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TMI Blog2020 (3) TMI 902X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lief and/or order in the interest of justice in favour of the petitioner firm. 2. The brief facts of the case are as under: 2.1 The petitioner being a limited liability partnership firm has filed this petition through its partner. The petitioner firm is registered with the Institute of the Chartered Accountants of India (for short the ICAI ) under the provisions of the Chartered Accountants Act, 1949 (for short the Act1949 ). 2.2 It is the case of the petitioner that the petitioner-firm was earlier known as M/s. Manubhai Co. prior to its conversion into Manubhai Shah LLP. M/s Manubhai Co was registered with ICAI on 20.01.1975 having Registration No.FRN 106041W. 2.3 It appears that Manubhai Co. entered into a Representation Agreement with HLB International Ltd (for short the HLBI ) on 26.09.1997 for providing common platform to the members of HLBI for sharing relevant knowledge, expertise and resources. 2.4 It is the case of the petitioner that Manubhai Co. from the date of execution of the agreement did not secure any business from the HLBI. 2.5 It is the case of the petitioner that the ICAI published Rules of Network and Merger Demerger amongst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost and other sources. 2.9 It is the case of the petitioner that neither the name of the petitioner firm nor the names of the partners of the petitioner firm were mentioned in the said report. It is the case of the petitioner that the petitioner-firm had never shared revenue, cost or other resources with HLBI, and therefore, there was no violation on the part of the petitioner firm and no action could have been taken against the petitioner-firm. 2.10 The ICAI revised the erstwhile guidelines for Networking with effect from 27.09.2011. In the new guidelines, the definition of 'Network' was completely changed. The new definition of 'Network' means Network that was aimed at providing cooperation as well as on sharing of profit, cost, common ownership, control, management and sharing of quality control policies and procedures with common brand name. 2.11 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. 2.12 It appears from the record th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the MNAF have got registered partnership firm with Indian partners, the real beneficiaries of transacting the business of Chartered Accountancy remains the Companies of the foreign entities. The Apex Court, therefore, issued directions to the ICAI to initiate appropriate and effective proceedings against such MNAF for violating the Code of Conduct and the Act1949. The Apex Court also directed the relevant authorities to take appropriate actions for violation of Foreign and Direct Investment Policies, FEMA regulations and the Act1949 after completing pending investigations that were initiated against the erring firms. The Apex Court directed the Union Government to constitute a three member committee of Experts to look into the statutory framework for enforcement of Sections 25 and 29 of the Act1949. 2.16 It is the case of the petitioner that neither the petitioner firm nor its partners were party respondents before the Apex Court. Moreover, as per the categorization of the firms made by the Apex Court, the petitioner-firm does not fall into any of the categories either A, B, C or D, and therefore, no action could have been initiated against the petitioner-firm for alleged viol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les framed there under in letter and spirit. The said Committee submitted its report on 25.08.2018. As per the said report, there was no violation, either of Section 25 or Section 29 of the Act1949. It was stated in the report that no instance of any malpractice was brought before the Committee and the ICAI was recommended to amend the regulations to prevent such potential malpractice. 2.21 It appears that, thereafter, the respondent no.2 addressed a communication dated 02.01.2019 to initiate disciplinary proceedings against the petitioner along with prima facie opinion dated 04.08.2018 of the respondent no.2 which was approved by the Disciplinary Committee, wherein the petitioner firm was prima facie found guilty of professional misconduct within the meaning of Items (2) and (5) of Part I of the First Schedule and Item (1) of the Part II of the Second Schedule to the Act1949 and in terms of Clause(b) of sub-rule (2) of the Rule (9) of the Rules 2007. Being aggrieved, the petitioner has filed this petition. 3. The coordinate bench of this Court (Coram: V. M. Pancholi, J.) passed the following order dated 15.02.2019: 1. Heard learned Senior Counsel Mr.Mihir Joshi assiste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rim relief in terms of paragraph 8(B) is granted till then. Direct service is permitted. 