Gulshan Rai vs Institute of Chart. Accountants of India and Another

M.L. Mehta, J. (Oral)

The Appellant is a Chartered Accountant (CA) and a fellow member of the Institute of Chartered Accountant ("the Institute" for short). The Institute received a complaint against him from Respondent No. 2 on 02-06-1989. The complaint was based on the allegations that (i) the Appellant had entered into a partnership with Respondent No. 2 in promoting a company M/s Sai Beverage Private Limited in violation of provision of Clause (4) of Part-I, First Schedule of Chartered Accountants Act, 1949 ("the Act" for short). (ii) The Appellant violated the provisions of Regulation 190A of Chartered Accountants Regulations 1988 (the Regulations) by engaging in the business activities; (iii) the Appellant violated the provisions of Clause 1 of Part-II of Second Schedule of the Act by having more than 20% shares in the aforesaid company in his name and in the name of his wife and son; (iv) the Appellant committed various acts of perjury such as he gave contradictory information to the court regarding the registered office of the company. (v) He also contradicted and gave false information to different Local Commissioners about the statutory records of the company and (vi) he gave false information to the Court about the number of directors in the company.

In addition to above, the Appellant was alleged to have misconducted himself as a CA by having violated the restraint order of the court, by having illegally allotted the shares worth `10 lac to his own friend/ nominees, by illegally removing Respondent No. 2 from the Directorship of the company and by illegally appointing his directors in place of others and by engaging in the activities of other companies namely M/s Sai Impex Private Limited through his own son as its Benami Director.

The institute decided to conduct an enquiry into the complaint and consequently entrusted the matter to Disciplinary Committee, which after hearing the Appellant submitted its report dated 29th December 1994 which inter alia found the Appellant to be innocent of all the charges except professional misconduct within the meaning of Clause 11 of Part-I of First Schedule of the Act. The Appellant submitted his representation against the said report dated 29-12-1994 to the Council of Institute of Chartered Accountants of India (for short ?the Council?) which after consideration of the report and the written as well as oral submissions of the Appellant accepted the report of Disciplinary Committee and found the Appellant guilty under the provision of Clause 11 of Part-I, First Schedule of Chartered Accountant Act and consequently passed the order against him u/s 21(4) of the Act. A show-cause notice was issued to the Appellant in this regard. The Council vide its decision dated 04-07-1998 decided to remove the name of the Appellant from the List of Members for a period of six months.

The Appellant has challenged the same by filing the present appeal alleging findings of the Disciplinary Committee to be based on conjectures and surmises. It has been averred that the Disciplinary Committee erred in not appreciating the fact that there was no need for the Appellant to act as a "Functional Director" inasmuch as the company had a full-time Executive Director i.e. Respondent No. 2, General Manager, Consultant and Commercial Manager to deal with the affairs of the company. He averred that his role was limited to attending periodical meetings to review project implementation and to oversee the statutory compliances. He averred that the Respondent No. 2 had filed this complaint in order to blackmail and pressurize him to extract more value of his shares in the company. He admitted that he was one of the signatories in the operation of the bank account and was involved in the banking activities such as operation of bank accounts, but stated that the Account Department was maintained by the Commercial Manager. He, however, stated that it was the complainant who alone was in-charge of the project and construction activities. He admitted that he had been signing cheques on behalf of the company and also stated that it was in the absence of the Executive Director who was other signatory for the operation of the bank accounts. He averred that his mere signing of cheques would not make him a "Working Director". He also averred that in his application dated 01-06-1987 whereby he sought permission of the Institute, he had stated that his relatives will have substantial interest to the tune of 20% in the said company. He averred that he had sought the permission and dispatched the same vide letter dated 20-06-1987. He averred that he also sent another letter dated 14-03-1994 to the Institute. He further averred that he bonafidely believe that he was not engaged as "full-time"/ working Director of the company, but as an abundant caution disclosed the fact about his being a Director of the said company in the ?entry record? dated 1-5-1987 submitted by him along with his remittance to the Institute for renewal of his membership within 4 days of his becoming Director of the company and also disclosed that he was devoting one hour per day and 7 hours a week in the activities of the company. He pleaded that in response to above, he received a communication from the Institute advising him to submit the request for permission in the prescribed format under Regulation 166 of the Regulations and that he complied with the same vide application dated 20.06.1987. He averred that no further communication was received from the Institute in this regard, that the Ex-Office Assistant Secretary of the Institute vide his letter dated 05-04-1990 certified the fact about his engagement in other business/ occupation and that if there was no application of permission on record of the institute and no permission had been granted to him, how the Assistant Secretary could issue certificate in this regard, that the question whether a person is whole-time engaged in a business (other than professionally), is to be considered qua the incident of his involvement therein and not merely on the presumption that he was signing the cheques or overseeing the functional activities of the company, that his engagement in the company was for a few hours a week and that he was not engaged in any sale, purchase or commercial activities. The Appellant consequently prayed for setting aside the decision dated 04-07-1998 of the institute.

