reports that are appropriate in the circumstances.
xxxx xxxx xxxx
Engagement Performance
46. The firm should establish policies and procedures designed to
provide it with reasonable assurance that engagements are
performed in accordance with professional standards and
regulatory and legal requirements, and that the firm or the
engagement partner issues reports that are appropriate in the
circumstances.
xxxx xxxx xxxx
Engagement Quality Control Review
60. The firm should establish policies and procedures requiring, for
appropriate engagements, an engagement quality control review
that provides an objective evaluation of the significant judgments
made by the engagement team and the conclusions reached in
formulating the report.
Such policies and procedures should:
(a) Require an engagement quality control review for all audits of
financial statements of listed entities;
(b) Set out criteria against which all other audits and reviews of
historical financial information, and other assurance and related
services engagements should be evaluated to determine whether an
engagement quality control review should be performed; and
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(c) Require an engagement quality control review for all
engagements meeting the criteria established in compliance with
subparagraph (b).
xxxx xxxx xxxx
Criteria for the Eligibility of Engagement Quality Control
Reviewers
68. The firm’s policies and procedures should address the
appointment of engagement quality control reviewers and establish
their eligibility through:
(a) The technical qualifications required to perform the role,
including the necessary experience and authority; and
(b) The degree to which an engagement quality control reviewer
can be consulted on the engagement without compromising the
reviewer’s objectivity.
xxxx xxxx xxxx
Completion of the Assembly of Final Engagement Files
74. The firm should establish policies and procedures for
engagement teams to complete the assembly of final engagement
files on a timely basis after the engagement reports have been
finalized.
xxxx xxxx xxxx
Confidentiality, Safe Custody, Integrity, Accessibility and
Retrievability of Engagement Documentation
77. The firm should establish policies and procedures designed to
maintain the confidentiality, safe custody, integrity, accessibility
and retrievability of engagement documentation
xxxx xxxx xxxx
Retention of Engagement Documentation
82. The firm should establish policies and procedures for the
retention of engagement documentation for a period sufficient to
meet the needs of the firm or as required by law or regulation.
83. The needs of the firm for retention of engagement
documentation, and the period of such retention, will vary with the
nature of the engagement and the firm’s circumstances, for
example, whether the engagement documentation is needed to
provide a record of matters of continuing significance to future
engagements. The retention period may also depend on other
factors, such as whether local law or regulation prescribes specific
retention periods for certain types of engagements, or whether there
are generally accepted retention periods in the jurisdiction in the
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absence of specific legal or regulatory requirements. In the specific
case of audit engagements, the retention period ordinarily is no
shorter than seven years8 from the date of the auditor’s report, or, if
later, the date of the group auditor’s report.
84. Procedures that the firm adopts for retention of engagement
documentation include those that:
Enable the retrieval of, and access to, the engagement
documentation during the retention period, particularly in the case
of electronic documentation since the underlying technology may
be upgraded or changed over time.
Provide, where necessary, a record of changes made to engagement
documentation after the engagement files have been completed.
Enable authorized external parties to access and review specific
engagement documentation for quality control or other purposes.
Ownership of Engagement Documentation
85. Unless otherwise specified by law or regulation, engagement
documentation is the property of the firm. The firm may, at its
discretion, make portions of, or extracts from, engagement
documentation available to clients, provided such disclosure does
not undermine the validity of the work performed, or, in the case of
assurance engagements, the independence of the firm or its
personnel.
Monitoring
86. The firm should establish policies and procedures designed to
provide it with reasonable assurance that the policies and
procedures relating to the system of quality control are relevant,
adequate, operating effectively and complied with in practice. Such
policies and procedures should include an ongoing consideration
and evaluation of the firm’s system of quality control, including a
periodic inspection of a selection of completed engagements.
xxxx xxxx xxxx
Complaints and Allegations
101. The firm should establish policies and procedures designed to
provide it with reasonable assurance that it deals appropriately
with:
(a) Complaints and allegations that the work performed by the firm
fails to comply with professional standards and regulatory and legal
requirements; and
(b) Allegations of non-compliance with the firm’s system of quality
control.
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102. Complaints and allegations (which do not include those that
are clearly frivolous) may originate from within or outside the firm.
They may be made by firm personnel, clients or other third parties.
They may be received by engagement team members or other firm
personnel.
103. As part of this process, the firm establishes clearly defined
channels for firm personnel to raise any concerns in a manner that
enables them to come forward without fear of reprisals.
104. The firm investigates such complaints and allegations in
accordance with established policies and procedures. The
investigation is supervised by a partner with sufficient and
appropriate experience and authority within the firm but who is not
otherwise involved in the engagement, and includes involving legal
counsel as necessary. Small firms and sole practitioners may use
the services of a suitably qualified external person or another firm
to carry out the investigation. Complaints, allegations and the
responses to them are documented.
105. Where the results of the investigations indicate deficiencies in
the design or operation of the firm’s quality control policies and
procedures, or non-compliance with the firm’s system of quality
control by an individual or individuals, the firm takes appropriate
action as discussed in paragraph 95.
SA 200 - Overall Objectives of the Independent Auditor and
the Conduct of an Audit in Accordance with Standards on
Auditing
13(d) Auditor – “Auditor” is used to refer to the person or persons
conducting the audit, usually the engagement partner or other
members of the engagement team, or, as applicable, the firm.
Where an SA expressly intends that a requirement or responsibility
be fulfilled by the engagement partner, the term “engagement
partner” rather than “auditor” is used. “Engagement partner” and
“firm” are to be read as referring to their public sector equivalents
where relevant.
SA 220 - Quality Control for an Audit of Financial Statements
2. Quality control systems, policies and procedures are the
responsibility of the audit firm. Under SQC 1, the firm has an
obligation to establish and maintain a system of quality control to
provide it with reasonable assurance that:
(a) The firm and its personnel comply with professional standards
and regulatory and legal requirements; and
(b) The reports issued by the firm or engagement partners are
appropriate in the circumstances
This SA is premised on the basis that the firm is subject to SQC 1.
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Differences of Opinion
22. If differences of opinion arise within the engagement team,
with those consulted or, where applicable, between the engagement
partner and the engagement quality control reviewer, the
engagement team shall follow the firm’s policies and procedures
for dealing with and resolving differences of opinion.
Acceptance and Continuance of Client Relationships and Audit
Engagements (Ref: Para. 12)
A8. SQC 1 requires the firm to obtain information considered
necessary in the circumstances before accepting an engagement
with a new client, when deciding whether to continue an existing
engagement, and when considering acceptance of a new
engagement with an existing client6. Information such as the
following assists the engagement partner in determining whether
the conclusions reached regarding the acceptance and continuance
of client relationships and audit engagements are appropriate:
• The integrity of the principal owners, key management and those
charged with governance of the entity;
• Whether the engagement team is competent to perform the audit
engagement and has the necessary capabilities, including time and
resources;
• Whether the firm and the engagement team can comply with
relevant ethical requirements; and
• Significant matters that have arisen during the current or previous
audit engagement, and their implications for continuing the
relationship.
Monitoring (Ref: Para. 23)
A32. SQC 1 requires the firm to establish a monitoring process
designed to provide it with reasonable assurance that the policies
and procedures relating to the system of quality control is relevant,
adequate and operating effectively.
A33. In considering deficiencies that may affect the audit
engagement, the engagement partner may have regard to measures
the firm took to rectify the situation that the engagement partner
considers are sufficient in the context of that audit.
A34. A deficiency in the firm’s system of quality control does not
necessarily indicate that a particular audit engagement was not
performed in accordance with professional standards and
regulatory and legal requirements, or that the auditor’s report was
not appropriate.
SA 230 – Audit Documentation
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A23. SQC 1 requires firms to establish policies and procedures for
the retention of engagement documentation. The retention period
for audit engagements ordinarily is no shorter than seven years
from the date of the auditor’s report, or, if later, the date of the
group auditor’s report”
121. Having noticed the relevant provisions of the Companies Act and
which contemplate an auditor to be either a partnership firm, LLP or an
individual, it becomes apparent that the statutory enactments do not
seek to create a distance between the auditing firm and its members or
partners who may undertake the actual audit. There is no separation or
disengagement between the two and the statutes duly acknowledge the
position of the audit firm acting through its members and constituents.
122. To propose an arrangement where distinct spheres of liability
operate independently for acts performed by a firm and for those same
acts attracting liability on its partners is inherently flawed. Such a
proposition assumes the existence of a framework in which the firm
functions autonomously, separate from its members or constituents,
while delivering auditing services. However, this assumption disregards
the very essence and the nature of auditing work, where such
disengagement is not only impractical but also fundamentally
incompatible with the professional obligations involved.
123. Auditing, by its very nature, requires an unbroken chain of
diligence, monitoring, and oversight. The service itself is deeply
collaborative, demanding seamless integration of expertise and
accountability between the firm and its partners. It necessitates
meticulous scrutiny of financial data, adherence to regulatory
frameworks and the exercise of professional judgment at every stage.
These elements inherently bind the firm and its members inextricably
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together. To suggest otherwise would ignore the operational realities of
such engagements, where the quality and integrity of the work are not
divisible between the firm and the individuals performing the task.
124. Moreover, rendering auditing services inherently imposes a duty
of care and an expectation of the highest standards of integrity and
control. The very nature of this work, with its reliance on human
expertise and active involvement of professionals, compels us to
outrightly reject the notion of the firm acting independent of its
partners. The firm’s identity and its ability to render services derives
entirely from the collective actions, expertise, and oversight of its
members. To argue that liability can be apportioned separately
undermines the reality that the firm and its partners operate as a single
cohesive entity when executing their professional obligations.
125. This interdependence must also be viewed in the context of the
operational structure of professional firms. When acts are performed in
the ordinary course of business—such as auditing financial statements
or ensuring compliance with statutory regulations—these acts
inherently reflect the firm’s will and purpose executed through its
partners. It is this unity of operation and accountability that ensures the
trustworthiness and reliability of auditing services. Any attempt to
artificially separate liability between the firm and its members creates a
false dichotomy and erodes the principles of collective accountability
and diligence that underpin the profession.
126. In essence, the relationship between a firm and its members
while delivering auditing services is one of complete integration, where
roles and responsibilities overlap to ensure the highest levels of
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professional service. The nature of such services does not permit a firm
to distance itself from the actions of its partners, especially when those
actions are performed in furtherance of the firm’s obligations.
Therefore, liability, whether incurred by the firm or its members,
cannot operate in silos but is instead a shared and unified responsibility
that reflects the cohesive nature of their engagement. Such an
arrangement is neither supported by the provisions contemplated within
the LLP Act as well as the Companies Act.
127. This would constitute an appropriate juncture to also notice the
position which would emerge upon a consideration of the Limited
38
Liability Partnership Act 2008
. It must at the outset be noted that by
virtue of Section 67, the Union Government stands statutorily
empowered to direct that the provisions of the LLP Act as specified
would also apply to any LLP. The said provision further enables the
Union Government to apply such provisions of the Companies Act to a
LLP, subject to such exceptions, modifications or adaptations as may
be specified. This becomes evident from a reading of Section 67 which
is reproduced hereunder:-
“ 67. Application of the provisions of the Companies Act.-
(1) The Central Government may, by notification in the Official
Gazette, direct that any of the provisions of the Companies Act, 2013
(1 of 1956) specified in the notification-
(a) shall apply to any limited liability partnership; or
(b) shall apply to any limited liability partnership with such exception,
modification and adaptation, as may be specified, in the notification.
(2) A copy of every notification proposed to be issued under sub-
section (1) shall be laid in draft before each House of Parliament,
while it is in session, for a total period of thirty days which may be
comprised in one session or in two or more successive sessions, and
38
LLP Act.
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if, before the expiry of the session immediately following the session
or the successive sessions aforesaid, both Houses agree in
disapproving the issue of the notification or both Houses agree in
making any modification in the notification, the notification shall not
be issued or, as the case may be, shall be issued only in such modified
form as may be agreed upon by both the Houses. ”
Of equal significance is Section 71 of the LLP Act and which reads as
follows:-
“
71. Application of other laws not barred.-
The provisions of this Act shall be in addition to, and not in
derogation of, the provisions of any other law for the time being in
force. ”
128. As is manifest from the above, the provisions contained in the
LLP Act are ordained to be in addition to as opposed to being in
derogation of the provisions contained in any other law for the time
being in force. They are thus not intended to override or supersede the
provisions of the Companies Act. Thus, both the provisions contained
under the Companies Act as well as the LLP statute, would have to be
harmoniously construed.
129. It is in the aforesaid backdrop that we then proceed to evaluate
the submission which was addressed, bearing in mind the provisions
contained in Section 27. That provision stands engrafted in the statute
in the following terms:-
“ 27. Extent of liability of limited liability partnership .-
(1) A limited liability partnership is not bound by anything done by a
partner in dealing with a person if-
(a) the partner in fact has no authority to act for the limited liability
partnership in doing a particular act; and
(b) the person knows that he has no authority or does not know or
believe him to be a partner of the limited liability partnership.
(2) The limited liability partnership is liable if a partner of a limited
liability partnership is liable to any person as a result of a wrongful act
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or omission on his part in the course of the business of the limited
liability partnership or with its authority.
(3) An obligation of the limited liability partnership whether arising in
contract or otherwise, shall be solely the obligation of the limited
liability partnership.
(4) The liabilities of the limited liability partnership shall be met out
of the property of the limited liability partnership. ”
130. As was noticed in the preceding parts of this decision, Section
27(1) essentially adopts the well-known precept of ultra vires. It thus
seeks to insulate the LLP from the acts of its partners if it were to be
established that they had not been authorized to do a particular act by
that entity. This is subject to the added qualification of the third party
being cognizant of the partner of the LLP having been conferred no
such authority or being aware of that partner not being associated with
the LLP.
131. However, of significance is sub-section (2), when it provides that
the LLP would be liable if its partner becomes liable to a person as a
result of a wrongful act or omission in the course of the business of the
LLP or with its authority. There could have been no starker
acknowledgement of an LLP in law being liable for the acts of its
partners or members. Section 27(2) thus stretches to an act of omission
or commission of a member of the LLP acting within the scope of its
authority and “in the course of the business” of the LLP. An audit
conducted by a firm or a LLP would undoubtedly be “in the course of
the business” of that entity.
132. We thus find ourselves unable to construe Section 132 of the
Companies Act creating a vicarious liability which is otherwise not
envisaged in cognate statutes and which are neither assailed nor
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asserted to be invalid. This quite apart from the audit firm being
enabled to act through its designated members, engagement partners to
undertake the actual audit. We thus find ourselves unable to
comprehend how that audit firm could disavow, disclaim or disown
their acts.
133. In terms of Section 27(2) of the LLP Act, the statute postulates
that an LLP would be liable to another person only if its partner be
guilty of a wrongful act or omission committed on its part in the course
of business. This provision thus is a reiteration of the LLP becoming
liable for acts of its partners. Section 28 of the LLP Act proceeds
further to then deal with contingencies where a partner may, if at all,
become liable. It prescribes that a partner would, on a fundamental
plane, not be viewed as being personally liable solely on account of
being a partner of the LLP. Sub-section (2) of Section 28, however,
provides that Section 27(3) which broadly stipulates that the obligations
arising out of contract or otherwise would be solely that of the LLP,
would not apply where personal liability comes to be attached upon a
partner by virtue of a wrongful act or omission. It proceeds further to
significantly provide that a partner would in turn not become personally
liable for the wrongful act or omission of any other partner of the LLP.
Section 28(2), however, would have to be construed, bearing in mind
the admitted position of the audit firm itself having been appointed as
the auditor of the corporate entity and the engagement and involvement
of its partners and members being indelibly and inextricably connected
with the discharge of that function.
134. While Section 28(2) insulates a partner from being held
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personally liable for the wrongful act or omission of any other partner,
the protection so accorded would clearly not apply in case the wrongful
act or omission were viewed as being that of the audit firm itself. As
was explained by us in the preceding paragraphs of this judgment, the
issue of accrual of liability arises in the context of the engagement of a
firm or an LLP as an auditor. Surely such an entity cannot discharge
and perform its obligations concerned with audit unless it were acting
through its members and partners. It is this ineffaceable connection
which cannot possibly be erased or ignored while examining the
challenge raised in the context of vicarious liability.
135. We also find ourselves unable to countenance the submission of
persons disconnected with the actual audit coming to be impacted as a
consequence of the audit firm suffering disciplinary action. This
submission again firstly proceeds on the premise of a member having a
standing distinct from that of the firm and which we have already
negated in the preceding parts of this decision. Secondly, such a
contingency is neither unknown nor unique. It cannot possibly be
viewed as a fallout peculiar to Section 132 alone. A penal action against
a corporate entity would invariably have a repercussion upon an
individual in that firm’s employment or engagement.
136. However, that disqualification or adverse consequence could
occur even in a situation where a firm were to be debarred under any
other law. Such a consequence could, for instance, occur if an entity
were to be blacklisted. What thus must be borne in mind is that a person
disconnected with the actual audit suffers the consequences of
punishment imposed upon its employer only as long as the individual
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remains associated with that entity and proposes to practise the
profession under its aegis only. A punishment that may come to be
imposed upon a firm by virtue of Section 132(4), therefore, cannot
possibly be said to be violative of Article 19 of the Constitution.
137. We thus find no merit in the contention that Section 132 of the
Companies Act is liable to be held as unconstitutional basis the audit
firm or its individual partners and members becoming vicariously
liable. In light of the above, the challenge to the constitutionality of
Section 132 on the grounds of vicarious liability is without merit. The
provision aligns with the fundamental principles of accountability and
collective responsibility that governs the auditing profession. The
firm’s role as an auditor, coupled with its reliance on its partners and
members to execute its obligations, makes it inevitable that liability
whether arising from negligence, misconduct, or breach of statutory
duties must extend to both the entity and the individuals involved. This
structure not only ensures accountability but also upholds the integrity
and trust essential to the auditing profession.
138. We also hold that Section 132 is neither an overreach nor can it
be said to be arbitrary; it is a necessary mechanism to enforce
professional accountability. The firm’s designation as an auditor
inherently includes the collective responsibilities of its members,
making the imposition of a vicarious liability a logical and justified
extension of its statutory obligations. Therefore, the contention that the
provision is unconstitutional lacks merit and proceeds in ignorance of
the operational and legal realities of an audit firm’s engagement.
139. Since the full spectrum of auditing services would be carried out
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under the aegis of a firm when it is engaged as an “auditor,” it would be
wholly untenable to abruptly sever the alignment between the firm and
its members. The proposition to the contrary disregards the very
essence of the firm’s operational structure and undermines the objective
sought to be achieved by Section 132. The essence of auditing lies in
the collective responsibility of the firm and its members who work in
unison to ensure compliance with accounting standards and deliver
services of the highest professional integrity. Any attempt to isolate the
liability of the firm from the actions of its members would result in a
fragmentation of accountability, contrary to the statutory intent and
purpose of ensuring public trust in financial reporting.
140. The liability in question pertains exclusively to the firm’s
adherence to accounting standards and its performance of auditing
services, which are fundamental to maintaining the credibility and
transparency of financial statements. These obligations are not abstract;
they are explicitly tied to the professional judgment and diligence
exercised by the firm’s members in executing their duties. Thus, it
cannot be construed that holding the firm and its members liable in this
context would infringe upon their constitutional rights flowing Article
19. The assertion that such a liability violates the fundamental rights
overlooks the reasonable restrictions imposed by statutory mandates
designed to uphold public interest and ensure accountability in financial
practices.
141. Moreover, statutory liability in this context is not an arbitrary
imposition but a necessary mechanism to enforce adherence to
regulatory standards and professional ethics. The NFRA, as the
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governing authority, has been established to regulate and ensure the
accountability of auditors and auditing firms in order to safeguard
public interest. The statutory framework does not infringe upon the
right to practice a profession. It merely regulates the profession in a
manner that ensures its integrity and aligns with larger public interest
concerns. The argument that liability under the NFRA framework falls
foul of Article 19 must, therefore, be unequivocally rejected.
142. By virtue of the firm being appointed as an auditor, the firm and
its members willingly undertake responsibilities that come with a clear
expectation of compliance with accounting standards and the assurance
of professional diligence. The alignment between the firm and its
members, particularly in the discharge of auditing services, is integral
and inseparable. Liability arising from statutory breaches, including
those regulated by the NFRA, is both reasonable and necessary to
ensure the firm’s adherence to professional obligations.
143. The argument of vicarious liability equally fails when tested on
the anvil of the 2007 Misconduct Rules. As is manifest from a reading
of Rule 8 if a complaint comes to be lodged before the Council against
a firm, the statute envisages that firm being called upon to disclose the
name or names of its “member/ members concerned” as well as for it
being apprised of the particulars of the alleged acts of omission or
commission. Rule 8 further prescribes that upon a requisite disclosure
being made by the firm, it would be the member or members concerned
who would become responsible for answering the complaint. Similarly,
the Explanation to Rule 8 stipulates that a notice to the firm would be
deemed to be a notice to all members who are partners or employees of
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that firm as on the date of registration of the complaint.
144. It is this statutory position which then stands mirrored in the
Proviso to Rule 11 of the NFRA Rules and which reads as follows:
“ 11. Disciplinary proceedings .—(1) Based on the reference
received from the Central Government or findings of its monitoring
or enforcement or oversight activities, or on the basis of material
otherwise available on record, if the Authority believes that
sufficient cause exists to take actions permissible under sub-section
(4) of Section 132, it shall refer the matter to the concerned division,
which shall cause a show-cause notice to be issued to the auditor.
(2) The show-cause notice shall be in writing, and shall, inter alia,
state—
( a ) the provisions of the Act or rules under which it has
been issued;
( b ) the details of the alleged facts;
( c ) the details of the evidence in support of the alleged facts;
( d ) the provisions of the Act, rules or the accounting
standards or auditing standards thereunder allegedly
violated, or the manner in which the public interest is
allegedly affected;
( e ) the actions that the Authority proposes to take or the
directions it proposes to issue if the allegations are
established;
( f ) the time limit and the manner in which the auditor is
required to respond to the show-cause notice;
( g ) the consequences of failure to respond to the show-cause
notice; and
( h ) the procedure to be followed for disposal of the show-
cause notice.
(3) The show-cause notice shall enclose copies of documents relied
upon and extracts of relevant portions from the report of
investigation or other records.
(4) The show-cause notice shall be served on the auditor in the
following manner, namely—
( a ) by sending it to the auditor at the address provided by
him or provided by the Institute of Chartered Accountants
of India (if required by the Authority) by registered post
with acknowledgement due; or
( b ) by an appropriate electronic means to the email address
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of the auditor provided by him or it or provided by the the
Institute of Chartered Accountants of India (if required by
the Authority):
Provided that where the auditor is a firm—
( a ) a notice to a firm shall be deemed to be a notice to all
the partners or employees of that firm as on the date of
service of notice;
( b ) the notice shall call upon the firm to disclose the name
or names of the partner or partners concerned who shall be
responsible for answering the allegations;
( c ) the partner whose name is disclosed by the firm shall be
responsible for answering the notice against the firm, and if
no partner, whether erstwhile or present, of the firm owns
responsibility for the allegations made against the firm, then
the firm as a whole shall be responsible for answering the
allegations, and all the partners and employees of that firm
as on the date of occurrence of alleged misconduct, shall be
responsible for answering the allegations.
(5) The Division shall dispose of the show-cause notice within a
period of ninety days of the assignment through a summary
procedure as may be specified by the Authority, by a reasoned order
in adherence to the principles of natural justice including where
necessary or appropriate an opportunity of being heard in person,
and after considering the submissions, if any, made by the auditor,
the relevant facts and circumstances, and the material on record;
[Provided that where the disposal does not take place within the said
period, the Division shall record the reasons for not disposing off the
show-cause notice within the said period, and the chairperson, may,
after taking into account the reasons so recorded, extend the
aforesaid period by such additional period not exceeding ninety days
as he may consider necessary:
Provided further that the chairperson may, if he thinks fit, grant the
said extension of period more than once.]
(6) The order disposing of a show-cause notice may provide for—
( a ) no action;
( b ) caution;
( c ) action for imposing penalty against auditor under sub-
clause (A) of clause ( c ) of sub-section (4) of Section 132 or
for debarring the auditor from engaging as such under sub-
clause (B) of clause ( c ) of sub-section (4) of Section 132 or
both.
(7) The order passed under sub-rule (6) shall not become effective
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until thirty days have elapsed from the date of issue of the order
unless the Division states otherwise in the order along with the
reason for the same.
(8) The order passed under sub-rule (6) shall be served on the
auditor in the manner specified in sub-rule (3) and a copy of the
same shall be sent—
( i ) in all cases to ( a ) the Central Government; and ( b ) the
Institute of Chartered Accountants of India;
( ii ) in the case of a company referred to in sub-section (5) of
Section 139 to the Comptroller and Auditor General of
India;
( iii ) in the case of a listed company to the Securities and
Exchange Board of India; ( iv ) in the case of a bank or a
non-banking finance company to the Reserve Bank of India;
( iv ) in the case of a bank or a non-banking finance company
to the Reserve Bank of India;
( v ) in the case of an insurance company to the Insurance
Regulatory and Development Authority of India;
( vi ) in case the auditor is resident outside India to concerned
regulator of such country;
and the same shall be published on the website of the
Authority.”
145. Rule 11 thus makes provisions identical to those contained in
Rule 8 of the 2007 Misconduct Rules. A conjoint reading of the
aforesaid statutory provisions leads us to the inevitable conclusion that
it would be wholly incorrect to either assume or countenance the
statutory scheme seeking to draw a distinction between the auditing
firm and its constituent members. The members of the auditing firm act
as its arms and sinews since an incorporated body can only act through
its constituents and integral components.
146. As was noticed by us hereinabove, members or employees of an
auditing firm do not come to be named or engaged in the work of audit
in their individual capacity. Such a member becomes involved in the
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audit of a corporate entity by virtue of being an employee of the
auditing firm and having been designated for the purposes of
discharging the obligations of audit that are proposed to be undertaken
by that firm. This position clearly emerges also from the various SAs’
which were noticed hereinbefore.
147. We also find the submission resting on the view expressed by the
US Supreme Court flowing from Elfbrandt to be wholly unmerited.
While it is true that some of the observations rendered by the US
Supreme Court found adoption and resonance in the decision of the
39
Supreme Court in Arup Bhuyan vs. State of Assam and Anr. and
which was reiterated in Indra Das , we take note of the judgment
rendered by three learned Judges of the Supreme Court in Arup
40
Bhuyan vs. State of Assam and Anr. [Arup Bhuyan-2]
and where
the Supreme Court ultimately came to hold that the decisions of the US
Supreme Court would be inapplicable bearing in mind the principles
enshrined in Article 19 of the Constitution and the principle of
reasonable restriction adopted by our Constitution as moderating that
right. As is manifest from a reading of Para 8 of the report in Arup
Bhuyan-2, the principal issue which had arisen for consideration was
whether active membership is required to be proven over and above the
membership of a banned organization. The second important question
which stood posited in Arup Bhuyan-2 was with respect to the
correctness of the view expressed in the earlier judgments of the
Supreme Court and which had proceeded to interpret the ambit of
Article 19 on the basis of the principles enunciated by the US Supreme
39
(2011) 3 SCC 377
40
(2023) 8 SCC 745
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Court.
148. In Arup Bhuyan-2, the Supreme Court noticed the distinction
which is liable to be acknowledged to exist between Article 19 of our
Constitution and the position which prevails in the US. Dealing with
this aspect, it was pertinently observed as follows: -
“ 74. Applying the law laid down by this Court in the aforesaid
decisions to the facts of the case on hand and considering the
different position of laws in US and in our country more particularly
faced with Articles 19(1)( c ) and 19(4) of the Constitution of India
under which the right to freedom of speech is subject to reasonable
restrictions and is not an absolute right and the Constitution permits
Parliament to frame the laws taking into consideration the public
order and/or the sovereignty of India, without noticing the
differences in American laws and the Indian laws, this Court in Arup
Bhuyan [ Arup Bhuyan v. State of Assam , (2011) 3 SCC 377 : (2011)
1 SCC (Cri) 855] and Raneef [ State of Kerala v. Raneef , (2011) 1
SCC 784 : (2011) 1 SCC (Cri) 409] has erred in straightway and
directly following the US Supreme Court decisions and that too
without adverting to the differences and the position of laws in India.
75. In the aforesaid two decisions without noticing the differences of
the US Supreme Court (referred to in the said decisions) this Court
has just followed the American decisions to which we are not
agreeable. This Court ought to have considered the differences in the
American laws and the Indian laws more particularly the provisions
in the Indian Constitution. By the aforesaid we do not say for a
moment that in a given case the US Supreme Court decisions may
not be taken into consideration and/or may not be a guidance. Before
following the American decisions, the Indian courts are required to
consider the difference in the nature of the laws applicable in the
respective countries.
76. As observed and held by this Court in Joseph Kuruvilla
Vellukunnel [ Joseph Kuruvilla Vellukunnel v. RBI , 1962 SCC
OnLine SC 3 : 1962 Supp (3) SCR 632 : AIR 1962 SC 1371] , the
aid of American concepts, laws and precedents in the interpretation
to which laws is not always without its dangers and they have
therefore to be relied upon with some caution if not with hesitation
because of the difference in the nature of those laws and the
institutions to which they apply.”
149. This distinction stood further highlighted in paragraphs 118 to
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120 as well as 125 of the aforenoted decision and which are extracted
hereinbelow:-
“ Distinction between the Indian and American Constitutions
118. In view of the above discussion, one now proceeds to consider
the First Amendment of the American Constitution which is
extracted as under:
“Congress shall make no law respecting an establishment of
religion, or prohibiting the free exercise thereof; or
abridging the freedom of speech, or of the press; or the right
of the people peaceably to assemble, and to petition the
Government for a redress of grievances.”
119. The contradistinction between the rights created by the First
Amendment of the American Constitution and Article 19 of the
Indian Constitution is the power given to the State to make laws
reasonably restricting such freedoms in India. Conversely, in the
United States of America, restrictions have been imposed by the
judiciary in instances, as relied upon in Arup Bhuyan [ Arup
Bhuyan v. State of Assam , (2011) 3 SCC 377 : (2011) 1 SCC (Cri)
855] and Indra Das [ Indra Das v. State of Assam , (2011) 3 SCC 380
: (2011) 1 SCC (Cri) 1150] , however no such explicit power is
available with the legislature.
120. This distinction has been enunciated by this Court as well.
In Babulal Parate v. State of Maharashtra [ Babulal Parate v. State
of Maharashtra , 1961 SCC OnLine SC 48 : (1961) 3 SCR 423 : AIR
1961 SC 884] , as submitted by the Union of India, a Constitution
Bench of this Court (five-Judge Bench) while upholding the
constitutional validity of Section 144CrPC has held that whatever
may be the position in the United States, the anticipatory action
under Section 144CrPC is permissible under clauses (2) and (3) of
Article 19, which allow the legislature to make laws placing
reasonable restrictions on the rights conferred by these clauses of
Article 19. Importantly, this Court further observed that there is
nothing in the American Constitution corresponding to clauses (2) to
(6) of Article 19 of the Indian Constitution. It was further observed
that the framework of the Indian Constitution is different from the
American Constitution.
125. In Shreya Singhal [ Shreya Singhal v. Union of India , (2015) 5
SCC 1 : (2015) 2 SCC (Cri) 449] , this Court speaking through R.F.
Nariman, J. highlighted on the differences between the US First
Amendment and freedom of speech and expression under Article
19(1)( a ) read with Article 19(2) in the following words : (SCC pp.
131-32, paras 15 & 17-18)
“ 15 . It is significant to notice first the differences between
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the US First Amendment and Article 19(1)( a ) read with
Article 19(2). The first important difference is the
absoluteness of the US First Amendment—Congress shall
make [ Ed. : The words between two asterisks have been
emphasised in original.] no law [ Ed. : The words between
two asterisks have been emphasised in original.] which
abridges the freedom of speech. Second, whereas the US
First Amendment speaks of freedom of speech and of the
press, without any reference to “expression”, Article
19(1)( a ) speaks of freedom of speech and expression
without any reference to “the press”. Third, under the US
Constitution, speech may be abridged, whereas under our
Constitution, reasonable restrictions may be imposed.
Fourth, under our Constitution such restrictions have to be
in the interest of eight designated subject-matters—that is,
any law seeking to impose a restriction on the freedom of
speech can only pass muster if it is proximately related to
any of the eight subject-matters set out in Article 19(2).
*
17 . So far as the second apparent difference is concerned,
the American Supreme Court has included “expression” as
part of freedom of speech and this Court has included “the
press” as being covered under Article 19(1)( a ), so that, as a
matter of judicial interpretation, both the US and India
protect the freedom of speech and expression as well as
press freedom. Insofar as abridgement and reasonable
restrictions are concerned, both the US Supreme Court and
this Court have held that a restriction in order to be
reasonable must be narrowly tailored or narrowly
interpreted so as to abridge or restrict only what is
absolutely necessary . It is only when it comes to the eight
subject-matters that there is a vast difference. In the US, if
there is a compelling necessity to achieve an important
governmental or societal goal, a law abridging freedom of
speech may pass muster. But in India, such law cannot pass
muster if it is in the interest of the general public. Such law
has to be covered by one of the eight subject-matters set out
under Article 19(2). If it does not, and is outside the pale of
Article 19(2), Indian courts will strike down such law.
18 . … American judgments have great persuasive value on
the content of freedom of speech and expression and the
tests laid down for its infringement. It is only when it comes
to subserving the general public interest that there is a
world of difference .”
(emphasis supplied) ”
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In view of the aforesaid, we find no merit in the arguments which were
canvassed on the basis of Elfbrandt, Arup Bhuyan and Indra Das.
150. As we had found above, the SQC defines an Engagement Partner
to mean one who is a member of the Institute of Chartered Accountants
of India and is in full time practice as such. Similarly, an Engagement
Quality Control Reviewer too is envisaged to be a partner or other
person in the firm suitably qualified to discharge the functions expected
of it in the course of audit. The expression “engagement team” is
defined by the SQC to mean all persons contracted and engaged by the
firm in connection with that engagement. The argument of Section 132
thus creating a vicarious liability which is otherwise not contemplated
or envisaged is thoroughly misconceived.
151. In our considered opinion, Mr. Hossain was correct in
highlighting the essential attributes of a partnership as envisaged in law
and which recognizes it to be distinct and distinguishable from an
incorporated entity. As was succinctly explained by the Supreme Court
in Commissioner of Income Tax, Madras vs. R. M. Chidambaram
41
Pillai and Others
, a firm is essentially a collection of persons
described compendiously with the aid of its name and the said
principles having been so adopted only for the purposes of “commercial
convenience”. The Supreme Court in Chidambaram Pillai had
significantly observed that a firm is not a legal person even though the
statute may attribute some aspects of personality to it. It was held that
the firm in that sense is merely a collective noun used to designate an
41
(1977) 1 SCC 431
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entity and not a person. Similar is the position which emerges when we
examine the underlying scheme informing the establishment and
functioning of LLPs.
152. These features of a partnership firm were reiterated in Dulichand
and where S.R. Das CJ speaking for the Bench had pertinently observed
that a firm though granted a limited personality by statute remains an
association of individuals and the name of the firm being only a
collective name to describe that body of individuals. The challenge on
the aforesaid grounds as urged by the writ petitioners is thus negated.
S ECTION 132 AND ITS RETROACTIVE OPERATION
153. Taking the discussion forward we propose to now evaluate the
challenge raised by the writ petitioners on the ground of Section 132
operating retrospectively and thus impacting valuable vested rights. The
petitioners had urged that although sub-sections (2) and (4) of Section
132 came to be enforced with effect from 24 October 2018 and the
NFRA Rules on 13 November 2018, the NFRA seeks to apply those
provisions retrospectively to audits concluded and completed prior to
the dates aforenoted. The petitioners submitted that we must bear in
mind the well settled precept that statutes ordinarily and as a general
proposition are assumed to operate prospectively unless retrospectivity
is expressly or impliedly provided for. It was their contention that the
provisions as introduced by Section 132 not only ushers in a new
procedure for purposes of trial of allegations of professional
misconduct, it also creates new disabilities apart from imposing new
obligations on transactions already accomplished. Viewed in that light
it was their submission that the provision can only be applied
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prospectively.
154. It was contended that prior to the introduction of Section 132
there was no provision under the CA Act in terms of which an LLP or a
firm could have been held guilty of acts of professional or other
misconduct purportedly committed by any of its partners. Taking us
through those provisions, the petitioners sought to highlight the fact
that any action consequent to a determination of guilt connected to
professional or other misconduct could have only exposed a partner to
punishments under the CA Act. It is in the aforesaid backdrop that they
contend that it was Section 132 which for the first time proceeded to
create a liability and contemplates penal action against an LLP and a
firm. It was submitted that the CA Act read alongside the Misconduct
Rules, 2007 had never provisioned for the debarment of a firm. In view
of the above, it was submitted that the provisions of Section 132 cannot
be invoked in respect of audits that had been undertaken or completed
prior to the dates from which the new regime came into force.
155. Learned senior counsels appearing for the writ petitioners then
took us through some of the provisions made in the Companies Act
including Section 139 and which according to them contemplates either
an individual or a firm being appointed as an auditor. Insofar as an
individual auditor is concerned, it was pointed out that the maximum
monetary penalty prescribed for professional misconduct under the CA
Act [prior to the amendments made therein in 2022] for Schedule I
offences was stipulated to be INR 1 lakh while the penalties that could
be imposed for Schedule II offences was INR 5 lakhs. It was submitted
that Section 132(4)(c), however, now prescribes a penalty in the case of
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individuals to be not less than INR 1 lakh and which could extend to
five times the fee received. Similarly, in the case of firms the monetary
penalty is prescribed to be not less than INR 5 lakhs and which could
extend to 10 times the fee received. These monetary penalties,
according to the writ petitioners, are in stark contrast to what prevailed
under the CA Act. They would thus contend that since the monetary
penalties are far greater than those that were provided for under the CA
Act, Section 132 cannot validly be enforced retrospectively.
156. The writ petitioners also questioned the stand taken by NFRA
and which had alluded to the scheme underlying Section 132 as merely
contemplating a change of forum and procedure. It was submitted that
while the section undoubtedly introduces procedural changes, it also
affects vested rights which had come to be perfected and this too would
necessarily warrant the Court rendering a declaration that Section 132
can only have prospective application.
157. Arguments were then addressed in great detail on behalf of the
writ petitioners with learned senior counsels referring to the various
procedural safeguards which formed part of the CA Act including
provisions for leading of evidence, cross-examination of witnesses and
all of which have been completely done away with and the NFRA
being empowered by statute to adopt such summary procedure as it
may deem fit. A retroactive application of Section 132 was also
assailed on the basis of Article 20(1) of the Constitution.
158. The petitioners also questioned the correctness of the stand taken
by NFRA and which had urged us to recognize the Proviso to Section
132(4) as being the embodiment of a legislative intent of those
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provisions applying even to past misdemeanors. It was submitted that
the Proviso to Section 132(4) stands confined to the initiation or
continuance of an investigation in the event NFRA were to take
cognizance of the same. It was thus submitted that were NFRA not to
initiate any investigation in relation to the audit of a company, the
Council or any other authority enabled by the CA Act would continue
to retain the right to initiate or continue an investigation. It was thus
submitted that the word “continue” as appearing in the Proviso to
Section 132(4) is to be read in that light and cannot possibly be
construed as being indicative of an express or implied intent of the
Legislature to confer retroactivity upon Section 132.
159. Reference was also made to the stand as taken by the NFRA in
its affidavit filed in these proceedings and where it had sought to
explain the ambit of the Proviso to Section 132(4) as being solely for
the purposes of interdicting parallel investigations. This admission,
according to the writ petitioners, supports their contention that the
Section would not operate retrospectively.
160. For purposes of explaining the well settled precepts of
substantive law operating prospectively unless a contrary intention is
manifest or could be inferred from the language of the statute, the writ
petitioners drew our attention to the following passages from the
decision of the Supreme Court in Hukum Chand vs. Union of India
42
and Ors.
:-
“ 9. The learned Solicitor-General has not been able to refer to
anything in Section 40 from which power of the Central Government
to make retrospective rules may be inferred. In the absence of any
42
(1972) 2 SCC 601
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such power, the Central Government, in our view, acted in excess of
its power insofar as it gave retrospective effect to the Explanation to
Rule 49. The Explanation, in our opinion, could not operate
retrospectively and would be effective for the future from the date it
was added in February, 1960.
In the case of Cannanore Spinning and Weaving Mills
10.
Ltd. v. Collector of Customs and Central Excise [(1969) 3 SCC 112 :
(1970) 2 SCR 830] this Court dealt with an explanation which had
been added by the Central Government in purported exercise of the
power vested under the Central Excise and Salt Act, 1944. Question
arose whether the explanation had a retrospective effect. The Court
referred in the context to the rule making power of the Central
Government under the aforesaid Act and observed:
“Dr Seiyed Muhammad, learned Counsel for the
department, did not support the impugned demand on the
basis of the retrospective effect purported to have been
given to the explanation referred to earlier by the
notification, dated February 16, 1963, (Exh. P-12) for
obvious reasons. The rule making authority had not been
vested with the power under the Central Excise and Salt Act
to make rules with retrospective effect. Therefore the
retrospective effect purported to be given under Exh. P-12
was beyond the powers of the rule-making authority.”
11. In the case of ITO v. M.C. Ponnoose [(1969) 2 SCC 351 : (1970)
1 SCR 678] this Court dealt with a notification, dated August 14,
1963, which empowered the revenue officials, including the
Tehsildar, to exercise the powers of a tax recovery officer under the
Income Tax Act, 1961 in respect of arrears. The notification was
given retrospective effect. Question which arose for determination
was whether the State Government could invest the Tehsildar with
such powers retrospectively. Answering this question in the
negative, this Court observed:
“The Parliament can delegate its legislative power within
the recognised limits. Where any rule or regulation is made
by any person or authority to whom such powers have been
delegated by the Legislature it may or may not be possible
to make the same so as to give retrospective operation. It
will depend on the language employed in the statutory
provision which may in express terms or by necessary
implication empower the authority concerned to make a rule
or regulation with retrospective effect. But where no such
language is to be found it has been held by the courts that
the persons or authority exercising subordinate legislative
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functions cannot make a rule, regulation or bye-law which
can operate with retrospective effect.”
Reference was made in the above cited case to an earlier decision of
this Court in B.S. Vadera, etc . v. Union of India [AIR 1969 SC 118 :
(1968) 3 SCR 575 : 17 FLR 411] wherein it had been observed with
reference to rules framed under the proviso to Article 309 of the
Constitution that those rules could be made with retrospective
operation. Vadera case was distinguished on the ground that the
view expressed therein was based upon the language employed in
the proviso to Article 309 that any rules so made shall have effect
subject to the provisions of any such Act. It was also observed:
“As the Legislature can legislate prospectively as well as
retrospectively there can be hardly any justification for
saying that the President or the Governor should not be able
to make rules in the same manner so as to give them
prospective as well as retrospective operation. For these
reasons the ambit and content of the rule-making power
under Article 309 can furnish no analogy or parallel to the
present case.”
12. We are, therefore, of the opinion that the Explanation added to
Rule 49 in the present case cannot be given retrospective operation.”
161. The judgment of the Orissa High Court in Krushna Chandra vs.
43
Commr. of Endowments and Ors.
was also cited in this respect and
where the legal position was summarized in the following words: -
“ The first question, arising out of these rival contentions. which,
28.
if decided in favour of the plaintiff-appellant, would negative the
plea of limitation is whether Section 39 of the Act is retrospective or
prospective in operation. The section opens in present tense, “When
the hereditary trustee of a math nominates his successor he shall give
intimation in writing”. Ordinarily the word “nominates” would not
comprise the connotation ‘has nominated’. It is a fundamental rule
of construction that no statute shall be construed to have a
retrospective operation unless such a construction appears very clear
in the terms of the Act or arises by necessary and distinct
implication. An offshoot of this rule is that if the enactment is
expressed in the language which is fairly capable of either
interpretation, it ought to be construed as prospective only and that
there is a presumption against a retrospective operation if, when so
operated, it would prejudicially affect the vested rights or the
43
1975 SCC OnLine Ori 70
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legality of past transactions. Section 39 imposes an obligation to
intimate the nomination within three months thereof. The effect of
giving it a retrospective operation would be to divest a nominated
trustee of his vested right of succession, even where Section 39
would be impossible of compliance by reason of three months
having elapsed since nomination and before enactment of Section 39
of the Act. Further it would result in altering the pre-existing
situation of parties and interfering with the antecedent rights of the
trustees in depriving them of their trusteeship and placing the
institution under the direct control of the Commissioner. Adoption of
a Chela or nomination of a successor being past transactions would
be nullified, even through the obligation of intimation provided in
Section 39, as indicated above, was impossible of performance.
Having regard to these far-reaching consequences of exproprietory
nature and of extinguishment of vested rights flowing from
retrospective operation of Section 39, and in absence of any clear,
strong and imperative words in that section intending that effect, the
conclusion is that the legislature never intended it to operate
retrospectively”
162. As was noticed hereinabove, the petitioners had laid great
emphasis on the presumption of statutes having prospective application
and the same being construed as intended to operate retrospectively
only if the legislative body were to consciously couch that provision in
a manner which could be countenanced as demonstrative of an express
intent or intended implication. In order to buttress the aforesaid
contention, the petitioners cited the decision of the Supreme Court in
44
State of Punjab and Ors. vs. Bhajan Kaur and Ors.
, relevant
extracts whereof are reproduced hereinbelow: -
“ 9. A statute is presumed to be prospective unless held to be
retrospective, either expressly or by necessary implication. A
substantive law is presumed to be prospective. It is one of the facets
of the rule of law.
10. Section 92-A of the 1939 Act created a right and a liability on
the owner of the vehicle. It is a statutory liability. Per se it is not a
tortuous ( sic tortious) liability. Where a right is created by an
44
(2008) 12 SCC 112
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enactment, in the absence of a clear provision in the statute, it is not
to be applied retrospectively.
11. Ms Arora, however, has drawn our attention to a decision of the
Kerala High Court in United India Insurance Co.
Ltd. v. Padmavathy [1990 ACJ 751 (Ker)] . The Kerala High Court
referred to a decision of this Court in M.K. Kunhimohammed v. P.A.
Ahmedkutty [(1987) 4 SCC 284 : 1987 SCC (Cri) 703 : AIR 1987
SC 2158] wherein the following observations were made : (SCC p.
295, para 14)
“ 14 . … Having regard to the inflationary pressures and the
consequent loss of purchasing power of the rupee we feel
that the amount of Rs 15,000 and the amount of Rs 7500 in
the above provisions appear to have become unrealistic.
We, therefore, suggest that the limits of compensation in
respect of death and in respect of permanent disablement,
payable in the event of there being no proof of fault, should
be raised adequately to meet the current situation.”
12. In Padmavathy [1990 ACJ 751 (Ker)] the Kerala High Court
held : (ACJ p. 756, paras 11-12)
“ 11 . The said suggestion of the Supreme Court was given
due respect by the law-making machinery when the Bill was
finally introduced in Parliament. This fact can be discerned
from the Statement of Objects and Reasons prefaced in the
new Act. Therefore, in effect Parliament has only retained
the same right which was conferred on the victims through
Chapter VII-A of the repealed Act. The difference in the
quantum of compensation is only intended to make the right
realistic and on a par with the amount fixed earlier. Hence
Section 6 of the General Clauses Act would not impede the
enforcement of Section 140 of the new Act in relation to an
accident which occurred prior to the coming into force of
the new Act.
12 . For yet another reason, we can support the said
conclusion. Section 6 of the General Clauses Act permits
switching over to the repealed Act only if a different
intention does not appear in the new statute. Such a
different intention can be discerned from the new Act. It is
in Chapter X of the new Act that provisions regarding ‘no
fault liability’ have been included. The Chapter starts with
Section 140 and ends with Section 144. The last section
reads as follows:‘The provisions of this Chapter shall have
effect notwithstanding anything contained in any other
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provision of this Act or of any other law for the time being
in force.’ The different intention manifested in the new Act
is that the provisions in Chapter X should get predominance
over all other laws. The provisions contained in that Chapter
must be given effect to notwithstanding any contrary
provision in any other law including Section 6 of the
General Clauses Act. All other provisions, therefore, must
yield to the provisions contained in Chapter X of the new
Act. This is the legislative intention manifested through
Section 144 of the new Act.”
In the decision of the Punjab and Haryana High Court
in Mosmi [1992 ACJ 192 (P&H)] , reliance has been placed upon the
judgment of the Kerala High Court. With the greatest of respect to
the learned Judges of the Kerala and Punjab and Haryana High
Courts, we could not persuade ourselves to agree with the said view.
No reason has been assigned as to why the 1988 Act should be
13.
held to be retrospective in character. The rights and liabilities of the
parties are determined when cause of action for filing the claim
petition arises. As indicated hereinbefore, the liability under the Act
is a statutory liability. The liability could, thus, be made
retrospective only by reason of a statute or statutory rules. It was
required to be so stated expressly by Parliament. Applying the
principles of interpretation of statute, the 1988 Act cannot be given
retrospective effect, more particularly, when it came into force on or
about 1-7-1989.
xxxx xxxx xxxx
16. It is now well-settled that a change in the substantive law, as
opposed to adjective law, would not affect the pending litigation
unless the legislature has enacted otherwise, either expressly or by
necessary implication.
17. In Garikapati Veeraya v. N. Subbiah Choudhry [AIR 1957 SC
540] the law is stated thus : (AIR p. 553, para 25)
“ 25 . … The golden rule of construction is that, in the
absence of anything in the enactment to show that it is to
have retrospective operation, it cannot be so construed as to
have the effect of altering the law applicable to a claim in
litigation at the time when the Act was passed.”
18. The question was considered by this Court in Gajraj
Singh v. STAT [(1997) 1 SCC 650] and the law was stated in the
following terms : (SCC pp. 664-66, paras 22-24)
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“ 22 . Whenever an Act is repealed it must be considered,
except as to transactions past and closed, as if it had never
existed. The effect thereof is to obliterate the Act
completely from the record of Parliament as if it had never
been passed; it never existed except for the purpose of those
actions which were commenced, prosecuted and concluded
while it was an existing law. Legal fiction is one which is
not an actual reality and which the law recognises and the
court accepts as a reality. Therefore, in case of legal fiction
the court believes something to exist which in reality does
not exist. It is nothing but a presumption of the existence of
the state of affairs which in actuality is non-existent. The
effect of such a legal fiction is that a position which
otherwise would not obtain is deemed to obtain under the
circumstances. Therefore, when Section 217(1) of the Act
repealed Act 4 of 1939 w.e.f. 1-7-1989, the law in Act 4 of
1939 in effect came to be non-existent except as regards the
transactions, past and closed or saved.
23 . In Crawford's Interpretation of Law (1989) at p. 626, it
is stated that:
‘… An express repeal will operate to abrogate an
existing law, unless there is some indication to the
contrary, such as a saving clause. Even existing rights
and pending litigation may be affected, both civil and
criminal, although it is not an uncommon practice to
use the saving clause in order to preserve existing
rights and to exempt pending litigation.’
At p. 627, it is stated that:
‘… Moreover, where a repealing clause expressly
refers to a portion of a prior Act, the remainder of
such Act will not usually be repealed, as a
presumption is raised that no further repeal is
necessary, unless there is irreconcilable inconsistency
between them. In like manner, if the repealing clause
is by its terms confined to a particular Act, quoted by
title, it will not be extended to an Act upon a different
subject.’
Section 6 of the GC Act enumerates, inter alia, that where
the Act repeals any enactment, unless a different intention
appears, the repeal shall not ( a ) revive anything not in force
or existing at the time at which the repeal takes effect; or ( b )
affect the previous operation of any enactment so repealed
or anything duly done or suffered thereunder; or ( c ) affect
any right, privilege, obligation or liability acquired, accrued
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or incurred under any enactment so repealed, and any such
investigation, legal proceeding or remedy may be instituted,
continued or enforced. In India Tobacco Co.
Ltd. v. CTO [(1975) 3 SCC 512 : 1975 SCC (Tax) 49] (SCC
at p. 517 in paras 6 and 11), a Bench of three Judges had
held that repeal connotes abrogation and obliteration of one
statute by another from the statute book as completely as if
it had never been passed. When an Act is repealed, it must
be considered, except as to transactions past and closed, as
if it had never existed. Repeal is not a matter of mere form
but is of substance, depending on the intention of the
legislature. If the intention indicated either expressly or by
necessary implication in the subsequent statute was to
abrogate or wipe off the former enactment wholly or in part,
then it would be a case of total or pro tanto repeal.
24 . When there is a repeal and simultaneous re-enactment,
Section 6 of the GC Act would apply to such a case unless
contrary intention can be gathered from the repealing Act.
Section 6 would be applicable in such cases unless the new
legislation manifests intention inconsistent with or contrary
to the application of the section. Such incompatibility would
have to be ascertained from all relevant provisions of the
new Act. Therefore, when the repeal is followed by a fresh
legislation on the same subject, the Court would
undoubtedly have to look to the provisions of the new Act
only for the purpose of determining whether the new Act
indicates different intention. The object of repeal and re-
enactment is to obliterate the repealed Act and to get rid of
certain obsolete matters.”
19. In Ramesh Singh v. Cinta Devi [(1996) 3 SCC 142 : 1996 SCC
(Cri) 467] it has clearly been held that Section 217 of the 1988 Act
does not expressly or by necessary implication make the relevant
provision retrospective in operation.
20. In Zile Singh v. State of Haryana [(2004) 8 SCC 1] a three-Judge
Bench of this Court stated the law thus : (SCC p. 10, para 17)
“ 17 . Maxwell states in his work on Interpretation of
Statutes (12th Edn.) that the rule against retrospective
operation is a presumption only, and as such it ‘may be
overcome, not only by express words in the Act but also by
circumstances sufficiently strong to displace it’ (p. 225). If
the dominant intention of the legislature can be clearly and
doubtlessly spelt out, the inhibition contained in the rule
against perpetuity becomes of doubtful applicability as the
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‘inhibition of the rule’ is a matter of degree which would
‘ vary secundum materiam ’ (p. 226). Sometimes, where the
sense of the statute demands it or where there has been an
obvious mistake in drafting, a court will be prepared to
substitute another word or phrase for that which actually
appears in the text of the Act (p. 231).”
21. In Lohia Machines Ltd. v. Union of India [(1985) 2 SCC 197 :
1985 SCC (Tax) 245 : (1985) 2 SCR 686] this Court held : (SCC p.
276, para 79)
“ 79 . On the other hand it is quite clear that if the relief
granted is to be withdrawn with retrospective operation
from 1972 the assessees who have enjoyed the relief for all
those years will have to face a very grave situation. The
effect of the withdrawal of the relief with retrospective
operation will be to impose on the assessee a huge
accumulated financial burden for no fault of the assessee
and this is bound to create a serious financial problem for
the assessee. Apart from the heavy financial burden which
is likely to upset the economy of the undertaking, the
assessee will have to face other serious problems. On the
basis that the relief was legitimately and legally available to
the assessee, the assessee had proceeded to act and to
arrange its affairs. If the relief granted is now permitted to
be withdrawn with retrospective operation, the assessee may
be found guilty of violation of provisions of other statutes
and may be visited with penal consequences.”
22. In Indian Metals and Ferro Alloys Ltd. v. State of Orissa [(1987)
3 SCC 189] it was opined : (SCC p. 204, para 25)
“ 25 . … we hold that the High Court was not right in
observing that the orders under Section 22-B of the Act
imposing restrictions on consumption of power could not
legally and validly be passed by the Government ‘with
retrospective effect’ in the middle of a water year. But the
position regarding disallowance of clubbing stands on an
entirely different footing. If a consumer had been allowed
the benefit of clubbing previously, that benefit cannot be
taken away with retrospective effect thereby saddling him
with heavy financial burden in respect of the past period
where he had drawn and consumed power on the faith of the
orders extending to him the benefit of clubbing.”
23. In Madishetti Bala Ramul v. Land Acquisition Officer [(2007) 9
SCC 650 : (2007) 8 Scale 184] this Court observed : (SCC p. 656,
para 19)
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“ 19 . In Land Acquisition Officer-cum-DSWO v. B.V. Reddy
and Sons [(2002) 3 SCC 463] this Court opined that Section
25 being not a procedural provision will have no
retrospective effect, holding : (SCC p. 471, para 6)
‘ 6 . Coming to the second question, it is a well-settled
principle of construction that a substantive provision
cannot be retrospective in nature unless the provision
itself indicates the same. The amended provision of
Section 25 nowhere indicates that the same would
have any retrospective effect. Consequently,
therefore, it would apply to all acquisitions made
subsequent to 24-9-1984, the date on which Act 68 of
1984 came into force. The Land Acquisition
(Amendment) Bill of 1982 was introduced in
Parliament on 30-4-1982 and came into operation
with effect from 24-9-1984.’ ”
24. In Ashok Lanka v. Rishi Dixit [(2005) 5 SCC 598] this Court
held : (SCC p. 623, para 62)
“ 62 . A statute must be read reasonably. A statute should not
read in such a manner which results in absurdity. A statute,
on its plain language, although postulates a prospective
operation, it cannot be held to be retrospective only because
it would apply for the excise year for which applications
were invited despite the fact that the selection process made
thereunder is over.”