4. Learned Senior Counsel Mr. Mihir Joshi assisted by Mr.Chintan Dave, learned advocate for the petitioner submitted that the initiation of the disciplinary proceedings under Section 21 of the Act1949 together with prima facie opinion formed by the Director (Discipline) under Rule 9(1) of the Rules 2007 for professional misconduct is without jurisdiction, as no showcause was ever issued to the petitioner-firm inForm-Ing about the prima facie opinion formed by the respondent no.2. It was submitted that the respondent authorities have relied upon Information received based on some documents which was never shared with the petitioner-firm. The disciplinary proceedings are initiated only on the basis of the order passed by the Apex Court. Reliance is placed on Rule 7 of the Rules 2007 to submit that the information constitute any written information in the form of any allegation against the member received in person or by post or by courier by the Director (Discipline) of ICAI. It was, therefore, submitted that as the respondent authorities have not received any information containing any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r secured any work from the members of Network of the HLBI. It was therefore, submitted that there is no violation of the provisions of the Act1949 or the Rules 2007 by the petitioner-firm by entering into an agreement for knowledge sharing and not profit sharing or cost. 4.2 The learned Senior Advocate for the petitioner referred to the relevant clause of the representation agreement to point out that the representation agreement was only an agreement for sharing of the knowledge and not for the profit. It was also pointed out that the clause (e) and (f) of the Representation Agreement Stipulates prohibition upon the petitioner-firm from operation of the Representation Agreement for breach of any prior agreement, undertaking or professional restrictions applicable to your firm where such agreements, undertakings or restrictions have been fully disclosed to HLBI. It was, therefore, submitted that the prima facie opinion arrived at by the respondent authority is contrary to the terms of the Representation Agreement. 4.3 Learned Senior Advocate for the petitioner submitted that ingredients of the professional misconduct falls within the meaning of item No.2 of Part I of the Fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not intervene in matters where only a show cause in the form of a prima-facie opinion of the Director (Discipline) is issued and further proceedings are still in progress. 5. It is submitted that the petitioner has rushed to invoke the extraordinary writ jurisdiction of this Hon'ble High Court under Article 226 of the Constitution of India when the facts suggest that no adverse order is passed by the respondent against the petitioner. An opportunity of hearing was given to the petitioner before the Director (Discipline) who is investigating authority as per Rules prior to the formation of the impugned prima facie opinion. The petitioner's case is placed before the quashi-judicial authority of the Institute in terms of the Chartered Accountant Act, 1949 which is required to conduct the Disciplinary proceeding in accordance with the provisions of the Act and Rules made thereunder by giving a fair and reasonable opportunity to the petitioner. 5.1 Learned Senior Counsel for the respondent submitted that that the Supreme Court in the case of S.Sukumare vs The Secretary, Institute of Chartered Accountants of India Ors passed in Civil Appeal No.2422 of 2018 and in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces, FDI in a Chartered Accountant firm cannot be made except by non-resident Indians or persons of Indian origin, subject to regulatory guidelines and restrictions imposed by the Act 1949 and the Regulations framed there under. 5.3 It was submitted that such report as well as the directions issued by the Supreme Court were considered as Information under Rule 7 of the Rules 2007 to issue show-cause notice dated 05.04.2018 for initiating disciplinary proceedings against the petitioner-firm under Section 21 of the Act1949. It was submitted that considering the reply filed by the petitioner, prima facie, opinion was formed by the respondent no.2 observing that the petitioner-firm is guilty for professional misconduct, and thereafter, in terms of provisions of Rule 9(2)(a)of the Rules 2007, the matter was placed before the Disciplinary Committee in its meeting held on 30.11.2018. The Disciplinary committee considered the prima facie opinion formed by the Director (Disciplinary) along with relevant material on record concurring with the prima-facie opinion and accordingly impugned communication dated 02.01.2019. 5.4 Learned Senior Advocate for the respondent submitted that what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er information as to relevant judicial decisions, secondly that `escape' in s. 34(1) was not confined to cases where no return had been submitted by the assessee or where income had not been assessed owing to inadvertence or oversight or other lacuna attributable to the assessing authorities. But even in a case where a return had been submitted, if the Income tax officer had erroneously failed to tax a part of the assessa ble income, it was a case where that part of the income had escaped assessment. The decision of the Privy Council, therefore, was held to be information within the meaning of s. 34(1) (b) and the proceedings for reassessment were validly initiated. 