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.

Background

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.

Case BriefsHigh Courts

Rajsthan High Court: The Bench of Dinesh Mehta, J., slammed the ICAI for illegally withholding the result of a young girl-student of 21 years of age due to her alleged derogatory e-mail. The Bench remarked,

“The Institute of Chartered Accountants of India is a statutory body. Hence, its decisions, actions and adjudication are supposed to conform to the standards expected of State. A State that suppresses freedom of speech and inflicts or imposes extreme punishment treating an act or attempt of criticism and/or if it treats any suggestion for improvement as a challenge to its authority or supremacy is a State, that disregards rather violates fundamental rights of a citizens guaranteed by Article 19(1)(a) of our Constitution.”

Factual Fulcrum of the Case

On account of unprecedented situation of spread of Covid-19 and imposition of lock-down, the exams due in May, 2020 were cancelled by the ICAI and were re-scheduled to be conducted between 21-11-2020 to 14-12-2020. Owing to the said rescheduling, the Institute gave an option to all those candidates to either appear in the examinations to be held in November, 2020 or opt-out of examinations with a liberty to appear in subsequent examinations in January, 2021.

On 20-11-2020, the petitioner chose to address an e-mail to the office bearers of the Institute. In the said e-mail, the petitioner highlighted the situation of spread of Covid-19 and cautioned that if the examinations were held, it would lead to exponential growth in number of Covid cases. The thrust of her e-mail was only to suggest that online infrastructure be developed so that all levels of CA Examinations be conducted online. Evidently, the petitioner opted out of the November exams and appeared in all the papers/exams held as per above schedule.

On 22-02-2021, as a bolt from the blue, the Dy. Secretary (Examinations) wrote a e-mail informing the petitioner that her result had been put on hold, because of derogatory remarks she had made in her e-mail and an explanation was also sought as to why disciplinary proceedings not be initiated against her for the same. No sooner had the petitioner received the notice than she sent an e-mail expressing her unconditional apology for her inappropriate remarks. Regardless of the aforesaid letter, the institute proceeded to send her a communication with the subject “Alleged resort to unfair means/derogatory remarks during Chartered Accountants Examinations – November 2020.” Consequently, the petitioner appeared before the examination committee and put forth her explanation, but she was kept uninformed about the order/result of the hearing.

Later on, on surfing the official website on the day of result the petitioner found out that her result had been cancelled, under caption “ADOPTED UNFAIR MEANS. LETTER FOLLOWS”. On making a query she was informed by the institute that the Examination Committee had reached a conclusion that she was guilty of making derogatory remarks in the captioned examination and thus, her result had been cancelled.

Findings of the Court

Having waded through the record, the Court opined that not only the initiation of proceedings against the petitioner, but also the manner in which, the proceedings had been conducted so also its culmination in cancellation of petitioner’s result suffered from vices. On the perusal of the contentious e-mail sent by the petitioner, the Court said that the same was addressed to Institute’s President and other office bearers and not to the Examination Committee. Hence, the Examination Committee ought not have taken cognizance of an e-mail. Further, the Bench remarked,

“There is hardly anything in the e-mail, for which it can be alleged/ considered as or even construed to be derogatory. The very initiation of the proceedings against the petitioner alleging that the e-mail contains derogatory remarks was uncalled for and unwarranted. On the contrary, this Court feels that action of the respondents was rather over bearing or high handed.”

Quoting Voltaire, the Bench said, “With great power comes great responsibility”, thus, the Institute which is adorned with enormous power to elevate or uplift the lives of vulnerable & struggling students, is required to practice greater restraint in invoking its powers especially against the students. The Bench added,

One cannot lose sight of the fact that on receipt of the notice dated 22-02-2021 itself, the petitioner had practically knelt down in subservience before respondent No.2 urging that she regretted her action and would not repeat the same in future.”

But for the reasons best known to the Examination Committee, instead of burrying the hatchet, it literally opened a battle-front and summoned the petitioner to Jaipur to defend her cause. Opining it disturbing that the petitioner was personally heard yet no order was ever communicated to her and that her result was cancelled that too, citing “adopted unfair means”; the Bench held that the actions of the institute were without jurisdiction and against the principles of natural justice on one hand and capricious and arbitrary on the other.