163. Similar principles appear in Purbanchal Cables & Conductors
45
(P) Ltd. v. Assam SEB
, which was yet another decision cited on
behalf of the writ petitioners and where the following pertinent
observations appear:-
“ 32. The fundamental rule of construction is the same for all statutes
whether fiscal or otherwise. The underlying principle is that the
meaning and intention of a statute must be collected from the plain
and unambiguous expression used therein rather from any notion. To
arrive at the real meaning, it is always necessary to get an exact
conception, scope and object of the whole Act.
33. In Zile Singh v. State of Haryana [(2004) 8 SCC 1] this Court
observed that there were four relevant factors which needed to be
45
(2012) 7 SCC 462
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considered while considering whether a statute applied prospectively
or retrospectively: (SCC p. 9, para 15)
“ 15 . … Four factors are suggested as relevant: ( i ) general
scope and purview of the statute; ( ii ) the remedy sought to
be applied; ( iii ) the former state of the law; and ( iv ) what it
was the legislature contemplated.”
34. The general scope of the Act has been discussed above. The
remedy sought to be applied by the Act is made clear in the
Statement of Objects and Reasons, in which, it is stated that due to
the delayed payments by buyers to the small-scale industries, their
working capital was being affected, causing great harm to the small-
scale industries in general. This Act was passed by Parliament to
impose a heavy interest on the buyers who delayed the payments of
the small-scale industries, in order to deter the buyers from delaying
the payments after accepting the supplies made by the suppliers.
35. The policy statement of the Ministry of Micro, Small and
Medium Enterprises dated 6-8-1991, reads:
“3. (3.4) A beginning has been made towards solving the
problem of delayed payments to small industries by setting
up of ‘factoring’ services through Small Industries
Development Bank of India (Sidbi). Network of such
services would be set up throughout the country and
operated through commercial banks. A suitable legislation
will be introduced to ensure prompt payment of small
industries' bills.”
36. Keeping in view the above object, the Act was enacted by
Parliament. Before such enactment, it is required to examine rights
of the supplier qua the buyer prior to the commencement of the Act.
In case of delayed payment, the supplier, prior to the commencement
of the Act, was required to file a suit for the payment of the principal
amount, and could claim interest along with the principal amount.
The supplier could avail of the same under Section 34 of the Code of
Civil Procedure, 1908 (hereinafter referred to as “CPC”), Section 61
of the Sale of Goods Act, 1930 and Section 3 of the Interest Act,
1978.
37. In other words, the supplier whose payment was delayed by the
buyer prior to the commencement of the Act, could file a suit for
payment of the principal amount along with the interest. The
supplier, thus, had the vested right to claim the principal amount
along with interest thereon in case of a delay in payment by the
buyer and it was the discretion of the court to award this interest.
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38. The court has the discretion to award interest along with the
principal amount and the same is clear from the use of the word
“may” in all the three provisions cited above. Section 34 CPC is the
main provision under which interest could be awarded by the court
and Section 61 of the Sale of Goods Act, 1930 is an offshoot of
Section 34 CPC. Section 3 of the Interest Act, 1978 also makes the
Interest Act subject to the provision of Section 34 CPC. Hence, we
can safely deduce that the interest awarded is a discretion exercised
by the court, on the principal amount claimed, in case of a suit for
recovery of payment by the supplier if such payment is delayed by
the buyer.
39. With the commencement of the Act, a new vested right exists
with the supplier, that being, if there is delay in payment after the
acceptance of the goods by the buyer, the supplier can file a suit for
claiming interest at a higher rate, as prescribed by the Act. This
position has been approved by this Court in Modern
Industries [(2010) 5 SCC 44 : (2010) 2 SCC (Civ) 280] . If a suit for
interest simpliciter is maintainable as held by this Court in Modern
Industries [(2010) 5 SCC 44 : (2010) 2 SCC (Civ) 280] , then a new
liability qua the buyer is created with the commencement of the Act
giving a vested right to the supplier in case of delayed payment. In
other words, if there is a delayed payment by the buyer, then a right
to claim a higher rate of interest as prescribed by the Act accrues to
the supplier.
The phrase “vested right” has been defined by this Court in Bibi
40.
Sayeeda v. State of Bihar [(1996) 9 SCC 516] as: (SCC p. 527, para
17)
“ 17 . The word ‘vested’ is defined in Black's Law
Dictionary (6th Edn.) at p. 1563 as:
‘Vested; fixed; accrued; settled; absolute; complete. Having
the character or given the rights of absolute ownership; not
contingent; not subject to be defeated by a condition
precedent.’
Rights are ‘vested’ when right to enjoyment, present or
prospective, has become property of some particular person
or persons as present interest; mere expectancy of future
benefits, or contingent interest in property founded on
anticipated continuance of existing laws, does not constitute
vested rights. In Webster's Comprehensive
Dictionary (International Edn.) at p. 1397 ‘vested’ is
defined as:
‘[L]aw held by a tenure subject to no contingency;
complete; established by law as a permanent right; vested
interests.’”
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41. A statute creating vested rights is a substantive statute. This
Court, in Dhenkanal Minor Irrigation Division v. N.C.
Budharaj [(2001) 2 SCC 721] , opined: (SCC p. 742, para 23)
“ 23 . … ‘Substantive law’, is that part of the law which
creates, defines and regulates rights in contrast to what is
called adjective or remedial law which provides the method
of enforcing rights. Decisions, including the one in Jena
case [ Deptt. of Irrigation v. Abhaduta Jena , (1988) 1 SCC
418] while adverting to the question of substantive law has
chosen to indicate by way of illustration laws such as Sale
of Goods Act, 1930 [Section 61(2)], Negotiable Instruments
Act, 1881 (Section 80), etc. The provisions of the Interest
Act, 1839, which prescribe the general law of interest and
become applicable in the absence of any contractual or
other statutory provisions specially dealing with the subject,
would also answer the description of substantive law.”
41. A statute creating vested rights is a substantive statute. This
Court, in Dhenkanal Minor Irrigation Division v. N.C.
Budharaj [(2001) 2 SCC 721] , opined: (SCC p. 742, para 23)
“ 23 . … ‘Substantive law’, is that part of the law which
creates, defines and regulates rights in contrast to what is
called adjective or remedial law which provides the method
of enforcing rights. Decisions, including the one in Jena
case [ Deptt. of Irrigation v. Abhaduta Jena , (1988) 1 SCC
418] while adverting to the question of substantive law has
chosen to indicate by way of illustration laws such as Sale
of Goods Act, 1930 [Section 61(2)], Negotiable Instruments
Act, 1881 (Section 80), etc. The provisions of the Interest
Act, 1839, which prescribe the general law of interest and
become applicable in the absence of any contractual or
other statutory provisions specially dealing with the subject,
would also answer the description of substantive law.”
42. In Thirumalai Chemicals Ltd. v. Union of India [(2011) 6 SCC
739 : (2011) 3 SCC (Civ) 458] this Court comparing substantial law
with procedural law, stated: (SCC pp. 748-49, paras 23-24)
“ 23 . Substantive law refers to a body of rules that creates,
defines and regulates rights and liabilities. Right conferred
on a party to prefer an appeal against an order is a
substantive right conferred by a statute which remains
unaffected by subsequent changes in law, unless modified
expressly or by necessary implication. Procedural law
establishes a mechanism for determining those rights and
liabilities and a machinery for enforcing them. Right of
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appeal being a substantive right always acts prospectively.
It is trite law that every statute is prospective unless it is
expressly or by necessary implication made to have
retrospective operation.
24 . Right of appeal may be a substantive right but the
procedure for filing the appeal including the period of
limitation cannot be called a substantive right, and an
aggrieved person cannot claim any vested right claiming
that he should be governed by the old provision pertaining
to period of limitation. Procedural law is retrospective
meaning thereby that it will apply even to acts or
transactions under the repealed Act.”
43. In Shyam Sunder v. Ram Kumar [(2001) 8 SCC 24] , a
Constitution Bench of this Court discussing the scope and ambit of a
declaratory law has observed: (SCC p. 49, para 39)
“ 39 . Lastly, it was contended on behalf of the appellants
that the amending Act whereby new Section 15 of the Act
has been substituted is declaratory and, therefore, has
retroactive operation. Ordinarily when an enactment
declares the previous law, it requires to be given retroactive
effect. The function of a declaratory statute is to supply an
omission or to explain a previous statute and when such an
Act is passed, it comes into effect when the previous
enactment was passed. The legislative power to enact law
includes the power to declare what was the previous law
and when such a declaratory Act is passed, invariably it has
been held to be retrospective. Mere absence of use of the
word ‘declaration’ in an Act explaining what was the law
before may not appear to be a declaratory Act but if the
court finds an Act as declaratory or explanatory, it has to be
construed as retrospective. Conversely where a statute uses
the word ‘declaratory’, the words so used may not be
sufficient to hold that the statute is a declaratory Act as
words may be used in order to bring into effect new law.”
In Katikara Chintamani Dora v. Guntreddi
44.
Annamanaidu [(1974) 1 SCC 567] this Court held: (SCC p. 582,
para 50)
“ 50 . It is well settled that ordinarily, when the substantive
law is altered during the pendency of an action, rights of the
parties are decided according to law, as it existed when the
action was begun unless the new statute shows a clear
intention to vary such rights ( Maxwell on Interpretation of
Statutes , 12th Edn. 220). That is to say, ‘in the absence of
anything in the Act, to say that it is to have retrospective
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operation, it cannot be so construed as to have the effect of
altering the law applicable to a claim in litigation at the time
when the Act is passed’.”
45. In Govind Das v. ITO [(1976) 1 SCC 906 : 1976 SCC (Tax) 133]
this Court speaking through P.N. Bhagwati, J. (as he then was) held:
(SCC p. 914, para 11)
“ 11 . Now it is a well-settled rule of interpretation hallowed
by time and sanctified by judicial decisions that, unless the
terms of a statute expressly so provide or necessarily require
it, retrospective operation should not be given to a statute so
as to take away or impair an existing right or create a new
obligation or impose a new liability otherwise than as
regards matters of procedure. The general rule as stated by
Halsbury in Vol. 36 of the Laws of England (3rd Edn.) and
reiterated in several decisions of this Court as well as
English courts is that all statutes other than those which are
merely declaratory or which relate only to matters of
procedure or of evidence are prima facie prospective and
retrospective operation should not be given to a statute so as
to affect, alter or destroy an existing right or create a new
liability or obligation unless that effect cannot be avoided
without doing violence to the language of the enactment. If
the enactment is expressed in language which is fairly
capable of either interpretation, it ought to be construed as
prospective only.”
46. In Jose Da Costa v. Bascora Sadasiva Sinai Narcornim [(1976)
2 SCC 917] this Court held: (SCC p. 925, para 31)
“ 31 . Before ascertaining the effect of the enactments
aforesaid passed by the Central Legislature on pending suits
or appeals, it would be appropriate to bear in mind two
well-established principles. The first is that ‘… while
provisions of a statute dealing merely with matters of
procedure may properly, unless that construction be
textually inadmissible, have retrospective effect attributed
to them, provisions which touch a right in existence at the
passing of the statute are not to be applied retrospectively in
the absence of express enactment or necessary intendment.’
(See Delhi Cloth and General Mills Co. Ltd. v. CIT [(1926-
27) 54 IA 421] , IA p. 425.)
The second is that a right of appeal being a substantive right
the institution of a suit carries with it the implication that all
successive appeals available under the law then in force
would be preserved to the parties to the suit throughout the
rest of the career of the suit. There are two exceptions to the
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application of this rule viz. ( 1 ) when by competent
enactment such right of appeal is taken away expressly or
impliedly with retrospective effect and ( 2 ) when the court to
which appeal lay at the commencement of the suit stands
abolished (see Garikapati Veeraya v. N. Subbiah
Choudhry [AIR 1957 SC 540] and Colonial Sugar Refining
Co. Ltd. v. Irving [1905 AC 369 : (1904-07) All ER Rep Ext
1620 (PC)] ).”
47. In K. Kapen Chako v. Provident Investment Co. (P) Ltd. [(1977)
1 SCC 593] this Court discussing the dicta of the English courts on
the aspect of retrospectivity observed: (SCC pp. 602-03, paras 37-
39)
“ 37 . A statute has to be looked into for the general scope
and purview of the statute and at the remedy sought to be
applied. In that connection the former state of the law is to
be considered and also the legislative changes contemplated
by the statute. Words not requiring retrospective operation
so as to affect an existing statutory provision prejudicially
ought not be so construed. It is a well-recognised rule that
statute should be interpreted if possible so as to respect
vested rights. Where the effect would be to alter a
transaction already entered into, where it would be to make
that valid which was previously invalid, to make an
instrument which had no effect at all, and from which the
party was at liberty to depart as long as he pleased, binding,
the prima facie construction of the Act is that it is not to be
retrospective. (See Gardner v. Lucas [(1878) 3 AC 582
(HL)] .)
38 . In Moon v. Durden [(1848) 2 Ex 22 : 154 ER 389] a
question arose as to whether Section 18 of the Gaming Act,
1845 which came into effect in August 1845 was
retrospective so as to defeat an action which had been
commenced in June 1845. The relevant section provided
that no suit shall be brought or maintained for recovering
any such sum of money alleged to have been won upon a
wager. It was held that it was not retrospective. Parke, B.
said: (ER p. 398)
‘It seems a strong thing to hold, that the legislature could
have meant that a party, who, under a contract made prior to
the Act, had as perfect a title to recover a sum of money, as
he had to any of his personal property, should be totally
deprived of it without compensation.’
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39 . Again in Smithies v. National Assn. of Operative
Plasterers [(1909) 1 KB 310 : (1908-10) All ER Rep 455
(CA)] Section 4 of the Trade Disputes Act, 1906 which
enacted that an action for tort against a trade union shall not
be entertained by any court was held not to prevent the
courts from hearing and giving judgment in actions of that
kind begun before the passing of the Act. It is a general rule
that when the legislature alters the rights of parties by taking
away or conferring any right of action, its enactments,
unless in express terms they apply to pending actions, do
not affect them. But there is an exception to this rule,
namely, where enactments merely affect procedure and do
not extend to rights of action. See Suche (Joseph) & Co.
Ltd., In re [(1875) 1 Ch D 48] . If the legislature forms a
new procedure alterations in the form of procedure are
retrospective unless there is some good reason or other why
they should not be. In other words, if a statute deals merely
with the procedure in an action, and does not affect the
rights of the parties it will be held to apply prima facie to all
actions, pending as well as future.”
48. In Dahiben v. Vasanji Kevalbhai [1995 Supp (2) SCC 295] this
Court held: (SCC pp. 299-300, para 12)
“ 12 . As the amendment in question is not to a procedural
law, it may be stated that the settled principle of
interpretation, where substantive law is amended, is that the
same does not operate retrospectively unless it is either
expressly provided or the same follows by necessary
implication. Lest it be thought that a vested right cannot be
taken away at all by retrospective legislation, reference may
be made to Rafiquennessa v. Lal Bahadur Chetri [AIR 1964
SC 1511] where it was stated that even where vested rights
are affected, legislature is competent to take away the same
by means of retrospective legislation; and retrospectivity
can be inferred even by necessary implication.”
In Zile Singh v. State of Haryana [(2004) 8 SCC 1] this Court
49.
examined the various authorities on statutory interpretation and
concluded: (SCC pp. 8-9, paras 13-14)
“ 13 . It is a cardinal principle of construction that every
statute is prima facie prospective unless it is expressly or by
necessary implication made to have a retrospective
operation. But the rule in general is applicable where the
object of the statute is to affect vested rights or to impose
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new burdens or to impair existing obligations. Unless there
are words in the statute sufficient to show the intention of
the legislature to affect existing rights, it is deemed to be
prospective only—‘ nova constitutio futuris formam
imponere debet non praeteritis ’—a new law ought to
regulate what is to follow, not the past. (See Principles of
Statutory Interpretation by Justice G.P. Singh, 9th Edn.,
2004 at p. 438.) It is not necessary that an express provision
be made to make a statute retrospective and the presumption
against retrospectivity may be rebutted by necessary
implication especially in a case where the new law is made
to cure an acknowledged evil for the benefit of the
community as a whole ( ibid. , p. 440).
14 . The presumption against retrospective operation is not
applicable to declaratory statutes…. In determining,
therefore, the nature of the Act, regard must be had to the
substance rather than to the form. If a new Act is ‘to
explain’ an earlier Act, it would be without object unless
construed retrospectively. An explanatory Act is generally
passed to supply an obvious omission or to clear up doubts
as to the meaning of the previous Act. It is well settled that
if a statute is curative or merely declaratory of the previous
law retrospective operation is generally intended…. An
amending Act may be purely declaratory to clear a meaning
of a provision of the principal Act which was already
implicit. A clarificatory amendment of this nature will have
retrospective effect ( ibid. , pp. 468-69).”
50. In State of Punjab v. Bhajan Kaur [(2008) 12 SCC 112 : (2009)
1 SCC (Cri) 328] this Court held: (SCC p. 116, para 9)
“ 9 . A statute is presumed to be prospective unless held to be
retrospective, either expressly or by necessary implication.
A substantive law is presumed to be prospective. It is one of
the facets of the rule of law.”
51. There is no doubt about the fact that the Act is a substantive law
as vested rights of entitlement to a higher rate of interest in case of
delayed payment accrues in favour of the supplier and a
corresponding liability is imposed on the buyer. This Court, time and
again, has observed that any substantive law shall operate
prospectively unless retrospective operation is clearly made out in
the language of the statute. Only a procedural or declaratory law
operates retrospectively as there is no vested right in procedure.
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52. In the absence of any express legislative intendment of the
retrospective application of the Act, and by virtue of the fact that the
Act creates a new liability of a high rate of interest against the buyer,
the Act cannot be construed to have retrospective effect. Since the
Act envisages that the supplier has an accrued right to claim a higher
rate of interest in terms of the Act, the same can only be said to
accrue for sale agreements after the date of commencement of the
Act i.e. 23-9-1992 and not any time prior.”
164. It would, however, be relevant to note that Purbanchal Cables
came to be subsequently overruled by the Supreme Court in Shanti
46
Conductors (P) Ltd. vs. Assam SEB
as would be evident from a
reading of paras 60, 61 and 62 of the report and which are extracted
hereunder:-
“ 60. The judgment of this Court in Purbanchal Cables &
Conductors (P) Ltd. [ Purbanchal Cables & Conductors (P)
Ltd. v. Assam SEB , (2012) 7 SCC 462 : (2012) 4 SCC (Civ) 245]
relying on Assam Small Scale Industries [ Assam Small Scale
Industries Development Corpn. Ltd. v. J.D. Pharmaceuticals , (2005)
13 SCC 19] and Shakti Tubes [ Shakti Tubes Ltd. v. State of Bihar ,
(2009) 7 SCC 673 : (2009) 3 SCC (Civ) 258] had laid down that the
1993 Act cannot be made applicable with regard to sale agreements
which were entered into prior to the enforcement of the Act and the
Act can be invoked only for the sale agreements which were entered
after the enforcement of the Act. Although attempt was made
in Purbanchal Cables [ Purbanchal Cables & Conductors (P)
Ltd. v. Assam SEB , (2012) 7 SCC 462 : (2012) 4 SCC (Civ) 245] to
get the judgment in Assam Small Scale Industries [ Assam Small
Scale Industries Development Corpn. Ltd. v. J.D. Pharmaceuticals ,
(2005) 13 SCC 19] and Shakti Tubes [ Shakti Tubes Ltd. v. State of
Bihar , (2009) 7 SCC 673 : (2009) 3 SCC (Civ) 258] reconsidered
but the coordinate Bench in Purbanchal Cables [ Purbanchal Cables
& Conductors (P) Ltd. v. Assam SEB , (2012) 7 SCC 462 : (2012) 4
SCC (Civ) 245] has refused to permit any such reconsideration. The
matter now having been referred to this three-Judge Bench we have
to consider and answer as to whether the above interpretation of the
1993 Act as given is in consonance with the statutory scheme.
61. We have noticed above that the incidence of applicability of the
liability under the Act is supply of goods or rendering of service . In
event the supply of goods and rendering of services is subsequent to
46
(2019) 19 SCC 529
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the Act, can liability to pay interest on delayed payment be denied
on the ground that agreement in pursuance of which supplies were
made were entered prior to enforcement of the Act? Entering into an
agreement being not expressly or impliedly referred to in the
statutory scheme as an incident for fastening of the liability, making
the date of agreement as date for imposition of liability does not
conform to the statutory scheme. This can be illustrated by taking an
example. There are two small scale industries which received orders
for supply of materials. ‘A’ received such orders prior to the
enforcement of the Act and ‘B’ received the order after the
enforcement of the Act. Both supplied the goods subsequent to
enforcement of the Act and became entitled to receive payment after
the supply, on or before the day agreed upon between the supplier
and buyer or before the appointed day. Payments were not made
both to ‘A’ and ‘B’ as required by Section 3. Can the buyer who has
received supplies from supplier ‘A’ escape from his statutory
liability to make payment of interest under Section 3 read with
Section 4? The answer has to be No . Two suppliers who supply
goods after the enforcement of the Act, become entitled to receive
payment after the enforcement of the Act one supplier cannot be
denied the benefit of the statutory protection on the pretext that the
agreement in his case was entered prior to enforcement of the Act.
When the date of agreement is not referred as material or incidence
for fastening the liability, by no judicial interpretation the said date
can be treated as a date for fastening of the liability. The 1993 Act
being beneficial legislation enacted to protect small scale industries
and statutorily ensure by mandatory provision for payment of
interest on the outstanding money, accepting the interpretation as put
by the learned counsel for the Board that the day of agreement has to
be subsequent to the enforcement of the Act, the entire beneficial
protection of the Act shall be defeated. The existence of statutory
liability depends on the statutory factors as enumerated in Section 3
and Section 4 of the 1993 Act. Factor for liability to make payment
under Section 3 being the supplier supplies any goods or renders
services to the buyer, the liability of buyer cannot be denied on the
ground that the agreement entered into between the parties for
supply was prior to the 1993 Act. To hold that liability of buyer for
payment shall arise only when agreement for supply was entered
into subsequent to enforcement of the Act, it shall be adding words
to Section 3 which is not permissible under the principles of
statutory construction.
62. We, thus, are of the view that the judgments in Purbanchal
Cables & Conductors [ Purbanchal Cables & Conductors (P)
Ltd. v. Assam SEB , (2012) 7 SCC 462 : (2012) 4 SCC (Civ) 245]
, Assam Small Scale Industries [ Assam Small Scale Industries
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Development Corpn. Ltd. v. J.D. Pharmaceuticals , (2005) 13 SCC
19] and Shakti Tubes [ Shakti Tubes Ltd. v. State of Bihar , (2009) 7
SCC 673 : (2009) 3 SCC (Civ) 258] which held that the 1993 Act
shall be applicable only when the agreement to sale/contract was
entered into prior/subsequent to the enforcement of the Act, does not
lay down the correct law. We accept the submission of the learned
counsel for the appellants that even if agreement of sale is entered
into prior to enforcement of the Act, liability to make payment under
Section 3 and liability to make payment of interest under Section 4
shall arise if supplies are made subsequent to the enforcement of the
Act.”
165. Of equal significance are the following passages forming part of
Shanti Conductors and where the aspect of retroactive application was
explained in the following words:-
“ 65. The two-Judge Bench of this Court in State Bank's Staff Union
(Madras Circle) v. Union of India [ State Bank's Staff Union
(Madras Circle) v. Union of India , (2005) 7 SCC 584 : 2005 SCC
(L&S) 994] , had occasion to examine the concept of retroactive and
retrospective. In paras 20 and 21 of the judgment the following has
been laid down: (SCC p. 593)
“ 20 . Judicial Dictionary (13th Edn.) by K.J. Aiyar,
Butterworth, p. 857, states that the word “retrospective”
when used with reference to an enactment may mean ( i )
affecting an existing contract; or ( ii ) reopening up of past,
closed and completed transaction; or ( iii ) affecting accrued
rights and remedies; or ( iv ) affecting procedure. Words and
Phrases , Permanent Edn., Vol. 37-A, pp. 224-25, defines a
“retrospective or retroactive law” as one which takes away
or impairs vested or accrued rights acquired under existing
laws. A retroactive law takes away or impairs vested rights
acquired under existing laws, or creates a new obligation,
imposes a new duty, or attaches a new disability, in respect
to transactions or considerations already past.
21 . In Advanced Law Lexicon by P. Ramanatha Aiyar
(3rd Edn., 2005) the expressions “retroactive” and
“retrospective” have been defined as follows at p. 4124,
Vol. 4:
‘ Retroactive .—Acting backward; affecting what is past.
(Of a statute, ruling, etc.) extending in scope or effect to
matters that have occurred in the past. —Also termed
retrospective. ( Black's Law Dictionary , 7th Edn., 1999)
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“Retroactivity” is a term often used by lawyers but
rarely defined. On analysis it soon becomes apparent,
moreover, that it is used to cover at least two distinct
concepts. The first, which may be called “true
retroactivity”, consists in the application of a new rule of
law to an act or transaction which was completed before the
rule was promulgated. The second concept, which will be
referred to as “quasi-retroactivity”, occurs when a new rule
of law is applied to an act or transaction in the process of
completion … The foundation of these concepts is the
distinction between completed and pending transactions …
[T.C. Hartley, The Foundations of European Community
Law , p. 129 (1981)].
*
Retrospective .—Looking back; contemplating what is
past.
Having operation from a past time.
“Retrospective” is somewhat ambiguous and that good
deal of confusion has been caused by the fact that it is used
in more senses than one. In general, however, the courts
regard as retrospective any statute which operates on cases
or facts coming into existence before its commencement in
the sense that it affects, even if for the future only, the
character or consequences of transactions previously
entered into or of other past conduct. Thus, a statute is not
retrospective merely because it affects existing rights; nor is
it retrospective merely because a part of the requisite for its
action is drawn from a time antecedent to its passing.’ (Vol.
44, Halsbury's Laws of England , 4th Edn., p. 570, para
921.)”
66. Further in Jay Mahakali Rolling Mills v. Union of India [ Jay
Mahakali Rolling Mills v. Union of India , (2007) 12 SCC 198] ,
explaining retroactive and retrospective the following has been laid
down: (SCC p. 200, para 8)
“ 8 . “Retrospective” means looking backward,
contemplating what is past, having reference to a statute or
things existing before the statute in question. Retrospective
law means a law which looks backward or contemplates the
past; one, which is made to affect acts or facts occurring, or
rights occurring, before it comes into force. Retroactive
statute means a statute, which creates a new obligation on
transactions or considerations or destroys or impairs vested
rights.”
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67. Retroactivity in the context of the statute consists of application
of new rule of law to an act or transaction which has been completed
before the rule was promulgated.
68. In the present case, the liability of buyer to make payment and
day from which payment and interest become payable under
Sections 3 and 4 does not relate to any event which took place prior
to the 1993 Act, it is not even necessary for us to say that the 1993
Act is retroactive in operation. The 1993 Act is clearly prospective
in operation and it is not necessary to term it as retroactive in
operation. We, thus, do not subscribe to the opinion dated 31-8-2016
[ Shanti Conductors (P) Ltd. v. Assam SEB , (2016) 15 SCC 13] of
one of the Hon'ble Judges holding that the 1993 Act is retroactive.”
166. The judgment in Katta Sujatha Reddy and Anr. vs.
47
Siddamsetty Infra Projects Private Limited and Ors. had dealt
with the question of whether some of the amendments introduced in the
48
Specific Relief Act, 1963
, in 2018 could be said to have retrospective
application. The Supreme Court in Katta Sujatha Reddy held that
Section 10 of the SRA could not be viewed as being merely procedural
since it also affected substantive principles underlying contracts in
general. The issue was thus answered as under: -
“ 47. The High Court, in the impugned order, has taken a different
approach in categorising the Specific Relief Act, 1963 as procedural
and holding that the 2018 Amendment is also a procedural provision
which requires to be given retrospective effect. The High Court
places reliance on an old case of Radheshyam Kamila v. Kiran Bala
Dasi [ Radheshyam Kamila v. Kiran Bala Dasi , 1971 SCC OnLine
Cal 15 : AIR 1971 Cal 341] , wherein the High Court, while relying
upon the commentary of Pollock & Mulla on Indian Contract Act
and Specific Relief Act (4th Edn.) specifically observed that “specific
relief, as a form of judicial process, belongs to the law of
procedure”. In this context, the Court came to a conclusion that such
procedural amendment ought to be given retrospective effect.
47
(2023) 1 SCC 355
48
SRA
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48. We do not subscribe to the aforesaid reasoning provided by the
High Court for the simple reason that after the 2018 Amendment,
specific performance, which stood as a discretionary remedy, is not
( sic now) codified as an enforceable right which is not dependent
anymore on equitable principles expounded by Judges, rather it is
founded on satisfaction of the requisite ingredients as provided
under the Specific Relief Act. For determination of whether a
substituted law is procedural or substantive, reference to the nature
of the parent enactment may not be material. Instead, it is the nature
of the amendments which determine whether they are in the realm of
procedural or substantive law.
xxxx xxxx xxxx
51. In any case, the amendment carried out in 2018 was enacted to
further bolster adherence to the sanctity of contracts. This approach
was radical and created new rights and obligations which did not
exist prior to such an amendment. Section 10, after amendment,
reads as under:
“ 10. Specific performance in respect of contracts .—The
specific performance of a contract shall be enforced by the
court subject to the provisions contained in sub-section (2)
of Section 11, Section 14 and Section 16.”
52. This provision, which remained in the realm of the courts'
discretion, was converted into a mandatory provision, prescribing a
power the courts had to exercise when the ingredients were fulfilled.
This was a significant step in the growth of commercial law as the
sanctity of contracts was reinforced with parties having to comply
with contracts and thereby reducing efficient breaches.
53. Under the pre-amended Specific Relief Act, one of the major
considerations for grant of specific performance was the adequacy of
damages under Section 14(1)( a ). However, this consideration has
now been completely done away with, in order to provide better
compensation to the aggrieved party in the form of specific
performance.
54. Having come to the conclusion that the 2018 Amendment was
not a mere procedural enactment, rather it had substantive principles
built into its working, this Court cannot hold that such amendments
would apply retrospectively.
55. In Shyam Sunder v. Ram Kumar [ Shyam Sunder v. Ram Kumar ,
(2001) 8 SCC 24] , this Court held as under : (SCC pp. 42-43, para
28)
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“ 28 . From the aforesaid decisions the legal position that
emerges is that when a repeal of an enactment is followed
by a fresh legislation, such legislation does not affect the
substantive rights of the parties on the date of the suit or
adjudication of the suit unless such a legislation is
retrospective and a court of appeal cannot take into
consideration a new law brought into existence after the
judgment appealed from has been rendered because the
rights of the parties in an appeal are determined under the
law in force on the date of the suit. However, the position in
law would be different in the matters which relate to
procedural law but so far as substantive rights of parties are
concerned, they remain unaffected by the amendment in the
enactment. We are, therefore, of the view that where a
repeal of provisions of an enactment is followed by fresh
legislation by an amending Act, such legislation is
prospective in operation and does not affect substantive or
vested rights of the parties unless made retrospective either
expressly or by necessary intendment. We are further of the
view that there is a presumption against the retrospective
operation of a statute and further a statute is not to be
construed to have a greater retrospective operation than its
language renders necessary, but an amending Act which
affects the procedure is presumed to be retrospective, unless
the amending Act provides otherwise. We have carefully
looked into the new substituted Section 15 brought in the
parent Act by the Amendment Act, 1995 but do not find it
either expressly or by necessary implication retrospective in
operation which may affect the rights of the parties on the
date of adjudication of the suit and the same is required to
be taken into consideration by the appellate court. In Shanti
Devi v. Hukum Chand [ Shanti Devi v. Hukum Chand ,
(1996) 5 SCC 768] this Court had occasion to interpret the
substituted Section 15 with which we are concerned and
held that on a plain reading of Section 15, it is clear that it
has been introduced prospectively and there is no question
of such section affecting in any manner the judgment and
decree passed in the suit for pre-emption affirmed by the
High Court in the second appeal. We are respectfully in
agreement with the view expressed in the said decision and
hold that the substituted Section 15 in the absence of
anything in it to show that it is retrospective, does not affect
the right of the parties which accrued to them on the date of
the suit or on the date of passing of the decree by the court
of first instance. We are also of the view that the present
appeals are unaffected by change in law insofar it related to
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determination of the substantive rights of the parties and the
same are required to be decided in the light of the law of
pre-emption as it existed on the date of passing of the
decree.”
56. From the aforesaid decision in Shyam Sunder case [ Shyam
Sunder v. Ram Kumar , (2001) 8 SCC 24] , it is clear that when a
substantive law is brought about by amendment, there is no
assumption that the same ought to be given retrospective effect.
Rather, there is a requirement for the legislature to expressly clarify
whether the aforesaid amendments ought to be retrospective or not.
57. In the light of the aforesaid discussion, it is clear that ordinarily,
the effect of amendment by substitution would be that the earlier
provisions would be repealed, and amended provisions would be
enacted in place of the earlier provisions from the date of inception
of that enactment. However, if the substituted provisions contain any
substantive provisions which create new rights, obligations, or take
away any vested rights, then such substitution cannot automatically
be assumed to have come into force retrospectively. In such cases,
the legislature has to expressly provide as to whether such
substitution is to be construed retrospectively or not.
58. In the case at hand, the Amendment Act contemplates that the
said substituted provisions would come into force on such date as
the Central Government may appoint, by notification in the Official
Gazette, or different dates may be appointed for different provisions
of the Act. It may be noted that 1-10-2018 was the appointed date on
which the amended provisions would come into effect.
59. In view of the above discussion, we do not have any hesitation in
holding that the 2018 Amendment to the Specific Relief Act is
prospective and cannot apply to those transactions that took place
prior to its coming into force.”
167. The petitioners while questioning the extent to which the
Proviso to Section 132(4) could be stretched, also bid us to bear in
consideration that a Proviso is in a sense an exception and cannot be
interpreted so as to expand the meaning of the principal provision. This
well settled legal proposition was lucidly explained by the Supreme
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49
Court in Ishverlal Thakorelal Almaula vs. Motibhai Nagjibhai
a
decision cited on behalf of the petitioners in this respect and relevant
passages whereof are extracted hereunder: -
“ 8. The proper function of a proviso is to except or qualify
something enacted in the substantive clause, which but for the
proviso would be within that clause. It may ordinarily be presumed
in construing a proviso that it was intended that the enacting part of
the section would have included the subject-matter of the proviso.
But the question is one of interpretation of the proviso : and there is
no Rule that the proviso must always be restricted to the ambit of the
main enactment. Occasionally in a statute a proviso is unrelated to
the subject-matter of the preceding section, or contains matters
extraneous to that section, and it may have then to be interpreted as a
substantive provision, dealing independently with the matter
specified therein, and not as qualifying the main or the preceding
section.
9. By the substantive clause of Section 43-C the tenants do not
acquire in respect of lands described therein rights conferred by
Sections 32 to 32-R : that part of Section 43-C is therefore in the
nature of a qualification or an exception, and functions as a proviso
to Sections 32 to 32-R. The proviso to Section 43-C goes on, not to
carve out an exception or to impose a qualification to the exclusion
prescribed by the main enactment, but deals with a matter which is
unrelated thereto. In terms it seeks to protect rights acquired or
arising not under Sections 32 to 32-R (which were added by Act 13
of 1956) but under the principal Act 67 of 1948 on or after
December 28, 1948, and those rights are protected not from the
operation of the substantive part of Section 43-C, but from the
operation of Act 33 of 1952, or of “the Amending Act of 1955”. It
may be recalled that by Act 33 of 1952, the Act ceased to apply to
land within the municipal boroughs, but the intention disclosed by
the proviso to Section 43-C was to declare that all rights acquired by
persons as tenants under the principal Act were to continue to
remain available to them in respect of lands within the Municipal
Boroughs as if Act 33 of 1952 were never enacted. The “Amending
Act of 1955” is no other than Act 13 of 1956 [see the definition of
“permanent tenant” in Section 2(10-A) added to the Principal Act
and Section 1(1) of Act 13 of 1956]. The legislature has by referring
to the Amending Act of 1955 sought also to protect, save as
expressly provided in Section 43-D, the rights acquired under Act 67
of 1948, notwithstanding the amendments made by Act 13 of 1956.
49
1965 SCC OnLine SC 102
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By Section 48 of Act 13 of 1956, the scheme of exemption from the
operation of the Act of certain provisions thereof was extensively
amended in respect of different classes of land. Section 88 of Act 67
of 1948 as originally enacted substituted by Sections 88, 88-A, 88-B,
88-C & 88-D. But this modified scheme of exemption and other
provisions of the Act were by virtue of the proviso to Section 43-C
not to affect the rights of tenants acquired on or after December 28,
1948 under Act 67 of 1948, save as expressly provided by Section
43-D.”
168. The petitioners then drew our attention to the judgment in S.
50
Sundaram Pillai vs. V.R. Pattabiramanb
, and where the purpose of
a proviso was explained more elaborately as would become apparent
from a reading of the following passages: -
“ 27. The next question that arises for consideration is as to what is
the scope of a proviso and what is the ambit of an Explanation either
to a proviso or to any other statutory provision. We shall first take up
the question of the nature, scope and extent of a proviso. The well
established rule of interpretation of a proviso is that a proviso may
have three separate functions. Normally, a proviso is meant to be an
exception to something within the main enactment or to qualify
something enacted therein which but for the proviso would be within
the purview of the enactment. In other words, a proviso cannot be
torn apart from the main enactment nor can it be used to nullify or
set at naught the real object of the main enactment.
28. Craies in his book Statute Law (7th Edn.) while explaining the
purpose and import of a proviso states at p. 218 thus:
“The effect of an exception or qualifying proviso, according
to the ordinary rules of construction, is to except out of the
preceding portion of the enactment, or to qualify something
enacted therein, which but for the proviso would be within
it.... The natural presumption is that, but for the proviso, the
enacting part of the section would have included the
subject-matter of the proviso.”
29. Odgers in Construction of Deeds and Statutes (5th Edn.) while
referring to the scope of a proviso mentioned the following
ingredients:
50
(1985) 1 SCC 591
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“p. 317. Provisos — These are clauses of exception or
qualification in an Act, excepting something out of, or
qualifying something in, the enactment which, but for the
proviso, would be within it.
p. 318. Though framed as a proviso, such a clause may
exceptionally have the effect of a substantive enactment.”
30. Sarathi in Interpretation of Statutes at pages 294-295 has
collected the following principles in regard to a proviso:
( a )When one finds a proviso to a section the natural
presumption is that, but for the proviso, the enacting part of
the section would have included the subject-matter of the
proviso.
( b )A proviso must be construed with reference to the
preceding parts of the clause to which it is appended.
( c )Where the proviso is directly repugnant to a section, the
proviso shall stand and be held a repeal of the section as the
proviso speaks the latter intention of the makers.
( d )Where the section is doubtful, a proviso may be used as a
guide to its interpretation: but when it is clear, a proviso
cannot imply the existence of words of which there is no
trace in the section.
( e )The proviso is subordinate to the main section.
( f )A proviso does not enlarge an enactment except for
compelling reasons.
( g )Sometimes an unnecessary proviso is inserted by way of
abundant caution.
( h )A construction placed upon a proviso which brings it into
general harmony with the terms of section should prevail.
( i )When a proviso is repugnant to the enacting part, the
proviso will not prevail over the absolute terms of a later
Act directed to be read as supplemental to the earlier one.
( j )A proviso may sometimes contain a substantive
provision.
31. In the case of Local Government Board v. South Stoneham
Union [1909 AC 57 : 99 LT 896 (HL)] Lord Macnaghten made the
following observation:
“I think the proviso is a qualification of the preceding
enactment which is expressed in terms too general to be
quite accurate.”
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32. In Ishverlal Thakorelal Almaula v. Motibhai Nagjibhai [(1966) 1
SCR 367 : AIR 1966 SC 459 : (1967) 1 SCJ 41] it was held that the
main object of a proviso is merely to qualify the main enactment.
In Madras and Southern Mahrata Railway Co. Ltd. v. Bezwada
Municipality [AIR 1944 PC 71 : 71 IA 113 : 218 IC 333] Lord
Macmillan observed thus:
“The proper function of a proviso is to except and deal with
a case which would otherwise fall within the general
language of the main enactment, and its effect is confined to
that case.”
33. The above case was approved by this Court in CIT v. Indo
Mercantile Bank Ltd. [1959 Supp (2) SCR 256 : AIR 1959 SC 713]
where Kapur, J. held that the proper function of a proviso was
merely to qualify the generality of the main enactment by providing
an exception and taking out, as it were, from the main enactment a
portion which, but for the proviso, would fall within the main
enactment. In Shah Bhojraj Kuverji Oil Mills and Ginning
Factory v. Subbash Chandra Yograj Sinha [(1962) 2 SCR 159 : AIR
1961 SC 1596 : (1962) 1 SCJ 377] Hidayatullah, J., as he then was,
very aptly and succinctly indicated the parameters of a proviso thus:
“As a general rule, a proviso is added to an enactment to
qualify or create an exception to what is in the enactment,
and ordinarily, a proviso is not interpreted as stating a
general rule.”
34. In West Derby Union v. Metropolitan Life Assurance
Society [1897 AC 647 : 66 LJ Ch 726 : 77 LT 284 (HL)] while
guarding against the danger of interpretation of a proviso, Lord
Watson observed thus:
“a very dangerous and certainly unusual course to import
legislation from a proviso wholesale into the body of the
statute.”
35. A very apt description and extent of a proviso was given by Lord
Oreburn in Rhondda Urban District Council v. Taff Vale Railway
Co. [1909 AC 253 : 100 LT 713 (HL)] where it was pointed out that
insertion of a proviso by the draftsman is not always strictly adhered
to its legitimate use and at times a section worded as a proviso may
wholly or partly be in substance a fresh enactment adding to and not
merely excepting something out of or qualifying what goes before.
To the same effect is a later decision of the same Court
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in Jennings v. Kelly [1940 AC 206 : (1939) 4 All ER 464 : 162 LT 1
(HL)] where it was observed thus:
“We must now come to the proviso, for there is, I think, no
doubt that, in the construction of the section, the whole of it
must be read, and a consistent meaning, if possible, given to
every part of it. The words are:... ‘provided that such licence
shall be granted only for premises situate in the ward or
district electoral division in which such increase in
population has taken place...’ There seems to be no doubt
that the words “such increase in population” refer to the
increase of not less than 25 per cent of the population
mentioned in the opening words of the section.”
36. While interpreting a proviso care must be taken that it is used to
remove special cases from the general enactment and provide for
them separately.
37. In short, generally speaking, a proviso is intended to limit the
enacted provision so as to except something which would have
otherwise been within it or in some measure to modify the enacting
clause. Sometimes a proviso may be embedded in the main
provision and becomes an integral part of it so as to amount to a
substantive provision itself.
38. Apart from the authorities referred to above, this Court has in a
long course of decisions explained and adumbrated the various
shades, aspects and elements of a proviso. In State of
Rajasthan v. Leela Jain [(1965) 1 SCR 276 : AIR 1965 SC 1296 :
(1966) 1 SCJ 37] the following observations were made:
“So far as a general principle of construction of a proviso is
concerned, it has been broadly stated that the function of a
proviso is to limit the main part of the section and carve out
something which but for the proviso would have been
within the operative part.”
39. In the case of STO , Circle-I , Jabalpur v. Hanuman
Prasad [(1967) 1 SCR 831 : AIR 1967 SC 565 : (1967) 19 STC 87]
Bhargava, J. observed thus:
“It is well-recognised that a proviso is added to a principal
clause primarily with the object of taking out of the scope of
that principal clause what is included in it and what the
legislature desires should be excluded.”
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40. In Commissioner of Commercial Taxes v. R.S. Jhaver [(1968) 1
SCR 148 : AIR 1968 SC 59 : 20 STC 453] this Court made the
following observations:
“Generally speaking, it is true that the proviso is an
exception to the main part of the section; but it is recognised
that in exceptional cases a proviso may be a substantive
provision itself.”
41. In Dwarka Prasad v. Dwarka Das Saraf [(1976) 1 SCC 128 :
(1976) 1 SCR 277 : AIR 1975 SC 1758] Krishna Iyer, J. speaking
for the Court observed thus: (SCC pp. 136-37, paras 16, 18)
“There is some validity in this submission but if, on a fair
construction, the principal provision is clean a proviso
cannot expand or limit it. Sometimes a proviso is engrafted
by an apprehensive draftsman to remove possible doubts, to
make matters plain, to light up ambiguous edges. Here, such
is the case.
*
If the rule of construction is that prima facie a proviso
should be limited in its operation to the subject-matter of
the enacting clause, the stand we have taken is sound. To
expand the enacting clause, inflated by the proviso, sins
against the fundamental rule of construction that a proviso
must be considered in relation to the principal matter to
which it stands as a proviso. A proviso ordinarily is but a
proviso, although the golden rule is to read the whole
section, inclusive of the proviso, in such manner that they
mutually throw light on each other and result in a
harmonious construction.”
42. In Hiralal Rattanlal v. State of U.P. [(1973) 1 SCC 216 : 1973
SCC (Tax) 307] this Court made the following observations: [SCC
para 22, p. 224: SCC (Tax) p. 315]
“Ordinarily a proviso to a section is intended to take out a
part of the main section for special treatment. It is not
expected to enlarge the scope of the main section. But cases
have arisen in which this Court has held that despite the fact
that a provision is called proviso, it is really a separate
provision and the so-called proviso has substantially altered
the main section.”
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43. We need not multiply authorities after authorities on this point
because the legal position seems to be clearly and manifestly well
established. To sum up, a proviso may serve four different purposes:
( 1 ) qualifying or excepting certain provisions from the main
enactment:
( 2 ) it may entirely change the very concept of the intendment of the
enactment by insisting on certain mandatory conditions to be
fulfilled in order to make the enactment workable:
( 3 ) it may be so embedded in the Act itself as to become an integral
part of the enactment and thus acquire the tenor and colour of the
substantive enactment itself; and
( 4 ) it may be used merely to act as an optional addenda to the
enactment with the sole object of explaining the real intendment of
the statutory provision.”
169. It was then contended that even if a statute were construed to be
procedural if its operation were to affect vested rights adversely, it
would be liable to be held to have prospective application only. In
support of the aforesaid proposition the petitioners cited the decision of
the Supreme Court in Garikapati Veeraya vs. N. Subbaih Choudhry
51
and Ors
and where the legal position was summarized as follows:-
“ 23. From the decisions cited above the following principles clearly
emerge:
(i) That the legal pursuit of a remedy, suit, appeal and second appeal
are really but steps in a series of proceedings all connected by an
intrinsic unity and are to be regarded as one legal proceeding.
(ii) The right of appeal is not a mere matter of procedure but is a
substantive right.
(iii) The institution of the suit carries with it the implication that all
rights of appeal then in force are preserved to the parties thereto till
the rest of the career of the suit.
(iv) The right of appeal is a vested right and such a right to enter the
superior court accrues to the litigant and exists as on and from the
date the lis commences and although it may be actually exercised
when the adverse judgment is pronounced such right is to be
governed by the law prevailing at the date of the institution of the
51
1957 SCC OnLine SC 28
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suit or proceeding and not by the law that prevails at the date of its
decision or at the date of the filing of the appeal.
(v) This vested right of appeal can be taken away only by a
subsequent enactment, if it so provides expressly or by necessary
intendment and not otherwise.”
170. Further, reliance was also placed on the decision in Hitendra
52
Vishnu Thakur and Ors. vs. State of Maharashtra
, where while
dealing with the Terrorist and Disruptive Activities (Prevention) Act,
1987, the Supreme Court had held:-
“ 25. We have already noticed that clause ( b ) of sub-section (4) of
Section 20 was amended by the Amendment Act No. 43 of 1993
with effect from 22-5-1993. Besides reducing the maximum period
during which an accused under TADA could be kept in custody
pending investigation from one year to 180 days, the Amendment
Act also introduced clause ( bb ) to sub-section (4) of Section 20
enabling the prosecution to seek extension of time for completion of
the investigation. Does the Amendment Act No. 43 of 1993 have
retrospective operation and does the amendment apply to the cases
which were pending investigation on the date when the Amendment
Act came into force? There may be cases where on 22-5-1993 the
period of 180 days had already expired but the period of one year
was not yet over. In such a case, the argument of learned counsel for
the appellant is that the Act operates retrospectively and applies to
pending cases and therefore the accused should be forthwith released
on bail if he is willing to be so released and is prepared to furnish the
bail bonds as directed by the court, an argument which is seriously
contested by the respondents.
26. The Designated Court has held that the amendment would
operate retrospectively and would apply to the pending cases in
which investigation was not complete on the date on which the
Amendment Act came into force and the challan had not till then
been filed in the court. From the law settled by this Court in various
cases the illustrative though not exhaustive principles which emerge
with regard to the ambit and scope of an Amending Act and its
retrospective operation may be culled out as follows:
( i ) A statute which affects substantive rights is presumed to be
prospective in operation unless made retrospective, either expressly
or by necessary intendment, whereas a statute which merely affects
52
(1994) 4 SCC 602
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procedure, unless such a construction is textually impossible, is
presumed to be retrospective in its application, should not be given
an extended meaning and should be strictly confined to its clearly
defined limits.
( ii ) Law relating to forum and limitation is procedural in nature,
whereas law relating to right of action and right of appeal even
though remedial is substantive in nature.
( iii ) Every litigant has a vested right in substantive law but no such
right exists in procedural law.
( iv ) A procedural statute should not generally speaking be applied
retrospectively where the result would be to create new disabilities
or obligations or to impose new duties in respect of transactions
already accomplished.
( v ) A statute which not only changes the procedure but also creates
new rights and liabilities shall be construed to be prospective in
operation, unless otherwise provided, either expressly or by
necessary implication.”
171. It was then lastly urged that a statute which imposes penal
consequences cannot be recognized to have a retroactive application
since conferment of such a construction would clearly violate Article
20(1) of the Constitution. The petitioners sought to draw sustenance in
this respect from the following paragraphs of the judgment in T. Barai
53
vs. Henry Ah Hoe
:-
“ 2. It is common ground that the offence with which the respondents
are charged is alleged to have been committed under Section
16(1)( a ) at a time when the Act stood amended in its application to
the State of West Bengal by the provisions of the West Bengal
Amendment Act. If the law continued to stand as it stood on the date
of the offence which was so committed, there would have been no
difficulty because the maximum penalty would be imprisonment for
life and fine and as such the offences would be exclusively triable by
the Court of Session. But a change was brought about when
Parliament enacted the Central Amendment Act which came into
force on April 1, 1976 by which the scheme of Section 16 of the Act
providing for various punishments was materially altered; so also the
procedure for the trial of such offences. The effect of the Central
Amendment Act was that the West Bengal Amendment Act stood
53
(1983) 1 SCC 177
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impliedly repealed with effect from April 1, 1976 and the question is
whether the previous operation of the repealed West Bengal
Amendment Act in respect of any liability incurred thereunder is
preserved by Section 8 of the Bengal General clauses Act, 1899
which is pari materia with Section 6 of the General clauses Act,
1897 both as to procedure for trial of such offences and the nature of
punishment liable to be imposed.
xxxx xxxx xxxx
17. It is strenuously argued on behalf of the appellant that Section
16-A of the Act is not retrospective in operation, and that it does not
deal with procedure alone but touches a substantive right. The
submission is that in view of clauses ( c ), ( d ) and ( e ) of sub-section
(1) of Section 8 of the Bengal General clauses Act, 1899 which
provide that if any law is repealed then unless a different intention
appears, the repeal shall not affect any liability incurred under any
enactment so repealed or affect any legal proceeding or remedy in
respect of such liability, penalty or punishment as aforesaid. It is
said that there was a liability incurred by the commission of an
offence punishable under Section 16(1)( a ) of the Act as amended by
the West Bengal Amendment Act and Section 8 of the Bengal
General clauses Act, 1899 preserved the continued operation of the
repealed West Bengal Amendment Act for imposition of that
punishment. The contention is that where rights and procedure are
dealt with together by the repealing Act, then, the intention of the
legislature is that the old rights are still to be determined by the old
procedure. In support of the contention, reliance is placed on the
decision of Sargant, J. in Re Hale ' s Patent [LR (1920) 2 Ch 377 : 90
LJ Ch 35 : 124 LT 261] . We are afraid, the contention cannot
prevail. Just as a person accused of the commission of an offence
has no right to trial by a particular court or to a particular procedure,
the prosecutor equally has no right to insist upon that the accused be
subjected to an enhanced punishment under the repealed Act. The
dictum of Sargant, J. in Re Hale's Patent [LR (1920) 2 Ch 377 : 90
LJ Ch 35 : 124 LT 261] is therefore not applicable.
Whenever there is a repeal of an enactment, the consequences
18.
laid down in Section 6 of the General clauses Act though it has been
specifically mentioned in the repealing Act or not, will follow,
unless, as the section itself says, a different intention appears.
In State of Punjab v. Mohar Singh [AIR 1955 SC 84: (1955) 1 SCR
893: 1955 SCJ 25 : 1955 Cri LJ 254] , this Court has elaborately
dealt with the effect of repeal. In the case of a simple repeal, there is
scarcely any room for expression of a contrary opinion. But when
the repeal is followed by fresh legislation on the same subject, the
court would undoubtedly have to look to the provisions of the new
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Act, but only for the purpose of determining whether they indicate a
different intention. “The line of inquiry would be, not whether the
new Act expressly keeps alive old rights and liabilities”, in the
words of Mukherjea, J., “but whether it manifests an intention to
destroy them.” The Court held that it cannot subscribe to the broad
proposition that Section 6 of the General clauses Act is ruled out
when there is repeal of an enactment followed by fresh legislation.
Section 6 would be applicable in such cases also unless the new
legislation manifests an intention incompatible with or contrary to
the provisions of the section. Such incompatibility would have to be
ascertained from a consideration of all the relevant provisions of the
new Act and the mere absence of a saving clause is not by itself
material. The Court therefore held that the provisions of Section 6 of
the General clauses Act will apply to a case of repeal even if there is
simultaneous enactment unless a contrary intention can be gathered
from the new enactment. Of course, the consequences laid down in
Section 6 of the General clauses Act will apply only when a statute
or regulation having the force of a statute is actually repealed. It has
no application when a statute which is of a temporary nature
automatically expires by efflux of time. The principles laid down by
the Court in Mohar Singh case [AIR 1955 SC 84: (1955) 1 SCR
893: 1955 SCJ 25 : 1955 Cri LJ 254] , have consistently been
followed in subsequent cases. The old doctrine of extinguishing or
effacing the repealed law for all purposes and intents except for the
acts past and closed has now given way to the principles enunciated
by the Court in Mohar Singh case [AIR 1955 SC 84: (1955) 1 SCR
893: 1955 SCJ 25 : 1955 Cri LJ 254] .
xxxx xxxx xxxx
21. Lastly, the learned Judge refers to the new offences created by
the Central Amendment Act, one of them being that under Section
16(1)( b ) of the Act with regard to manufacturing for sale, or storing,
or selling, or distributing any adulterant which was not in the Act at
any time before. Accordingly, he holds that it is not possible to give
retrospective effect to the other parts of the Act and observes that it
could never have been the intention of the legislature nor was it
possible to give retrospective effect to the Act. According to him,
Article 20(1) of the Constitution stands in the way of giving
retrospective effect to Section 16(1)( b ) of the Act and thus renders
the act which was otherwise innocent at the time when it was done
to be an offence by later enactment. We are not concerned with new
offences created by the Central Amendment Act or with offences for
which an enhanced punishment is provided for and therefore there is
no question of Article 20(1) of the Constitution being attracted. We
are here concerned with the same offence, namely, an offence
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punishable under Section 16(1)( a ) of the Act for which a reduced
punishment is provided for.
22. It is only retroactive criminal legislation that is prohibited under
Article 20(1). The prohibition contained in Article 20(1) is that no
person shall be convicted of any offence except for violation of a
law in force at the time of the commission of the act charged as an
offence prohibits nor shall he be subjected to a penalty greater than
that which might have been inflicted under the law in force at the
time of the commission of the offence. It is quite clear that insofar as
the Central Amendment Act creates new offences or enhances
punishment for a particular type of offence no person can be
convicted by such ex post facto law nor can the enhanced
punishment prescribed by the amendment be applicable. But insofar
as the Central Amendment Act reduces the punishment for an
offence punishable under Section 16(1)( a ) of the Act, there is no
reason why the accused should not have the benefit of such reduced
punishment. The rule of beneficial construction requires that even ex
post facto law of such a type should be applied to mitigate the rigour
of the law. The principle is based both on sound reason and common
sense. This finds support in the following passage from Craies on
Statute Law , 7th Edn., at pp. 388-89:
“A retrospective statute is different from an ex post facto
statute. “Every ex post facto law…” said Chase, J., in the
American case of Calder v. Bull [3 US (3 Dall) 386: 1 L Ed
648 (1798)] “must necessarily be retrospective, but every
retrospective law is not an ex post facto law. Every law that
takes away or impairs rights vested agreeably to existing
laws is retrospective, and is generally unjust and may be
oppressive; it is a good general rule that a law should have
no retrospect, but in cases in which the laws may justly and
for the benefit of the community and also of individuals
relate to a time antecedent to their commencement: as
statutes of oblivion or of pardon. They are certainly
retrospective, and literally both concerning and after the
facts committed. But I do not consider any law ex post facto
within the prohibition that mollifies the rigour of the
criminal law , but only those that create or aggravate the
crime , or increase the punishment or change the rules of
evidence for the purpose of conviction.... There is a great
and apparent difference between making an unlawful act
lawful and the making an innocent action criminal and
punishing it as a crime.”