12. The matter was again fully considered by this Court in A. Raman and Company's case (supra), where Shah, J., speaking for the Court extended the connotation of the word `information' to two different categories of cases and observed as follows: The expression information in the context in which it occurs must, in our judgment, mean instruction or knowledge derived from an external source concerning facts or particulars, as to law relating to a matter bearing on the assessment. Jurisdiction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n' may be of facts or of law. The 'information' of a fact may be from external source. The fact that the Incometax Officer with diligence could have obtained the information during the previous assessment on a proper investigation of the materials on the record or the facts disclosed thereby, would not make it any the less information if the fact was not in fact obtained and came to his knowledge only subsequently. So also the fact that on a research as to the sate of law the Incometax would have ascertained the true legal position would not make anyu difference. If the office came to know the real position of the law only subsequently. The decision of a Court of law subsequent to the assessment would be 'information' and the Incometax Officer is entitled to take note of it. Mr.B.Sen, the learned counsel for the assessee, contended that on the facts of this case, it cannot be said that the Income Tax Officer had only 'information' as required under the section. He submitted that the officer was fully aware of the fact that the houses were selfoccupied and therefore the question of coming into possession of any information as to facts does not arise. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his defense by way of writtenstatement to offer his comments as per the provisions of the Rules 2007. It was, therefore, submitted that the petition is premature and no interference is required to be made at this stage by the Court while exercising the powers under Article 226 of the Constitution of India. 6. Mr. Mihir Joshi, learned Senior Advocate, in rejoinder submitted that, as the entire initiation of proceedings is without jurisdiction, the petition is maintainable and should be entertained by this Court under Article 226 of the Constitution of India. It was further submitted that the Representation Agreement cannot constitute Information as per the Rule 7 of the Rules 2007 which stipulates that information means any written information containing allegation or allegations against the member or a firm received by the Directorate to be treated as Information received under Section 21 of the Act1949. It was, therefore, pointed out that as there is no written information containing allegation or allegations against the petitioner-firm, mere reliance upon the representation agreement read with report on MNAF and the observations made by the Supreme Court in the case where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired to be granted to the petitioner at the stage of formation of prima facie opinion, it was submitted by the learned senior advocate for the respondent that the Rule 11 of the Rules 2007 stipulates that the procedure laid down for dealing with complaint in sub-rule 6 of Rule 3, sub-rule (1), (2), (3) and (4) of Rule5 and sub-rule (1),(2), (3) (5) of Rule 8 and Rule 9 and Rule 10 shall also applied to the information received by the Director relating to misconduct of the member and therefore, the petitioner ought to have been given an opportunity to explain its case at the time of formation of prima facie opinion by the respondent no.2. 6.4 It was submitted that the procedure prescribed in Rule 3 for filing Complaint, Rule 5 for Registration of Complaint, Rule 8 for procedure to be followed by Director on a complaint, Rule 9 for Examination of complaint and Rule 10 for Mode of a ending Notice in Rules 2007 would apply if the information is received by the Directorate in written form containing allegations against the petitioner-firm. It was, therefore, submitted that in absence of procedure followed by the respondent no.2, the entire proceedings is vitiated, and therefore, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is communicated to him, prefer an appeal to the High Court :Provided that the High Court may entertain any such appeal after the expiry of the said period of thirty days, if it is satisfied that the member was prevented by sufficient cause from filing the appeal in time. (2) The High Court may, on its own motion or otherwise, after calling for the records of any case, revise any order made by the Council under subsection (2) or subsection (4) of section 21 and May (a) confirm, modify or set aside the order; (b) impose any penalty or set aside, reduce, confirm, or enhance the penalty imposed by the order; (c) remit the case to the Council for such further inquiry as the High Court considers proper in the circumstances of the case; or (d) pass such other order as the High Court thinks fit : Provided that no order of the Council shall be modified or set aside unless the Council has been given an opportunity of being heard and no order imposing or enhancing a penalty shall be passed unless the person concerned has also been given an opportunity of being heard. Explanation. In this section High Court and member of the Institute have the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he copy of the complaint sent to the firm by the Director had been duly received by him, her or them. Explanation : A notice to the firm shall be deemed to be notice to all the members who are partners or employees of that firm as on the date of registration of the complaint. 11. Certain provisions relating to complaint also be responsible for information relating to misconduct of members: The procedure laid down for dealing with complaints in sub-rule( 6) of rule 3, sub-rule (1), (2), (3) and (4) of rule 5, sub-rule (1), (2), (3) and (5) of rule 8, rule 9 and rule 10 shall also apply to information received by the Director relating to misconduct of members. 