Gujarat High Court
Manojkumar Ganeshmal Jain vs State Of Gujarat on 26 July, 2023
NEUTRAL CITATION
R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/CRIMINAL MISC.APPLICATION NO. 17966 of 2020
With
R/CRIMINAL MISC.APPLICATION NO. 16698 of 2020
With
R/CRIMINAL MISC.APPLICATION NO. 18031 of 2020
With
R/CRIMINAL MISC.APPLICATION NO. 18026 of 2020
With
R/CRIMINAL MISC.APPLICATION NO. 17994 of 2020
With
R/CRIMINAL MISC.APPLICATION NO. 18000 of 2020
With
R/CRIMINAL MISC.APPLICATION NO. 17944 of 2020
With
R/CRIMINAL MISC.APPLICATION NO. 17968 of 2020
With
R/CRIMINAL MISC.APPLICATION NO. 17992 of 2020
With
R/CRIMINAL MISC.APPLICATION NO. 9289 of 2021
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE SANDEEP N. BHATT
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1 Whether Reporters of Local Papers may be allowed to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of the judgment ?
4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ?
========================================================== MANOJKUMAR GANESHMAL JAIN Versus STATE OF GUJARAT ========================================================== Appearance:
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NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined MRS SANGEETA PAHWA FOR THAKKAR AND PAHWA ADVOCATES(1357) for the Applicant(s) No. 1 MR PY DIVYESHVAR(2482) for the Respondent(s) No. 2 MR SOAHAM JOSHI, APP for the Respondent(s) No. 1 ========================================================== CORAM:HONOURABLE MR. JUSTICE SANDEEP N. BHATT Date : 26/07/2023 COMMON CAV JUDGMENT
1. All these applications are filed under Section 482 of the Code of Criminal Procedure, 1973 (`the Code' for short) for quashing and setting aside the complaints being Criminal Case Nos.23296 of 2018, 23301 of 2018, 21845 of 2018, 21807 of 2018, 21846 of 2018, 21842 of 2018, 23299 of 2018, 21809 of 2018, 21813 of 2018 and 21840 of 2018 respectively filed under the offences punishable under Section 143(2) read with Section 129 read with Schedule-III Part I of the Companies Act, 2013 (`the Act' for short) pending in the Court of learned Chief Metropolitan Magistrate, Ahmedabad and the order of issuance of process against the applicant under Section 204 of the Code.
2. As the common question of facts and law are involved in all these applications, at the request of learned advocates for the parties, they are heard together Page 2 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined and disposed of by this common oral judgment.
3. Rule returnable forthwith. Learned APP Mr.Joshi waives service of notice of rule for respondent no.1-state and learned advocate Mr.Divyeshwar waives service of notice of rule for respondent no.2.
4. For the sake of convenience, the facts of Criminal Miscellaneous Application No.17966 of 2020 as stated in the application, are considered, which are as under:
4.1 The applicant is arraigned as an accused in the capacity of Auditor/Chartered Accountant of a company. It is alleged in the complaint that `it is observed from the balance sheet (filed with Income Tax Department) as at 31.03.2015 that it was not mentioned as to whether the figures are in rupees or not. However, you being the statutory auditor have reported in your audit report dated 28.8.2015 that financial statement give true and fair view. Thus there is a violation of Sec.143(2) of the Companies Act, 2013 punishable under section 147(2) of the Act, 2013." That the applicant, as Page 3 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined an Auditor/Chartered Accountant of the company, has submitted audit report for financial year 2014-15, however, the complaint is filed after three years by the respondent no.2, which is sought to be quashed by way of these applications.
4.2 During the pendency of these applications, there is a further development in some of the matters that the report of Institute of Chartered Accountants of India (`ICAI' for short) pursuant to the complaint filed before the Institute is prepared and therefore such reports were also placed on record by way of draft amendment in some of the applications.