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23. To illustrate, if Parliament were to reenact Section 302 of the
Penal Code, 1860 and provide that the punishment for an offence of
murder shall be sentence for imprisonment for life instead of the
present sentence of death or imprisonment for life, then it cannot be
that the courts would still award a sentence of death even in pending
cases.
24. In Rattan Lal v. State of Punjab [AIR 1965 SC 444: (1964) 7
SCR 676: (1965) 1 SCJ 779: (1965) 1 Cri LJ 360] , the question that
fell for consideration was whether an appellate court can extend the
benefit of Probation of Offenders Act, 1958 which had come into
force after the accused had been convicted of a criminal offence. The
Court by majority of 2: 1 answered the question in the affirmative.
Subba Rao, J. who delivered a majority opinion, concluded that in
considering the question, the rule of beneficial construction required
that even ex post facto law of the type involved in that case should
be applied to reduce the punishment.
25. It is settled both on authority and principle that when a later
statute again describes an offence created by an earlier statute and
imposes a different punishment, or varies the procedure, the earlier
statute is repealed by implication. In Michell v. Brown [(1958) 120
ER 909, 912: 32 LTOS 146 : 7 WR 80] Lord Campbell put the
matter thus:
“It is well settled rule of construction that, if a later statute
again describes an offence created by a former statute and
affixes a different punishment, varying the procedure, the
earlier statute is repealed by the later statute; see
also Smith v. Benabo [(1937) 1 All ER 523: (1937) 1 KB
518: 156 LT 194] .
In Regina v. Youle [(1861) 158 ER 311, 315-16: 4 LT 299:
9 WR 637] , Martin, B. said in the oft-quoted passage:
“If a statute deals with a particular class of offences, and a
subsequent Act is passed which deals with precisely the
same offences, and a different punishment is imposed by the
later Act, I think that, in effect, the legislature has declared
that the new Act shall be substituted for the earlier Act.”
The rule is however subject to the limitation contained in Article
20(1) against ex post facto law providing for a greater punishment
and has also no application where the offence described in the later
Act is not the same as in the earlier Act i.e. when the essential
ingredients of the two offences are different.
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26. In the premises, the Central Amendment Act having dealt with
the same offence as the one punishable under Section 16(1)( a ) and
provided for a reduced punishment, the accused must have the
benefit of the reduced punishment. We wish to make it clear that
anything that we have said shall not be construed as giving to the
Central Amendment Act a retrospective operation insofar as it
creates new offences or provides for an enhanced punishment.”
172. In support of the aforesaid proposition, the petitioner also
additionally drew our attention to the following paragraphs forming
part of the judgment of the Bombay High Court in Balu Shankar Patil
54
vs. State of Maharashtra
:-
“10. Mr. Murtaza Najmi the learned counsel for the applicant
contended that it is ex-post facto law with retrospective operation
and, therefore, it will be applicable to all the accused persons, who
were undergoing life imprisonment on the date, when this
amendment came into force. At the outset, it may be stated that Mr.
Kumbhakoni also took the same stand. However, before coming to
the conclusion, it will be necessary to refer to the law settled in
different cases by the Supreme Court. In Punjab Tin Supply Co.
Ltd. v. Central Government , (1984) 1 SCC 206 : AIR 1984 SC 87,
Their Lordships had observed as follows in paragraph 17:
“17. All laws which affect substantive rights generally
operate prospectively and there is a presumption against
their retrospectivity if they affect vested rights and
obligations unless the legislative intent is clear and
compulsive. Such retrospective effect may be given where
there are express words giving retrospective effect or where
the language used necessarily implies that such
retrospective operation is intended. Hence the question
whether a statutory provision has retrospective effect or not
depends primarily on the language in which it is couched. If
the language is clear and unambiguous effect will have to be
given to the provision in question in accordance with its
tenor. If the language is not clear then the Court has to
decide whether in the light of the surrounding circumstances
retrospective effect should be given to it or not.”
In State Bank's Staff Union v. Union of India , (2005) 7 SCC 584,
11.
Their Lordships observed as follows in paragraph 19.
54
[2007] (5) Mh. LJ 675
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“19. Every sovereign legislature possesses the right to make
retrospective legislation. The power to make laws includes
the power to give it retrospective effect. Craies on Statute
Law (7th Edn.) at p. 387 defines retrospective statutes in the
following words:
“A statute is to be deemed to be retrospective, which takes
away or impairs any vested right acquired under existing
laws, or creates a new obligation, or imposes a new duty, or
attaches a new disability in respect to transactions or
considerations already past.”
12. Their Lordships observed that every sovereign legislature
possesses the right to make retrospective legislation and then
considered what the “retrospective” means. Their Lordships
observed as follows in paragraph 20 as follows:
20. Judicial Dictionary (13th Edn.) by K.J. Aiyar,
Butterworth, p. 857, states that the word “retrospective”
when used with reference to an enactment may mean (i)
affecting an existing contract; or (ii) reopening up of past,
closed and completed transaction; or (iii) affecting accrued
rights and remedies; or (iv) affecting procedure. Words and
Phrases , Permanent Edn., Vol. 37-A, pp. 224-25, defines a
“retrospective or retroactive law” as one which takes away
or impairs vested or accrued rights acquired under existing
laws. A retroactive law takes away or impairs vested rights
acquired under existing laws, or creates a new obligation,
imposes a new duty, or attaches a new disability, in respect
to transactions or considerations already past.”
13. Their Lordships further observed in paragraph 21 as follows:
“21. In Advanced Law Lexicon by P. Ramanath Aiyar (3rd
Edn., 2005) the expressions “retroactive” and
“retrospective” have been defined as follows at p. 4124,
Vol. 4;
“Retroactive. — Acting backward; affecting what is past.
(Of a statute, ruling, etc.) extending in scope or effect to
matters that have occurred in the past. — Also termed
retrospective. ( Black's Law Dictionary , 7th Edn., 1999)
“Retroactivity” is a term often used by lawyers but rarely
defined. On analysis it soon becomes apparent, moreover,
that it is used to cover at least two distinct concepts. The
first, which may be called “true retroactivity”, consists in
the application of a new rule of law to an act or transaction
which was completed before the rule was promulgated. The
second concept, which will be referred to as “quasi-
retroactivity”, occurs when a new rule of law is applied to
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an act or transaction in the process of completion…. The
foundation of these concepts is the distinction between
completed and pending transactions….’ T.C. Hartley,
Foundations of European Community Law, p. 129 (1981).
*
Retrospective. — Looking back; contemplating what is
past.
Having operation from a past time.”
14. In T. Barai v. Henry Ah Hoe , (1983) 1 SCC 177 : AIR 1983 SC
150, the Supreme Court observed as follows in paragraph 22:
“22. It is only retroactive criminal legislation that is
prohibited under Article 20(1). The prohibition contained in
Article 20(1) is that no person shall be convicted of any
offence except for violation of a law in force at the time of
the commission of the act charged as an offence prohibits
nor shall he be subjected to a penalty greater than that
which might have been inflicted under the law in force at
the time of the commission of the
offence……………………”
15. In view of this authority, it becomes clear that the act, which was
not prohibited or not offence at the time of commission would not be
made an offence by some legislation with retrospective effect and
nor a penalty greater than which might have been inflicted under the
law in force could be made applicable to the act committed at a
particular time by making a law later on with retrospective effect.
Therefore, the retrospective or retroactive law, which takes away or
impairs vested or accrued rights under the existing law or which
creates a new obligation or imposes a new duty or attaches a new
disability or which makes an act, which was not an offence before
the act, an offence under the Act, or which provides a punishment
higher than that obtaining at the time of commission of the offence,
is prohibited under Article 20(1) of the Constitution. However, if the
law mollifies the rigour of the criminal law and thereby give certain
benefits to the accused, that law is not prohibited under Article 20(1)
of the Constitution of India.”
173. While various other decisions were also cited in this respect and
which have essentially reiterated the legal position as enunciated in the
judgments aforenoted, we for the sake of completeness also deem it
apposite to reproduce the following paragraphs which appear in the
decision of the Supreme Court in Virtual Soft Systems Ltd. vs.
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55
Commissioner of Income Tax
:-
“ 54. There is nothing in the language of Section 271(1)( c ) as
amended by the Finance Act, 2002 w.e.f. 1-4-2003 to suggest that
the amendment is retrospective. The amendment in sub-clause ( iii )
and simultaneously in Explanation 4( a ) carried out enlarges the
scope of penalty under Section 271(1)( c ) to include even cases
where assessment has been completed at loss. The same being in the
nature of a substantive amendment would be prospective, in the
absence of any indication to the contrary.
55. Explanation 4 to Section 271(1)( c ) as it stood prior to its
amendment by the Finance Act, 2002, requires to be carefully
compared with the said Explanation as amended by the Finance Act,
2002. The comparison of the Explanation as it stood before 2002 and
after 2002 by itself shows clearly that it is only after the amendment
made by the Finance Act, 2002 that the Explanation dealt with the
situation of an assessee having returned a loss and where, even after
addition of concealed income by the assessee, the end result was still
an assessed loss. This situation was not dealt with at all by the
Explanation to Section 271(1)( c ) as it stood prior to its amendment
by the Finance Act, 2002. Further, a plain reading of Clause ( a ) of
Explanation 4 to Section 271 as it stood prior to the 2002
Amendment, shows that this clause applied to a situation where an
assessee has returned a loss which by reason of the addition of the
concealed income thereto by the assessing officer, is converted into
a positive figure of the assessed income on which the assessee is
required to pay tax. In contrast, Clause ( c ) of the said Explanation 4
applies only to a situation where the assessee has returned a positive
income, which stands enhanced by reason of the concealed income
added thereto by the assessing officer in the assessment order.
Consequently, both under Clause ( a ) and Clause ( c ) of the said
Explanation 4, the assessee can be penalised only if he has a positive
assessed income on which tax is payable. The only difference
between Clause ( a ) and Clause ( c ) is that Clause ( a ) applied to an
assessee who had filed a loss return, and Clause ( c ) to an assessee
who has filed a positive return. However, the end result in both the
cases was the same i.e. a positive assessed income on which the
assessee was required to pay tax. It is this basic condition precedent
for the imposition of the penalty i.e. existence of liability to pay tax
which existed prior to 2002, which has been done away with for the
first time by the Finance Act, 2002.
55
(2007) 9 SCC 665
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56. There is nothing in the language of Section 271(1)( c ) as
amended by the Finance Act, 2002 w.e.f. 1-4-2003 to suggest that
the amendment is retrospective. The amendment in sub-clause ( iii )
and simultaneously in Explanation 4( a ) carried out enlarges the
scope of penalty under Section 271(1)( c ) to include even cases
where assessment has been completed at loss. The same being in the
nature of a substantive amendment would be prospective, in the
absence of any indication to the contrary. The Finance Bill/Finance
Act, 2002 brought about many amendments in the statute, some of
which had retrospective operation. The amendment in Section
271(1)( c ) was consciously made applicable w.e.f. 1-4-2003 and not
with retrospective date.
57. Next proposition is with reference to the amended provision of
law made by the Finance Act, 2002, where the expression used in
Explanation 4 “the amount of tax sought to be evaded” has been
deliberately amended providing specifically for cases where the
filing of return and the assessment had the effect of reducing the loss
declared in the return or converting that loss into income. Taking
support from this amendment brought about in the statute with effect
from 1-4-2003, it is contended that the legislature has now
deliberately enacted such provision to fill in the lacuna in law and
also to put an end to the controversy which existed between the High
Courts in interpreting the laws after 1-4-1976. The amended
provision of law is not available prior to 1-4-2003, as the same is not
enacted with retrospective effect. That this amendment is declaratory
and applies to all pending cases, as held by the Bombay High Court
in CIT v. Chemiequip Ltd. [(2004) 265 ITR 265 (Bom)] is untenable
for the following reasons:
( a ) There is nothing in the statute to suggest to that
effect. The interpretation that it is clarificatory as per the
Notes on Clauses do not advance the Revenue's case,
because of its specific omission to that effect. It is purely a
case of amendment to the statute.
( b ) Amendment is not retrospective and there is no
assumption as to its retrospectivity. Retrospectivity has to
be enacted specifically in the fiscal statute and it is more so
in the case of penal provisions, otherwise it would be
contradictory or derogatory to Article 20(1) of the
Constitution. This Court has held in Brij
Mohan v. CIT [(1979) 4 SCC 118 : 1979 SCC (Tax) 294 :
(1979) 120 ITR 1] that the law to be applied is the one in
force on the first day of accounting period. To this effect are
the other decisions of this Court as CIT v. Patel Bros. & Co.
Ltd. [(1995) 4 SCC 485 : (1995) 215 ITR 165] The
Allahabad High Court has also taken the same view in Zam
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Zam Tanners [(2005) 279 ITR 197 (All)] . Notes on Clauses
on the amendment introduced by the Finance Act, 2002
makes specific mention inter alia of the amendment to be
effective from 1-4-2003 of which the Bombay High Court
has failed to take notice in its judgment
in CIT v. Chemiequip Ltd. [(2004) 265 ITR 265 (Bom)]”
174. Mr. Hossain, learned counsel appearing for the respondents,
however, questioned the soundness of the arguments on retrospectivity
and addressed the following submissions. Learned counsel firstly
reminded us of the debate and deliberations which had ensued both at
the level of the executive arm of the Union as well as the legislative
bodies and all of which had found an imperative necessity to revamp
the regulatory regime with respect to auditing firms. According to Mr.
Hossain, since a peer review was found to be clearly flawed and
unresponsive, Parliament had deliberately intervened by introducing
Section 132 in the statute book so as to remedy the mischief of errant
companies and auditing firms having failed to adequately regulate their
activities.
175. According to Mr. Hossain, no CA or auditing firm can claim to
have a vested right to commit professional or other misconduct and not
be tried. It was pointed out that misconduct already stood defined in
the CA Act and made such conduct unlawful right from the time of the
commencement of that statute in 1949. It was thus submitted that since
professional or other misconduct was always triable under the CA Act,
the petitioners are clearly incorrect when they argue that a vested right
had been taken away by Section 132(4) of the Act.
176. Mr. Hossain laid great emphasis on the fact that Section 132(4)
does not create a new category of misconduct since it merely
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incorporates the definition of professional or other misconduct as
appearing in Section 22 of the CA Act. It was thus submitted that a
misdemeanor which would fall within the meaning of professional or
other misconduct had remained unaltered with Section 132(4) merely
providing that the expression “ professional or other misconduct ” would
have the same meaning as assigned to that phrase by the CA Act.
177. It was further submitted that the obligation to comply with SAs
too was one which existed even prior to the introduction of Section 132
as would be manifest from a reading of Section 143(9) of the
Companies Act alongside Section 147(2) thereof. It was argued that by
virtue of the aforenoted two statutory provisions, non-compliance with
SAs was a criminal offence which existed and stood recognized by law
even prior to 2018 when Section 132 came to be introduced. It was thus
submitted by Mr. Hossain that it would be wholly incorrect to suggest
that either a vested right had come to be infringed or that the provisions
of Section 132 violated rights and the protection flowing from Article
20(1) of the Constitution.
178. Mr. Hossain then vehemently argued that Article 20(1) can
clearly have no application since the expression penalty as appearing
therein is used in a narrow sense and stands confined to a criminal
prosecution. It was thus argued that the said provision is clearly
inapplicable to a civil penalty arising out of disciplinary proceedings.
According to Mr. Hossain while this proposition is well settled, since
the petitioners have repeatedly alluded to an infraction of Article 20(1),
it would be apposite to refer to the following enunciation of the legal
position as it appears in Shiv Dutt Rai Fateh Chand vs. Union of
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56
India
:-
“ 25. The contention of the petitioners is that any act or omission
which is considered to be a default under the Act for which penalty
is leviable is an offence, that such act or omission was not an offence
and no penalty was payable under the law in force at the time when
it was committed and hence they cannot be punished by the levy of
penalty under a law which is given retrospective effect. They
principally rely on Article 20(1) in support of their case. Article
20(1) is modelled on the basis of Section 9(3) of Article 1 of the
Constitution of the United States of America which reads: “No bill
of attainder or ex post facto law shall be passed.” This clause has
been understood in the United States of America as being applicable
only to legislation concerning crimes (see Calder v. Bull [3 Dall 386
: 1 L Ed 648 (1798)] ). The expression “offence” is not defined in
the Constitution. Article 367 of the Constitution says that unless the
context otherwise provides for words which are not defined in the
Constitution, the meaning assigned in the General' Clauses Act,
1897 may be given. Section 3(38) of the General Clauses Act
defines “offence” as any act or omission made punishable by any
law for the time being in force. The marginal note of our Article 20
is “protection in respect of conviction for offences”. The presence of
the words “conviction and “offences”, in the marginal note
“convicted of an offence”, “the act charged as an offence” and
“commission of offence” in clause (1) of Article 20, ‘prosecuted and
punished’ in clause (2) of Article 20 and ‘accused of an offence’ and
‘compelled to be a witness against himself’ in clause (3) of Article
20 clearly suggests that Article 20 relates to the constitutional
protection given to persons who are charged with a crime before a
criminal court [see H.M. Seervai: Constitutional Law of India (3rd
Edn.), Vol. 1, p. 759]. The word “penalty” is a word of wide
significance. Sometimes it means recovery of an amount as a penal
measure even in a civil proceeding. An exaction which is not of
compensatory character is also termed as a penalty even though it is
not being recovered pursuant to an order finding the person
concerned guilty of a crime. In Article 20(1) the expression
“penalty” is used in the narrow sense as meaning a payment which
has to be made or a deprivation of liberty which has to be suffered as
a consequence of a finding that the person accused of a crime is
guilty of the charge.
xxxx xxxx xxxx
31. After giving an anxious consideration to the points urged before
us, we feel that the word ‘penalty’ used in Article 20(1) cannot be
construed as including a ‘penalty’ levied under the sales tax laws by
56
(1983) 3 SCC 529
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the departmental authorities for violation of statutory provisions. A
penalty imposed by the Sales Tax Authorities is only a civil liability,
though penal in character. It may be relevant to notice that sub-
section (2-A) of Section 9 of the Act specifically refers to certain
acts and omissions which are offences for which a criminal
prosecution would lie and the provisions relating to offences have
not been given retrospective effect by Section 9 of the Amending
Act. The argument based on Article 20(1) of the Constitution is,
therefore, rejected.”
179. Proceeding along these lines, Mr. Hossain submitted that Section
132 neither introduces a new or novel concept of misconduct nor does
NFRA seek to levy a penalty greater than the quantum of penalty
envisaged under the CA Act and which is a fine which may extend to
INR 5 lakhs for all cases pertaining to the period prior to 2018. It was
his submission that even the penalty of debarment is lesser when
compared to the specter of permanent removal from the register by the
Council as was envisioned under the CA Act. The challenge according
to Mr. Hossain based on Article 20(1) of the Constitution is thus wholly
misconceived.
180. It was further submitted that the essence of Section 132(4) of the
Companies Act is essentially a change in the regulatory mechanism
pertaining to audits and auditing standards driven by the legislative
policy of bringing a certain class of auditors engaged in the audit of
financial statements to be overseen by an expert body in public interest.
It was his contention that Section 132 now envisages those cases being
examined by an independent regulatory body in line with global
practices and thus following the trend of the self- regulatory model
which had earlier prevailed having been jettisoned the world over. Mr.
Hossain submitted that Section 132(4) thus merely represents a change
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in forum. Mr. Hossain submitted that the legislative amendments
represented by Section 132 are also in sync with the observations of the
Supreme Court and which had held that accounting firms can no longer
be left to self-regulate and had underscored the need for the creation of
an adequate oversight mechanism.
181. Mr. Hossain also referred to the following chart and with the aid
of which he sought to illustrate and lend clarity to the aforenoted
submissions. The chart which seeks to highlight the similarity between
Section 21B of the CA Act and Section 132(4)(c) is reproduced below:-
“
S. 21(B)
Chartered Accountants Act, 1949 (3)
Where the Disciplinary Committee is
of the opinion that a member is guilty
of a professional or other misconduct
mentioned in the Second Schedule or
both the First Schedule* and the Second
Schedule, it shall afford to the
member an opportunity of being heard
before making any order against him
and may thereafter take any one or more
of the following actions, namely: −
(a) reprimand the member;
(b) remove the name of the member
from the Register permanently or for
such period, as it thinks fit;
(c) impose such fine as it may think
fit, which may extend to rupees five
lakhs .
S. 132(4)(c)
Companies Act, 2013
Where professional or other
misconduct is proved , have the power
to make order for— (A) imposing
penalty of—
(I) not less than one lakh rupees, but
which may extend to five times of the
fees received, in case of individuals;
and
(II) not less than ten lakh rupees, but
which may extend to ten times of the
fees received, in case of firms;
(B) debarring the member or the firm
from—
I. being appointed as an auditor or
internal auditor or undertaking any
audit in respect of financial
statements or internal audit of the
functions and activities of any
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company or body corporate; or
II. performing any valuation as
provided under Section 247, for a
minimum period of six months or
such higher period not exceeding ten
years as may be determined by the
National Financial Reporting
Authority.]
Explanation. —For the purposes of 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).
”
182. Mr. Hossain argued that while interpreting a statutory provision,
Courts as is well-settled, are obliged to bear in mind the nature of the
remedy and the mischief which a Legislature seeks to address. Learned
counsel thus urged us to interpret Section 132(4) in a manner which
suppresses the mischief and furthers the cure. He referred to the
celebrated Heydon’s principle which came to be expounded in
57
Heydon's Case
and submitted that since the system of a peer review
had been found to be inadequate, Parliament was compelled to step in
and formulate a new regulatory mechanism which would be more
robust and responsive. The statutory procedure now embodied in
Section 132(4), according to learned counsel, was intended to overcome
the various shortcomings which beset the earlier statutory regime and to
learn from the bitter experiences of the past. Learned counsel thus
submitted that there exists no justification for the Court to strike down
Section 132(4) on grounds as suggested by the petitioners.
57
(1584) 76 ER 637
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183. Mr. Hossain then contended that a statutory audit of a company
was undoubtedly liable to be conducted in accordance with law and in
compliance with the SAs which are binding on auditors by virtue of
Section 143(9) of the Companies Act. These, according to learned
counsel, were obligations which applied to auditors in general even
prior to the introduction of Section 132(4). It was in the aforesaid light
that Mr. Hossain submitted that the creation of the NFRA does not alter
the liability of a statutory auditor. NFRA, according to Mr. Hossain, is
merely envisaged to be an authority which would monitor and enforce
compliance with existing SAs and which had themselves been
formulated in accordance with law and were binding on statutory
auditors. It was thus submitted that it would be wholly incorrect for the
petitioners to argue that a new obligation stands created. This more so
since NFRA would be obliged to examine allegations of misconduct on
the anvil of SAs which already existed and which were liable to be
adhered to by all statutory auditors in any case.
184. It was further argued that no person can claim to have a vested
right in a particular forum. This principle, Mr. Hossain submitted,
stands succinctly explained by the Supreme Court in New India
58
Insurance Co. Ltd. vs. Shanti Misra
as would be evident from the
following extracts of that judgment:-
“ 5. On the plain language of Sections 110-A and 110-F there should
be no difficulty in taking the view that the change in law was merely a
change of forum i.e. a change of adjectival or procedural law and not
of substantive law. It is a well-established proposition that such a
change of law operates retrospectively and the person has to go to the
new forum even if his cause of action or right of action accrued prior
to the change of forum. He will have a vested right of action but not a
58
( 1975) 2 SCC 840
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vested right of forum. If by express words the new forum is made
available only to causes of action arising after the creation of the
forum, then the retrospective operation of the law is taken away.
Otherwise the general rule is to make it retrospective. The expressions
“arising out of an accident” occurring in sub-section (1) and “over the
area in which the accident occurred”, mentioned in sub-section (2)
clearly show that the change of forum was meant to be operative
retrospectively irrespective of the fact as to when the accident
occurred. To that extent there was no difficulty in giving the answer in
a simple way. But the provision of limitation of 60 days contained in
sub-section (3) created an obstacle in the straight application of the
well-established principle of law. If the accident had occurred within
60 days prior to the constitution of the tribunal then the bar of
limitation provided in sub-section (3) was not an impediment. An
application to the tribunal could be said to be the only remedy. If such
an application, due to one reason or the other, could not be made
within 60 days then the tribunal had the power to condone the delay
under the proviso. But if the accident occurred more than 60 days
before the constitution of the tribunal then the bar of limitation
provided in sub-section (3) of Section 110-A on its face was attracted.
This difficulty of limitation led most of the High Courts to fall back
upon the proviso and say that such a case will be a fit one where the
tribunal would be able to condone the delay under the proviso to sub-
section (3), and led others to say that the tribunal will have no
jurisdiction to entertain such an application and the remedy of going
to the civil court in such a situation was not barred under Section 110-
F of the Act. While taking the latter view the High Court failed to
notice that primarily the law engrafted in Sections 110-A and 110-F
was a law relating to the change of forum.”
185. Yet another decision which was cited for our consideration in
this respect was that of Securities and Exchange Board of India vs.
59
Classic Credit Ltd.
and to Paras 49 and 50 of the report which are
reproduced hereinbelow:-
“ 49. We will now deal with the legality of the propositions canvassed
at the hands of learned counsel for the rival parties. In our considered
view, the legal position expounded by this Court in a large number of
judgments including New India Insurance Co. Ltd. v. Shanti
Misra [ New India Insurance Co. Ltd. v. Shanti Misra , (1975) 2 SCC
840] ; SEBI v. Ajay Agarwal [ SEBI v. Ajay Agarwal , (2010) 3 SCC
765 : (2010) 2 SCC (Cri) 491] and Ramesh Kumar Soni v. State of
59
(2018) 13 SCC 1
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M.P. [ Ramesh Kumar Soni v. State of M.P. , (2013) 14 SCC 696 :
(2014) 4 SCC (Cri) 340] , is clear and unambiguous, namely, that
procedural amendments are presumed to be retrospective in nature,
unless the amending statute expressly or impliedly provides otherwise.
And also, that generally change of “forum” of trial is procedural, and
normally following the above proposition, it is presumed to be
retrospective in nature unless the amending statute provides otherwise.
This determination emerges from the decision of this Court
in Hitendra Vishnu Thakur v. State of Maharashtra [ Hitendra Vishnu
Thakur v. State of Maharashtra , (1994) 4 SCC 602 : 1994 SCC (Cri)
1087] ; Ranbir Yadav v. State of Bihar [ Ranbir Yadav v. State of
Bihar , (1995) 4 SCC 392 : 1995 SCC (Cri) 728] and Kamlesh
Kumar v. State of Jharkhand [ Kamlesh Kumar v. State of Jharkhand ,
(2013) 15 SCC 460 : (2014) 6 SCC (Cri) 489] , as well as, a number
of further judgments noted above.
We have also no doubt, that alteration of “forum” has been
50.
considered to be procedural, and that, we have no hesitation in
accepting the contention advanced on behalf of the SEBI, that change
of “forum” being procedural, the amendment of the “forum” would
operate retrospectively, irrespective of whether the offence allegedly
committed by the accused was committed prior to the amendment.”
186. Proceeding then to the Proviso to Section 132(4) itself, it was
Mr. Hossain’s contention that a plain reading of the Proviso would
establish that the legislative intendment clearly was to debar any
authority other than the NFRA from initiating an investigation even in
respect of matters relating to professional or other misconduct
committed prior to Section 132(4) coming into force. According to
learned counsel the expression “ such matters of misconduct ” would
clearly mean misconduct which may have been committed prior to 24
October 2018, the date when Section 132(4) came into force.
According to learned counsel, the language of the proviso leaves no
room for doubt of the legislative intent being that allegations of
professional misconduct arising out of audits falling within a specified
class being examined exclusively by the NFRA. The fact that
Parliament clearly intended for the NFRA to exclusively try such cases,
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according to learned counsel, is further fortified by that provision in
unambiguous terms also interdicting pending investigations and
enquiries. The bar with respect to initiation as well as continuation of
enquiries as created by that provision would, according to Mr. Hossain,
lead one to the irrefutable conclusion of the statute intended to operate
retroactively.
187. Mr. Hossain also commended for our consideration the concept
of a continuing offense to submit that a misconduct even if committed
in the past does not get effaced by mere passage of time. According to
learned counsel, a misconduct is not governed by a statute of limitation
on the basis of which the petitioners could have legitimately urged that
a misdemeanor committed prior to 2018 cannot be enquired into.
Learned counsel referred to the following definitions of the word
“continue/continuing” as explained in the Black’s Law Dictionary: -
“1. uninterrupted: persisting <a continuing offense>.
2. Not requiring renewal; enduring <continuing stockholders >
<continuing jurisdiction>”.
188. Proceeding ahead to deal with the argument of retrospectivity,
Mr. Hossain submitted that the fundamental principles which would
govern the operation of statutes were lucidly enunciated by the
60
Supreme Court in Zile Singh vs. State of Haryana
in the following
terms: -
“ 13. It is a cardinal principle of construction that every statute is
prima facie prospective unless it is expressly or by necessary
implication made to have a retrospective operation. But the rule in
general is applicable where the object of the statute is to affect
vested rights or to impose new burdens or to impair existing
obligations. Unless there are words in the statute sufficient to show
60
(2004) 8 SCC 1
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the intention of the legislature to affect existing rights, it is deemed
to be prospective only — “ nova constitutio futuris formam imponere
debet non praeteritis ” — a new law ought to regulate what is to
follow, not the past. (See Principles of Statutory Interpretation by
Justice G.P. Singh, 9th Edn., 2004 at p. 438.) It is not necessary that
an express provision be made to make a statute retrospective and the
presumption against retrospectivity may be rebutted by necessary
implication especially in a case where the new law is made to cure
an acknowledged evil for the benefit of the community as a whole
( ibid ., p. 440).
14. The presumption against retrospective operation is not applicable
to declaratory statutes…. In determining, therefore, the nature of the
Act, regard must be had to the substance rather than to the form. If a
new Act is “to explain” an earlier Act, it would be without object
unless construed retrospectively. An explanatory Act is generally
passed to supply an obvious omission or to clear up doubts as to the
meaning of the previous Act. It is well settled that if a statute is
curative or merely declaratory of the previous law retrospective
operation is generally intended…. An amending Act may be purely
declaratory to clear a meaning of a provision of the principal Act
which was already implicit. A clarificatory amendment of this nature
will have retrospective effect ( ibid ., pp. 468-69).
15. Though retrospectivity is not to be presumed and rather there is
presumption against retrospectivity, according to Craies ( Statute
Law , 7th Edn.), it is open for the legislature to enact laws having
retrospective operation. This can be achieved by express enactment
or by necessary implication from the language employed. If it is a
necessary implication from the language employed that the
legislature intended a particular section to have a retrospective
operation, the courts will give it such an operation. In the absence of
a retrospective operation having been expressly given, the courts
may be called upon to construe the provisions and answer the
question whether the legislature had sufficiently expressed that
intention giving the statute retrospectivity. Four factors are
suggested as relevant: ( i ) general scope and purview of the statute;
( ii ) the remedy sought to be applied; ( iii ) the former state of the law;
and ( iv ) what it was the legislature contemplated. (p. 388) The rule
against retrospectivity does not extend to protect from the effect of a
repeal, a privilege which did not amount to accrued right. (p. 392)
16. Where a statute is passed for the purpose of supplying an
obvious omission in a former statute or to “explain” a former statute,
the subsequent statute has relation back to the time when the prior
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Act was passed. The rule against retrospectivity is inapplicable to
such legislations as are explanatory and declaratory in nature. A
classic illustration is the case of Attorney General v. Pougett [(1816)
2 Price 381 : 146 ER 130] (Price at p. 392). By a Customs Act of
1873 (53 Geo. 3, c. 33) a duty was imposed upon hides of 9s 4d, but
the Act omitted to state that it was to be 9s 4d per cwt., and to
remedy this omission another Customs Act (53 Geo. 3, c. 105) was
passed later in the same year. Between the passing of these two Acts
some hides were exported, and it was contended that they were not
liable to pay the duty of 9s 4d per cwt., but Thomson, C.B., in giving
judgment for the Attorney General, said: (ER p. 134)
“The duty in this instance was, in fact, imposed by the first
Act; but the gross mistake of the omission of the weight, for
which the sum expressed was to have been payable,
occasioned the amendment made by the subsequent Act: but
that had reference to the former statute as soon as it passed,
and they must be taken together as if they were one and the
same Act;” (Price at p. 392)
17. Maxwell states in his work on Interpretation of Statutes (12th
Edn.) that the rule against retrospective operation is a presumption
only, and as such it “may be overcome, not only by express words in
the Act but also by circumstances sufficiently strong to displace it”
(p. 225). If the dominant intention of the legislature can be clearly
and doubtlessly spelt out, the inhibition contained in the rule against
perpetuity becomes of doubtful applicability as the “inhibition of the
rule” is a matter of degree which would “ vary secundum materiam ”
(p. 226). Sometimes, where the sense of the statute demands it or
where there has been an obvious mistake in drafting, a court will be
prepared to substitute another word or phrase for that which actually
appears in the text of the Act (p. 231).
18. In a recent decision of this Court in National Agricultural Coop.
Marketing Federation of India Ltd. v. Union of India [(2003) 5 SCC
23] it has been held that there is no fixed formula for the expression
of legislative intent to give retrospectivity to an enactment. Every
legislation whether prospective or retrospective has to be subjected
to the question of legislative competence. The retrospectivity is
liable to be decided on a few touchstones such as: ( i ) the words used
must expressly provide or clearly imply retrospective operation; ( ii )
the retrospectivity must be reasonable and not excessive or harsh,
otherwise it runs the risk of being struck down as unconstitutional;
( iii ) where the legislation is introduced to overcome a judicial
decision, the power cannot be used to subvert the decision without
removing the statutory basis of the decision. There is no fixed
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formula for the expression of legislative intent to give retrospectivity
to an enactment. A validating clause coupled with a substantive
statutory change is only one of the methods to leave actions
unsustainable under the unamended statute, undisturbed.
Consequently, the absence of a validating clause would not by itself
affect the retrospective operation of the statutory provision, if such
retrospectivity is otherwise apparent.
19. The Constitution Bench in Shyam Sunder v. Ram Kumar [(2001)
8 SCC 24] has held: (SCC p. 49, para 39)
“Ordinarily when an enactment declares the previous law, it
requires to be given retroactive effect. The function of a
declaratory statute is to supply an omission or to explain a
previous statute and when such an Act is passed, it comes
into effect when the previous enactment was passed. The
legislative power to enact law includes the power to declare
what was the previous law and when such a declaratory Act
is passed, invariably it has been held to be retrospective.
Mere absence of use of the word ‘declaration’ in an Act
explaining what was the law before may not appear to be a
declaratory Act but if the court finds an Act as declaratory
or explanatory, it has to be construed as retrospective.” (p.
2487).
20. In Bengal Immunity Co. Ltd. v. State of Bihar [(1955) 2 SCR 603
: AIR 1955 SC 661] , Heydon case [(1584) 3 Co Rep 7a : 76 ER
637] was cited with approval. Their Lordships have said: (SCR pp.
632-33)
“It is a sound rule of construction of a statute firmly
established in England as far back as 1584 when Heydon
case [(1584) 3 Co Rep 7a : 76 ER 637] was decided that—
‘… for the sure and true interpretation of all statutes in
general (be they penal or beneficial, restrictive or enlarging
of the common law) four things are to be discerned and
considered—
1st . What was the common law before the making of the
Act.
2nd . What was the mischief and defect for which the
common law did not provide.
3rd . What remedy Parliament hath resolved and
appointed to cure the disease of the Commonwealth, and
4th . The true reason of the remedy; and then the office
of all the judges is always to make such construction as
shall suppress the mischief, and advance the remedy, and to
suppress subtle inventions and evasions for continuance of
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the mischief, and pro privato commodo , and to add force
and life to the cure and remedy, according to the true intent
of the makers of the Act, pro bono publico .’ ”
21. In Allied Motors (P) Ltd. v. CIT [(1997) 3 SCC 472] certain
unintended consequences flowed from a provision enacted by
Parliament. There was an obvious omission. In order to cure the
defect, a proviso was sought to be introduced through an
amendment. The Court held that literal construction was liable to be
avoided if it defeated the manifest object and purpose of the Act.
The rule of reasonable interpretation should apply.
“A proviso which is inserted to remedy unintended
consequences and to make the provision workable, a
proviso which supplies an obvious omission in the section
and is required to be read into the section to give the section
a reasonable interpretation, requires to be treated as
retrospective in operation so that a reasonable interpretation
can be given to the section as a whole.” (SCC pp. 479-80,
para 13)”
189. Mr. Hossain submitted that a presumption against a retrospective
applicability can only arise when a vested right is impaired. According
to learned counsel, the petitioners have clearly failed to prove or
establish that this primordial benchmark has been violated. It was Mr.
Hossain’s submission that no CA can possibly claim to have a vested
right not to be tried for a misconduct. According to learned counsel, it
would be preposterous to accept the argument of the petitioners that
they acquired a perfected right to be tried for professional misconduct
only in accordance with the procedure prescribed by the CA Act.
190. This more so since professional or other misconduct in any case
in light of Section 22 of the CA Act already stood prohibited and
statutorily declared to be illegal. It was submitted that the said statute
itself envisaged an enquiry into allegations of misconduct and the
consequential possibility of a CA being exposed to disciplinary action.
Mr. Hossain thus submitted that absent any vested right being infringed
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or impacted, the argument of retrospectivity is clearly misconceived
and untenable.
191. It would be appropriate to preface our evaluation of the challenge
to Section 132(4) on the basis of its perceived retroactive operation as
well as Article 20(1) of the Constitution by taking note of the following
two significant statements which were made by Mr. Hossain. Learned
counsel firstly stated that NFRA has taken the considered position that
it would impose no fines which exceed INR 5 lakhs in respect of any
audit conducted prior to October 2018. It was in this regard further
stated that any orders if passed by NFRA violating the aforenoted
statement would be duly recalled to the aforesaid extent. It becomes
pertinent to note that this statement assumes significance since
undisputedly the maximum penalty which the CA Act envisages is INR
5 lakhs. The statement so made thus and to an extent impacts the
challenge which was mounted to the validity of Section 132(4) on the
ground of it having introduced penalties which were more onerous and
greater than those existing under the CA Act.
192. The second without prejudice statement, and clearly one which
was of greater import and consequence, was that NFRA would not
proceed against any firms in respect of an audit that may have been
conducted prior to 20 October 2018. The aforesaid statement was made
by Mr. Hossain notwithstanding his submission that the obligations of
firms to comply with the law as well as the SAs predated the
introduction of Section 132 in the Companies Act. However, and since
that statement is duly taken on board and accepted, it obviates the Court
ruling on the challenge raised by auditing firms to Section 132(4)
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insofar as it was sought to be extended to audits completed prior to
October 2018 and the argument of it being retroactive.
193. However, the Court would still be required to deal with the
challenge to its validity insofar as individual CAs’ and pre-2018 audits
to which they were a party is concerned. The related facet of the
common challenge raised before us which too would survive for
consideration would be the validity of Section 132(4) as applicable to
audits that may be undertaken post its promulgation and as voiced by
the two categories of writ petitioners before us. Having broadly
delineated the contours of the challenge which survives, we proceed
ahead to evaluate the submissions which were advanced in the context
of the perceived retrospective operation of Section 132(4).
194. There cannot possibly be a cavil of doubt with respect to the
well-established precept that statutes are generally presumed to be
prospective in their operation. That presumption, undoubtedly,
constitutes the starting point from which a court would embark upon its
analysis. Equally well-settled is the principle of that presumption being
dispelled only if a court were to find from the language of an enactment
or a provision that the law maker intended otherwise. The intention of
the legislative body can be discerned either from the express language
in which a provision is couched or if it be not explicitly stated, where it
is implicitly evident that it was intended to apply to events and acts of
the past.
195. As Maxwell eloquently explains in his seminal work on
th
Interpretation of Statutes [12 Edition], the rule against retrospective
operation is only a presumption and as such “it may be overcome, not
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only by express words in the Act but also by circumstances sufficiently
strong to displace it.” The rule as expounded by Maxwell was quoted
with approval by our Supreme Court in Zile Singh and where it was
pertinently observed that “If the dominant intention of the legislature
can be clearly and doubtlessly spelt out, the inhibition contained in the
rule against perpetuity becomes of doubtful applicability as the
inhibition of the rule is a matter of degree……”. What needs to be
acknowledged is that the retrospective application of laws is not an
aberration but a well-established and necessary tool to correct historical
oversights, address legal vacuums, and ensure that legislative objectives
are met in their true spirit. The determination of retrospectivity is
guided by several factors, foremost among them being the intent of the
Legislature, which may be discerned from the statutory language and
the circumstances leading upto the law's enactment. Where the
language of the provision indicates a clear or even implicit intent of
being intended to have retrospective operation, Courts would give full
effect to that intent, recognizing that legislative power extends not only
to regulating future conduct but also to rectifying past anomalies. The
necessity that may have prompted the enactment is another crucial
factor. Often, laws are introduced to address pressing concerns, to
correct that which has persisted for long due to outdated legal
frameworks, or to fill gaps that have led to uncertainty or unfair
advantage. In such cases, applying the law prospectively alone would
fail to remedy the mischief the Legislature sought to address, rendering
the enactment ineffective in achieving its true objective.
196. While innumerable decisions were cited by learned counsels
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appearing for respective sides in this regard, in our considered opinion
the legal position has remained unaltered and our understanding of the
application and operation of statutes has over the centuries continued to
be guided by the precepts culled out above.
197. A challenge to a statute on the ground of it being retrospective,
however, is invariably and indelibly linked to how it impacts or
infringes the rights of an individual or entity. The issue of
retrospectivity thus becomes liable to be examined in the backdrop of
how the enactment operates and affects the rights which inhere or may
have come to be perfected prior to its promulgation. What we seek to
emphasize is that the argument of retrospectivity cannot be evaluated in
an abstract dimension. That submission has to be necessarily tested on
what we find at the crossroads and intersection where the statute meets
with the expanse of the bundle of rights which are asserted to exist.
198. The challenge to Section 132(4) and its retrospective application
too would thus have to be appreciated on the assertion of certain rights,
procedural or substantive, which could be said to have become absolute
and fixed. The petitioners had essentially contended that the creation of
penalties as well as the shifting of the adjudicatory function from the
Council to the NFRA in respect of audits conducted prior to October
2018 would lead one to necessarily come to the irresistible conclusion
that the statute impacts rights retrospectively.
199. We at the outset note that the presumption against retrospectivity
is founded on the jurisprudential principle of rights not being impaired
by statutes which may come to be promulgated after the former have
accrued or become absolute. We find a detailed explanation on the
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meaning liable to be ascribed to the word ‘vested’ in MGB Gramin
61
Bank vs. Chakrawarti Singh
and which would be of relevance:-
“ 11. The word “vested” is defined in Black's Law Dictionary (6th
Edn.) at p. 1563, as:
“Vested.—fixed; accrued; settled; absolute; complete.
Having the character or given in the rights of absolute
ownership; not contingent; not subject to be defeated by a
condition precedent. Rights are ‘vested’ when right to
enjoyment, present or prospective, has become property of
some particular person or persons as present interest; mere
expectancy of future benefits, or contingent interest in
property founded on anticipated continuance of existing
laws, does not constitute ‘vested rights’.”
12. In Webster's Comprehensive Dictionary (International Edition)
at p. 1397, “vested” is defined as law held by a tenure subject to no
contingency; complete; established by law as a permanent right;
vested interest. (Vide Bibi Sayeeda v. State of Bihar [(1996) 9 SCC
516 : AIR 1996 SC 1936] and J.S. Yadav v. State of U.P. [(2011) 6
SCC 570 : (2011) 2 SCC (L&S) 140] )
Thus, vested right is a right independent of any contingency and
13.
it cannot be taken away without consent of the person concerned.
Vested right can arise from contract, statute or by operation of law.
Unless an accrued or vested right has been derived by a party, the
policy decision/scheme could be changed. [Vide Kuldeep
Singh v. Govt. (NCT of Delhi). [(2006) 5 SCC 702 : AIR 2006 SC
2652] ]”
As is evident from the aforesaid passages, the word “vested” was
defined and explained by the Supreme Court as pertaining to rights
which could be said to have become fixed, absolute and complete.
Those rights would fall in the category of assertions and protections
which could be claimed and not being contingent or subject to be
defeated by a condition precedent. It was, however, also pertinently
observed that mere expectancy of future benefits and interests which
may be contingent, or an anticipated continuance of existing laws
61
(2014) 13 SCC 583
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would not constitute vested rights. The word “vested” was thus
explained to mean a right which is not dependent on any contingency
and which in that sense had accrued and was entitled to be derived by a
party irrespective of any subsequent change in the legal position.
Vested rights were thus explained to mean those which would remain
unimpacted by any future change in the legal position. Regard must be
had to the fact that if the right hinges on an unsecured or contingent
foundation, susceptible to modification by a change in the legislative
scheme, then such a right was never truly vested, as it lacked the
essential characteristics of being absolute, fixed, or immune to future
alteration.
200. In Howrah Municipal Corporation. vs. Ganges Rope Co.
62
Ltd
, the Supreme Court was called upon to consider the correctness
of a submission that an application for obtaining sanction to undertake
construction would be governed by the law as it existed on the date
when that application was made. Negating that contention, the Supreme
Court held that it would be the law as prevalent on the date when the
application arises for consideration which would apply. It was observed
in Howrah Municipal Corporation that a person could not claim a
“settled expectation” of an application for sanction being decided
within a particular time. It proceeded further to hold that even such a
settled expectation would not constitute a vested right. We deem it
apposite to extract para 37 of that decision hereunder:-
“ 37. The argument advanced on the basis of so-called creation
of vested right for obtaining sanction on the basis of the Building
Rules (unamended) as they were on the date of submission of the
62
(2004) 1 SCC 663
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application and the order of the High Court fixing a period for
decision of the same, is misconceived. The word “vest” is normally
used where an immediate fixed right in present or future enjoyment
in respect of a property is created. With the long usage the said word
“vest” has also acquired a meaning as “an absolute or indefeasible
right” [see K.J. Aiyer's Judicial Dictionary (A Complete Law
Lexicon) , 13th Edn.]. The context in which the respondent Company
claims a vested right for sanction and which has been accepted by
the Division Bench of the High Court, is not a right in relation to
“ownership or possession of any property” for which the expression
“vest” is generally used. What we can understand from the claim of
a “vested right” set up by the respondent Company is that on the
basis of the Building Rules, as applicable to their case on the date of
making an application for sanction and the fixed period allotted by
the Court for its consideration, it had a “legitimate” or “settled
expectation” to obtain the sanction. In our considered opinion, such
“settled expectation”, if any, did not create any vested right to obtain
sanction. True it is, that the respondent Company which can have no
control over the manner of processing of application for sanction by
the Corporation cannot be blamed for delay but during pendency of
its application for sanction, if the State Government, in exercise of
its rule-making power, amended the Building Rules and imposed
restrictions on the heights of buildings on G.T. Road and other
wards, such “settled expectation” has been rendered impossible of
fulfilment due to change in law. The claim based on the alleged
“vested right” or “settled expectation” cannot be set up against
statutory provisions which were brought into force by the State
Government by amending the Building Rules and not by the
Corporation against whom such “vested right” or “settled
expectation” is being sought to be enforced. The “vested right” or
“settled expectation” has been nullified not only by the Corporation
but also by the State by amending the Building Rules. Besides this,
such a “settled expectation” or the so-called “vested right” cannot be
countenanced against public interest and convenience which are
sought to be served by amendment of the Building Rules and the
resolution of the Corporation issued thereupon.”
201. This would constitute an appropriate juncture to view the
celebrated enunciation of the principle of retrospectivity which is found
in Halsbury’s Laws of England and which has been repeatedly quoted
with approval in various judgments handed down by the Supreme
Court. The Halsbury’s Law of England while defining the expression
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“retrospective” had stated that a statute would not be construed as
retrospective merely because a part of the requisites for its action is
drawn from a time antecedent to its passing. The aforesaid proposition
as mooted in that authoritative work was cited with approval by the
63
Supreme Court in Darshan Singh vs. Ram Pal Singh
and where the
following observations appear:-
“ 35. Mr Sachar relies on Thakur Gokulchand v. Parvin
Kumari [(1952) 1 SCC 713 : AIR 1952 SC 231 : 1952 SCR 825]
, Garikapatti Veeraya v. N. Subbiah Choudhury [1957 SCR 488 :
AIR 1957 SC 540] , Jose Da Costa v. Bascora Sadasiva Sinai
Narcornim [(1976) 2 SCC 917] , Govind Das v. ITO [(1976) 1 SCC
906 : 1976 SCC (Tax) 133] , Henshall v. Porter [(1923) 2 KBD :
193 : 39 TLR 409] , United Provinces v. Mst. Atiga Begum [1940
FCR 110 : AIR 1941 FC 16] , in support of his submission that the
Amendment Act was not made retrospective by the legislature either
expressly or by necessary implication as the Act itself expressly
provided that it shall be deemed to have come into force on January
23, 1973; and therefore there would be no justification to giving it
retrospective operation. The vested right to contest which was
created on the alienation having taken place and which had been
litigated in the court, argues Mr Sachar, could not be taken away. In
other words, the vested right to contest in appeal was not affected by
the Amendment Act. However, to appreciate this argument we have
to analyse and distinguish between the two rights involved, namely,
the right to contest and the right to appeal against lower court's
decision. Of these two rights, while the right to contest is a
customary right, the right to appeal is always a creature of statute.
The change of the forum for appeal by enactment may not affect the
right of appeal itself. In the instant case we are concerned with the
right to contest and not with the right to appeal as such. There is also
no dispute as to the propositions of law regarding vested rights being
not taken away by an enactment which is ex facie or by implication
not retrospective. But merely because an Act envisages a past act or
event in the sweep of its operation, it may not necessarily be said to
be retrospective. Retrospective, according to Black's Law
Dictionary , means looking backward; contemplating what is past;
having reference to a statute or things existing before the Act in
question. Retrospective law, according to the same dictionary,
means a law which looks backward or contemplates the past; one
63
1992 Supp (1) SCC 191
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which is made to affect acts or facts occurring, or rights occurring,
before it came into force. Every statute which takes away or impairs
vested rights acquired under existing laws, or creates a new
obligation, imposes a new duty, or attaches a new disability in
respect to transactions or considerations already past. Retroactive
statute means a statute which creates a new obligation on
transactions or considerations already past or destroys or impairs
vested rights.
36. In Halsbury's Laws of England (4th edn., Vol. 44, at paragraph
921) we find:
“921. Meaning of ‘retrospective ’.— It has been said that
‘retrospective’ is somewhat ambiguous and that a good deal
of confusion has been caused by the fact that it is used in
more senses than one. In general, however, the courts regard
as retrospective any statute which operates on cases or facts
coming into existence before its commencement in the
sense that it affects, even if for the future only, the character
or consequences of transactions previously entered into or
of other past conduct. Thus a statute is not retrospective
merely because it affects existing rights; or is it
retrospective merely because a part of the requisites for its
action is drawn from a time antecedent to its passing.”
37. We are inclined to take the view that in the instant case
legislature looked back to January 23, 1973 and not beyond to put an
end to the custom and merely because on that cut off date some
contests were brought to abrupt end would not make the Amendment
Act retrospective. In other words, it would not be retrospective
merely because a part of the requisites for its action was drawn from
a time antecedent to the Amendment Act coming into force. We are
also of the view that while providing that “no person shall contest
any alienation of immovable property whether ancestral or non-
ancestral or any appointment of an heir to such property”, without
preserving any right to contest such alienations or appointments as
were made after the coming into force of the Principal Act and
before the coming into force of the Amendment Act, the intention of
the legislature was to cut off even the vested right; and that it was so
by implication as well. There is no dispute as to the proposition that
retrospective effect is not to be given to an Act unless, the legislature
made it so by express words or necessary implication. But in the
instant case it appears that this was the intention of the legislature.
Similarly courts will construe a provision as conferring power to act
retroactively when clear words are used. We find both the intention
and language of the Amendment Act clear in these respects.
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38. Craies on Statute Law (7th edn., page 389) has stated as under:
“It is obviously competent for the legislature, in its wisdom,
to make the provisions of an Act of Parliament
retrospective, and no one denies the competency of the
legislature to pass retrospective statutes if they think fit, and
many times they have done so. Before giving such a
construction to an Act of Parliament one would require that
it should either appear very clearly in the terms of the Act or
arise by necessary and distinct interpretation, and perhaps
no rule of construction is more firmly established than this
— that a retrospective operation is not to be given to a
statute so as to impair an existing right or obligation
otherwise than as regards matter of procedure, unless that
effect cannot be avoided without doing violence to the
language of the enactment.”
We agree with the above statement of law. However, applying the
Amending Act of 1973 to alienations prior to January 23, 1973 does
not necessarily mean its retrospective operation.”
202. As is apparent from the aforesaid discussion, while delving on
the subject of retrospectivity of a legislation the Supreme Court had
pertinently observed that while it is true that an enactment would not be
construed as having retrospective operation unless such be the position
which could be countenanced either on account of an express provision
or by implication, merely because the statute takes into consideration a
past act or event, that would not necessarily lead one to conclude that it
be said to operates retrospectively. The Supreme Court in Darshan
Singh, went even further to observe that a statute would be deemed to
be retroactive only if it created a new obligation on transactions or
considerations already past or where its application would result in the
destruction or impairment of vested rights.
203. The rules so enunciated also find resonance in the following
passages of the judgment of the Supreme Court in Securities and
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64
Exchange Board of India vs. Rajkumar Nagpal and Ors.
:-
“ 98. Mr N. Venkataraman, learned Senior Counsel and Additional
Solicitor General has argued that the SEBI Circular is retroactive in
nature as it does not take away or impair any vested rights. It
operates in the future, based on events that arose prior to its
issuance. Mr Darius Khambata, learned Senior Counsel appearing
for RCFL argued that the effect of applying the SEBI Circular to the
present case will render it retrospective and not retroactive.
According to him, Clauses 22 and 23 of the Fifth Schedule to the
Debenture Trust Deed(s) vested debenture-holders with the right to
authorise debenture trustees “to sanction any compromise or
arrangement proposed to be made between the company and the
beneficial owner(s)/debenture-holder(s)”. This sanction could be
authorised by a majority of “not less than three-fourths of the
persons voting … or if a poll is demanded … not less than three-
fourths in value of the votes cast on such poll”. The SEBI Circular, it
has been urged, changed the nature of the special majority required
to sanction a compromise by introducing the requirement of a
majority of 60% of ISIN level votes.
99. We are of the opinion that the SEBI Circular has retroactive
application. In Principles of Statutory Interpretation by Justice G.P.
Singh (14th Edn., 2016 at p. 583), it is stated that:
“The rule against retrospective construction is not
applicable to a statute merely because “a part of the
requisites for its action is drawn from a time antecedent to
its passing ”. If that were not so, every statute will be
presumed to apply only to persons born and things which
come into existence after its operation and the rule may well
result in virtual nullification of most of the statutes.”
(emphasis supplied)
100. In Vineeta Sharma v. Rakesh Sharma [ Vineeta
Sharma v. Rakesh Sharma , (2020) 9 SCC 1 : (2021) 1 SCC (Civ)
119] this Court described the nature of prospective, retrospective,
and retroactive laws : (SCC p. 53, para 61)
“ 61 . The prospective statute operates from the date of its
enactment conferring new rights. The retrospective statute
operates backwards and takes away or impairs vested rights
acquired under existing laws. A retroactive statute is the one
that does not operate retrospectively. It operates in futuro.
64
(2023) 8 SCC 274
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However, its operation is based upon the character or status
that arose earlier. Characteristic or event which happened in
the past or requisites which had been drawn from
antecedent events.”
101. The terms “retrospective” and “retroactive” are often used
interchangeably. However, their meanings are distinct. This Court
succinctly appreciated the difference between these concepts in State
Bank's Staff Union (Madras Circle) v. Union of India [ State Bank's
Staff Union (Madras Circle) v. Union of India , (2005) 7 SCC 584 :
2005 SCC (L&S) 994] :
“ “Retroactivity” is a term often used by lawyers but rarely
defined. On analysis it soon becomes apparent, moreover,
that it is used to cover at least two distinct concepts. The
first, which may be called “true retroactivity”, consists in
the application of a new rule of law to an act or transaction
which was completed before the rule was promulgated. The
second concept, which will be referred to as “quasi-
retroactivity”, occurs when a new rule of law is applied to
an act or transaction in the process of completion….The
foundation of these concepts is the distinction between
completed and pending transactions….” [T.C. Hartley, The
Foundations of European Community Law 129 (1981).]
