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TMI Blog2025 (2) TMI 379X X X X Extracts X X X X X X X X Extracts X X X X ..... udit completed before 01 October 2018 - applicability of provisions to audits that may have been completed prior to the introduction of Section 132 in the Companies Act and thus avoid a declaration of invalidity being rendered. Appointment and engagement of an auditor - Vicarious liability of pertners of the firm - HELD THAT:- An individual, a partnership firm or an LLP can be appointed as an auditor of a company. The appointment, prescriptions and the nature of services which could be rendered by it are further prescribed and regulated by Section 144 of the Companies Act. The Explanation to Section 144 proceeds to explain and provide a definition to the expression "directly or indirectly" as appearing therein - It will be wholly incorrect to hold that Section 132 creates a liability which is foreign to or uncontemplated by the various other provisions forming part of that statute. The Companies Act clearly contemplates a firm suffering a liability as a consequence of the action of its Engagement Partners and constituents who may be involved in the conduct of the audit. Thus, both the audit firm as well as its individual partners would be exposed to a statutory liability if Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjudicatory function from the Council to the NFRA in respect of audits conducted prior to October 2018 would lead one to necessarily come to the irresistible conclusion that the statute impacts rights retrospectively. Vested rights were explained to mean those which would remain unimpacted by any future change in the legal position. Regard must be had to the fact that if the right hinges on an unsecured or contingent foundation, susceptible to modification by a change in the legislative scheme, then such a right was never truly vested, as it lacked the essential characteristics of being absolute, fixed, or immune to future alteration. While delving on the subject of retrospectivity of a legislation the Supreme Court had pertinently observed that while it is true that an enactment would not be construed as having retrospective operation unless such be the position which could be countenanced either on account of an express provision or by implication, merely because the statute takes into consideration a past act or event, that would not necessarily lead one to conclude that it be said to operates retrospectively. The argument of retrospectivity is unmerited is the facet of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 132 (4) as well as the procedure adopted by the NFRA was then assailed on the ground of the latter having deprived the petitioners of various significant rights and procedural safeguards which were otherwise provisioned for under the CA Act and the subordinate rules governing the conduct of disciplinary proceedings. It was submitted that the Act as well as the NFRA Rules merely provide for that authority evolving such procedure as may be considered expedient in the facts of a particular case. The statute, the petitioners argued, neither lays in place a codified procedure for the conduct of disciplinary proceedings nor do its provisions provide any guidance to the NFRA to adhere to a procedure which would be commensurate with the constitutional imperatives of fairness and natural justice. Rule 11 of the NFRA Rules, it becomes apparent that the statute clearly commands that authority to ensure that the disciplinary proceedings are undertaken in accordance with the principles of natural justice including where deemed necessary and appropriate by providing an opportunity of hearing to the charged entity in person. By virtue of Rule 11(5), the division of the NFRA is obliged to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and violation of the SAs'. Those reports had come to conclude in no uncertain terms that the petitioners had violated the ethics standards required to be maintained and having acted in violation of the SAs' which applied. That very body proceeded to take a decision to commence disciplinary action based not an independent review of the facts that obtained but solely on the strength of what had been found in the AQRR. The composition of the body which penned the AQRR and that which issued the SCN remained unaltered. The proceedings have thus come to be stigmatized beyond repair and cannot in law be salvaged or saved. The Executive Body could not have discharged the dual role of rendering findings of guilt and violation of the SAs' while authoring the SQARR/AQRR and thereafter don the mantle of the division which is contemplated under Rule 11. The assessment of whether circumstances warranted a disciplinary enquiry being initiated was statutorily liable to be undertaken by a unit of the NFRA separated from the one which drew up those reports - The doctrine of necessity has also been found to be inapplicable since it was open for the NFRA to have constituted separate units which could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GSC along with Mr. Waize Ali Noor, Mr. Varun Rajawat, Mr. Ranjeev Khatana and Mr. Varun P. Singh, Advs., Mr. Kirtiman Singh, CGSC along with Mr. Waize Ali Noor, Mr. Varun Rajawat, Mr. Ranjeev Khatana and Mr. Varun P. Singh, Advs. Ms. Pooja Mehra Saigal, Adv. for Mr. Jatin Dua and Mr. Kaveri Rawal, Advs. for R-3., Mr. Vikram Jetly, CGSC along with Mr. Abhigyan Siddhant, GP. Mr. Prashant Rawat, GP and Mr. Kabir Singh, Adv. JUDGMENT YASHWANT VARMA, J. TABLE OF CONTENTS Preface 8 Disciplinary Procedure as per the CA Act 12 Section 132 : A Legislative History 31 Broad Structure under the CA Act 96 NFRA Rules 109 Additional Disclosures by NFRA 116 Auditing Industry : Executive Deliberations 150 The Vicarious Liability Argument 171 Section 132 and its retroactive operation 232 NFRA Rules : Lack of Procedural Safeguards 322 Divisions : Separation of Functions 384 SCNs: The Scar of Pre-determination 437 Peripheral Issues 456 Statement of Conclusions 457 Disposition 474 PREFACE 1. This batch of writ petitions instituted by individual Chartered Accountants [CAs] as well as auditing firms assail the validity of Section 132 (4) of the Companies A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contemplates the imposition of penalties as well as disciplinary action in terms which were not contemplated by the statute prior to 01 October 2018. The challenge to Section 132 also proceeds on the ground of an alleged lack of procedural due process as well as the deprivation of rights and safeguards which were conferred upon a CA or a firm while facing disciplinary action under the Chartered Accountants Act, 1949 [CA Act.] read along with the Chartered Accountants Regulations, 1988 [1988 Regulations] and the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007 [Rules 2007.]. 6. The action of the respondents which stands impugned in this batch is also based on the various provisions contained in Section 132 itself as well as the NFRA Rules. This facet of the challenge is based on the petitioners arguing that in terms of the statutory provisions aforenoted, the NFRA is envisaged to discharge its functions and duties through various independent and separate "divisions". According to the writ petitioners, the statute itself envisages the functions of monitoring and enforcement of accounting standards, overseeing q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forming part of the CA Act, 1949. 9. By virtue of amendments which came to be ushered by Act 12 of 2022, various amendments came to be introduced in Sections 2 which also and alongside saw the introduction of Sections 21A and 21B in the CA Act. Act 12 of 2022 also introduced provisions pertaining to the registration of firms. As the provisions stood in the CA Act around the time when Section 132 came to be introduced, the Council as contemplated under Section 9 of the CA Act, stood empowered to establish a Disciplinary Directorate headed by an officer designated as the Director Discipline for undertaking investigations in respect of any information or complaint received by the Council. In terms of Section 21, the Director Discipline was firstly charged with analyzing the information or complaint and arrive at a prima facie opinion with respect to the alleged misconduct. Wherever a Director Discipline were to form the opinion that a member was guilty of any professional or other misconduct specified in the First Schedule, it was required to place the matter before the Board of Discipline. If the Director Discipline were to be of the opinion that the misconduct would be classifiabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se may be, to submit a written statement. Upon the Director Discipline finding prima facie that a case for professional or other misconduct mentioned in the First Schedule was made out, it was required to submit a preliminary examination report to the Board of Discipline. Similarly, if it came to the prima facie conclusion that a professional or other misconduct was found to be established and would fall either in the Second Schedule or both the Schedules, it was required to transmit its preliminary examination report to the Disciplinary Committee. 