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TMI Blog2024 (11) TMI 1171X X X X Extracts X X X X X X X X Extracts X X X X ..... or not would depend on the fact whether he had applied his mind diligently to the job entrusted to him, and whether due care and caution, as is required to be adopted, was taken. Additionally, it should also be seen whether there was failure to act honestly or reasonably. It was also observed that when a Chartered Accountant signs certificates, minimum that is expected to do is to verify the accuracy of the figures certified. It does appear that the respondent no. 1, on the mere asking of the Society, and without seeking any document from the Society in this regard, had mentioned amount of ₹ 41,000/- as expenditure towards Additional Essential Machinery in the second Utilisation Certificate, and also later certified that this certificate would supersede all the previous certificates issued by him. There was also no reason assigned by him in the said clarification, as to why the second Utilisation Certificate would supersede the previous certificates issued by him. It is noted that in the case of Council of Institute of Chartered Accountants of India v. Dayal Singh FCA, [ 2007 (5) TMI 696 - DELHI HIGH COURT ], the allegations against the respondent therein (a chartered account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s filed against him in the year 2005, and the proceedings against him have remained pending for about 19 years. Considering that the present proceedings have continued for 19 years without any history of professional misconduct by the respondent no. 1, the ends of justice would be served by severely reprimanding the respondent no. 1, under Section 21(6)(b) of the Act, for his professional misconduct - the present reference is disposed of. - HON'BLE MR. JUSTICE VIBHU BAKHRU AND HON'BLE MS. JUSTICE SWARANA KANTA SHARMA For the Appellant: Mr. Aldanish Rein, Advocate For the Respondents : Mr. Deep Bisht and Mr. Sarthak Gupta, Advocates for R-1. Mr. Asheesh Jain, CGSC, Mr. Gaurav Kumar, and Ms. Pooja Bhardwaj, Advocates for R-2 JUDGMENT SWARANA KANTA SHARMA, J. 1. This reference has been made under Section 21(5) of the Chartered Accountants Act, 1949 (prior to the Amendment Act, 2006) [hereafter the Act ] by which the Council of Institute of Chartered Accountants of India [hereafter the Council ] has forwarded the case to this Court after finding the respondent no. 1, Chartered Accountant (CA) Sh. Subhajit Sahoo, who is the member of Institute of Chartered Accountants of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the same expenditure to ₹ 41,000/- by way of another certificate appeared to be inappropriate. 4. A copy of the complaint was forwarded to respondent no. 1 on 22.02.2006 with a request to send a written statement, if any, as required under Regulation 12(6) of the Chartered Accountants Regulations, 1988 [hereafter the Regulations ]. Respondent no. 1 submitted his written statement on 20.03.2006. The complainant submitted his rejoinder on 03.10.2006. Thereafter, respondent no. 1 submitted his comments on 30.10.2006. 5. In accordance with Regulation 12(11) of the Regulations, the aforementioned documents were considered by the Council at its meeting held on 10.01.2008 and 12.01.2008 at New Delhi. The Council was prima facie of the opinion that respondent no. 1 was guilty of professional and/or other misconduct and therefore, the matter was referred to the Disciplinary Committee for inquiry. 6. The effective hearing before the Disciplinary Committee took place on 08.04.2008, in presence of the complainant s representatives, and of respondent no. 1, his counsel and two witnesses. The respondent no. 1 did not plead guilty and opted to defend his case. The witnesses namely Ms. Pra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be removed from the Register of Members for a period of one year. 10. In accordance with Section 21(5) of the Act, a reference i.e. Chat A. Ref. No. 8/2014 was made before this Court. However, this Court, by way of order dated 25.07.2017, quashed the Council s decision and directed the Council to reconsider the Disciplinary Committee s report in its next meeting, after giving an opportunity of hearing to both the sides. The relevant extract of the order dated 25.07.2017 is reproduced hereunder: 3. In other words, if the number of members comprised in the Council are 40 and in this case, 14 members were present but one of them, namely Shri. J. Venkateshwarlu, did not participate in the said proceedings since he was a part of the Disciplinary Committee, 1/3rd of the 40 members on a percentage-wise basis would come to 13.33% and going by the practice followed by the petitioner, 14 members would have been required to be present to complete the quorum, whereas the members present on 02.06.2013, were 13. 4. In view of the aforesaid position, it is deemed appropriate to quash and set aside the decision of the petitioner/Council in relation to the respondent as taken on 02.06.2013. Furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Disciplinary Committee and the recommendation made by the Council are well-reasoned, based on appreciation of the facts and evidence. 