102. Many decisions of this Court define “retroactivity” to mean
laws which destroy or impair vested rights. In real terms, this is the
definition of “retrospectivity” or “true retroactivity”. “Quasi-
retroactivity” or simply “retroactivity” on the other hand is a law
which is applicable to an act or transaction that is still underway.
Such an act or transaction has not been completed and is in the
process of completion. Retroactive laws also apply where the status
or character of a thing or situation arose prior to the passage of the
law. Merely because a law operates on certain circumstances which
are antecedent to its passing does not mean that it is retrospective.”
204. Hereto, the Supreme Court apart from revisiting the succinct
exposition of the legal principle as propounded in Halsbury’s Laws of
England, it, and in addition, quoted with approval the view penned by
the celebrated author G.P. Singh in ‘Principles of Statutory
Interpretation’ and who had opined that if a statute were to be
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acknowledged as being retrospective merely because it were found to
draw from actions taken or completed prior to its passing, every statute
would necessarily have to be presumed to apply only to persons born
and things which had come into existence after its promulgation. The
essential characteristics of a retroactive statute were further explained
with the Supreme Court holding that although such an enactment would
operate in futuro , its operation itself could be based upon a character or
status that had arisen earlier.
205. Tested on the aforesaid principles, we find ourselves unable to
sustain the argument that Section 132 is liable to be struck down on the
ground that it operates retrospectively and impacts rights which may
have been perfected or completed. It becomes relevant to note that the
Explanation to Section 132(4) in unambiguous and explicit terms
provides that the expression “ professional or other misconduct ” would
have the same meaning as assigned to that phrase by Section 22 of the
CA Act. Section 132 therefore, does not create a new species of
misconduct nor does it create a liability which was otherwise not
contemplated under a pre-existing legislation. “ Professional or other
misconduc t” already stood defined by Section 22 of the CA Act and
thus all actions of CAs and auditors were liable to be tested on the basis
thereof. It would thus be wholly incorrect to contend that Section 132
creates a new liability with respect to a misconduct or misdemeanor
committed prior to October 2018.
206. The principal issue which weighs upon us and compels us to hold
that the argument of retrospectivity is unmerited is the facet of
professional misconduct having remained unaltered and only the
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manner and ambit of the inquiry having been amended for a particular
class of audits. As noted hereinabove, the argument of retrospectivity is
liable to be rejected also because it does not introduce new categories
of misconduct or liabilities. Instead, it relies on the pre-existing
definition of "professional or other misconduct" under Section 22 of the
CA Act. Since the legal characterization of misconduct remains
unchanged, the only discernible difference is the manner and scope of
the inquiry under Section 132.
207. Suffice it to note that no auditor can possibly claim or assert a
vested right having come to be created in respect of professional
misconduct that may have been committed prior to Section 132 coming
into force. We find ourselves unable to comprehend any right, leave
alone a vested right, that could have been claimed to have come into
existence in respect of professional conduct which would have fallen
within the scope of Section 22 of the CA Act prior to the introduction
of Section 132. Vested rights, as was observed in the preceding parts of
this decision, would be those which had come to accrue, settle or had
become absolute.
208. Vested rights are those which come to be perfected and would
remain unimpacted by any contingency. Surely an auditor cannot
possibly assert that it had acquired a settled expectation to not be tried
in respect of professional or other misconduct merely because that act
had come to be completed prior to Section 132 coming into force.
Acceptance of the contention as broadly canvassed on behalf of the writ
petitioners would essentially mean that professional or other
misconduct if committed prior to October 2018 would stand insulated
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and not be liable to be tried or inquired into under Section 132. We find
ourselves unable to countenance that submission since a CA or an
auditor cannot justifiably in law argue or assert that it is not liable to be
tried for an act of misconduct. We do so observe conscious of the
separate contention of the petitioners pertaining to the procedural
safeguards which Section 132 allegedly does away with and which is an
aspect that we propose to deal with in a subsequent segment of this
decision.
209. We are thus of the firm opinion, that no right, let alone a vested
right, accrued in favour of the writ petitioners and which could be said
to be entitled to be insulated from the reach of Section 132(4). As was
pertinently observed by the Supreme Court, a statute is not liable to be
viewed as having retroactive operation merely because it draws upon an
event or act which preceded its promulgation. Acts of misconduct
committed prior to October 2018 were neither accorded nor conferred a
shield of immunity. Section 132 does not create a new disqualification
or create a novel set or category of misdemeanors to constitute
professional or other misconduct. The conduct of an audit, an
individual or a firm remains liable to be enquired into based on the
obligations and duties which held the field even prior to the
introduction of Section 132. The conduct of an audit would continue to
be examined and evaluated based on those legal obligations and set of
rules which existed earlier.
210. The scrutiny, test and rigor of conduct in the rendering of
services as a professional or auditor is a well-understood, rooted and an
accepted reality. To raise objections to the new and evolved rigors
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under Section 132 on the ground that it exposes them to an
unprecedented level of scrutiny and that they were previously protected
from such rigors would be to incorrectly assume the existence of an
immunity prior to Section 132. Therefore, any contention that Section
132 unfairly introduces a novel and retrospective burden on auditors
fails to acknowledge that the foundational principles of professional
accountability have always remained intact. The only change is in the
manner and extent of enforcement and not in the fundamental
obligation of auditors to uphold professional and ethical standards.
211. Regard must also be had to the fact that the CA Act incorporated
no provision for a firm being held liable for an audit that may have
been conducted. The only contingency in which a firm could have been
penalised were those envisaged in Sections 21A and 21B and which in
turn stood confined to repeat offenses committed by the partner or
member. Thus, even though the firm may have been appointed as an
auditor, it was the individual partners who alone could have been
proceeded against and punished. We have while dealing with the
argument of vicarious liability already held that a firm cannot in law
disavow or disassociate itself from the actions of its partners and
members. They after all act in discharge of the principal obligation
which stands placed upon the firm to undertake the audit. This was a
serious lacuna and shortcoming in the CA Act.
212. Parliament as well as the expert groups which were formed had
after undertaking an exhaustive review of global practices and norms
ultimately come to the firm conclusion that peer review and self-
corrective or in-house models had neither been found to be effective
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nor efficacious. Section 132, viewed in that light, therefore borrows,
learns and seeks to build upon regulatory regimes prevalent in other
parts of the world and thus sync our regulatory practices with global
norms. With the spread of international commerce and upon India
becoming part of the globalized world order, Parliament appears to
have acted in acknowledgement of the imperative need to review the
regulatory scheme relating to audits as prevalent in different
jurisdictions.
213. Parliament appears to have borne in consideration the indubitable
necessity of financial statements being compliant with standards and
best practices accepted as the benchmark in different jurisdictions. The
system of audit and review in India had to necessarily keep abreast with
the winds of change. The amendments embodied in Section 132 are
thus a reflection of this change in policy and in that sense clearly
remedial. We consequently find ourselves unable to accept the
submissions of the writ petitioners addressed on this score.
214. On a consideration of the legislative history preceding the
introduction of Section 132 clearly suggests a pre-existing regulatory
deficiency or gap was sought to be addressed through the introduction
of Section 132 aligning with the broader objective of strengthening
oversight mechanisms and enhancing the quality of professional
services rendered by audit firms. This measure was implemented not to
create new liabilities but to bridge an existing gap in enforcement,
ensuring that standards of professional conduct and accountability
evolve in tandem with global best practices.
215. The enactment of Section 132 thus represents a progressive
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regulatory shift, aimed at reinforcing compliance, raising the bar for
audit quality, and ensuring that no aspect of professional misconduct or
deficiency in service remains unchecked or unsupervised. By instituting
a more structured and stringent framework, Section 132 ensures that
audit firms and professionals adhere to internationally recognized
standards, thereby fostering greater transparency, accountability, and
confidence in financial reporting.
216. This regulatory evolution does not operate retrospectively in a
punitive sense but rather brings India’s auditing and financial oversight
framework in line with global standards, ensuring that all professional
conduct meets the highest levels of scrutiny and quality assurance. The
underlying objective is to create a more robust and reliable regulatory
ecosystem, where professional standards are continuously refined to
prevent any compromise in audit quality or integrity
217. Of equal import is the Proviso to Section 132 (4) (a) and which
prohibits any other institute or body to initiate or continue an
investigation once the same has been taken over by the NFRA. The
Proviso thus clearly seeks to operate both in respect of proceedings
which may be either pending or under contemplation. In our considered
opinion, the provision is a clear essay of the intent of Parliament to vest
exclusive authority in the NFRA to investigate allegations of
misconduct and to bring even pending proceedings within the scope of
its investigation.
218. Regard may additionally be had to the fact that the power which
is conferred upon the NFRA is available to be exercised only in respect
of a particular class of bodies corporate or persons. Those are bodies
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which are specified in Rule 3 of the NFRA Rules. The statute thus
insofar as entities falling within the ambit of Rule 3 are concerned
clearly removes such cases from the remit of any other council or body
which could have under a pre-existing law investigated or initiated
disciplinary action. One also cannot possibly ignore the non obstante
clause which introduces sub-section (4) into the statute book and by
virtue of which its provisions are ordained to apply notwithstanding any
other law which may have been in force.
219. There is thus ample clarity with respect to the legislative intent
which informs Section 132(4) and the NFRA having been conferred
with an overriding power to initiate and take over enquiries and
investigations. It is in this respect that the decision of the Supreme
Court in New India Assurance assumes importance and which was an
authority cited by Mr. Hossain in aid of his submission that Section
132(4) amounted to a mere change of forum. We find that Section
132(4) is fundamentally intended to confer an overarching authority
upon the NFRA to investigate and enquire into matters relating to a
particular class of bodies corporate and persons. Cases which are thus
taken over by the NFRA would then be liable to be investigated by it
exclusively. Such category of cases shall be liable to be tried only by
that statutory authority.
220. However, and as was observed earlier, NFRA does not assume
authority for the purposes of enquiring into a newly created specie of
misconduct. Misconduct continues to be an act as defined by Section 22
of the CA Act. It is only the enquiry which would now be undertaken
by the NFRA and which represents the new forum for the aforesaid
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purpose. In New India Assurance the Supreme Court had observed that
amendments of procedure which may compel one to institute an action
before a newly minted forum would not be unconstitutional. Their
Lordships had pertinently observed that what vests in an individual is
“a right of action but not a vested right of forum” . Of course, whether
the procedure prescribed under the amended regime is fair, reasonable
and does not cause prejudice is a separate issue altogether and the
challenge mounted on that score by the writ petitioners is presently kept
aside and shall be dealt with in the latter parts of this judgment.
221. However, the aforesaid discussion is liable to be appreciated
subject to the following caveat. Our understanding of the imperatives
underlying the introduction of Section 132(4) and which stands
elucidated in the immediately preceding paragraphs was in the context
of the broad challenge to the validity of that section which was
addressed before us. This we state since NFRA has taken a principled
stand that it does not propose to subject any firm or LLP to an action
referrable to Section 132(4) for an audit undertaken prior to October
2018. Our observations rendered hereinabove are thus liable to be
appreciated solely from the perspective of the foundational validity of
that provision and which could extend to firms and LLPs’ for audits
undertaken after the date when the section came into being.
222. That then takes us to the argument based on Article 20(1) of the
Constitution and in terms of which it was sought to be contended that
Section 132(4) is an ex post facto law and creates a punishment for an
act or omission which had occurred prior to its enforcement.
Controverting the submissions that were advanced by the petitioners,
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Mr. Hossain had cited for our consideration the decision of the
Supreme Court in Shiv Dutt . The decision assumes significance in view
of how the Supreme Court construed offences and punishment in the
context of Article 20. In Shiv Dutt it was held that a penalty imposed
under a Sales Tax legislation is only a civil liability albeit having the
attributes of being penal. However, the Supreme Court held that such
penalties would not fall within the ken of Article 20(1) and which
would have to be narrowly interpreted as relating to a payment made in
the context of deprivation of liberty or as a consequence of a finding of
guilt coming to be returned against a person accused of a crime.
223. The principle that a civil liability would not fall within the
meaning of the word offense as it appears in Article 20(1) of the
Constitution came to be reiterated by a Constitution Bench of the
Supreme Court in Hathising Manufacturing Co. Ltd. vs. Union of
65
India
, with Shah J. observing as under:-
27. For reasons already set out, payment of compensation and wages in
lieu of notice under the impugned section are not made conditions
precedent to effective termination of employment. The section only creates
a right in the employees : it does not enjoin the employers to do anything
before closure. Section 31(2) of the Act which imposes penal liability for
contravention of the provisions of the Act can therefore have no
application to failure to make payment of compensation and wages for the
period of notice under Section 25-FFF(1). The amending Act was, it is
true, passed in June 1957, and liability to pay compensation arises in
respect of all undertakings closed on or after November 28, 1956. But, if
liability to pay compensation is not a condition precedent to closure, by
failing to discharge the liability to pay compensation and wages in lieu of
notice, the employer does not contravene Section 25-FFF(1). A statute
may prohibit or command an act and in either case, disobedience thereof
will amount to contravention of the statute. If the statute fixes criminal
liability for contravention of the prohibition or the command which is
made applicable to transactions which have taken place before the date of
65
AIR 1960 SC 923
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its enactment the protection of Article 20(1) may be attracted. But Section
25-FFF(1) imposes neither a prohibition nor a command. Under Section
25-F, there is a distinct prohibition against an employer against retrenching
employees without fulfilling certain conditions. Similar prohibitions are
found in Sections 22 and 23 of the Act. If this prohibition is infringed,
evidently, criminal liability may arise. But there being no prohibition
against closure of business without payment of compensation, Section
31(2) does not apply. By Section 33( c ) liability to pay compensation may
be enforced by coercive process, but that again does not amount to
infringement of Article 20(1) of the Constitution. Undoubtedly for failure
to discharge liability to pay compensation, a person may be imprisoned,
under the statute providing for recovery of the amount e.g., the Bombay
Land Revenue Code, but failure to discharge a civil liability is not, unless
the statute expressly so provides, an offence. The protection of Article
20(1) avails only against punishment for an act which is treated as an
offence, which when done was not an offence.”
224. This position came to be reaffirmed by the Supreme Court in
66
Securities and Exchange Board of India vs. Ajay Agarwal and
which again held that a penalty imposed in the context of adjudicatory
proceedings would not fall within the ambit of Article 20(1) of the
Constitution. While reiterating the legal position which had been
enunciated in Rao Shiv Bahadur Singh vs. State of Vindhya
67
Pradesh
, the Supreme Court held that even if penalty had come to be
imposed in the context of adjudicatory proceedings, Article 20(1)
would have no application since the person foisted with the penalty
cannot be called an accused. We deem it apposite to extract the
following paragraphs from the decision in Ajay Agarwal :
“ 24. The right of a person of not being convicted of any offence
except for violation of a law in force at the time of the commission
of the act charged as an offence and not to be subjected to a penalty
greater than that which might have been inflicted under the law in
force at the time of the commission of the offence, is a fundamental
right guaranteed under our Constitution only in a case where a
66
(2010) 3 SCC 765
67
(1953) 2 SCC 111
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person is charged of having committed an “offence” and is subjected
to a “penalty”.
xxxx xxxx xxxx
26. The word “offence” under Article 20, sub-clause (1) of the
Constitution has not been defined under the Constitution. But Article
367 of the Constitution states that unless the context otherwise
requires, the General Clauses Act, 1897 shall apply for the
interpretation of the Constitution as it does for the interpretation of
an Act.
27. If we look at the definition of “offence” under the General
Clauses Act, 1897 it shall mean any act or an omission made
punishable by any law for the time being in force. Therefore, the
order of restrain for a specified period cannot be equated with
punishment for an offence as has been defined under the General
Clauses Act.
28. Under the Criminal Procedure Code, “offence” has been defined
under Section 2( n ) as follows:
“2. ( n ) ‘offence’ means any act or omission made
punishable by any law for the time being in force and
includes any act in respect of which a complaint may be
made under Section 20 of the Cattle-Trespass Act, 1871 (1
of 1871);”
On a comparison of the aforesaid two definitions we find that
29.
there are common links between the two. An offence would always
mean an act of omission or commission which would be punishable
by any law for the time being in force.
30. Article 20(1) was interpreted by the Court in Rao Shiv Bahadur
Singh v. State of Vindhya Pradesh [(1953) 2 SCC 111 : AIR 1953
SC 394 : 1953 Cri LJ 1480] . Jagannadha Das, J. speaking for the
Constitution Bench, on a comparison of similar provisions in
English law and the American Constitution, opined that the language
used in Article 20 is in much wider terms. This Court held that: (AIR
p. 398, para 8)
“ 8 . … what is prohibited is the conviction of a person or his
subjection to a penalty under ‘ex post facto’ laws. The
prohibition under the article is not confined to the passing
or the validity of the law, but extends to the conviction or
the sentence and is based on its character as an ‘ex post
facto’ law.”
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The ratio of this judgment has again been affirmed in State of
W.B. v. S.K. Ghosh [AIR 1963 SC 255 : (1963) 1 Cri LJ 252] ,
wherein another Constitution Bench of this Court speaking through
Wanchoo, J., as His Lordship then was, held that a forfeiture by a
District Judge under Section 13(3) of the Criminal Laws
Amendment Ordinance of 1944 cannot be equated to a forfeiture
under Section 53 IPC inasmuch as forfeiture under Section 13(3) of
the Ordinance involved embezzlement of government money or
property and the same is not a punishment or penalty within the
meaning of Article 20(1) of the Constitution (see paras 14 and 15 of
the judgment).
31. Even if penalty is imposed after an adjudicatory proceeding,
persons on whom such penalty is imposed cannot be called an
accused. It has been held that proceedings under Section 23(1-A) of
the Foreign Exchange Regulation Act, 1947 are adjudicatory in
character and not criminal proceedings [see Director of
Enforcement v. MCTM Corpn. (P) Ltd. [(1996) 2 SCC 471 : 1996
SCC (Cri) 344] ]. Persons who are subjected to such penalties are
also not entitled to the protection under Article 20(1) of the
Constitution.
32. Following the aforesaid ratio, this Court cannot hold that
protection under Article 20(1) of the Constitution in respect of ex
post facto laws is available to the respondent in this case.
If we look at the legislative intent for enacting the said Act, it
33.
transpires that the same was enacted to achieve the twin purposes of
promoting orderly and healthy growth of securities market and for
protecting the interest of the investors. The requirement of such an
enactment was felt in view of substantial growth in the capital
market by increasing the participation of the investors. In fact such
enactment was necessary in order to ensure the confidence of the
investors in the capital market by giving them some protection.
34. The said Act is pre-eminently a social welfare legislation seeking
to protect the interests of common men who are small investors. It is
a well-known canon of construction that when the court is called
upon to interpret provisions of a social welfare legislation the
paramount duty of the court is to adopt such an interpretation as to
further the purposes of law and if possible eschew the one which
frustrates it. Keeping this principle in mind if we analyse some of
the provisions of the Act it appears that the Board has been
established under Section 3 as a body corporate and the powers and
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functions of the Board have been clearly stated in Chapter IV and
under Section 11 of the said Act.”
68
225. In
Yogendra Kumar Jaiswal vs. State of Bihar
, the Supreme
Court was faced with a similar challenge contained in a statute
promulgated by the Legislature of the State of Orissa and which had
contemplated confiscation of properties. Following the line of
precedents rendered in the context of Article 20(1), the Supreme Court
held that confiscation was clearly not a punishment which would attract
Article 20(1). We extract the following passages from that decision
hereinbelow:
“147. The next facet of the said submission pertains to retrospective
applicability. The submission has been put forth on the ground that
by transfer of cases to the Special Courts under the Orissa Act in
respect of the accused persons who are arrayed as accused under the
1988 Act, have been compelled to face harsher punishment which is
constitutionally not permissible. It is contended that there was no
interim confiscation under the 1988 Act but under the Orissa Act
they have to face confiscation. We have already opined that
confiscation is not a punishment and, therefore, Article 20(1) is not
attracted. Thus, the real grievance pertains to going through the
process of confiscation and suffering the same after the ultimate
adjudication of the said proceeding which is subject to appeal. In this
context we are required to see the earlier provision. The 1988 Act
provides for applicability of the Criminal Law (Amendment)
Ordinance, 1944. Section 2 refers to “interpretation” and in sub-
section (1) it is stipulated that “schedule offence” in the Ordinance
means an offence specified in the Schedule to the Ordinance;
Section 3 deals with the application for attachment of property;
Section 4 provides for ad interim attachment; Section 5 deals with
investigation of objections to attachment; Section 6 provides for
attachment of property of mala fide transferees; Section 7 stipulates
how execution of orders of attachment shall take place; Section 8
provides for security in lieu of attachment and Section 9 deals with
administration of attached property. Section 10 deals with duration
of attachment and Section 11 provides for appeals. Section 13 deals
with disposal of attached property upon termination of criminal
proceedings. Section 13(3) reads as follows:
68
(2016) 3 SCC 183
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“13. (3) Where the final judgment or order of the criminal
courts is one of conviction, the District Judge shall order
that from the property of the convicted person attached
under this Ordinance or out of the security given in lieu of
such attachment, there shall be forfeited to the Government
such amount or value as is found in the final judgment or
order of the criminal courts in pursuance of Section 12 to
have been procured by the convicted person by means of the
offence, together with the costs of attachment as determined
by the District Judge and where the final judgment or order
of the criminal courts has imposed or upheld a sentence of
fine on the said person (whether alone or in conjunction
with any other punishment), the District Judge may order,
without prejudice to any other mode of recovery, that the
said fine shall be recovered from the residue of the said
attached property or of the security given in lieu of
attachment.”
148. The learned counsel for the appellants would submit that under
the 1988 Act the accused were liable to face attachment during trial
and forfeiture after conviction but by virtue of the Orissa Act they
are compelled to face confiscation as a consequence of which they
are deprived of the possession and the property goes to the State
Government. The learned counsel for the State would submit that the
forfeiture is provided after the conviction as the property has to be
forfeited and embezzled amount requires to be realised but it does
not debar the legislature to provide confiscation of property as an
interim measure by providing an adequate adjudicatory process. It is
also submitted that the offence under Section 13(1)( e ) has its gravity
and, therefore, the stringent interim measure is the requisite.
Alternatively, it is argued that when forfeiture was prescribed, and
attachment of property was provided as an interim measure, different
arrangement, may be a stringent one, can always be provided by the
legislature.
149. We have already held that confiscation is not a punishment and
hence, Article 20(1) is not violated. The learned counsel for the State
would lay stress on the decision in State of A.P. v. Gandhi [ State of
A.P. v. Gandhi , (2013) 5 SCC 111 : (2013) 2 SCC (Cri) 884] . In
that case, the issue that arose for consideration was : when the
disciplinary proceeding was initiated one type of punishment was
imposable and when the punishment was imposed due to
amendment of rule, a different punishment, which was a greater one,
was imposed. The High Court opined that the punishment imposed
under the amended rule amounted to imposition of two major
penalties which was not there in the old rule. Dealing with the issue
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the Court referred to the rule that dealt with major penalties and the
rule-making power. Reference was made to the decision in Pyare
Lal Sharma v. J&K Industries Ltd. [ Pyare Lal Sharma v. J&K
Industries Ltd. , (1989) 3 SCC 448 : 1989 SCC (L&S) 484] wherein
it has been stated that no one can be penalised on the ground of a
conduct which was not penal on the date it was committed.
Thereafter, the two-Judge Bench referred to the authority in K.
Satwant Singh v. State of Punjab [ K. Satwant Singh v. State of
Punjab , AIR 1960 SC 266 : 1960 Cri LJ 410] wherein it has been
held thus : ( Gandhi case [ State of A.P. v. Gandhi , (2013) 5 SCC 111
: (2013) 2 SCC (Cri) 884] , SCC pp. 133-34, para 46)
“ 46 . … ‘ 28 . … In the present case a sentence of
imprisonment was, in fact, imposed and the total of fines
imposed, whether described as ‘ordinary’ or ‘compulsory’,
was not less than the amount of money procured by the
appellant by means of his offence. Under Section 420 of the
Penal Code an unlimited amount of fine could be imposed.
Article 20(1) of the Constitution is in two parts. The first
part prohibits a conviction of any person for any offence
except for violation of law in force at the time of the
commission of the act charged as an offence. The latter part
of the article prohibited the imposing of a penalty greater
than that which might have been inflicted under the law in
force at the time of the commission of the offence. The
offence with which the appellant had been charged was
cheating punishable under Section 420 of the Penal Code
which was certainly a law in force at the time of the
commission of the offence. The sentence of imprisonment
which was imposed upon the appellant was certainly not
greater than that permitted by Section 420. The sentence of
fine also was not greater than that which might have been
inflicted under the law which had been in force at the time
of the commission of the offence, as a fine unlimited in
extent could be imposed under the section.’” ( K. Satwant
Singh case [ K. Satwant Singh v. State of Punjab , AIR 1960
SC 266 : 1960 Cri LJ 410] , AIR p. 275, para 28)
150. Thereafter, the Court referred to Maya Rani Punj v. CIT [ Maya
Rani Punj v. CIT , (1986) 1 SCC 445 : 1986 SCC (Tax) 220] , K.
Satwant Singh [ K. Satwant Singh v. State of Punjab , AIR 1960 SC
266 : 1960 Cri LJ 410] and Tiwari Kanhaiyalal v. CIT [ Tiwari
Kanhaiyalal v. CIT , (1975) 4 SCC 101 : 1975 SCC (Cri) 312 : 1975
SCC (Tax) 214] and eventually held : ( Gandhi case [ State of
A.P. v. Gandhi , (2013) 5 SCC 111 : (2013) 2 SCC (Cri) 884] , SCC
p. 135, para 51)
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“ 51 . … The order of compulsory retirement is a lesser
punishment than dismissal or removal as the pension of a
compulsorily retired employee, if eligible to get pension
under the Pension Rules, is not affected. Rule 9( vii ) was
only dealing with reduction or reversion but issuance of any
other direction was not a part of it. It has come by way of
amendment. The same being a lesser punishment than the
maximum, in our considered opinion, is imposable and the
disciplinary authority has not committed any error by
imposing the said punishment, regard being had to the
nature of charges. It can be looked from another angle. The
rule-making authority has split Rule 9( vii ) into two parts—
one is harsher than the other, but, both are less severe than
the other punishments, namely, compulsory retirement,
removal from service or dismissal. The reason behind it, as
we perceive, is not to let off one with simple reduction but
to give a direction about the condition of pay on restoration
and also not to impose a harsher punishment which may not
be proportionate. In our view, the same really does not
affect any vested or accrued right. It also does not violate
any constitutional protection.”
151. We are absolutely conscious that the said judgment was
delivered in a different context. What is prohibited under Article
20(1) is imposition of greater punishment that might have been
imposed and prohibition of a conviction of any person for violation
of law at the time of commission of the act. We repeat at the cost of
repetition that confiscation being not a punishment does not come in
either of the categories. Thus viewed, the property of an accused
facing trial under the 1988 Act could be attached and there can be
administration by third party of the said property and eventual
forfeiture after conviction. The term “attachment” has been
understood by this Court in Kerala State Financial Enterprises
Ltd. v. Official Liquidator [ Kerala State Financial Enterprises
Ltd. v. Official Liquidator , (2006) 10 SCC 709] in the following
manner : (SCC p. 713, para 11)
“ 11 . The word ‘attachment’ would only mean ‘taking into
the custody of the law the person or property of one already
before the court, or of one whom it is sought to bring before
it’. It is used for two purposes : ( i ) to compel the appearance
of a defendant; and ( ii ) to seize and hold his property for the
payment of the debt. It may also mean prohibition of
transfer, conversion, disposition or movement of property
by an order issued by the court.”
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152. The legislature has thought it proper to change the nature and
character of the interim measure. The property obtained by ill-gotten
gains, if prima facie found to be such by the authorised officer, is to
be confiscated. An accused has no vested right as regards the interim
measure. He is not protected by any constitutional right to advance
the plea that he cannot be made liable to face confiscation
proceedings of the property which has been accumulated by illegal
means. That being the litmus test, the filament of reasoning has to
rest in favour of confiscation and not against it. Therefore, we are of
the considered view that the provision does not violate any
constitutional assurance.”
226. The precedents thus rendered in the context of Article 20(1)
clearly appear to exclude civil liabilities or penalties that may come to
be imposed from the ambit of that constitutional prohibition. The scope
of Article 20(1) has thus been consistently explained to be confined to
crimes and punishments as generally understood. In any event, an act of
professional misconduct was liable to be penalised and punishment
meted out even earlier and had existed as such decades prior to the
insertion of Section 132 in the Companies Act. Section 132, as noticed
hereinabove, merely adopts the meaning assigned to misconduct by the
CA Act for the purposes of proceedings that may be initiated
thereunder. The argument based on Article 20(1) is thus liable to be
rejected on this score alone.
227. We thus come to the conclusion that the present case does not
fall within the ambit of Article 20(1) as it neither involves the creation
of a new offence nor the imposition of a criminal penalty with
retrospective effect. The disciplinary consequences for professional
misconduct had always existed under the CA Act and Section 132
merely reinforces and formalizes the enforcement framework without
altering the substantive nature of misconduct. Since Article 20(1)
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applies exclusively to criminal offences and punishments, and the
present case pertains to civil and regulatory disciplinary proceedings,
its invocation is clearly misconceived. Moreover, professional
misconduct was always subject to scrutiny and Section 132 does not
introduce an unprecedented liability but only refines the mechanism for
inquiry and enforcement. Thus, the challenge based on Article 20(1) is
without merit.
228. While it is true that the monetary penalties that are imposed by
Section 132(4) could exceed those which were prescribed under the CA
Act, the challenge so raised in any case remains of little significance in
light of the statement made by Mr. Hossain and who had submitted that
no monetary penalties exceeding INR 5 Lakhs would be imposed in
respect of any audit conducted prior to 2018.
229. Regard must also be had to the fact that the debarment which
may come to be imposed upon a member or the firm could run for a
minimum period of six months or such higher period not exceeding ten
years as may be determined by the NFRA. This may be contrasted with
the position which prevails under the CA Act and contemplates the
name of a CA or an auditor being removed permanently from the
register of members. The removal from the register thus had the
potential of depriving a CA from practicing the profession for all times
to come. The punishment thus which has now come to be introduced
clearly cannot be said to be greater than that which could have been
imposed under the CA Act.
ULES ACK OF ROCEDURAL AFEGUARDS
NFRA R : L P S
230. The validity of Section 132(4) as well as the procedure adopted
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by the NFRA was then assailed on the ground of the latter having
deprived the petitioners of various significant rights and procedural
safeguards which were otherwise provisioned for under the CA Act and
the subordinate rules governing the conduct of disciplinary
proceedings. It was submitted that the Act as well as the NFRA Rules
merely provide for that authority evolving such procedure as may be
considered expedient in the facts of a particular case. The statute, the
petitioners argued, neither lays in place a codified procedure for the
conduct of disciplinary proceedings nor do its provisions provide any
guidance to the NFRA to adhere to a procedure which would be
commensurate with the constitutional imperatives of fairness and
natural justice. Our attention was also drawn to Rule 11(5) with the
petitioners highlighting the fact that the said rule merely enjoins a
division of the NFRA to dispose of the SCN proceedings through a
summary procedure albeit while adhering to the principles of natural
justice.
231. The note submitted by DHS enclosed a chart which sought to
highlight the substantive differences between the disciplinary procedure
as existing under the CA Act with how proceedings would unfold under
the NFRA Rules. That chart is reproduced hereinbelow:-
“ COMPARATIVE CHART – ICAI AND NFRA
Sr. No. Board of
Discipline
of ICAI (“Board”)
Disciplinary
Committee of ICAI
NFRA
(“Committee”)
Receipt of the
prima facie opinion
formed by the
Director upon
receipt and
examination of a
Receipt of prima
facie
opinion formed by
the Director upon
receipt and
examination of a
Receipt of matter by
the
Investigation Division
upon receiving any
reference from and
the central
1.
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complaint under
Rule 9.
[Rule 14(1)]
complaint under Rule
9.
government, or on the
basis of NFRA’s
oversight activities or
suo motu
investigation and
issue show-cause
notice.
[Rule 18(1)]
[Rule 10(1) and Rule
(11)1]
Written Statement
to
be submitted by the
person against
whom
the complaint is
made.
Written Statement to
be submitted by the
person against whom
the complaint is
made
2.
[Rule 18(3)]
[Rule 14(3)]
Provision for
additional
time to submit the
written statement.
Provision for
additional
time to submit the
written statement
[Rule 18(3)]
3.
[Rule 14(4)]
4. Rejoinder to the
Written Statement.
[Rule 14(5)]
Rejoinder to the
Complaint
[Rule 18(5)]
4.
Hearing (including
the right to be
represented by an
advocate, or any
Authorized
representative who
may be a CA, Cost
Accountant or
Company
Secretary)
Hearing (including
the right to be
represented by an
advocate, or any
Authorized
representative who
may be a CA, Cost
Accountant or
Company Secretary)
Discretion to grant an
opportunity for being
heard in person.
[Rule 11(5)]
NFRA has by its
letter dated 10th June,
2020 interpreted the
term ‘in person’
hearing to mean a
hearing where only
the person
himself/herself can
appear and make
submissions and has
accordingly expressly
denied the right to
5.
[Rule 18(6)]
[Rule 14(6)]
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being
represented by an
authorized
representative.
- Framing of charges
and response by the
respondent to
charges framed.
[Rule 18(7)]
-
6.
- Recording of the plea
of the respondent.
[Rule 18(8)]
-
7.
- Fixing of date for
examination of
witnesses and
production of
documents
[Rule 18(9)]
-
8.
- Power to issue notice
to any witnesses
along with directions
to attend or produce
any documents or
material evidence (on
an application from
the Director)
[Rule 18(10)]
-
9.
- Evidence to be given
by the Director.
(Discretion to permit
cross-examination of
any witnesses or re-
call of any witness
for further cross-
examination.)
[Rule 18(11)]
-
10.
- Opportunity to the
complainant to
present
evidence
[Rule 18(12)]
-
11.
- Evidence to be given
by
the Respondent.
[Rule 18(13)]
-
12.
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- Power to issue notice
to any witnesses
along with directions
to attend or produce
any documents or
material evidence (on
an application from
the
Respondent)
[Rule 18(14)]
-
13.
- After presentation of
Evidence, arguments
to be made before the
Committee by the
Director, Respondent
and the Complainant.
[Rule 18(16)]
-
14.
Discretion to serve
of fresh notice, in
case the person
against whom the
complaint is made
does not appear for
the hearing.
[Rule 14(7)]
-
15.
Power to adjourn
the proceedings at
any stage.
[Rule 14(8)]
Power to adjourn the
proceedings at any
stage
[Rule 18(18)]
-
16.
Further, if the
Board arrives at a
finding that the
respondent is guilty
of professional or
other misconduct a
further opportunity
is given to the
respondent to be
heard before such
an order is passed.
[Rule 15]
Further, if the
Committee arrives at
a finding that the
respondent is guilty
of professional or
other misconduct a
further opportunity is
given to the
respondent to be
heard before such an
order is passed.
[Rule 19]
-
17.
”
232. DHS also sought to underscore the salient and salutary
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procedural safeguards which guided the Council as well as other similar
regulatory bodies including the PCAOB and FRC. The chart which was
placed for our consideration in this regard is extracted below:-
“ Procedure followed in disciplinary proceedings against Chartered
Accountants prior to imposing sanctions
Procedure ICAI PCAOB FRC
Board of
Discipline of
ICAI
69
(“Board”)
Disciplinary
Committee of
ICAI
(“Committee”)
70
If the Board
agrees with
the prima
facie opinion
of the Director
that the
member of
firm is guilty
of misconduct
st
under 1
Schedule of
CA Act it may
proceed with
disciplinary
proceedings.
[Rule 9 (2) (b)
of
ICAI Rules]
If the
Committee
agrees with the
prima facie
opinion of the
Director that the
member of firm
is guilty of
misconduct
st nd
under 1 and 2
nd
Schedule or 2
Schedule of CA
Act it may
proceed with
disciplinary
proceedings.
[Rule 9 (2) (b)
of ICAI Rules]
If the Board
disagrees with
the prima facie
opinion of the
Director that the
member or the
firm is not
guilty of any is
conduct then it
Board may
initiate
Disciplinary
proceedings
as a result of
investigation
or otherwise.
[Rule 5200
(a) of
PCAOB
Rules]
If the
Enforcement
Committee
finds the
Respondent
liable for
Enforcement
action it shall
issue a
Decision
Notice. If the
respondent
does not agree
with the
Decision
Notice the
matter is
referred for
hearing before
a Tribunal
[Rule 26 of
FRC Audit
Enforcement
Procedure]
Initiation of
proceedings
If the Board
disagrees with
the prima
facie opinion
of the Director
that the
member or the
firm is not
69
Conducts disciplinary proceedings in relation to offences under Schedule 1 of the Chartered
Accountants Act, 1949.
70
Conducts proceeding in relation to offences under Schedule 2 of the Chartered Accountants Act,
1949.
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guilty of any
misconduct
then it may
proceed with
disciplinary
proceedings.
[Rule 9 (3) (b)
of
ICAI Rules]
may proceed
with
disciplinary
proceedings.
[Rule 9 (3) (b)
of ICAI Rules]
Notice The Board
shall
Expeditiously
cause to
deliver to the
respondent
and the
complainant a
copy of the
following:
(a) Prima
facie
opinion of
the
Director;
and
(b) Particulars
of forming
documents
relied
upon by
the
Director, if
any, for
forming
p rima
facie
opinion.
[Rule 14 (2)
of
ICAI Rules]
The Committee
shall cause to
deliver to the
response and the
complainant a
copy of the
following:
(a) Prima facie
A copy of
the Order
instituting
proceedings
shall be
issued by the
Board which
shall
include a
which
statement of
matters of
fact and law
to be
considered
and
determined
with respect
to each
person
charged
including the
conduct
alleged to
have
violated the
Act and the
rule, statute
or standard
violated.
[Rule 5201
(a)
and (b) of
PCAOB
Rules]
Where the
Tribunal is to
hold a hearing,
the notice of
hearing shall
state:
(a) Date, time
and venue;
(b) Allegation
s;
(c) Warning
opinion of
the Director;
and
(b) Particulars
of
documents
relied upon
by the
Director, if
any, for
forming
prima facie
opinion.
[Rule 18 (2) of
ICAI Rules]
that the
Tribunal
may
proceed
with the
hearing in
the
absence of
any party.
[Rule 34 of
FRC Audit
Enforcement
Procedure]
The
Reply
respondent
The respondent
shall file a
A party may
be required
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shall file a
written
statement
within such
time as may
be specified
by the Board.
[Rule 14 (3)
of
ICAI Rules]
written
statement within
such time as the
Committee may
specify.
[Rule 18 (3) of
ICAI Rules]
by the Board
vide the
order
instituting
proceedings
or a party
may elect to
file an
answer to
each of the
allegations
levelled in
the order
instituting
proceedings.
The reply
shall be filed
within 20
days after
service of
the
order
instituting
proceedings
unless
additional
time has
been
granted.
[Rule 5421
(a)
and (b) of
PCAOB
Rules]
Rejoinder The
complainant
or the Director
may, after
receipt of the
written
statement,
submit a
rejoinder to
the Board with
a copy to the
respondent
N.A. N.A.
The
complainant or
the Director
may, after
receipt of the
written
statement,
submit a
rejoinder to the
Committee with
a copy to the
respondent
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along with
supporting
documents, if
any.
[Rule 14 (5)
of
ICAI Rules]
along with
supporting
documents, if
any.
[Rule 18 (5) of
ICAI Rules]
The Director,
respondent
and
complainant
shall appear
before the
Board
themselves or
through an
advocate or
authorized
representative
who may be a
CA, Cost
Accountant or
Company
Secretary.
[Rule 14 (6)
read
With
Explanation
thereto of
ICAI
Rules]
The Director,
respondent and
complainant
shall appear
before the
Committee
themselves or
through an
advocate or
authorized
representative
who may be a
CA, Cost
Accountant or
Company
Secretary.
[Rule 18 (6)
read
with
Explanation
thereto of ICAI
Rules]
Person may
represent
oneself
before the
Board or a
Hearing
Officer or be
represented
by counsel.
[Rule 5401
(a) and (b)
of PCAOB
Rules]
The
respondent
may represent
themselves or
be represented
by a Solicitor
or Counsel or
another person
at the
discretion of
the Chair or
Tribunal
provided the
person is not a
witness in the
case, a
member or
employee of
FRC.
[Rule 53 of
FRC Audit
Enforcement
Procedure]
Representatio
n
Hearing The Presiding
Officer of the
Board shall fix
a date, hour
and place of
hearing, not
later than 45
days from date
of receipt of
prima facie
opinion.
[Rule 14 (6)
of
ICAI Rules]
The Presiding
Officer of the
Committee shall
fix a date, hour
and place of
hearing, not
later than 45
days from date
of receipt of
prima facie
opinion.
[Rule 18 (6) of
ICAI Rules]
In an
informal
inquiry the
Director of
Enforcement
and
Investigation
s may
request
documents,
testimony,
information
or an
interview
with any
The Tribunal
shall consider
any
preliminary
legal
arguments; the
respondent
shall indicate
whether any
admissions are
made;
Executive
Council shall
open the case
and call
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person.
[Rule 5100
(b)
of PCAOB
Rules]
evidence in
support; the
respondent
may
open his case
and call
evidence in
support;
subject to Rule
54, the
Tribunal shall
announce its
decision
[Rule 53 of
FRC Audit
Enforcement
Procedure]
Summary
Evidence
procedure and
therefore no
provision for
leading
evidence.
The Board
shall consider
the written
Representation
s including
written
statements,
rejoinder and
supporting
documents
and oral
submissions
and arrive at
its finding on
whether the
respondent is
guilty or not
of professional
or other
misconduct.
If at the first
hearing the
respondent does
not plead guilty,
the Committee
shall fix a date
for examination
of witnesses and
production of
documents. On
the date so fixed
the Committee
shall proceed to
take evidence
produced by the
Director
including oral
examination of
witnesses and
production of
documents. The
Committee may
permit cross
examination of
witnesses. After
presenting of
A party may
present its
case or
defence by
oral or
Documentar
y evidence,
submit
rebuttal
evidence,
and conduct
such cross-
examination
as
determined
by
the Board or
the Hearing
Officer.
[Rule 5444
of PCOAB
Rules]
The Tribunal
has discretion
to allow a
party to
adduce
Written
evidence or
call a witness
at a hearing
which has not
been disclosed
in accordance
with the Rules
or at the Case
Management
Direction.
Witnesses
shall first be
examined by
the party
calling them;
may be cross
examined and
re-examined;
may
be questioned
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[ Rule 14 (1)
read
with Rule 14
(9)
of ICAI
Rules]
evidence by the
Director, the
complainant
shall be given
an
opportunity to
present any
additional
evidence.
Thereafter the
respondent shall
be called upon
to enter his
defence and
produced his
evidence.
[Rule 18 (9) to
(13) of ICAI
Rules]
by the
Tribunal.
[Rules 37 and
41 of FRC
Audit
Enforcement
Procedure]
Oral
arguments
permitted at
the hearing
before the
Board which
shall be fixed
within 45 days
of the prima
facie opinion.
[Rule 14 (6)
of ICAI
Rules]
After the
evidences have
been presented
the Director and
respondent shall
present their
arguments
before the
Committee.
[Rule 18 (16) of
ICAI Rules]
Oral
arguments
permitted
before the
Board
[Rule 5463
of PCAOB
Rules]
Oral
arguments
permitted
before the
Tribunal
[Rule 53 of
FRC Audit
Enforcement
Procedure]
Oral
arguments
N.A. N.A. At the end of
the hearing
the
Hearing
Officer
shall, after
consulting
the parties,
prescribe a
period
within which
post hearing
briefs or
other
N.A.
Post hearing
submission
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submissions
are to be
filed.
[Rule 5445
of PCAOB
Rules]
Hearing prior
to passing
order
imposing
sanctions
N.A. If the
Committee
finds the
respondent
guilty of
professional or
other
misconduct the
Committee
shall, before
passing any
order, give the
respondent an
opportunity of
being heard.
[Rule 19 (1) of
ICAI Rules]
N.A. In the event of
an adverse
finding the
Tribunal may
receive
evidence and
submissions in
respect of
sanction.
[Rule 54 (b)
of
FRC Audit
Rules of
Procedure]
”
Although a similar comparative table was placed for our consideration
by SRBC, we do not propose to burden this judgment by reproducing
that table here since the distinctions which are sought to be highlighted
are identical to those which were pointed out by DHS.
233. The petitioners also laid emphasis on the provisions which
existed under the CA Act and which enabled them to undertake cross -
examination of witnesses, lead evidence, evidence in defense as well as
the elaborate procedure of hearing which the Disciplinary Directorate,
as well as the Board of Discipline were obliged to follow. All of this,
according to the petitioners, has been completely done away with and
replaced by a summary procedure and where a person or entity charged
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with professional misconduct is restricted to construct a defense based
solely on the audit record.
234. It was argued that the insistence of NFRA to restrict responses to
the audit file clearly deprives the petitioners of the right to effectively
respond to allegations of professional misconduct and causes immense
prejudice. It was in this respect submitted that SA 230 and more
particularly Para A7 thereof itself acknowledges the fact that it would
neither be practicable nor is it necessary for an auditor to document
every matter considered or professional judgment made. It was thus
argued that since the SA itself takes note of the impracticality of every
document being included and made part of the audit file, the restriction
so placed by the NFRA is wholly arbitrary and illegal. It was then
contended that the restriction of the disciplinary proceedings to the
audit file is violative of Rule 11(5) itself and which speaks of the
procedure being in consonance with the principles of natural justice, the
respondents being obliged to provide an opportunity of hearing and on
consideration of the submissions made by the auditor as well as all
relevant facts and circumstances.
235. SRBC had additionally argued that the limitation of evidence to
the audit file is an artificial restriction created by NFRA and cannot be
sustained in light of Section 132(4)(b) read along with Rule 8(3) itself.
236. In order to appreciate the submissions so addressed, we deem it
apposite to extract clauses (i), (iii) and (iv) of Section 132(4)(b) which
read as follows:-
“(i) discovery and production of books of account and other
documents
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xxxx xxxx xxxx
(iii) inspection of any books, registers and other documents of any
person referred to in clause (b) at any place
(iv) issuing commissions for examination of witnesses or
documents”
237. It becomes pertinent to note that Rule 8 though cited in this
regard is principally concerned with the power of the NFRA to monitor
and enforce compliance with auditing standards. Although not directly
connected with disciplinary proceedings since the same was referred to,
we only note that the argument essentially was that since the authority
stands empowered to review working papers including audit plans,
other audit documents and communications related to audit coupled
with the power conferred upon the authority by Rule 8(3) enabling
NFRA to call for and seek additional information or explanation in
connection with the conduct of an audit, there exists no plausible
justification for the defense of the auditor being confined to the audit
file alone.
238. Resisting the aforesaid arguments, Mr. Hossain contended that
the challenge based on the inquiry being restricted to the audit file
documentation is thoroughly misconceived since the said limitation
binds and operates upon the NFRA also. Quite apart from the above,
Mr. Hossain submitted that not only Section 143(9) but the specific
SAs themselves lay emphasis on the audit record being comprehensive
and including all material forming part of the audit exercise itself.
Reference in this respect was specifically made to the provisions
contained in SA 230, SA 500 and SQC1. It was Mr. Hossain's
submission that the essential purpose of all records pertaining to the
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audit being preserved and maintained is to enable external inspection
and review. It was submitted that the completeness of the audit file is
an aspect which is duly highlighted and underscored by SA 230.
239. It was further submitted that in fact Para A5 of SA 230 itself
provides that oral explanations that may be proffered by an auditor
would not be liable to be taken into consideration nor would they
“represent adequate support for the work auditor performed or
conclusions the auditor reached”. Oral explanations, Mr. Hossain
submitted in terms of Para A5 can only be used to explain or clarify
information contained in the audit documentation. It was thus submitted
that the NFRA is clearly justified in restricting the enquiry proceedings
to the audit file and excluding the introduction of additional evidence.
240. Mr. Hossain then contended that merely because the statute
speaks of a summary procedure, the same cannot lead to a presumption
being drawn that the proceedings would inevitably be in violation of the
fundamental precepts of fair play or for that matter the principles of
natural justice. Mr. Hossain submitted that such a course is adopted
even by the PCAOB as would be evident from a reading of Rule
5427(d) which makes the following provisions:-
“Rule 5427. Motion for Summary Disposition
xxxx xxxx xxxx
(d)Decision on Motion
The hearing officer shall promptly grant a motion for summary
disposition if the pleadings, depositions, and admissions on file,
together with the affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is entitled to a
disposition as a matter of law. A summary disposition, interlocutory
in character, may be rendered on the issue of liability alone although
there is a genuine issue as to a sanction. A hearing officer's decision
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to deny a motion for summary disposition is not subject to
interlocutory appeal”
241. It was thus argued that since the only proof accepted is the audit
file, a summary procedure can neither be said to be arbitrary nor
violative of the basic principles of fair play which must imbue all
actions of an administrative authority. Learned counsel in this context
also relied upon the decision of the Hyderabad High Court in Institute
71
of Chartered Accountants of India vs. Mukesh Gang
which while
speaking of the procedure liable to be followed under the CA Act
which respect to disciplinary proceedings had held as follows:-
“43. One of the contentions urged by Sri Ashok Anand Kumar,
learned counsel for the respondent, is that no evidence was recorded
following the rules of evidence but, based on admission of the
respondent, a finding was recorded. Undoubtedly, there is no
specific procedure prescribed to be followed by the Disciplinary
Committee to record its finding. The strict rules of evidence, under
the Indian Evidence Act, and the elaborate procedure prescribed
under the Code of Civil Procedure or the Criminal Procedure Code,
are not applicable to proceedings before the Disciplinary Committee
of the Institute except for a few provisions of the Code of Civil
Procedure as stipulated under Section 21(8) of the Act. There is
nothing in the Act, or in the Regulations, which disables the
Committee from evolving its own procedure in conducting an
enquiry into the misconduct alleged to have been committed by a
member of the Institute. A questionnaire was sent, during the
enquiry, eliciting answers from the respondent on 29.11.2008 at
10.10 a.m. in the office of the Institute at Chennai, and an
opportunity was given to the respondent to explain the
circumstances in which the certificate was issued by him. During
questioning, the President of the Committee put a specific question
What do you want to say in your defence? then the respondent gave
the following answer:
I gave a certificate on 9th June, 1995 and on that date the
cheques were deposited and because the cheques could not
cleared on that day and subsequently I appeared before the
SEBI they told me that you should have subsequently
71
2016 SCC OnLine Hyd 327
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withdrawn the certificate if you had come to know that the
cheques are not cleared. I told them that that is the work of
Merchant Bank and they are monitoring the day to day
movement of the funds. I cannot go and monitor the day to
day movement of the funds in their Company and based on
their track record whatever cheques they have earlier
deposited got cleared that is only one time that Rs. 37 lacs
cheques not cleared. That was the only plea which I took
before the SEBI and I also taking before the Disciplinary
Committee.”
242. The aforesaid principles as enunciated in Mukesh Gang ,
according to Mr. Hossain, would, a fortiori, apply to disciplinary
proceedings under the NFRA Rules. Mr. Hossain submitted that the
degree of proof or evidence which is required in disciplinary
proceedings that may be initiated by the NFRA, is not expected to meet
the test of guilt being proven beyond reasonable doubt and which is the
fundamental test governing criminal trials. Disciplinary proceedings,
learned counsel submitted are concerned solely with preponderance of
probabilities. It was submitted that other regulatory bodies including
the PCAOB and the FRC also follow a similar criterion of deciding
charges of professional misconduct based on persuasive evidence. Our
attention in this respect was invited to Rule 5204 which guides the
PCAOB in the conduct of disciplinary proceedings and is extracted
hereunder:-
“ Rule 5204. Determinations in Disciplinary Proceedings
(a) Burden of Proof
In any disciplinary proceeding instituted pursuant to Rule
5200(a)(1), Rule 5200(a)(2), or Rule 5200(a)(3), the interested
division shall bear the burden of proving an alleged violation or
failure to supervise by a preponderance of the evidence. A
respondent raising an affirmative defense shall bear the burden of
proving that affirmative defense by a preponderance of the evidence.
(b) Initial Decision of a Hearing Officer
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Unless the Board directs otherwise, a hearing officer shall prepare an
initial decision in any proceeding in which the Board directs a
hearing officer to preside at a hearing. An initial decision shall
include findings and conclusions, including sanctions, if appropriate,
and the reasons or basis therefor, as to all the material issues of fact,
law or discretion presented on the record and such other information
as the Board may require.
Note: Unless the Board has directed otherwise, the Board expects
hearing officers in proceedings instituted pursuant to Rule
5200(a)(1) or Rule 5200(a)(2) to prepare initial decisions within 60
days after the deadline for filing post-hearing briefs or other
submissions; the Board expects hearing officers in proceedings
instituted solely pursuant to Rule 5200(a)(3) to prepare initial
decisions within 30 days after the deadline for filing post-hearing
briefs; and the Board expects hearing officers in proceedings
pursuant to Rule 5500 to prepare initial decisions within 45 days
after the deadline for filing post-hearing briefs or other submissions.
(c) Filing, Service and Publication
The hearing officer shall file the initial decision with the Secretary.
The Secretary shall promptly serve the initial decision upon the
parties. In a public proceeding, the Secretary shall as soon as
practicable thereafter publish the initial decision, unless the Board
otherwise directs.
(d) When Final
(1) An initial decision as to a party shall become the final
decision of the Board as to that party upon issuance of a notice of
finality by the Secretary.
(2) Subject to subparagraph (3) of this paragraph, the Secretary
shall issue a notice of finality no later than 20 days after the lapsing
of the time period for filing a petition for review of the initial
decision.
(3) The Secretary shall not issue a notice of finality as to any
party
(i) who has filed a timely petition for review; or
(ii) with respect to whom the Board has ordered review of the
initial decision pursuant to Rule 5460(b).”
243. It was then contended that it would be wholly incorrect to seek
similarity in the procedure that was prescribed under the CA Act with
the Rules which regulate the conduct of disciplinary proceedings by the
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NFRA. It was submitted that the Council under the CA Act is also
enjoined to try complaints that may be made against members. NFRA
proceedings on the other hand, it was explained, are merely concerned
with monitoring the quality of service related to the audit. Those
proceedings, Mr. Hossain submitted, can be initiated either suo moto or
upon a reference being received by the NFRA from an appropriate
authority. Viewed in that light, it was his contention, that it would be
wholly incorrect to view the disciplinary proceedings as being
adversarial and consequently obliging the NFRA to factor in an
opportunity of cross-examination or recordal of evidence.
244. It was lastly urged that a statute is not rendered unconstitutional
merely if it fails to stipulate a procedure or prescribe a code for the
conduct of disciplinary proceedings. The submission was that as long as
an authority adheres to a procedure which is reasonable and compliant
with the principles enshrined in Article 14 of the Constitution, the
statute itself would not be liable to be struck down. Reliance in this
respect was placed upon a decision handed down by a Division of the
Court in
Reckitt Benckiser India Private Limited vs. Union of India
72
Through: Its Secretary & Ors
where the Court had observed as
under:-
“125. It is also well-established that where a power exists to
prescribe a procedure and such power has not been exercised, the
implementing authorities are at liberty to determine and adopt such
procedure as they may deem fit subject to the same being fair and
reasonable. In Dhanjibhai Ramjibhai v. State of Gujarat [(1985) 2
SCC 5.] , the Supreme Court has held, “… Merely because
procedural rules have not been framed does not imply a negation of
the power. In the absence of such rules, it is sufficient that the power
72
2024 SCC OnLine Del 3649
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is exercised fairly and reasonably, having regard to the context in
which the power has been granted….”. In Chairman and MD, BPL
Ltd. v. S.P. Gururaja [(2003) 8 SCC 567.] , the Supreme Court has
held, “…Under the Act or the Regulations framed thereunder, no
procedure for holding such consultations had been laid down. In that
situation it was open to the competent authorities to evolve their own
procedure. Such a procedure of taking a decision upon deliberations
does not fall foul of article 14 of the Constitution of India.
126. Consequently, rule 126 of the Rules, 2017 to the extent it grants
flexibility to NAA to determine the methodology and procedure to
decide whether reduction in rate of tax or benefit of input-tax credit
has been passed on or not to the recipient is reasonable and legal.
Moreover, as per rule 126 NAA “may determine” the methodology
and not “prescribe” it. The substantive provision, i.e., section 171 of
the Act, 2017 itself provides sufficient guidance to NAA to
determine the methodology on a case by case basis depending upon
peculiar facts of each case and the nature of the industry and its
peculiarities. Consequently, so long as the methodology determined
by NAA is fair and reasonable, the petitioners cannot raise the
objection that the specifics of the methodology adopted are not
prescribed.”