13. Section 21 further contemplated that if a Director Discipline were to come to form the opinion that no prima facie case was made out either against the member or the firm, it was required to transmit the complaint along with all relevant documents to the Board of Discipline and if that body were to concur with the findings of the Director Discipline, it could direct a closure of the proceedings. If it were to disagree and continue action upon the complaint itself, it could refer the matter either to the Disciplinary Committee or even advise the Director Discipline to undertake a further investigation. Sections 21A and 21B thus encap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Section 16, for making investigations either suo motu, or on receipt of an information or a complaint, in such form, along with such fees as may be specified. (2) Within thirty days of receipt of an information or a complaint, the Director (Discipline) shall decide in such manner as may be specified, whether a complaint or information is actionable or is liable to be closed as non- actionable: Provided that the Director (Discipline) may call for additional information from the complainant or the informant, as the case may be, by giving fifteen days time before deciding whether the case is actionable or non-actionable: Provided further that the recommendations of the Director (Discipline) on nonactionable complaints or information shall be submitted to the Board of Discipline within sixty days of its receipt and the Board of Discipline may, after looking into its merits refer such complaint or information to the Director (Discipline) for conducting further investigation. (3) While making investigation into a case which is found to be actionable, the Director (Discipline) shall give an opportunity to the member or the firm, as the case may be, to submit a written statement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed by the Boards of Discipline under Section 21-A and by the Disciplinary Committees under Section 21-B shall be made available in the public domain by the Disciplinary Directorate in such manner as may be prescribed.] S.21A 1) The Council shall constitute a Board of Discipline consisting of− (a) a person with experience in law and having knowledge of disciplinary matters and the profession, to be its presiding officer; (b) two members one of whom shall be a member of the Council elected by the Council and the other member shall be nominated by the Central Government from amongst the persons of eminence having experience in the field of law, economics, business, finance or accountancy; (c) the Director (Discipline) shall function as the Secretary of the Board. (2) The Board of Discipline shall follow summary disposal procedure in dealing with all cases before it. (3) Where the Board of Discipline is of the opinion that a member is guilty of a professional or other misconduct mentioned in the First Schedule, it shall afford to the member an opportunity of being heard before making any order against him and may thereafter take any one or more of the following ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons to be recorded in writing. (4) The Board of Discipline shall conclude its inquiry within ninety days of the receipt of preliminary examination report from the Director (Discipline). (5) Upon inquiry, if the Board of Discipline finds that such member is guilty of a professional or other misconduct mentioned in the First Schedule, it may pass an order within thirty days of such finding, after providing an opportunity of being heard to the member, taking any one or more of the following actions, namely-- (a) reprimand the member and record it in the Register of members; (b) remove the name of the member or members from the Register of members up to a period of six months; (c) impose such fine as it may think fit which may extend to two lakh rupees. (6) Where on the basis of evidence brought on record or during the course of an inquiry pertaining to a member, the Board of Discipline is of the opinion that any such member who is a partner or owner of a firm, has been repeatedly found guilty of misconduct mentioned in the First Schedule during the last five years, the following action may also be taken against such firm, namely-- (a) prohibit the firm from undertaking any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be prescribed; (b) two members, who are persons of eminence having experience in the field of law, economics, business, finance or accountancy and not being a member of the Institute, to be nominated by the Central Government from out of a panel of persons prepared and provided by the Council in such manner as may be prescribed; (c) two members to be nominated by the Council from out of a panel of members of the Institute to be prepared by the Council in such manner as may be prescribed: Provided that the Presiding Officer nominated under clause (a) and the members nominated under clause (b) may be the same for different Disciplinary Committees constituted under this sub-section. (2) The Disciplinary Committee shall, while considering the cases placed before it, follow such procedure including faceless proceedings and virtual hearings as may be specified. (3) The Disciplinary Committee shall, on receipt of preliminary examination report from Director (Discipline), require the member or the firm, as the case may be, against whom such preliminary examination report has been filed, to submit a written statement within twenty- one days, which may further be extended by another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date. In this regard, reference may be made to Notification dated 10 May 2022 and which reads as under:- "S.O. 2184(E).--In exercise of the powers conferred by sub-section (2) of section 1 of the Chartered Accountants, the Cost and Works Accountants and the Company Secretaries (Amendment) Act, 2022 (12 of 2022), the Central Government hereby appoints the 10th day of May, 2022, as the date on which the following provisions of the said Act shall come into force, namely:- SI. No. Provisions 1. Sections 1 to 15 (both inclusive). 2. Section 16 [except clause (i)]. 3. Sections 17 to 19 (both inclusive). 4. Section 24. 5. Sections 28 to 35 (both inclusive). 6. Section 36 [except clause (i)]. 7. Section 37 [except clause (i) & (ii)]. 8. Sections 38 to 50 (both inclusive). 9. Section 51 [except clause (i)]. 10. Sections 52 to 54 (both inclusive). 11. Sections 59. 12. Sections 63 to 71 (both inclusive). 13. Sections 74 to 83 (both inclusive). 14. Section 84 [except clause (i)]. 15. Sections 85 to 87 (both inclusive). 16. Sections 92. 17. Sections 96 to 104 (both inclusive). [F. No. 12/11/2019-PI] INDER DEEP SINGH DHARIWAL, Jt. Secy. A look at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Council for the purpose of permitting such partnerships; (5) secures, either through the services of a person who is not an employee of such chartered accountant or who is not his partner or by means which are not open to a chartered accountant, any professional business: Provided that nothing herein contained shall be construed as prohibiting any arrangement permitted in terms of Items (2), (3) and (4) of this Part; (6) solicits clients or professional work either directly or indirectly by circular, advertisement, personal communication or interview or by any other means: Provided that nothing herein contained shall be construed as preventing or prohibiting-- (i) any chartered accountant from applying or requesting for or inviting or securing professional work from another chartered accountant in practice; or (ii) a member from responding to tenders or enquiries issued by various users of professional services or organisations from time to time and securing professional work as a consequence; (7) advertises his professional attainments or services, or uses any designation or expressions other than chartered accountant on professional documents, visiting cards, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson any share in the emoluments of the employment undertaken by him; (2) accepts or agrees to accept any part of fees, profits or gains from a lawyer, a chartered accountant or broker engaged by such company, firm or person or agent or customer of such company, firm or person by way of commission or gratification. Part III Professional misconduct in relation to members of the Institute generally A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct, if he-- (1) not being a fellow of the Institute, acts as a fellow of the Institute; (2) does not supply the information called for, or does not comply with the requirements asked for, by the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority; (3) while inviting professional work from another chartered accountant or while responding to tenders or enquiries or while advertising through a write up or anything as provided for in Items (6) and (7) of Part I of this Schedule, gives information knowing it to be false. Part IV Other misconduct in relation to me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances; (10) fails to keep moneys of his client other than fees or remuneration or money meant to be expended in a separate banking account or to use such moneys for purposes for which they are intended within a reasonable time. Part II Professional misconduct in relation to members of the Institute generally A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct, if he-- (1) contravenes any of the provisions of this Act or the regulations made thereunder or any guidelines issued by the Council; (2) being an employee of any company, firm or person, discloses confidential information acquired in the course of his employment except as and when required by any law for the time being in force or except as permitted by the employer; (3) includes in any information, statement, return or form to be submitted to the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority any particulars knowing them to be false; (4) defalcates or embezzles moneys received in his professional capacity. [(5) acts as an audito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... line; (b) one member each nominated by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949), the Institute of Cost and Works Accountants of India constituted under the Cost and Works Accountants Act, 1959 (23 of 1959) and the Institute of Company Secretaries of India constituted under the Company Secretaries Act, 1980 (56 of 1980); (c) one representative of the Central Government to be nominated by it; (d) one representative of the Reserve Bank of India to be nominated by it; (e) one representative of the Comptroller and Auditor-General of India to be nominated by him; (f) a person who holds or has held the office of professor in accountancy, finance or business management in any university or deemed university; (g) the Chairman of the Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963) or his nominee; (h) two members to represent the chambers of commerce and industry to be nominated by the Central Government; and (i) one representative of the Securities and Exchange Board of India to be nominated by it. (3) The Advisory Committee shall give its recommend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case he has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed. Suggestions have been received that this clause may also be modified to cover such relationship whether 'directly or indirectly' to prevent any misuse of these provisions by the auditors. (g) (i) At present as per provisions of section 210A of the Companies Act, 1956, the National Advisory Committee on Accounting Standards (NACAS) has the mandate to recommend/advise the Central Government on the formulation and laying down of accounting policies and accounting standards for adoption by companies or class of companies. (ii) The Companies Bill, 2009 has sought to enhance the role of NACAS. The Bill (Clause 118) empowers NACAS to make recommendations to the Central Government both on accounting standards as well as auditing standards. It has also been proposed in the Bill to change the title of this Committee to National Advisory Committee on Accounting and Auditing Standards (NACAAS). (iii) Suggestions have been received expressing that in view of economic challenges being f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edibility of the audit process and creation of a supervisory mechanism for this purpose. The Committee would recommend that the proposed body namely, NACAAS would be given sufficient mandate not only to set and oversee auditing and accounting standards, but also to monitor the quality of audit undertaken across the corporate sector. It should, therefore, be manned by professionals. Its role may be expanded depending upon experience gained." 