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PETITIONER: INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

       Vs.

RESPONDENT: P.   K. MUKHERJI AND ANR.

DATE OF JUDGMENT: 26/02/1968

BENCH: RAMASWAMI, V. BENCH: RAMASWAMI, V. SHAH, J.C. MITTER, G.K.

CITATION:  1968 AIR 1104            1968 SCR  (3) 330

ACT: Chartered  Accountants  Act 38 of 1949-S. 21  and  Schedule, items  (o),  (p) and (q)-Chartered accountant  appointed  by company under Provident Fund Rules to audit accounts of  the Fund-Writing to company disapproving certain transactions in contravention  of  Rules but not commenting on them  in  his report on the accounts-If guilty of professional misconduct- Whetlier owed duty only to company who appointed him or also to beneficiaries of provident fund.

HEADNOTE: A joint stock company had an employees provident fund scheme which  was being managed by a board of trustees.  The  first respondent,  a  chartered accountants was appointed  by  the board  of directors of the company to audit the accounts  of the Provident Fund for the years 1953 and 1954.  During 1954 the  trustees  of  the Fund made certain  advances  of  over rupees  six  lakhs to the company in  contravention  of  the Rules  of the Fund.  The company issued various  cheques  in repayment  of  the  advances but, .it  the  request  of  the company,  the cheques were not cashed and were kept  by  the trustees.   After  receiving the cheques the  trustees  made book  en-tries showing repayment of the advances though  the cheques   were  uncashed.   On  May  25,  1955,  the   first respondent wrote to the company disapproving the advances as not  being in accordance with the Rules as Well as the  fact that the cheques issued by the company in repayment were not cashed  promptly.  At a meeting of the Trustees on  May  27, 1955  it was regretted that the cheques, were not cashed  at he  company’s  request  and resolved  that  they  should  be returned  to the company and interest charged from the  date of issue of the cheques. The  first respondent signed the statements of  accounts  of the Provident Fund for 1953 on May 14, 1954 and for 1954  on June 30, 1955 and certified them as "Checked with the  books and  accounts  produced  and  found  correct".   The  second respondent filed a complaint against him  with the institute of  Chartered  Accountants  of India alleging  that  as  the auditor, he had failed to disclose in his certificate on the statement of accounts that advances were made to the company in  contravention of Rules of the Fund or to draw  attention

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to the fact that a large amount of cash was shown as cash in hand in the statements of accounts also in contravention  of the  Rules.  After an enquiry under s. 21 of  the  Chartered Accountants  Act,  1949, the Disciplinary Committee  of  the Institute found the first respondent guilty of  professional misconduct,under  items (o), (p) and (q) of the Schedule  to the  Act  and the Council of the  Institute  confirmed  this finding  and referred the case to the High Court  for  final orders.   The  High  Court  set  aside  these  findings  and absolved the first respondent of the crages of misconduct. On appeal to this Court, HELD  Allowing the appeal: (1) On June 30, 1955  when the  first respondent signed  the statement of accounts for 1954 be fully knew that a loan had been granted by the trustees to the company in violation  of the Rules; and further that cheques 331 received in repayment were not cashed and, indeed, were  not intended to be cashed, and were issued by the Company for  a false indication of adjustment at the end of the  accounting year.  In these circumstances it was ,,he duty of the  first respondent to point out in the statement of accounts that  a major part of the cash in hand represented uncashed cheques, that  the cheques were apparently given by the  company  for repayment  of  the  loan and that  the  transaction  was  in violation of the Rule,, of the Provident Fund.  His  failure in  not  pointing out these facts  constituted  professional misconduct  falling  within cl. (o) of the Schedule  to  the Act. [336 A, E-G] (ii) It  was  no defence- for the first respondent  to  ’say that he had disclosed the irregularity to the company by his letter dated May 5, 1955 and that he owed a duty only to the company  which appointed him to audit the account’s  of  the Provident Fund but not to the beneficiaries of the Fund.  On the contrary it was a breach of duty on his part not to have made a disclosure to the beneficiaries of the Provident Fund in  the  statement  of  accounts.   The  primary  object  of auditing  the Fund was to apprise the beneficiaries  of  the true financial Position of the accounts and investments made from time to time and in such a case the auditor is under  a clear  duty  towards the beneficiaries "to  probe  into  the transaction" and to report on their true character. [338  A- B]