5. Heard learned advocates for the parties.
5.1 Learned advocate Mrs.Pahwa for the applicant submitted that pursuant to the complaint filed by the Registrar of Companies (ROC for short) against the applicant and considering the various charges which are mentioned in the report of ICAI, the ICAI has also considered this aspect about the violation of provisions of Section 129 of the Act and also considered the other Page 4 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined provisions of the Act. That, the complaints are filed under Section 143(2) read with Section 129 read with Schedule-III Part I of the Act wherein the complaint is required to be filed within a period of six months, however, in this case, as per the complaint, the offence is committed on 28.8.2015, the date of knowledge to the authority is in the year 2017 and the complaints are filed in the year 2018, which are apparently time barred as it is not filed within the prescribed period of limitation. She referred to the provisions of Sections 468 and 449 of the Code and submitted that the impugned complaints are beyond the period of limitation. 5.2 Learned advocate Mrs.Pahwa submitted that paragraph 8 of the complaint states that the complaint is filed on the basis of inspection report and Director's letter dated 20.2.2017; that such report is not given to the applicant though the applicant has demanded the same under RTI Act; from the internal communication of the department, it appears that Part-D of the inspection report provides that against the auditor, complaint is to be made to the ICAI; that a letter of the Joint Director to ROC provides that for violation of auditor of the Page 5 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined Company, the matter should be referred to ICAI; that in the facts of the present case, the allegation against the applicant is sent to ICAI and the ICAI has considered the charge @charge no.15, thus, it is clear that the report does not state that the complaint should be filed against the applicant before the learned Chief Metropolitan Magistrate; that in paragraph 5 of the complaint, it is stated that the Director, vide letter dated 20.2.2017, has directed to file prosecution against company and/or its officers/directors/auditors, however, the letter nowhere provides as to against whom the complaint should be filed. She, therefore, submitted that the present proceedings initiated by the respondent no.2 is misconceived and not tenable in the eye of law; that from the contents of paragraphs 5 to 8, they are without any basis and there is no such communication to ROC to file complaint against the applicant, therefore, the ROC has no authority to file the complaint. 5.3 Learned advocate Mrs.Pahwa for the applicant submitted that as per Sections 224 and 223 of the Act, prosecution under section 143(2) read with Section 129 of the Act cannot be launched before the learned Chief Page 6 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined Metropolitan Magistrate unless and until there is any criminality involved; Section 224 of the Act provides that if from an inspection report made under Section 223, it appears to the Central Government that any person for whom investigation is made is criminally liable, the Central Government may prosecute such person; in the present case, looking to the charge, even the ICAI has stated that it is a casual approach of the Auditor, but the complaint also does not attribute any criminality against the applicant.
5.4 She further submitted that on the basis of report under Section 206(5) of the Act, the complaint is not maintainable, unless and until investigation is carried out by the inspector appointed by the central government and report is filed under Section 223 of the Act. 5.5 She has further submitted that the complaint is also filed under Section 129 of the Act. Section 129(2) provides obligation of the company for laying down financial statement. As per Section 129(7) of the Act, if company contravenes any of the provisions of Section 129, the managing director, whole time director and Page 7 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined Chief Financial Officer or a person charged by the board with the duty of complying the requirement of this section is punishable with imprisonment; that this provision obliges the company to put financial statement before the Board of Directors; Section 125(5) gives the liability to the company if the financial statement is not placed as per the accounting standards as provided in sub-section (1); in the present case, the complainant has not filed any complaint against the company and therefore, auditor cannot be held liable for violation of Section 129 of the Act because Section 129 does not provide for any duty of the auditor, therefore, the punishment of Section 129 is not relevant in deciding the limitation of present complaint, thus, the complaint is beyond the period of limitation. She relied on the judgment of the Hon'ble Apex Court in the case of Darshan Singh Saini V/s Sohan Singh reported in (2015) 4 SCC 570 as well as the judgment of this Court in the case of Ravi N Kapoor V/s State of Gujarat, delivered in Special Criminal Application No.809 of 2014. 5.6 She has further submitted that the present prosecution filed against the auditor without arraigning Page 8 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined the company as accused is not maintainable. She has relied on the decision in the case of Aneeta Hada V/s State reported in (2010)5 SCC 661 on this point. 5.7 She submitted that the complaint states that in the balance sheet note no.8, heading was given as `short term borrowings' is not a proper heading and though the heading was not proper, the statutory auditor has reported that the accounts are giving true and fair view of the matter; that if Section 143(2) is perused, the auditor has to say that the financial statement gives true and fair view of the company's affairs. That if the company has not given proper heading, this would not mean that the report of auditor that the financial statement gives true and fair view of the company's affairs is not proper. She, therefore, submitted that the offence under Section 143(2) of the Act is not made out. She has relied on the judgment in the case of J.K.Industries Limited and Another V/s Union of India and Others, reported in (2007) 13 SCC 673 on this point.
5.8 She lastly submitted that Section 129 of the Page 9 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined Act obliges the company to place before the Board in the format as mentioned in the Act; Section 129 nowhere casts duty upon the auditor and it does not apply to the auditor; section 129 falls under Chapter-9 accounts of companies, whereas chapter-10 which applies to audit and auditor, the duties of auditors is provided in sections 139 to 148; therefore, the offence under Section 129 of the Act is not made out.
