2024 (2) TMI 493 - SC - Indian Laws

Jurisdiction - Constitutional Validity of Rule 9(3)(b) of the Chartered Accountants (Procedure of Investigation of Professional and Other Misconduct and Conduct of Cases) Rules, 2007 - ultra vires section 21 A (4) of the Chartered Accountants (Amendment) Act, 2006 or not - Whether Rule 9(3)(b) of the Rules, 2007 is inconsistent with and beyond the rule-making power of the Central Government? - professional misconduct - HELD THAT - Experience of legislative drafting in India has shown that, generally, the delegation of power to formulate rules follows a standardized pattern within statutes. Typically, a section of the statute grants this authority in broad terms, using phrases like 'to carry out the provisions of this Act' or 'to carry out the purposes of this Act.' Subsequently, another sub-section details specific matters or areas for which the delegated power can be exercised, often employing language such as 'in particular and without prejudice to the generality of the foregoing power.' Judicial interpretation of such provisions underscores that the specific enumeration is illustrative and should not be construed as limiting the scope of the general power. This approach allows for flexibility in rulemaking, enabling the authorities to address unforeseen circumstances. A key principle emerges from this interpretation even if specific topics are not explicitly listed in the statute, the formulation of rules can be justified if it falls within the general power conferred, provided it stays within the overall scope of the Act. In State of Jammu and Kashmir v Lakhwinder Kumar and Ors., 2015 (7) TMI 218 - SUPREME COURT , this Court held that when a general power to make regulations is followed by a specific power to make regulations, the latter does not limit the former. This is the principle of 'generality vs enumeration' a residuary provision can always be given voice. In the instant case, the ultra vires challenge has been mounted on the ground that the impugned Rule exceeds the power conferred by the parent Act. On looking at the parent Act, the rule-making power has been conferred under Section 29A, which is titled as Power of the Central Government to make Rules . While sub-clause (1) of Section 29A sets out the general power of delegation, sub-clause (2) provides for enumerated heads - Admittedly, Rule 9(3) goes beyond what is provided for under Section 21A(4) in terms of the options available to the Board of Discipline in case it disagrees with the opinion of the Director (Discipline). Other than the option of advising the director to further investigate, Rule 9(3) provides the additional option to the Board for proceeding to deal with the complaint by itself or referring it to the Disciplinary Committee, depending on whether the alleged misconduct falls under the First Schedule or the Second Schedule. Object of the CA Act vis a vis Chapter on Misconduct - HELD THAT - The Chartered Accountants Act, 1949, is a legislation that governs the regulation of the chartered accountancy profession in India. The chapter on Misconduct in the Chartered Accountants Act, 1949, plays a crucial role in maintaining the ethical standards of the profession in India. Its main objectives are to set ethical guidelines, prevent actions that may compromise public interests, ensure accountability among chartered accountants, and preserve the profession's reputation. This Chapter defines and prohibits professional misconduct, while aiming to uphold honesty, integrity, and professionalism in the practice of chartered accountancy. By addressing instances of misconduct, it establishes a framework for accountability, reinforcing the credibility of individual professionals and the reputation of the entire profession. To achieve these goals, the Act includes a disciplinary mechanism, ensuring a fair and transparent process for investigating and adjudicating alleged cases of misconduct. There are no hesitation to conclude that the impugned rule is completely in sync with the object and purpose of framing the Chapter on Misconduct under the Act. As has been rightly argued by the learned counsel for the Respondent, accepting the contention of the Appellant will create an anomalous situation. The Director (Discipline) who functions as a secretary to the Board of Discipline as per Section 21A (2) will be having greater powers than the Board itself. The prima facie opinion of the Director will become nothing but a final opinion if the Board will have no option except to direct the Director (Discipline) to further investigate the matter - even if it accepted for the sake of argument, that Rule 9(3) cannot be saved under Section 29A(2)(c), as it directly relates to furthering the purposes of the Act in ensuring that a genuine complaint of professional misconduct against the member is not wrongly thrown out at the very threshold, it can be easily concluded that the impugned Rule falls within the scope of the general delegation of power under Section 29A(1). Appeal dismissed.

Summary

Issues Involved:
1. Whether the audit firm failed to discharge its professional obligations.
2. Whether Rule 9(3)(b) of the Rules, 2007 is inconsistent with and beyond the rule-making power of the Central Government.

Summary:

Issue 1: Failure to Discharge Professional Obligations
The Complainant-bank engaged M/s Ramesh C. Agrawal & Co. for audit work at its Sahara India, Aliganj, Lucknow Branch. The firm was required to submit monthly audit reports and report any suspicious activities. On 27.09.2009, a series of circuitous transactions involving large sums of money occurred, which were not flagged in the audit report. The Complainant alleged the firm failed to discharge its professional obligations. Despite multiple letters seeking an explanation, no satisfactory response was received. Consequently, the Complainant registered a complaint with the Director (Discipline) on 21.12.2009. The Director (Discipline) concluded that the Appellant was not guilty of any professional or other misconduct. However, the Board of Discipline disagreed and referred the matter to the Disciplinary Committee for further action.

Issue 2: Validity of Rule 9(3)(b)
The Appellant challenged the Board's action before the High Court, arguing that Rule 9(3)(b) of the Rules, 2007, which allows the Board to refer the matter to the Disciplinary Committee, was ultra vires section 21 A (4) of the Act. The High Court rejected this challenge, leading to the present appeal. The Appellant contended that the Board could only close the matter or direct the Director (Discipline) to further investigate, not refer it to the Disciplinary Committee. The Respondent argued that accepting the Appellant's view would give the Director (Discipline) greater powers than the Board. The Supreme Court analyzed the relevant provisions and judicial precedents and concluded that Rule 9(3)(b) was within the general delegation of power under Section 29A(1) of the Act. The Court held that the rule was consistent with the object and purpose of the Act, ensuring that genuine complaints of professional misconduct are not wrongly dismissed at the threshold. Therefore, the appeal was dismissed.