2007 (7) TMI 413 - HC - Companies Law

Show cause notice - Non compliance with accounting standard and bogus accounting statements - Held that - Matters relating to accounts are specialised business and the Registrar has not been able to demonstrate why reliance on Note 8 of Schedule XIV to the Act was misplaced. It is not necessary for the petitioners in proceedings of the present kind to conclusively establish that there was no departure from the guidelines found in the Accounting Standards. To repeat, such fiscal matters are always open to interpretation, divergence of opinion and never free from doubt. The petitioners and the auditors of the company have read Note 8 to justify charging of depreciation in the manner it has been done during the relevant financial year and there does not appear to be any palpable lack of bona fides on the petitioners part on such score. In respect of the two major heads of charge seriously pressed by the Registrar, the petitioners appear to have acted honestly on their interpretation of AS-13 and Note 8 of Schedule XIV to the Act. In addition, the petitioners had specifically mentioned such matters in Note 4 and Note 1(d) of Schedule 17 to the accounts for the relevant year. The petitioners have acted reasonably not only in complying with the accepted norms but in specifically drawing the attention of whoever cared to read the accounts to such matters. Even if there were any violation on the part of the petitioners, and of which there is serious doubt, the petitioners ought fairly to be excused. The petitioners are relieved of all liabilities in respect of the 12 show-cause notices being the subject-matter of these proceedings.

Issues Involved:
1. Violation of Section 211 of the Companies Act, 1956.
2. Violation of Section 217(1)(e) of the Companies Act, 1956.
3. Violation of Sections 127 and 292 of the Companies Act, 1956.
4. Interpretation and application of Section 633(2) of the Companies Act, 1956.
5. Compliance with Accounting Standards.
6. Depreciation of assets costing below Rs. 5,000.

Issue-wise Detailed Analysis:

1. Violation of Section 211 of the Companies Act, 1956:
The first, second, third, and sixth show-cause notices alleged violations of Section 211 of the Companies Act, 1956. The first three notices pertained to violations under Section 211(3A) in conjunction with various Accounting Standards, while the sixth notice involved a violation under Section 211(1) read with Schedule VI. The ninth notice alleged a violation of Section 211(2) read with Part II of Schedule VI. The court noted that the explanations provided by the petitioners indicated a possible bona fide view that they had complied with the Accounting Standards. The court emphasized that the charges were based on subjective assessments and rival interpretations of the same provisions.

2. Violation of Section 217(1)(e) of the Companies Act, 1956:
The eighth and eleventh show-cause notices alleged violations of Section 217(1)(e) regarding the contents of the director's report. The court found that the explanations provided by the petitioners were sufficient to justify the contents of the director's report. The eighth notice's claim of non-compliance with Rule 2(A) of the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, was contradicted by the eleventh notice, which implicitly accepted the inclusion of energy consumption figures in the director's report.

3. Violation of Sections 127 and 292 of the Companies Act, 1956:
The twelfth show-cause notice alleged breaches of Sections 127 and 292. The court found the explanations provided by the petitioners adequate. The court noted that upon the merger of the transferor company's assets into the subject company, no further action was required under Section 127. The charge of violation of Section 292 was deemed vague, and the explanation furnished was considered sufficient.

4. Interpretation and Application of Section 633(2) of the Companies Act, 1956:
The Registrar argued that for Section 633(2) to apply, the officer must first concede default and then seek pardon by demonstrating honest and reasonable conduct. The court disagreed, stating that nothing in Section 633(2) limits the High Court's authority to consider whether the officer committed no offense at all. The court emphasized that forcing an officer to admit default before invoking Section 633(2) would seriously prejudice the officer if the High Court did not grant relief.

5. Compliance with Accounting Standards:
The fourth, fifth, seventh, and tenth show-cause notices were pressed with more enthusiasm. The court noted that the petitioners had provided explanations indicating a possible bona fide view that they had complied with the Accounting Standards. The court highlighted that matters relating to accounts are subjective and open to interpretation. The petitioners' subjective assessment that the diminution in the value of investments was temporary was deemed justifiable.

6. Depreciation of Assets Costing Below Rs. 5,000:
The fifth show-cause notice alleged a violation of Section 205(2) and Schedule XIV regarding the depreciation of assets costing below Rs. 5,000. The petitioners justified their actions by referring to Note 8 under Schedule XIV, which allows for 100% depreciation on such assets. The court found no non-compliance with Schedule XIV, read with Section 205, and noted that the petitioners' reliance on Note 8 was reasonable.

Conclusion:
The court relieved the petitioners of all liabilities in respect of the 12 show-cause notices, acknowledging the subjective nature of the charges and the bona fide explanations provided. The petition was allowed, and the petitioners were ordered to pay costs to the Registrar. The court commended the Registrar for the thorough scrutiny of the company's accounts.

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