5.9 She, therefore, submitted that considering all these aspects, these applications may be allowed and the impugned complaints be quashed.
6. Per contra, learned advocate Mr.Divyeshwar for the respondent no.2 has strongly opposed the prayers made in the applications and submitted that prima facie, the trial is required to be proceeded; that prima facie the offence is made out under Section 143 read with Section 129 of the Act. He referred to the affidavit-in- reply filed by the ROC and submitted that the applicant has knowingly and willfully committed offence with the intention to deceive the company or its shareholders or creditors or tax authorities and therefore, the applicant Page 10 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined shall be punishable with imprisonment for a term which may extend to one year; that inspection of books of accounts and other records of the company was ordered by the Ministry for defaulting in repayment of bank loans including from public sector bank and indulging in fraudulent activities through manipulation of books of accounts, dubious import transactions, misappropriation and diversion of funds; the inspection was conducted and on the basis of inspection report, it is found that the company and its auditors have committed offence and the respondent no.2 had filed complaint as per Section 468 of the Code.
6.1 He has submitted that the applicant was supposed to undergo the trial before the Court of Additional Chief Metropolitan Court, Ahmedabad instead of filing this quashing application before this Court; that if any relief is granted by this Court, it may send wrong signal to the public removing their fear against violation of the Act in future and thereby jeopardizing the very foundation of a well regulated corporate affairs and put the other stakeholders interest and whole public money at risk. He relied on the judgment of the Hon'ble Apex Page 11 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined Court in the case of U.P.Pollution Control Board V/s M/s Mohan Meakins Ltd. And Others, decided in Special Leave petition (cri.) 3978 of 1999 on 27.3.2000 and in the case of Taramani Parakh V/s State of M.P. & Ors., decided in Criminal Appeal No.456 of 2015 on 16.3.2015. 6.2 He submitted that where there is a clear averment made regarding the active role played by the applicant in the company to the extent of his liability, the present complaints are not required to be quashed; that the Court cannot consider any external material produced by an accused for reaching to the conclusion that no offence was disclosed or there was possibility of acquittal and quashing of a charge is an exception to the rule of continuous prosecution, where the offence is even broadly satisfied, the Court should continue the prosecution rather than its quashing at initial stage; that the Court is not required to analyze the evidence available against the applicant and where the prima facie case is made out from the complaint, this Court should not exercise power under Section 482 of the Code. 6.3 He, therefore, submitted not to exercise the Page 12 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined inherent powers under Section 482 of the Code, which should be used sparingly, and prayed to dismiss these applications, as the offences are made out against the applicant and therefore they are required to face trial.
7. I have considered the rival submissions and perused the material placed on record.
8. Paragraphs 3, 4 and 5 of the impugned complaints read as under:
"That the inspection under section 206(5) of the Companies Act, 2013 of Books of Accounts and other records of the Company was ordered by the Ministry of Corporate Affairs, New Delhi and during the course of inspection of the Books of accounts carried out by an officer appointed by the Central Government, u/s 206(5) of the Companies Act, 2013, it was observed and inter alia pointed out by the Inspecting Officer that provisions of Section 143(2) r.w.129 r.w. Schedule III Part I of the Companies Act, 2013 has been contravened as under:
"It is observed from the balance sheet (filed with Income Tax Department) as at 31.03.2015 that it was not mentioned as to whether the figures are in rupees or not. However, Page 13 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined you being the statutory auditor have reported in your audit report dated 28.8.2015 that financial statement give true and fair view. Thus there is a violation of Sec.143(2) of the Companies Act, 2013 punishable under section 147(2) of the Act, 2013.
4. That the matter regarding violation/contravention as aforesaid was taken up with the accused hereof vide this office Show Cause Notice (SCN) dated 14.06.2017. A copy thereof is enclosed herewith as Annexure-`A'. The Accused has not responded to show cause notices issued by the Complainant.
5. That the Directors vide their letter No.RD (NWR)/206(5)/Insp./29/2016-17/4905 dated 15.02.2017 has directed this office to file prosecution after issue of SCN for violation of Section 143(2) r.w.129 r.w. schedule III Part I of the Companies Act, 2013 against the Company and/or its officers/directors in default. The said sanction was received by the Complainant's office on 15.02.2017 and therefore, this complaint is well within the limitation period under section 468 as well as under other provisions of chapter XXXVI of Criminal Procedure Code, 1973. A Copy of the Directorate letter No. RD (NWR)/206(5)/Insp./29/2016-17/4905 dated 15.02.2017 is enclosed herewith and marked as Annexure-
`B'."