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 426 of 1965. Appeal  by special leave from the judgment and  order  dated December 5, 1962 of the Calcutta High Court in Matter No.-78 of 1959. H.   R.  Gokhale, R. K. P. Shankardas, H. K. Puri and K.  K. Jain for the appellant. M.   C. Chagla, S. V. Gupta and K. Baldev Mehta, for respon- dent No. 1. E. Udayarathnam, for respondent No. 2. The Judgment of the  Court was delivered by Ramaswami, J. This appeal is brought, by special leave, from the  judgment of the Calcutta High Court dated  December  5, 1962 in matter No. 78 of 1959. Ananda  Bazar  Patrika  Limited is a  Joint  Stock  Company, hereinafter  referred  to as the ’Company’ and  has  got  an employees’ Provident Fund Scheme which was being managed  by a  Board  of  Trustees.  Respondent No.  1  is  a  Chartered Accountant  and was appointed by the Board of  Directors  of

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the Company to audit the accounts of the Provident Fund  for the  years 1953 and 1954.  It appears that in the year  1954 the Trustees of the Fund had made Certain advances amounting to about Rs. 6,21,864/- to tile Company in contravention  of the  Rules of the Fund.  The Director of the Company  issued various  cheques  in repayment of the advance,  but  at  the request  of the management of the Company the  cheques  were kept with the Trustees of the Fund uncashed and not credited in the account of the Fund.  After receipt of the cheques 332 the  Trustees  of the Fund made book  entries  showing  the- repayment  of the loan so granted to the Company, though  in fact  note  ,of  these cheques had  been  cashed  when  such entries  were  made.   In  his letter  dated  May  25,  1955 respondent No. 1 wrote to the Company as follows :               "It appears that certain loans were granted by               the  Trustees of the Fund to. the  Company  in               1954   which  although  adjusted  within   the               accounting  year;  does not appear  to  be  in               accordance with the Provident Fund Rules.   We               disapprove  such  transaction and  believe  it               will  not recur in future.  Cheques issued  by               you  to  the  Fund  should  also  be   cleared               promptly." After receipt of the letter from respondent No. 1 a  meeting of  the  Board of Trustees was held on May 27, 1955  when  a resolution was passed to the following effect :               "This  meeting  records with regret  that  the               cheques amounting to Rs. 6,21,864/- could  not               be presented to the bank on the verbal request               of  the management of the Anand Bazar  Patrika               Ltd.,   this  meeting  considering   all   the               relevant  facts resolves that all the  cheques               be returned to the Company to the debit of the               loan  account  bearing an interest of  6%  per               annum  with effect from the date of  issue  of               the cheques." Respondent  No.  1 signed the statement of  Accounts  ending December  31,  1953  on May 14, 1954 and  the  statement  of Accounts  ending  December 31, 1954 on June 30,  1955.   The statement  was  signed  by  the Trustees  of  the  Fund  and respondent  No.  1  after signing the  statements  gave  the following certificate               "Checked with the books and accounts  produced               and found correct." Though respondent No. 1 pointed out in his letter dated  May 25,  1955  that loans were granted and adjustment  was  made during the accounting year he did not disclose this fact  in his note when he signed the statement of account on June 30, 1955  knowing  fully  well that the cheques  were  not  only uncashed  but were returned to the Company in  pursuance  of the   resolution  of  the  Trustees  dated  May  27,   1955. Respondent  No. 1 also failed to point out in the  statement of account that adjustment of loans was made by showing in a very  vague  manner cash in hand (Cheques and cash)  as  Rs. 6,21,86.4 and the proportion of the cheques to the cash  was not  specified.  Later on Kishori Lal Dutta, respondent  No. 2,  President  of  the Employees’ Union  filed  a  complaint against  respondent No. 1 before the Institute of  Chartered Accountants  of,  India,  hereinafter  referred  to  as  the ’Institute.  It was alleged in 333 the  complaint that (1) the loan granted to the Company  was in contravention of Rule 12 of the Provident Fund Rules  and the  auditor  failed to disclose this in  the  statement  of