Before us, none appeared for the Appellant despite long passovers. We, thus, proceeded to hear the learned Counsel for the Respondent No. 1. We have perused the record including the report dated 29th December 1994 of the Disciplinary Committee. The matter was finally heard by the Disciplinary Committee on 12th March, 1994 which was attended by the Appellant along with his counsel. The Council perused the statement of the Respondent made before the Committee. The Appellant stated that in April, 1987 he had discussions with Respondent No. 2 for starting business of a bottling plant and it was agreed that the capital required was to be contributed by them equally and the company was to be established under the name and style of M/s Sai Beverage Private Limited. The said company was incorporated on 16-04-1987 with the Appellant and Respondent No. 2 as the only Directors holding equal shares. The Appellant stated that he was not engaged as whole-time Director or Managing Director and has never managed the substantial work of the company, which was being looked after by the General Manager and Respondent No. 2 as its Executive Director. The Appellant in the grounds of appeal has admitted that as Director of the company his role was to handle the bank operations of the company including obtaining loans from the banks and to look after the accounting records of the company. It was also an admitted case that the Appellant and Respondent No. 2 were authorized signatories to operate the bank accounts of the company in different banks. The Disciplinary Committee also found from the record that both the Appellant as well as Respondent No. 2 were authorized to raise loans and overdraft from the banks and to acknowledge all types of debts from the company. The Council examined the plea of the Appellant that he had sought permission of the Institute for engaging in other occupation vide his letter dated 20-06-1987. Since the said letter was not available on record of the Institute, the Disciplinary Committee questioned the Appellant to the manner of his sending the said letter to the Institute. In reply thereto, the Appellant stated having sent the same by ordinary post. The Disciplinary Committee has recorded that after the hearing was concluded, the Appellant vide his letter dated 14th March, 1994 informed about having dispatched the said letter on 23-06-1987. The Disciplinary Committee further records that although the Appellant in the said letter dated 14-03-1994 had stated about his enclosing photocopy of the dispatch register along with it, no such enclosure was received. In an answer to a question the Appellant had also admitted before the Disciplinary Committee that he used to arrange loans for the company from the banks. In an answer to another question, he admitted that substantial paper work of the company was being signed by him since he had the competence in the field. The Appellant had submitted record showing his holding and that of his wife and son in the said company to the extent of `10,60,000/- apart from shareholding of the M/s Sai Impex Pvt. Ltd which company was stated to be pertaining to his son. In addition, it was also seen by the Disciplinary Committee from the record that Shasi and Indu Aggarwal who had the same address as that of the Appellant were also shareholders and thereby the shareholding of the Appellant and his family group was as much as 69.2%. The Appellant''s son Vikas Rai was also examined. He stated to be working in the company as an apprentice.

Considering the submissions and evidence on record, the Disciplinary Committee arrived at the conclusion that the Appellant never made any application for obtaining permission of the Disciplinary Committee to act as a full-time Director of the company. The Disciplinary Committee recorded that as per rule before engaging himself in any commercial activities he should have verified that in fact the permission had been granted. In fact this was the requirement of Clause 11 of Part-I of the First Schedule of the Act read with Regulation 190(A) of the Regulations and Appendix (10) thereto which speaks about obtaining specific and prior approval of the Disciplinary Committee. The type of activities being carried out by the Appellant as Director thereto would demonstrate that he was substantially involved in the managing of affairs of the company though not designated as Managing Director or whole-time Director. The Disciplinary Committee report records that the Appellant was guilty of professional misconduct for violating the provisions of Clause 11 of Part-II of First Schedule read with Section 190 (A) of the Regulations. We do not find any infirmity or illegality in the said decision of the Disciplinary Committee.

The Council considered the report of the Disciplinary Committee and also representation made by the Appellant and vide its decision dated 4th July, 1998 accepted the report of the Disciplinary Committee and found the Appellant guilty of professional misconduct within the meaning of Clause 11 Part-I of First Schedule. The Council also gave a show-cause notice to the Appellant to which he submitted his reply. Consequently, the Council vide its decision dated 04-07-1998 decided to remove the name of the Appellant from the list of members for a period of six months. We do not find any infirmity or illegality in the impugned decision of the Council dated 04-07-1998. We are of the view that since the allegation of professional misconduct against the Appellant pertained to the year 1987 and 23 years have since passed, the interest of justice would be met in reducing the period of removal from the list of members from the period of six months to three months. Consequently, the decision of the Council dated 04-07-1998 is modified to the extent as indicated above.

The appeal stands disposed of.