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NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined
9. From the material on record and as per the submission of learned advocate Mrs.Pahwa for the applicant, it transpires that the applicant is rendering his services as auditor/chartered accountant of the company in question whereby on some report prepared by the Regional Director directing the ROC to file prosecution, sanction was received by the present respondent no.2 on 15.2.2017, complaint was filed as per the provisions of Section 468 of the Code. From the inspection report, the necessary extract of which is produced in the affidavit-in-reply to the effect that 'that inspection of books of accounts and other records of the company was ordered by the Ministry for defaulting in repayment of bank loans including from public sector bank and indulging in fraudulent activities through manipulation of books of accounts, dubious import transactions, misappropriation and diversion of funds; the inspection was conducted', it transpires that essentially the assessee who is the company in question has concealed particulars of its income and has furnished inaccurate particulars and one Shri Praveen Kumar Jain is director in 11 companies who is operating and managing the bogus entries/transactions through the shell Page 15 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined companies.
10. Now, if we peruse the provisions of Companies Act relevant for the purpose of considering these applications, they read as under:
"Section 143 : Powers and duties of auditors and auditing standards.
(2) The auditor shall make a report to the members of the company on the accounts examined by him and on every financial statements which are required by or under this Act to be laid before the company in general meeting and the report shall after taking into account the provisions of this Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of this Act or any rules made thereunder or under any order made under sub-section(11) and to the best of his information and knowledge, the said accounts financial statements give a true and fair view of the state of the company's affairs as at the end of its financial year and profit or loss and cash flow for the year and such other matters as may be prescribed.
"Provided that until the National Financial Reporting Authority is constituted under Section 132, the Central Government may hold consultation required under this sub-Page 16 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023
NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined section with the Committee chaired by an officer of the rank of Joint Secretary or equivalent in the Ministry of Corporate Affairs and the Committee shall have the representatives from the Institute of Chartered Accountants of India and Industry Chambers and also special invitees from the National Advisory Committee on Accounting Standards and the office of the Comptroller and Auditor-General."
129. Financial statement.--
(1) The financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under section 133 and shall be in the form or forms as may be provided for different class or classes of companies in Schedule III:
Provided that the items contained in such financial statements shall be in accordance with the accounting standards:
Provided further that nothing contained in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company:
Provided also that the financial statements shall not be treated as not disclosing a true and fair view of the state of affairs of the company, merely by reason of the fact that they do not disclose-- (a) in the case of an insurance Page 17 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined company, any matters which are not required to be disclosed by the Insurance Act, 1938 (4 of 1938), or the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999);
(b) in the case of a banking company, any matters which are not required to be disclosed by the Banking Regulation Act, 1949 (10 of 1949);
(c) in the case of a company engaged in the generation or supply of electricity, any matters which are not required to be disclosed by the Electricity Act, 2003 (36 of 2003);
(d) in the case of a company governed by any other law for the time being in force, any matters which are not required to be disclosed by that law.
(2) At every annual general meeting of a company, the Board of Directors of the company shall lay before such meeting financial statements for the financial year. (3) Where a company has one or more subsidiaries, it shall, in addition to financial statements provided under sub-
section (2), prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2):
Provided that the company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in such form as may be prescribed:Page 18 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023
NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined Provided further that the Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed. Explanation.--For the purposes of this sub-section, the word ―subsidiary‖ shallsubsidiary‖ shall shall include associate company and joint venture.
(4) The provisions of this Act applicable to the preparation, adoption and audit of the financial statements of a holding company shall, mutatis mutandis, apply to the consolidated financial statements referred to in sub-section (3). (5) Without prejudice to sub-section (1), where the financial statements of a company do not comply with the accounting standards referred to in sub-section (1), the company shall disclose in its financial statements, the deviation from the accounting standards, the reasons for such deviation and the financial effects, if any, arising out of such deviation. (6) The Central Government may, on its own or on an application by a class or classes of companies, by notification, exempt any class or classes of companies from complying with any of the requirements of this section or the rules made thereunder, if it is considered necessary to grant such exemption in the public interest and any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification. (7) If a company contravenes the provisions of this section, the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person Page 19 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined charged by the Board with the duty of complying with the requirements of this section and in the absence of any of the officers mentioned above, all the directors shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.
Explanation.--For the purposes of this section, except where the context otherwise requires, any reference to the financial statement shall include any notes annexed to or forming part of such financial 82 statement, giving information required to be given and allowed to be given in the form of such notes under this Act.
The provisions of the Code which are relevant read as under:
Section 468 of the Code reads as under:
"468. Bar to taking cognizance after lapse of the period of limitation.