245. This would constitute an appropriate juncture to additionally
notice some of the decisions that were cited for our consideration by
respective sides. From the side of the writ petitioners reliance was
73
firstly placed on an Advocate vs. Bar Council of India
and where
the Supreme Court while examining Section 35 of the Advocates Act
had held as follows:-
“4. At this juncture, it is appropriate to articulate some basic
principles which must inform the disciplinary proceedings against
members of the legal profession in proceedings under Section 35 of
the Advocates Act, read with the relevant Rules:
“( i ) essentially the proceedings are quasi-criminal in character
inasmuch as a member of the profession can be visited with penal
consequences which affect his right to practise the profession as also
his honour; under Section 35(3)( d ) of the Act, the name of the
advocate found guilty of professional or other misconduct can be
removed from the State Roll of Advocates. This extreme penalty is
73
1989 Supp (2) SCC 25
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equivalent of death penalty which is in vogue in criminal
jurisprudence. The advocate on whom the penalty of his name being
removed from the roll of advocates is imposed would be deprived of
practising the profession of his choice, would be robbed of his
means of livelihood, would be stripped of the name and honour
earned by him in the past and is liable to become a social apartheid.
A disciplinary proceeding by a statutory body of the members of the
profession which is statutorily empowered to impose a punishment
including a punishment of such immense proportions is quasi-
criminal in character;
( ii ) as a logical corollary it follows that the Disciplinary Committee
empowered to conduct the enquiry and to inflict the punishment on
behalf of the body, in forming an opinion must be guided by the
doctrine of benefit of doubt and is under an obligation to record a
finding of guilt only upon being satisfied beyond reasonable doubt.
It would be impermissible to reach a conclusion on the basis of
preponderance of evidence or on the basis of surmise, conjecture or
suspicion. It will also be essential to consider the dimension
regarding mens rea.”
This proposition is hardly open to doubt or debate particularly
having regard to the view taken by this Court in L.D.
Jaisinghani v. Naraindas N. Punjabi [(1976) 1 SCC 354] wherein
Ray, C.J., speaking for the Court has observed: (SCC p. 358, para 9)
“In any case, we are left in doubt whether the
complainant's version, with which he had come forward with
considerable delay was really truthful. We think that in a case
of this nature, involving possible disbarring of the advocate
concerned, the evidence should be of a character which should
leave no reasonable doubt about guilt . The Disciplinary
Committee had not only found the appellant guilty but had
disbarred him permanently.”
(emphasis added)
( iii ) in the event of a charge of negligence being levelled against an
advocate, the question will have to be decided whether negligence
simpliciter would constitute misconduct. It would also have to be
considered whether the standard expected from an advocate would
have to answer the test of a reasonably equipped prudent practitioner
carrying reasonable workload. A line will have to be drawn between
tolerable negligence and culpable negligence in the sense of
negligence which can be treated as professional misconduct
exposing a member of the profession to punishment in the course of
disciplinary proceedings. In forming the opinion on this question the
standards of professional conduct and etiquette spelt out in Chapter 2
of Part VI of the Rules governing advocates, framed under Section
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60(3) and Section 49(1)( g ) of the Act, which form a part of the Bar
Council of India Rules may be consulted. As indicated, in the
preamble of the Rules, an advocate shall, at all times compose
himself in a manner befitting his status as an officer of the court, a
privileged member of the community and a gentleman bearing in
mind what may be lawful and moral for one who is not a member of
the Bar may still be improper for an advocate and that his conduct is
required to conform to the rules relating to the duty to the court, the
duty to the client, to the opponent, and the duty to the colleagues, not
only in letter but also in spirit.
It is in the light of these principles the Disciplinary Committee
would be required to approach the question as regards the guilt or
otherwise of an advocate in the context of professional misconduct
levelled against him. In doing so apart from conforming to such
procedure as may have been outlined in the Act or the Rules, the
Disciplinary Authority would be expected to exercise the power with
full consciousness and awareness of the paramount consideration
regarding principles of natural justice and fair play.”
246. The petitioners then pressed into aid the judgment of the
74
Supreme Court in L.D Jaisinghani vs. Naraindas Punjabi
which
too was in respect of disciplinary action taken against an advocate. In
that decision, the Supreme Court had observed:-
“ 9. It is true that the advocate had not fared well under cross-
examination. He had tried to conceal similar complaints against him
in the past. It is, however, equally true that the complainant was no
greenhorn. At any rate he was not so gullible as he tried to make
himself out to be. After going through the relevant evidence, we
doubt whether both sides have come out with full and true facts. It is
more likely that there was some dispute over the payment of Rs 350
which the advocate appellant claimed as his fee for work done, but,
the complainant seems to have considered himself entitled to
demand the payment back. It is possible that there may have been
other reasons too for friction between the two so as to lead to a
disruption between the complainant and the Counsel whom he had
been frequently engaging in addition to others. In any case, we are
left in doubt whether the complainant's version, with which he had
come forward with considerable delay, was really truthful. We think
that, in a case of this nature, involving possible disbarring of the
advocate concerned, the evidence should be of a character which
74
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should leave no reasonable doubt about guilt. The Disciplinary
Committee had not only found the appellant guilty but had disbarred
him permanently.
10. The complainant has no doubt produced Tendolkar and D.D.
Nalvade to show what enquiries were made relating to Suit No. 1040
of 1964 by the respondent complainant. It is, however, not disputed
that the respondent did make those enquiries. The case of the
appellant was that these enquiries were made in an attempt to bolster
up a weak case. These enquiries merely prove a much too belated
conduct of the complainant. They could be the result of an attempt to
give a semblance of truth to a coloured and exaggerated version. It is
also true that the appellant had been most unwise in not sending a
registered letter in reply to the registered notice received by him on
January 8, 1971 by the complainant. His version that he spoke to the
complainant on the telephone and sent a letter in reply on January
15, 1971, of which- a copy was Ex. R-1, had been rejected by the
committee on the ground that the advocate's conduct did not appear
to be above board. We cannot help thinking that the committee had
been unduly swayed by the unsavoury background of the appellant
so that it could not see its way to giving the appellant even the
benefit of doubt in the instant case.”
247. The petitioners had also sought to invoke the principle of
manifest arbitrariness in the context of Rule 11(5) failing to incorporate
appropriate safeguards and defining the content of the summary
procedure that the NFRA is obliged to adopt. In order to explain the
precept of manifest arbitrariness and which has now become an
indelible part of our jurisprudence insofar as constitutional validity of
statutes is concerned, the petitioners relied upon the following passages
from the celebrated decision of the Supreme Court in
Shreya Singal vs.
75
Union of India
:-
“ 57. In Burstyn v. Wilson [96 L Ed 1098: 343 US 495 (1952)] ,
sacrilegious writings and utterances were outlawed. Here again, the
US Supreme Court stepped in to strike down the offending section
stating : (L Ed p. 1121)
75
(2015) 5 SCR 963
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“… It is not a sufficient answer to say that ‘sacrilegious’
is definite, because all subjects that in any way might be
interpreted as offending the religious beliefs of any one of the
300 sects of the United States are banned in New York. To
allow such vague, undefinable powers of censorship to be
exercised is bound to have stultifying consequences on the
creative process of literature and art—for the films are
derived largely from literature. History does not encourage
reliance on the wisdom and moderation of the censor as a
safeguard in the exercise of such drastic power over the
minds of men. We not only do not know but cannot know
what is condemnable by ‘sacrilegious’. And if we cannot tell,
how are those to be governed by the statute to tell?”
xxxx xxxx xxxx
97. The argument of the learned Additional Solicitor General on this
score is reproduced by us verbatim from one of his written
submissions:
“Furthermore it is respectfully submitted that in the event
of Hon'ble Court not being satisfied about the constitutional
validity of either any expression or a part of the provision, the
Doctrine of Severability as enshrined under Article 13 may
be resorted to.”
98. The submission is vague : the learned Additional Solicitor
General does not indicate which part or parts of Section 66-A can
possibly be saved. This Court in Romesh Thappar v. State of
Madras [ Romesh Thappar v. State of Madras , 1950 SCR 594 : 1950
SCC 436 : AIR 1950 SC 124 : (1950) 51 Cri LJ 1514] repelled a
contention of severability when it came to the courts enforcing the
fundamental right under Article 19(1)( a ) in the following terms :
(SCR p. 603 : AIR p. 129, para 13)
“… It was, however, argued that Section 9(1-A) could not be
considered wholly void, as, under Article 13(1), an existing
law inconsistent with a fundamental right is void only to the
extent of the inconsistency and no more. Insofar as the
securing of the public safety or the maintenance of public
order would include the security of the State, the impugned
provision, as applied to the latter purpose, was covered by
clause (2) of Article 19 and must, it was said, be held to be
valid. We are unable to accede to this contention. Where a
law purports to authorise the imposition of restrictions on a
fundamental right in language wide enough to cover
restrictions both within and without the limits of
constitutionally permissible legislative action affecting such
right, it is not possible to uphold it even so far as it may be
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applied within the constitutional limits, as it is not severable .
So long as the possibility of its being applied for purposes not
sanctioned by the Constitution cannot be ruled out, it must be
held to be wholly unconstitutional and void. In other words,
clause (2) of Article 19 having allowed the imposition of
restrictions on the freedom of speech and expression only in
cases where danger to the State is involved, an enactment,
which is capable of being applied to cases where no such
danger could arise, cannot be held to be constitutional and
valid to any extent.”
248. With respect to the aspect of vagueness of a statute the
petitioners sought to draw sustenance from the following observations
76
appearing in K.A. Abbas vs. Union of India
:-
“ 44. This brings us to the manner of the exercise of control and
restriction by the directions. Here the argument is that most of the
regulations are vague and further that they leave no scope for the
exercise of creative genius in the field of art. This poses the first
question before us whether the “void for vagueness” doctrine is
applicable. Reliance in this connection is placed on Municipal
Committee, Amritsar v. State of Rajasthan [AIR 1960 SC 1100] . In
that case a Division Bench of this Court lays down that an Indian
Act cannot be declared invalid on the ground that it violates the due
process clause or that it is vague. Shah, J., speaking for the Division
Bench, observes:
“... the rule that an Act of a competent Legislature
maybe ‘struck down’ by the courts on the ground of
vagueness is alien to our constitutional system. The
Legislature of the State of Punjab was competent to enact
legislation in respect of ‘fairs’, vide Entry 28 of List II of
the VII Schedule to the Constitution. A law may be declared
invalid by the superior courts in India if the Legislature has
no power to enact the law or that the law violates any of the
fundamental rights guaranteed in Part III of the Constitution
or is inconsistent with any constitutional provision, but not
on the ground that it is vague”.
The learned Judge refers to the practice of the Supreme Court of the
United States in Claude C. Caually v. General Construction
Co. [(1926) 70 L Ed 332] where it was observed:
76
(1970) 2 SCC 780
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“A statute which either forbids or requires the doing of
an act in terms so vague that men of common intelligence
must necessarily guess at its meaning and differ as to its
application violates the first essential of due process of
law.”
The learned Judge observes in relation to this as follows:
“But the rule enunciated by the American Courts has no
application under our constitutional set-up. This rule is
regarded as an essential of the ‘due process clause’
incorporated in the American Constitution by the 5th and
14th Amendments. The Courts in India have no authority to
declare a statute invalid on the ground that it violates ‘the
due process of law’. Under our Constitution, the test of due
process of law cannot be applied to the statutes enacted by
the Parliament or the State Legislature.”
Relying on the observations of Kania, C.J., in A.K. Gopalan v. State
of Madras [1950 SCC 228 : (1950) SCR 88] to the effect that a law
cannot be declared void because it is opposed to the spirit supposed
to pervade the Constitution but not expressed in words, the
conclusion above set out is reiterated. The learned Judge, however,
adds that the words “cattle fair” in act there considered, are
sufficiently clear and there is no vagueness.
45. These observations which are clearly obiter are apt to be too
generally applied and need to be explained. While it is true that the
principles evolved by the Supreme Court of the United States of
America in the application of the Fourteenth Amendment were
eschewed in our Constitution and instead the limits of restrictions on
each fundamental right were indicated in the clauses that follow the
first clause of the nineteenth article, it cannot be said as an absolute
principle that no law will be considered bad for sheer vagueness.
There is ample authority for the proposition that a law affecting
fundamental rights may be so considered. A very pertinent example
is to be found in State of Madhya Pradesh and Another v. Baldeo
Prasad [(1961) 1 SCR 970 at 979] where the Central Provinces and
Berar Goondas Act, 1946 was declared void for uncertainty. The
condition for the application of Sections 4 and 4-A was that the
person sought to be proceeded against must be a Goonda but the
definition of Goonda in the Act indicated no tests for deciding which
person fell within the definition. The provisions were therefore held
to be uncertain and vague.
46. The real rule is that if a law is vague or appears to be so, the
court must try to construe it, as far as may be, and language
permitting, the construction sought to be placed on it, must be in
accordance with the intention of the Legislature. Thus if the law is
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open to diverse construction, that construction which accords best
with the intention of the Legislature and advances the purpose of
legislation, is to be preferred. Where however the law admits of no
such construction and the persons applying it are in a boundless sea
of uncertainty and the law prima facie takes away a guaranteed
freedom, the law must be held to offend the Constitution as was
done in the case of the Goonda Act. This is not application of the
doctrine of due process. The invalidity arises from the probability of
the misuse of the law to the detriment of the individual. If possible,
the Court instead of striking down the law may itself draw the line of
demarcation where possible but this effort should be sparingly made
and only in the clearest of cases.”
249. Another argument that was addressed by the writ petitioners was
of Section 132(4) suffering from the vice of invidious discrimination. It
was argued that while auditors generally are guaranteed salutary rights
under the CA Act when faced with allegations of professional
misconduct, auditors and firms falling within Rule 3 would face the
specter of a trial in accordance with a summary procedure and thus
deprived of the right to lead evidence, cross-examination and the
various other procedural safeguards which otherwise imbue enquiries
conducted under the CA Act. This according to the writ petitioners
results in hostile discrimination amongst members otherwise forming
part of a homogenous class. The petitioners also assailed the validity of
the procedure followed by the NFRA arguing that the denial of legal
assistance which could otherwise be availed of under the CA Act has
been done away with and which renders the impugned provisions
wholly arbitrary and liable to be struck down.
250. Controverting the aforenoted submissions, Mr. Hossain
submitted that a right of cross examination cannot be elevated to the
status of an inviolable facet of natural justice. Learned counsel in this
respect cited for our consideration the decision of the Supreme Court in
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77
M/s Kanugo & Company vs. Collector of Customs
and where the
following observations appear:-
“ 12. We may first deal with the question of breach of natural justice.
On the material on record, in our opinion, there has been no such
breach. In the show-cause notice issued on August 21, 1961, all the
material on which the Customs Authorities have relied was set out
and it was then for the appellant to give a suitable explanation. The
complaint of the appellant now is that all the persons from whom
enquiries were alleged to have been made by the authorities should
have been produced to enable it to cross-examine them. In our
opinion, the principles of natural justice do not require that in
matters like this the persons who have given information should be
examined in the presence of the appellant or should be allowed to be
cross-examined by them on the statements made before the Customs
Authorities. Accordingly we hold that there is no force in the third
contention of the appellant.”
251. Mr. Hossain then argued that the principles of natural justice, as
is well settled, are not mantras or incantations but a set of fundamental
rules of fair play which we have recognised as being applicable to a
varied nature of proceedings. However, it was submitted that their
application would depend upon the character of the proceedings. It was
his contention that since the proceedings envisaged under Section
132(4) do not entail the NFRA relying upon any oral evidence, the right
of cross examination as claimed is thoroughly misconceived. Learned
counsel also questioned the challenge to the provisions on the ground of
NFRA refusing lawyers to represent auditors and submitted that legal
assistance in such enquiries has never been recognised to be a
fundamental right. It was his submission that the writ petitioners, in any
case, were not pitted against legal experts but members of the NFRA
having domain knowledge in finance and accounting. It was thus
argued that no prejudice had been caused to the petitioners in this
77
(1973) 2 SCC 438
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respect.
252. It was further submitted that NFRA had subsequent to the
commencement of the proceedings impugned before us decided to
permit auditors to be represented by lawyers before it. Notwithstanding
the above, for the purposes of lending support to his submission with
respect to a right to legal representation, Mr. Hossain relied upon the
judgment of the Supreme Court in Hyderabad Vanaspati Limited vs.
78
A.P State Electricity Board
and to the following observations
rendered therein:-
“ 42. In Patel Parshottamadas Vanmalidas v. Gujarat Electricity
Board [AIR 1987 Guj 188 : (1987) 1 Guj LR 637 : (1987) 2 Guj LH
64] a Division Bench of the Gujarat High Court considered similar
conditions and upheld their validity. The Bench said:
“Thus, it is clear that the Board has formulated such a
condition in order to safeguard its interest. Such a condition
is there for the purpose of checking, apart from other things,
the theft of electricity. It is not a case of any defective meter,
but it is a case of theft of electricity by the consumer
concerned. As a matter of fact, in this case it is alleged that
the petitioner, by inserting a plastic strip, was able to stop the
running of the meter and thereby, committed theft of
electricity. The condition clearly states as to the procedure
that has to be adopted for the purpose of questioning the
departmental action in levying penal charges. It has also been
made clear in the condition as to the limit to which the
Department can go for the purpose of assessing the theft of
electricity. In no case the Department can go beyond a period
of six months, according to this condition. In Condition No.
34, we are able to see that manner of assessment also has
been specified. If all these steps are taken by the Department,
the condition itself states that the consumer has a remedy by
filing an appeal to the appropriate authority within a specified
time. Thus, a conjoint reading of this condition and the
purpose for which it is intended, clearly makes out that such a
condition is not arbitrary or unreasonable, but within the
powers of the Board and, in our opinion, it does not offend
78
(1988) 4 SCC 470
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any of the articles of the Constitution. The argument as if the
imposition of penal assessment before filing an appeal is
harsh and makes the appeal illusory cannot be appreciated.
The penal assessment, as we have stated already, is restricted
to a limited period. Such an assessment was made after the
Department itself was satisfied with regard to the theft of
electricity committed by the consumer concerned. Hence, it
cannot be said that the appeal provided under Condition No.
34 is an illusory one.”
We agree with the above opinion.
43. The principle “ nemo judex in causa sua ” will not apply in this
case as the officers have no personal lis with the consumers. As
pointed out by learned Senior Counsel for the Board, they are similar
to income tax or sales tax officials. There is nothing wrong in their
adjudicating the matter especially when the consumers may be
represented by an advocate and the formula for making provisional
assessment is fixed in the clause itself. An argument has been
advanced that the Board has recently deleted the provision enabling
the consumer to be represented by a power-of-attorney agent. It is
contended that the consumer is thereby deprived of the assistance of
an expert which may be required in technical matters. We do not
agree. When the consumer is represented by a lawyer, he can
certainly get such assistance as may be needed from a technical
expert. It is stated by the Board's learned counsel that the provision
was deleted as there was frequent misuse of the same. Whatever may
be the reason for deleting the provision, the existing part of the
clause enables the consumer to be represented by an advocate. That
is sufficient safeguard for the consumer.”
253. From the recordal of submissions addressed by respective sides,
it becomes apparent that the primary challenge under this head was of
the NFRA not being bound to follow a fair and just procedure while
conducting an enquiry. That submission rested on the perceived lack of
due process contemplated in Rule 11 of the NFRA Rules when
contrasted with the procedure which was liable to be adhered to in the
case of an inquiry under the CA Act read along with the Misconduct
Rules, 2007. It was this perceived and asserted distinction in the
procedure prescribed which was sought to be highlighted by both the
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DHS and SRBC with the aid of the charts which have been referred to
hereinabove. The petitioners had essentially referred to the provisions
contained in Rules 14, 18 and 19 of the Misconduct Rules, 2007 to
highlight the nature of rights which according to them CAs’ and firms
stand deprived of in the course of proceedings that may unfold before
the NFRA.
254. In order to evaluate the soundness of that submission, it would be
appropriate to advert to the Misconduct Rules, 2007. As is evident from
Rule 7, the proceedings that may come to be initiated could have
commenced upon the receipt of any written information containing
allegations against a member or a firm. On receipt of such an
application, the Director in terms of Rule 9 was obliged to examine the
complaint, the written statements submitted by the CA or the firm as
well as other additional particulars or documents in order to come to a
prima facie conclusion of guilt in respect of the member or the firm. It
was that prima facie opinion of the Director which would, in terms of
the procedure prescribed, be thereafter transmitted to the Board of
Discipline or the Disciplinary Committee.
255. It becomes pertinent to note that in terms of Rule 14(1), the
Board of Discipline was statutorily enjoined to follow a summary
disposal procedure while dealing with cases laid before it. It was
required, by virtue of Rule 14(2), to supply a copy of the prima facie
opinion formed by the Director as well as particulars and documents
relied upon by that authority for the purposes of formation of that
opinion to the arrayed respondent as well as the complainant. Since the
complainant was envisaged to be a party to those proceedings, it was
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also entitled to respond to any written statement that would have been
submitted by a respondent in terms of Rule 14(5). The Board of
Discipline was enjoined to consider the written representations, written
statements, documents as well as oral submissions, if any made by the
complainant as well as the respondent while arriving at a finding on
whether the charge of professional or other misconduct was made out.
256. Similarly, and in terms of Rule 18, the Disciplinary Committee
was cautioned to ensure that all proceedings undertaken by it were in
accord with the principles of natural justice. This statutory command
stands embodied in Rule 18(1). By virtue of Rule 18(2), the
Disciplinary Committee is enjoined to provide a copy of the prima facie
opinion of the Director together with documents relied upon by that
authority to both the complainant and the respondent. The respondent
as well as the complainant were thereafter entitled to submit their
written statements and replies for the consideration of the Disciplinary
Committee. Rule 18(9) then dealt with a contingency where the
respondent was to deny the allegations of professional misconduct and
on such a stand being struck, the Disciplinary Committee being obliged
to fix a date for the examination of witnesses and for the production of
documents. In terms of Rule 18(11), the Disciplinary Committee could
take evidence as led before it as well as the statement of witnesses that
may have been recorded in the course of such oral examination. The
Proviso to Rule 18(11) gives an indication of the Disciplinary
Committee also being obliged to permit cross-examination of witnesses
whose testimony may have come to be recorded in the course of those
proceedings.
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257. According to the writ petitioners, it is some of these facets or the
procedure which the Board of Discipline and the Disciplinary
Committee were enjoined to follow which have been completely done
away with in proceedings that may unfold before the NFRA.
258. As we view Rule 11 of the NFRA Rules, it becomes apparent
that the statute clearly commands that authority to ensure that the
disciplinary proceedings are undertaken in accordance with the
principles of natural justice including where deemed necessary and
appropriate by providing an opportunity of hearing to the charged entity
in person. By virtue of Rule 11(5), the division of the NFRA is obliged
to pass an order after considering all submissions made and taking into
account the material on record as well as all other relevant facts and
circumstances. The NFRA Rules, however, do not speak of or appear to
envisage oral testimony being recorded in the course of proceedings
that may ensue.
259. The reason for this is clearly not far to discern since the
proceedings themselves would have been commenced based either on a
suo motu decision taken by the NFRA or on receipt of a reference made
to it either by the Union Government or any other competent authority.
The NFRA thus commences proceedings not on the basis of a written
complaint or at the behest of a complainant and which was a possibility
envisaged under the CA Act and the Misconduct Rules, 2007. Even
though the Union Government itself is enabled to make a reference to
the NFRA to undertake an investigation, the said entity merely stands
in the shoes of an informant or a body which provides material for the
NFRA to investigate. The proceedings thus are clearly not adversarial
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and which was a possible scenario under the Misconduct Rules 2007.
260. We further note that the NFRA itself initiates and undertakes the
inquiry on the basis of the audit file and record which may have been
gathered in the course of an audit quality review. Those proceedings are
thus not triggered or based upon the oral testimony of a complainant or
person. As is thus manifest from a reading of Rule 10, the investigative
process would commence either with the NFRA receiving a reference
or where it decides itself to undertake an investigation into any matter
based on its review of audit and oversight functions. In terms of Rule
10(1)(c), it could also initiate an investigation suo motu if it were for
reasons recorded come to form a preliminary opinion that a matter
pertaining to professional or other misconduct which comes to light
merits an inquiry. Thus, the commencement of an inquiry by the NFRA
is premised entirely on either a reference that may be made to it by the
Union Government or where the said body were to initiate an
investigation suo motu or in light of facts that may be gathered in the
course of its supervisory role envisaged in Rules 7, 8 and 9.
261. In the absence of those proceedings being based on the version of
an individual complaint or testimony, we fail to appreciate the
submission that the denial of a right of cross-examination is liable to be
viewed as a factor which renders the procedure prescribed under the
NFRA Rules to be arbitrary. A right to cross examine could have been
claimed provided the NFRA were to rely upon the oral testimony of an
individual or such a statement constituting material that it took into
consideration for the purposes of formation of an opinion to commence
proceedings referrable to Section 132(4) of the Act. However, and on
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facts, we find that none of the impugned SCNs’ are based on a
complaint of an individual or a statement made by a person. At least the
petitioners have woefully failed to establish that such was the case.
262. The position which thus emerges from the record is of the SCNs’
being prompted by the prima facie conclusions which were recorded
and the AQRRs’. It is that material alone which constituted the basis for
initiation of the action impugned before us. It was not the case of the
petitioners that the disciplinary action was prompted by a complaint
submitted by a person or based upon a statement that may have been
recorded. In fact, the only testimony which appears to have been borne
in consideration was the responses submitted by the writ petitioners as
well as the statements of representatives, members and partners made
and recorded. We thus find ourselves unable to appreciate the assertion
of a right of cross examination which was vehemently canvassed before
us.
263. We also bear in mind the undisputed fact of both Rules 14 and 18
of the Misconduct Rules, 2007 themselves envisaging a summary
procedure of disposal being adopted by the Board of Discipline and the
Disciplinary Committee. Both those rules only placed those authorities
under the over-arching obligation of ensuring that proceedings were
undertaken in consonance with the principles of natural justice. It was
in terms of Rule 18(9) alone that oral examination and recordal of
testimony were contemplated. The aforesaid provision clearly appears
to have been engrafted since the Disciplinary Committee would be
considering a complaint made by an individual against a CA or a firm.
Since the complainant could have introduced oral testimony in such
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proceedings, the rules proceeded to incorporate a right of cross-
examination. However, and undisputedly the NFRA rules do not
contemplate oral testimony or evidence for the purposes of the
investigation or inquiry that may be undertaken.
264. Regard must also be had to the well-settled precept of the
principles of natural justice being essentially concerned with adherence
to a fair procedure and the provision of an adequate opportunity to the
charged person to contest the allegations leveled. Rules of natural
justice, as has been repeatedly held, cannot be applied or viewed as
operating as a straight jacketed formula. They are neither rigid nor are
they liable to be viewed as inviolable conditions etched in stone. Way
79
back in the decision of K.L. Tripathi vs. State Bank of India
, the
Supreme Court had pertinently held that a right of cross-examination
would inevitably arise if the version or the statement of a person who
has tendered testimony is sought to be disputed or challenged.
However, their Lordships pertinently observed that absent such a
situation, the right of cross-examination cannot be acknowledged to be
a necessary ingredient of the principles of natural justice. We deem it
apposite to extract the following passages from that decision:-
“ We are of the opinion that Mr Garg is right that the rules of
29.
natural justice as we have set out hereinbefore implied an
opportunity to the delinquent officer to give evidence in respect of
the charges or to deny the charges against him. Secondly, he
submitted that even if the rules had no statutory force and even if the
party had bound himself by the contract, as he had accepted the Staff
Rule, there cannot be any contract with a Statutory Corporation
which is violative of the principles of natural justice in matters of
domestic enquiry involving termination of service of an employee.
We are in agreement with the basic submission of Mr Garg in this
79
(1984) 1 SCC 43
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respect, but we find that the relevant rules which we have set out
hereinbefore have been complied with even if the rules are read that
requirements of natural justice were implied in the said rules or even
if such basic principles of natural justice were implied, there has
been no violation of the principles of natural justice in respect of the
order passed in this case. In respect of an order involving adverse or
penal consequences against an officer or an employee of Statutory
Corporations like the State Bank of India, there must be an
investigation into the charges consistent with the requirements of the
situation in accordance with the principles of natural justice as far as
these were applicable to a particular situation. So whether a
particular principle of natural justice has been violated or not has to
be judged in the background of the nature of charges, the nature of
the investigation conducted in the background of any statutory or
relevant rules governing such enquiries. Here the infraction of the
natural justice complained of was that he was not given an
opportunity to rebut the materials gathered in his absence. As has
been observed in On Justice by J.R. Lucas, the principles of natural
justice basically, if we may say so, emanate from the actual phrase
“ audi alteram partem” which was first formulated by St. Augustine
( De Duabus Animabus , XIV, 22 J.P. Migne, PL. 42, 110).
30. In dealing with particular situation we must formulate the actual
principles to be applied in a particular situation. Hence it may be
illustrated as J.R. Lucas — On Justice (p. 86) has done it, thus:
“Hence, when we are judging deeds, and may find that a man
did wrong, there is a requirement of logic that we should
allow the putative agent to correct misinterpretations or
disavow the intention imputed to him or otherwise disown the
action. God needed to ask Adam ‘Hast thou eaten of the tree
whereof I commanded thee that thou shouldest not eat?’
Because it was essential that Adam should not be blamed or
punished unless he had done exactly that deed. If the serpent
had planted the evidence, or if he had beguiled Adam into
eating it under the misapprehension that it came from
another, non-forbidden tree, then Adam had not sinned and
should not have been expelled from Eden. Only if the
accused admits the charge, or, faced with the accusation,
cannot explain his behaviour convincingly in any other way,
are we logically entitled to conclude that he did indeed do it.”
31. Wade in his Administrative Law , 5th Edn. at pp. 472-475 has
observed that it is not possible to lay down rigid rules as to when the
principles of natural justice are to apply: nor as to their scope and
extent. Everything depends on the subject-matter, the application of
principles of natural justice, resting as it does upon statutory
implication, must always be in conformity with the scheme of the
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Act and with the subject-matter of the case. In the application of the
concept of fair play there must be real flexibility. There must also
have been some real prejudice to the complainant; there is no such
thing as a merely technical infringement of natural justice. The
requirements of natural justice must depend on the facts and the
circumstances of the case, the nature of the inquiry, the rules under
which the tribunal is acting, the subject-matter to be dealt with, and
so forth.
32. The basic concept is fair play in action administrative, judicial or
quasi-judicial. The concept of fair play in action must depend upon
the particular lis, if there be any, between the parties. If the
credibility of a person who has testified or given some information is
in doubt, or if the version or the statement of the person who has
testified, is, in dispute, right of cross-examination must inevitablly
form part of fair play in action but where there is no lis regarding the
facts but certain explanation of the circumstances there is no
requirement of cross-examination to be fulfilled to justify fair play in
action. When on the question of facts there was no dispute, no real
prejudice has been caused to a party aggrieved by an order, by
absence of any formal opportunity of cross-examination per se does
not invalidate or vitiate the decision arrived at fairly. This is more so
when the party against whom an order has been passed does not
dispute the facts and does not demand to test the veracity of the
version or the credibility of the statement.
33. The party who does not want to controvert the veracity of the
evidence from record or testimony gathered behind his back cannot
expect to succeed in any subsequent demand that there was no
opportunity of cross-examination specially when it was not asked for
and there was no dispute about the veracity of the statements. Where
there is no dispute as to the facts, or the weight to be attached on
disputed facts but only an explanation of the acts, absence of
opportunity to cross-examination does not create any prejudice in
such cases.
34. The principles of natural justice will, therefore, depend upon the
facts and circumstances of each particular case. We have set out
hereinbefore the actual facts and circumstances of the case. The
appellant was associated with the preliminary investigation that was
conducted against him. He does not deny or dispute that.
Information and materials undoubtedly were gathered not in his
presence but whatever information was there and gathered namely,
the versions of the persons, the particular entries which required
examination were shown to him. He was conveyed the information
given and his explanation was asked for. He participated in that
investigation. He gave his explanation but he did not dispute any of
the facts nor did he ask for any opportunity to call any evidence to
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rebut these facts. He did ask for a personal hearing, as we have
mentioned hereinbefore and he was given such opportunity of
personal hearing. His explanations were duly recorded. He does not
allege that his version has been improperly recorded nor did he
question the veracity of the witnesses or the entries or the letters or
documents shown to him upon which the charges were framed and
upon which he was found guilty. Indeed it may be mentioned that he
was really consulted at every stage of preliminary investigation upon
which the charges were based and upon which proposed action
against him has been taken. In that view of the matter, we are of the
opinion, that it cannot be said that in conducting the enquiry or
framing of the charges or arriving at the decision, the authorities
concerned have acted in violation of the principles of natural justice
merely because the evidence was not recorded in his presence or that
the materials, the gist of which was communicated to him, were not
gathered in his presence. As we have set out hereinbefore, indeed he
had accepted the factual basis of the allegations. We have set out
hereinbefore in extenso the portions where he had actually admitted
the factual basis of these allegations against him, where he has not
questioned the veracity of the witness of the facts or credibility of
the witnesses or credibility of the entries on records. Indeed he has
given explanation namely, he was overworked, he had consulted his
superiors and sought their guidance, his conduct has not actually,
according to him caused any financial risk or damage to the bank
concerned. Therefore, in our opinion, in the manner in which the
investigation was carried out as a result of which action has been
taken against him cannot be condemned as bad being in violation of
the principles of natural justice. Had he, however, denied any of the
facts or had questioned the credibility of the persons who had given
information against him, then different considerations would have
applied and in those circumstances, refusal to give an opportunity to
cross-examine the persons giving information against him or to lead
evidence on his own part to rebut the facts would have been
necessary and denial of such opportunity would have been fatal. But
such is not the case here as we have mentioned hereinbefore.”
265. In Transmission Corporation. of A.P. Ltd. vs. Sri Rama
80
Krishna Rice Mill
, a question arose as to whether the statement of
officers that may come to form the basis for action that the Board may
initiate was liable to be tested by providing a right of cross-examination
to the consumer. Negating the assertion of such a right, the Supreme
80
(2006) 3 SCC 74
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Court held:-
“ 5. In response, learned counsel for the respondent submitted that
clause 39.9.2 provides for grant of a “reasonable opportunity” to the
consumer. If the statements of the officers are to be relied upon
without being tested by cross-examination, the consumer will be
highly prejudiced and, therefore, the right to cross-examine them is
inbuilt in clause 39.9.2 of the Terms and Conditions of Supply.
Clause 39.9.2 deals with final assessment. Sub-clauses (1) to (3)
thereof are extracted below for ready reference:
39.9.1. After the provisional assessment, notice is served upon the
consumer as mentioned in clause 39.3 thereof. The officer
authorised in this behalf by the Board (see statement referred to in
clause 39.4 above) shall issue a show-cause notice in the forms
prescribed therefor advising the consumer to file his representation,
if any, within 30 days from the receipt of the notice.
39.9.2. The said officer of the Board shall, after the expiry of the
aforesaid notice period, enquire into the matter and after giving
reasonable opportunity to the consumer and taking into account all
relevant facts and circumstances shall decide whether the consumer
has committed malpractice or pilferage of energy and if so satisfied
proceed to assess to the best of his judgment, the loss sustained by
the Board on account of such malpractice or pilferage of energy by
the consumer. The consumer may be represented by an advocate or
any other person at the time of personal hearing provided the
consumer files proper vakalatnama or power of attorney as the case
may be.
39.9.3. The final assessing authority shall then pass an order setting
out his conclusions and the reasons thereof and communicate a copy
of the order to the consumer and demand the amount, if any, due
from the consumer on the basis of such order after giving credit to
the amounts paid by him.
6. At this juncture, it is to be noted that in para 39 of Hyderabad
Vanaspathi case [(1998) 4 SCC 470] what was observed by this
Court was in relation to disconnection and for that purpose reliance
was placed on an earlier decision of this Court in M.P. Electricity
Board v. Harsh Wood Products [(1996) 4 SCC 522] . At the stage of
issuing notice of disconnection there is no question of granting any
opportunity to the consumer. On the basis of prima facie view of the
officer concerned, notice of disconnection is issued. In that context it
was held both in M.P. Electricity Board [(1996) 4 SCC 522]
and Hyderabad Vanaspathi cases [(1998) 4 SCC 470] that the
procedure laid down was not in violation of the principles of natural
justice. So far as para 43 of Hyderabad Vanaspathi case [(1998) 4
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SCC 470] is concerned, that related to the absence of personal lis or
interest of the adjudicator. In that background it was held that merely
because the departmental authority was adjudicating there was no
prejudice involved. Those principles are not of any assistance in the
present case. In the case at hand without even granting of an
opportunity to the respondent, the final order of assessment was
passed. Merely taking note of the objection filed cannot be said to be
compliance with the provisions contained in clause 39.9.2.
Therefore, the respondent had made a prayer before the Appellate
Authority. The parameters of the principles of natural justice cannot
be covered by any straitjacket formula. It would vary depending
upon the circumstances involved. It is true that the Terms and
Conditions of Supply did not contemplate anything like recording
oral or documentary evidence in the way as is normally done in the
courts of law. But clause 39.9.2 itself provides for a reasonable
opportunity being granted. What would be a reasonable opportunity
would also depend upon the fact situation. In Advanced Law
Lexicon by P. Ramanatha Aiyar (3rd Edn., Vol. 4, pp. 3959 and
3968) the word “reasonable” has been described as follows:
( i ) “[What is] fair, proper, or moderate under the circumstances….”
( ii ) “The expression ‘reasonable’ is not susceptible of a clear and
precise definition. A thing which is reasonable in one case may not
be reasonable in another. Reasonable does not mean the best, it
means most suitable in a given set of circumstances.”
( iii ) “There is no point on which a greater amount of decision is to
be found in courts of law and equity than as to what is reasonable : It
is impossible a priori to state what is reasonable as such in all cases.
You must have the particular facts of each case established before
you can ascertain what is meant by reasonable under the
circumstances—Lord Romilly,
M.R., Labouchere v. Dawson [(1872) LR 13 Eq 322 : 25 LT 894] .”
7. In Khem Chand v. Union of India [1958 SCR 1080 : AIR 1958
SC 300] a Constitution Bench of this Court explained the meaning
of “reasonable opportunity” thus in the context of Article 311(2) of
the Constitution of 1950 (in short “the Constitution”) : (SCR pp.
1096-97)
“( a ) an opportunity to deny his guilt and establish his innocence….
( b ) an opportunity to defend himself by cross-examining the
witnesses produced against him and by examining himself or any
other witnesses in support of his defence; and finally
( c ) an opportunity to make his representation as to why the proposed
punishment should not be inflicted on him….”
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8. The nature of adjudication under clause 39.9.2 of the Terms and
Conditions of Supply is somewhat different from an enquiry under
Article 311(2) of the Constitution. It cannot be laid down as a rule of
universal application that whenever the statement of the
departmental officer is pressed into service for the purpose of
adjudication, a right of cross-examination is inbuilt. On the other
hand, what was said in Bakshi case [1966 Supp SCR 401 : AIR 1967
SC 122] has also really no relevance because that was a case where
no penal consequences were involved and the Commission was only
a fact-finding Commission and, therefore, is clearly distinguishable
of facts.
9. In order to establish that the cross-examination is necessary, the
consumer has to make out a case for the same. Merely stating that
the statement of an officer is being utilised for the purpose of
adjudication would not be sufficient in all cases. If an application is
made requesting for grant of an opportunity to cross-examine any
official, the same has to be considered by the adjudicating authority
who shall have to either grant the request or pass a reasoned order if
he chooses to reject the application. In that event an adjudication
being concluded, it shall be certainly open to the consumer to
establish before the Appellate Authority as to how he has been
prejudiced by the refusal to grant an opportunity to cross-examine
any official. As has been rightly noted by the High Court in the
impugned judgment where the reliance is only on accounts prepared
by a person, cross-examination is not necessary. But where it is
based on reports alleging tampering or pilferage, the fact situation
may be different. Before asking for cross-examination the consumer
may be granted an opportunity to look into the documents on which
the adjudication is proposed. In that event, he will be in a position to
know as to the author of which statement is necessary to be cross-
examined. The applications for cross-examination are not to be filed
in a routine manner and equally also not to be disposed of by an
adjudicator in casual or routine manner. There has to be application
of mind by him. Similarly, as noted above, the consumer has to
show as to why cross-examination is necessary.”
Of significance is the observation rendered in Transmission
Commission when their Lordships held that a right of cross-
examination cannot be elevated to the status of a rule of universal
application whenever the statement of a departmental officer is made
the basis of an adjudication. It further held that even if a consumer were
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denied the opportunity to cross-examine an official, it would still be
incumbent upon it to prove and establish the prejudice that may have
been caused.
266. Reverting then to the varied situations in which an investigation
or an inquiry may be commenced by the NFRA, we fail to discern any
possibility of oral testimony being made the basis for disciplinary
action. In fact, it was the categorical and unequivocal stand of that body
that any proceedings that it may initiate would stand confined to the
audit record only. We thus fail to find any merit in the submission that
the denial of a right to cross examine would result in the violation of
the principles of natural justice. That right would in any event be liable
to be claimed provided the action were based on the testimony and
statement of an individual. The petitioners have failed to dislodge the
stand of the NFRA that its action was founded solely on the audit
record and the inferences and findings that formed part of the AQRR.
The statements and material that it appears to have taken into
consideration were only the responses submitted by the writ petitioners
and the statements attributed to their members. The arguments
addressed on this score are thus wholly unmerited.
267. We also bear in consideration the following succinct
observations entered in Kanugo and Co . and where too the Supreme
Court had negated a contention of a right of cross-examination being an
inviolable principle of natural justice. The relevant extracts from
Kanugo are reproduced hereinbelow:-
“ 11. The learned counsel for the appellant contended that the burden
on the Customs Authorities has not been discharged. He urged that
there was no evidence that the watches had not been brought into
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India lawfully. He urged, secondly, that the impugned order wrongly
placed the burden on the appellant, thirdly, that the impugned order
was made in contravention of natural justice; and fourthly, that there
was no evidence that watches had been improted in contravention of
law.
We may first deal with the question of breach of natural justice.
12.
On the material on record, in our opinion, there has been no such
breach. In the show-cause notice issued on August 21, 1961, all the
material on which the Customs Authorities have relied was set out
and it was then for the appellant to give a suitable explanation. The
complaint of the appellant now is that all the persons from whom
enquiries were alleged to have been made by the authorities should
have been produced to enable it to cross-examine them. It our
opinion, the principles of natural justice do not require that in
matters like this the persons who have given information should be
examined in the presence of the appellant or should be allowed to be
cross-examined by them on the statements made before the Customs
Authorities. Accordingly, we hold that there is no force in the third
contention of the appellant.”
268. In Hyderabad Vanaspati the Supreme Court was called upon to
consider the submission of a right of cross-examination in the context
of energy theft. Negating that submission, the Supreme Court observed
as follows:-
“43. The principle “ nemo judex in causa sua ” will not apply in this
case as the officers have no personal lis with the consumers. As
pointed out by learned Senior Counsel for the Board, they are similar
to income tax or sales tax officials. There is nothing wrong in their
adjudicating the matter especially when the consumers may be
represented by an advocate and the formula for making provisional
assessment is fixed in the clause itself. An argument has been
advanced that the Board has recently deleted the provision enabling
the consumer to be represented by a power-of-attorney agent. It is
contended that the consumer is thereby deprived of the assistance of
an expert which may be required in technical matters. We do not
agree. When the consumer is represented by a lawyer, he can
certainly get such assistance as may be needed from a technical
expert. It is stated by the Board's learned counsel that the provision
was deleted as there was frequent misuse of the same. Whatever may
be the reason for deleting the provision, the existing part of the
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clause enables the consumer to be represented by an advocate. That
is sufficient safeguard for the consumer.”
The aforenoted observations are clearly apt and relevant in the context
of the character of proceedings that may be undertaken by virtue of
Section 132(4) and which are neither adversarial nor one which could
be said to entail a resolution of a lis.
269. It is also pertinent to note that the mere usage of the word
‘summary’ cannot lead one to presume that the procedure that the
NFRA may ultimately adhere to, would be violative of the principles of
natural justice. When Rule 11(5) uses the expression ‘summary
procedure’ all that the rule-making authority perhaps intended to
convey was that disciplinary proceedings would not be liable to be
conducted in accordance with a procedure or rules of evidence which a
court of law may be obliged to follow while trying a lis . In fact, that
rule itself enjoins the authority to ensure adherence to the principles of
natural justice. It also places it under the duty to provide an opportunity
of hearing to a person in cases where circumstances may so warrant.
The statute thus provides enough guidance for the authority to ensure
that the disciplinary proceedings are conducted in a manner which is
fair, transparent and in consonance with the broad, basic and
fundamental principles of natural justice.
270. The proceedings in terms of Rule 11 are envisaged to commence
with the issuance of a SCN and which as per Rule 11(2) must
necessarily make available to the charged CA or firm a detail of the
allegations that are laid together with the evidence in support thereof as
well as an appropriate disclosure with respect to the provisions of the
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Act, Rules or the SAs which are found to have been allegedly violated.
Rule 11(2) further enjoins the SCN to broadly indicate the action that
the NFRA proposes to take or the directions that it may be constrained
to frame if the allegations were to be ultimately established. By virtue
of Rule 11(3) the authority is also statutorily obliged to enclose all
copies of documents relied upon as well as to make available the
extracts of reports of investigation or other records which are proposed
to be used for proving the allegation levelled. In terms of Rule 11(4) the
SCN must be served upon the auditor as well as the firm dependent
upon the action which the authority proposes to initiate. The statute
thus adopts and incorporates appropriate measures and safeguards to
ensure that the procedure that it adopts is in accord with the principles
of fair play and natural justice.
271. We are also of the firm opinion that the proceedings which the
NFRA would undertake are not liable to conform to the requirement of
guilt being proved beyond reasonable doubt and which is a test which
primarily applies to criminal trials. The proceedings under Section
132(4) are essentially disciplinary proceedings and which are governed
and guided by the well-accepted principle of the charge being liable to
be proved on the basis of preponderance of probabilities. While dealing
with the nature of the inquiry, which Section 21 of the CA Act
envisaged, the Supreme Court in Mukesh Gang had upon an exhaustive
review of the scheme of that statute observed as follows:-
“ 23. On a reference made by the Institute, this Court can exercise the
power conferred under Section 21(6) of the Act. In such a reference,
the jurisdiction and powers of the High Court, while dealing with
cases under sub-sections (2), (3) and (4) of Section 21 of the Act, are
limited. The Calcutta High Court took the view that, even if a wider
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construction is put on the material words used in Sections 21 and 22,
they would not be justified in passing any orders against the
respondent in the proceedings because the finding which had been
referred to the High Court was only one, and that was that the
respondent was guilty of professional misconduct in the narrow sense
of the term. In other words, the High Court was of the view that if a
wider construction is placed on the material words of the Section, it
would be making out a new case on the reference, and the Court
would not be justified in adopting such a course. The Apex Court,
in Council of the Institute of Chartered Accountants v. B.
Mukherjea (referred supra), held that the view of the Calcutta High
Court was not well-founded. Section 21(2) lays down the procedure to
be followed by the High Court when a finding, made by the Council,
is referred to it under Section 21(1). Notice, of the day fixed for the
hearing of the reference, should be given to the parties specified in
Section 21(1), and an opportunity of being heard has to be afforded to
them. Section 21(3) then lays down that the High Court may either
pass such final orders on the case as it thinks fit or refer it back for
further inquiry by the Council, upon receipt of the finding after such
inquiry, to deal with the case in the manner provided in sub-section
(2), and to pass final orders thereon. It is clear that, in hearing a
reference made under Section 21(5), the High Court can examine the
correctness of the findings recorded by the statutory bodies in that
behalf. The High Court can even refer the matter back for further
inquiry by the Council, and record a fresh finding. It is not as if the
High Court is bound in every case to consider the merits of the finding
as it has been recorded, and to either accept or reject the said finding.
If, in a given case, it appears to the High Court that, on the facts
alleged and proved, an alternative finding may be recorded, the High
Court can as well send the case back to the Council with appropriate
directions in this regard. The powers of the High Court, under Section
21(3), are undoubtedly wide enough to enable it to adopt any course
which, in its opinion, will enable it to render justice to the parties.
In Institute of Chartered Accountants of India v. L.K.
24.
Ratna (referred supra) the Apex Court discussed the scope of an
enquiry in a reference under Section 21(5) of the Act, and held that it
was apparent that, in the scheme incorporated in Section 21 of the
Act, there were separate functionaries, the Disciplinary Committee,
the Council and, in certain cases, the High Court. The controlling
authority was the Council, which was only logical for the Council is
the governing body of the Institute. When the Council receives
information or a complaint alleging that a member of the Institute is
guilty of misconduct, and it is prima facie of the opinion that there is
substance in the allegations it refers the case to the Disciplinary
Committee. The Disciplinary Committee plays a subordinate role. It
conducts an inquiry into the allegations. Since the inquiry is into the
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allegations of misconduct by the member, it possesses the character of
a quasi-judicial proceeding. The Disciplinary Committee, thereafter,
submits a report of the result of the inquiry to the Council. The
Disciplinary Committee is merely a Committee of the Institute, with
its functions specifically limited by the provisions of the Act. As a
subordinate body, it reports to the Council, the governing body. The
report will contain a statement of the allegations, the defence entered
by the member, a record of evidence and the conclusions upon that
material. The conclusions are the conclusions of the Committee. They
are only tentative. They cannot be regarded as ‘findings’. The
Disciplinary Committee is not vested by the Act with power to render
any findings. It is the Council which is empowered to find whether the
member is guilty of misconduct. Both Section 21(2) and Section 21(3)
are clear as to that. If, on receipt of the report, the Council finds that
the member is not guilty of misconduct, Section 21(2) requires it to
record its finding accordingly, and to direct that the proceedings shall
be filed or the complaint shall be dismissed. If, on the other hand, the
Council finds that the member is guilty of misconduct, Section 21(3)
requires it to record a finding accordingly, and thereafter to proceed in
the manner laid down in the succeeding sub-sections. The finding by
the Council is the determinative decision as to the guilt of the
member, and because it is determinative, the Act requires it to be
recorded. A responsibility as grave as the determination that a member
is guilty of misconduct, and recording of that finding, has been
specifically assigned by the Act to the governing body, the Council. It
is also apparent that it is only upon a finding being recorded by the
Council that the Act moves forward to the final stage of penalisation.
The recording of the finding by the Council is the jurisdictional
springboard for the penalty proceeding which follows.
25. At this point, it is necessary to advert to the nature of the power
conferred on the Council. The Council is empowered to find a
member guilty of misconduct. The penalty which follows is so harsh
that it may result in the removal of a members name from the Register
for several years which would deprive him of the right to a certificate
of practice. As is clear from Section 6(1) of the Act, he cannot
practice without such a certificate. In the circumstances there is every
reason to presume in favour of an opportunity being given to the
member of being heard by the Council before it proceeds to
pronounce upon his guilt. As seen, the finding by the Council operates
with finality in the proceeding, and it constitutes the foundation for
the penalty imposed by the Council on him. The power to find and
record whether a member is guilty of misconduct has been specifically
entrusted by the Act to the entire Council itself and not to a few of its
members who constitute the Disciplinary Committee. It is the
character and complexion of the proceeding, considered in
conjunction with the structure of power constituted by the Act, which
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leads to the conclusion that the member is entitled to a hearing by the
Council before it can find him guilty.
26. In Institute of Chartered Accountants of India v. Price
Waterhouse (referred supra) the Apex Court held that a combined
reading of the relevant provisions in Section 21 and Regulation 16 did
indicate that recording of a finding of guilt or non-guilt by the Council
was mandatory to take further action or to dismiss the complaint or for
further process. The Council was required to consider independently
the explanation submitted by the member and the evidence adduced in
the enquiry before the Disciplinary Committee, and the report of the
Disciplinary Committee. It provided an in-built mechanism under
which the Council itself was required to examine the case of the
professional or other misconduct of a member of the Institute or
associate member, taking the aid of the report submitted by the
Disciplinary Committee, the evidence adduced before the Committee,
and the explanation offered by the delinquent member. The entire
material constitutes the record of the proceeding before the Council to
reach a finding whether or not the delinquent member had committed
professional or other misconduct. Otherwise, the primacy accorded to
the report of the Disciplinary Committee would attain finality,
denuding the Council of the power of discipline over the members of
the Institute, and that would have a deleterious effect on the
maintenance of discipline among the members or associate members
of the Institute.
xxxx xxxx xxxx
48. The phrase Quasi-criminal mean a lawsuit or equity proceeding
that has some, but not all, of the qualities of a criminal prosecution. It
may appear either in a Common law or a Civil law jurisdiction. It
refers to a courts right to punish for actions or omissions as if they
were criminal. The origins of the phrase comes from the Latin word,
quasi, meaning somewhat, sort-of, alike or akin to criminal law, as in
Quasi-contract. The word Quasi is used to indicate that one subject
resembles another, with which it is compared, in certain
characteristics, but there are intrinsic and material differences between
them. During a civil or equity trial, a court may act as if it were a
criminal case to punish a person for contempt of court. In some cases,
a court may impose asset forfeiture or another penalty. For example, a
court has the right to punish actions or omissions of a party in a child
support case as if they were a criminal, penalizing the parent with a
sentence of jail term. Quasi-criminal proceedings include a wide
variety of matters, including prosecution for a violation of the law or
ordinance, psychiatric matters, motor vehicle law, status offences,
family court actions, and equity proceedings such as a Writ.
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49. In criminal cases, generally, Courts try cases following the
prescribed procedure, and impose punishment either of a sentence or a
fine or both, but in disciplinary proceedings, more particularly under
the Act, the punishment which may be imposed is not a jail term or
fine like any other criminal proceeding. The punishment which may
be imposed under Section 21 of the Act, if the respondent is found
guilty of misconduct, cannot be equated to a sentence or a fine
imposed on a person being found guilty in a criminal prosecution. The
standard of proof required in criminal cases and civil cases also vary.
50. In S.A.L. Narayan Row v. Ishwarlal Bhagwandas the Supreme
Court held that, generally speaking, a proceeding is a civil proceeding
only if it relates to a civil right whether resting on common law or
created by statute. The nature of the proceeding depends not upon the
nature of the tribunal which is invested with the authority to grant
relief, but upon the nature of the right violated, and the appropriate
relief which may be claimed. A civil proceeding is, therefore, one in
which a person seeks to enforce, by appropriate relief, the alleged
infringement of his civil rights against another person or the State, and
which if the claim is proved would result in the declaration, express or
implied, of the right claimed and relief such as payment of debt,
damages, compensation, delivery of specific property, enforcement of
personal rights, determination of status etc. There is thus a marked
difference between Civil Proceeding and Criminal Proceeding.
51. If the principles laid down in S.A.L. Narayan Row v. Ishwarlal
Bhagwandas (referred supra) is applied to the facts of the present case,
the proceedings before this Court, before the Council and Committee
are not criminal proceedings, and the rules of evidence applicable to
criminal cases cannot be applied to the disciplinary proceedings
initiated against the respondent.
xxxx xxxx xxxx
60. It is apparent from the above definitions that the Indian Evidence
Act applies the same standard of proof in all civil cases. It makes no
difference between cases in which charges of fraudulent or criminal
character are made and cases in which such charges are not made. But
this is not to say that the Court will not, while striking the balance of
probability, keep in mind the presumption of honesty or innocence or
the nature of the crime or fraud charged. In our opinion, Woodroffe,
J., was wrong in insisting that such charges must be proved clearly
and beyond reasonable doubt.
61. In view of the law laid down by the Constitution Bench of the
Apex Court, in Gulabchand v. Kudilal (referred supra), and the
Judgment of the Privy Council in A, a pleader v. The Judges of the
High Court of Madras (referred supra), it must be held that the
standard of proof required to establish a charge, in a disciplinary
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proceedings, is on a preponderance of probabilities, and cannot be
equated with the standard of proof in a criminal prosecution, wherein
a charge is required to be proved beyond reasonable doubt.
Accordingly, this point is decided.
xxxx xxxx xxxx
114. The Chartered Accountant is a professional whose expertise in
accountancy is acknowledged. He is a member of an expert body and
of a premier institute in India. The certificate issued by an Auditor has
its own impact on the public at large, as it is largely on the basis of
this certificate that the general public subscribe to the shares of the
company. Reckless certification by an Auditor, which has resulted in
the public being misled into subscribing to the shares of the company
in the public issue, would undoubtedly amount to gross negligence.
Large sections of society rely on the certification by the Chartered
Accountants for taking many vital decisions. It is imperative that
utmost care and caution is exercised in issuing such certificates, and
the objectivity, integrity, reliability and credibility of the information
therein is ensured. Of late, several instances have come to light where,
due to the erroneous/ambiguous advice tendered by Chartered
Accountants, borrowal accounts have had to face quick mortality
resulting in huge losses for banks and financial institutions. To ensure
public faith and protect gullible small investors from being cheated of
their life savings, the Institute should ensure that its members possess
competence of a high order, their character is above board, and their
integrity beyond reproach. Chartered Accountants are responsible to
the public for their actions, as heavy reliance is placed on their
credibility by the general public consisting of investors, banks,
financial institutions, governments etc. The Chartered Accountants
duty is not merely to his client, but extends to various segments of
society, more particularly in the commercial field, on whose expertise,
integrity and impartiality they rely on in taking various decisions.
Larger public interest would be served only if Chartered
115.
