Kerala High Court
Narayanan Nambudiri vs Institute Of Chartered Accountants Of ... on 27 October, 2005
Equivalent citations: [2006]150TAXMAN406(KER)
Author: K.S. Radhakrishnan
Bench: K.S. Radhakrishnan
JUDGMENT K.S. Radhakrishnan, J.
Whether formation of opinion by the Council of the Institute of Chartered Accountants under section 21, read with regulation 12(11)(i) is a condition precedent to confer jurisdiction on the disciplinary authority to conduct an enquiry on professional or other misconduct is the question that has come up for consideration in this case.
2. Petitioner is a Chartered Accountant by profession practising for the last quarter of a century. He was the Central Statutory Auditor of the Catholic Syrian Bank Ltd. for the year ended on 31-3-1994 and he had audited the profit and loss account for the year ended on 31-3-1994. Audit work was carried out very systematically with the assistance of experienced staff and was conducted as per the audit programme which was prepared taking into consideration the system of internal control deployed by the bank. While conducting the audit work of the bank a clerical error occurred in the calculation of interest received. A sum of Rs. 3.58 crores was credited to interest received account instead of interest receivable account on 24-11-1993 and a sum of Rs. 30 lakhs was omitted to be entered in January 1994 in the general ledger, resulting a net increase of Rs. 3.28 crores in the profit for that year. The same was not detected in the course of audit, as the entries had come in the middle of the year. Reserve Bank of India had inspected the books and also did not find out the error. Bank later noticed the mistake and called for the petitioner's comments vide their letter dated 16-11-1994 to which petitioner had replied on the same day. Bank had simultaneously filed a complaint on 24-11-1995 before the Council of the Institute of Chartered Accountants of India under section 21 of the Chartered Accountants Act, 1949 stating that the omission pointed out on the part of the petitioner would come under the Second Schedule to section 21(5) and section 22 Part 1, sub-section (8) namely, "fails to obtain sufficient information to warrant the expression of an opinion."
3. The Institute forwarded the copy of the complaint to the petitioner on 20-12-1996 requiring him to send his written statement in the matter. Petitioner filed his detailed written statement on 3-2-1997. Board of Directors of the bank had however, in the meantime considered the explanation given by the petitioner in the Board meeting held on 23-9-1996 and after considering the further submissions made by the petitioner and taking into account all relevant aspects decided that the complaint preferred by the bank against the petitioner be withdrawn with the concurrence of the Reserve Bank of India. Bank vide their letter dated 1-9-1997 addressed the Institute expressing their intention to withdraw the complaint. Bank in the meantime received a letter from the Institute directing them to file rejoinder stating as follows:
"In this connection, I have to inform you that once a complaint has been made in the manner prescribed by the Chartered Accountants Regulations the complainant does not have the right to withdraw it. In view of this, the matter will have to be placed before the Council with or without your rejoinder, as required under the provisions of the Chartered Accountants Act and the Regulations.
Further as regards your submissions in your aforesaid letter with respect to Reserve Bank of India's permission being invited for withdrawal of the aforesaid complaint, you are requested to send a copy of letter of Reserve Bank of India received, if any."
Bank then sent a reply dated 1-9-1997 stating as follows:
"In view of our decision to withdraw the complaint as already intimated to you as per our letter Nos. B&S/206/97, dated 27-2-1997 and B&S/312/97, dated 4-4-1997, we are not inclined to file any rejoinder. However, the following submissions are made in this connection:-
1. We do not dispute the Statements set out in paras 4.1, 4.3, 5.1, 5.2, 6.1, 6.2, 7.1 and 7.2 of the respondent's submission dated 3-2-1997. Regarding the statement in para 4.2, the audit work appears to have been carried out according to their audit programme and the connected work sheets, which apparently are in order.
2. On the basis of enquiries made by our bank on the subject-matter of the complaint and taking into account all relevant aspects, we have come to the conclusion that there has been no wilful omission or negligence on the part of the respondent Auditors in carrying out the audit work and hence the decision to withdraw the complaint.