(1) Except as otherwise provided elsewhere in this Code, no Court shall take cognizance of an offence of the category specified in sub-section (2), after the expiry of the period of limitation;Page 20 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023
NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined (2) The period of limitation shall be -
(a) six months, if the offence is punishable with fine only
(b) one year, if the offence is punishable with imprisonment for a term not exceeding one year.
(c) three years, if the offence is punishable with imprisonment for term exceeding one year but not exceeding three years.
(3) For the purpose of this section, the period of limitation in relation to offences which may be tried together, shall be determined with reference to the offence which is punishable with the more severe punishment or, as the case may be, the most severe punishment.
469: Commencement of the period of limitation. (1) The period of limitation, in relation to an offender, shall commence,
(a) on the date of the offence; or
(b) where the commission of the offence was not known to the person aggrieved by the ofence or to any police officer, the first day on which such offence comes to the knowledge of such person or to any police officer, whichever is earlier; or
(c) where it is not known by whom the offence was communicated, the first day on which the identity of the offender is known to the person aggrieved by the offence or Page 21 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined to the police officer making investigation into the offence, whichever is earlier.
(2) In computing the said period, the day from which such period is to be computed shall be excluded."
11. There is no dispute to the fact that the applicant was working as chartered accountant/auditor of the companies in question at the relevant point of time. The Regional Director found some mischief in some transactions and directed to file complaint against the companies and/or its officers/directors in default. However, the submission made by learned advocate for the applicant makes sense that the authority who conducted the inspection under Section 206(5) of the Act has not directed to file complaint against the applicant, who is the auditor/chartered accountant of the companies in question. The reference of communication made in paragraph 5 of the complaint also does not state that the complaint be filed against the applicant and there is no such communication to the ROC to file complaint against the applicant. Therefore, the complaint against the applicant is without any basis and without authority.
12. As regards the second contention that as per Page 22 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined Section 224 of the Act, prosecution under Section 143(2) read with Section 129 of the Act cannot be launched before the learned Chief Metropolitan Magistrate unless and until there is any criminality involved, the provisions of Sections 223 and 224 are required to be perused, which read as under:
"223. . Inspector's report.--
(1) An inspector appointed under this Chapter may, and if so directed by the Central Government shall, submit interim reports to that Government, and on the conclusion of the investigation, shall submit a final report to the Central Government.
(2) Every report made under sub-section (1) shall be in writing or printed as the Central Government may direct. (3) A copy of the report made under sub-section (1) may be obtained by making an application in this regard to the Central Government.
(4) The report of any inspector appointed under this Chapter shall be authenticated either--
(a) 1 [by the seal, if any] of the company whose affairs have been investigated; or
(b) by a certificate of a public officer having the custody of the report, as provided under section 76 of the Indian Evidence Act, 1872 (1 of 1872), and such report shall be admissible in any legal proceeding Page 23 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined as evidence in relation to any matter contained in the report.
(5) Nothing in this section shall apply to the report referred to in section 212."
224. Actions to be taken in pursuance of inspector's report.-- (1) If, from an inspector's report, made under section 223, it appears to the Central Government that any person has, in relation to the company or in relation to any other body corporate or other person whose affairs have been investigated under this Chapter been guilty of any offence for which he is criminally liable, the Central Government may prosecute such person for the offence and it shall be the duty of all officers and other employees of the company or body corporate to give the Central Government the necessary assistance in connection with the prosecution. (2) If any company or other body corporate is liable to be wound up under this Act and it appears to the Central Government from any such report made under section 223 that it is expedient so to do by reason of any such circumstances as are referred to in section 213, the Central Government may, unless the company or body corporate is already being wound up by the Tribunal, cause to be presented to the Tribunal by any person authorised by the Central Government in this behalf--
(a) a petition for the winding up of the company or body corporate on the ground that it is just and equitable that it Page 24 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined should be wound up;
(b) an application under section 241; or (c) both. (3) If from any such report as aforesaid, it appears to the Central Government that proceedings ought, in the public interest, to be brought by the company or any body corporate whose affairs have been investigated under this Chapter--
(a) for the recovery of damages in respect of any fraud, misfeasance or other misconduct in connection with the promotion or formation, or the management of the affairs, of such company or body corporate; or
(b) for the recovery of any property of such company or body corporate which has been misapplied or wrongfully retained, the Central Government may itself bring proceedings for winding up in the name of such company or body corporate.
(4) The Central Government, shall be indemnified by such company or body corporate against any costs or expenses incurred by it in, or in connection with, any proceedings brought by virtue of subsection (3).