Accountants maintain high ethical standards apart from her standards
of expertise in accountancy and related fields. In the rare instances
where Auditors are found to lack integrity, objectivity, professional
competence, and to have failed to exercise due care and caution in
issuing certificates, larger public interest would be served only if they
are sternly dealt with. The certificate issued by the auditor is, in this
case, the basis for the general public subscribing to the shares of the
company. The present case best illustrates how a false and misleading
certification by the Auditors, has resulted in the general public being
cheated into believing that the promoters of the company had invested
Rs. 2.25 crores in its capital, before the public at large were invited to
invest in the share capital of the company.
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125. As seen from Clause (7) of Part I of Schedule II read with
Section 21(5) and 22 of the Act, mere negligence by itself would not
constitute misconduct, as the word negligence is prefixed with the
word gross. What is gross negligence is a question required to be
decided by us.
126. The Act does not define gross negligence, but it is defined in
Black Law Dictionary as follows:
Gross Negligence:
1. A lack of slight diligence or care. 2. A conscious, voluntary act
or omission in reckless disregard of a legal duty and of the
consequences to another party, who may typically recover exemplary
damages. Also termed reckless negligence; wanton negligence; willful
negligence; willful and wanton negligence; hazardous negligence,
magna neglegentia. 3. See criminal negligence.
127. Negligence is gross if the precautions to be taken against harm
are very simple, such as persons who are but poorly endowed with
physical and mental capacities can easily take. H.L.A. Hart,
Negligence, Mens Rea and Criminal Responsibility, in Punishment
and Responsibility 136, 149 (1968).
128. Gross Negligence. As it originally appeared, this was very great
negligence, or the want of even slight or scant care. It has been
described as a failure to exercise even that care which a careless
person would use. Several courts, however, dissatisfied with a term so
nebulous. have construed gross negligence as requiring willful,
wanton, or reckless misconduct, or such utter lack of all care as will
be evidence thereof. But it is still true that most courts consider that
gross negligence falls short of a reckless disregard of the
consequences, and differs from ordinary negligence only in degree,
and not in kind.
129. Similarly, in Law Lexicon by P. Ramanatha Aiyar the word gross
negligence is defined as follows:
130. Gross negligence, sometimes called wilful blindness is the same
thing as negligence, with the additional of a vituperative epithet.
131. The term gross neglect means and involves a failure on the part
of a person to take such reasonable precautions against the risk of an
innocent person being deceived in the circumstances of the particular
case.
132. Gross negligence means some culpable default, not arising
merely from want of foresight or mistake of judgment.
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133. Negligence marked by total or nearly total disregard for the
rights of others and by total or nearly total indifference to the
consequences of an act.
For an act of negligence to constitute gross negligence, it must be
134.
in reckless disregard of a legal duty and of the consequences to
another party, or wilful or voluntary or wanton omission. Negligence
is the failure to take reasonable care as an ordinary prudent man,
depending upon the circumstances of the case, would take.
xxxx xxxx xxxx
155. The Supreme Court also held that the Auditor holds a position of
trust and it is his bounden duty to honour that trust by being candid
with the shareholders, and telling them frankly and fully everything
with regard to the affairs of the company which has come to his
knowledge and which it is material for the shareholders to know; if an
Auditor does not do what it is his duty to do, it is no defence for him
to say in a disciplinary proceeding, started under the Chartered
Accountants Act, that he had told the shareholders that he had not
done it. The lapse is constituted by his failure to perform a duty
without which an audit is meaningless and it is not excused by giving
information of the omission to the share-holders. The reason is that
the object of the Act is to ensure in public interest that those who
practise the profession of Auditors shall perform, in their actual
practice, at least the essential duties of an audit and shall bring to bear
on their work attention to matters to which their duty requires them to
pay attention, and the examination of accounts involves thorough and
exhaustive testing of every account in the general ledger. If such
negligence would cause no damage to anyone, such negligence cannot
be termed as gross negligence within the definition of Section 22 of
the Act.
xxxx xxxx xxxx
178. The professional misconduct attributed to the respondent is grave
and serious in nature which affects public confidence, and their faith
in the integrity and impartiality of the Chartered Accountants and the
Institute of which they are members. A false certification by the
respondent has enabled the promoters of the company to squander
public money, on inducing the general public to subscribe to the share
capital of the company. Taking a lenient view, or exonerating such
professionals, would encourage others to indulge in similar acts, and
completely erode the faith of the general public in the impartiality and
integrity of the members of the Institute, and bring the Institute itself
into disrepute.
179. The Council of the Institute has recommended removal of the
name of the respondent from the Register of the Institute for a period
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of three (3) years i.e. suspending him from practicing as a Chartered
Accountant for a period of three (3) years. The recommendation of the
Institute, regarding the nature of the punishment, is not binding on this
Court and, in exercise of the wide powers conferred on it by the Act,
this Court can impose a different punishment. In a similar situation,
the Division Bench of this Court, in Council of the Institute of
Chartered Accountants of India v. V.I. Oommen (referred supra),
imposed a higher punishment than the one recommended by the
Institute.
180. In the light of the above discussion, after anxious consideration
of the matter, we find it appropriate that the respondent herein should
be suspended from practising as a Chartered Accountant for a period
of three years from 01.11.2016 to 31.10.2019.”
181. Accordingly, the referred case is disposed of directing the
respondent's membership with the Institute of Chartered Accountants
of India shall stand suspended from 01.11.2016 to 31.10.2019, and,
consequently, during that period he shall not practice or function as a
Chartered Accountant. There shall be no order for costs.”
272. As is evident from a reading of the conclusions rendered in
Mukesh Gang the Supreme Court had in unequivocal terms found that
the rules of evidence which otherwise inform criminal trials cannot be
imputed to or held to govern proceedings initiated under the CA Act. It
was held that the standard of proof required to establish a charge in
those proceedings cannot be equated to that which applies to a criminal
prosecution. It would thus be wholly incorrect for the proceedings in
question being held to necessarily be in conformity with proof of
evidence and the standard of beyond reasonable doubt and which are
principles concerned with criminal trials alone.
273. That then takes us to the assertion of the petitioners being
deprived of an opportunity to effectively meet the charges levelled in
light of the proceedings being restricted to the audit file. We in the
preceding parts of this judgment had an occasion to notice some of the
provisions contained in the SAs and which had repeatedly laid
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emphasis on the audit file and record being comprehensive and
incorporating all material which may have constituted the basis for the
conclusions appearing in the audit report. Suffice it to state that the
charge of professional misconduct which may come to be laid against a
CA or a firm would have to be necessarily proved and established on
the basis of that audit record alone. The restriction of the proceedings to
the audit record thus binds not only the person charged with misconduct
but the NFRA itself.
274. Of course that is not to state, that an auditor or a firm is
precluded from referring to material or standards that may be sought to
be referred to in order to lend credence or support to the conclusions
contained in the audit report. However, since the charge is to be proved
solely on the basis of the audit record and the reports of investigation
and other records, we find no merit in the challenge to the procedure
prescribed under the NFRA Rules when they restrict the inquiry to the
audit file.
275. Yet another submission which was advanced in challenge to the
procedure contemplated under the NFRA Rules was on the basis of a
procedure distinct from the Misconduct Rules, 2007 being made
applicable only to a particular class of auditors and firms. The
submission was that since an investigation or inquiry by the NFRA
would only be in respect of a class of companies, which are spoken of
in Rule 3, the same would lead to a situation where only auditors of
such companies would be subjected to disciplinary proceedings
undertaken in accordance with the NFRA Rules. All other auditors and
firms, according to the writ petitioners, would continue to be governed
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by the CA Act and the Rules framed thereunder.
276. The aforenoted submission is clearly misconceived since it
proceeds on the premise that the NFRA Rules are far more stringent
and onerous when compared to the Misconduct Rules, 2007. However,
we have already in the preceding parts of this judgment found that the
aforesaid contention is clearly untenable. Both the Misconduct Rules,
2007, as well as Rule 11(5) enjoin disciplinary proceedings to be
conducted in accordance with the principles of natural justice and to
follow a summary procedure of disposal. The Misconduct Rules, 2007
speak of oral examination and testimony only since proceedings under
those rules could commence on the basis of information supplied or
submitted by a complainant or an individual against an auditor or a
firm. It is only to cater to such contingencies that those rules
incorporate provisions of oral testimony and cross-examination.
However, and as was noted hereinabove, disciplinary proceedings
commenced on the basis of Section 132(4) are not concerned with
individual complaints or the testimony of persons. Those proceedings
commence either upon a reference by the Union Government or on
information that may be available with the NFRA or the opinion
formed by it in the course of discharge of its various statutory
functional obligations contemplated under Rules 8, 9 and 10 of the
NFRA Rules.
277. As was noted in the prefatory parts of this decision, Section
132(4) and the consequential rules framed to enable NFRA to discharge
its functions, represent a policy decision taken by Parliament to bring
the regulation of audits in tune with global practices. The statute thus
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seeks to borrow from and adopt some of the best practices which
inform the functioning of other regulatory bodies including the PCAOB
and the FRC. The PCAOB is guided by the following Rules in the
conduct of investigations:-
“ Rule 5100. Informal Inquiries
(a) Commencement of an Informal Inquiry
The Director of Enforcement and Investigations may
undertake an informal inquiry where it appears that, or to determine
whether, an act or practice, or omission to act, by a registered public
accounting firm, any associated person of that firm, or both, may
violate -
(1) any provision of the Act;
(2) the Rules of the Board;
(3) the provisions of the securities laws relating to the
preparation and issuance of audit reports and the obligations and
liabilities of accountants with respect thereto, including the rules of
the Commission issued under the Act; or
(4) professional standards.
(b) Informal Inquiry Activities
In an informal inquiry, the Director of Enforcement and
Investigations may request documents, information or testimony
from, or an interview with, any person.
Rule 5101. Commencement and Closure of Investigations
(a) Commencement of Investigations
(1) Order of Formal Investigation
Upon the recommendation of the Director of Enforcement
and Investigations or the Director of Registration and Inspections, or
upon the Board's own initiative, or otherwise, the Board may issue
an order of formal investigation when it appears that an act or
practice, or omission to act, by a registered public accounting firm or
any person associated with a registered public accounting firm may
violate any provision of the Act, the Rules of the Board, the
provisions of the securities laws relating to the preparation and
issuance of audit reports and the obligations and liabilities of
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accountants with respect thereto, including the rules of the
Commission issued under the Act, or professional standards.
(2) Designation of Staff
In an order of formal investigation, the Board may designate
members, or groups of members, of the Board's staff to issue
accounting board demands to, and otherwise require or request
cooperation of, any person pursuant to Section 105(b)(2) of the Act,
and the Board's Rules thereunder, to the extent the information
sought is relevant to the matters described in the Board's order of
investigation.
(b) Closure of Investigations
Upon the recommendation of the Director of Enforcement
and Investigations, or on its own initiative, the Board may issue an
order terminating or suspending, for a specified period of time, a
formal investigation.
Rule 5102. Testimony of Registered Public Accounting Firms
and Associated Persons in Investigations
(a) General
The Board, and the staff of the Board designated in an order
of formal investigation, may require the testimony of any registered
public accounting firm or any person associated with a registered
public accounting firm, with respect to any matter that the Board
considers relevant or material to an investigation.
(b) Accounting Board Demand for Testimony
The Board, and the staff of the Board designated in an order
of formal investigation, shall require testimony by serving an
accounting board demand that -
(1) gives reasonable notice of the time and place for the taking
of testimony;
(2) states the method or methods by which the testimony shall
be recorded, which may be by sound or sound-and-visual, but shall
include by stenographic means; and
(3) if the person to be examined is a registered public accounting
firm, a description with reasonable particularity of the matters on
which examination is requested.
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(c) Conduct of Examination
(1) Oath or Affirmation
Before testifying, every witness shall be required to declare that the
witness will testify truthfully, by oath or affirmation administered in
a form calculated to awaken the witness's conscience and impress
the witness's mind with the duty to do so.
(2) General
Examinations shall be conducted before a reporter designated
by the Board's staff.
(3) Persons Permitted to be Present
Persons permitted to be present at an examination pursuant to this
Rule are limited to -
(i) the person being examined and his or her counsel, subject to
Rule 5109(b);
(ii) any Board member or member of the staff of the Board;
(iii) the reporter; and
(iv) such other persons as the Board, or the staff of the Board
designated in the order of formal investigation, determine are
appropriate to permit to be present; provided, however, that in no
event shall a person other than the witness who has been or is
reasonably likely to be examined in the investigation be present.
(4) Examinations of Registered Public Accounting Firms
A registered public accounting firm subject to an accounting
board demand shall designate one or more individuals who consent
to testify on its behalf, and shall set forth, for each individual
designated, the matters on which the individual will testify. The
individuals so designated shall testify as to matters known or
reasonably available to the registered public accounting firm.
(d) Transcript
A witness shall have 15 days, or such longer period as the
Director of Enforcement and Investigations may allow, after being
notified by the reporter that the transcript, or, where applicable,
video or other recording, is available in which to review the
transcript or other recording and, if there are changes in form or
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substance, to sign a statement reciting such changes and the reasons
given by the witness for making them. The reporter shall make a
certificate in writing to accompany the transcript, which shall
indicate -
(1) that the witness was duly sworn by the officer and that the
transcript is a true record of the testimony given by the witness; and
(2) whether the witness requested to review the transcript and, if
so, that the reporter has appended any changes made by the witness
during the period allowed.
Rule 5105. Requests for Testimony or Production of Documents
from Persons Not Associated With Registered Public Accounting
Firms
(a) Testimony
The Board, and the staff of the Board designated in an order
of formal investigation, may issue an accounting board request for
the testimony of any person, including any client of a registered
public accounting firm, that the Board considers relevant or material
to an investigation.
(1) Requests for Testimony
An accounting board request for testimony pursuant to
subparagraph (a) of this Rule shall -
(i) give appropriate notice, subject to the needs of the
investigation of the time and place for the taking of testimony;
(ii) state the method or methods by which the testimony shall be
recorded, which may be by sound or sound-and-visual, but shall
include by stenographic means; and
(iii) if the person to be examined is an issuer, broker, dealer,
partnership, association, governmental agency, or other organized
entity, provide a description with reasonable particularity of the
matters on which examination is requested.
(2) Conduct of Examination and Transcript
An examination requested pursuant to this Rule shall be
conducted consistent with Rules 5102(c) and a transcript shall be
prepared consistent with Rule 5102(d). If the person to be examined
is an issuer, broker, dealer, partnership, association, or governmental
agency, the person to be examined shall designate one or more
individuals who consent to testify on its behalf and shall set forth,
for each individual designated, the matters on which the individual
will testify. The individuals so designated shall testify as to matters
known or reasonably available to the organization.
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(b) Documents
The Board, and the staff of the Board designated in an order
of formal investigation, may issue an accounting board request to
any person, including any issuer, broker, or dealer for the production
of any document that is relevant or material to an investigation, with
appropriate notice, subject to the needs of the investigation. A
request issued pursuant to this Rule shall set forth a reasonable time
and place for production, subject to the needs of the investigation.
Note: Failure to comply with an accounting board request pursuant
to Rule 5105 may result in a Board request for the issuance of a
Commission subpoena, pursuant to Rule 5111.
Rule 5200. Commencement of Disciplinary Proceedings
(a) Grounds for Commencement of Disciplinary Proceedings
The Board may commence a disciplinary proceeding when –
(1) it appears to the Board, as the result of an investigation
or otherwise, that a hearing is warranted to determine whether a
registered public accounting firm, or an associated person of such a
firm, has engaged in any act or practice, or omitted to act, in
violation of the Act, the Rules of the Board, the provisions of the
securities laws relating to the preparation and issuance of audit
reports and the obligations and liabilities of accountants with respect
thereto, including the rules of the Commission issued under the Act,
or professional standards;
(2) it appears to the Board, as the result of an
investigation or otherwise, that a hearing is warranted to determine
whether a registered public accounting firm, or any person who is, or
at the time of the alleged failure reasonably to supervise was, a
supervisory person of such firm, has failed reasonably to supervise
an associated person, either as required by the Rules of the Board
relating to auditing or quality control standards, or otherwise, with a
view to preventing violations of this Act, the Rules of the Board, the
provisions of the securities laws relating to the preparation and
issuance of audit reports and the obligations and liabilities of
accountants with respect thereto, including the rules of the
Commission under the Act, or professional standards, and that such
associated person has committed a violation of the Act, or of any
such rules, laws, or standards;
(3) it appears to the Board that a hearing is warranted
pursuant to Rule 5110.
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[Effective pursuant to SEC Release No. 34-49704, File No. PCAOB-
2003-07 (May 14, 2004); and SEC Release No. 34-72087, File No.
PCAOB-2013-03 (May 2, 2014)]
(b) Presiding Official
All proceedings shall be presided over by the Board or, if the
Board orders, by a hearing officer.
(c) Assignment of a Hearing Officer
Subject to Rule 5200(b), as soon as practicable after the
Board has issued an order instituting proceedings, or after a
registration applicant has requested a hearing pursuant to Rule
5500(b), the Secretary shall assign a hearing officer to preside over
the proceeding and shall serve the parties with notice of the hearing
officer's assignment. Subject to Rules 5402 and 5403, the hearing
officer shall have the authority to do all things necessary and
appropriate to discharge his or her duties. The powers of the hearing
officer include, but are not limited to, the following –
(1) obtaining a court reporter to administer oaths and
affirmations;
(2) issuing accounting board demands pursuant to Rule
5424;
(3) receiving relevant evidence and ruling upon the
admission of evidence and offers of proof;
(4) regulating the course of a proceeding and the conduct
of the parties and their counsel;
(5) holding prehearing and other conferences and
requiring the attendance at any such conference of at least one
representative of each party who has authority to negotiate
concerning the resolution of issues in controversy;
(6) recusing himself or herself upon motion made by a
party or upon his or her own motion;
(7) ordering, in his or her discretion, in a proceeding
involving more than one respondent, that the interested division
indicate, on the record, at least one day prior to the presentation of
any evidence, each respondent against whom that evidence will be
offered;
(8) subject to any limitations set forth elsewhere in these
Rules, considering and ruling upon all procedural and other motions;
(9) preparing an initial decision as provided in Rule 5204;
(10) upon notice to all parties, reopening any hearing prior
to the filing of an initial decision therein, or, if no initial decision is
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to be filed, prior to the time fixed for the filing of final briefs with
the Board;
(11) informing the parties as to the availability of one or
more alternative means of dispute resolution, and encouraging the
use of such methods; and
(12) scheduling hearing dates, except that a hearing officer
may not, absent the approval of the Board, change a hearing date set
by Board order.
(d) Separation of Functions
The staff of the Division of Enforcement and Investigations
may not participate or advise in the decision, or in Board review of
the decision, in any proceeding in which the Division of
Enforcement and Investigations is the interested division, except as a
witness or counsel in the proceeding. Any other employee or agent
of the Board engaged in the performance of investigative or
prosecutorial functions for the Board in a proceeding may not, in
that proceeding or one that is factually related, participate or advise
in the decision, or in Board review of the decision, except as a
witness or counsel in the proceeding. A hearing officer may not be
responsible to or subject to the supervision or direction of an
employee or agent engaged in the performance of investigative or
prosecuting functions for the Board.
(e) Consolidation of Proceedings
By order of the Board or a hearing officer, proceedings
involving a common question of law or fact may be consolidated for
hearing of any or all the matters at issue in such proceedings. The
Board or the hearing officer may make such orders concerning the
conduct of such proceedings as it deems appropriate to avoid
unnecessary cost or delay. Consolidation shall not prejudice any
rights under these Rules and shall not affect the right of any party to
raise issues that could have been raised if consolidation had not
occurred. For purposes of this Rule, no distinction is made between
joinder and consolidation of proceedings.”
A consideration of the above would establish that the NFRA Rules are
broadly in consonance with the above. The departure occurs only on
account of oral testimony being excluded.
D IVISIONS : S EPARATION OF F UNCTIONS
278. That takes us to the next segment of our decision and which
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pertains to the contention that the NFRA failed to follow the statutory
scheme itself and with a common complement of people authoring the
AQRR which contained damning findings of guilt and the same body
thereafter taking a decision to commence disciplinary proceedings. Our
attention was firstly drawn to Section 132(1)(a) and which prescribes
that the NFRA would perform its functions through such divisions as
may be prescribed. The petitioners also invited our attention to Section
132(3)(a) and which stipulates that each division of the NFRA would
be presided over by its Chairperson or a full time member authorized
by the former. The petitioners lay stress on the clear and distinct role
which is assigned to the Executive Body on the other hand and whose
composition is spelt out in Section 132(3)(b).
279. Proceeding then to the Rules, the petitioners alluded to Rule 2(g)
and which defines that word to mean a division including one headed
by a Chairperson or a full time member established for the purpose of
organizing and carrying out its functions and duties. It was submitted
that the broad division of functions amongst separate units of the NFRA
is clearly evident from the statutory scheme underlying the NFRA
Rules and which at more than one place speak of the “concerned
division” .
280. For instance, they referred to Rule 7(4) and which postulates that
if the NFRA has reason to believe that any accounting standard has
been violated, it may take a decision on the further course of
investigation or action liable to be undertaken “ through its concerned
division” . The petitioners underscore the fact that the dichotomy of
functions which are envisaged to be performed by different divisions of
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the NFRA stands replicated in Rule 8(8). The said Rule too enjoins the
authority to chart a future course of investigation or enforcement
“through its concerned division” . Similar provisions are found in Rule
10 and which entails the NFRA forwarding a particular case for
investigation or a reference received by the Union Government or even
where it were to suo moto decided to commence an investigation to a
division dealing with enforcement. The aforesaid position again stands
reiterated in Rule 11 and which in unequivocal terms provides that
based on the findings of the NFRA in the course of discharge of its
monitoring, enforcement or oversight functions, if sufficient cause were
found to exist warranting action being taken under Section 132(4), the
matter would be referred to the concerned division which shall
thereafter dispose of the SCN proceedings. This is a position which also
emerges from a reading of sub-rule (5) of Rule 11.
281. Reference in this respect was also made to Rules 14 and 18 of the
Misconduct Rules, 2007 and which are extracted hereinbelow: -
“ 14. Procedure to be followed by the Board of Discipline
(1) The Board of Discipline shall follow summary disposal
procedure in dealing with all cases before it, as laid down in this
Chapter.
(2) If the Board of Discipline decides to proceed further under clause
(b) of sub-rule (2) of rule 9 or under clause (b) of sub-rule (3) of rule
9, it shall expeditiously cause to deliver to the respondent and the
complainant, a copy each of the following: −
(a) prima facie opinion formed by the Director; and
(b) particulars or documents relied upon by the Director, if any,
during the course of formulation of prima facie opinion.
(3) The Board of Discipline shall inform the respondent to file a
written statement, within such time as may be specified:
Provided that the Board of Discipline may give him additional time
for submitting his written statement on application by the respondent
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on his adducing sufficient reasons to the satisfaction of the Board of
Discipline for seeking additional time:
Provided further that such additional time shall not be given more
than once and if the respondent still does not submit a written
statement, the Board of Discipline shall presume that he has no
further submissions to make and shall proceed to decide the case on
merits.
(4) The respondent shall send a copy of his written statement, along
with supporting documents, to the Director and the complainant
within the stipulated time.
(5) The complainant or the Director may, after receipt of the written
statement, submit a rejoinder to the Board of Discipline, with a copy
to the respondent, along with supporting documents, if any.
(6) The Presiding Officer of the Board of Discipline shall fix a date,
hour and place of hearing, which shall not ordinarily be later than 45
days from the date of receipt of prima facie opinion and the Board of
Discipline shall cause a notice to be sent of such date, hour and place
to the Director, respondent and complainant and require them to
appear before it in person to make oral submissions, if any.
Explanation 1. − For the purpose of this rule, the appearance
includes, unless and otherwise directed, appearance by an advocate
or through any authorized representative, who may be a Chartered
Accountant, Cost Accountant or Company Secretary. 1
[Explanation 2 - For the purpose of this rule, the appearance also
includes the appearance through video-conference, modalities for
which may be as formulated by the Institute from time to time.]
(7) On the date of hearing, if the respondent, in spite of the service
of notice, under sub-rule (6), does not appear either in person 1 [or
through video conference in terms of the modalities formulated
under these Rules] or through his authorized representative, the
Board of Discipline may proceed ex-parte and pass such orders as it
may think fit or direct fresh notice to be served.
(8) The Board of Discipline may, on such terms as it thinks fit, and
at any stage of the proceedings, adjourn the hearing: Provided that
such adjournment shall not be given more than once at any stage of
the proceedings.
(9) The Board of Discipline shall consider the written
representations, including the written statements, rejoinder and
supporting documents, and the oral submissions, if any made by the
Director, the complainant and the respondent and arrive at a finding
on whether the respondent is guilty or not of any professional or
other misconduct.
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xxxx xxxx xxxx
18. Procedure to be followed by the Committee
(1) The Committee shall be guided by the principles of natural
justice and shall follow the procedure in dealing with all cases
before it, as laid down in this Chapter.
(2) If the Committee decides to proceed further under clause (b) of
sub-rule (2) of rule 9 or if it receives a reference from Board of
Discipline under clause (b) of sub-rule (3) of rule 9, it shall
expeditiously cause to deliver to the respondent and the complainant,
a copy each of the following, −
(a) prima facie opinion formed by the Director, and (b) particulars or
documents relied upon by the Director, if any, during the course of
formulation of prima facie opinion.
(3) The Committee shall inform the respondent, as the case may be
to file a written statement, within such time as may be specified:
Provided that the Committee may give him additional time for
submitting his written statement, on application by the respondent on
his adducing sufficient reasons to the satisfaction of the Committee
for seeking additional time:
Provided further that such additional time shall not be given more
than once and if the respondent still does not submit a written
statement, the Committee shall presume that he has no further
submissions to make and shall proceed to decide the case on merits.
(4) The respondent shall send a copy of his written statement, along
with supporting documents and a list of witnesses, to the Director
and the complainant within the stipulated time.
(5) The complainant or the Director may, after receipt of the written
statement, submit a rejoinder to the Committee, with a copy to the
respondent, along with supporting documents, if any.
(6) The Presiding Officer of the Committee shall fix a date, hour and
place of hearing, which shall not ordinarily be later than 45 days
from the date of receipt of prima facie opinion and the committee
shall cause a notice to be sent of such date, hour and place to the
Director, respondent and complainant and require them to appear
before it in person to make oral submissions, if any.
[Explanation 1. – For the purpose of this rule, the appearance
includes, unless and otherwise directed, appearance by an advocate
or through any authorized representative, who may be a Chartered
Accountant, Cost Accountant or Company Secretary.
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[Explanation 2. - For the purpose of this rule, the appearance also
includes the appearances through video-conference, modalities for
which may be as formulated by the Institute from time to time.]”
282. It becomes pertinent to note that by virtue of the Act and the
NFRA Rules, all matters pertaining to investigation, monitoring,
enforcement and disciplinary proceedings are to be decided by the
Chairperson or any one or more of the full-time members acting
through “one of the divisions”. According to the petitioners, while a
division may be headed by either a Chairperson or a full time Member,
it would be clearly untenable in law for the same body of persons
donning the dual role of examining compliance with auditing standards
and thereafter using the said material to form an opinion as to whether
disciplinary proceedings should be initiated. The writ petitioners would
contend that a conspectus of the provisions comprised in the Act as
well as the NFRA Rules makes it abundantly clear that the monitoring
and oversight functions, the power of the NFRA to investigate as well
as the power to initiate and adjudicate disciplinary proceedings are
necessarily required to be performed through separate divisions. They
assert that in the facts of these cases, it becomes apparent that no
separate divisions in fact existed.
283. The petitioners thereafter invited our attention to our order of 12
September 2023 passed in these proceedings. Pursuant to the directions
issued by us on that date, the NFRA had filed an affidavit dated 06
October 2023 contents whereof have been extracted hereinbefore.
According to the writ petitioners, from the disclosures so made, it is
manifest that NFRA admits that the AQRR and SAQRR was prepared
and approved by its Executive Body and it was that body which
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decided to issue the impugned notices. It was submitted that it is thus
apparent that was the Executive Body which prepared and approved the
Show Cause Notices which came to be issued to the partners and it was
that very body which had heard oral arguments.
284. It was submitted that the statutory provisions requiring NFRA to
discharge its functions through separate divisions is based on the
principles of natural justice itself and which forbids a person from
being a judge in its own cause. We were referred to the well-settled
precept of reasonable likelihood of bias and which ordains that bias
need not be actually proved in fact. It was submitted that proceedings
would be rendered a nullity even where one were able to establish from
the circumstances obtaining that a reasonable apprehension of bias
could arise. According to the writ petitioners, it is this reasonable
apprehension and likelihood of bias which is frowned upon by courts.
285. In order to buttress the aforesaid contentions, the petitioners cited
for our consideration the judgment of the Supreme Court in Mohd.
81
Yunus Khan vs. State of Uttar Pradesh and Ors.
and where it was
held that a witness in a case can neither initiate disciplinary proceedings
nor pass an order of punishment. The judgment in Mohammad Yunus
Khan , however, and in our considered opinion, is clearly
distinguishable since what it essentially held was that a person cannot
don the dual role of being a witness in an enquiry as well as act as the
Inquiry Officer. Neither the NFRA as a body nor its Executive Body
can possibly be construed as having acted as a witness in proceedings.
286. The decision cited by the writ petitioners in the matter of
81
(2010) 10 SCC 539
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Institute of Chartered Accountants of India vs. LK Ratna and
82
Ors.
, however, would be more apt since the said judgment was
rendered in the context of the CA Act and the disciplinary powers
which stand vested in the Council. It would thus be appropriate to refer
to the following passage of that decision: -
24. There can be no dispute that the function of the Disciplinary
“
Committee of holding an enquiry under Section 21(1) of the Act into
the conduct of the member calls for a recording of evidence by the
Committee. Its duty does not end there. It must consider the
evidence and come to its conclusions. As Section 21(2) of the Act
plainly says, it must report “the result of its enquiry” to the Council.
In the absence of express or implied statutory intendment to the
contrary, it appears to us that the members of such a Committee
would be disqualified from participating in the deliberations of the
Council when it proceeds to consider the report in order to find
whether the member is guilty of misconduct. For that alone would be
consistent with the fundamental principle that justice must not only
be done but must also appear to be done. The nature of the function
discharged by the Council in rendering its finding is quasi-judicial,
and we are reminded of the observations of this Court as far back
as Manek Lal v. Prem Chand [AIR 1957 SC 425 : 1957 SCR 575,
580-81] :
“It is well settled that every member of a tribunal that is called
upon to try issues in judicial or quasi-judicial proceedings must
be able to act judicially; and it is of the essence of judicial
decisions and judicial administration that Judges should be
able to act impartially, objectively and without any bias. In
such cases the test is not whether in fact a bias has affected the
judgment; the test always is and must be whether a litigant
could reasonably apprehend that a bias attributable to a
member of the Tribunal might have operated against him in the
final decision of the Tribunal. It is in this sense that it is often
said that justice must not only be done but must also appear to
be done.” ”
287. SRBC while advancing submissions similar to those canvassed
by DHS had urged that it is manifest from the disclosures made by the
82
(1986) 4 SCC 537
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respondent that all functions had been bundled into one singular body,
namely the Executive Body. It was contended that since Section
132(3)(b) clearly and specifically spells out the composition of the
Executive Body, it would be wholly incorrect to equate it to a division
and which is separately defined under the NFRA Rules quite apart from
having been spoken of in the principal provision of the Act itself. The
petitioners in this respect also sought to highlight the distinction and
division of functions which are factored in and placed as salutary
safeguards to guide proceedings taken by similar regulatory bodies
including the PCAOB as well as the FRC. We propose to deal with
some of those provisions and which regulate the functioning of those
authorities in the latter parts of this decision.
288. It was thus contended that the overlapping of functions coupled
with the admitted fact of a body of individuals having discharged a dual
role and function despite the separation which is envisaged, gives rise
to a reasonable apprehension of likelihood of bias. Our attention was in
this context drawn to the decision of the US Supreme Court in
83
Williams vs. Pennsylvania
and where the following illuminating
passages appear:-
“Due process guarantees “an absence of actual bias” on the part of a
judge. In re Murchison, 349 U. S. 133, 136 (1955). Bias is easy to
attribute to others and difficult to discern in oneself. To establish an
enforceable and workable framework, the Court’s precedents apply
an objective standard that, in the usual case, avoids having to
determine whether actual bias is present. The Court asks not whether
a judge harbors an actual, subjective bias, but instead whether, as an
objective matter, “the average judge in his position is ‘likely’ to be
neutral, or whether there is an unconstitutional ‘potential for bias.’”
Caperton, 556 U. S., at 881. Of particular relevance to the instant
83
579 U.S. ___ (2016)
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case, the Court has determined that an unconstitutional potential for
bias exists when the same person serves as both accuser and
adjudicator in a case. See Murchison, 349 U. S., at 136–137. This
objective risk of bias is reflected in the due process maxim that “no
man can be a judge in his own case and no man is permitted to try
cases where he has an interest in the outcome.” Id., at 136.
The due process guarantee that “no man can be a judge in his own
case” would have little substance if it did not disqualify a former
prosecutor from sitting in judgment of a prosecution in which he or
she had made a critical decision. This conclusion follows from the
Court’s analysis in In re Murchison. That case involved a “one-man
judge grand jury” proceeding, conducted pursuant to state law, in
which the judge called witnesses to testify about suspected crimes.
Id., at 134. During the course of the examinations, the judge became
convinced that two witnesses were obstructing the proceeding. He
charged one witness with perjury and then, a few weeks later, tried
and convicted him in open court. The judge charged the other
witness with contempt and, a few days later, tried and convicted him
as well. This Court overturned the convictions on the ground that the
judge’s dual position as accuser and decisionmaker in the contempt
trials violated due process: “Having been a part of [the accusatory]
process a judge cannot be, in the very nature of things, wholly
disinterested in the conviction or acquittal of those accused.” Id., at
137.
No attorney is more integral to the accusatory process than a
prosecutor who participates in a major adversary decision. When a
judge has served as an advocate for the State in the very case the
court is now asked to adjudicate, a serious question arises as to
whether the judge, even with the most diligent effort, could set aside
any personal interest in the outcome. There is, furthermore, a risk
that the judge “would be so psychologically wedded” to his or her
previous position as a prosecutor that the judge “would consciously
or unconsciously avoid the appearance of having erred or changed
position.” Withrow, 421 U. S., at 57. In addition, the judge’s “own
personal knowledge and impression” of the case, acquired through
his or her role in the prosecution, may carry far more weight with the
judge than the parties’ arguments to the court. Murchison, supra, at
138; see also Caperton, supra, at 881.”
289. Yet another decision which was cited in this respect was that of
84
the Supreme Court in
Ranjit Thakur vs Union of India
and which
84
(1987) 4 SCC 611
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had explained the concept of bias in the following words:-
“ “16. It is the essence of a judgment that it is made after due
observance of the judicial process; that the court or tribunal passing
it observes, at least the minimal requirements of natural justice; is
composed of impartial persons acting fairly and without bias and in
good faith. A judgment which is the result of bias or want of
impartiality is a nullity and the trial “ coram non-judice ”.
(See Vassiliades v. Vassiliades [AIR 1945 PC 38 : 221 IC 603]
17. As to the tests of the likelihood of bias what is relevant is the
reasonableness of the apprehension in that regard in the mind of the
party. The proper approach for the Judge is not to look at his own
mind and ask himself, however, honestly, “Am I biased?”; but to
look at the mind of the party before him.
18. Lord Esher in Allinson v. General Council of Medical Education
and Registration [(1894) 1 QB 750, 758-59] said:
“The question is not, whether in fact he was or was not
biased. The court cannot inquire into that. . . . In the
administration of justice, whether by a recognised legal court
or by persons who, although not a legal public court, are
acting in a similar capacity, public policy requires that, in
order that there should be no doubt about the purity of the
administration, any person who is to take part in it should not
be in such a position that he might be suspected of being
biased.”
19. In Metropolitan Properties Co. (F.G.C.) Ltd. v. Lannon [(1969)
1 QB 577, 599] Lord Denning M.R. observed:
“. . . in considering whether there was a real likelihood of bias,
the court does not look at the mind of the justice himself or at
the mind of the chairman of the tribunal, or whoever it may be,
who sits in a judicial capacity. It does not look to see if there
was a real likelihood that he would, or did, in fact favour one
side at the expense of the other. The court looks at the
impression which would be given to other people. Even if he
was as impartial as could be, nevertheless if right-minded
persons would think that, in the circumstances, there was a real
likelihood of bias on his part, then he should not sit.”
20. Frankfurter, J. in Public Utilities Commission of the District of
Columbia v. Pollak [343 US 451, 466-67 : 96 L Ed 1068, 1079]
said:
“The judicial process demands that a Judge move within the
framework of relevant legal rules and the covenanted modes
of thought for ascertaining them. He must think
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18:46:26
dispassionately and submerge private feeling on every aspect
of a case. There is a good deal of shallow talk that the judicial
robe does not change the man within it. It does. The fact is
that on the whole Judges do lay aside private views in
discharging their judicial functions. This is achieved through
training, professional habits, self-discipline and that fortunate
alchemy by which men are loyal to the obligation with which
they are entrusted. But it is also true that reason cannot
control the subsconscious influence of feelings of which it is
unaware. When there is ground for believing that such
unconscious feelings may operate in the ultimate judgment,
or may not unfairly lead others to believe they are operating,
Judges recuse themselves. They do not sit in judgment.”
21. Referring to the proper test, Ackner, L.J. in Regina v. Liverpool
City Justices, ex parte Topping [(1983) 1 WLR 119 : (1983) 1 All
ER 490, 494] said:
“Assuming, therefore, that the magistrates had applied the
test advised by Mr Pearson: ‘Do I feel prejudiced?’ then they
would have applied the wrong test, exercised their discretion
on the wrong principle and the same result, namely, the
quashing of the conviction, would follow.”
22. Thus tested the conclusion becomes inescapable that, having
regard to the antecedent events, the participation of Respondent 4 in
the court-martial rendered the proceedings coram non-judice.
xxxx xxxx xxxx
Judicial review generally speaking, is not directed against a
25.
decision, but is directed against the “decision-making process”. The
question of the choice and quantum of punishment is within the
jurisdiction and discretion of the court-martial. But the sentence has
to suit the offence and the offender. It should not be vindictive or
unduly harsh. It should not be so disproportionate to the offence as
to shock the conscience and amount in itself to conclusive evidence
of bias. The doctrine of proportionality, as part of the concept of
judicial review, would ensure that even on an aspect which is,
otherwise, within the exclusive province of the court-martial, if the
decision of the court even as to sentence is an outrageous defiance of
logic, then the sentence would not be immune from correction.
Irrationality and perversity are recognised grounds of judicial
review. In Council of Civil Service Unions v. Minister for the Civil
Service [(1984) 3 WLR 1174 (HL) : (1984) 3 All ER 935, 950] Lord
Diplock said:
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“Judicial review has I think developed to a stage today
when, without reiterating any analysis of the steps by which
the development has come about, one can conveniently
classify under three heads the grounds on which administrative
action is subject to control by judicial review. The first ground
I would call ‘illegality’, the second ‘irrationality’ and the third
‘procedural impropriety’. That is not to say that further
development on a case by case basis may not in course of time
add further grounds. I have in mind particularly the possible
adoption in the future of the principle of ‘proportionality’
which is recognised in the administrative law of several of our
fellow members of the European Economic Community;. . .”
26. In Bhagat Ram v. State of Himachal Pradesh [(1983) 2 SCC 442
: 1983 SCC (L&S) 342 : AIR 1983 SC 454] this Court held: [SCC p.
453, SCC (L&S) p. 353, para 15]
“It is equally true that the penalty imposed must be
commensurate with the gravity of the misconduct, and that any
penalty disproportionate to the gravity of the misconduct
would be violative of Article 14 of the Constitution.”
The point to note, and emphasise is that all powers have legal limits.
27. In the present case the punishment is so strikingly
disproportionate as to call for and justify interference. It cannot be
allowed to remain uncorrected in judicial review.”
290. Insofar as the facts are concerned, SRBC had additionally
asserted that the proceedings which were undertaken and the hearings
conducted were fatally flawed since the full complement of the
authority was not even in place on the relevant dates. They have sought
to highlight this aspect by drawing our attention to the following table
in order to buttress their contention that at different stages of the
impugned proceedings, the NFRA had not even been constituted in
accordance with the Act. The table seeks to underscore the absence of
the requisite number of full-time members who could have chaired and
headed the committee which drew up the prima facie conclusions, the
DAQRR, the AQRR and all of which ultimately culminated in the
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issuance of the impugned SCNs’. That chart is reproduced
hereinbelow :-
“ Tabulation of number of full-time members in NFRA at every
stage of the review and disciplinary proceedings in each matter.
S.N
DOCUM
DATE OF
ISSUANCE-
ITNL
NO. OF
DATE OF
ISSUANC
E-IL & FS
NO. OF
DATE
NO. OF
O.
ENT
FULL
TIME
MEMBERS
FULL
TIME
MEMBERS
OF
ISSUAN
CEWPC
2194/202
3
FULL
TIME
MEMBE
RS
ON
DATE
WPC
11737/2021,
WPC
11738/2021,
WPC
11739/2021
WPC
11987/2021
,
WPC
1650/2023
ON DATE
ON DATE
OF
ISSUANCE
OF
ISSUANCE
OF
ISSUAN
CE
1. Question
03.07.2019
(Annexure P-
8,
pg. 122-135)
1 (Prasenjit
Mukherjee)
19.11.2019
1 (Prasenjit
Mukherjee)
-- --
naire-
(Annexure
P-6,
pg. 123-
1
147)
19.07.2019
(Annexure P-
10,
pg. 138-141)
26.08.2020
2. Question
-- --
(Suppleme
ntary
Questionna
ire)
(Annexure
P-8,
pg. 340-
naire-
2
348)
3. PFC 24.03.2020
(Annexure P-
25,
pg. 340 –
21.12.2020
-- --
(Annexure
P-10,
pg. 651-
460)
899)
4. SPFC 17.04.2020
(Annexure P-
26,
pg. 461-481)
-- -- --
08.03.2021
5. DAQRR
Annexure P-
27,
pg. 482 -
23.07.2021
-- --
Annexure
P- 11,
pg. 900-
839)
1231)
st
6.
1 Oral
Hearing
08.09.2021 17.05.2022 2 (Smita
Jhingran,
Praveen Kr.
-- --
23.09.2021
(Annexure P-
22.06.2022
7. Publicati
-- --
Tiwari)
on of
(Annexure
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AQRR 29,
pg. 841 -
1183)
P-
15, pg.
1235-
1623)
8. SCN 29.09.2021
(Annexure P-
31,
pg. 1210 -
27.06.2022
05.01.202
2 (Smita
Jhingran,
3
(Annexure
(Annexure
P- 16
pg. 1624-
Praveen
Kr.
Tiwari
9. 2nd Oral
P-15, pg.
168-202)
1585)
2028)
05.07.2023
Chaired by
EB:
Ajay
Bhushan
2 (Smita
Jhingran,
Praveen Kr.
Jayesh
Gandhi:
17.08.2023
13.07.202
2 (Smita
Jhingran,
3
Ajay
Bhushan
Hearing
Praveen
Kr.
Tiwari)
Tiwari)
N
Ramkrishn
a:
11.10.2023
Pandey,
Pandey,
Smita
Jhingran,
Praveen Kr.
Smita
Jhingran,
Ajay
Bhushan
Praveen
Kr.
Tiwari
Tiwari
Pandey,
Smita
Jhingran,
Praveen Kr.
Tiwari
”
291. The petitioners also alleged that the affidavit submitted by NFRA
pursuant to our order of 12 September 2023 is wholly vague and clearly
fails to inspire confidence since there has been a deliberate omission to
make a full, complete and candid disclosure. This was sought to be
underscored with reference to the following concise table: -
“ A. CONTENTS OF THE AFFIDAVIT IN LIGHT OF THE DIRECTIONS
IN THE ORDER DATED 12.09.2023:
SNO DIRECTION IN ORDER
(PARA 6) Affidavit to place on
record:
COMPLIANCE IN AFFIDAVIT
1. Details with respect to proceedings
drawn and initiated by the
Authority and drawn against the
petitioners here.
Although the Affidavit makes
submissions with respect to the body
that drafted the AQRR and the SCN,
there is no submission
regarding which division of the NFRA
drafted the PFC, SPFC, DAQRR.
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Therefore, the details with respect to
proceedings drawn and initiated by the
Authority in the Affidavit are not
complete.
2. Complete details of the personnel
who penned the AQRR in each
particular case as well as the
complement of persons who
initiated action under Section
132(4) and ultimately passed the
orders impugned.
The affidavit does not provide any
personnel details in this regard. It only
mentions the:
- Executive Body, NFRA (“ EB ”)
- Secretary, NFRA
- Chief General Manager,
NFRA(“ ”) and;
CGM
- a team under the CGM
There is no specific submission with
respect to:
- the composition of the EB;
- the names of the respective EB
members in each specific case;
- the eligibility and qualification of
such members of the EB;
- the names of the respective CGM
involved in each specific case
(NFRA website shows currently 2
CGMs, record of previous CGMs
not available);
- the qualification of the CGM;
- the composition of the team under
the CGM;
- the names of the respective
Secretaries involved in each
specific case (NFRA website on
shows the name of the present
Secretary, record of past
Secretaries not available)
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B. CONTRADICTIONS WITH THE APPLICABLE SECTIONS AND RULES
SNO PROVISION CONTRADICTION
1. Section 132(3B), Companies Act:
“There shall be an executive body of the
National Financial Reporting Authority
consisting of the Chairperson and
fulltime Members of such Authority for
efficient discharge of its functions under
sub-section (2) other than clause (a)
and sub-section (4)”
The Affidavit gives no details about the
composition or strength of the EB during
the different stages in each case and such
information is also not available on the
NFRA website. The order directs NFRA to
Complete details of the personnel who
penned the AQRR in each particular case
as well as the complement of persons who
initiated action under Section 132(4) and
ultimately passed the orders impugned.
It is not possible to ascertain whether the
EB at each stage in different cases was
composed in compliance with the
requirements of Section 132(3B).
Rule 3(1), NFRA (Manner of
2.
Appointment and other Terms and
Conditions of Service of Chairperson
and Members) Rules, 2018:
Composition of Authority: (1) The
Authority shall consist of the following
persons to be appointed
by the Central Government, namely:-
(a) a chairperson;
(b) three full time members; and
(c) nine part time members.
Tenure of all Full-time members of NFRA
till date:
• Dr Prasenjit Mukherjee: 03.10.2018 to
01.10.2021
• Dr. Praveen Kumar Tiwari: 28.03.2022
to present
• Ms. Smita Jhingran: 19.04.2022 to
Present
Use of the word ‘shall’ makes it
mandatory for NFRA to have, at all
times, 3 full time members . From the
abovementioned tenures of full time
members, it is evident that NFRA, from its
establishment till date, does not have the
requisite number of full-time members.
3. Section 132(1A) of the Companies Act:
Despite the prescribed mandate for NFRA
to discharge its functions through
divisions, the submissions in the affidavit
make it clear that NFRA has not
functioned through divisions as the EB
itself has:
“The National Financial Reporting
Authority shall perform its functions
through such divisions as may be
prescribed”
- Scrutinized the audit file
- Prepared and signed the AQR
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- Conducted the investigation for
drafting of SCN
- Prepared and approved the SCN
- Conducted the oral hearing
It is therefore evident that NFRA has not
adhered to the mandate of functioning
through divisions.
4. Section 132(4)(a), Companies Act:
[Page 16, Page 20, Page 29 of Affidavit]
The affidavit states that “ The AQR of the
ILFS group was started suo-motu as
authority/official decided by the EB. Later,
a reference from the central government
was also received by NFRA on the same
the initiation of matter.”
However, no communication in the above
cases has been received by the Petitioners
from NFRA stating that NFRA initiated
the said proceedings in suo moto exercise
of its powers.
[Page 33 of affidavit]
Although the SCN in this case is based on
the letter dated 11.05.2021 containing
SEBI’s findings, NFRA has neither cited
suo moto initiation nor central government
reference in this para of the affidavit and
there has been no investigation conducted
by NFRA in this matter. Therefore, the
Affidavit gives no clarity about who
initiated action under Section 132(4) in this
case as directed by the order.
“reasons to believe that sufficient cause
existed to initiate action u/s 132(4)” were
not communicated to the Petitioner to
provide a response.
“ Notwithstanding anything contained in
any other law for the time being in
force, the National Financial Reporting
Authority shall— (a) have the power to
investigate, either suo motu or on a
reference made to it by the Central
Government, for such class of bodies
corporate or persons, in such manners
may be prescribed into the matters of
professional or other misconduct
committed by any member or firm of
chartered accountants, registered under
the Chartered Accountants Act, 1949”
”
292. Refuting the aforesaid submissions, Mr. Hossain argued that as is
manifest from a reading of Section 132(3)(b), the statute requires the
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Executive Body to be involved in the monitoring, enforcement, inquiry
and disciplinary proceedings that may be undertaken. It was his
submission that quite apart from there being no challenge to that
provision, the law recognizes no overarching principle which may
postulate that enquiry and adjudicatory functions cannot be conferred
on the same body. It was submitted that criminal legislation as well as
various revenue laws incorporate innumerable instances where an
assessing officer acts both as an investigator as well as the adjudicator.
It was submitted that the division as defined in Rule 2(g) itself includes
one which would be headed by the Chairperson or a full-time member.
This, according to Mr. Hossain, is itself indicative of the statute
contemplating divisions to be constituted only for the purposes of
internal administrative convenience.
293. It was then submitted that neither the Act nor the NFRA Rules
contemplate that the person who investigates or conducts an inquiry
would be different from the one who takes a final decision. According
to Mr. Hossain, this is evident when one bears in mind Rule 11 and
which contemplates the same division issuing the Show Cause Notice
and taking a final decision in terms of sub-rule (5) thereof. It was
further argued that Rule 14 is yet another indicator of the statute
contemplating the involvement of the Executive Body in all matters
including those pertaining to disciplinary proceedings. Mr. Hossain
submitted that while Rule 7 does allude to a concerned division, the
reference to that authority would be occasioned only if the NFRA were
to form an opinion that accounting standards had been violated. This, in
any case, according to the learned counsel, would lead to action being
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taken either under Rule 10(2) or disciplinary proceedings under Rule 11
and thus it being evident that those Rules did not contemplate that the
division which caused further investigation would be different from the
one which issued the SCN.
294. Mr. Hossain also questioned the applicability of various
precedents which had been cited on behalf of the writ petitioners and all
of which pertained to service jurisprudence. It was submitted that
unlike disciplinary authorities who may have an interest in the outcome
of departmental inquiries, the Chairperson and Members of the NFRA
are bound by the oath that they subscribe to in terms of Section 132(3)
and are completely impartial while acting as constituents of the
statutory authority. It was submitted that by virtue of the nature of the
office held by the Chairperson and members, the possibility of bias is
clearly ruled out. This according to learned counsel, quite apart from
the fact that a review mechanism also stands put in place in the shape of
an appeal being carried to a statutory tribunal which in turn is headed
by a former Supreme Court Judge.
295. Reverting then to the provisions as they existed under the CA
Act, it was Mr. Hossain’s submission that the Board of Discipline as
well as the Disciplinary Committee were not only conducting an
inquiry but also imposing punishments. The Director Discipline, it was
pointed out, was only obliged to examine a complaint and to form a
prima facie opinion as to whether information provided was actionable
or liable to be examined in greater detail. Mr. Hossain also questioned
the reliance placed upon the judgment of the Supreme Court in L.K.
Ratna and submitted that the CA Act itself came to be amended
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thereafter and as a consequence of which an enquiry was to be
conducted by the Disciplinary Committee and which in turn is
empowered to pass a final order of punishment. This submission,
however, has been noted mindful of the fact that neither Sections 21A
nor 21B are yet to be brought into force.
296. Mr. Hossain then sought to sustain the procedure as adopted by
referring to the doctrine of necessity. It was his submission that a mere
overlap of investigative and adjudicative functions would not render a
provision unconstitutional. In support of the aforesaid submission, Mr.
Hossain firstly referred to the judgment of the Supreme Court in
85
Election Commission of India vs. Subramaniam and which had
ultimately upheld the decision of the Election Commission by alluding
to the doctrine of necessity. Yet another line of precedents which were
cited by Mr. Hossain were those rendered in the context of income tax
assessments and other revenue laws, including those in Anuj Chawla
86
,
vs. Commissioner of Income Tax Om Pal Singh vs. Union of
87 88
and
India Union of India vs. Vipan Kumar Jain
. These set of
decisions have essentially held that there is nothing inherently
unconstitutional in the Assessing Officer collating or gathering
information and thereafter undertaking the assessment process itself.
The relevant parts of the decision of the Supreme Court in Vipin Kumar
Jain are reproduced hereinbelow:-
“ 8. There is nothing inherently unconstitutional in permitting the
assessing officer to gather the information and to assess the value of
85
(1996) 4 SCC 104
86
2017 SCC OnLine Del 7852
87
2006 SCC OnLine Del 290
88
(2005) 9 SCC 579
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the information himself. The issue as to the constitutional validity of
a provision which permitted an examining board not only to hold an
inquiry but also to take action against doctors was raised before the
Supreme Court of the United States in Harold Withrow v. Duane
Larkin [43 L Ed 2d 712 : 421 US 35 (1975)] . In negating the
challenge the Court said: (US p. 47)
“The contention that the combination of investigative and
adjudicative functions necessarily creates an unconstitutional
risk of bias in administrative adjudication has a much more
difficult burden of persuasion to carry. It must overcome a
presumption of honesty and integrity in those serving as
adjudicators; and it must convince that, under a realistic
appraisal of psychological tendencies and human weakness,
conferring investigative and adjudicative powers on the same
individual poses such a risk of actual bias or prejudgment that
the practice must be forbidden if the guarantee of due process
is to be adequately implemented.”
9. It is true that there may be cases where the outcome of the
assessment may be influenced by the fact that the raiding assessing
officer had himself in the course of the raid been witness to any
incriminating material against the assessee. The assessing officer's
decision on the basis of such material is not the final word in the
matter. The assessment order is appealable under the provisions of
the statute itself and ultimately by way of judicial review .
Finally, the courts cannot read in limitations to the jurisdiction
10.
conferred by statutes, in the absence of a challenge to the provision
itself when the language of the Act clearly allows for an ostensible
violation of the principles of natural justice including the principle
that a person cannot be a judge in his own cause. In Union of
India v. Tulsiram Patel [(1985) 3 SCC 398 : 1985 SCC (L&S) 672]
in recognition of this principle this Court held: (SCC p. 479, para
101)
“ 101 . Not only, therefore, can the principles of natural
justice be modified but in exceptional cases they can even be
excluded. There are well-defined exceptions to the nemo judex
in causa sua rule as also to the audi alteram partem rule.
The nemo judex in causa sua rule is subject to the doctrine of
necessity and yields to it as pointed out by this Court in J.
Mohapatra & Co. v. State of Orissa [(1984) 4 SCC 103] .”
xxxx xxxx xxxx
12. Ultimately, the question of bias will have to be decided on the
facts of each case. If the assessee is able to establish that the
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assessing officer was in fact biased in the sense that he was involved
or interested in his personal capacity in the outcome of the
assessment or the procedure for assessment, no doubt, it would be a
good ground for setting aside the assessment order. But to hold, as
the High Court has that bias is established only because the
authorised officer under Section 132 and the assessing officer are the
same person is, in our view, an incorrect approach.”
297. We, firstly and on facts find that it appears to be the conceded
case of the NFRA that proceedings both at the stage of preparation of
the SQARR as well as the AQRR were all undertaken by the Executive
Body of the NFRA. This becomes evident from the disclosures which
were made in the affidavit of compliance filed pursuant to our order of
12 September 2023. For instance, in the matter of DHS, it is disclosed
that the AQRR was prepared by the Executive Body of the NFRA
assisted by a team consisting of the Secretary, an Executive Director
and three Chartered Accountants. It is then disclosed that a draft AQRR
note was initiated by the Secretary NFRA on 25 September 2019 and
which was thereafter placed for the approval of the Executive Body.
This was accorded by the Executive Body on the same date itself
pursuant to which the draft DAQRR came to be issued to the
engagement partner.
298. Similar was the process which appears to have been followed for
the drawl of the AQRR which was approved by the Executive Body on
11 December 2019. After the issuance of the AQRR, it is the same
Executive Body which with the assistance of a team headed by a Chief
General Manager examined the observations appearing therein and
drew up a draft SCN proposed to be issued to DHS and its partners.
This draft SCN prepared by the Executive Body was thereafter
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approved by it and issued.
299. The NFRA followed a similar procedure in the case of Udayan
Sen, Rukshad Daruvala and Shrenik Baid, petitioners in WP(C) No.
1524 of 2020, WP(C) No. 1522 of 2020 and WP(C) No. 1525 of 2020
respectively. Here again starting from the circulation of a prima facie
conclusion leading upto the issuance of the AQRR by the Executive
Body, the proceedings ultimately culminated in the issuance of a SCN.