15. Referring to the findings of the Disciplinary Committee, upheld by the Council, the learned counsel contended that the respondent no. 1 was negligent in carrying out his professional duties as he had issued the two Utilisation Certificates without verifying the relevant documents. In respect of the first such certificate, it is stated that the respondent no. 1 had failed to verify the machinery physically before issuing the certificate, which he ought to have done. Rather, he had simply relied on the certificate issued by another Chartered Accountant firm without mentioning the said fact in the certificate. As regards the second certificate, it is stated that the respondent no. 1 had failed to place on record any document whatsoever which he had verified before issuing the said certificate. 16. Insofar as the standard of proof to be followed while holding a person guilty of professional misconduct under the Act is concerned, the learned counsel contended that the same may be slightly higher than balance of probabilities (as required in civil case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ization Certificate, dated 28.01.2004, was submitted late by the Society in March 2004, after an inspection report indicated unsatisfactory operations. However, the delay and decision to procure or return machinery were entirely the Society s responsibility, not respondent no. 1 s. Additionally, no action has been taken against the Society itself. 21. It was also contended that it is a settled position of law that the disciplinary enquiries relating to professional misconduct are quasi criminal in nature inasmuch as such proceedings may affect the professional s right to practice the profession. In other words, being quasi criminal cases, such cases ought to be proved beyond reasonable doubt and the onus to prove lies on the complainant. The evidence should be of a character which should leave no reasonable doubt about the guilt of the professional. In this regard, reliance is placed on certain case laws. 22. The learned counsel for the respondent no. 1 further argued that the Council failed to consider that the Disciplinary Committee had conducted its inquiry in gross violation of principles of natural justice and denied him the right to fair trial. It is submitted that the respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being heard before orders are passed against him on the case, and may thereafter make any of the following orders, namely :- (a) reprimand the member; (b) remove the name of the member from the Register for such period, not exceeding five years, as the Council thinks fit; Provided that where it appears to the Council that the case is one in which the name of the member ought to be removed from the Register for a period exceeding five years or permanently, it shall not make any order referred to in clause (a) or clause (b), but shall forward the case to the High Court with its recommendations thereon. (5) Where the misconduct in respect of which the Council has found any member of the Institute guilty is misconduct other than any such misconduct as is referred to in sub-section (4), it shall forward the case to the High Court with its recommendations thereon. (6) On receipt of any case under sub-section (4) or sub-section (5), the High Court shall fix a date for the hearing of the case and shall cause notice of the date so fixed to be given to the member of the Institute concerned, the Council and to the Central Government, and shall afford such member, the Council and the Central ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of clause (7) of Part-I of the Second Schedule to the Act, the said clause (as it stood prior to the amendment dated 17.11.2006) is extracted below: THE SECOND SCHEDULE PART I : Professional misconduct in relation to chartered accountants in practice A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he * * * (7) is grossly negligent in the conduct of his professional duties; 29. A perusal of clause (7), as set out above, clearly indicates that a chartered accountant can be held guilty of professional misconduct if he is grossly negligent in conduct of his professional duties. 30. In Black s Law Dictionary [10th Edition], the terms negligence and gross negligence have been defined in the following manner: negligence , n. (14c) 1. The failure to exercise the standard of care that a reasonably prudent person would have exercised in a similar situation; any conduct that falls below the legal standard established to protect others against unreasonable risk of harm, except for conduct that is intentionally, wantonly, or willfully disregardful of others rights; the doing of what a reasonable and prudent person would not do under the particula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... man, depending upon the circumstances of the case, would take. 32. Coordinate Bench of this Court in case of Institute of Chartered Accountants of India, New Delhi v. B.L. Khanna Anr., 2000 SCC OnLine Del 674, had the occasion to explain the scope of clause (7) and the meaning of gross negligence . It was held that whether the professional was grossly negligent or not would depend on the fact whether he had applied his mind diligently to the job entrusted to him, and whether due care and caution, as is required to be adopted, was taken. Additionally, it should also be seen whether there was failure to act honestly or reasonably. It was also observed that when a Chartered Accountant signs certificates, minimum that is expected to do is to verify the accuracy of the figures certified. The relevant portion of the said decision is reproduced hereunder: 6. As noted above, respondent has not been found to have contravened Clause (6), but Clause (7). Latter clause relates to grossly negligent action in the conduct of professional duties. On the background facts, it has to be seen whether failure of respondent to notice the mistake would constitute an act of negligence. It depends upon