Evidently, the Institute had warned the petitioner of dire consequences, if she further indulged in addressing any such communication to ICAI or any other organization concerning examinations.  Indisputably, the petitioner had not written even a single letter to the Institute or to any other authority after 20-11-2020. The respondent-Institute, therefore bound by its own notice was estopped from initiating any action much less disciplinary proceedings. Hence, the Bench held that the impugned proceedings were fundamentally without any basis besides being arbitrary. Since there was no mentioning or even indication of cancellation of result neither in the e-mail dated 22-02-2021 nor in the subsequent communications, there remains not even an iota of doubt that the impugned order of cancelling the result was inherently illegal, falling foul to Article 14 of the Constitution of India and the same was quashed.

Whether the Examination Committee had the jurisdiction to cancel petitioner’s result?

The moot question, required to be decided was whether the Examination Committee had the jurisdiction to cancel petitioner’s result in the present factual matrix.  Regulation 41 of the Regulations of 1988 revealed that the Examination Committee can initiate disciplinary proceedings in connection with the Examination. The language used therein is unequivocal, leaving no room for ambiguity that an action can be taken if a candidate behaves in a disorderly manner in or near an examination hall or has resorted to unfair means. The incidence or the e-mail in question had no nexus or proximity with the examination hall, hence, the proceedings under challenge were void since their inception or very beginning.

The institute’s action of reflecting such mis-information in its official website, in clear contrast with the actual facts is beyond acceptable limits.

The Examination Committee ought to have realized that such casual rather reckless approach involving imputation on reputation may have serious repercussions on emotional or mental equilibrium of a student.”

Verdict

The writ petition was thus, allowed with the cost of litigation quantified at Rs.20,000. On referring the result produced by the institute in a sealed envelope, the Court found out that the petitioner had passed the CA Intermediate Examination. Hence, the ICAI was directed to send original mark sheet and certificate to the petitioner and further, directed the institute to appropriately reflect petitioner’s result on its official portal. Lastly, the Bench warned the ICAI to take criticisms in positive stride, the Court stated,

A professional body like the respondent Institute should introspect and ensure that its over-enthusiasm of attaining professional excellence and endeavors of setting high standards of discipline should not silence rather stifle the speech of a student or its member in the manner that has been done in the present case.”

[Risha Lodha v. ICAI,  2021 SCC OnLine Raj 457, decided on 13-05-2021]


Kamini Sharma, Editorial Assistant has put this report together 

Appearance before the Court by:

For Petitioner(s): Adv. Vikas Balia

For ICAI: Adv. Manoj Bhandari and Adv. Anjay Kothari

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.

Case BriefsHigh Courts

Delhi High Court: The Bench of Vibhu Bakhru, J., while pronouncing a decision in respect to determining the jurisdiction of “Board of Discipline of Institute of Chartered Accountants of India” stated that,

Court is unable to accept the contention that Board of Discipline does not have the jurisdiction to examine the alleged misconduct. Clause (2) of Part-IV of the First Schedule to the Act is wide, and would include within its scope, any conduct that would tend to bring disrepute to the profession or the Institute.”

The matrix of facts in the present case is that the petitioner is a Chartered Accountant (CA) and a member of ICAI who has filed the present petition impugning the decision of the Board of Discipline of ICAI. Board had expressed its prima facie opinion of the Director (Discipline) that the petitioner was not guilty of “other misconduct” falling within the meaning of Clause 2 of Part IV of the First Schedule to the Chartered Accountants Act, 1949.

Petitioner had submitted that allegations against him have no bearing with him carrying the profession as a Chartered Accountant and therefore, the Board and/or ICAI would have no jurisdiction to entertain a complaint in that regard.

ICAI commenced the proceedings in regard to the complaints filed by Respondent 2 alleging that petitioner had outraged the modesty of his daughter, i.e. HA along with certain other offences under the Penal Code, 1860. An incident of harassment in 2004 took place for which HA had lodged a complaint and for which the petitioner’s statement stated that, “would not go to the street on which HA’s residence was located and would neither speak to her nor obstruct her while she was on her way”.  Petitioner still repeated the offence twice. Further, the petitioner continued to harass HA by threatening and defaming her and once dragging her in an attempt to get her inside his car. Thereafter, Respondent 2 lodged a complaint with ICAI for initiating disciplinary proceedings against the petitioner.

Director (Discipline)’s Stand

Director (Discipline), ICAI concluded the allegations levelled against petitioner relate to inter-personal relationships between HA and petitioner, thus, it would be appropriate if Respondent 2 sought redressal of the problems in another forum. Allegations did not necessarily fall within the disciplinary mechanism in respect of professional or other misconduct as provided under the Act and Rules framed thereunder.