20. The need to sufficiently empower the NACAS also appears to have formed the subject matter of consideration of that Committee as would be evident from the following extracts of the 57th Report of the Standing Committee on Finance (2011-12):- "(c) National Advisory Committee on Accounting and Auditing Standards (NACAAS) proposed to be renamed as National Financial Reporting Authority (NFRA) with a mandate to ensure monitoring and compliance of accounting and auditing standards and to oversee quality of service of professionals associated with compliance. The Authority shall consider the International Financial Reporting Standards and other internationally accepted accounting and auditing policies and standards while making recommendations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for this specific dual role (like SEBI). The constitution of NFRA needs to be re-examined in the mentioned contexts where relevant mechanisms and units have been enabled by and/or within the ICAI organisation to deliver the twin objectives of robust policy making and unbiased enforcement in a timely manner. c) Relevance of NFRA in the context of the Companies Act 2013: The objective of NFRA is to regulate audit quality and protect public interest. These, in any case, are also the main objectives of ICAI which strives to be a world class regulator. It is pertinent to note that the new Companies Act 2013 has significantly enhanced provisions, pertaining to Accounts, Audit and Corporate Governance which can deliver the above objectives very well. Specific aspects to regulate audit quality include integration of financial statement reporting with Internal Financial Controls, restrictions on auditors rendering conflicting services, audit rotation, audit limits and penalties on the audit profession have been included in the new Act. Similarly entity level discipline is sought to be enhanced by significant controls over related party transactions, acceptance of deposits, code of ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... coping with new changes such as penalties, rotation, restricted services, Internal Financial Controls over Financial Reporting and other aspects imposed by the Companies Act. The profession would, rightly, need some more time to understand and assess the expectations of a NFRA regime which, in our view shall not be notified. The ICAI has sufficient regulatory, supervisory, organisational and budgetary independence as regards the audit profession although we both a standard setter and a regulator. We would continue to discharge our obligations to ensure the highest standards of audit quality as well as to protect public interest." 23. The proposed introduction of Section 132 again formed subject matter of consideration of the Standing Committee on Finance which in its 37th Report observed as follows:- "3.18. Sec 132 of the Act provides for the creation of National Financial Reporting Authority (NFRI) for matters relating to accounting and auditing standards under the Act. However this section is yet to be notified The key functions of NFRA as envisaged by the Act include: • Recommendations to the Central Government on the formulation and laying down of accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity (NFRA) and creation of one post of Chairperson, three posts of full-time Members and one post of Secretary for NFRA on 28th February, 2018. The Provisions of subsection (3) and (11) of section 132 of the Act have been brought into force w.e.f. 21.03.2018 alongwith NFRA (Manner of appointment and other Terms and Conditions of Service of Chairperson and Members) Rules, 2018." It was thereafter on 01 October 2018 that the NFRA came to be finally constituted. 25. Of significant importance is the judgment rendered by the Supreme Court in S. Sukumar vs. The Secretary, Institute of Chartered Accountants of India (2018) 14 SCC 360 wherein the following directions were passed: - "The Union of India may constitute a three-member Committee of experts to look into the question whether and to what extent the statutory framework to enforce the letter and spirit of Sections 25 and 29 of the CA Act and the statutory Code of Conduct for the CAs requires revisit so as to appropriately discipline and regulate MAFs. The Committee may also consider the need for an appropriate legislation on the pattern of Sarbanes Oxley Act, 2002 and Dodd Frank Wall Street Reform and Consumer Protection Act, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rohibited non-audit services are needed to address the issue of conflict of interest, especially at the network level. These networking arrangements also create an impression that the Indian audit firms which are affiliated with these international networks constitute Multi- national Accounting Firms (MAFs). However, on closer scrutiny it turns out that these Indian audit firms are set up as partnerships or Limited Liability Partnerships (LLPs) under Indian laws and all their partners are members of the ICAI. Therefore, there is neither any violation of section 29 (reciprocity) nor any violation of section 25 (companies not to engage in accountancy) of the Chartered Accountants Act, 1949. Neither can such Indian audit firms simply be equated to multi- national corporations. Consequently, the term 'MAF' is a misnomer. However, such Indian audit firms admittedly follow various internal processes, policies and methodology adopted by their respective networks internationally. This is aimed at maintaining consistent standards in audit quality globally within a network. While such networks bring better business opportunities in a global economy, they should be subject to necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ality professional services at par with international standards. The Advocates Act, 1961 needs to be rationalised to facilitate development of Indian law firms as well as Indian audit firms into MDPs. Adopting these three measures i.e., advertising, branding and MDPs will not only enhance the standards of services offered to corporates, but also facilitate the audit firms to expand in size/operation enabling them to compete internationally." 27. It is the aforesaid legislative interventions which ultimately led to the NFRA coming to be established with the avowed objective of monitoring and enforcing compliance of companies auditing standards, reviewing quality of service, suggesting measures required for improvement in the quality of service rendered by persons associated with the audit profession, the framing of recommendations pertaining to formulation and laying down of accounting and auditing policies, standards connected therewith and additionally being empowered to investigate either suo motu or on a reference made by the Union Government and to take and draw such proceedings as may be warranted to examine matters pertaining to professional or other misconduct. 28. In orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related consultancy firms) during the course of their appointment and two years after ceasing to hold such appointment. (4) Notwithstanding anything contained in any other law for the time being in force, the National Financial Reporting Authority shall-- (a) have the power to investigate, either suo motu or on a reference made to it by the Central Government, for such class of bodies corporate or persons, in such manner as may be prescribed into the matters of professional or other misconduct committed by any member or firm of chartered accountants, registered under the Chartered Accountants Act, 1949 (38 of 1949): Provided that no other institute or body shall initiate or continue any proceedings in such matters of misconduct where the National Financial Reporting Authority has initiated an investigation under this section; (b) have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely:-- (i) discovery and production of books of account and other documents, at such place and at such time as may be specified by the National Financial Reporting Authority; (ii) summon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be prescribed its annual report giving a full account of its activities and forward a copy thereof to the Central Government and the Central Government shall cause the annual report to be laid before each House of Parliament. (10) The National Financial Reporting Authority shall meet at such times and places and shall observe such rules of procedure in regard to the transaction of business at its meetings in such manner as may be prescribed. (11) The Central Government may appoint a secretary and such other employees as it may consider necessary for the efficient performance of functions by the National Financial Reporting Authority under this Act and the terms and conditions of service of the secretary and employees shall be such as may be prescribed. (12) The head office of the National Financial Reporting Authority shall be at New Delhi and the National Financial Reporting Authority may, meet at such other places in India as it deems fit. (13) The National Financial Reporting Authority shall cause to be maintained such books of account and other books in relation to its accounts in such form and in such manner as the Central Government may, in consultation with the Compt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate; or II. performing any valuation as provided under Section 247, for a minimum period of six months or such higher period not exceeding ten years as may be determined by the National Financial Reporting Authority.". 