th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and object of the Act is to maintain the standard of the profession at a high level. (Emphasis supplied) 33. In B.L. Khanna (supra), this Court had also referred to the observations of Lopes L.J. in Re. Kingston Cotton Mill Co., 1896-2 Ch. 279, in respect of the duties of an auditor. The same is set out below: 7. In Re. Kingston Cotton Mill Co., 1896-2 Ch. 279, Lopes L.J. observed: ..It is the duty of an auditor to bring to bear on the work he has to perform that skill and care and caution which a reasonably competent, careful, and cautious auditor would use, what is reasonable skill, care, and caution must depend on the particular circumstances of each case. An auditor is not bound to be a detective, or, as was said, to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is a watch- dog, but not a bloodhound . If there is anything calculated to excite suspicion he should probe it to the bottom; but in the absence of anything of that mind he is only bound to be reasonably cautious and careful. 34. The duties and responsibilities of an auditor were also emphasized by the Hon ble Supreme Court in Institute of Chartered Accountants of In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... py of the bank statement showing the DD payment of Rs. 2.50 Lacs and the photocopy of the certificate obtained from M/s M.K.M. Associates, the Respondent could not adduce any other document to support his defence. The Committee also noted that the Inspection of the unit was carried out in Marcli, 2004 whereat machinery worth Rs. 41,000/- was found and the Society submitted the report on training for I and II phases vide their letter dated 15 .4.2004 alongwith the second DC dated 28.1.2004 issued by the Respondent certifying the purchase of machinery worth Rs.41,000/- , The Committee, however failed to understand the delay in submitting the 2nd DC of the Respondent by the Society to the Complainant Office (which was procured from the Respondent on 28.1.2004 i.e. before the date of Inspection ) vide its letter dated 15.4.2004 (after the date of Inspection). The Respondent also failed to give any cogent reasons for the same. 23. The Committee also noted that the Complainant Department has filed a complaint against M/s M.K.M. Associates in another case wherein the said Firm has categorically denied their involvement in any certification work for the grantee company and has stated it to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. Thereafter, upon considering the report of the Disciplinary Committee and after hearing both the sides and perusing the written statements filed by the respondent no. 1, the Council in its meeting held from 21.03.2018 to 24.03.2018, inter alia, held as under: 15. Upon deliberations, the Council noted that the Disciplinary Committee had thoroughly examined the matter second time on specific issues and at this stage and nothing new has been brought on record by either of the parties. Accordingly, the Council was of the view that as regards the first certificate, the Respondent failed to verify the machineries physically before issuing the said certificate which he ought to have done. As regard his contention in this regard that he has relied on the certificate issued by another Chartered Accountant for M/s,' MKM Associates and the Bank Statement, the Council upheld the opinion of the Disciplinary Committee in this regard that he ought to have clarified the same in the certificate issued by him by duly mentioning the fact, which he failed to do. 16. As regard the second certificate dated 28th January, 2004 issued by the Respondent and submitted by the Society to the Complainant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... documents such as the Receipt and Payment Account certified by M/s MKM Associates and countersigned by Secretary of the Society, bank statements evidencing the payment of ₹ 2,50,000/- (being payment towards the machinery), Form-ST35 i.e. the road permit to bring machinery inside Manipur, and letter dated 12.11.2003 by Ms. Prabha Mohanty (Consultant to Mr. G.K. Asthana, Deputy Director of the Complainant) and letter dated 29.11.2003 by Mr. Akai Haokip (Treasurer of the Society). Additionally, it was contended that the Council failed to appreciate that the downward revision from ₹ 2,50,000/- to ₹ 41,000/- towards additional machinery in the second Utilisation Certificate was because most of the machineries that were sent to the Society could not be utilized due to lack of technical expertise/skilled manpower and lack of electricity, and this had been explained in the letter dated 29.11.2003. 40. Insofar as the first Utilisation Certificate issued by the respondent no. 1 is concerned, even if it is accepted that the respondent no. 1 could not have physically verified the machinery by visiting Manipur, and he had to rely on the certificate issued by M/s MKM Associates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ountants of India v. Dayal Singh FCA, 2007 SCC OnLine Del 724, the allegations against the respondent therein (a chartered accountant) were that he was instrumental in getting a loan sanctioned from Union Bank of India in favor of an entity, on the basis of forged documents such as quotations, supply orders, money deposit receipts of various firms, rent deed and rent receipts etc., and that he had given a false certificate stating that the concerned entity had brought the contribution required in the books on the basis of which loan had been released from Union Bank of India. The Coordinate Bench of this Court accepted the recommendations of the Council and held as under: 12. It appears that the officers of the bank completed all paper formalities perhaps at the behest of Respondent No. 1 or at least on the basis of his certificate for disbursement of the loan. The activity of Respondent No. 1 in issuing such a vague certificate with the intention of persuading the bank to grant his client a loan amounts to other misconduct within the meaning of the Act read with the Regulations framed there under. We agree with this conclusion. 