Conclusion

The Bench stated that, as is apparent from the plain language of Part IV of First Schedule to the Act, the expression ‘other misconduct’ includes any conduct, which brings disrepute to the profession or the ICAI as a result of an action whether or not related to professional work. Thus, it is not necessary that misconduct complained should be a conduct in exercise of the profession of Chartered Accountancy. Conduct, which tends to bring disrepute, would be a subject matter of proceedings under Chapter V of the Act.

Thus, the Court was unable to accept that the proceedings before the Board of Discipline are without jurisdiction. Further while concluding its decision, it stated that the Board of Discipline has no jurisdiction to sentence the petitioner, but it would be erroneous to contend that the Board of Discipline does not have jurisdiction to examine the allegations made against the petitioner, in the context of determining whether the petitioner is guilty of other misconduct as defined under Part-IV of the Schedule-I of the Act.

Therefore, Court refrained from expressing any opinion on the merits of the complaint as the question of other misconduct was yet to be decided by the Board of Discipline. Also if the petitioner is found guilty, he has the remedy of an appeal before the Appellate Authority under Section 22-G of the Act. [Lalit Agrawal v. ICAI, 2019 SCC OnLine Del 6960, decided on 11-02-2019]

NewsTreaties/Conventions/International Agreements

The Union Cabinet has given its ex-post facto approval for the Memorandum of Understanding (MoU) signed in 2014 and approval for renewal of MoU between the Institute of Chartered Accountants of India (ICAI) & Saudi Organisation for Certified Public Accountants (SOCPA) in Saudi Arabia to promote mutual co-operation framework in the areas of Corporate Governance, Technical Research & Advice, Quality Assurance, Forensic Accounting, issues for Small and Medium Sized Practices (SMPs), Islamic Finance, Continuing Professional Development (CPD) and other subjects of mutual interest related to Accountancy profession.

Major impact:

The aim is to work together to develop a mutually beneficial relationship inthe best interest of ICAI members, students and their organizations.

The MoU will provide an opportunity to the ICAI members to expand their professional horizons and simultaneously ICAI will become an entity to aidand strengthen capacity building of local nationals.

The MoU will further enable ICAI to promote the Accounting and Auditing profession and all matters that might lead to the development of the profession and improve its status.

Beneficiaries:

ICAI has strong presence of 3 Chapters at Eastern Province covering Jeddah, Riyadh and Saudi Arabia, having more than 200 members who have been engaged at different professional level. The MoU will foster strong working relations between the ICAI & SOCPA thus giving strong professional opportunities to Indian Chartered Accountants in India and more confidence to employers in Eastern Province, thus creating significant employment opportunities for Indian Chartered Accountants.

Background:

The Institute of Chartered Accountants of India (ICAI) is a statutory body established by an Act of Parliament of India, The Chartered Accountants Act, 1949′, to regulate the profession of Chartered Accountancy in India. Saudi Certified Public Accountants’ Regulations issued under Royal Decree entrusted the “Saudi Organisation for Certified Public Accountants (SOCPA)” for promotion of the Accountancy and Auditing profession in that country.

Cabinet

NewsTreaties/Conventions/International Agreements

The Union Cabinet has approved the Mutual Recognition Agreement between the Institute of Chartered Accountants of India (ICAI) and The South African Institute of Chartered Accountants (SAICA).

Approval of the Cabinet has been granted in respect of Mutual Recognition Agreement (MRA) between ICAI and SAICA to establish a mutual co-operation framework for the advancement of accounting knowledge, professional and intellectual development, advancing the interests of their respective members and positively contributing to the development of the accounting profession in South Africa and India. The Agreement will facilitate recognition of Indian Accountancy Professionals with local Accountancy qualification in addition to existing ICAI qualification, which will increase their professional avenues in South African markets, foster strong working relations between the two accounting institutes, increase mobility of professionals at either end and would herald a new dimension for small and medium businesses in both countries.

Benefits: Strategically it is very important for the ICAI to maintain a close relationship with SAICA, which will significantly help the Institute to further the interests of its members and strengthen the ICAI brand in the region. The relationship developed over the past few years is strategic in nature and of mutual benefit. The MRA is likely to lead to greater employment opportunities for the Indian Chartered Accountants in the region and also lead to greater remittances from them to India.

[Press Release no. 1530963, dt. 02-05-2018]

Ministry of Corporate Affairs