2022 (9) TMI 612 - HC - Indian Laws

Alleged misconduct on Chartered Accountants - bar under Rule 12 of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007 - HELD THAT - It would be pertinent to firstly note that Rule 12 does not expressly debar the Director Discipline from entertaining a complaint merely because it may relate to acts of misconduct committed seven years prior to the same being lodged. The said Rule also does not prescribe that a complaint would not lie if it be preferred seven years after the alleged misconduct was committed. Rule 12 is founded on the satisfaction of the Director Discipline that the circumstances envisaged and stipulated therein render it impracticable to conduct an enquiry. That satisfaction may be arrived at if the Director be of the considered opinion that it would be difficult to gather evidence in connection with the complaint made or where it be of the view that the member would find it difficult to lead evidence to defend himself effectively in the proceedings contemplated - The formation of opinion in this regard may rest on either a difficulty in securing evidence or even where it be found that the time lag between the commission of the misconduct and the making of the complaint would place the member under an unreasonable burden of collecting material and evidence which may be required to proffer a wholesome defense. The Court thus finds itself unable to accept the contentions advanced on behalf of the petitioner that the complaint proceedings must be interdicted merely because seven or more years have elapsed since the commission of the misconduct. The Court notes that before proceeding to reject that objection, it was incumbent upon the respondent to have duly considered whether the petitioner was in fact severely handicapped from submitting a response to the allegations levelled in the complaint as also whether there was material and evidence available on the basis of which the enquiry could be proceeded with. It was, in the considered opinion of this Court, incumbent upon the respondent to have recorded cogent reasons in support of its conclusion that the objection taken with reference to Rule 12 was unfounded or unjustified. Petition allowed.

Issues Involved:
1. Whether the complaint against the petitioner is barred by Rule 12 of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007.
2. Whether the Disciplinary Directorate was justified in rejecting the petitioner's preliminary objections based on Rule 12 without recording reasons.

Issue-wise Detailed Analysis:

1. Whether the complaint against the petitioner is barred by Rule 12 of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007:

The petitioner, a practicing Chartered Accountant, challenged a communication dated 22 September 2021 from the Disciplinary Directorate of the Institute of Chartered Accountants, which rejected his contention that the complaint against him was barred by Rule 12 of the 2007 Rules. The petitioner argued that the alleged misconduct occurred more than seven years before the Institute took cognizance, thus falling under the limitation period prescribed by Rule 12. The petitioner was the Statutory Auditor for Canyon Financial Services from 2003-2004 to 2007-2008. The SFIO initiated an investigation into multiple companies, including Canyon Financial Services, and recorded the petitioner's statement in 2017. A complaint was subsequently filed against the petitioner in 2021, leading to the Disciplinary Directorate's notice.

The petitioner argued that Rule 12 imposes a limitation period of seven years for taking cognizance of complaints of misconduct. He contended that since the audits in question were conducted more than 13-17 years ago, the complaint should be barred. The petitioner cited the "Consequential Amendment to Audit Documentation Retention Period in Standard on Auditing (SA) 230" and Rule 6F(5) of the Income Tax Rules, 1962, which require retention of audit documents and books of accounts for seven and six years, respectively. Additionally, Section 128(5) of the Companies Act, 2013, mandates retention of financial records for eight years. The petitioner argued that the expiration of these periods made it impossible to mount an effective defense.

The Court noted that Rule 12 does not explicitly bar the Director Discipline from entertaining complaints related to acts of misconduct committed more than seven years prior. Instead, Rule 12 allows the Director to refuse to entertain such complaints if satisfied that securing proper evidence or leading a defense would be difficult due to the time lag. The Director must form an opinion based on whether the lapse of time makes the inquiry impracticable. The Court rejected the petitioner's argument that the complaint should be automatically barred after seven years.

2. Whether the Disciplinary Directorate was justified in rejecting the petitioner's preliminary objections based on Rule 12 without recording reasons:

The Court found that the Disciplinary Directorate unjustifiably rejected the petitioner's objections outright without considering whether the petitioner was severely handicapped in responding to the allegations or whether there was sufficient material to proceed with the inquiry. The Court emphasized that the respondent should have recorded cogent reasons for rejecting the objection based on Rule 12. The Court held that the respondent failed to provide a reasoned decision, making the rejection of the petitioner's objections improper.

The Court remanded the matter to the respondent for fresh consideration, directing that the petitioner's preliminary objections be treated as his written statement under the 2007 Rules. The Disciplinary Directorate was instructed to proceed in accordance with the law, taking into account the observations made by the Court.

Conclusion:

The writ petition was allowed, and the impugned order dated 22 September 2021 was quashed. The Disciplinary Directorate was directed to reconsider the petitioner's objections afresh, treating them as the written statement, and proceed in accordance with the law.

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