Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal, Mumbai: The Coram of Justice Tarun Agarwala (Presiding Officer) and Justice M.T. Joshi (Judicial Member) while addressing a matter whether a Chartered Accountant could be held guilty by SEBI for lack of due diligence, held that,

Lack of due diligence can only lead to professional negligence which would amount to a misconduct which could be taken up only by ICAI.


An appeal was filed against the order passed by the Whole Time Member of Securities and Exchange Board of India whereby the appellant who was a statutory auditor/chartered accountant had been prohibited from issuing any certificate of audit and had been restrained from rendering any other auditing services to any listed companies and intermediaries for a period of one year.

Factual Matrix

Deccan Chronicle Holdings Limited, its promoters, directors, and Chartered Accountant (appellant) were issued show cause notice after investigation, wherein it was alleged that the company had understated its outstanding loans to the tune of Rs 1339.17 crores in the year 2008-9 and had also wrongly disclosed the difference between the actual and reported outstanding loans for the FYs 2009-10 and 2010-11.

Misleading Financial Information

Further, it was alleged that the company had manipulated its financials and failed to make necessary disclosure and that the promoters of the company wrongly transferred loans on the last day of the FY and reverted it on the first day of the financial year, thus misleading financial information.

In view of the above, show cause notice alleged that the appellant had violated Section 12A(a), (b) and (c) of the Securities and Exchange Board of India Act, 1992 read with Regulation 3(a), (b), (c) and (d) and Regulation 4(1), 4(2)(f), (k) and (r) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

WTM’s Conclusion

WTM concluded stating that the company had made wrong misleading or inadequate disclosures to the stock exchange and had understated the outstanding loans and interest and financial changes in the annual returns.

Further, it held that the appellant under Sections 224 and 227 of the Companies Act, 1956 owes an obligation towards the shareholders to report true and correct facts about the financials of the company and audit is caused to report correctly and faithfully under Section 227 of the Companies Act.

Additionally, the WTM held that the appellant overlooked the reporting of the outstanding loans and that he was not diligent and cautious and that it was his obligation to check the details of the outstanding loan from the bank and through other independent sources which he failed to do so and thereby did not adhere to the Auditing Assurance Standard (AAS)  and consequently allowed the fudging of the books of accounts by the company which suggested that the appellant colluded with the other notices.

Analysis, Law and Decision

Tribunal held that the impugned order could not be sustained for the following reasons:

In the Bombay High Court decision of Price Waterhouse Co. v. SEBI, WP No. 5249 of 2010, it was held that while exercising the powers under the SEBI Act, it is not open to SEBI to encroach upon the powers vested with the Institute under Chartered Accountant Act, 1949.

However, in a given case, if there is material against the C.A. to the effect that he was instrumental in preparing false and fabricated accounts in connivance, then SEBI is entitled to pass appropriate orders under Section 11(4) of the SEBI Act in the interest of the investors or securities market and is entitled to take measures as prescribed in the said section.

Further, SAT in its decision of Price Waterhouse Co. v. SEBI, Appeal No. 6 of 2018, found that the scope of the enquiry was only restricted to the charge of professional negligence since the C.A/C.A Firm were not dealing directly in the securities. This Tribunal held that in absence of inducement, fraud was not proved nor there was connivance or collusion by the C.A.s and therefore, the provision of section 12 (A) of SEBI Act and Regulation 3 & 4 of PFUTP Regulations are not applicable.

In the present matter, A.O. found that due diligence was not carried out by the appellant and there was no finding that the appellants were instrumental in preparing false and fabricated accounts or have connived in preparation or falsification of the books of account. Additionally, the Coram found that the appellants had manipulated the books of accounts with knowledge and intention, in the absence of which, there was no deceit or inducement by the appellants.

In the absence of any inducement, the question of fraud committed by the appellants does not arise.

Tribunal found that the appellant as a statutory auditor was not responsible for the preparation and falsification of the books of accounts, the financials of the company and the balance sheet of the company.

Concluding the matter, Coram held that once CA was not found responsible for the preparation of financials of company, merely because he was not cautious will not suggest that he colluded with the promoters and directors of the company.

In view of the above discussion, Tribunal allowed the appeal, and the impugned order did not sustain so far as it concerned the appellant (CA). [Mani Oommen v. SEBI, 2022 SCC OnLine SAT 60, decided on 18-2-2022]

Advocates before the Tribunal:

Mr. Chetan Kapadia, Advocate with Mr. Rahul Sarda, Mr. KRCV Seshachalam, Ms. Sabeena Mahadik, Mr. Aayush Kothari, Mr. Sagar Hate, Advocates i/b. Visesha Law Services for the Appellant.