132. Constitution of National Financial Reporting Authority. (1) The Central Government may, by notification, constitute a National Financial Reporting Authority to provide for matters relating to accounting and auditing standards under this Act. (1A) The National Financial Reporting Authority shall perform its functions through such divisions as may be prescribed.] (2) Notwithstanding anything contained in any other law for the time being in force, the National Financial Reporting Authority shall-- (a) make recommendations to the Central Government on the formulation and laying down of accounting and auditing policies and standards for adoption by companies or class of companies or their auditors, as the case may be; (b) monitor and enforce the compliance with accounting standards and auditing standards in such manner as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial Reporting Authority has initiated an investigation under this section; (b) have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit, in respect of the following matters, namely:- (i) discovery and production of books of account and other documents, at such place and at such time as may be specified by the National Financial Reporting Authority; (ii) summoning and enforcing the attendance of persons and examining them on oath; (iii) inspection of any books, registers and other documents of any person referred to in clause (b) at any place; (iv) issuing commissions for examination of witnesses or documents; (c) where professional or other misconduct is proved, have the power to make order for-- (A) imposing penalty of-- (I) not less than one lakh rupees, but which may extend to five times of the fees received, in case of individuals; and not less than 1[five lakh rupees], but which may extend to ten times of the fees received, in case of firms; [(B) debarring the member or the firm from-- I. being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivities during the financial year and forward a copy thereof to the Central Government and the Central Government shall cause the annual report and the audit report given by the Comptroller and Auditor-General of India to be laid before each House of Parliament. 29. The power which stands conferred on the NFRA to investigate in terms of Section 132 (4) is, however, restricted to such class of bodies corporate or persons as may be prescribed. The classes of companies and bodies corporate which are subject to the regulation of the NFRA is prescribed by Rule 3 of the NFRA Rules and which reads as follows:- "3. Classes of companies and bodies corporate governed by the Authority.─ (1) The Authority shall have power to monitor and enforce compliance with accounting standards and auditing standards, oversee the quality of service under sub-section (2) of section 132 or undertake investigation under sub-section (4) of such section of the auditors of the following class of companies and bodies corporate, namely:- (a) companies whose securities are listed on any stock exchange in India or outside India; (b) unlisted public companies having paid-up capital of not less than rupees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uditing standards, overseeing the quality of service which is a function envisaged under Section 132(2) or undertake an investigation in terms of sub-section (4) of that provision and exercise regulatory powers on the following five classes of companies and bodies:- (a) Companies whose securities are listed on any stock exchange in India or abroad. (b) Unlisted public companies having a paid-up capital of not less than INR 1500 Crores or having an annual turnover of not less than INR 1000 Crores or in aggregate having outstanding loans, debentures and deposits of not less than INR 1500 Crores; (c) Insurance and banking companies as also those engaged in the generation or supply of electricity as well as bodies corporate or companies governed by any special Act; (d) Any body, corporate or company or person in respect of which a reference may be made to the NFRA by the Union Government in public interest; and (e) A body corporate incorporated or registered outside India and which may be a subsidiary or associate of any company or body corporate falling within the ambit of classes (a) to (d) referred to above. Such a body corporate is further qualified by the condition that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or (Discipline) as well as the Board of Discipline and the Disciplinary Committee to require the member or the firm as the case may be to participate in proceedings that those authorities would have commenced in the course of investigation and inquiry. This is evident from a reading of Section 21(3), 21A (3) and 21B (3) of the CA Act. Although and by virtue of Act 12 of 2022, Chapter IVA came to be incorporated in the CA Act which required every firm to be registered with the Council and for a register of firms to be maintained, the CA Act did not independently incorporate any provision in terms of which a firm could be prohibited or debarred from undertaking an audit or be subjected to penalties that are envisaged under Section 132 (4) (c). 35. Section 20C of the CA Act, while stipulating situations where a name of a firm could be removed from the register did not envisage that power to be exercised basis a decision that may have been taken by either the Board of Discipline or the Disciplinary Committee. The only contingencies in which a firm could be prohibited or be subjected to a fine were those which find mention in Sections 21A (6) and 21B (6). As is manifest from a reading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18 made a representation before the NFRA. This was followed by written submissions being tendered by DHS to the NFRA in response to the various observations, comments and conclusions appearing in the DAQRR. NFRA, thereafter, circulated the Audit Quality Review Report [AQRR] where significant conclusions relating to fraud and collusion with IFIN management came to be alleged. On 17 January 2020, based on the conclusions contained in the aforenoted AQRR, NFRA issued a Show Cause Notice [SCN] under Section 132 (4) upon Mr. Udayan Sen. Separate SCNs dated 24 and 28 January 2020 came to be issued against Mr. Shrenik Baid and Mr. Rukshad Daruvala, respectively. The aforenoted partners of DHS assailed the validity of the SCNs by filing writ petitions before this Court. Those writ petitions also questioned the constitutional validity of Section 132 (4) of the Companies Act as well as the jurisdiction of NFRA to investigate matters of professional and other misconduct in respect of audits which had come to be concluded prior to Section 132 coming into force. 40. On 01 May 2020, NFRA furnished a Draft Supplementary Audit Quality Review Report [DSAQRR] to Mr. Udayan Sen pertaining to the aud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its reply to the impugned notice but at best are entitled to further reasonable time and not to stay of any further proceedings, since the said relief has already been declined. 6. We are today concerned only with this application and deem it appropriate that the matter otherwise, whether to grant time or not and/or what orders are to be finally passed on this application, be left to the Bench before which the matter comes up on 24th March, 2021. 7. Thus, directing as aforesaid, list on 24th March, 2021, as already scheduled." 42. The same was made absolute in terms of our order passed on 14 November 2022 as seen hereinbelow:- "1. We are informed that the pleadings are complete. 2. Counsel for the parties will file their written submissions, not exceeding five pages each, at least three days before the next date of hearing. 3. List the matter on 25.01.2023. 4. Interim orders dated 28.01.2021 and 12.03.2021 are made absolute during the pendency of the writ petition. CM No.2979/2021 and CM No.9896/2021 shall, accordingly, stand disposed of." 43. It is apposite to note that the original DAQRR and which culminated in the issuance of the AQRR dated 12 December 2019 apart f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onse to the prima facie conclusions of the NFRA that the policies and procedures relating to independence, which are required to be an integral part of the QC Manual, are not present in the section titled "Independence" in Annexure 2, the Audit Firm has stated that the policies and procedures for independence, including threats to independence, are covered by DPM 1420- Independence. The said document (DPM 1420-Independence), which runs to 150 pages, has been carefully gone through. It is seen that this document is based completely on US laws; it has no reference whatsoever to Indian laws. 2.2.8 NFRA is reinforced in its conclusion that the Audit Firm does not have a policy document as required by SQC1. Such documents as have now been produced to the Authority do not conform, for the reasons already made clear, to the requirements of SQC1. These documents also have a very substantial part completely unrelated to any operations in India. The sheer volume of the documents, and their substantial irrelevance to Indian conditions, laws and operations, will make it a certainty that the employees of the Audit Firm will be left completely without any guidance about what exactly is to be u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of Section 144 of the Companies Act, 2013; (b) The Audit Firm has been in serious breach of the Code of Ethics; (c) These violations have continued over several years; (d) The violations have undoubtedly fatally compromised the independence in mind required of the Audit Firm; 2.4 Role of Engagement Partner (EP) 2.4.1 The prima facie conclusion of the NFRA, on the above matter, vide its communication dated 28th June, 2019, was that the Engagement Partner, CA. Udayan Sen, being the Engagement Partner as defined by para 6(b) of SQC1, had signed the audit report notwithstanding the documented facts that he had completely failed in discharging his obligations as Engagement Partner. 