(5) Where the report made by an inspector states that fraud has taken place in a company and due to such fraud any director, key managerial personnel, other officer of the company or any other person or entity, has taken undue advantage or benefit, whether in the form of any asset, property or cash or in any other manner, the Central Government may file an application before the Tribunal for Page 25 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined appropriate orders with regard to disgorgement of such asset, property, or cash, as the case may be, and also for holding such director, key managerial personnel, officer or other person liable personally without any limitation of liability."
13. From the contents of the said sections, if from an inspection report made under Section 223, it appears to the Central Government that any person for which investigation is made is criminally liable, the Central Government may prosecute such person. In the present case, looking to the charge, even the ICAI has stated that it is casual approach of the auditor but it does not attribute any criminality against the applicant. Thus, there is substance in the argument of learned advocate for the applicant that the prosecution cannot be launched under this section.
14. As regards the third contention that the complaint filed on the basis of the report under Section 206(5) of the Act is not maintainable, unless and until investigation is carried out by the inspector appointed by the Central Government and report is filed under Section 223 of the Act, if Registrar finds that business of the Page 26 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined company is being carried out on for a fraudulent or unlawful purpose, the central government u/s 206(5) can direct inspection of the books of accounts of the Company and after inspection, report is made under Section 208 of the Act which empowers the Registrar or Inspector to give recommendation for further investigation into the affairs of the Company, if it is found necessary. In the present case, as per the complaint, only inspection is carried out and investigation is not carried out by any authority, and therefore, before investigation, the prosecution cannot be launched as per Section 224 of the Act and inspection under Section 206(5) of the Act does not empower the complainant to file the present complaint. Therefore, the said contention is found valid and reasonable.
15. As regards the next contention of the learned advocate for the applicant that the complaint is barred by limitation as provided under Section 468 of the Code, it needs to be seen that the complaint is filed under Section 143(2) read with Section 129 of the Act and the contravention of Section 143(2) of the Act is punishable under Section 147 of the Act and Section 147(2) provides Page 27 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined for punishment of fine and if the punishment is fine, as per Section 468 of the Code, the limitation period is six months. In the present case, the date of knowledge is 20.2.2017 and the complaints are filed on 20.2.2018 and therefore the complaints are apparently barred by period of limitation.
16. As regards the contention of learned advocate for the applicant that the complaint is also filed under Section 129 of the Act and that the auditor cannot be held liable for violation of this section because Section 129 does not provide for any duty of the auditor, if we see the provision of Section 129 itself, 129(2) provides obligation on the company for laying down financial statement, Section 129(7) of the Act provides that if company contravenes any of the provisions of Section 129, the managing director, whole time director and Chief Financial Officer or a person charged by the board with the duty of complying the requirement of this section is punishable with imprisonment, that this provision obliges the company to put financial statement before the Board of Directors; Section 125(5) gives the liability to the company if the financial statement is not Page 28 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined placed as per the accounting standards as provided in sub-section (1), in the present case, admittedly, the complainant has not filed any complaint against the company and this contention is required to be accepted that the complaint cannot be filed against the auditor, as now, it is well settled that any prosecution relating to the transaction of the company cannot be launched against the directors or against other persons who are managing affairs of the company without arraigning the company as accused.
17. As regards the last contention of learned advocate Mrs.Pahwa for the applicant that no offences as alleged in the complaint are made out, the auditor is obliged to examine the accounts and financial statement required under the Act and after examining the same, the auditor is required to report that to the best of his information and knowledge, the said accounts give a true and fair view of the Company's affairs. In the present case, the complaint states that in the balance sheet note no.8, heading was given as `short term borrowings' is not a proper heading and even though the heading was not proper, the statutory auditor has Page 29 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined reported that the accounts give true and fair view of the matter. In this connection, if we peruse Section 143(2) of the Act, the auditor has to say that the financial statement give true and fair view of the Company's Affairs and if the company has not given proper hearing, it would not mean that the report of the auditor that the financial statement gives true and fair view of the company's affair is not proper.
18. As regards the contention that offence under Section 129 of the Act is not made out, if we peruse Section 129 of the Act, it obliges the company to place before the Board in the format as mentioned in the Act; Section 129 nowhere casts duty upon the auditor and it does not apply to the auditor; section 129 falls under Chapter-9 accounts of companies, whereas chapter-10 which applies to audit and auditor, the duties of auditors is provided in sections 139 to 148.
