2020 (3) TMI 902 - HC - Indian Laws

Professional Misconduct - Applicability of Network guidelines to petitioner-firm of Chartered Accountants (CAs) - It is the case of the petitioner that the petitioner-firm cannot be considered as having Network with the HLBI , as it never shared its profit, cost etc. It is, therefore, the case of the petitioner that the network guidelines would not be applicable to the petitioner-firm - HELD THAT - It is relevant to note that prima facie opinion is silent with regard to applicability of Rule 7 of the Rules 2007 which provides that the information has to be in form of any written information containing allegation or allegations against the member or a firm, received in person or by post or courier - However, the report of operation of MNAF in India of the prima facie opinion, there is no reference to petitioner and therefore, question arises whether it would constitute the Information as per Rule 7 of the Rules 2007 or not. However, it appears from the material on the record that what is to be treated as Information within the meaning of Rule 7 of the Rules 2007 is missing because from the contents of the Paragraph No.3 of the prima facie opinion, which is extracted herein above, it does not reveal any written allegation or allegations against the petitioner so as to treat the same as Information within the meaning of Rule 7 of the Rules 2007. The entire basis of formation of prima facie opinion is contrary to Rule 7 of the Rules 2007. The report of operation of MNAF in India of the prima-facie opinion, it cannot consider as information within the meaning of Rule 7 of the Rules 2007. Therefore, entire basis of formation of prima-facie opinion is contrary to Rule 7 of the Rules 2007. On perusal of the contents of the letter dated 05.04.2018, it emerges that the very basis to treat the material available on record and observations of the Supreme Court as the Information within the meaning of Rule 7 of the Rules 2007 for alleged violation of Section 25 and Section 29 of the Act1949 cannot be considered as Information in absence of any written information containing allegation or allegations against the petitioner-firm as provided under Rule 7 of the Rules 2007. Therefore, merely on the basis of inference drawn by the respondent no.2, and thereby, analyzing various terms of the representation agreement between the petitioner and the HLBI to form prima facie opinion is without any basis in absence of information as contemplated in Rule 7 of the Rules 2007. In absence of any Information , as contemplated under Rule 7 of the Rules 2007, the respondent no.2 has formed prima facie opinion only to do fishing inquiry and investigation. The intention of prima facie opinion is not for initiating disciplinary inquiry for the purpose of investigating further to establish whether the petitioner-firm in collaboration with the international entity, HLBI was involved in encouraging surrogate practice in India or not - the petitioner-firm which is in existence for more than 70 years cannot be put to rigors of disciplinary proceedings in absence of any specific allegation and in absence of any written information containing allegation as per Rule 7 of the Rule 2007. The preliminary objection raised by the respondents with regard to maintainability of the petition is not tenable as there is no written information containing allegation against the petitioner-firm and no disciplinary proceedings could have been initiated against the petitioner-firm - Petition allowed.

Summary

Issues Involved:
1. Validity of the initiation of disciplinary proceedings under Section 21 of the Chartered Accountants Act, 1949.
2. Whether the information used to initiate disciplinary proceedings qualifies as "Information" under Rule 7 of the Chartered Accountants (Procedure of Investigations of Professional and other Misconduct and Conduct of Cases) Rules, 2007.
3. Jurisdiction and procedural compliance in forming a prima facie opinion of professional misconduct.

Detailed Analysis:

1. Validity of the Initiation of Disciplinary Proceedings:
The petitioner, a limited liability partnership firm registered with the Institute of Chartered Accountants of India (ICAI), challenged the initiation of disciplinary proceedings under Section 21 of the Chartered Accountants Act, 1949. The petitioner argued that the proceedings were initiated without jurisdiction as no show-cause notice was issued to inform the petitioner about the prima facie opinion formed by the respondent. The petitioner contended that the disciplinary proceedings were based solely on directions issued by the Supreme Court in unrelated proceedings, where the petitioner was not a party, and on documents not shared with the petitioner.

2. Qualification of Information Under Rule 7:
The petitioner argued that the information used to initiate the disciplinary proceedings did not meet the criteria of "Information" as defined under Rule 7 of the Chartered Accountants (Procedure of Investigations of Professional and other Misconduct and Conduct of Cases) Rules, 2007. Rule 7 stipulates that "Information" must be any written information containing allegations against a member or firm received in person or by post or courier. The petitioner contended that the respondent authorities relied on a report on the operation of Multinational Network Accounting Firms (MNAF) in India and the Supreme Court's directions, which did not specifically mention the petitioner or contain any written allegations against them.

3. Jurisdiction and Procedural Compliance:
The court noted that the prima facie opinion formed by the Director (Discipline) was based on the report on the operation of MNAF in India and the Supreme Court's judgment, neither of which contained specific written allegations against the petitioner. The court emphasized that the prima facie opinion must be based on "Information" as defined under Rule 7, which was missing in this case. The court observed that the prima facie opinion was formed to conduct a fishing inquiry and investigation rather than to initiate disciplinary proceedings based on specific allegations.

The court also highlighted that Rule 11 of the Rules 2007 requires the same procedure for dealing with complaints to be followed for information received by the Directorate. In the absence of any written information containing allegations against the petitioner, the Directorate could not comply with Rule 11, rendering the initiation of disciplinary proceedings without jurisdiction.

Conclusion:
The court concluded that the initiation of disciplinary proceedings against the petitioner was without jurisdiction due to the absence of any written information containing allegations as required under Rule 7 of the Rules 2007. The prima facie opinion formed by the Director (Discipline) was based on an incorrect interpretation of "Information" and was aimed at conducting a fishing inquiry. Consequently, the court quashed and set aside the impugned communication dated 02.01.2019 and the prima facie opinion dated 04.08.2018, holding the petitioner-firm guilty of professional misconduct. The petition was allowed, and no costs were imposed.