K. Ram Reddy vs Board Of Discipline

Mr. Rakesh Sanghi, learned counsel for the petitioner. Ms. S.A.V. Ratnam, learned counsel for respondent Nos.1 and 2 in both the writ petitions.

Mr. T. Surya Satish, learned counsel for respondent No.3 in both the writ petitions.

Mr. G. Purushotham Reddy, learned counsel for respondent No.4 in both the writ petitions.

In W.P.No.31619 of 2014, following relief is prayed for:

“… to issue an appropriate Writ, Order or direction more particularly in the nature of a Writ of Certiorari calling for the entire records and be pleased to set aside the impugned order in P.R. No.236/12-DD/02/2013 dated 06.02.2014 passed by the 1st respondent by directing an incisive enquiry with the participation of the petitioner herein by awarding exemplary costs to the petitioner herein and be pleased to pass such further or other orders as this Hon’ble Court may deem fit and proper in the circumstances of the case.”

2.1 Similarly in W.P.No.31625 of 2014, the petitioner has prayed for the following relief:

“… to issue an appropriate Writ, Order or direction more particularly in the nature of a Writ of Certiorari calling for the entire records and be pleased to set aside the impugned order in P.R. No.235/12-DD/02/2013 dated 06.02.2014 passed by the 1st respondent by directing an incisive enquiry with the participation of the petitioner herein by awarding exemplary costs to the petitioner herein and be pleased to pass such other orders or orders”.

Since similar issues arise for consideration in both the writ petitions, they were heard together and are being decided by this common order. For facility of reference, facts in W.P.No.31619 of 2014 are being referred to.

The petitioner, a Managing Partner in M/s. Variety Recon Trucks, avers in the petition that agreement dated 01.04.2007 was entered with respondent No.4 for transfer and sale of lorries. A suit bearing O.S.No.425 of 2011 was instituted seeking rendition of accounts from respondent No.4. A notice dated 05.11.2011 was issued under Order XI Rules 15 and 16 of the Code of Civil Procedure, 1908 to respondent Nos.3 and 4 calling for production of documents in the suit on suspicion that respondent No.4 conducted its business illegally and in the process avoided payment of various taxes and transfer fee running into crores of rupees. It is also the case of the petitioner that respondent No.3 being the statutory auditor has not disclosed the information as required under the Auditing Standards and the same constitutes misconduct as per Accounting Standards of Companies Act, 1956 and violation of relevant audit Rules. A complaint against respondent No.3 was lodged in the office of respondent No.2 under Regulation No.12 of the Chartered Accountant Regulations, 1988 (for short, ‘the Regulations, 1988’) read with Section 21 of the Chartered Accountants Act, 1968 (for short, ‘the Act, 1968’).

3.1. The respondent No.1 - Board of Discipline, the Institute of Chartered Accountants of India (for short ‘ICAI’), Disciplinary Directorate, in its Board Meeting held on 6th of February, 2014 concurred with the reasons given against the charges and agreed with the prima facie opinion of Director, dated 04.02.2014 which held respondent No.3 NOT GUILTY of professional misconduct within the meaning of Clause (1) of Part I of the Second Schedule to the Chartered Accountants (Amendment) Act, 2006 and the Board passed order for closure of the case. It is this order which is under challenge in these writ petitions.

It is submitted by learned counsel appearing on behalf of petitioner that the firm, of which the petitioner was Managing Director (M/s. Variety Recon Trucks) and respondent No.4 entered into an agreement dated 01.04.2007 for transfer and sale of its lorries. It is submitted that respondent No.4 colluding with respondent No.3 evaded payment of Income Tax, Value Added Tax (VAT), Central Sales Tax (CST) and Motor Vehicle Transfer Fees by not declaring the sales transactions of hypothecated lorries which constitutes illegal business activity by respondent No.4 and also gross misconduct of relevant audit rules by respondent No.3. It is further submitted that the petitioner instituted a civil suit bearing O.S.No.425 of 2011 seeking rendition of accounts in respect of the said transactions arising out of the said agreement. It is also submitted that a notice dated 05.11.2011 was issued calling for production of certain documents into Court in O.S.No.425 of 2011.