Copy of Reserve Bank of India's letter No. DOS.499/08:36:003/97, dated 27-2-1997 taking note of our Bank's decision to withdraw the complaint, is enclosed hereto." (Emphasis herein italic insize supplied) Petitioner later received a communication dated 20-5-1999 from the Institute stating as follows:
"In accordance with the provisions of Regulation 12(11) of the Chartered Accountants Regulations, 1988, the papers containing the above complaint, your written statement, rejoinder of the complaint and your comments were considered by the Council. The Council was Prima facie of opinion that you are guilty of professional and/or other misconduct.
It was, therefore, decided to cause an enquiry to be made in the matter by the Disciplinary Committee. The enquiry willbe made by the Disciplinary Committee in due course, when a detailed notice will be sent to you. In the meantime, you are requested to send a list of witnesses whom you would like to be examined by the Disciplinary Committee, on your behalf."
Later petitioner was served with another communication dated 27-5-1999 stating that in accordance with clause (11)(i) of regulation 12 of the Chartered Accountants Regulations, 1988, the Council has decided to cause an inquiry to be made in the matter by the Disciplinary Committee. Petitioner was informed that the inquiry would be held on 10-6-1999 and was directed to appear either in person or through a legal practitioner on the said date. Petitioner is aggrieved by the action taken by the Institute and has approached this court seeking writ of certiorari to quash Ext. P3 complaint and the steps taken by the Institute to proceed with the complaint and also for other consequential reliefs. Learned Single Judge. disposed of the matter at the admission stage holding that the defence' available to the petitioner could be placed bef ore the enquiry officer since Ext. P9 would show the Prima facie satisfaction of the Council.
4. Counsel appearing for the petitioner Sr. KP. Dandapani submitted that first respondent Institute was not justified in referring the matter to the Disciplinary Committee without applying its mind to all aspects of the matter. Counsel submitted mechanical reference to the Disciplinary Committee is illegal and contrary to section 21, read with regulation 12(11). Senior counsel appearing for the first respondent Sri C.M. Devan on the other hand contended that under section 21 of the Chartered Accountants Act, 1949 on receipt of a complaint the Council has got the power to refer the case to Disciplinary Committee enabling the Committee to hold an enquiry. Counsel further submitted, even if the complaint is withdrawn the information made available to the Council would be sufficient for prosecuting the matter further by the Council by referring the dispute to Disciplinary Committee counsel submitted the Council have got a duty and obligation to examine the allegation raised against the Chartered Accountant in public interest and therefore this court in this jurisdiction is not justified in interfering with the order passed by the Council.
5. Chartered Accountants Act, 1949 was enacted to make provision for the regulation of the profession of Chartered Accountants. In order to appreciate the rival contentions it is necessary to refer to the relevant provision of the Act. Section 9 of the Act deals with constitution of the Council of the Institute for the management of the affairs of the Institute and for discharging the functions assigned to it under the Act. Section 15 deals with functions of the Council which include the exercise of disciplinary powers conferred by the Act. Section 21 of the Act deals with procedure in inquiries relating to misconduct of members of Institute. Section 21 of the Act reads as follows:
Procedure in inquiries relating to misconduct of members of Institute. (1) Where on receipt of information by, or of a complaint made to it, the Council is Prima facie of opinion that any member of the Institute has been guilty of any professional or other misconduct, the Council shall refer the case to the Disciplinary Committee, and the Disciplinary Committee shall thereupon hold such inquiry and in such manner as may be prescribed, and shall report the result of its inquiry to the Council.
(2) If on receipt of such report the Council finds that the member of the Institute is not guilty of any professional or other misconduct, it shall record its finding accordingly and direct that the proceedings shall be filed or the complaint shall be dismissed, as the case may be." (Emphasis herein italic insize supplied) Section 30 empowers the Council to make Regulations for the purpose of carrying out the objects of the Act. In exercise of the powers conferred under section 30 of the Chartered Accountants Regulations, 1988 was framed. Regulation 12 deals with complaints and enquiries relating to misconduct of members. We may extract regulation 12 in its entirety:
"12. Complaints and enquiries relating to misconduct of members. (1) Subject to the provisions of this regulation, a complaint against a member under section 21 shall be investigated and all other enquiries relating to misconduct of such member shall be held by the Disciplinary Committee:
Provided that if the subject-matter or a complaint is in the opinion of the President, substantially the same as or has been covered by any previous complaint or information received, the Secretary shall file the said complaint without any further action and inform the Complainant accordingly.