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account,  and (2) the auditor failed to invite attention  to the  fact that huge amount was shown as cash in hand in  the financial  statement  for  the  years’  1953  and  1954   in contravention  of  Rule 11 of the Fund.  The  complaint  was referred by the Council of the Institute to the Disciplinary Committee  for  an  inquiry under s.  21  of  the  Chartered Accountants  Act  (Act 38 of 1949), hereinafter  called  the Act, read with regulation made thereunder.  The Disciplinary Committee  made  a  report  on  September  13,  1958.    The Disciplinary Committee found that the loans were  admittedly granted  by the Trustees in contravention of  the  Provident Fund Rules and respondent No. 1 should have brought out this fact  in his report and that respondent No. 1 was guilty  of not  disclosing  the fact that a large amount  of  loan  was given  out of the fund of the Provident Fund to the  Company and that the cheques received in payment of these loans  and shown  as cash in hand "Cheques and cash" were not  uncashed at  least upto the day on which he wrote the letter  to  the Directors i.e., May 25, 1955 and the non-disclosure of  this material information was an act of misconduct on the part of respondent  No. 1. The Disciplinary Committee held that  .he loans  were  given  in contravention of  the  Rules  of  the Provident  Fund  and  failure to report on  the  default  in clearing  the  cheques received in repayment  of  the  loans amounted  to a failure to report on a material  misstatement known  to  respondent No. 1.  Accordingly  the  Disciplinary Committee   held  that  respondent  No.  1  was  guilty   of misconduct  under items (o), (p) and (q) of the Schedule  to The  Act.   The  Council of the Institute  agreed  with  the report of the Disciplinary Committee and held respondent No. 1 guilty of professional misconduct.  Under s. 21 of the Act the matter was referred to the Calcutta High Court for final orders.   By  its judgment dated December 5, 1962  the  High Court set aside the finding’s of the Disciplinary  Committee as  confirmed by the Council of the Institute  and  absolved respondent No. 1 of the charges of misconduct. It  is necessary at this stage to examine the scheme of  the material provisions of the Act.  Section 2(1) (b) of the Act defines a "Chartered Accountant" as meaning "a person who is a member of the Institute and who is in practice." Section 6 lays down that no member of the Institute shall be  entitled to  practise  unless  he has obtained  from  the  Council  a certificate of practice.  Section 8 deals with disabilities. Any person who incurs any one of the disabilities enumerated in  sub-cls.  (i) to (vi) of s. 8 shall not be  entitled  to have  his  name entered in or borne of the  Register.   Sub- clause  (vi)  deals with the disability in  case  where  the chartered accountant is found on an inquiry to be guilty 334 of  conduct  which renders him unfit to be a member  of  the Institute.   Under s. 20(2) it is provided that the  Council shall  remove from the Register the name of any  member  who has  been  found by the High Court to have ’been  guilty  of conduct  which  renders  him unfit to be  a  member  of  the Institute.  Chapter V deals with the question of misconduct. It  consists  of ss. 21 and 22. Section 21  deals  with  the procedure of enquiries relating to misconduct of members  of the Institute.  It reads thus               "21. (1) Where on receipt of information or on               receipt of a complaint made to it, the Council               is of opinion that any member of the Institute               has  been guilty of conduct which, if  proved,               will  render him unfit to be a member  of  the               Institute,  or  where a  complaint  against  a               member of the Institute has been made by or on

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             behalf of the Central Government, the  Council               shall  cause  an inquiry to be  held  in  such               manner  as may be prescribed, and the  finding               of the Council shall be forwarded to the  High               Court.               (2)   On  receipt  of the  finding,  the  High               Court shall fix a date for the hearing of  the               case  and  shall cause notice of  the  day  so               fixed  to  be  given  to  the  member  of  the               Institute  concerned, the Council and  to  the               Central  Government,  and  shall  afford  such               member, the Council and the Central Government               an  opportunity of being heard  before  orders               are passed on the case.               (3)   The  High Court may, thereafter,  either               pass  such  final  orders on the  case  as  it               thinks  fit  or  refer  it  back  for  further               inquiry by the Council and upon receipt of the               finding after such inquiry, deal with the case               in the manner provided in sub-section (2)  and               pass final orders thereon.               Section 22 defines misconduct.  It reads  thus               :               "For the purposes of this Act, the  expression               ’conduct  which,  if  proved,  will  render  a               person unfit to be a member of the  Institute’               shall be deemed to include any act or omission               specified in the Schedule, but nothing in this               section   shall  be  construed  to  limit   or               abridge, in any way the power conferred on the               Council under subsection (1) of section 21  to               inquire into the conduct of any member of  the               Institute under any other circumstances."               Clauses (o), (p) and (q) of the Schedule  read               as follows               "A chartered accountant shall be deemed to  be               guilty of conduct rendering him unfit to be  a               member of the institute, if he . ..........               335               (o)   fails to disclose a material fact  known               to him which is               not   disclosed in a financial statement,  but               disclosure  of which is necessary to make  the               financial statement not misleading;               (p)   fails to report a material  misstatement               known  to  him  to  appear,  in  a   financial               statement  with  which he is  concerned  in  a               professional capacity;               (q)   is  grossly negligent in the conduct  of               his professional duties;"               Rules  II and 12 of the Ananda  Bazar  Patrika               Provident Fund provide as follows :               "11.  The Manager shall from time to time  pay               into the Bank approved by the trustees to  the               credit of an account to be styled ’The  Ananda               Bazar  Patrika  Provident  Fund  Account’  all               moneys  received  by him.  All moneys  to  the               credit  of  such account shall be  dealt  with               only  in  accordance  with  these  rules   and               regulations  and  any or all portion  of  such               moneys  shall be, withdrawn from such  account               only by cheques bearing the signatures of  the               Manager and one of the trustees."               "12.  All moneys not immediately required  for               the  purpose  of the fund shall from  time  to