2.4.2 This prima facie conclusion of the NFRA was based on the list of work papers reviewed by CA. Udayan Sen, which clearly shows that almost all the important work of audit, i.e., independence evaluation, risk assessment, audit plan, audit procedures, audit evidence, communications with management or those charged with governance (TCWG) was not directed/supervised/reviewed by CA. Sen. 2.4.3 Further, the date-wise schedule of hours charged by CA. Udayan Sen to the engagement as E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the performance of the engagement and the report that is issued on behalf of the firm. SA 220 clearly provides that the Engagement Partner shall take responsibility for the overall quality on each audit engagement to which the partner is assigned (para 8). Further paras in the same SA elaborate on the responsibilities of the Engagement Partner. Having more than one Engagement Partner may or may not enhance audit quality. In the present case, the failure to discharge the role of Engagement Partner by CA. Udayan Sen clearly shows that audit quality has badly suffered. (e) The "integral" designation of Shrenik Baid as the engagement/review partner also discloses a great confusion and lack of clarity about the respective roles of an Engagement Partner and a review partner. (f) For all the above reasons, NFRA considers that CA. Udayan Sen alone can be accepted as Engagement Partner for this engagement in terms of the definition provided in SQC1 and the SAs. 2.4.6 NFRA has further examined the matter relating to aspects of the engagement that were directed/supervised/reviewed by CA. Udayan Sen in his capacity as Engagement Partner. Contrary to the statement made at document 5/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... communication dated 28th June, 2019 was that: (a) No evidence has been produced from the Audit File to show what was discussed with the management/TCWG prior to the date of the audit report and the financial statement signing date. (b) There is no record of any communication addressed to the Audit Committee/Management/TCWG by the ET. xxxx xxxx xxxx 2.5.3 NFRA has examined the above contentions of the Audit Firm and has concluded as follows: (a) Clearly the Audit Firm has admitted that except the engagement letter given to the company before commencement of the statutory audit, and final presentation made to the Committee on 28th May, 2018, there was no other communication that was made to the Audit Committee/Management/TCWG. The presentation made at the time of the half yearly review represents action on a different engagement. (b) The Audit Firm's contention that discussions with the management are embedded within each work paper, as prima facie, all information obtained by them from company are provided by the management, and hence would not require separate documentation is not acceptable, since this is a clear admission that nothing really was communicated to TCWG. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stead of compliance to Auditing Standards prescribed u/s 143(9). (b) WP No. 13501 Minutes of the Engagement Team discussion does not disclose participation of the Engagement Partner CA. Udayan Sen. (c) The Audit Firm in their WP No.13501 have mentioned different statements with reference to the assessment of fraud risk factors. There are significant contradictions in the assessment of ROMM which lead to the conclusion that the assessment has been carried out in a very casual manner as to result in a complete sham. (d) WP No.13501 on ROMM provides a staggering conclusion "No fraud risk factors or engagement risk have been identified". (e) Evidence of mismatch in the date of meeting and the date of communication between the Engagement Team and Engagement Partner has proved that assessment of ROMM is a complete sham. Study of WP No.13501 shows that while the meeting for discussion took place on 13th October 2017, the matters were already communicated to all concerned in September 2017. (f) Based upon the analysis of the working papers, it was observed that certain important issues having been identified from the whistle blower complaints and RBI inspection reports have not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even on 31st March, 2015, in line with RBI directions. (b) The so called put option backing the shares was not even a fig leaf for the reasons detailed therein. (c) The Siva Group, as a counter party was completely un- creditworthy. (d) The Shareholder's and Option Agreements does not form part of the Audit File. There is, hence, no evidence that the Auditor has verified or checked the agreement. (e) The Guidelines on Derivatives Contracts do not apply to the put option. (f) The requirements of Section 143((1)(a) of the Companies Act, 2013 had not been complied with. (g) The Black Scholes Option Pricing Model was inapplicable in the present case. (h) The worksheet supporting the option valuation as per the Black Scholes Model appears to be a calculated fraudulent work paper having no audit substance. The calculations seem, for reasons spelt out in detail, to have been made in order to support the company management's attempt to bypass the RBI directions to provide for 100% of the value of the TTSL shares. (i) There is a clear conflict of interest in engaging DTTI LLP to verify the valuation of the derivative assets. (j) As a consequence of all the above, the valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finition of "companies in the same group" as mentioned by the Regulator in its inspection report. This definition is what is given according to para II of the explanation to Section 45 IA of the RBI Act, 1934. The ET had unquestioningly accepted the management's position on this matter that there was no clarity in the definition of "companies in the same group" in the Act and that there were multiple interpretations possible. xxxx xxxx xxxx 2.8.3 The NFRA has closely gone through all the points made by the Audit Firm and its conclusions are as follows: (a) As to the value of the minutes of discussions with the officers of the RBI relating to the disclosure to be made under the accounts, and the extent to which credibility can be given to such a "written representation", the detailed conclusions of the Authority have already been provided in Section 2.9 below. (b) As far as Annexures 4.9A and 4.9B are concerned, these documents cannot be accepted as evidence of due performance of audit procedures by the Audit Firm since they do not form part of the Audit File. There is nothing in the Audit File, or in the submissions made by the Audit Firm, to corroborate the claim made that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its conclusions are as follows: (a) Admittedly, the issue relating to calculation of NOF and CRAR was a very serious issue about which there had been protracted correspondence between the management and the RBI. Admittedly also, the RBI had not changed its stand on the matter, or in any way accepted the company's position notwithstanding the company's efforts over a long period of time. This background and context should have informed the Audit Firm's evaluation of any evidence, including management representations, that had been provided to it. (b) The Audit Firm has quoted para 15 of SA 580 and has said that ET did not come across any information that should have caused it to have any concern about management competence, integrity etc. However, at the same time, they have failed to take note of other requirements of SA 580 as follows: (i) Although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal. Furthermore, the fact that the management has provided reliable written representations does not affect the nature or extent of other audit evidence that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot SA-500 which is not in compliance with Section 143(9) read with section 2(7) of the Companies Act, 2013. (c) Further the said WP ought to evaluate the competence of BDO India LLP, whereas the document includes evaluation of Knight Frank at various places and not of BDO. (d) The Engagement team has not evaluated the work of the experts or obtained understanding of the work of such expert. The auditor is grossly negligent in performing his obligation in this regard since the engagement team has not performed the actual audit procedures in accordance with the prevailing law and standards. (e) Having examined WP 13305, the procedures performed on IPE are unclear. With reference to "Manual Approvals" and other IPEs in the nature of "validating" the Audit Firm has failed to fulfill the requirement of Para 9 of SA 500. 