(2) A complaint under section 21 shall be in the appropriate Form duly verified and shall be in triplicate.
(3) Such complaint shall contain the following particulars namely:
(a) the acts and omission which, if proved, would render the person complained against guilty of professional or other misconduct;
(b) the oral and/or documentary evidence relied upon in support of the allegations made in the complaint.
(4) Every complaint, other than a complaint made by or on behalf of the Central or any State Government, shall be accompanied by a deposit of one hundred rupees which will be forfeited if the Council, after considering the complaint, comes to the conclusion that no Prima facie case is made out and moreover that the complaint is either a frivolous one or-is made with mala fide intention.
(5) The Secretary shall return a complaint which is not in the appropriate Form or which does not contain the aforesaid particulars to the Complainant for representation after removing the objections thereto and within such time as the Secretary may specify.
(6) Ordinarily within sixty days of the receipt of a complaint under section 2 1, the Secretary shall:-
(a) if the complaint is against a member, send a copy thereof to such member at his professional address as entered in the Register;
(b) if the complaint is against a firm, send a copy thereof to the firm at the address of its head office, as entered in the register of offices and firms, with a notice calling upon the firm to disclose the name of the member who is answerable to the charge of misconduct and requiring it to send a copy of the complaint to him.
Explanation-A notice to the firm shall be deemed to be a notice to all the members who are partners or employees of that firm.
(7) A member against whom the complaint is made (hereinafter referred to as 'the Respondent') may, within fourteen days of the service of a copy of the complaint under sub-regulation (6), or within such time as may be extended by the Secretary, forward to the Secretary in triplicate, a written statement in his defence verified in the same manner as the complaint.
(8) On receipt of the written statement, if any, the Secretary shall send a copy thereof to the Complainant and the Complainant may within 14 days of the service of a copy of the written statement, or within such time as may be extended by the Secretary, forward to the Secretary, in triplicate, his rejoinder on the written statement, duly verified in the same manner as the complaint.
(9) On receipt of the complainant's rejoinder, if any, the Secretary shall send a copy thereof to the respondent and the respondent may within 14 days of the service of a copy of the rejoinder, or within such time as may be extended by the Secretary, forward to the Secretary, in triplicate, his comments on the rejoinder, duly verified in the same manner as the complaint.
(10) On a perusal of the complaint, the written statement, if any, the complainant's rejoinder on the written statement, if any, and the respondent's comments on the complainant's rejoinder, if any, the President may call for such additional particulars or documents connected therewith either from the complainant or the respondents as he may consider expedient.
(11)(i) If on a perusal of the complaint, the written statement, if any, the complainant's rejoinder, if any, and other relevant documents, the Council is Prima facie of opinion that the respondent is guilty of prolessionalandlor other misconduct, the Council shall cause an enquiry to be made in the matter by the Disciplinary Committee.
(ii) If, on the other hand, the Council is Prima facie of opinion that the respondent is not guilty of any professional or other misconduct, the complaintshall be filedand the complainantand the respondentshall be informed accordingly.
(12)(i) Any notice issued by the Secretary under this regulation shall be sent to the member or the firm, as the case may be, by registered post with acknowledgement due.
(ii) If any such notice is returned unserved with an endorsement to the effect that the addressee had refused to accept the notice, the notice shall be deemed to have been served.
(iii) If the notice is returned with an endorsement to the effect that the addressee cannot be found at the address given, the Secretary shall ask the complainant to supply to him the correct address of the member or the firm, as the case may be.
(iv) A fresh notice shall be issued to the member or the firm at the correct address.