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             time  be  invested by the  trustees  at  their               discretion in any of the following securities,               that is to say, of the rupee securities of the               Government  of  India or any  securities,  the               interest on which is or shall be guaranteed by               the   Government   of  India  or   in   bonds,               debentures, securities of or issued by  Public               municipal or local body or authority in India,               with  a  power  for  the  trustees  at   their               discretion  from  time to time to vary  or  to               transpose such investment or for others of any               nature  hereinbefore authorised.  So  however,               that the securities in which the contributions               made  by  the subscribers, after the  date  of               recognition  of  the Provident  Fund  and  the               interest  on the accumulated balance  of  such               contributions are invested are payable both in               respect of capital and of interest in India."               Rule 28 states :               "The  accounts  of the Fund shall  be  audited               yearly   by  an  auditor  appointed   by   the               Company." The  question  to be considered in this  appeal  is  whether respondent  No.  1  was guilty  of  professional  misconduct falling  within cls. (o), (p) or (q) of the Schedule to  the Act.   It  is  the  admitted  position  in  this  case  that respondent No. 1 signed the statement of account for 1954 on June 30, 1955.  At the time when he signed 336 the  statement he was aware that loans were granted  by  the trustees of the Fund to the Company in 1954 and cheques  had been issued in repayment of the loan.  This is apparent from the letter of respondent No. 1 dated May 25, 1955  addressed to  the  Company  in which he pointed  out  that  the  loans granted  by the trustees do not appear to be  in  accordance with the Provident Fund Rules and the cheques issued by  the Company  should  be cleared promptly.  As a sequel  to  this letter the trustees passed a resolution on May 27, 1955 that the  cheques  amounting to Rs. 6,21,864/- and odd  were  not presented  to the Bank on the verbal request of the  COMpany and that the cheques should be returned to the Company,  and the  amount  should be debited to the loan  account  bearing interest  at  6%  p.a. with effect from  the  issue  of  the cheques.   It  is manifest therefore,that on June  30,  1955 when  respondent No. 1 signed the statement of  accounts  he fully  knew that a loan had been granted by the trustees  to the Company in violation of Rules 11 and 12 and further that cheques  received in repayment of the loan were  not  cashed and,  indeed,  were  not intended to be  cashed.   In  other words,  the cheques were issued by the Company not with  the intention  of  repayment of the loan by their  being  cashed but. they really represented acknowledgement of the loan  by the Company.  In fact, the cheques had been returned to  the Company uncashed by virtue of the resolution of the Board of trustees dated May 27, 1955 before the statement of  account was  signed by respondent No. 1. To put it differently,  the cheques  were apparently issued by the Company not  so  much for  repayment  of  the loan as for a  false  indication  of adjustment  at  the end of the accounting year.  We  are  of opinion  that  in  these circumstances it was  the  duty  of respondent  No. 1 to point out in the statement  of  account that  a major part of the cash in hand represented  uncashed cheques  and that the cheques were apparently given  by  the Company for repayment of the loan and the transaction was in violation  of Rules 11 and 12 of the Provident  Fund  Rules.