19. In view of the aforesaid discussion, if we consider the judgments cited at the bar by learned advocates for the parties, they read as under: Page 30 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023
NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined In the case of Darshan Singh Saini (supra), it is held as under:
"We have considered the aforesaid contention advanced at the hands of the learned Counsel for the appellant. It is apparent from the submissions advanced by the learned Counsel for the appellant, that he is calculating limitation by extending the same to the order passed by the Judicial Magistrate, First Class, Nalagarh, on 06.02.2009. The instant contention is wholly misconceived on account of the legal position declared by a Constitution Bench of this Court in Sarah Mathew v/s Institute of Cardio Vascular Diseases (2014) 2 SCC 62, wherein in para 51, this Court has held as under:
"51. In view of the above, we hold that for the purpose of computing the period of limitation under Section 468 of the CrPC the relevant date is the date of filing of the complaint or the date of institution of prosecution and not the date on which the Magistrate takes cognizance. We further hold that Bharat Kale which is followed in Japani Sahoo lays down the correct law. Krishna Pillai will have to be restricted to its own facts and it is not the authority for deciding the question as to what is the relevant date for the purpose of computing the period of limitation under Section 468 CrPC."
In the above view of the matter, we are satisfied, that keeping in mind the allegations levelled against the Page 31 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined appellant by the respondent, the date of limitation had to be determined with reference to the date of incident and the date when the complaint was filed by the respondent. Since the complaint was filed by the respondent on 24.01.2008, with reference to an incident of 15.01.2008, we are of the view, that Section 468 of the Criminal Procedure Code would not stand in the way of the respondent, in prosecuting the complaint filed by him." In the case of Aneeta Hada (supra), it is held by the Hon'ble Apex Court in paragraphs 58, 63 and 64 as under:
"58. Applying the doctrine of strict construction, we are of the considered opinion that commission of offence by the company is an express condition precedent to attract the vicarious liability of others. Thus, the words "as well as the company" appearing in the section make it absolutely unmistakably clear that when the company can be prosecuted, then only the persons mentioned in the other categories could be vicariously liable for the offence subject to the averments in the petition and proof thereof. One cannot be oblivious of the fact that the company is a juristic person and it has its own respectability. If a finding is recorded against it, it would create a concavity in its reputation. There can be situations when the corporate reputation is affected when a Director is indicated.Page 32 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023
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63. Section 85 of the 2000 Act is as under:
"85. Offences by companies - (1) Where a person committing a contravention of any of the provisions of this Act or of any rule, direction or order made thereunder is a company, every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of business of the company as well as the company, shall be guilty of the contravention and shall be liable to be proceeded against and punished accordingly:
Provided that nothing contained in this sub-section shall render any such person liable to punishment if he proves that the contravention took place without his knowledge or that he exercised all due diligence to prevent such contravention.
(2) Notwithstanding anything contained in sub-section(1), where a contravention of any of the provisions of the Act or of any rule, direction or order made thereunder has been committed by a company and it is proved that the contravention has taken place with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly."Page 33 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023
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20. In the case of J.K.Industries Limited and Another (supra), it is held in paragraph 24 as under:
"24. The insertion of the concept of "true and fair view" in place of "true and correct" has been made to do away with the view that accounts should disclose arithmetical accuracy. Adherence to the disclosure requirements as per Schedule VI is subservient to the overriding requirement of "true and and fair view" as regards the state of affairs. Therefore, the annual financial statements should convey an overall fair view and should not give any misleading information or impression. All the relevant information should be disclosed in the balance-sheet and the P&L a/c in such a manner that the financial position and the working results are shown as they are. There should be neither an overstatement nor an understatement. Further, the information to be disclosed should be in consonance with the fundamental accounting assumptions and commonly accepted accounting policies. Therefore, failure to make provision for taxation would not disclose true and fair view of the state of affairs. Non-compliance for taxation would, therefore, amount to contravention of Sections 209 and 211 of the Companies Act. Accordingly, it is necessary for the auditor to qualify in his report, and such qualification should bring out in what manner the accounts do not disclose a true and fair view of the state of affairs of the company as well as the profit/loss of the company."Page 34 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023
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21. The submissions raised by learned advocate Mr.Divyeshwar for the respondent no.2-complainant, are not helpful to the respondent in view of the settled position of law and also in view of the facts of the present case. As regards the judgments relied on by learned advocate Mr.Divyeshwar, there cannot be any dispute about the ratio laid down and legal proposition therein, but the facts and circumstances of the present case are different from the facts of those judgments and therefore the same are not applicable to the present case.
