1956 (4) TMI 28 - HC - Companies Law

Summary

Issues Involved:
1. Misconduct under items (o) and (p) of the Schedule to the Chartered Accountants Act.
2. Non-disclosure of managing agents' remuneration.
3. Misstatement of gross income in the profit and loss account.
4. Jurisdiction of the Chartered Accountants Act, 1949, over pre-Act conduct.
5. Bona fides and reasonable care in the auditor's conduct.

Issue-wise Detailed Analysis:

1. Misconduct under items (o) and (p) of the Schedule to the Chartered Accountants Act:
The respondent, Mr. A.K. Joscelyne, was charged with misconduct under items (o) and (p) of the Schedule to the Chartered Accountants Act. Item (o) pertains to failing to disclose a material fact necessary to make a financial statement not misleading, while item (p) concerns failing to report a material misstatement known to appear in a financial statement. The Council found that the respondent had failed to report the non-compliance with section 132(3) and regulation 107 of Table A of the Indian Companies Act, and the non-disclosure of the selling commission as part of the managing agents' remuneration, thereby misleading the shareholders.

2. Non-disclosure of managing agents' remuneration:
The complaint against the respondent was that he did not disclose the total remuneration paid to the managing agents, including the selling commission, in the profit and loss account. The managing agents received Rs. 74,666 as remuneration, but the selling commission of Rs. 35,400 was not shown as part of the remuneration or as an item of expenditure. This non-disclosure misled the shareholders about the actual cost of the managing agents.

3. Misstatement of gross income in the profit and loss account:
The profit and loss account showed the profit on trading as Rs. 7,83,010 after deducting the selling commission of Rs. 35,400 from the gross receipts. This deduction was not disclosed, resulting in a misstatement of the gross income. The shareholders were misled into believing that the amount shown as profit on trading was the whole amount of the receipts from sales.

4. Jurisdiction of the Chartered Accountants Act, 1949, over pre-Act conduct:
Dr. Pal, representing the respondent, contended that the Chartered Accountants Act, 1949, could not apply to pre-Act conduct, as the impugned profit and loss account was signed in 1947. However, the court held that the Act applies to all cases of proved misconduct, whenever committed, as the Act is designed to protect the public from unscrupulous, negligent, or dishonest accountants. The court found ample indication in the Act that it contemplates pre-Act conduct within its purview.

5. Bona fides and reasonable care in the auditor's conduct:
The respondent claimed that he acted on his honest understanding of the law and the agreement, guided by legal opinions obtained in 1937 and 1953. However, the court found that the respondent did not act with reasonable care. He failed to obtain explanations from the directors or seek further legal advice regarding the managing agency agreement. The respondent's reliance on his interpretation of the legal opinion and the established practice among accountants was not sufficient to establish bona fides. The court concluded that the respondent's conduct showed negligence and imprudence.

Conclusion:
The court held that the specific charges under items (o) and (p) of the Schedule to the Chartered Accountants Act were not established against the respondent, despite evidence of negligence and imprudence. The court emphasized the need for the Council to provide reasons when it disagrees with the Disciplinary Committee's findings. No orders were necessary on the reference, and there was no order for costs.