2.10.3 The NFRA has examined the above contentions of the Audit Firm and has concluded as follows: (a) The company has been incorporated in India. Reference to global standards for any reason does not meet the essence of the engagement and is not in compliance with the section 143(9) of the Act. (b) Repetition of a typographical error in the same document red ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y had not forecasted any future cash flows nor was any future action plan drafted. However, the Audit Firm has asserted that, attempting to draw authority from para A9 of SA 570, that it is not the auditor's responsibility to rectify the lack of analysis by management. They have also quoted the same paragraph to say that the auditor's evaluation of the appropriateness of the management's assessment may be made without performing detailed evaluation procedures if the auditor's other procedures are sufficient to enable the auditor to conclude about the management's use of the going concern assumption. (b) The above stated argument of the Audit Firm is not only violative of the spirit but also the very letter of SA 570. As clearly provided by para 10(b) of SA 570, the auditor was duty bound to discuss with the management the basis for the intended use of the going concern assumption in a situation where the management had itself not performed such an assessment, as was the admitted situation in this case. (c) Para 10(b) of SA 570 is under the Requirement portion of the SA. As is the convention relating to the Requirements portion, all such Requirements are made Unconditional and M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FRA's earlier contention should not require any clarification at all) that it was never contended by NFRA that a plan did not exist on May 28, 2018. This issue had not come up for NFRA's consideration at all. What was instead asserted by NFRA is that no such plan was found in the Audit File and therefore could not have been discussed with the management on the grounds that any discussion about such a plan between the Audit Firm and the management would also have had to be documented appropriately in the Audit File and the Audit Firm's conclusion thereon also duly recorded. Since no such evidence was available in the Audit File, NFRA had concluded that the Audit Firm's claim that they had discussed the plans with the management and understood the same, was patently false. Some details of the alleged plan have been placed at pages 51 and 52 in response to para 11 and repeated again at pages 68 to 69 of the same response. Both these references and details have to be considered only as an afterthought and a subsequent creation of audit evidence since there is no substance of these matters in the Audit File. The NFRA, therefore, is reinforced in its conclusion that the statement about d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... needs to be documented. The word "document" cannot be interpreted to mean mere 'yes' or 'no' responses to a set of standard questions prepared as a general all purposes template. The documentation needs to have specific reference to the facts of the case in question and must provide the evidence as required by the SAs all taken together. (e) Therefore, the documentation of the EQCR processes does not provide any evidence of the proper and complete performance of the EQCR work by the EQCR Team. 2.12.4 NFRA, therefore, concludes that the Engagement Quality Control Review was not carried out in the manner stipulated by SQC1 and other applicable SAs." 44. The DSAQRR which thereafter came to be issued on 01 May 2020 proceeded to lay various allegations with respect to the treatment of investments and a purported violation of the obligations flowing from SA500 and SA200. These allegations pertained to the valuation ascribed to investments and related party transactions as well the acceptance of those declarations in the course of an audit. 45. The writ petitions which initially came to be preferred before this Court were those instituted by Mr. Udayan Sen and Mr. Shrenik Baid, who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing firms to highlight this issue. SRBC then alludes to the audit quality review which was initiated by the NFRA in February 2019. 49. Pursuant to the initiation of that review, the petitioner is stated to have submitted the audit file and records to NFRA on 22 March 2019. This was followed by communications of 17 May 2019 and 03 July 2019 by NFRA calling upon SRBC to respond to the various queries raised therein. After a detailed exchange of correspondence in the course of that audit quality review the NFRA issued its Prima Facie Conclusions on 24 March 2020. This was followed by Supplementary Prima Facie Conclusions which were issued on 17 April 2020. The summary of the Prima Facie Conclusions are reproduced hereinbelow:- "5. Summary of PFC The following is a summary of the most important of the PFC. Details of the evidence in support of these PFCs, and the reasoning leading thereto, are provided in the subsequent Sections of this PFC Report. (a) The initial appointment of SRBC & Co LLP, and the continuation of SRBC & Co LLP, as statutory auditor of ITNL was prima facie illegal and void. Nevertheless, NFRA has proceeded to examine compliance by the Audit Firm with the SAs, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them. (h) The Audit Firm has not determined the persons comprising TCWG. Further, NFRA has not found any communication to TCWG relating to Auditor's independence, and the relationships and other matters between the firm, network firms. (i) The Audit Firm has failed to maintain documents as per SA 230. The integrity of the Audit File is questionable due to tampering and inconsistency pointed out at several places in the PFC Report." 50. The Supplementary Prima Facie Conclusions then proceeded to observe as under:- "INTEGRITY OF AUDIT FILE AND AUDIT FIRM'S IT CONTROLS REVIEW 4. To assess the extent of compliance with SQC 1 and SA 230 for the requirements discussed above, NFRA wrote to the Audit Firm on 17-Oct-2019 seeking clarifications and proof of authenticity of date of preparation of WPs. The Audit Firm was asked to provide NFRA the following: a. The Audit firm's administrative procedures/instructions relating to building up/organizing/closing the Audit File and the safeguards incorporated therein to ensure the integrity of the said Audit File, and to prevent any tampering thereof; and b. Details of the IT systems and processes that are designed by the Audit Firm to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e auditor's report date, but before the documentation completion date, we add a memo or other documentation explaining the difference in sign-off dates in accordance with DOC+ARC 4.3. • We archive our documentation on a timely basis after the date of the auditor's report and when our procedures and documentation are complete. The documentation completion date is no later than 21 days after the date of our auditor's report / other deliverables. The electronic i.e., CANVAS archival to be commenced after the paper documentation is submitted to the Admin teams. • When finalizing our documentation, we review the electronic and paper documentation to determine that we have a complete and final set of documentation to support our opinion. Administrative changes that may be made to documentation during the assembly or finalization process include: • Documenting audit evidence that we obtained, discussed and agreed with • relevant members of the audit team prior to the date of our auditor's report • Adding an original confirmation response previously received via fax or email (although we also retain the faxed/email copy as it evidences the original work p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... audit file at any time before or after review signoff by the EP. There is neither any log of when the changes are made nor to what extent changes are made. Therefore, NFRA concludes that the Audit documentation cannot identify, beyond doubt, about who has performed the audit work and the date such work was completed, and who has reviewed the audit work performed and the date and extent of such review. c. There is no monitoring or control over the policy of modifications that can be made to audit documentation. There is no track of what has been modified in the audit file documentation post the audit report signoff. Practically, an entirely new documentation of audit can be created with no logging or monitoring or control over the same. Therefore, NFRA concludes that the audit firm has no controls that can ensure that the audit documentation has been completed in a timely manner without performing any further audit procedures or changes, other than administrative changes, after the audit report date. d. No review takes place for the files modified after a review by the designated reviewer of the audit team. Therefore, there is sufficient reason to believe that the audit firm's S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y Canvas Audit Files, etc. The Security testing reports, specific to EY Canvas and archival applications and servers, have not been shared. Further, the supporting process documentation has also not been shared so that it is not possible to understand the scope and frequency of security assessments. [Indicating absence of attribute mentioned in Para 3(a), version history and security, and 3(b) system logs and its monitoring] c. Based on the input received from the Audit Firm, EY development team follows ITIL processes for development and maintains a change management process for all changes to the EY infrastructure globally. The change management process uses a controlled release process with appropriate testing and validation processes. However, the SDLC Process document was not shared for review to sufficiently conclude if security tests such as secure code review and dynamic testing were part of the SDLC process. Further, infrastructure change management process document was also not shared for review. Not building security controls into the design of the application as part of Software Development Life Cycle, while designing upgrades, could lead to an application vulnerable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tect, alert or prevent such events, leading to serious accountability issues. In case of an incident, root cause analysis (RCA) may lead to inappropriate results, since there would be no IP/Unique system ID logged-in along with user identifier [Indicating absence of attribute mentioned in Para 3(c) authentication and access control protocols] g. Roles and responsibility matrix for all roles of ET members, including access and the level of access, is not defined completely, such as right to operations add/delete/modify/sign-off/ archive/ retrieve from archive etc. audit documents, for individual roles. [Indicating absence of attribute mentioned in Para 3(c) authentication and access control protocols]. h. Above all, there is no mechanism to scan and sync the hard copy files to prevent or track any changes made to hard copy files post the archival date. This vulnerability alone is sufficient to totally compromise the entire objective of audit file integrity. 