1952 (4) TMI 42 - HC - Income Tax

Summary

Issues Involved:
1. Whether the respondent was negligent in auditing the accounts and preparing the income-tax returns.
2. Whether the respondent had a duty to investigate the correctness of the accounts provided by the assessees.
3. Whether the respondent's statements and representations to the Income-tax Department were misleading or incorrect.
4. Whether the delay in instituting the proceedings against the respondent was justified.

Detailed Analysis:

Issue 1: Negligence in Auditing and Preparing Income-Tax Returns
The primary complaint against the respondent was that he performed his auditing duties negligently. The respondent's firm was responsible for auditing the accounts of Messrs. A. Mohamed & Co., who maintained two sets of accounts-one for regular transactions and another for black market transactions. The respondent prepared the income-tax return based on the regular account books and included entries from the separate book in the profit and loss statement. The Disciplinary Committee held that the respondent was guilty of gross negligence under clause (q) of the Schedule of the Chartered Accountants Act. However, the Court emphasized that negligence requires a duty to perform a particular act, which the respondent allegedly failed to do.

Issue 2: Duty to Investigate the Correctness of Accounts
The Court examined whether the respondent had a duty to investigate the correctness of the accounts provided by the assessees. The respondent argued that his duty was limited to preparing statements based on the accounts produced by the assessees without further investigation. The Disciplinary Committee believed that the respondent should have probed into the matter to verify the accuracy of the accounts. The Court distinguished between the duties of auditors for joint stock companies and individuals, stating that while auditors must investigate company accounts to protect shareholders, individual auditors act on their clients' instructions and are not obligated to verify the accuracy of the accounts.

Issue 3: Misleading or Incorrect Statements to the Income-Tax Department
The Court assessed the respondent's statements to the Income-tax Department. The respondent had stated that the books of accounts were kept in the usual course of business and that the statements represented the correct income of the firm. The Court found that the respondent's statements were based on the accounts provided by the assessees and that he had no duty to verify their accuracy. The Court also dismissed the argument that the reference to the separate book in the profit and loss statement was misleading, as it merely represented entries carried forward into the regular account books.

Issue 4: Delay in Instituting Proceedings
The Court noted the significant delay in instituting proceedings against the respondent. The statements in question were made in 1944, and the complaint was filed in 1951. The Court emphasized the importance of promptitude in making such charges.

Conclusion:
The Court concluded that the respondent was not guilty of any conduct rendering him unfit to be a member of the Institute. The respondent had no duty to investigate the correctness of the accounts provided by the assessees and was not negligent in his auditing duties. The Court also highlighted the inordinate delay in filing the complaint. Consequently, the respondent was acquitted of all charges, and no order for costs was made in the reference.

Ordered accordingly.