Mr. Pradeep Sancheti, Senior Advocate with Mr. Abhiraj Arora, Mr. Karthik Narayan, Mr. Harshvardhan Nankani, Mr. Shourya Tanay, Advocates i/b. ELP for the Respondent.

Income Tax Appellate Tribunal
Appointments & TransfersNews

Appointments Committee of the Cabinet has approved the proposal for appointment of the following persons as Judicial Member and Accountant Member in the Income Tax Appellate Tribunal (ITAT) for a period of 4 years with effect from the date of assumption of the charge of the post, or until attaining the age of 67 years, or until further order, whichever is the earliest:

Judicial Member

Un-Reserved Category

  • Shri Sonjoy Sarma, Advocate
  • Ms S. Seethalakshmi, Advocate
  • Shri Shatin Goyal, Additional District & Sessions Judge
  • Shri Anubhav Sharma, Additional District & Sessions Judge

OBC Category

Shri T.R. Senthil Kumar, Advocate

SC Category

Shri Manmohan Das, Law Officer in SBI

Accountant Member

Un-Reserved Category

  • Bhagirath Mal Biyani, Chartered Accountant
  • Balakrishnan S. Chartered Accountant
  • Jamiappa Dattatraya Battull, Chartered Accountant
  • Padmavathy S, Chartered Accountant
  • Arun Khodpia, Chartered Accountant

OBC Category

Rathod Kamlesh Jayantbhai, Chartered Accountant

SC Category

Ripote Dipak Pandurang, Commissioner of Income Tax

Alternate Dispute ResolutionCase BriefsHigh Courts

Delhi High Court: J.R. Midha, J., in view of serious doubts on the independence of sole arbitrator as named in the arbitration agreement, appointed another independent arbitrator.

Petitioner sought appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act.

Parties had agreed for reference of disputes to the sole arbitrator, Sachin Dev Sharma, Chartered Accountant as per the arbitration agreement between them.

Petitioners Counsel submitted that the sole arbitrator was not competent to act as an arbitrator in terms of Section 12(5) read with 7th Schedule of the Arbitration and Conciliation Act as the named arbitrator was a consultant/advisor to the respondent and a director and shareholder in PEB Steel Lloyd (India) Ltd.

This Court vide an Order in March had directed the arbitrator to file an affidavit with respect to his relationship between the parties in terms of the Seventh Schedule under Section 12(5) of the Arbitration and Conciliation Act, wherein he admitted that he was an independent director in PEB Steel Lloyd (India) Ltd. in which respondent 1 was also a director.

Further, respondent 1 submitted that the petitioner had agreed to the named arbitrator cannot wriggle out of the arbitration agreement.

High Court in view of the above submissions, held that it had serious doubt to the independence of named arbitrator and hence in the interest of justice it would be appropriate to appoint an independent arbitrator to adjudicate disputes between the parties.

Saurabh Kirpal, Senior Advocate was appointed as the sole arbitrator and was directed to ensure compliance with Section 12 of the Arbitration and Conciliation Act before commencing the arbitration. [Monica Khanna v. Mohit Khanna, 2021 SCC OnLine Del 3421, decided on 18-06-2021]

Advocates before the Court:

For the Petitioners: Abhay Mahajan, Advocate

For the Respondents: Amit Mishra, Advocate

Kerala High Court
Case BriefsHigh Courts

Kerala High Court: N.Nagaresh, J., pronounced a landmark judgment regarding right to practice of Chartered Accountants. The Bench held,

“The decision of ICAI not to recognize and record the retirement of the petitioner from ‘M/s. R. Kumar and Associates’ will therefore cause unnecessary and unwarranted hindrance to the professional advancement of the petitioner. It will offend the fundamental right of the petitioner to practice a profession freely, guaranteed to him under Article 19(1)(g) of the Constitution of India.”

The petitioner, a registered Chartered Accountant was aggrieved by the refusal of the Institute of Chartered Accountants of India (ICAI) to register his sole proprietorship on its website. The grievance of the petitioner was that he was the only working partner of ‘R Menon & Associates’ which was a partnership at will, though the petitioner had sent an application to ICAI to record the dissolution of the firm and to delete his name from the records pertaining to the said firm in all capacities, it had not been recorded due to want of confirmation from other Partners, namely respondent 2 and respondent 3.