10. It is, therefore, evident from the above that EY Canvas application, which is the only audit documentation system used by the Audit Firm, completely fails to ensure even the minimum controls essential to meet the requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Audit Firm did not discuss the susceptibility of the financial statements to material misstatement due to fraud, did not identify and assess revenue recognition and management override of controls as serious potential risks, which ultimately resulted in several violations of applicable Ind AS and SAs, as highlighted in the AQRR, thus making the Financial Statements subject to serious material misstatements and therefore unreliable. 1.8.4. ITNL's financial exposure to its subsidiaries, associates and joint ventures amounting to Rs. 3,346 crore was not properly valued as per the applicable Accounting Standards because the Audit Firm had failed to obtain sufficient appropriate evidence to justify the valuation of ITNL's investment and loans to these entities. 1.8.5. The Company's losses during 2017-18 were understated by at least Rs. 2021 crore on account of unjustified reversal of Expected Credit Loss (ECL) on loans given to the SPV and on trade receivables, and due to incorrect impairment valuation. This is excluding the impact due to incorrect treatment of the letter of comforts amounting to Rs 2654 crore, which should have been correctly treated as financial guarantees a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficance that, in NFRA's view, the Audit Firm did not have any justification for issuing the Audit Report asserting that the audit was conducted in accordance with the SAs. NFRA draws attention to Response 12 in the ICAI's Implementation Guide on Reporting Standards (November 2010 edition) that says that "a key assertion that is made in this paragraph is that the audit was conducted in accordance with the SAs"; and that "If during a subsequent review of the audit process, it is found that some of the audit procedures detailed in the SAs were not in fact complied with, it may tantamount to the auditor making a deliberately false declaration in his report and the consequences for the auditor could be very serious indeed" (emphasis added). Failure to comply with any of the requirements of applicable SAs indicates that the Audit Firm has failed to achieve the central purpose of audit, and that there was not an adequate justification for issuing the Audit Report." 52. Since the facts which formed the subject matter of the writ petition preferred by Rukshad Daruvala have been taken note of while dealing with the writ petition preferred by DHS, we do not propose to reiterate the chronolog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment, as the case may be. (4) A complaint filed by or on behalf of a company or a firm, shall be accompanied by a resolution, duly passed by the Board of Directors of the company or the partners of the firm, as the case may be, specifically authorizing an officer or a person to make the complaint on behalf of the company or the firm. Explanation. − In the case of a bank or financial institution, the general resolution or power of attorney authorizing an officer holding a particular position to file complaints on behalf of the bank or financial institution, shall be deemed to be the specific resolution passed by the bank or financial institution concerned, for the purposes of these rules. (5) In case of complaints filed by any Government, statutory authority, bank or financial institution, a change in the name of complainant at any later stage, shall be duly supported by a specific authorization made by an officer holding a post equivalent to that of the original complainant. (6) Every complaint received by the Directorate shall be acknowledged by ordinary post together with an acknowledgement number." 54. As is evident from a reading of Rule 3(1) a complaint under Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of commission or omission or the 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 a notice to all the members who are partners or employees of that firm as on the date of registration of the complaint. (2) A member whose name is disclosed by the firm shall be responsible for answering the complaint, provided such a member was associated, either as partner or employee, with the firm, against which the complaint has been filed, at the time of occurrence of the alleged misconduct: Provided that if no member, whether erstwhile or present, of the firm, own responsibility for the allegation or allegations made against the firm, then the firm as a whole shall be responsible for answering the allegation or allegations and, as such, all the members who were partners or employees of that firm, as on the date of occurrence of the alleged misconduct, shall be responsible for answering the allegation or allegations as contained in the complaint. (3) A member who has been informed of the complaint filed against him (hereinafter referred to as the respondent) shall, within 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r under clause (a) above, then the Board of Discipline or the Committee may proceed further under Chapter IV or V respectively. (c) If the Board of Discipline or the Committee, as the case may be, disagrees with the prima facie opinion of the Director under clause (a) above, it shall either close the matter or advise the Director to further investigate the matter. (3) Where the Director is of the prima facie opinion that the member or the firm is not guilty of any misconduct either under the First Schedule or the Second Schedule, he shall place the matter before the Board of Discipline, and the Board of Discipline, − (a) if it agrees with such opinion of the Director, shall pass order, for closure. (b) if it disagrees with such opinion of the Director, then it may either proceed under chapter IV of these rules, if the matter pertains to the First Schedule, or refer the matter to the Committee to proceed under Chapter V of these rules, if the matter pertains to the Second Schedule or both the Schedules, or may advise the Director to further investigate the matter. (4) The Director shall, after making further investigation as advised by the Board of Discipline under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udes, unless and otherwise directed, appearance by an advocate or through any authorized representative, who may be a Chartered Accountant, Cost Accountant or Company Secretary. [Explanation 2 - For the purpose of this rule, the appearance also includes the appearance through video-conference, modalities for which may be as formulated by the Institute from time to time.] (7) On the date of hearing, if the respondent, in spite of the service of notice, under sub-rule (6), does not appear either in person 1[or through video conference in terms of the modalities formulated under these Rules] or through his authorized representative, the Board of Discipline may proceed ex-parte and pass such orders as it may think fit or direct fresh notice to be served. (8) The Board of Discipline may, on such terms as it thinks fit, and at any stage of the proceedings, adjourn the hearing: Provided that such adjournment shall not be given more than once at any stage of the proceedings. (9) The Board of Discipline shall consider the written representations, including the written statements, rejoinder and supporting documents, and the oral submissions, if any made by the Director, the complai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6) The Presiding Officer of the Committee shall fix a date, hour and place of hearing, which shall not ordinarily be later than 45 days from the date of receipt of prima facie opinion and the committee shall cause a notice to be sent of such date, hour and place to the Director, respondent and complainant and require them to appear before it in person to make oral submissions, if any. [Explanation 1. - For the purpose of this rule, the appearance includes, unless and otherwise directed, appearance by an advocate or through any authorized representative, who may be a Chartered Accountant, Cost Accountant or Company Secretary. [Explanation 2. - For the purpose of this rule, the appearance also includes the appearances through video-conference, modalities for which may be as formulated by the Institute from time to time.] (7) During the first hearing, the Committee shall read out the charge or charges to the respondent along with the summary of prima facie opinion arrived at by the Director, and ask the respondent whether he pleads guilty to the charge or charges made against him: Provided that if the respondent does not appear for the first hearing even after one adjournment, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at any vital argument has been left out by the Director, may present the argument, after convincing the Committee of the same. (17) The Committee shall consider the evidences and arguments produced before it and arrive at a finding on whether the respondent is guilty or not of any professional or other misconduct. (18) The Committee may, at the request of any of the parties before it or due to other reasons, and on such terms as it thinks fit, and at any stage of the proceedings, adjourn the hearing: Provided that such adjournment shall not be given more than once at any stage of the proceedings. Explanation. - For the purpose of this rule, inability of the complainant, advocate, authorized representative or witness, to appear shall not be treated as a valid reason for adjournment of a hearing." 