22. In view of the above discussion, the act of the auditor/chartered accountant-applicant, at the best, can be termed as negligence but cannot be termed as criminality such as to invoke the sections as invoked in the complaints and therefore the complaints cannot be allowed to stand against the applicant for the sections invoked herein and continuing of further proceedings pursuant to the said FIR will cause greater hardships to the applicants and no fruitful purpose would be served if such further proceedings are allowed to be continued. Page 35 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023
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23. Further, it will also be fruitful to mention the judgment of Hon'ble Supreme Court in the case of State of Haryana V/s Bhajan Lal reported in AIR 1992 SC 604, wherein the Hon'ble Supreme Court has observed thus -
"In the backdrop of the interpretation of the various relevant provisions of the Code under Ch.XIV and of the principles of law enunciated by this court in a series of decisions relating to the exercise of the extraordinary power under Art.226 or the inherent powers under sec.482 of the Code which we have extracted and reproduced above, we give the following categories of cases by way of illustration wherein such power could be exercised either to prevent abuse of the process of any court or otherwise to secure the ends of justice, though it may not be possible to lay down any precise, clearly defined and sufficiently channelised and inflexible guidelines or rigid formulae and to give an exhaustive list of myriad kinds of cases wherein such power should be exercised.
(1) Where the allegations made in the first information report or the complaint, even if they are taken at their face value and accepted in their entirety do not Page 36 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined prima facie constitute any offence or make out a case against the accused.
(2) Where the allegations in the first information report and other materials, if any, accompanying the FIR do not disclose a cognizable offence, justifying an investigation by police officers under sec.156(1) of the Code except under an order of a Magistrate within the purview of sec.155(2) of the Code.
(3) Where the uncontroverted allegations made in the FIR or complaint and the evidence collected in support of the same do not disclose the commission of any offence and make out a case against the accused.
(4) Where, the allegations in the FIR do not constitute a cognizable offence but constitute only a non-
cognizable offence, no investigation is permitted by a police officer without an order of a Magistrate as contemplated under sec.156(2) of the Code. (5) Where the allegations made in the FIR or complaint are so absurd and inherently improbable on the basis of which no prudent person can ever reach a just conclusion that there is sufficient ground for proceeding against the accused.
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NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined (6) Where there is an express legal bar engrafted in any of the provisions of the Code or the concerned Act (under which a criminal proceeding is instituted) to the institution and continuance of the proceedings and/ or where there is a specific provision in the Code or the concerned Act, providing efficacious redress for the grievance of the aggrieved party.
(7) Where a criminal proceeding is manifestly attended with mala fide and/or where the proceeding is maliciously instituted with an ulterior motive for wreaking vengeance on the accused and with a view to spite him due to private and personal grudge."
24. It is also relevant to refer to the judgment of the Hon'ble Apex Court in the case of Inder Mohan Goswami and Another versus State of Uttaranchal reported in (2007) 12 SCC 1, more particularly para : 23 & 24 thereof, which read as under :
"23. This Court in a number of cases has laid down the scope and ambit of courts' powers under Sec. 482 CrPC. Every High Court has inherent power to act ex debito justitiae to do real and substantial justice, for the administration of which alone it exists, or to Page 38 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined prevent abuse of the process of the court. Inherent power under Sec. 482 CrPC can be exercised:
[(i) to give effect to an order under the Code;] [(ii) to prevent abuse of the process of court, and] [(iii) to otherwise secure the ends of justice.]
24. Inherent powers under Sec. 482 CrPC though wide have to be exercised sparingly, carefully and with great caution and only when such exercise is justified by the tests specifically laid down in this section itself'. Authority of the court exists for the advancement of justice. If any abuse of the process leading to injustice is brought to the notice of the court, then the court would be justified in preventing injustice by invoking inherent powers in absence of specific provisions in the statute. Discussion of decided cases."
25. Resultantly, all these applications are allowed qua the present applicant. The Criminal Case Nos.23296 Page 39 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023 NEUTRAL CITATION R/CR.MA/17966/2020 CAV JUDGMENT DATED: 26/07/2023 undefined of 2018, 23301 of 2018, 21845 of 2018, 21807 of 2018, 21846 of 2018, 21842 of 2018, 23299 of 2018, 21809 of 2018, 21813 of 2018 and 21840 of 2018 respectively are hereby quashed and set aside qua the present applicant only. Rule is made absolute. Direct service is permitted.
(SANDEEP N. BHATT,J) SRILATHA After the pronouncement of the judgment, learned advocate for the respondent no.2-Mr.Divyeshwar requested to stay this judgment for a period of four weeks to approach the higher forum. However, in view of the observations made in the judgment hereinabove and the fact that the complaints are initiated as back as in the year 2018 and pending since then against the applicant, I do not find any reason to grant stay of this judgment. Hence, the request is rejected.
(SANDEEP N. BHATT,J) SRILATHA Page 40 of 40 Downloaded on : Sat Sep 16 23:00:45 IST 2023