All that is additionally disclosed insofar as these writ petitioners are
concerned is that post the issuance of the AQRR, the Executive Body
with the assistance of a team working under a Chief General Manager
who was not a part of the AQR team, examined the observations
forming part of that report and prepared a draft SCN to be issued to the
audit firm and its partners. It thus becomes apparent that it was the
Executive Body which not only authored the AQRR, but it was the
same body, albeit assisted by a supportive team, which then proceeded
to form an opinion with respect to initiation of disciplinary proceedings
and which in turn culminated in the issuance of the impugned SCNs.
300. As we view Section 132 of the Companies Act, there appears to
be no doubt in our mind that the provision did and always contemplated
the NFRA performing and discharging its functions through such
divisions as may be constituted. While it is true that Rule 2(g), while
defining the word ‘division’ includes one headed by a Chairperson or a
full time Member, the Executive Body cannot possibly be construed to
be a division in itself. A conjoint reading of sub-sections (3)(a) and
(3)(b) appearing in Section 132 alongside the NFRA Rules, leads us to
the irresistible conclusion that the statute clearly contemplated the
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discharge of functions enumerated in Rules 7 and 8 being undertaken
by independent units or divisions of the NFRA. Mr. Hossain had
submitted that by virtue of Section 132(3)(b), the Act clearly
contemplates the Executive Body to be the pivotal authority to
discharge the various functions which it has to perform. This position,
according to Mr. Hossain, is further fortified by Rule 2(g) when it
includes within its ambit a part, component or unit of the authority
which could be headed by the Chairperson or a full-time member. Mr.
Hossain submitted that the only function which the NFRA acting as a
body as a whole is liable to discharge is that specified in sub-section
(2)(a) of Section 132. It was the contention of the respondents that
since the power to undertake disciplinary action is one which is placed
in sub-section (4) and which too stands reserved in favour of the
Executive Body, the dual role, if it were to be so acknowledged as
having been discharged, would not invalidate the proceedings
impugned before us.
301. We find ourselves unable to concur with the aforenoted
contentions of Mr. Hossain since and although the Executive Body of
the NFRA does stand conferred a status of pre-eminence in the overall
hierarchical structure of that authority, the same would clearly not lend
credence or be liable to be countenanced as sanctioning a dual role
being discharged by the same body or complement of people. This we
hold since it is imperative that the proceedings be not only fair in fact,
but also liable to be perceived from the standpoint of a reasonable
person as being fair and compliant with Article 14 of the Constitution.
302. Acceptance of the position as canvassed on behalf of the NFRA
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would essentially mean that the very body which had come to render
findings of guilt and infraction of the SAs’ would be expected to
independently form an opinion as to whether circumstances warranted
initiation of disciplinary action. There would in such a situation hardly
be a possibility of the matter being independently and dispassionately
reviewed or examined. As has been repeatedly held by courts,
proceedings expected to be in consonance with the principles of natural
justice, must not only qualify the test of fairness in fact, but be expected
to appear to be impartial and untainted by bias.
303. While various decisions were cited by the respondents in this
respect, we note that the petitioners while questioning the validity of
the procedure ultimately adopted by the NFRA have not alleged
institutional bias. The various judgments which were cited for our
consideration by Mr. Hossain are clearly of little relevance and do not
appear to be germane to the challenge which stands raised before us.
While courts may accept a broad or loose overlap of investigative and
adjudicatory functions being exercised by a singular authority, the
aforenoted general precept would clearly not withstand the test of
fairness when one of those bodies is expected to form an independent
opinion of whether transgressions alleged to have been committed
warrant further disciplinary measures being adopted. The judgments
cited by Mr. Hossain and which pertained to the exercise of powers by
authorities under the Income Tax Act is also misplaced since it is well
settled that proceedings under a fiscal statute are neither akin to judicial
proceedings nor are they concerned with an adjudication of a lis which
may be said to exist between an assessee and the officer concerned.
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Those statutes by virtue of the inherent nature of the obligation that
officers are enjoined to discharge contemplate those persons
performing the dual function of investigation and assessment.
Although this principle is by now well recognized, we deem it
appropriate to take note of the succinct enunciation of the legal position
in this respect which appears in Deepak Agro Foods vs. State of
89
Rajasthan
:-
“18. Proceedings for assessment under a fiscal statute are not in the
nature of judicial proceedings, like proceedings in a suit inasmuch as
the assessing officer does not adjudicate on a lis between an assessee
and the State and, therefore, the law on the issue laid down under the
civil law may not stricto sensu apply to assessment proceedings.
Nevertheless, in order to appreciate the distinction between a null
and void order and an illegal or irregular order, it would be
profitable to notice a few decisions of this Court on the point.”
304. That then takes us to review the constitutional requirements
which we would expect administrative proceedings to adhere to. In
90
Ratan Lal Sharma vs. Managing Committee
, the Supreme Court,
while broadly explaining the fundamental facets of natural justice, had
this to say with respect to the principle of nemo debet esse judex in
propria causa : -
“ Since the rules of natural justice were not embodied rules it is
10.
not possible and practicable to precisely define the parameters of
natural justice. In Russell v. Duke of Norfolk [(1949) 1 All ER 109
(CA)] Tucker, L.J. observed:
“… There are, in my view, no words which are of universal
application to every kind of inquiry and the every kind of
domestic tribunal. The requirements of natural justice must
depend on the circumstances of the case, the nature of the
89
(2008) 7 SCC 748
90
(1993) 4 SCC 10
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inquiry, the rules under which the tribunal is acting, the
subject-matter that is being dealt with, and so forth.”
It has been observed by this Court in Union of India v. P.K.
Roy [(1968) 2 SCR 186 : AIR 1968 SC 850 : (1970) 1 LLJ 633] :
“The extent and application of the doctrine of natural justice
cannot be imprisoned within the strait-jacket of a rigid
formula. The application of the doctrine depends upon the
nature of the jurisdiction conferred on the administrative
authority, upon the character of the rights of the persons
affected, the scheme and policy of the statute and other
relevant circumstances disclosed in the particular case.”
Similar view was also expressed in A.K. Kraipak case [(1969) 2
SCC 262 : (1970) 1 SCR 457] . This Court observed: (SCC pp. 272-
73, para 20)
“… What particular rule of natural justice should apply to a
given case must depend to a great extent on the facts and
circumstances of that case, the framework of the law under
which the enquiry is held and the constitution of the Tribunal
or body of persons appointed for that purpose. Whenever a
complaint is made before a court that some principle of natural
justice had been contravened, the court has to decide whether
the observance of that rule was necessary for a just decision on
the facts of that case.”
Prof. Wade in his Administrative Law has succinctly summarised the
principle of natural justice to the following effect:
“It is not possible to lay down rigid rules as to when the
principles of natural justice are to apply: not as to their scope
and extent. Everything depends on the subject-matter, the
application for principles of natural justice, resting as it does
upon statutory implication, must always be in conformity with
the scheme of the Act and with the subject-matter of the case.
In the application of the concept of fair play there must be real
flexibility. There must also have been some real prejudice to
the complainant; there is no such thing as a merely technical
infringement of natural justice. The requirements of natural
justice depend on the facts and the circumstances of the
case, the nature of the enquiry, the rules under which the
tribunal is acting, the subject-matter to be dealt with, and so
forth.”
One of the cardinal principles of natural justice
is nemo debet esse judex in propria causa (no man shall be a judge
in his own cause). The deciding authority must be impartial and
without bias. It has been held by this Court in Secretary to
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Government, Transport Department v. Munuswamy Mudaliar [1988
Supp SCC 651] that a predisposition to decide for or against one
party without proper regard to the true merits of the dispute is bias.
Personal bias is one of the three major limbs of bias namely
pecuniary bias, personal bias and official bias. A classic case of
personal bias was revealed in the decision of this Court in State of
U.P. v. Mohd. Nooh [1958 SCR 595 : AIR 1958 SC 86] . In the said
case, a departmental inquiry was held against an employee. One of
the witnesses against the employee turned hostile. The officer
holding the inquiry then left the inquiry, gave evidence against the
employee and thereafter resumed to complete the inquiry and passed
the order of dismissal. This Court quashed the order of dismissal by
holding inter alia that the rules of natural justice were grievously
violated.”
305. The principle of no man being a judge in its own cause was
explained by the Supreme Court as mandating the deciding authority
being one which was impartial and without bias. It also alluded to
aspects such as a predisposition to decide for or against one party or
where that authority may be inclined to disregard the true merits of the
dispute by virtue of bias. Ratan Lal Sharma was a case where the
delinquent employee in the course of disciplinary proceedings had
assailed the participation of an individual who not only was a member
of the enquiry committee but had also appeared as a witness to prove
the charges that had been laid. Deprecating such a procedure, the
Supreme Court pertinently observed: -
“ In the instant case, charge No. 12 states that a particular sum
11.
on account of amalgamated fund for the month of December was
given to the appellant by Shri Maru Ram who was teacher in
charge of the amalgamated fund. In the inquiry committee
comprising three members, the said Shri Maru Ram was taken as
one of the members and he himself deposed to establish the said
charge No. 12 and thereafter again joined the inquiry committee
and submitted a report holding the appellant guilty of some of the
charges including the said charge No. 12. Shri Maru Ram was
interested in establishing the said charge. From the charge itself, it
is apparent that he had a pre-disposition to decide against the
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appellant. It is really unfortunate that although the appellant raised
an objection before the inquiry committee by clearly indicating that
the said Shri Maru Ram was inimical towards him and he should
not be a member in the inquiry committee, such objection was
rejected on a very flimsy ground, namely, that since the said Shri
Maru Ram was one of the members of the Managing Committee
and was the representative of the teachers in the Managing
Committee it was necessary to include him in the inquiry
committee. It is quite apparent that the inquiry committee could
have been constituted with other members of the Managing
Committee and the rules of the inquiry are not such that Shri Maru
Ram being teachers' representative was required to be included in
the said inquiry committee so that the doctrine of necessity may be
attracted. If a person has a pecuniary interest, such interest, even if
very small, disqualifies such person. For appreciating a case of
personal bias or bias to the subject-matter the test is whether there
was a real likelihood of a bias even though such bias has not in fact
taken place. De Smith in his Judicial Review of Administrative
Action , (1980) at page 262 has observed that a real likelihood of
bias means at least substantial possibility of bias.
In R. v. Sunderland Justices [(1901) 2 KB 357, 373] it has been
held that the court will have to judge the matter as a reasonable
man would judge of any matter in the conduct of his own business.
In R. v. Sussex Justices [(1924) 1 KB 256, 259 : 1923 All ER Rep
233] it has been indicated that answer to the question whether there
was a real likelihood of bias depends not upon what actually was
done but upon what might appear to be done. In Halsbury's Laws
of England , 4th Edn., Vol. 2, para 551, it has been indicated that
the test of bias is whether a reasonable intelligent man, fully
apprised of all the circumstances, would feel a serious
apprehension of bias. The same principle has also been accepted by
this Court in Manak Lal v. Dr Prem Chand [1957 SCR 575 : AIR
1957 SC 425] . This Court has laid down that the test is not
whether in fact, a bias has affected the judgment; the test always is
and must be whether a litigant could reasonably apprehend that a
bias attributable to a member of the tribunal might have operated
against him in the final decision of the tribunal. It is in this sense
that it is often said that justice must not only be done but must also
appear to be done.
12. In the facts of the case, there was not only a reasonable
apprehension in the mind of the appellant about the bias of one of
the members of the inquiry committee, namely, the said Shri Maru
Ram but such apprehension became real when the said Shri Maru
Ram appeared as a witness against the appellant to prove the said
charge and thereafter proceeded with the inquiry proceeding as a
member of the inquiry committee to uphold the correctness of his
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deposition as a judge. The learned Single Judge considering the
aforesaid facts came to the finding that the participation of Shri
Maru Ram as a member of the inquiry committee has vitiated the
inquiry proceeding because of flagrant violation of the principles of
natural justice. Unfortunately, the Division Bench set aside such
judgment of the learned Single Judge and dismissed the writ
petition improperly, to say the least, on a technical ground that plea
of bias of Shri Maru Ram and his acting as a judge of his own case
by being a member of the inquiry committee was not specifically
taken before the Deputy Commissioner and also before the
appellate authority, namely, the Commissioner by the appellant and
as such the said plea should not be allowed to be raised in writ
proceeding, more so, when the case of prejudice on account of bias
could be waived by the person suffering such prejudice. Generally,
a point not raised before the tribunal or administrative authorities
may not be allowed to be raised for the first time in the writ
proceeding, more so when the interference in the writ jurisdiction
which is equitable and discretionary is not of course a must as
indicated by this Court in A.M. Allison v. B.L. Sen [AIR 1957 SC
227] particularly when the plea sought to be raised for the first time
in a writ proceeding requires investigation of facts. But if the plea
though not specifically raised before the subordinate tribunals or
the administrative and quasi-judicial bodies, is raised before the
High Court in the writ proceeding for the first time and the plea
goes to the root of the question and is based on admitted and
uncontroverted facts and does not require any further investigation
into a question of fact, the High Court is not only justified in
entertaining the plea but in the anxiety to do justice which is the
paramount consideration of the court, it is only desirable that a
litigant should not be shut out from raising such plea which goes to
the root of the lis involved. The aforesaid view has been taken by
this Court in a number of decisions and a reference may be made to
the decisions in A. St. Arunachalam Pillai v. Southern Roadways
Ltd. [AIR 1960 SC 1191 : (1960) 3 SCR 764] and Cantonment
Board, Ambala v. Pyarelal [(1965) 3 SCR 341 : AIR 1966 SC 108
: 1966 Cri LJ 93] . In our view, the learned Single Judge has very
rightly held that the Deputy Commissioner was under an obligation
to consider the correctness and propriety of the decision of the
Managing Committee based on the report of the inquiry committee
which since made available to him, showed on the face of it that
Shri Maru Ram was included and retained in the inquiry committee
despite objection of the appellant and the said Shri Maru Ram
became a witness against the appellant to prove one of the charges.
It is really unfortunate that the Division Bench set aside the
decision of the learned Single Bench by taking recourse to
technicalities that the plea of bias on account of inclusion of Shri
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Maru Ram in the inquiry committee and his giving evidence on
behalf of the department had not been specifically taken by the
appellant before the Deputy Commissioner and the Commissioner.
The Division Bench has also proceeded on the footing that as even
apart from charge No. 12, the Deputy Commissioner has also
considered the other charges on consideration of which along with
charge No. 12, the proposed order of dismissal was made, no
prejudice has been caused to the appellant. Such view, to say the
least, cannot be accepted in the facts and circumstances of the case.
The learned Single Judge, in our view, has rightly held that the bias
of Shri Maru Ram, one of the members of the inquiry committee
had percolated throughout the inquiry proceeding thereby vitiating
the principles of natural justice and the findings made by the
inquiry committee was the product of a biased and prejudiced
mind. The illegality committed in conducting the departmental
proceedings has left an indelible stamp of infirmity on the decision
of the Managing Committee since affirmed by the Deputy
Commissioner and the Commissioner. The observation of S.R.
Das, C.J. in Mohd. Nooh case [1958 SCR 595 : AIR 1958 SC 86]
may be referred to in this connection:
“… Where the error, irregularity or illegality touching
jurisdiction or procedure committed by an inferior court or
tribunal of first instance is so patent and loudly obtrusive that
it leaves on its decision an indelible stamp of infirmity or vice
which cannot be obliterated or cured on appeal or revision. If
an inferior court or tribunal of first instance acts wholly
without jurisdiction or patently in excess of jurisdiction or
manifestly conducts the proceedings before it in a manner
which is contrary to the rules of natural justice and all
accepted rules of procedure and which offends the superior
court's sense of fair play, the superior court may, we think,
quite properly exercise its power to issue the prerogative writ
of certiorari to correct the error of the court or tribunal of first
instance, even if an appeal to another inferior court or
tribunal was available and recourse was not had to it or if
recourse was had to it, it confirmed what ex facie was a
nullity for reasons aforementioned.”
Some of the observations which appear in para 12 of the report assume
added significance in light of the Supreme Court holding that an
illegality which taints administrative proceedings and leaves an
“indelible stamp of infirmity” would not be salvaged merely because a
review or an appeal avenue may have existed.
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306. In explaining the rule of reasonable likelihood of bias, the
91
Supreme Court in State of West Bengal vs. Shivananda Pathak
observed :-
“ 25. Bias may be defined as a preconceived opinion or a
predisposition or predetermination to decide a case or an issue in a
particular manner, so much so that such predisposition does not
leave the mind open to conviction. It is, in fact, a condition of
mind, which sways judgments and renders the judge unable to
exercise impartiality in a particular case.
xxxx xxxx xxxx
29. As pointed out earlier, an essential requirement of judicial
adjudication is that the judge is impartial and neutral and is in a
position to apply his mind objectively to the facts of the case put up
before him. If he is predisposed or suffers from prejudices or has a
biased mind, he disqualifies himself from acting as a judge. But
Frank, J. of the United States in Linahan, In re [138 F 2d 650] says:
“If, however, ‘bias’ and ‘partiality’ be defined to mean
the total absence of preconceptions in the mind of the judge,
then no one has ever had a fair trial and no one will. The
human mind, even at infancy, is no blank piece of paper. We
are born with predispositions…. Much harm is done by the
myth that, merely by … taking the oath of office as a judge, a
man ceases to be human and strips himself of all
predilections, becomes a passionless thinking machine.”
[See also Griffith and Street, Principles of Administrative
Law (1973 Edn.), p. 155; Judicial Review of Administrative
Action by de Smith (1980 Edn.), p. 272; II Administrative Law
Treatise by Davis (1958 Edn.), p. 130.]
30. These remarks imply a distinction between prejudging of facts
specifically relating to a party, as against preconceptions or
predispositions about general questions of law, policy or discretion.
The implication is that though in the former case, a judge would
disqualify himself, in the latter case, he may not. But this question
does not arise here and is left as it is.
31. This Court has already, innumerable times, beginning with its
classic decision in A.K. Kraipak v. Union of India [(1969) 2 SCC
262 : AIR 1970 SC 150] laid down the need of “fair play” or “fair
hearing” in quasi-judicial and administrative matters. The hearing
91
(1998) 5 SCC 513
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has to be by a person sitting with an unbiased mind. To the same
effect is the decision in S.P. Kapoor (Dr) v. State of H.P. [(1981) 4
SCC 716 : 1982 SCC (L&S) 14 : AIR 1981 SC 2181] In an earlier
decision in Mineral Development Ltd. v. State of Bihar [AIR 1960
SC 468 : (1960) 2 MLJ (SC) 16] it was held that the Revenue
Minister, who had cancelled the petitioner's licence or the lease of
certain land, could not have taken part in the proceedings for
cancellation of licence as there was political rivalry between the
petitioner and the Minister, who had also filed a criminal case
against the petitioner. This principle has also been applied in cases
under labour laws or service laws, except where the cases were
covered by the doctrine of necessity. In Financial Commr.
(Taxation), Punjab v. Harbhajan Singh [(1996) 9 SCC 281] the
Settlement Commissioner was held to be not competent to sit over
his own earlier order passed as Settlement Officer under the
Displaced Persons (Compensation & Rehabilitation) Act, 1954.
The maxim nemo debet esse judex in propria sua causa was
invoked in Gurdip Singh v. State of Punjab [(1997) 10 SCC 641 :
1997 SCC (L&S) 1742] .”
307. As is manifest from the aforesaid passages, the Supreme Court
laid great emphasis on proceedings not being tainted by preconceived
opinions, predisposition or predetermination and underscored the
imperatives of the absence of an unbiased mind. The principles of
reasonable likelihood of bias so enunciated were again explained in
92
Kumaon Mandar Vikas Nigam Ltd. vs. Girja Shankar Pant
and
where it was pertinently observed:-
“ 28. Mathew, J. in Parthasarathi case [(1974) 3 SCC 459 : 1973
SCC (L&S) 580] observed: (SCC pp. 465-66, para 16)
“ 16 . The tests of ‘real likelihood’ and ‘reasonable
suspicion’ are really inconsistent with each other. We think
that the reviewing authority must make a determination on the
basis of the whole evidence before it, whether a reasonable
man would in the circumstances infer that there is real
likelihood of bias. The court must look at the impression which
other people have. This follows from the principle that justice
must not only be done but seen to be done. If right-minded
persons would think that there is real likelihood of bias on the
92
(2001) 1 SCC 182
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part of an inquiring officer, he must not conduct the inquiry;
nevertheless, there must be a real likelihood of bias. Surmise or
conjecture would not be enough. There must exist
circumstances from which reasonable men would think it
probable or likely that the inquiring officer will be prejudiced
against the delinquent. The court will not inquire whether he
was really prejudiced. If a reasonable man would think on the
basis of the existing circumstances that he is likely to be
prejudiced, that is sufficient to quash the decision [see per
Lord Denning, M.R. in Metropolitan Properties Co. (F.G.C.)
Ltd. v. Lannon [(1968) 3 WLR 694, 707 : (1969) 1 QB 577 :
(1968) 3 All ER 304 (CA)] (WLR at p. 707]. We should not,
however, be understood to deny that the court might with
greater propriety apply the ‘reasonable suspicion’ test in
criminal or in proceedings analogous to criminal proceedings.”
29. Lord Thankerton however in Franklin v. Minister of Town and
Country Planning [1948 AC 87 : (1947) 2 All ER 289 (HL)] had this
to state:
“… I could wish that the use of the word ‘bias’ should be
confined to its proper sphere. Its proper significance, in my
opinion, is to denote a departure from the standard of even-
handed justice which the law requires for those who occupy
judicial office, or those who are commonly regarded as holding
a quasi-judicial office, such as an arbitrator. The reason for this
clearly is that, having to adjudicate as between two or more
parties, he must come to his adjudication with an independent
mind, without any inclination or bias towards one side or other
in the dispute.”
30. Recently however, the English Courts have sounded a different
note, though may not be substantial but the automatic
disqualification theory rule stands to some extent diluted. The
affirmation of this dilution however is dependent upon the facts and
circumstances of the matter in issue. The House of Lords in the case
of R. v. Bow Street Metropolitan Stipendiary Magistrate, ex p
Pinochet Ugarte (No. 2) [(2000) 1 AC 119] observed:
“… In civil litigation the matters in issue will normally
have an economic impact; therefore a Judge is automatically
disqualified if he stands to make a financial gain as a
consequence of his own decision of the case. But if, as in the
present case, the matter at issue does not relate to money or
economic advantage but is concerned with the promotion of
the cause, the rationale disqualifying a Judge applies just as
much if the Judge's decision will lead to the promotion of a
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cause in which the Judge is involved together with one of the
parties.”
31. Lord Brown-Wilkinson at p. 136 of the report stated:
“It is important not to overstate what is being decided. It
was suggested in argument that a decision setting aside the
order of 25-11-1998 would lead to a position where Judges
would be unable to sit on cases involving charities in whose
work they are involved. It is suggested that, because of such
involvement, a Judge would be disqualified. That is not
correct. The facts of this present case are exceptional. The
critical elements are ( 1 ) that A.I. was a party to the appeal; ( 2 )
that A.I. was joined in order to argue for a particular result; ( 3 )
the Judge was a director of a charity closely allied to A.I. and
sharing, in this respect, A.I.'s objects. Only in cases where a
Judge is taking an active role as trustee or director of a charity
which is closely allied to and acting with a party to the
litigation should a Judge normally be concerned either to
recuse himself or disclose the position to the parties. However,
there may well be other exceptional cases in which the Judge
would be well advised to disclose a possible interest.”
32. Lord Hutton also in Pinochet case [(2000) 1 AC 119] observed:
“There could be cases where the interest of the Judge in the
subject-matter of the proceedings arising from his strong
commitment to some cause or belief or his association with a
person or body involved in the proceedings could shake public
confidence in the administration of justice as much as a
shareholding (which might be small) in a public company
involved in the litigation.”
33. Incidentally in Locabail [Locabail (U.K.) Ltd. v. Bayfield
Properties Ltd. [2000 QB 451] ] the Court of Appeal upon a detail
analysis of the oft-cited decision in R. v. Gough [1993 AC 646]
together with the Dimes case [3 House of Lords Cases 759]
, Pinochet case [(2000) 1 AC 119] , Australian High Court's decision
in the case of J.R.L., ex p C.J.L., Re [(1986) 161 CLR 342 (Aus
HC)] as also the Federal Court in Ebner, Re [(1999) 161 ALR 55]
and on the decision of the Constitutional Court of South Africa
in President of the Republic of South Africa v. South African Rugby
Football Union [(1999) 4 SA 147] stated that it would be rather
dangerous and futile to attempt to define or list the factors which
may or may not give rise to a real danger of bias. The Court of
Appeal continued to the effect that everything will depend upon
facts which may include the nature of the issue to be decided. It
further observed:
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“By contrast, a real danger of bias might well be thought to
arise if there were personal friendship or animosity between
the Judge and any member of the public involved in the case;
or if the Judge were closely acquainted with any member of
the public involved in the case, particularly if the credibility of
that individual could be significant in the decision of the case;
or if, in a case where the credibility of any individual were an
issue to be decided by the Judge, he had in a previous case
rejected the evidence of that person in such outspoken terms as
to throw doubt on his ability to approach such person's
evidence with an open mind on any later occasion; or if on any
question at issue in the proceedings before him the Judge had
expressed views, particularly in the course of the hearing, in
such extreme and unbalanced terms as to throw doubt on his
ability to try the issue with an objective judicial mind
(see Vakuta v. Kelly [(1989) 167 CLR 568] ); or if, for any
other reason, there were real ground for doubting the ability of
the Judge to ignore extraneous considerations, prejudices and
predilections and bring an objective judgment to bear on the
issues before him. The mere fact that a Judge, earlier in the
same case or in a previous case, had commented adversely on a
party-witness, or found the evidence of a party or witness to be
unreliable, would not without more found a sustainable
objection. In most cases, we think, the answer, one way or the
other, will be obvious. But if in any case there is real ground
for doubt, that doubt should be resolved in favour of recusal.
We repeat: every application must be decided on the facts and
circumstances of the individual case. The greater the passage
of time between the event relied on as showing a danger of
bias and the case in which the objection is raised, the weaker
(other things being equal) the objection will be.”
34. The Court of Appeal judgment in Locabail [2000 QB 451]
though apparently as noticed above sounded a different note but in
fact, in more occasions than one in the judgment itself, it has been
clarified that conceptually the issue of bias ought to be decided on
the facts and circumstances of the individual case — a slight shift
undoubtedly from the original thinking pertaining to the concept of
bias to the effect that a mere apprehension of bias could otherwise be
sufficient.
35. The test, therefore, is as to whether a mere apprehension of bias
or there being a real danger of bias and it is on this score that the
surrounding circumstances must and ought to be collated and
necessary conclusion drawn therefrom — in the event however the
conclusion is otherwise inescapable that there is existing a real
danger of bias, the administrative action cannot be sustained: If on
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the other hand, the allegations pertaining to bias is rather fanciful
and otherwise to avoid a particular court, Tribunal or authority,
question of declaring them to be unsustainable would not arise. The
requirement is availability of positive and cogent evidence and it is
in this context that we do record our concurrence with the view
expressed by the Court of Appeal in Locabail case [2000 QB 451] .”
308. More recently, the Constitution Bench in
Central Organization
93
for Railway Electrification vs. ECI SPIC
after a review of
precedents relating to bias rendered by courts across jurisdictions had
held as follows:-
“ 76. The principles of natural justice principally consist of two rules
: (i) no one shall be a judge in their own cause (nemo judex in causa
sua); and (ii) no decision shall be given against a party without
affording a reasonable opportunity of being heard.141 Adherence to
the principles of natural justice is a facet of procedural fairness. A
decision made by the State to the prejudice of a person must be after
following the basic rules of justice and fair play.142 The principles
of natural justice are applied because administrative or quasi-judicial
proceedings can abridge or take away rights.143 Application of the
principles of natural justice prevents miscarriage of justice.144
Natural justice has both an intrinsic and an instrumental function.
The intrinsic function values natural justice as an end in itself. It
values natural justice as an essential feature of fairness. In its
instrumental element, natural justice is viewed as a means to
achieving just outcomes.
77. The principle of nemo judex is based on the precept that justice
should not only be done but manifestly and undoubtedly be seen to
be done.145 The principle of nemo judex applies to judicial, quasi-
judicial, and administrative proceedings.146 An adjudicator should
be disinterested and unbiased.147 A bias is a predisposition to decide
for or against one party, without proper regard to the true merits of
the dispute.
xxxx xxxx xxxx
124. The doctrine of bias as evolved in English and Indian law
emphasizes independence and impartiality in the process of
adjudication to inspire the confidence of the public in the
adjudicatory processes. Although Section 12 deals with the quality
of independence and impartiality inherent in the arbitrators, the
93
2024 SCC OnLine SC 3219
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provision's emphasis is to ensure an independent and impartial
arbitral process.”
309. The attributes of equal treatment and impartiality were
highlighted by Chandrachud, C.J. (whose opinion constituted the
majority) in the following words:-
“ 129. Equal treatment of parties at the stage of appointment of an
arbitrator ensures impartiality during the arbitral proceedings. A
clause that allows one party to unilaterally appoint a sole arbitrator is
exclusive and hinders equal participation of the other party in the
appointment process of arbitrators. Further, arbitration is a quasi-
judicial and adjudicative process where both parties ought to be
treated equally and given an equal opportunity to persuade the
decision-maker of the merits of the case. An arbitral process where
one party or its proxy has the power to unilaterally decide who will
adjudicate on a dispute is fundamentally contrary to the adjudicatory
function of arbitral tribunals.
130. In comparison, a three-member arbitral tribunal usually allows
each party to nominate one arbitrator of their choice, with the third
arbitrator being appointed either by the two party-appointed
arbitrators or by agreement of parties.240 The fact that both parties
nominate their respective arbitrators gives them “a sense of
investment in the arbitral tribunal.”241 A three-member arbitral
tribunal also enhances the quality of the adjudicative deliberations
and ensures compliance with due process.242 According to Gary
Born, the major advantage of a three-member tribunal is that the
parties can participate in the selection of the tribunal to the
maximum extent possible.
In a three-member tribunal, each of the parties seeks to appoint
131.
a co-arbitrator. However, the third arbitrator is usually appointed by
a process which allows equal participation of both parties in the
appointment process. The equal participation of parties enables the
appointment of an independent and impartial third arbitrator. Hence,
any perceived tilt of an arbitrator in favour of the party which
nominated that arbitrator is offset by the appointment of the third
arbitrator in the course of a deliberative process involving both the
arbitrators or as envisaged in the agreement between parties. Perkins
(supra) rightly observed that whatever advantage a party may derive
by nominating an arbitrator of its choice would get counter-balanced
by equal power with the other party.244 This counter-balancing will
ideally apply only in situations where the arbitrators are appointed
by the parties in the exercise of their genuine party autonomy. TRF
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(supra) and Perkins (supra) have been relied upon by this Court on
numerous occasions, including in Glock Asia-Pacific Limited v.
Union of India245 and Lombardi Engg Ltd. v. Uttarakhand Jal
Vidyut Nigam Ltd.
132. In Voestalpine (supra) and CORE (supra), one of the parties
curated a panel of arbitrators and mandated the other party to select
their arbitrator from the panel. Since the curation of the list is
exclusively undertaken by one party, the other party is effectively
excluded from the process of curating the panel from which
exclusively, the appointment of an arbitrator is to be made. The other
party has to mandatorily select its arbitrator from a curated panel,
restricting their freedom to appoint an arbitrator of their choice. This
is against the principle of equal treatment contained under Section
18. In this situation, there is no effective counter-balance because
both parties do not participate equally in the process of appointing
arbitrators. The party curating the panel can restrict the choice of the
party only to a person who is on the panel selected by the other party
and to no other person.
133. Many PSUs are regularly involved in arbitration disputes and
constantly need the services of arbitrators. Such institutions often
maintain a pool of potential arbitrators with the sole object of having
a ready pool of qualified professionals who have committed their
time and consented to act as arbitrators for fixed fees. The
Arbitration Act does not prohibit parties to an arbitration agreement
from maintaining a curated panel of potential arbitrators. However,
the problem arises when the PSUs make it mandatory for other
parties to select their nominees from the curated panel of arbitrators.
When a PSU exercises its discretion to curate a panel, the very factor
that the PSU is choosing only a certain number of persons as
potential arbitrators and not others will raise a reasonable doubt in
the mind of a fair-minded person. The PSUs may conceivably have
nominated a person on the panel of potential arbitrators because they
have a certain predisposition in favour of the former. This doubt is
reinforced when the other party is given no choice but to select its
arbitrator from the curated panel.”
310. As was succinctly explained by Chandrachud CJ, bias is a
predisposition to decide for or against one party disregarding the true
merits of the dispute. It was pertinently observed that a unilateral
appointment impinges upon the right of the other party to equal
participation and could give rise to serious doubts with respect to the
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impartiality of the tribunal itself. The view so expressed by the majority
and relating to equal treatment finds resonance in the part penned by
Hrishikesh Roy J. who penned a concurring opinion.
311. What thus emerges from the aforesaid discussion is that a body
must not only be fair and impartial, but it should also not be burdened
by a predisposition or a predetermined state of mind. This aspect
assumes significance insofar as we are concerned in light of a common
complement of persons having rendered findings of alleged
professional misconduct and thereafter sitting upon that very opinion to
consider commencement of disciplinary action. A person charged by
such an authority could be reasonably said to apprehend a reasonable
likelihood of the opinion so formed being tainted by the proscription of
a reasonable likelihood of bias. It is these principles which weighed
upon the Supreme Court in L.K. Ratna to hold that a person who may
have been a party to the preparation of the result of the enquiry would
be disqualified from participating in the deliberations of the Council.
94
312. In
De. Smith's Judicial Review
, the test of bias was lucidly
explained in the following words:-
“12- 011 Whether a decision is unlawful on the basis that a fair
minded and informed observer would conclude there was a real
possibility of bias is a question of law for a reviewing or appellate
court to decide. Recusal is not a matter of discretion for the decision
maker. If the Porter test is made out the decision- maker is
disqualified from hearing the case. If it is not, there is no valid
objection to the decision-maker sitting.
12-012 In applying the Porter test a court should consider the
circumstances in the round. The fair-minded and informed observer
would not view allegations of bias individually and conclude that if
there is nothing in them individually there can be nothing in them in
94 th
9 Edition
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combination, Rather, all factors alleged to indicate apparent bias are
to be considered collectively.
12-013 The outcome of a decision-making process is irrelevant to
the question of determining whether there was an appearance of
bias. If the fair-minded and informed observer would conclude that
there was a real possibility of bias, a decision is not lawful simply
because it is likely that a different decision-maker would have
reached the same conclusion. Correlatively, the fact that a decision-
maker reached a conclusion adverse to the complaining party is not a
factor pointing to apparent bias. The question is whether the fair-
minded and informed observer would have been concerned before
the outcome of the process was known Considerations of cost and
delay are also irrelevant.
12-014 Bias has been defined as "prejudice against one party or its
case for reasons unconnected with the legal or factual merits." A
"real possibility" of bias does not require probability. However, "it is
a test which is founded on reality and demands not only any
possibility but a real possibility of bias.”
313. While commenting on whether an appeal could cure such a
defect, the learned authors observe thus:-
“ SUBSEQUENT FAIR HEARING OR APPEAL
10-053 The common law and the ECHR both permit a public
authority to make decisions which do not comply fully with
procedural fairness requirements if the person affected has recourse
to a further hearing or appeal which itself provides fairness.
Common law and subsequent hearings
10-054 There are situations where the absence of procedural fairness
before a decision is made can subsequently be adequately "cured",
for example on appeal. A prior hearing may be better than a
subsequent hearing, but a subsequent hearing is better than no
hearing at all, and in some cases the courts have held that statutory
provisions for an administrative appeal or even full judicial review
on the merits are sufficient to negative the existence of any implied
duty to have a hearing before the original decision is made. This
approach may be acceptable where the original decision does not
cause significant detriment to the person affected, or where there is
also a paramount need for prompt action, or where it is otherwise
impracticable to afford antecedent hearings.
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10-055 The question of whether a decision vitiated by a breach of
the rules of fairness can be made good by a subsequent hearing does
not admit of a single answer applicable to all situations in which the
issue may arise. In general the approach will depend upon an
assessment of whether, in all the circumstances of the hearing and
appeal, the procedure as a whole satisfied the requirements of
fairness. Of particular importance are (1) the gravity of the error
committed at first instance, (2) the likelihood that the prejudicial
effects of the error may also have permeated the rehearing, (3) the
seriousness of the consequences for the individual, (4) the width of
the powers of the appellate body, (5) whether the appellate decision
is reached only on the basis of the material before the original
tribunal or by way of fresh hearing, or rehearing de novo, and (6) if
applicable, the purpose of the statutory scheme.
10-056 In general, the courts will not intervene on grounds of
procedural unfairness where the procedurally unfair decision is
subject to correction by a procedure which has proper procedural
safeguards. In Calvin v Carr, the Privy Council doubted that there
was a general rule that a failure of fairness at the initial hearing is
not to be cured by procedurally correct appeal; in particular, it was
suggested, a more latitudinarian attitude should be taken towards the
proceedings of domestic tribunals whose authority is derived from
the consensual rules of a voluntary association.
Thus, in that case, an appeal to the Committee of the
Australian Jockey Club was held, for this reason, to cure a defective
decision of race stewards who had disqualified the owner of a horse
alleged to have been raced improperly. In Lloyd vs McMahon, the
House of Lords confirmed this approach outside the context of
domestic tribunals. It was held that the decision of a district auditor
to surcharge councilors for failure to set a valid rate, without
according them oral hearings would, had it been procedurally
defective, have been cured by the statutory appeal from the auditor's
decision to the High Court. It should be noted, however, with
reference to the criteria set out above, that the scope of the appeal
was very wide, all the evidence being susceptible of re-examination,
including the merits of the decision.
Where there is an option for rapidly seeking annulment or
10-057
amendment of the order made, the initial procedurally unfair
proceeding will not be reviewed. Thus, where interim anti-social
behaviour orders were made without notice, there was no breach of
procedural fairness since the orders were subject to the safeguards of
early review or discharge hearings, which were compliant with
procedural fairness. Similarly, where a re-categorisation decision is
being made in respect of a determinate sentence prisoner, there is no
need to permit the prisoner to make representations in advance of the
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re-categorisation decision; all that fairness requires is that the
prisoner have an opportunity to appeal the re-categorisation
decision. It has also been held that unfairness in the context of
school exclusion decisions are capable of being cured by means of
statutory appeal, provided that the independent appeal body is
entrusted with the task of dealing with the merits of the case fully
and de novo, and that it does so in a way that is not open to
challenge on normal judicial review grounds and the appeal process
is not contaminated in some real sense by the defect in the earlier
decision-making process . The curative principle also applies in the
immigration context and in the context of care proceedings. It is not
just appeal procedures which can cure an initial defective decision
and defective decisions have been cured by a minister’s lawful
approval and later fair and open-minded reconsideration of the
decision.
Limits
10-058 There are, however, limits to the extent to which procedural
unfairness can be "cured". There may be situations in which,
although the provision of a right of appeal is not required, a court
will be satisfied that nothing short of compliance with the
requirements of procedural fairness at both stages will afford to the
individual the standards of fairness demanded in the particular
context. For example, trial on indictment is not an adequate
alternative to judicial review for committal on inadmissible evidence
given the importance of providing a right to cross-examine at a
preliminary stage. Similarly, inadequate consultation was not
corrected by appeal where a budgetary decision was easier to
overturn before it was firmly made; while a procedurally defective
decision will not be cured by the decision-maker communicating
with the aggrieved party after the decision, in defence of the
decision. A right of individual petition to the ECtHR is also not a
right of appeal to an appeal court capable of curing the national
authorities' failure to provide a fair trial.”
314. The test which was propounded by the learned authors was that
of the view that could be formed by a fair minded and informed
observer and whether a real possibility of bias could have been
legitimately inferred. It was further pertinently observed that a
decision-making process which fails to satisfy the test of real possibility
of bias is not saved merely because it is likely that a different decision
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maker may have reached the same conclusion. The learned authors also
expressed a doubt as to whether a subsequent fair hearing of appeal
would cure proceedings which otherwise failed to meet the test of
likelihood of bias. This reminds us of what our Supreme Court
observed in Ratan Lal Sharma when they held that when the error or
irregularity is “so patent and loudly obtrusive” it leaves “an indelible
stamp of infirmity or vice which cannot be obliterated or cured on
appeal or revision” . The celebrated work also has the following
elucidating passages on “predetermination” and which are relevant to
the question which stands posed before us: -
“ PREDERMINATION
12-054 Closely related to the concept of bias is that of
predetermination. Bias is commonly defined as a prejudice against one
of the parties or their case for reasons unconnected to its merits.
Predetermination occurs when a decision-maker approaches the issues
with a closed mind: "it is seen in a corporate determination to adhere
to a particular view, regardless of the relevant factors or how they
could be weighed. Although bias and predetermination are treated as
distinct they clearly overlap: a decision-maker with a strong prejudice
again party is likely to approach the issues with a closed mind. It is
therefore for the grounds to be considered together.
12-055 As with bias, courts are concerned both with actual
predetermination appearance. A finding of actual predetermination
will be made if the available evidence shows that a decision-maker in
fact approached the issues without an open evidence. For example, a
decision to refuse security clearance to the applicant was held to be
unlawful in R. (on the application of Kind) v Secretary of State for the
Home Department . Documentary evidence and email exchanges
between officers demonstrated a "decision-making process which was
designed to appear to tick the boxes" but the result of which was
effectively prejudged. A finding of actual predetermination can
overlap with other forms of legal error, such as a failure to undertake
consultation at a formative stage.
12-056 The lawful expression of a provisional view on a case is
distinct from predetermination. While the law "certainly does not
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sanction the premature expression of factual conclusions or anything
which may prematurely indicate a closed mind", disclosure by a judge
or other decision-maker of their provisional thinking may positively
assist the parties and may be necessary to displace a presumption or
misapprehension. The provision of an incomplete draft judgment in
order to assist the parties has therefore been held not give rise to
apparent bias or predetermination. A judge or other decision-maker
may also quite properly indicate that they find an answer impossible
to believe when hearing from parties or witnesses without appearing
to have predetermined the case.
The distinction between unlawful predetermination and lawful
predisposition
10-057 A distinction is to be drawn between the case where a
decision-maker predetermines a matter in the sense that they approach
it with a closed mind, and the case where the decision-maker has a
predisposition towards a particular outcome. While predetermination
(both actual and apparent) is always unlawful, it may be lawful for a
decision-maker to approach a case with an inclination towards a
particular conclusion. Indeed, in some contexts, such as where the
decision-maker holds an elected office or has been appointed on the
basis of their expertise on a particular subject matter, predispositions
towards particular views may be inevitable or even desirable.”
315. We are in this respect also tempted to recall the theory of self-
affirmation and lack of sensitivity to argument strength which is spoken
of by psychologists. That theory proceeds on the premise that self-
affirmation disables an individual to objectively evaluate information. It
speaks of persons seeking to resist information that may conflict with
an opinion harboured or a decision made. This, according to that
theory, leads to a person being predisposed to affirm a view expressed
or an opinion formed.
316. We are thus of the firm opinion that the bifurcation or division of
functions which the statute envisaged could have neither been ignored
nor disregarded. The underlying purpose of that separation of functions
and roles was clearly intended to confer a real and discernible degree of
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impartiality and neutrality. The statute clearly envisaged separate and
distinct branches of the NFRA discharging its functions of monitoring,
oversight and adoption of disciplinary measures. But for the separation
of those powers, one would be inevitably faced with the possibility of
one branch discharging dual and overlapping roles. This clearly
exposes the authority to the charge of a predilection to affirm, the
tendency to shut out a challenge to an opinion already formed and
disregard the weight of argument aimed at convincing one to review
and reappreciate. It would thus be akin to what we in law term as the
useless formality theory- an appeal from Caesar to Caesar’s wife. This
in addition to such a procedure clearly becoming susceptible to the
possibility of a person reasonably and justifiably viewing the same as
being unfair and violating the golden principle of justice not only being
done but being visibly and perceivably served.
317. As is evident from the various disclosures which were made by
the NFRA before us, it was the Executive Body which was involved
and engaged at all stages of the drawl of the AQRR as well as the
formation of the opinion that action in terms of Section 132(4) was
liable to be initiated. The mere fact that in the course of this exercise, it
was assisted by certain other officers is, in our considered opinion,
wholly irrelevant, since the ultimate formation of opinion was one
which was of the Executive Body as a whole. The petitioners could
have thus reasonably harboured an apprehension of lack of neutrality
and potential bias.
318. As in all such situations, it is not our intent to even remotely
suggest that the Executive Body was in fact biased or prejudiced
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against the writ petitioners. It ultimately boils down to the view or
opinion that a reasonable person may form. While it is true that the
reasonableness of apprehension cannot be based on an unfounded belief
or tenuous reasoning, as long as it is an opinion which could be said to
be reasonably drawn, the test of reasonable likelihood of bias would be
satisfied.
319. We also find ourselves unable to sustain the argument of
necessity and which was canvassed for our consideration by Mr.
Hossain. The doctrine of necessity applies where it is impermissible or
impossible for a modified composition of a statutory body being
enabled to undertake the decision-making inquiry. In fact, and as we
have found on a review of the statutory scheme, the Legislature as well
as the rule making authority appears to have consciously made
appropriate provisions for the monitoring of compliance of SAs,
enforcement of compliance, oversight, investigation and disciplinary
proceedings being undertaken by different arms of the NFRA. The
division of functions which the principles of due process and fairness
would demand clearly appear to inform the statutory provisions when
they speak of divisions performing different functions and obligations
that stand placed.
320. It is these fundamental constructs which also stand adopted by
authorities such as the PCAOB and the FRC. The Byelaws which
govern and regulate the functioning of the PCAOB incorporate the
following significant provisions. As per those rules, disciplinary
proceedings are to be undertaken by a Hearing Officer who must and
necessarily be a person other than a board member or staff of the
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interested division. This becomes apparent from the manner in which
those Rules define the phrase “hearing officer” in Rule 1001(h)(i):-
“ Hearing Officer
The term "hearing officer" means a person, other than a Board
member or staff of the interested division, appointed in accordance
with Article 6.3 of the Board’s bylaws to preside at hearings.
321. An interested division is defined by Rule 1000(i)(iv) as follows:-
“ Interested Division
The term "interested division" means a division or office of the
Board assigned primary responsibility by the Board to participate
in a particular proceeding. ”
322. Under Section 4, the task of undertaking an inspection is
entrusted to the Division of Registration. This flows from a reading of
Rules 4000, 4001 and 4002 and which are extracted hereinbelow: -
“ Section 4. Inspections
Rule 4001. Regular Inspections
In performing a regular inspection, the staff of the Division of
Registration and Inspections and any other person authorized by the
Board to participate in the inspection shall take such steps, and
perform such procedures, as the Board determines are necessary or
appropriate. Such steps and procedures must include, but need not be
limited to, those set forth in Section 104(d)(1) and (2) of the Act and
such other tests of the audit, supervisory, and quality control
procedures of the firm as the Director of the Division of Registration
and Inspections or the Board determines.
Rule 4002. Special Inspections
In performing a special inspection, the staff of the Division of
Registration and Inspections and any other person authorized by the
Board to participate in the inspection shall take such steps, and
perform such procedures, as are necessary or appropriate concerning
the issue or issues specified by the Board in connection with its
authorization of the special inspection.”
323. The dichotomy of roles that may be discharged by separate
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constituents of the PCAOB comes to the fore as we proceed to Section
5 and which is concerned with investigations and adjudications. The
said Chapter speaks of a Director of Enforcement and Investigation
which may undertake an informal inquiry in the first instance. It is upon
the recommendation of the Director that the Board then proceeds to
draw a formal order for commencement of an investigation. This
becomes apparent from a reading of Rules 5000 and 5101 which are
reproduced hereinbelow: -
“ Rule 5000. General
A registered public accounting firm, and any person
associated with such a firm, shall comply with all Board orders to
which the firm or person is subject.
[Effective pursuant to SEC Release No. 34-49704, File No. PCAOB-
2003-07 (May 14, 2004)]
Part 1 - Inquiries and Investigations
Rule 5100. Informal Inquiries
( a) Commencement of an Informal Inquiry
The Director of Enforcement and Investigations may
undertake an informal inquiry where it appears that, or to determine
whether, an act or practice, or omission to act, by a registered public
accounting firm, any associated person of that firm, or both, may
violate -
(1) any provision of the Act;
(2) the Rules of the Board;
(3) the provisions of the securities laws relating to the preparation
and issuance of audit reports and the obligations and liabilities of
accountants with respect thereto, including the rules of the
Commission issued under the Act; or
(4) professional standards.
(b) Informal Inquiry Activities
In an informal inquiry, the Director of Enforcement and
Investigations may request documents, information or testimony
from, or an interview with, any person.”
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324. The subject of disciplinary proceedings is spelt out in Rule 5200
and which reads as under: -
“ Rule 5200. Commencement of Disciplinary Proceedings
(a) Grounds for Commencement of Disciplinary Proceedings
The Board may commence a disciplinary proceeding when –
(1) it appears to the Board, as the result of an investigation or
otherwise, that a hearing is warranted to determine whether a
registered public accounting firm, or an associated person of such a
firm, has engaged in any act or practice, or omitted to act, in
violation of the Act, the Rules of the Board, the provisions of the
securities laws relating to the preparation and issuance of audit
reports and the obligations and liabilities of accountants with respect
thereto, including the rules of the Commission issued under the Act,
or professional standards;
(2) it appears to the Board, as the result of an investigation or
otherwise, that a hearing is warranted to determine whether a
registered public accounting firm, or any person who is, or at the
time of the alleged failure reasonably to supervise was, a supervisory
person of such firm, has failed reasonably to supervise an associated
person, either as required by the Rules of the Board relating to
auditing or quality control standards, or otherwise, with a view to
preventing violations of this Act, the Rules of the Board, the
provisions of the securities laws relating to the preparation and
issuance of audit reports and the obligations and liabilities of
accountants with respect thereto, including the rules of the
Commission under the Act, or professional standards, and that such
associated person has committed a violation of the Act, or of any
such rules, laws, or standards;
(3) it appears to the Board that a hearing is warranted pursuant to
Rule 5110.
[Effective pursuant to SEC Release No. 34-49704, File No. PCAOB-
2003-07 (May 14, 2004); and SEC Release No. 34-72087, File No.
PCAOB-2013-03 (May 2, 2014)]
(b) Presiding Official
All proceedings shall be presided over by the Board or, if the
Board orders, by a hearing officer.
(c) Assignment of a Hearing Officer
Subject to Rule 5200(b), as soon as practicable after the
Board has issued an order instituting proceedings, or after a
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registration applicant has requested a hearing pursuant to Rule
5500(b), the Secretary shall assign a hearing officer to preside over
the proceeding and shall serve the parties with notice of the hearing
officer's assignment. Subject to Rules 5402 and 5403, the hearing
officer shall have the authority to do all things necessary and
appropriate to discharge his or her duties. The powers of the hearing
officer include, but are not limited to, the following –
(1) obtaining a court reporter to administer oaths and affirmations;
(2) issuing accounting board demands pursuant to Rule 5424;
(3) receiving relevant evidence and ruling upon the admission of
evidence and offers of proof;
(4) regulating the course of a proceeding and the conduct of the
parties and their counsel;
(5) holding prehearing and other conferences and requiring the
attendance at any such conference of at least one representative of
each party who has authority to negotiate concerning the resolution
of issues in controversy;
(6) recusing himself or herself upon motion made by a party or
upon his or her own motion;
(7) ordering, in his or her discretion, in a proceeding involving more
than one respondent, that the interested division indicate, on the
record, at least one day prior to the presentation of any evidence,
each respondent against whom that evidence will be offered;
(8) subject to any limitations set forth elsewhere in these Rules,
considering and ruling upon all procedural and other motions;
(9) preparing an initial decision as provided in Rule 5204;
(10) upon notice to all parties, reopening any hearing prior to the
filing of an initial decision therein, or, if no initial decision is to be
filed, prior to the time fixed for the filing of final briefs with the
Board;
(11) informing the parties as to the availability of one or more
alternative means of dispute resolution, and encouraging the use of
such methods; and
(12) scheduling hearing dates, except that a hearing officer may
not, absent the approval of the Board, change a hearing date set by
Board order.
(d) Separation of Functions
The staff of the Division of Enforcement and Investigations
may not participate or advise in the decision, or in Board review of
the decision, in any proceeding in which the Division of
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Enforcement and Investigations is the interested division, except as a
witness or counsel in the proceeding. Any other employee or agent
of the Board engaged in the performance of investigative or
prosecutorial functions for the Board in a proceeding may not, in
that proceeding or one that is factually related, participate or advise
in the decision, or in Board review of the decision, except as a
witness or counsel in the proceeding. A hearing officer may not be
responsible to or subject to the supervision or direction of an
employee or agent engaged in the performance of investigative or
prosecuting functions for the Board.
(e) Consolidation of Proceedings
By order of the Board or a hearing officer, proceedings involving a
common question of law or fact may be consolidated for hearing of
any or all the matters at issue in such proceedings. The Board or the
hearing officer may make such orders concerning the conduct of
such proceedings as it deems appropriate to avoid unnecessary cost
or delay. Consolidation shall not prejudice any rights under these
Rules and shall not affect the right of any party to raise issues that
could have been raised if consolidation had not occurred. For
purposes of this Rule, no distinction is made between joinder and
consolidation of proceedings.”
325. Of significance is the statutory injunct of the staff of the Division
of Enforcement and Investigation from having any participatory role at
any stage of the proceedings that may be undertaken. Similar is the
restraint which operates in respect of any other employee or agent of
the Board who may have been engaged in the performance of
investigative or prosecutorial functions at any prior stage of the
proceedings that may have involved the auditor or the auditing firm.
326. A similar structure is followed by the FRC and which discharges
its functions through an Executive Committee, the Audit and Risk
Committee and the Conduct Committee amongst various others. As is
95
apparent from a reading of the
Terms of Reference
framed with
respect to the Audit and Risk Committee, the said body is enjoined to
95
TOR
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support and advise the Board by providing oversight of a company’s
financial reporting process, use of public funds, adherence to corporate
government principles, audit process and internal controls. The TOR of
the Conduct Committee exercises oversight over inquiries,
investigations and enforcement functions that may be performed. The
Enforcement Committee panel is enjoined to consider report submitted
by audit quality review teams deciding whether a recognized auditor is
liable to be sanctioned as well as considering representations that may
be submitted in response to a notice proposing sanctions. The structure
so put in place by the FRC too thus follows lines similar to those
adopted by the PCAOB.
327. While we do not intend to suggest that the NFRA was obliged to
punctiliously follow or adopt an identical structure, what we seek to
highlight is that regulatory bodies appear to have universally
formulated and attempted to adhere to a procedure which would meet
the test of due process, of a fair opportunity being afforded to the
person charged and above all justice appearing to have been truly
served. These are surely not principles foreign to our jurisprudence.
They are above all the command of Article 14 itself. The proceedings
impugned before us, however, clearly falter and fall when tested on the
aforenoted basic postulates.
SCN S : T HE S CAR OF P RE - DETERMINATION
328. As noticed above, it was the Executive Body which in the first
instance came to record findings of guilt and violation of the SAs’.
Those reports had come to conclude in no uncertain terms that the
petitioners had violated the ethics standards required to be maintained
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Signing Date:07.02.2025
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and having acted in violation of the SAs’ which applied. That very
body proceeded to take a decision to commence disciplinary action
based not an independent review of the facts that obtained but solely on
the strength of what had been found in the AQRR. The composition of
the body which penned the AQRR and that which issued the SCN
remained unaltered. The proceedings have thus come to be stigmatized
beyond repair and cannot in law be salvaged or saved.
329. This facet of the challenge attains added significance in light of
the nature of findings which we find came to be reflected in the AQRR .
Some of those findings and observations as appearing in the AQRR of
WP(C) 1065 of 2021 are extracted hereinbelow:-
“ 2.5.16 NFRA had analysed the details given in Annexure 4.5, and
its conclusions were as follows:
Annexure 4.5 Presumed Risk of Management Override of Control
The working papers referred in this Annexure primarily cover the
testing of design and implementation and the operating effectiveness
of the controls related to accounting of transactions as well as serial
continuity testing on the COD listing. The working papers do not
contain any relevant information to enable the Audit Firm to assess
the impact of management involvement in the functioning of the
company in such a manner as to override the established policies and
procedures.
2.5.17 The above figures clearly indicated that almost all the
sanctioning of loans was done manually and that was afterwards
regularized in the system. As has been highlighted in the RBI reports
also, the manual overrides essentially have to do with relaxation of
the norms and conditions that should normally attach to the
sanctions. Apart from the possibility of ROMM due to fraud, such
overrides also needed to be examined by the Audit Firm in order to
do its duties as per Sec 143 of the Companies Act, 2013. The Audit
Firm had been grossly negligent in considering and evaluating the
effect of management override of controls on account of sanctioning
of such loans and failed to evaluate the circumstances that required
the company to sanction the loans manually instead of following the
established policies and procedures. This preponderance of manual
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overrides should also have alerted the Audit Firm to the possibility
of fraud that needed to be reported under Sec 143(12). However,
nothing was done in this regard. Also, having analysed the COD
listing of manual approvals, NFRA had come across various cases of
sanctioning of loans/ modification in the conditions attached to
existing loans which were subsequently pointed out by the RBI in
their report. The audit documentation clearly indicates that the Audit
Firm in such cases has relied on the management representations
completely instead of performing adequate audit procedures.