13. The lack of responsibility displayed by Responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Auditor issued a certificate confirming receipt of Rs. 2,25,00,000/- towards promoters contribution, and that 15,00,000 shares, at Rs.10/- per share with premium of Rs.5/-, was allotted though only Rs. 35,00,000/- was actually received by the company towards promoters contribution, that too just one day prior to opening of the public issue. The certificate was issued by the respondent without even verifying actual receipt of cash for such allotment, and without qualifying the certificate to the effect that the consideration received was subject to realisation of the cheque amount. This act of certification by the respondent amounts to gross negligence since he had voluntarily omitted to do so in reckless disregard of his duty/obligation as the statutory auditor of the company. The certificate issued by the respondent, which was among the documents which formed the basis for inviting contribution from the public towards share capital of Rs.4,50,00,000/-, is a mis-statement in the prospectus which resulted in defrauding investors of the company, other stakeholders, and the public at large. *** It is also contended that to impose penalty or punishment against a professional for h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts advanced on behalf of the Council. In this regard, we may refer to the passage on Standard of Proof in the Halsbury Laws of England, which reads as follows: 19. Standard of proof. To succeed on any issue the party bearing the legal burden of proof must (1) satisfy a judge or jury of the likelihood of the truth of his case by adducing a greater weight of evidence than his opponent, and (2) adduce evidence sufficient to satisfy them to the required standard or degree of proof. The standard differs in criminal and civil cases. In civil cases the standard of proof is satisfied on a balance of probabilities. However, even within this formula variations in subject matter or in allegations will affect the standard required; the more serious the allegation, for example fraud, crime or professional misconduct, the higher will be the required degree of proof, although it will not reach the criminal standard. (Emphasis supplied) 51. Thus, in cases of professional misconduct, the degree of proof may be higher than the balance of probabilities, yet the same would not reach the criminal standard of proof beyond reasonable doubt. The aforesaid passage was also cited by the Hon ble Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Division Bench of Calcutta High Court in Joydeep Roy v. The Institute of Chartered Accountants India Ors., 2024 SCC OnLine Cal 1211. 54. In Institute of Chartered Accountants of India, Indraprastha Marg, New Delhi v. CA Gordhanbhai Madhabhai Savalia, 2023 SCC OnLine Bom 2347, the Division Bench of Bombay High Court, while deciding a reference under Section 21(5) of the Act, noted as under: Though the degree of proof required in disciplinary action is much less than a criminal prosecution, it can still be safely inferred that there is a cloud of doubts over the finding of guilt of Respondent. 55. One of us (Vibhu Bakhru, J.) in Lalit Agrawal v. The Institute of Chartered Accountants of India Anr., 2019 SCC OnLine Del 6960 has also taken a view that while the standard of proof as required in criminal proceedings is beyond reasonable doubt, the standard of proof as required in disciplinary proceedings under the Act is preponderance of probabilities. However, as the weight of the authorities indicates, it is higher than preponderance of probabilities, but not as high as beyond reasonable doubt. 56. The learned counsel for the respondent no. 1 had relied on the decision in H.V. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or it proceeds on mere conjectures and surmises. Finding in such disciplinary proceedings must be sustained by a higher degree of proof than that required in civil suits, yet falling short of the proof required to sustain a conviction in a criminal prosecution. There should be convincing preponderance of evidence. (Emphasis supplied) 59. Therefore, the contention raised on behalf of the respondent no. 1 that the charges of professional misconduct in the present case will have to be proven beyond reasonable doubt like a criminal prosecution is unmerited. 60. When the material placed before the Disciplinary Committee and the Council in this case is analysed, even after considering the defense of the respondent no. 1, we find that the charges against the respondent no. 1 have been proven with reasonable certainty, which is higher than the standard of preponderance of probabilities and evidence. 61. Therefore, for the reasons recorded hereinabove, in the given facts and circumstances, we are of the view that the Council has not erred in holding the respondent no. 1, guilty of professional misconduct under clause (7) of Part-I of Second Schedule to the Act. 62. Insofar as the recommen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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