4.1 It is contended that the petitioner filed a complaint before respondent No.2 for professional misconduct under Regulation No.12 of the Regulations, 1988 read with Section 21 of the Act, 1968. It is further contended that respondent No.4 was selling lakhs of vehicles across the country as de jure and de facto owner of vehicles by utilizing the hypothecated lorries as own assets and not as stock in trade. It is also contended that without disclosing the said sale transactions in its books and without offering VAT, CST and transfer fees, sales were effected. It is submitted that its auditors are not only privy but also party to the illegalities committed resulting in evasion of taxes running into crores of rupees.

4.2 It is submitted that respondent No.1 without application of mind concurred with the reasons assigned and agreed with prima facie opinion of respondent No.2 and ordered for closure of the case. It is further submitted that respondent No.4 has adopted illegal methods of conducting its finance business and in the process avoided payment of various taxes and fees running into crores of rupees which is within the knowledge of its auditors and the same constitutes gross misconduct by the auditors of the company.

4.3 It is submitted that acts of commission includes acts of omission too. Learned counsel relied upon the decisions of the Apex Court in Gopal Krishnaji Ketkar v. Mohamed Haji Latif and Others AIR 1968 SC 1413 for the proposition that adverse inference can be drawn if a party withholds documents in possession which would throw light on the facts of issue. Learned counsel for  the  petitioner  further  relied  on  National  Institute  of Mental Health and Neuro Sciences v. C. Parameshwara AIR 2005 SC 242 for the proposition that whether the final decision reached in a previous suit would operate as res judicata.

It is submitted by learned counsel appearing on behalf of respondent No.4 that the petitioner and respondent No.4 entered into a contractual relationship by an agreement dated 01.04.2007 for the purpose of dealing and selling new and old tractors and other commercial vehicles. It is further submitted that the suit was filed for rendition of accounts so as to know how transactions of the company were treated for payment of taxes to authorities. It is also submitted that the petitioner approached the statutory auditors of the company seeking confidential details of accounts for taxes for purpose of various laws.

5.1 It is submitted that owing to the professional misconduct, respondent No.3 provided permissible information and having not satisfied, a complaint was lodged alleging complicity of respondent Nos.3 and 4 for disciplinary action before respondent No.1 who referred a complaint to respondent No.2. It is further submitted that respondent No.2 after evaluation of material on record prima facie opined that respondent No.3 was not guilty and the said opinion was placed before the Board i.e., respondent No.1 and the Board accepted the opinion of respondent No.2 and ordered for closure of the case.

It is submitted by learned counsel appearing on behalf of respondent No.3 that the dispute between respondent No.1 and respondent No.4 is arising out of an agreement dated 01.04.2007, resulting in a civil suit i.e., O.S.No.425 of 2011 and a criminal complaint bearing No.4153 of 2011 under the Negotiable Instruments Act, 1881. It is further submitted that respondent No.3 is neither party to the agreement nor to the legal proceedings. It is also submitted that the civil suit was dismissed with the findings that the petitioner could not prove the claim.

6.1 It is submitted that by lodging a complaint against a Chartered Accountant, a party who provides information and it is between the ICAI and its members. It is further submitted that the proceedings are in the nature of disciplinary proceedings, though the complainant has a right to participate, the same cannot be viewed as a private dispute. It is also submitted that the petitioner does not have the locus to file this writ petition against the order impugned and that there is no appellate remedy against the decision as essentially the matter is between ICAI and its members. The learned counsel has supported the order passed by the authority which was upheld by the Board and contended that no grounds have been made out for interference. It is submitted that reliance placed on the decisions of the Apex Court is misconceived as they are not applicable in the facts and circumstances of the case as the disciplinary authority has held that respondent No.3 is not guilty and the Board has ordered for closure of the case.

It is submitted by learned counsel appearing on behalf of respondent Nos.1 and 2 that respondent No.1 referred the complaint to respondent No.2 and respondent No.2 following due procedure looked into the allegations and after evaluation of material available on record prima facie concluded that there was no material to proceed with disciplinary action against respondent No.3 and was of the opinion that respondent No.3 was not guilty. It is further submitted that the Board, i.e., respondent No.1, after considering the opinion concurred with the reasons given and ordered for closure of the case. It is also submitted that there is no infirmity in the order passed by the authority as upheld by the Board and the learned counsel has supported the orders of respondent Nos.1 and 2.