8. It appears that the impugned communication dated 02.01.2019 along with prima facie opinion dated 04.08.2018 is based on the report on the operation of Multinational Network Accounting Firm in India which was considered by the Council of the ICAI in the year 2010 and finalized by a group constituted by the Council in July2011. Based upon the said report, the Secretary, ICAI, who was authorized to look into the documents relating to the facts of the case of the petitioner decided to seek clarification in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. The report of operation of MNAF in India and the judgment referred to in Paragraph No.3 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. 10. Letter dated 05.04.2018 in form of show cause notice which refers to the earlier communication dated 03.08.2016 and reply of the petitioner-firm dated 24.09.2016 is also based on report on operation of MNAF in India so as to consider the said report and recommendation contained in Paragraph No.7 of the said report as Information . Relevant extract of same is as under: In this regard, Hon'ble Apex Court has observed violation of Section 25 and Section 29 of the Chartered Accountant Act, 1949 and has also raised certain questions on the way and manner the fee is being shared by the Indian CA firms who are associates of multinational international entities. Therefore, in light of the above judgment as quoted above and facts/submissions on record, it is felt that your firm has violated the provisions of Item (2) of Part I of First Schedule and Item (1) of Part II of Secon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation as contemplated in Rule 7 of the Rules 2007. 11. On perusal of the prima-facie opinion recorded by the Director (Discipline), wherein reference was made to the meaning of agreement and other provisions of the agreement to come to the conclusion that one cannot say that, there was absolute intent of securing business through the international tie up, is without any basis. It appears that the submissions made by the petitioner-firm that the payments made to the HLBI were only for the membership fees and conference fees is totally ignored while arriving at prima facie opinion is without any basis as is evident from the extract as under: 10.14 Thus, it is opined that considering there has been payments made and there is no categorical denial by the respondent-firm of the references work received from HLBI (the firm is only stating that mere referral does not entail acceptance), there appears a cause for further investigation and accordingly, the respondent-firm is prima facie guilty for professional misconduct falling within the meaning of Item (5) of Part I of First Schedule to the Chartered Accountants Act1949. Similarly, reference was made to Clause (h) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entity is having a global presence with may firms being its member including nonCA firms. In this regard, the observations made by Hon'ble Supreme Court read as under: In the present context, having regard to the statutory framework under the CA Act, current FDI Policy and the RBI circulars, it may prima facie appear that there is violation of statutory provisions and policy framework effective enforcement of which has to be ensured. Statutory regulatory provisions intended to advance the object of law have to be enforced meaningfully. No vested interest can flout the same by manifesting compliance only in form. Compliance has to be in substance. The law enforcing agencies are expected to see the real situation. As found by the Expert Committee in its respect, there is a compliance by MAFs only in form and not in substance, by having got registered partnership firms with the Indian partners, the real beneficiaries of transacting the business of Chartered Accountancy remain the companies of the foreign entities. The partnership firms are merely a face to defy the law. The principle of lifting the corporate veil has to apply when the law is sought to be circumvented. (Emph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Senior Advocate for the respondents upon the decisions of the Supreme Court to contend that the information from any source would be Information to mean any information or knowledge derived from an external source concerning facts or particulars would not be applicable as it would not be information equivalent to the information as per Rule 7 of the Rules 2007. 15. In order to initiate disciplinary proceedings for professional and other misconducts as per provisions of the Act 1949, the procedure of investigation is prescribed in the Rules 2007. Therefore, initiation of disciplinary proceedings has to be as per the provisions of the Rules 2007. Rule 3 provides for procedure for filing complaint in Form I, in triplicate before the Director in person or by post of courier, whereas Rule 5 prescribes procedure registration of complaint. Rule 7 prescribes Information means any written information which is not in Form-I under sub-rule (1) of rule 3 containing allegation or allegations against member or a firm, received in person or by post or courier, by the Directorate. Hence, when the formal complaint is not lodged in Form-I as per sub-rule (1) of Rule 3 of the Rules 2007, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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