2.5.18 To summarise,
(a) The Audit Firm had clearly indulged in a deliberate
misrepresentation of a material fact;
(b) There had been a complete lack of clarity, and utter confusion
had prevailed, in the ROMM assessment;
(c) Important aspects of the auditee company’s situation, such as its
SI-NBFC status, the very disturbing RBI Inspection Reports on the
company, the wide discrepancies in reporting of NPAs, etc., had not
been given adequate importance in the ROMM assessment;
(d) Accordingly, the audit responses had been grossly inadequate;
(e) Such procedures as had been performed have had no link to the
real ROMM;
(f) In crucial matters, the Audit Firm had relied completely on the
management’s representations;
(g) The Audit Firm had totally failed in communicating to
TCWG/the management the key issues arising out of the audit.
xxxx xxxx xxxx
NFRA had further examined aspects of the engagement that
2.3.6
were directed/supervised/reviewed by CA Udayan Sen in his
capacity as EP. Contrary to the statement made at document 5/page
10 of the Audit Firm’s response to the prima facie conclusions, WP
No. 29702 (Manual) Closing Procedures Check list had not been
initiated by CA Udayan Sen. CA Udayan Sen’s initials were seen
only in that part of the WP No. 29702 which is designated as the
closing memorandum. This is in the form of a report sent by CA
Shrenik Baid to CA Udayan Sen. This paper is a summary of the
procedures adopted during the course of the audit. The very fact that
CA Shrenik Baid had to send such a memorandum to CA Udayan
Sen was itself proof that CA Udayan Sen had not participated in any
W.P.(C) 1065/2021 & other connected matters Page 439 of 476
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of the audit processes listed therein. This is for the reason that if CA
Udayan Sen had indeed participated in the listed procedures etc., his
presence there would have been automatically recorded and the need
for such a closing procedures memorandum would not have arisen.
No further evidence had been provided by the Audit Firm to counter
the conclusions of the NFRA that CA Udayan Sen was not involved
with almost all the important work of the audit engagement.
xxxx xxxx xxxx
2.3.18 The Audit Firm in their reply submits that IFIN classified its
investment in RNEL as a long term investment, which, under AS 13,
was measured at cost less any other than temporary diminution in
value. The highest traded price of the shares of RNEL during FY
2017-18 was Rs.70.65, and there were many days during FY 17-18
where the closing traded price of shares of RNEL were more than
the carrying value of the shares in the books of account of IFIN.
Given such share prices and the general volatile nature of the RNEL
share price, there certainly was no decline in value other than
temporary as on 31st March, 2018. The Engagement Team
documented important facts set forth in management's representation
regarding the RNEL investment in WP 23150.01.05 including
carrying cost and price movement, in the documentation of its
testing reflected in WP 23150.01.01 "Investment In Equity and
Preference Shares"- Refer Tab 'Valuation of listed shares'.
xxxx xxxx xxxx
2.4.2 The response of the Audit Firm was as follows:
(a) Discussions were had with TCWG throughout the audit period;
(b) Not all discussions are required to be documented in the form of
minutes of discussions;
(c) Our written communications with the Audit Committee are as
follows:
(i) Engagement letter
(ii) Presentation made at the time of the half year review; and
st
(iii) Presentation made at the time of audit for the year ended 31
March, 2018, jointly with the joint statutory auditors.
(d) Our discussions with the Management are embedded within each
work paper as, prima facie, all information was provided by the
Management and hence would not require separate documentation.
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(e) All work was performed at the client’s offices, and hence
communication with the Management was on a daily basis.
xxxx xxxx xxxx
2.6.4 For all the above reasons, the DAQRR concluded that it is very
clear that the ET had completely failed to obtain sufficient
appropriate audit evidence to satisfy itself about the credit risk
associated with the fulfilment of the put option by SREPPL.
2.6.5 It is seen that the option Agreement was executed sometime in
December 2015. If the argument of the Audit Firm that the option
had a value of around Rs.180 crores was to be accepted, there was
no reason why this was not reflected in the Balance Sheets as of 31st
March, 2016, or 2017. The fact that this option contract was brought
into the books as of 31st March, 2018, only served to confirm the
prima facie conclusion of the NFRA that this action was only a
method used by the management to inflate the profit, and that the
Audit Firm did not display the required professional skepticism and
challenge the evidence produced by the management
2.6.6 After considering all the above matters, NFRA concluded as
follows in the DAQRR:
(a) The Audit Firm did not obtain sufficient, appropriate audit
evidence to support the value of the derivative asset included in the
Balance Sheet as at 31st March, 2018;
(b) The Audit Firm did not do the due diligence necessary to obtain
and critically evaluate such evidence as was provided to it by the
management;
(c) Accounting guidelines that are clearly inapplicable had been used
to justify the treatment given;
(d) In order to offset the impact of provisioning that could not be
deferred any more, on account of RBI insistence, the Audit Firm
went along with the management in including a derivative asset of
zero value in the Balance Sheet at over Rs 180 crores, and taking
credit in the Profit and Loss Account. This resulted in a very
material misstatement of the financial statements.
xxxx xxxx xxxx
2.6.9 NFRA has come to the conclusion that:
(a) The Audit Firm had failed in not insisting on fully providing for
the value of TTSL shares even in the earlier years;
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(b) The Audit Firm did not obtain sufficient appropriate audit
evidence to support the value of the derivative assets (put option)
included in the balance sheet as of 31.03.2018;
(c) The Audit Firm did not show the due diligence necessary to
obtain and critically evaluate such evidence as was provided to it by
the management;
(d) Accounting treatment that is clearly inapplicable, had been used
to justify the treatment given;
(e) The RBI Directions relating to restructuring were flouted; the
Audit Firm did not raise this issue, nor did it take up the matter of
non-disclosure of such restructured account in the financial
statements;
(f) In order to offset the impact of provisioning that was long
overdue, the Audit Firm went along with the management in
including a derivative asset of zero value in the balance sheet at
Rs.184.31 crores and taking credit for the same in the profit and loss
account. This resulted in a very material misstatement in the
financial statements.
xxxx xxxx xxxx
2.11.11 NFRA has considered the above contentions of the Audit
Firm and its conclusion are as follows:
(a) NFRA is a body constituted under the Companies Act, 2013, to,
inter alia, monitor and enforce compliance with auditing and
accounting standards prescribed under the said Act. All auditors of
companies that are registered under the Act will be monitored only
with reference to standards in force in India. The supposed
equivalence of International Standard to, or their even greater rigour
in comparison with, Indian Standards is entirely irrelevant for the
purposes of NFRA;
(b) Both the inadequacies of the QC policies and processes on the
one hand, and the non compliance with such policies as exist on the
other, have been clearly brought out in this AQRR. Specifically,
NFRA wishes to draw attention to the large scale and serious
violations of Independence requirements, the clear display of the
lack of the required professional skepticism, the lack of insistence on
obtaining sufficient appropriate audit evidence, the repeated
assertions that there could be more than one EP for an engagement,
the evident confusion in assessing the ROMM and its impacts on the
Audit responses and evidence obtained, and the sham character of
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the EQCR, as evidence of the need to revamp the QC policies and
processes of the Audit Firm;
(c) The complete breakdown of QC system evident in this case is
serious enough to support the suspicion that the Audit Firm had
aligned itself completely with the interests of the management of the
Auditee Company;
(d) NFRA, therefore, is of the opinion that the Audit Firm would be
well advised to prepare a comprehensive, concise and systematically
structured policy document to conform to SQC 1, and to put in place
mechanisms to rigorously enforce it and monitor compliance.
xxxx xxxx xxxx
SAQRR
2.2.3 On consideration of all the above evidence, the NFRA had
concluded in the DSAQRR that:
a) The reappointment of the Audit Firm as Statutory Auditor of IFIN
for the FY 201 7-18 was ab initio illegal and void for violation of
Section 141(3)(e) and Section 141(3)(i) of the Act.
b) The declaration of eligibility submitted by the Audit Firm in
terms of Proviso to Section 139(1) of the Act read with Rule 4 of the
Companies (Audit and Auditors) Rules, 2014, was false and invalid,
with full knowledge of such illegality. Hence, this clearly constituted
fraudulent conduct on the part of the Audit Firm.
c) The Audit Firm's compliance with the fundamental principles of
the Code of Ethics was threatened by the self-interest threat.
d) The Audit Firm, its EP, and the EQCR Partner were all guilty of
professional misconduct arising out of gross violations of the law
and the Code of Ethics.
2.5.16 NFRA had analysed the details given in Annexure 4.5, and its
conclusions were as follows:
Annexure 4.5 Presumed Risk of Management Override of Control
The working papers referred in this Annexure primarily cover the
testing of design and implementation and the operating effectiveness
of the controls related to accounting of transactions as well as serial
continuity testing on the COD listing. The working papers do not
contain any relevant information to enable the Audit Firm to assess
the impact of management involvement in the functioning of the
W.P.(C) 1065/2021 & other connected matters Page 443 of 476
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Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
company in such a manner as to override the established policies and
procedures.
2.5.17 The above figures clearly indicated that almost all the
sanctioning of loans was done manually and that was afterwards
regularized in the system. As has been highlighted in the RBI reports
also, the manual overrides essentially have to do with relaxation of
the norms and conditions that should normally attach to the
sanctions. Apart from the possibility of ROMM due to fraud, such
overrides also needed to be examined by the Audit Firm in order to
do its duties as per Sec 143 of the Companies Act, 2013. The Audit
Firm had been grossly negligent in considering and evaluating the
effect of management override of controls on account of sanctioning
of such loans and failed to evaluate the circumstances that required
the company to sanction the loans manually instead of following the
established policies and procedures. This preponderance of manual
overrides should also have alerted the Audit Firm to the possibility
of fraud that needed to be reported under Sec 143(12). However,
nothing was done in this regard. Also, having analysed the COD
listing of manual approvals, NFRA had come across various cases of
sanctioning of loans/ modification in the conditions attached to
existing loans which were subsequently pointed out by the RBI in
their report. The audit documentation clearly indicates that the Audit
Firm in such cases has relied on the management representations
completely instead of performing adequate audit procedures.
2.5.18 To summarise,
(a)The Audit Firm had clearly indulged in a deliberate
misrepresentation of a material fact;
(b) There had been a complete lack of clarity, and utter confusion
had prevailed, in the ROMM assessment;
(c) Important aspects of the auditee company’s situation, such as its
SI-NBFC status, the very disturbing RBI Inspection Reports on the
company, the wide discrepancies in reporting of NPAs, etc., had not
been given adequate importance in the ROMM assessment;
(d) Accordingly, the audit responses had been grossly inadequate;
(e) Such procedures as had been performed have had no link to the
real ROMM;
(f) In crucial matters, the Audit Firm had relied completely on the
management’s representations;
W.P.(C) 1065/2021 & other connected matters Page 444 of 476
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Signing Date:07.02.2025
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(g) The Audit Firm had totally failed in communicating to
TCWG/the management the key issues arising out of the audit.
2.3.6 NFRA had further examined aspects of the engagement that
were directed/supervised/reviewed by CA Udayan Sen in his
capacity as EP. Contrary to the statement made at document 5/page
10 of the Audit Firm’s response to the prima facie conclusions, WP
No. 29702 (Manual) Closing Procedures Check list had not been
initialed by CA Udayan Sen. CA Udayan Sen’s initials were seen
only in that part of the WP No. 29702 which is designated as the
closing memorandum. This is in the form of a report sent by CA
Shrenik Baid to CA Udayan Sen. This paper is a summary of the
procedures adopted during the course of the audit. The very fact that
CA Shrenik Baid had to send such a memorandum to CA Udayan
Sen was itself proof that CA Udayan Sen had not participated in any
of the audit processes listed therein. This is for the reason that if CA
Udayan Sen had indeed participated in the listed procedures etc., his
presence there would have been automatically recorded and the need
for such a closing procedures memorandum would not have arisen.
No further evidence had been provided by the Audit Firm to counter
the conclusions of the NFRA that CA Udayan Sen was not involved
with almost all the important work of the audit engagement.
xxxx xxxx xxxx
2.4.2 The response of the Audit Firm was as follows:
(a) Discussions were had with TCWG throughout the audit period;
(b) Not all discussions are required to be documented in the form of
minutes of discussions;
(c) Our written communications with the Audit Committee are as
follows:
(i) Engagement letter
(ii) Presentation made at the time of the half year review; and
st
(iii) Presentation made at the time of audit for the year ended 31
March, 2018, jointly with the joint statutory auditors.
(d) Our discussions with the Management are embedded within each
work paper as, prima facie, all information was provided by the
Management and hence would not require separate documentation.
(e) All work was performed at the client’s offices, and hence
communication with the Management was on a daily basis.
W.P.(C) 1065/2021 & other connected matters Page 445 of 476
Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
xxxx xxxx xxxx
2.6.4 For all the above reasons, the DAQRR concluded that it is very
clear that the ET had completely failed to obtain sufficient
appropriate audit evidence to satisfy itself about the credit risk
associated with the fulfilment of the put option by SREPPL.
2.6.5 It is seen that the option Agreement was executed sometime in
December 2015. If the argument of the Audit Firm that the option
had a value of around Rs.180 crores was to be accepted, there was
no reason why this was not reflected in the Balance Sheets as of 31st
March, 2016, or 2017. The fact that this option contract was brought
into the books as of 31st March, 2018, only served to confirm the
prima facie conclusion of the NFRA that this action was only a
method used by the management to inflate the profit, and that the
Audit Firm did not display the required professional skepticism and
challenge the evidence produced by the management.
2.6.6 After considering all the above matters, NFRA concluded as
follows in the DAQRR:
(a) The Audit Firm did not obtain sufficient, appropriate audit
evidence to support the value of the derivative asset included in the
Balance Sheet as at 31st March, 2018;
(b) The Audit Firm did not do the due diligence necessary to obtain
and critically evaluate such evidence as was provided to it by the
management;
(c) Accounting guidelines that are clearly inapplicable had been used
to justify the treatment given;
(d) In order to offset the impact of provisioning that could not be
deferred any more, on account of RBI insistence, the Audit Firm
went along with the management in including a derivative asset of
zero value in the Balance Sheet at over Rs 180 crores, and taking
credit in the Profit and Loss Account. This resulted in a very
material misstatement of the financial statements.
xxxx xxxx xxxx
2.6.9 NFRA has come to the conclusion that:
(a) The Audit Firm had failed in not insisting on fully providing for
the value of
TTSL shares even in the earlier years;
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Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
18:46:26
(b) The Audit Firm did not obtain sufficient appropriate audit
evidence to support the value of the derivative assets (put option)
included in the balance sheet as of 31.03.2018;
(c) The Audit Firm did not show the due diligence necessary to
obtain and critically evaluate such evidence as was provided to it by
the management;
(d) Accounting treatment that is clearly inapplicable, had been used
to justify the treatment given;
(e) The RBI Directions relating to restructuring were flouted; the
Audit Firm did not raise this issue, nor did it take up the matter of
non-disclosure of such restructured account in the financial
statements;
(f) In order to offset the impact of provisioning that was long
overdue, the Audit Firm went along with the management in
including a derivative asset of zero value in the balance sheet at
Rs.184.31 crores and taking credit for the same in the profit and loss
account. This resulted in a very material misstatement in the
financial statements.
2.11.11 NFRA has considered the above contentions of the Audit
Firm and its conclusion are as follows:
(a) NFRA is a body constituted under the Companies Act, 2013, to,
inter alia, monitor and enforce compliance with auditing and
accounting standards prescribed under the said Act. All auditors of
companies that are registered under the Act will be monitored only
with reference to standards in force in India. The supposed
equivalence of International Standard to, or their even greater rigour
in comparison with, Indian Standards is entirely irrelevant for the
purposes of NFRA;
(b) Both the inadequacies of the QC policies and processes on the
one hand, and the non compliance with such policies as exist on the
other, have been clearly brought out in this AQRR. Specifically,
NFRA wishes to draw attention to the large scale and serious
violations of Independence requirements, the clear display of the
lack of the required professional skepticism, the lack of insistence on
obtaining sufficient appropriate audit evidence, the repeated
assertions that there could be more than one EP for an engagement,
the evident confusion in assessing the ROMM and its impacts on the
Audit responses and evidence obtained, and the sham character of
the EQCR, as evidence of the need to revamp the QC policies and
processes of the Audit Firm;
W.P.(C) 1065/2021 & other connected matters Page 447 of 476
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Digitally Signed
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Signing Date:07.02.2025
18:46:26
(c) The complete breakdown of QC system evident in this case is
serious enough to support the suspicion that the Audit Firm had
aligned itself completely with the interests of the management of the
Auditee Company;
(d) NFRA, therefore, is of the opinion that the Audit Firm would be
well advised to prepare a comprehensive, concise and systematically
structured policy document to conform to SQC 1, and to put in place
mechanisms to rigorously enforce it and monitor compliance.
2.3.18 The Audit Firm in their reply submits that IFIN classified its
investment in RNEL as a long term investment, which, under AS 13,
was measured at cost less any other than temporary diminution in
value. The highest traded price of the shares of RNEL during FY
2017-18 was Rs.70.65, and there were many days during FY 17-18
where the closing traded price of shares of RNEL were more than
the carrying value of the shares in the books of account of IFIN.
Given such share prices and the general volatile nature of the RNEL
share price, there certainly was no decline in value other than
temporary as on 31st March, 2018. The Engagement Team
documented important facts set forth in management's representation
regarding the RNEL investment in WP 23150.01.05 including
carrying cost and price movement, in the documentation of its
testing reflected in WP 23150.01.01 "Investment In Equity and
Preference Shares"- Refer Tab 'V1luation of listed shares'.
xxxx xxxx xxxx
2.2.3 On consideration of all the above evidence, the NFRA had
concluded in the DSAQRR that:
a) The reappointment of the Audit Firm as Statutory Auditor of IFIN
for the FY 201 7-18 was ab initio illegal and void for violation of
Section 141(3)(e) and Section 141(3)(i) of the Act.
b) The declaration of eligibility submitted by the Audit Firm in
terms of Proviso to Section 139(1) of the Act read with Rule 4 of the
Companies (Audit and Auditors) Rules, 2014, was false and invalid,
with full knowledge of such illegality. Hence, this clearly constituted
fraudulent conduct on the part of the Audit Firm.
c) The Audit Firm's compliance with the fundamental principles of
the Code of Ethics was threatened by the self-interest threat.
d) The Audit Firm, its EP, and the EQCR Partner were all guilty of
professional misconduct arising out of gross violations of the law
and the Code of Ethics.
W.P.(C) 1065/2021 & other connected matters Page 448 of 476
Signature Not Verified
Digitally Signed
By:KAMLESH KUMAR
Signing Date:07.02.2025
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xxxx xxxx xxxx
2.3.6 NFRA therefore reiterates its conclusions in the DSAQRR and
observes that the Audit Firm has gone against its own assessment
and has accepted higher valuation of the Investments. The Audit
Firm has, thus, colluded with the Management, and has failed to
disclose the overstatement of profit.
xxxx xxxx xxxx
2.10.2 The above observations of NFRA are reinforced by various
observations of NFRA in this SAQRR, which are as follows:
a) In Para 2.3 above, it has been conclusively shown that the
reappointment of the Audit Firm as Statutory Auditor of IFIN for the
FY 2017-18 was ab initio illegal and void for violation of Section
141(3)(e) and Section 141(3)(i) of the Act. The declaration of
eligibility submitted by the Audit Firm in terms of Proviso to
Section 139(1) of the Act when read with Rule 4 of the Companies
(Audit and Auditors) Rules, 2014, was false and invalid, with full
knowledge of such illegality. The Audit Firm's compliance with the
fundamental principles of the Code of Ethics was threatened by the
self-interest threat. Thus, the EQCR Partner was guilty of
professional misconduct arising out of gross violations of the law
and Code of Ethics .
b) As shown in Para 2.3.3.19, the ET and EQCR failed to verify the
investments of the Company and their valuation with valid,
sufficient, appropriate and reliable Audit Evidences and failed to
comply with the applicable Accounting Framework.
c) There is absolutely no record of any discussion held by the EQCR
with the ET. For example, the reversal of Rs. l75 Crores from
provision for general contingencies has not been explained in any
WP. The EQCR team has neither done any independent Analysis nor
questioned the ET on the same. The conclusion is, therefore,
inescapable that the profits for the year were inflated by Rs.175
Crores, without any basis or justification.
d) As shown in Para 2.9.7, NFRA ~ad pointed out several
discrepancies in audit documentation that raised doubts, even at a
prima facie level, about the authenticity and reliability of the audit
documentation. The details given in Para 2.9 shows that the
deficiencies are systemic and structural in nature and arise
substantially from a complete disregard for the basic principles of IT
security in the software used. This renders the audit documentation
completely unfit for the intended purpose. In not having cross
verified that the IT systems used for Audit File documentation did
not suffer from any of these serious deficiencies, the EQCR has been
guilty of serious professional misconduct.
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2.10.3 Thus NFRA reiterates its conclusions in the DSAQRR and
concludes that: -
a. The EQCR has completely failed in documenting its working
properly and separately from the work of the Audit team as required
by SQC 1 and SA 230.
b. The EQCR has violated the provisions of SA 220 in preforming
their works.
c. The conclusion, therefore, is inescapable that such EQCR as was,
if at all, performed, was so perfunctory as to render it a complete
sham.”
330. Similar observations and findings can be found in the AQRR of
WP(C) 11737 of 2021:-
“2.16 . The above instances clearly prove that even SRBC identifies
itself as an EY entity. All the above facts show that the audit
network of SRBC is clearly EY itself, when substance over form is
considered. Read together with all the above facts, and the
requirements of the ethical guidelines, and how they are to be
applied, as described above, it is clear that the arguments presented
by the Audit Firm to try and make out that they have no “indirect”
connection (as contemplated by explanation (ii) to Sec 144) with
EYG entities are clearly intended only to mislead and deceive. All
entities in the EY network clearly hold themselves out as EY
constituents. In summary, it is crystal clear that any entity providing
any non-audit services under the EY brand name is to be regarded as
providing the said non-audit services indirectly, as contemplated by
the explanation to Section 144 of the Act. The separate legal
structure of the entities providing the non-audit services does not
exclude them from being considered as services provided
“indirectly” for the purposes of explanation (ii) to Sec 144.
xxxx xxxx xxxx
Therefore, NFRA concludes that SRBC, EYLLP and EYMBS
2.19.
are covered under directly or indirectly related entities as per
explanation (ii) to Sec 144 of the Act. Read with conclusions in
section above, the non-audit services provided by these entities fall
within the purview of the prohibited services, including management
services, covered under section 144 of the Companies Act, 2013.
xxxx xxxx xxxx
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2.46. In view of the above observations, NFRA concludes that the
EP and the EQCR Partner have been grossly negligent in complying
with the requirements of Para 11 and Para 21 of SA 220. Para 11 of
SA 220 stipulates that the EP shall obtain relevant information from
the firm and, where applicable, network firms to identify and
evaluate circumstances and relationships that create threats to
independence. Para 21 of SA 220 requires that for audits of financial
statements of the listed entities, the EQCR Partner shall consider the
ET’s evaluation of firm’s independence in relation to the audit
engagement
2.47. Thus, subject to the above observations, NFRA reiterated its
findings in the preliminary stage and concluded in the DAQRR that:
i. The appointment of the Audit Firm as Statutory Auditor of IFIN
was ab initio illegal and void for violation of Section 141(3)(e) and
Section 141(3)(i) of the Act, because of the provision of non-audit
services, in violation of section 144 of the Act, as listed in Appendix
1, except the two services mentioned above.
Because of the two non-audit services detailed above, the Audit
Firm has violated section 141(4) as well.
ii. The declaration of eligibility submitted by the Audit Firm in terms
of Proviso to Section 139(1) of the Act read with Rule 4 of the
Companies (Audit and Auditors) Rules, 2014, was false and invalid,
with full knowledge of such illegality. Hence, this clearly constitutes
fraudulent conduct on the part of the Audit Firm.
iii. The Audit Firm had grossly violated the provisions of Section
144 of the Companies Act, 2013.
iv. The Audit Firm had been in serious breach of the Code of Ethics.
v. The violations had undoubtedly fatally compromised the
independence in mind and independence in appearance required of
the Audit Firm. Independence in appearance stood destroyed since
no unbiased person could conclude, on an objective assessment of
the circumstances, that there had been no abridgement of the
auditor’s independence.
vi. EP and the EQCR Partner were guilty of professional misconduct
arising out of gross violations of the applicable Auditing Standards.
xxxx xxxx xxxx
In view of the above, NFRA reiterates its observations in the
2.67.
DAQRR and concludes that:
i. The appointment of the Audit Firm as Statutory Auditor of ITNL
was ab initio illegal and void for violation of Section 141(3)(e) and
Section 141(3)(i) of the Act, because of the provision of prohibited
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non-audit services, in violation of section 144 of the Act. Because of
the two non-audit services detailed in para 2.45 above, the Audit
Firm has violated section 141(4) as well.
ii. The declaration of eligibility submitted by the Audit Firm in terms
of Proviso to Section 139(1) of the Act read with Rule 4 of the
Companies (Audit and Auditors) Rules, 2014, was false and invalid,
with full knowledge of such illegality. The Audit Firm had grossly
violated the provisions of Section 144 of the Companies Act, 2013.
iii. The Audit Firm had been in serious breach of the Code of Ethics.
iv. The violations had undoubtedly fatally compromised the
independence in mind and independence in appearance required of
the Audit Firm. Independence in appearance stood destroyed since
no unbiased person could conclude, on an objective assessment of
the circumstances, that there had been no abridgement of the
auditor’s independence.
xxxx xxxx xxxx
On consideration of all the above evidence, NFRA therefore
11.3.
reiterates its conclusions made in the PFC that:
i. Based on the overall inadequacies in the audit done by the
Engagement Team led by EP, it is apparent that the EQCR Partner
has failed to bring to notice the key matters not appropriately dealt
with during the audit.
ii. The EQCR partner failed to report material misstatements known
to him to appear in a financial statement with which he is concerned
in his professional capacity.
iii. The EQCR partner did not exercise due diligence to obtain
sufficient information to objectively evaluate the significant
judgments of the ET and conclusions reached by them.
iv. The exaggerated claims of the Audit Firm about involvement of
EQCR Partner are clearly unsupported by evidence and the Audit
Firm has failed in complying with various provisions of SQC 1, SA
220 and SA 230.
xxxx xxxx xxxx
Annexure II
Thus, SRBC did not independently exercise reasonable due
1.3
diligence to ensure compliance with Section 141 (3) (i) of the Act.
SRBC also did not exercise due diligence to prevent violation of Sec
144 of the Act. This resulted in compromise of the independence in
mind and independence in appearance required of the auditor. This
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failure to evaluate the independence breaches resulted in accepting
an illegal appointment by the Audit Firm as a statutory auditor of
ITNL for FY 2017-18 and continuing and added illegality thereafter.
1.4 SRBC is guilty of breach of independence in mind and
independence in appearance as required by the Para 290.8 of Code
of Ethics. SRBC is also guilty of violation of para 220.2 of Code of
Ethics which stipulates “A professional accountant in public practice
should evaluate the significance of any threats. Evaluation includes
considering, before accepting or continuing a client relationship or
specific engagement, whether the professional accountant in public
practice has any business interests or relationships with the client or
a third party that could give rise to threats”.
1.5 Because of the above actions/omissions, SRBC has failed to
comply with Para A1 of SA 210, Para 11 of SA 220, Paras 14, A14,
A15, and A16 of SA 200.
1.6 Thus, SRBC is guilty of professional misconduct arising out of
gross violations of the Companies Act, 2013, the Standards of
Auditing and the Code of Ethics. These actions/omissions/violations
of SRBC, as detailed with evidence in the AQRR, therefore, amount
to professional misconduct of failure to exercise due diligence and
being grossly negligent in the conduct of professional duties.
xxxx xxxx xxxx
2.6 The above actions of SRBC, as detailed with evidence in the
AQRR, amount to professional misconduct of failure to:
a) disclose a material fact known to them which is not disclosed in a
financial statement, but disclosure of which is necessary in making
such financial statement where SRBC is concerned with that
financial statement in a professional capacity,
b) report a material misstatement known to them to appear in a
financial statement with which SRBC is concerned in a professional
capacity,
c) exercise due diligence, and being grossly negligent in the conduct
of professional duties,
d) obtain sufficient information which is necessary for expression of
an opinion or its exceptions are sufficiently material to negate the
expression of an opinion, and
e) invite attention to any material departure from the generally
accepted procedure of audit applicable to the circumstances. ”
331. As is manifest from the above, those findings clearly appear to
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transgress the boundaries of a prima facie opinion or one which could
be termed as being precursive. They ex facie verge if not cross the
border of the conclusive. They are clearly imbued by notes of finality.
It is these findings and conclusions rendered by the Executive Body
which constituted the foundational material for the formation of opinion
by it as to whether circumstances warranted disciplinary action being
taken against the writ petitioners. The Executive Body thereafter is
stated to have reviewed that very material in order to come to the
conclusion that circumstances clearly did exist which merited action
being taken in terms of Rule 11. The Executive Body thus not only
acted as the propounder of a prima facie finding of violation of SAs and
the laws, it took its own opinion into consideration for the purposes of
formation of the belief that sufficient cause existed to take action as
contemplated under Section 132(4).
332. We are in this respect also reminded of the following pertinent
observations which came to be rendered by the Supreme Court in Oryx
96
Fisheries (P) Ltd. vs Union of India
and where it was held:-
“ 27. It is no doubt true that at the stage of show cause, the person
proceeded against must be told the charges against him so that he
can take his defence and prove his innocence. It is obvious that at
that stage the authority issuing the charge-sheet, cannot, instead of
telling him the charges, confront him with definite conclusions of his
alleged guilt. If that is done, as has been done in this instant case, the
entire proceeding initiated by the show-cause notice gets vitiated by
unfairness and bias and the subsequent proceedings become an idle
ceremony.
28. Justice is rooted in confidence and justice is the goal of a quasi-
judicial proceeding also. If the functioning of a quasi-judicial
authority has to inspire confidence in the minds of those subjected to
its jurisdiction, such authority must act with utmost fairness. Its
96
(2010) 13 SCC 427
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fairness is obviously to be manifested by the language in which
charges are couched and conveyed to the person proceeded against.
xxxx xxxx xxxx
31. It is of course true that the show-cause notice cannot be read
hypertechnically and it is well settled that it is to be read reasonably.
But one thing is clear that while reading a show-cause notice the
person who is subject to it must get an impression that he will get an
effective opportunity to rebut the allegations contained in the show-
cause notice and prove his innocence. If on a reasonable reading of a
show-cause notice a person of ordinary prudence gets the feeling
that his reply to the show-cause notice will be an empty ceremony
and he will merely knock his head against the impenetrable wall of
prejudged opinion, such a show-cause notice does not commence a
fair procedure especially when it is issued in a quasi-judicial
proceeding under a statutory regulation which promises to give the
person proceeded against a reasonable opportunity of defence.
Therefore, while issuing a show-cause notice, the authorities
32.
must take care to manifestly keep an open mind as they are to act
fairly in adjudging the guilt or otherwise of the person proceeded
against and specially when he has the power to take a punitive step
against the person after giving him a show-cause notice.
33. The principle that justice must not only be done but it must
eminently appear to be done as well is equally applicable to quasi-
judicial proceeding if such a proceeding has to inspire confidence in
the mind of those who are subject to it.
xxxx xxxx xxxx
Going by the aforesaid test any man of ordinary prudence would
35.
come to a conclusion that in the instant case the alleged guilt of the
appellant has been prejudged at the stage of show-cause notice
itself.”
333. We are thus of the firm opinion that the Executive Body could
not have discharged the dual role of rendering findings of guilt and
violation of the SAs’ while authoring the SQARR/AQRR and thereafter
don the mantle of the division which is contemplated under Rule 11.
The assessment of whether circumstances warranted a disciplinary
enquiry being initiated was statutorily liable to be undertaken by a unit
of the NFRA separated from the one which drew up those reports. This
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since, the Act and the Rules clearly contemplate a separation of
functions between different constituents of the NFRA. Notwithstanding
what may be observed in those reports, the law would contemplate and
require a decision to initiate disciplinary action being arrived at
impartially and independently. The procedure which NFRA chose to
follow in these cases clearly lacked attributes of neutrality and a
dispassionate appraisal.
334. The doctrine of necessity has also been found to be inapplicable
since it was open for the NFRA to have constituted separate units
which could have discharged the functions statutorily envisaged. Since
the body of persons which penned the reports and took a decision to
initiate proceedings under Rule 11 was one and the same, the procedure
is found to be in clear violation of the reasonable likelihood of bias test.
An informed observer would be justified in alleging predisposition,
predetermination and an inclination to affirm against that body. We
have also borne in consideration the damning and conclusive findings
of guilt and infraction which came to form part of the AQRR and
essentially shut the doors on an independent and impartial evaluation of
the infractions which were alleged to have been committed. We are
thus convinced that these facets have ineffaceably tainted the
proceedings impugned before us.
P ERIPHERAL I SSUES
335. That only leaves us to examine the argument of invidious
discrimination amongst members of a homogenous class and those
falling within the ambit of Rule 3 being placed at a serious
disadvantage in the sense of being deprived of the safeguards
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incorporated in the CA Act and the Misconduct Rules, 2007. We find
ourselves unable to accede to that submission bearing in mind the
underlying policy objectives which imbue Section 132(4) and the
classification of auditors on the basis of entities whose audit they may
have conducted. As we view the class of entities which are placed
within the scope of Rule 3, it becomes apparent that they are body
corporates in which members of the general public would have a vital
interest and financial exposure. The potential fallout of financial
statements of such entities not being compliant with the statutory
obligations which apply may have huge ramifications. It is these facets
which appear to have constituted the basis of classification. It would
therefore be wholly incorrect to assert that the classification is not
based on a rational criteria or nexus aimed at subserving a larger public
interest. We have, in any case, found that there is no fundamental
difference between the procedure contemplated under the CA Act and
the NFRA Rules if matter being tried be based not on a complaint but
on an investigation initiated either by the authority itself or on a
reference made.
336. The argument of deprivation of the right of legal representation
pales into insignificance in light of the statement made on behalf of
NFRA and when it was stated that it had undertaken a course correction
and taken a principled decision to permit legal assistance to a charged
auditor or auditing firm.
S TATEMENT OF C ONCLUSIONS
337. For sake of convenience and ease of reference we deem it
appropriate to summarise our principal conclusions which form part of
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this judgment as under:-
A. The Companies Act makes provisions in terms of which both the
firm as well as its engagement partners are held liable and could
face the spectre of incarceration as well as the imposition of
monetary fines. Section 147 existed on the statute book even
before the NFRA came to be operationalized. The said provision
gets attracted the moment the provisions of Sections 139 to 146
are found to have been contravened. It is thus evident that the Act
does not make any distinction insofar as the issue of liability is
concerned. A liability in terms of the Companies Act could
accrue or come to be suffered by both the firm as well as its
partners. It would thus be wholly incorrect to hold that Section
132 creates a liability which is foreign to or uncontemplated by
the various other provisions forming part of that statute.
B. The Companies Act clearly contemplates a firm suffering a
liability as a consequence of the action of its Engagement
Partners and constituents who may be involved in the conduct of
the audit. Thus, both the audit firm as well as its individual
partners would be exposed to a statutory liability if Sections 139
to 146 were found to have been violated. Therefore, the liability
which is suffered by an audit firm by virtue of the actions of its
partners engaged in an audit can neither be said to be abhorrent
to the constitutional scheme nor violative of Article 14. It would
be wholly impermissible for an audit firm to disavow or seek to
distance itself from the actions of its members.
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C. This we hold bearing in mind the indubitable fact that members
come to be engaged in the conduct of the audit solely on account
of the firm being appointed as an auditor of a company. The
appointment of those members is not an independent engagement
for it is the firm, be it a partnership or an LLP, which comes to be
designated as the auditor. The individual members of those firms
discharge functions and carry out duties in accordance with the
directives issued by the audit firm.
D. This reasoning aligns closely with the principles of the organic
theory which views the firm and its members as a single,
inseparable unit for the purposes of legal and professional
obligations. This indivisibility reflects the theory's premise that
the firm and its members are one and their roles are
interdependent and unified. Thus, the appointment of the firm as
an auditor naturally encompasses the actions of its members. The
engagement of members in the conduct of an audit is not an
independent or isolated act but is inherently derivative of the
firm's appointment as the auditor. The firm acts as the central
organ, and its members function as its limbs, carrying out its
obligations and responsibilities. The firm’s designation as the
auditor inherently extends to its members, who act on its behalf.
E. To propose an arrangement where distinct spheres of liability
operate independently for acts performed by a firm and for those
same acts attracting liability on its partners is inherently flawed.
Such a proposition assumes the existence of a framework in
which the firm functions autonomously, separate from its
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members or constituents, while delivering auditing services.
However, this assumption disregards the very essence and the
nature of auditing work, where such disengagement is not only
impractical but also fundamentally incompatible with the
professional obligations involved.
F. Auditing, by its very nature, requires an unbroken chain of
diligence, monitoring, and oversight. The service itself is deeply
collaborative, demanding seamless integration of expertise and
accountability between the firm and its partners. It necessitates
meticulous scrutiny of financial data, adherence to regulatory
frameworks and the exercise of professional judgment at every
stage. These elements inherently bind the firm and its members
inextricably together. To suggest otherwise would ignore the
operational realities of such engagements, where the quality and
integrity of the work are not divisible between the firm and the
individuals performing the task.
G. In essence, the relationship between a firm and its members
while delivering auditing services is one of complete integration,
where roles and responsibilities overlap to ensure the highest
levels of professional service. The nature of such services does
not permit a firm to distance itself from the actions of its
partners, especially when those actions are performed in
furtherance of the firm’s obligations. We thus find no merit in the
contention that Section 132 of the Companies Act is liable to be
held as unconstitutional basis the audit firm or its individual
partners and members becoming vicariously liable.
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H. We also hold that Section 132 is neither an overreach nor can it
be said to be arbitrary; it is a necessary mechanism to enforce
professional accountability. The firm’s designation as an auditor
inherently includes the collective responsibilities of its members,
making the imposition of a vicarious liability a logical and
justified extension of its statutory obligations. Therefore, the
contention that the provision is unconstitutional lacks merit and
proceeds in ignorance of the operational and legal realities of an
audit firm’s engagement.
I. There cannot possibly be a cavil of doubt with respect to the
well-established precept that statutes are generally presumed to
be prospective in their operation. That presumption, undoubtedly,
constitutes the starting point from which a court would embark
upon its analysis. Equally well-settled is the principle of that
presumption being dispelled only if a court were to find from the
language of an enactment or a provision that the law maker
intended otherwise.
J. The word “vested” is explained by precedents as pertaining to
rights which could be said to have become fixed, absolute and
complete. Those rights would fall in the category of assertions
and protections which could be claimed and not being contingent
or subject to be defeated by a condition precedent. However,
mere expectancy of future benefits and interests which may be
contingent, or an anticipated continuance of existing laws would
not constitute vested rights.
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K. Vested rights are those which would remain unimpacted by any
future change in the legal position. Regard must be had to the
fact that if the right hinges on an unsecured or contingent
foundation, susceptible to modification by a change in the
legislative scheme, then such a right was never truly vested, as it
lacked the essential characteristics of being absolute, fixed, or
immune to future alteration.
L. A challenge to a statute on the ground of it being retrospective,
however, is invariably and indelibly linked to how it impacts or
infringes the rights of an individual or entity. The issue of
retrospectivity thus becomes liable to be examined in the
backdrop of how the enactment operates and affects the rights
which inhere or may have come to be perfected prior to its
promulgation. What we seek to emphasize is that the argument of
retrospectivity cannot be evaluated in an abstract dimension.
That submission has to be necessarily tested on what we find at
the crossroads and intersection where the statute meets with the
expanse of the bundle of rights which are asserted to exist.
M. Tested on the aforesaid principles, we find ourselves unable to
sustain the argument that Section 132 is liable to be struck down
on the ground that it operates retrospectively and impacts rights
which may have been perfected or completed. It becomes
relevant to note that the Explanation to Section 132(4) in
unambiguous and explicit terms provides that the expression
“ professional or other misconduct ” would have the same
meaning as assigned to that phrase by Section 22 of the CA Act.
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Section 132 therefore, does not create a new species of
misconduct nor does it create a liability which was otherwise not
contemplated under a pre-existing legislation.
N. “ Professional or other misconduc t” already stood defined by
Section 22 of the CA Act and thus all actions of CAs and auditors
was liable to be tested on the basis thereof. It would thus be
wholly incorrect to contend that Section 132 creates a new
liability with respect to a misconduct or misdemeanor committed
prior to October 2018.
O. No auditor can possibly claim or assert a vested right coming to
be created in respect of professional misconduct that may have
been committed prior to Section 132 coming into force. We find
ourselves unable to comprehend any right leave alone a vested
right that could have been claimed to have come into existence in
respect of professional conduct which would have fallen within
the scope of Section 22 of the CA Act prior to the introduction of
Section 132.
P. As was pertinently observed by the Supreme Court, a statute is
not liable to be viewed as having retroactive operation merely
because it draws upon an event or act which preceded its
promulgation. Acts of misconduct committed prior to October
2018 were neither accorded nor conferred a shield of immunity.
Section 132 does not create a new disqualification or create a
novel set or category of misdemeanors to constitute professional
or other misconduct. The conduct of an audit, an individual or a
firm remains liable to be enquired into based on the obligations
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and duties which held the field even prior to the introduction of
Section 132. The conduct of an audit would continue to be
examined and evaluated based on those legal obligations and set
of rules which existed earlier.
Q. A consideration of the legislative history preceding the
introduction of Section 132 clearly suggests that a pre-existing
regulatory deficiency or gap was sought to be addressed through
the introduction of Section 132 aligning with the broader
objective of strengthening oversight mechanisms and enhancing
the quality of professional services rendered by audit firms. This
measure was implemented not to create new liabilities but to
bridge an existing gap in enforcement, ensuring that standards of
professional conduct and accountability evolve in tandem with
global best practices.
R. The enactment of Section 132 thus represents a progressive
regulatory shift, aimed at reinforcing compliance, raising the bar
for audit quality, and ensuring that no aspect of professional
misconduct or deficiency in service remains unchecked or
unsupervised. By instituting a more structured and stringent
framework, Section 132 ensures that audit firms and
professionals adhere to internationally recognized standards,
thereby fostering greater transparency, accountability, and
confidence in financial reporting.
S. This regulatory evolution does not operate retrospectively in a
punitive sense but rather brings India’s auditing and financial
oversight framework in line with global standards, ensuring that
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all professional conduct meets the highest levels of scrutiny and
quality assurance. The underlying objective is to create a more
robust and reliable regulatory ecosystem, where professional
standards are continuously refined to prevent any compromise in
audit quality or integrity.
T. The precedents rendered in the context of Article 20(1) clearly
appear to exclude civil liabilities or penalties that may come to be
imposed from the ambit of that constitutional prohibition. The
scope of Article 20(1) has thus been consistently explained to be
confined to crimes and punishments as generally understood. An
act of professional misconduct was liable to be penalised and
punishment meted out as per a law which existed decades prior to
the insertion of Section 132 in the Companies Act. Section 132,
as noticed hereinabove, merely adopts the meaning assigned to
misconduct by the CA Act for the purposes of proceedings that
may be initiated thereunder. The argument based on Article
20(1) is thus liable to be rejected on this score alone.
U. As we view Rule 11 of the NFRA Rules, it becomes apparent that
the statute clearly commands that authority to ensure that the
disciplinary proceedings are undertaken in accordance with the
principles of natural justice including where deemed necessary
and appropriate providing an opportunity of hearing to the
charged entity in person. The reason for not prescribing for oral
testimony as a matter of rule or practice is evident from the fact
that the proceedings themselves would have been commenced
based either on a suo motu decision taken by the NFRA or on
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receipt of a reference made to it either by the Union Government
or any other competent authority.
V. The NFRA thus commences proceedings not on the basis of a
written complaint or at the behest of a complainant and which
was a possibility envisaged under the CA Act and the Misconduct
Rules, 2007. Even though the Union Government itself is
enabled to make a reference to the NFRA to undertake an
investigation, the said entity stands merely in the shoes of an
informant or a body which provides material for the NFRA to
investigate. The proceedings are thus clearly not adversarial and
which was a possible scenario under the Misconduct Rules 2007.
W. The NFRA itself initiates and undertakes the inquiry on the basis
of the audit file and record which may have been gathered in the
course of an audit quality review. Those proceedings are thus not
triggered or based upon the oral testimony of a complainant or
person. Thus, the commencement of an inquiry by the NFRA is
premised entirely on either a reference that may be made to it by
the Union Government or where the said body were to initiate an
investigation suo motu or in light of facts that may be gathered in
the course of its supervisory role envisaged in Rules 7, 8 and 9.
X. In the absence of those proceedings being based on the version of
an individual complaint or testimony, we fail to appreciate the
submission that the denial of a right of cross-examination is
liable to be viewed as a factor which renders the procedure
prescribed under the NFRA Rules to be arbitrary.
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Y. The mere usage of the word ‘summary’ cannot lead one to
presume that the procedure that the NFRA may ultimately adhere
to, would be violative of the principles of natural justice. When
Rule 11(5) uses the expression ‘summary procedure’ all that the
rule-making authority perhaps intended to convey was that
disciplinary proceedings would not be liable to be conducted in
accordance with a procedure or rules of evidence which a court
of law may be obliged to follow while trying a lis . In fact, that
rule itself enjoins the authority to ensure adherence to the
principles of natural justice. It also places it under the duty to
provide an opportunity of hearing to a person in cases where
circumstances may so warrant. The statute thus provides enough
guidance for the authority to ensure that the disciplinary
proceedings are conducted in a manner which is fair, transparent
and in consonance with the broad, basic and fundamental
principles of natural justice.
Z. The NFRA Rules oblige the authority to make available to the
charged CA or firm a detail of the allegations that are laid
together with the evidence in support thereof as well as an
appropriate disclosure with respect to the provisions of the Act,
Rules or the SAs which are found to have been allegedly
violated. It enjoins the SCN to broadly indicate the action that
NFRA proposes to take or the directions that it may be
constrained to frame if the allegations were to be ultimately
established. The authority is also statutorily obliged to enclose all
copies of documents relied upon as well as to make available the
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extracts of reports of investigation or other records which are
proposed to used for proving the allegation levelled. The SCN
must be served upon the auditor as well as the firm dependent
upon the action which the authority proposes to initiate. The
statute thus adopts and incorporates appropriate measures and
safeguards to ensure that the procedure that it adopts is in accord
with the principles of fair play and natural justice.
AA. We are also of the firm opinion that the proceedings which the
NFRA would undertake are not liable to conform to the
requirement of guilt being proved beyond reasonable doubt and
which is a test which primarily applies to criminal trials. The
proceedings under Section 132(4) are essentially disciplinary
proceedings and which are governed and guided by the well-
accepted principle of the charge being liable to be proved on the
basis of preponderance of probabilities.
BB. The argument of the restriction of proceedings to the audit file
being arbitrary is misconceived. The provisions contained in the
SAs’ have repeatedly laid emphasis on the audit file and record
being comprehensive and incorporating all material which may
have formed the basis for the conclusions appearing in the audit
report. Suffice it to state that the charge of professional
misconduct which may come to be laid against a CA or a firm
would have to be necessarily proved and established on the basis
of that audit record alone. The restriction of the proceedings to
the audit record thus binds not only the person charged with
misconduct but the NFRA itself.
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CC. Of course that is not to state, that an auditor or a firm is
precluded from referring to material or standards that may be
sought to be referred to in order to lend credence or support to
the conclusions contained in the audit report. However, since the
charge is to be proved solely on the basis of the audit record, the
reports of investigation and other records, we find no merit in the
challenge to the procedure prescribed under the NFRA Rules
when they restrict the inquiry to the audit file.
DD. As we view Section 132 of the Companies Act, there appears to
be no doubt in our mind that the provision did and always
contemplated the NFRA performing and discharging its
functions through such divisions as may be constituted. While it
is true that Rule 2(g), while defining the word ‘division’ includes
one headed by a Chairperson or a full time Member, the
Executive Body cannot possibly be construed to be a division in
itself. A conjoint reading of sub-sections (3)(a) and (3)(b)
appearing in Section 132 alongside the NFRA Rules, leads us to
the irresistible conclusion that the statute clearly contemplated
the discharge of functions enumerated in Rules 7 and 8 being
undertaken by independent units or divisions of the NFRA.
EE. A body must not only be fair and impartial, but it should also not
be burdened by a predisposition or a predetermined state of mind.
This aspect assumes significance insofar as we are concerned in
light of a common complement of persons having rendered
findings of alleged professional misconduct and thereafter sitting
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upon that very opinion to consider commencement of disciplinary
action.
FF. A person charged by such an authority could be reasonably said to
apprehend a reasonable likelihood of the opinion so formed being
tainted by the proscription of a reasonable likelihood of bias. It is
these principles which weighed upon the Supreme Court in L.K.
Ratna to hold that a person who may have been a party to the
preparation of the result of the enquiry would be disqualified from
participating in the deliberations of the Council.
GG. We are in such situations primarily concerned with the view that
could be formed by a fair minded and informed observer and
whether a real possibility of bias could have been legitimately
inferred. As has been pertinently observed, a decision-making
process which fails to satisfy the test of real possibility of bias is
not saved merely because it is likely that a different decision
maker may have reached the same conclusion.
HH. We also doubt the soundness of the proposition that a subsequent
fair hearing or appeal would cure proceedings which otherwise
failed to meet the test of likelihood of bias or that the said
statement could be accepted as an inviolable rule. We are
reminded of what our Supreme Court observed in Ratan Lal
Sharma when they held that when the error or irregularity is “so
patent and loudly obtrusive” it leaves “an indelible stamp of
infirmity or vice which cannot be obliterated or cured on appeal
or revision” .
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II. We are thus of the firm opinion that the bifurcation or division of
functions which the statute envisaged could have neither been
ignored nor disregarded. The underlying purpose of that
separation of functions and roles was clearly intended to confer a
real and discernible degree of impartiality and neutrality. The
statute clearly envisaged separate and distinct branches of the
NFRA discharging its functions of monitoring, oversight and
adoption of disciplinary measures. But for the separation of those
powers, one would be inevitably faced with the possibility of one
branch discharging dual and overlapping roles.
JJ. The principle of no man being a judge in its own cause was
explained by the Supreme Court as mandating the deciding
authority being one which was impartial and without bias. It also
alluded to aspects such as a predisposition to decide for or
against one party or where that authority may be inclined to
disregard the true merits of the dispute by virtue of bias.
KK. This clearly exposes the authority to the charge of a predilection
to affirm, the tendency to shut out a challenge to an opinion
already formed and disregard the weight of argument aimed at
convincing one to review and reappreciate. It would thus be akin
to what we in law term as the useless formality theory- an appeal
from Caesar to Caesar’s wife. This in addition to such a
procedure clearly becoming susceptible to the possibility of a
person reasonably and justifiably viewing the same as being
unfair and violating the golden principle of justice not only being
done but being visibly and perceivably served.
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LL. Our jurisprudence on the subject lays great emphasis on
proceedings not being tainted by preconceived opinions,
predisposition or predetermination and underscores the
imperatives of the absence of an unbiased mind. What thus
emerges from the aforesaid discussion is that a body must not
only be fair and impartial, but it should also not be burdened by a
predisposition or a predetermined state of mind.
MM. This aspect assumes significance insofar as we are concerned in
light of a common complement of persons having rendered
findings of alleged professional misconduct and thereafter sitting
upon that very opinion to consider commencement of
disciplinary action. A person charged by such an authority could
be reasonably said to apprehend a reasonable likelihood of the
opinion so formed being tainted by the proscription of a
reasonable likelihood of bias.
NN. As we have found on a review of the statutory scheme, the
Legislature as well as the rule making authority appears to have
consciously made appropriate provisions for the monitoring of
compliance of SAs, enforcement of compliance, oversight,
investigation and disciplinary proceedings being undertaken by
different arms of the NFRA. The division of functions which the
principles of due process and fairness would demand clearly
appear to inform the statutory provisions when they speak of
divisions performing different functions and obligations that
stand placed.
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OO. As we have found in the body of this judgment, it was the
Executive Body which in the first instance came to record
findings of guilt and violation of the SAs’. Those reports had
come to conclude in no uncertain terms that the petitioners had
violated the ethics standards required to be maintained and
having acted in violation of the SAs’ which applied. That very
body proceeded to take a decision to commence disciplinary
action based not an independent review of the facts that obtained
but solely on the strength of what had been found in the AQRR.
The composition of the body which penned the AQRR and that
which issued the SCN remained unaltered. The proceedings have
thus come to be stigmatized beyond repair and cannot in law be
salvaged or saved.
PP. As is manifest from the language in which the AQRR and the
SCNs’ proceed, they are replete with findings which clearly
appear to transgress the boundaries of a prima facie opinion or
one which could be termed as being precursive. They ex facie
verge if not cross the border of the conclusive. They are clearly
imbued by notes of finality. It is these findings and conclusions
rendered by the Executive Body which constituted the
foundational material for the formation of opinion by it as to
whether circumstances warranted disciplinary action being taken
against the writ petitioners. The Executive Body thus not only
acted as the propounder of a prima facie finding of violation of
SAs and the laws, it took its own opinion into consideration for
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the purposes of formation of the belief that sufficient cause
existed to take action as contemplated under Section 132(4).
QQ. We are thus of the firm opinion that the Executive Body could
not have discharged the dual role of rendering findings of guilt
and violation of the SAs’ while authoring the SQARR/AQRR
and thereafter don the mantle of the division which is
contemplated under Rule 11. The assessment of whether
circumstances warranted a disciplinary enquiry being initiated
was statutorily liable to be undertaken by a unit of the NFRA
separated from the one which drew up those reports. This since,
the Act and the Rules clearly contemplate a separation of
functions between different constituents of the NFRA.
RR. Notwithstanding what may be observed in those reports, the law
would contemplate and require a decision to initiate disciplinary
action being arrived at impartially and independently. The
procedure which NFRA chose to follow in these cases clearly
lacked attributes of neutrality and a dispassionate appraisal.
D ISPOSITION
338. On an overall conspectus of the above, we uphold the validity of
Section 132 and the NFRA Rules. We find no merit in the challenge
based on the arguments of vicarious liability, retroactive operation and
a violation of Article 20(1) of the Constitution.
339. We also find ourselves unable to sustain the challenge to those
provisions which were asserted to suffer from the vice of manifest
arbitrariness and deprivation of a fair procedure. The prescription of a
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summary procedure for trial of disciplinary matters neither obviates nor
relieves the NFRA from adhering to a procedure which is in
consonance with the principles of fairness and natural justice.
340. However, the NFRA clearly acted contrary to the command of
the legislation which obliged it to bear in mind the division of functions
and which clearly mandates a separation of roles that the authority is
called upon to discharge under the Companies Act and the NFRA
Rules. The assessment of whether circumstances warranted a
disciplinary enquiry being initiated was statutorily liable to be
undertaken by a unit of the NFRA separated from the one which drew
up those reports. The procedure which NFRA chose to follow in these
cases clearly lacked attributes of neutrality and a dispassionate
appraisal.
341. We would thus allow the instant writ petitions and quash the
impugned SCNs’ and final orders assailed in this batch as per the
details which appear below:-
S.No. Case Number Date of SCN Date of Final
Order
1. W.P.(C) 1065/2021 06 January 2021 -
2. W.P.(C) 1522/2020 28 January 2020 23 July 2020
3. W.P.(C) 1524/2020 17 January 2020 22 July 2020
4. W.P.(C) 11737/2021 29 September 2021 -
5. W.P.(C) 11738/2021 28 September 2021 -
6. W.P.(C) 11739/2021 29 September 2021 -
7. W.P.(C) 11987/2022 27 June 2022 -
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8. W.P.(C) 1525/2020 24 January 2020 28 July 2020
9. W.P.(C) 1650/2023 27 June 2022 -
10. W.P.(C) 2194/2023 5 January 2023 -
11. W.P.(C) 5842/2023 21 November 2022 29 September 2023
342. However, we leave it open to the NFRA to draw proceedings
afresh if so chosen and advised from the stage of issuance of fresh
notices based on the findings that have come to be recorded in the
AQRRs’. The findings and conclusions appearing in the AQRRs’
would be liable to viewed as merely being the expression of a prima
facie opinion as opposed to definitive conclusions. Those findings and
conclusions may be evaluated afresh for the purposes of formation of
opinion whether disciplinary action is liable to be initiated.
343. The decision of whether disciplinary action is liable to be
commenced shall be taken independently by a complement of the
NFRA comprising of members who were disconnected and
disassociated from the process of audit review and the drawl of the
AQRRs’.
YASHWANT VARMA, J.
DHARMESH SHARMA, J.
Neha/DR/RW/KK
FEBRUARY 07, 2025/
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