Heard learned counsels, perused the record and considered the rival submissions. It is an admitted fact that respondent Nos.1 and 4 had entered into an agreement dated 01.04.2007 and that petitioner had instituted a civil suit bearing O.S.No.425 of 2011 for rendition of accounts and the said suit was dismissed with the finding that the petitioner could not prove the claim. It is also not in dispute that petitioner lodged a complaint before respondent No.1 which was referred to respondent No.2 and respondent No.2 by an order dated 04.02.2014 found respondent No.3 not guilty of professional misconduct. It is pertinent to extract the relevant portion of the prima facie opinion of respondent No.2 placed before the Board which concurred with the reasons and agreed with the opinion of the Director, ICAI, and the same is as follows:

“In view of requisite information as required by the Complainant (his advocate) it is evident that these are related to the accounting of the Company and the Respondent as a Statutory Auditor is not required to retain each and every voucher/supporting/ledger of the auditee client. Furthermore, after completing the audit assignment, an auditor has to return all the books/papers/documents to the auditee as it is property of the auditee. Moreover, the Complainant is a third party and as Clause per Clause (1) Part 1 of the Second Schedule of the Chartered Accountants (Amendment) Act, 2006, a member is guilty of professional misconduct, if he 'disclose information acquired in the course of his professional engagement to any person other than his client so engaging him, without the consent of his client or otherwise than as required by any law for the time being in force. In view of this Clause, it is correct on the part of the Respondent that he cannot share any information with the Complainant, hence there is no misconduct on the part of the Respondent in this regard as alleged by the Complainant.

7.5. On perusal of documents on record, it is evident that the Complainant has filed a case in the Court for this dispute against the Company and the Respondent is not a party to this case. Moreover, in this complaint, it is evident that the Respondent has sought certain clarifications from the Respondent on the audited Financial Statements of the Company, however, the Complainant has not pointed out/observe any discrepancy/mistake or irregularity in the Financial Statements of the Company audited by the Respondent. Moreover, the Respondent as the statutory auditor is not bound to respond to individual queries/clarifications from third parties and it was for the authorised official/management of the clientele to answer or disclose information, if any, warranted.

7.6. In view of above, no misconduct on the part of the Respondent is evident as alleged by the Complainant.”

It is trite law that disclosure of information acquired in the course of professional engagement by a professional to a person other than a client without consent of client or otherwise than as required under law for time being in force would amount to professional misconduct. It is stated in the affidavit filed by respondent No.3 that permissible information was made available to petitioner and this fact is not denied. This Court is of the opinion that a fact finding authority i.e., respondent No.2 before whom the complaint came to be referred after evaluation of all the material available on record was prima facie of the opinion that there was no material against respondent No.3 and the Board has concurred with the reasons and ordered for the closure of the case against respondent No.3. It is a fact that O.S.No.425 of 2011 instituted for rendition of accounts has been dismissed with the finding that petitioner could not prove his claim. We have perused the decision of the Apex Court and we are of the opinion that they are not applicable to the facts and circumstances of the case as rightly contended by learned counsel for respondent No.3 that the fact finding authority has held that the documents sought for by a third party cannot be disclosed which are privy to the client and the professional.

The order impugned in W.P.No.31625 of 2014 is P.R. No.236/12-DD/01/2013 dated 06.02.2014 passed by the respondent No.1, facts being similar except for respondent No.3 also a chartered accountant and the Disciplinary Directorate, ICAI, passed an order finding not guilty upheld by Board.

We are of the considered opinion that Disciplinary Directorate, ICAI, has dealt with the complaints and has arrived at a proper conclusion, which has been upheld by the Board in both the cases. We do not find any merit in the contentions advanced. We do not find any ground for interference with order, dated 06.02.2014.

The Writ Petitions are accordingly dismissed. No order as to costs.

Miscellaneous applications pending, if any, shall stand closed.