Additionally, the petitioner had proposed to register “Joshi John & Co.” as a sole proprietorship. Though with the interference of the Court, the petitioner was allowed to submit Form-18 for the registration of new firm, since the name of the dissolved Firm still exists in the records of ICAI, he was denied the right to apply for Multi Purpose Empanelment to obtain audit assignments of Banks and Public Sector Undertakings.

Stand Taken by ICAI

ICAI asserted that that when an activity of dissolution of a Partnership Firm is pending, another activity of registration of a Proprietary Firm cannot be initiated. ICAI further submitted that in view of Section 27(1) of the Chartered Accountants Act, 1949, where a Chartered Accountant in practice or a Firm, has more than one office in India, each one of such offices shall be in the separate charge of a member of the Institute of Section 27(1) of the Act and of the Regulation 187(1), the petitioner cannot register his sole proprietorship in the self-service portal at a different address unless he is relieved as in-charge of the Head Office of the Firm.

To reject the petitioner’s request for dissolution of firm ICAI relied on 165th meeting of the Institute held during 24th – 26th November, 1993, wherein it had been laid down that:

“In case of intimation of existence of dispute between/among partners received from the firm/other partners a suitable note would be kept in the records of the Institute and retirement will not be noted; and

The fact that there was dispute among the partners of a firm would also be intimated to the C.&A.G./RBI while furnishing the particulars of the firm for empanelment of bank/C.&A.G. audit.”

Findings of the Court

The issue before the Court was when a partnership firm of Chartered Accountants is dissolved or when one of the partners retires, can the Council refuse to recognize the dissolution or retirement, in the absence of unanimous approval thereof by all existing partners? The Bench stated that the actions of ICAI were such that the petitioner would either have to wait till the other partners agree either to the dissolution of the Firm or to the retirement of the petitioner from the Firm, in order to come out of the earlier partnership.

Whether consent of other partners required for dissolution of a Partnership at will?

The Bench observed that the Scheme and provisions of the CA Act, 1949 is not intended to register the partnerships of CAs or regulate inter se relations or disputes between partners. The Regulation 190 of CAs Regulations, 1993 is intended only to regulate the Trade name or Firm name of Chartered Accountants. Hence, registration and regulation of a partnership Firm of CAs would be governed by the Indian Partnership Act, 1932. It was not disputed that ‘M/s. R. Menon and Associates’ was a partnership at will. The Court expressed,

Section 43 of the Partnership Act, 1932 provides that when a partnership is ‘at will’, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm. The Firm is dissolved as from the date mentioned in the notice and if no date is so mentioned, as from the date of communication of the notice.”

According to the dissolution notice sent by the petitioner the date of dissolution mentioned therein was 20.12.2019. Therefore, as per Section 43 of the Partnership Act, the Firm ‘M/s. R. Menon and Associates’ should ordinarily be treated as dissolved from that date. Similarly, section 32(1)(c) of the Partnership Act, 1932 provides that a partner may retire, where the partnership is at will, by giving notice in writing to all other partners of his intention to retire. The petitioner had given notice of his retirement to respondents 2 and 3, thus, the petitioner stands retired from the partnership namely ‘R. Menon and Associates’.

Hence, ICAI could not deny to recognize such retirement. The forcible continuance of the petitioner, as a partner of a Firm which was loaded with partnership disputes, has civil consequences also on the petitioner. As per the general decisions taken by the Council, the Council had to communicate the existence of disputes among partners to C & A.G. and RBI, while furnishing the particulars of a Firm for empanelment of Bank/C&AG audits. Such recording and communication will affect the chances of the petitioner to get audit assignments. Therefore, the decision of ICAI not to recognize and record the retirement of the petitioner from ‘M/s. R. Kumar and Associates’ will cause unnecessary and unwarranted hindrance to the professional advancement of the petitioner and will offend the fundamental right of the petitioner to practice a profession freely, guaranteed to him under Article 19(1)(g) of the Constitution. The petitioner was therefore held entitled to reliefs; ICAI was directed to recognize the retirement of the petitioner from the Firm ‘M/s. R. Kumar and Associates’.

[Joshi John v. Institute of Chartered Accountants, 2021 SCC OnLine Ker 1876 , decided on 26-04-2021]

Kamini Sharma, Editorial Assistant has put this report together 

Appearance before the Court by:

Counsel for the Petitioner: V.M.Krishnakumar

Counsel for the Respondents: M.Gopikrishnan Nambiar, K.John Mathai, Joson Manavalan, Kuryan Thomas, Paulose C. Abraham, Ann Maria Francis, B.S.Suraj Krishna and Febin Raj T.S.