(13) The provision relating to a notice shall apply 'mutatis mutandis'to a latter." (Emphasis herein italic insize supplied) Section 21 (1), read with regulation 12(11)(i) cast a statutory duty on the Council of the Institute to form a Prima facie opinion on receipt of the information or of a complaint that a member of the Institute has been guilty of any professional or other misconduct before referring the case to the Disciplinary Committee to hold an enquiry. Formation of a Prima facie opinion is a condition precedent for referring the case to Disciplinary Committee. Disciplinary Committee is authorised to hold an enquiry only afterreferring the case to the Disciplinary Committee by the Council of the Institute after having formed a Prima facie opinion that member of the Institute has been guilty of professional or other misconduct. While forming the opinion the Council of the Institute could peruse the complaint, written statement if any, the complainant's rejoinder to the written statement if any and the respondent's comments on the complainant's rejoinder if any and other relevant documents. On a perusal of the complaint, written statement if any, the complainant's rejoinder on the written statement if any, and the respondent's comments on the complainant's rejoinder if any, the President of the Council may call for such additional particulars or documents connected therewith either from the complainant or the respondent as he may consider expedient to decide as to whether a Prima facie opinion has been made out as to whether a member of the Institute is guilty of professional misconduct.
6. Council is also statutorily obliged not to refer the complaint to the Disciplinary Committee if they reach a Prima facie conclusion that the respondent is not guilty of the professional misconduct. Council while exercising its powers under section 2 1, read with regulation 12(11)(i) has to act objectively.Prima facie satisfaction of the Council on the basis of the materials placed before it is a factor which gives jurisdiction to the disciplinary authority to hold an enquiry. Expression of an opinion by the Council is a sine qua non or a condition precedent for assumption of jurisdiction by the disciplinary authority and is usually a check against frivolous complaints against Chartered Accountants. When a power is conferred on any authority to refer a dispute or not to refer a dispute and to form a Prima facie opinion to that effect the authority has to form an opinion not mechanically but objectively. Formation of opinion by the Council under section 21, read with regulation 12 would be discernible from the proceedings, especially in a case where the complainant has withdrawn the complaint after having found that there has been no wilful omission or negligence on the part of the Chartered Accountant.
7. We are of the view in a case where the complainant has found there was no wilful omission or negligence which was endorsed by the Reserve bank of India a duty is cast on the Council of the Institute to show why in spite of that fact the Council has decided to refer the matter to the Disciplinary Committee. The counter affidavit is totally silent on this aspect. Further Council has also committed a mistake in Ext. P9 letter dated 20-5-1999 stating that they have referred to the rejoinder filed by the complainant. Facts would indicate that the bank has not filed any rejoinder to the complaint. Bank has in fact stated that they do not purpose to file any rejoinder to the written statement filed by the respondent since they have decided to withdraw the complaint. Facts of this case would show that there is total non-application of mind by the Council and it has acted mechanically while deciding to refer the complaint to the Disciplinary Committee, which cannot be sustained in the eye of law.
8. Similarissue came up for consideration before the Division Bench of the Punjab High Court in Institute of Chartered Accountants of India v. V.K. Verma AIR 1965 Punjab 295. The court while interpreting section 21 (1) of the Chartered Accountants Act held that the occasion for an enquiry by the Disciplinary Committee arises on a reference to it of a charge or charges against a member of the Institute after the Council has done its preliminary statutory duty of forming an opinion that there exists a Prima facie case of professional or other misconduct against the member. The court held without such a reference there could be no proceedings before the Disciplinary Committee.
9. The Calcutta High Court in Kishorilal Dutta v. P.K. Mukherjee AIR 1964 Cal. 131 held that great are the responsibilities on the Council and the Disciplinary Committee and they must not-so act as to become a convenient tool and an engine of oppression against the members of the profession. They must act with responsibility. That is why section 21 imposes a preliminary duty on the Council to form a Prima facie opinion before proceeding further. It will be a misfortune for the profession of the Chartered Accountants in India, if the Council chooses to let loose the whole machinery of Disciplinary Committee on any complaint or information received without examining it with care to see that a Prima facie case has been made out.
10. We fully endorse the views expressed in the above-mentioned decisions that formation of an opinion on the basis of relevant materials is a condition precedent for conferring power on the Disciplinary Committee to conduct an enquiry against a Chartered Accountant. First respondent could not produce any material before us to show as to how the Council has formed a Prima facie opinion before referring the case to the Disciplinary Committee especially in a case where complainant has withdrawn the complaint after having found that there was no wilful omission or negligence on the part of the Chartered Accountant. Under such circumstance we are inclined to allow this appeal and set aside the judgment of the learned Single Judge. The decision taken by the Council to refer the complaint to the Disciplinary Committee would stand quashed.