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We accordingly consider that the failure- of respondent  No. 1  in  not  pointing out these facts  in  the  statement  of accounts   for  the  year  1954   constituted   professional misconduct  failing  within cl. (o) of the Schedule  to  the Act.   It is not necessary for us to express any opinion  on whether  the case also falls within cls. (p) and (q) of  the Schedule. On  behalf  of respondent No. 1 Mr. Chagla put  forward  the argument  that since the cheques had already been  given  by the  Company  the  loans stood cleared and,  in  any  event, respondent  No.  1 had already informed the Company  of  the irregularity  in  his  letter dated May 25,  1955.   It  was therefore  contended  the  at  there  was  no   professional misconduct on the part of respondent No. 1. We are unable to accept  this  argument  as correct.  It  is  true  that  the cheques had been given by the Company before the close of 337 the  year  1954 but respondent No. 1 knew that  the  cheques were  not  really intended to be encashed by  the  trustees. Respondent No. 1 also knew of the resolution of the trustees dated  May 27, 1955 that the cheques were to be returned  to the Company and the amount was ordered by the trustees to be entered  and carried over to the loan account.  It was  also maintained  by Mr. Chagla that respondent No. 1 owed a  duty only  to  the  Company  which appointed  him  to  audit  the accounts of the Provident Fund and there was no duty owed by respondent  No. 1 to the beneficiaries of the Fund.   It  is not possible for us to accept this argument.  Respondent No. 1  owed a duty to all the subscribers of the Provident  Fund who  were  in  the position of  beneficiaries.   It  is  not correct to say that respondent No. 1 owed a duty only to the Company  which had appointed him to perform  the  Auditing,. The  contributors  to the Provident Fund  had  a  beneficial interest in the Fund and the primary object of auditing  the Fund was to appraise them of the true financial position  of the  accounts  and  investments  made  from  Time  to  time. Respondent  No. 1 therefore owed a duty to the  contributors to  the Provident Fund for making a true report to  them  of the  financial position.  In other words, the  auditing  was intended for protection of the beneficiaries and the auditor was  expected  to  examine the accounts  maintained  by  the trustees with a view to inform the beneficiaries of the true financial position.  The auditor is, in such a case, under a clear  duty  towards the beneficiaries "to  probe  into  the transactions" and to report on their true character.  In our opinion,  the legal position of the auditor in  the  present case  is  similar to that of the auditor  under  the  Indian Companies  Act, 1956.  In such a case the audit is  intended for  the protection of the shareholders and the  auditor  is expected to examine the accounts maintained by the Directors with a view to inform the shareholders of the true financial position  of the Company.  The Directors occupy a  fiduciary position in relation to the shareholders and in auditing the accounts maintained by the Directors the auditor acts in the interest  of  the shareholders who are in  the  position  of beneficiaries.   In  London Oil Storage Co. Ltd.  v.  Seear, Hasluck & Co.,(1) Lord Alverstone stated as follows               "He  must  exercise such  reasonable  care  as               would  satisfy  a man that  the  accounts  are               genuine,  assuming  that there is  nothing  to               arouse his suspicion of honesty and if he does               that he fulfils his duty; if his suspicion  is               aroused,  his duty is to ’probe the  thing  to               the  bottom and tell the directors of  it  and               get  what information he can." (Vide also  the

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             observations  in In re : London  General  Bank               (No.  2) (2 )-’In re Kingston Cotton Mill  Co.               (No.  2)’(3)  and-In re  City  Equitable  Fire               Insurance Co. Ltd.’ (4 )". (1)  Dicksee on Auditing., 17th Edn., p. 632.  (2) (1895)  2 Ch. 673. (3) (1896) 2 Ch. 279.      (4) (1925) Ch. 407. 338 It  was  therefore no defence for respondent No. 1  in  this case  to say that he had disclosed the irregularity  to  the Company by hi,; letter dated May 25, 1955.  On the  contrary it  was-  a breach of duty on his part not to  have  made  a disclosure  thereof  to the beneficiaries of  the  Provident Fund in the statement of account.,; for the year 1954  which he signed on June 30, 1955. For  these reasons we hold that the charge  of  professional misconduct  is established against respondent No. 1  falling under cl. (o) of the Schedule to the Act.  The only question which  now remains is the final order to be  passed  against respondent No. 1. In our opinion, the conduct of  respondent No.  1 is wholly unworthy of a Chartered Accountant  who  is expected  to  maintain  a  high  standard  of   professional conduct.  The proper punishment would have been the  removal of  the  respondent  No. 1’s name from the  Register  for  a limited period but in view of the fact that the  proceedings have been pending against respondent No. 1 for a long  time, we  think  that the ends of justice will be served  in  this particular case if respondent No. 1 is severely  reprimanded for  his  misconduct  under s. 21(2) of the  Act.   We  also direct respondent No. 1 to pay the cost of the appellant  in this Court and in the High Court.  We accordingly set  aside the order of the High Court dated December 5, 1962 and allow this appeal with costs. R.K.P.S. Appeal allowed. 339