60. Proceeding on lines akin to Rule 15 the Disciplinary Committee, upon arriving at a finding of guilt, was enjoined to follow the procedure as prescribed in Rule 19 and which reads as under: - "19. Orders of the Committee (1) On arriving at a finding under sub-rule (8) or sub-rule (17) of rule 18 that the respondent is guilty of professional or other misconduct, the Committee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orfeited if the Council, after considering the complaint, comes to the conclusion that no prima facie case is made out and moreover that the complaint is either a frivolous one or is made with malafide intention. (5) The Secretary shall return a complaint, which is not in the appropriate Form or which does not contain the aforesaid particulars, to the Complainant for representation after removing the objections thereto and within such time as the Secretary may specify. (6) Ordinarily within sixty days of the receipt of a complaint under Section 21, the Secretary shall:-- (a) if the complaint is against a member, send a copy thereof to such member at his professional address as entered in the Register; (b) if the complaint is against a firm, send a copy thereof to the firm at the address of its head office, as entered in the register of offices and firms, with a notice calling upon the firm to disclose the name of the member who is answerable to the charge of misconduct and requiring it to send a copy of the complaint to him. Explanation - A notice to the firm shall be deemed to be a notice to all the members who are partners or employees of that firm. (7) A member again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved with an endorsement to the effect that the addressee had refused to accept the notice, the notice shall be deemed to have been served. (iii) If the notice is returned with an endorsement to the effect that the addressee cannot be found at the address given, the Secretary shall ask the Complainant to supply to him the correct address of the member or the firm, as the case may be. (iv) A fresh notice shall be issued to the member or the firm at the correct address. (13) The provision relating to a notice shall apply 'mutatis mutandis' to a letter." 62. Although supplementary and additional provisions pertaining to inquiries and disciplinary action stood embodied in Regulations 15, 16 & 17, we do not deem it appropriate to extract those provisions here since those too were confined to proceedings initiated or pending prior to 17 November 2006. NFRA RULES 63. While we had an occasion to notice Section 132 as embodied in the Companies Act in the earlier parts of this decision, for purposes of completeness we now turn our gaze upon the NFRA Rules and to the salient provisions contained therein. Rule 2 which constitutes the definition clause defines the word "division" in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act by a company or a body corporate governed under rule 3, the Authority may review the financial statements of such company or body corporate, as the case may be, and if so required, direct such company or body corporate or its auditor by a written notice, to provide further information or explanation or any relevant documents relating to such company or body corporate, within such reasonable time as may be specified in the notice. (2) The Authority may require the personal presence of the officers of the company or body corporate and its auditor for seeking additional information or explanation in connection with the review of the financial statements of such company or body corporate. (3) The Authority shall publish its findings relating to non- compliances on its website and in such other manner as it considers fit, unless it has reasons not to do so in the public interest and it records the reasons in writing. (4) Where the Authority finds or has reason to believe that any accounting standard has or may have been violated, it may decide on the further course of investigation or enforcement action through its concerned Division." 66. As an extension of the power th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to oversee the quality of service rendered by professionals associated with auditing, Rule 9 provides as follows:- "9. Overseeing the quality of service and suggesting measures for improvement. (1) On the basis of its review, the Authority may direct an auditor to take measures for improvement of audit quality including changes in their audit processes, quality control, and audit reports and specify a detailed plan with time-limits. (2) It shall be the duty of the auditor to make the required improvements and send a report to the Authority explaining how it has complied with the directions made by the Authority. (3) The Authority shall monitor the improvements made by the auditor and take such action as it deems fit depending on the progress made by the auditor. (4) The Authority may refer cases with regard to overseeing the quality of service of auditors of companies or bodies corporate referred to in rule 3 to the Quality Review Board constituted under the Chartered Accountants Act, 1949 (38 of 1949) or call for any report or information in respect of such auditors or companies or bodies corporate from such Board as it may deem appropriate. (5) The Authority may take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e issued to the auditor. (2) The show-cause notice shall be in writing, and shall, inter alia, state- (a) the provisions of the Act or rules under which it has been issued; (b) the details of the alleged facts; (c) the details of the evidence in support of the alleged facts; (d) the provisions of the Act, rules or the accounting standards or auditing standards thereunder allegedly violated, or the manner in which the public interest is allegedly affected; (e) the actions that the Authority proposes to take or the directions it proposes to issue if the allegations are established; (f) the time limit and the manner in which the auditor is required to respond to the show-cause notice; (g) the consequences of failure to respond to the show-cause notice; and (h) the procedure to be followed for disposal of the show-cause notice. (3) The show-cause notice shall enclose copies of documents relied upon and extracts of relevant portions from the report of investigation or other records. (4) The show-cause notice shall be served on the auditor in the following manner, namely - (a) by sending it to the auditor at the address provided by him or provided by the Institute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ants of India; (ii) in the case of a company referred to in sub-section (5) of section 139 to the Comptroller and Auditor General of India; (iii) in the case of a listed company to the Securities and Exchange Board of India; (iv) in the case of a bank or a non- banking finance company to the Reserve Bank of India; (iv) in the case of a bank or a non-banking finance company to the Reserve Bank of India; (v) in the case of an insurance company to the Insurance Regulatory and Development Authority of India; (vi) in case the auditor is resident outside India to concerned regulator of such country; and the same shall be published on the website of the Authority." ADDITIONAL DISCLOSURES BY NFRA 69. Pausing here, we also take note of a salient aspect which was noticed by us in our order of 12 September 2023. It becomes pertinent to note that during the course of hearing of this batch of writ petitions it had been alleged by the petitioners that the complement of persons which had formed the opinion that disciplinary proceedings were liable to be initiated against the petitioners was the same or identical to that which had authored the AQRR. The petitioners had in that context ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 nor the 2018 Rules contemplates a strict "separation of powers" or a bifurcation of functions relating to investigation, inquiry and conduct of disciplinary proceedings. 5. On facts, it was stated that the body which drew up the AQRR is the one which initiated proceedings under Section 132 (4) of the Act. 6. Mr. Hossain, in light of the submissions aforenoted, is accorded liberty to file an additional affidavit placing on the record the details with respect to proceedings drawn and initiated by the Authority and drawn against the petitioners here. That affidavit shall place on the record complete details of the personnel who penned the AQRR in each particular case as well as the complement of persons who initiated action under Section 132 (4) and ultimately passed the orders impugned. 7. Mr. Kathpalia, learned senior counsel is continuing with his submissions. Let the matter be called again on 09.10.2023 as part heard in the category of "End of Board" matters." 72. Pursuant to the aforesaid order an additional affidavit came to be filed by the NFRA and where the following disclosures are made:- "1. One of the issues which had arisen in the course of hearing submissions a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2023 as part heard in the category of "End of Board" matters. SI.No. Question Answer 1 By whom AQR was prepared The AQR report was prepared by the Executive Body (EB) NFRA. A team of Staff in NFRA, consisting of the Secretary, one Executive Director, and three Chartered Accountants (Professionals) assisted the EB in scrutiny of the Audit file, however EB has examined all the relevant documents contained in the audit file and after consideration of all relevant legal conditions, prepared and signed the AQRR, which was finally, with the approval of EB, issued by the Secretary, NFRA. The chronology of preparing the AQRR is as follows: a) NFRA letter dated 25.02.2019 was sent to the Engagement Partner (EP) requesting for the Audit file of IL&FS Financial Services Ltd for the Financial Year 2017-18. b) EP submitted the Audit File on 11.03.2019. c) NFRA's letter dated 25.04.2019 was sent to the Engagement Partner seeking a list of related parties and Audit/Non-Audit revenue m stipulated format on Affidavit. d) NFRA's letter dated 02.05.2019, containing a Questionnaire on matters observed in the Audit File, was sent via email on 02.05.2019 to the Engagement Partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t) On 15.11.2019 DHS provided its Reply to NFRA letter dated 17.10.2019 and 21.10.2019 w.r.t Audit Documentation/ IT issues and additional questionnaire. u) AQR Note was initiated by Secretary-NFRA on 11.12.2019 and put up for approval of EB. v) It was then approved by the EB for the issue vide note dated 11.12.2019. w) AQR Report, approved by the EB, was issued by the Secretary NFRA on 12.12.2019. x) On 23.01.2020, NFRA issued a letter to DHS for scheduling a meeting on 27.01.2020 regarding the IT application used for maintaining Audit Files. y) Presentation was given by the DHS team on 28.01.2020 regarding the IT application used for maintaining Audit Files at NFRA office and email sent by DHS regarding points to be clarified by DHS on IT related issues. z) NFRA Team with IT consultants visited office of Deloitte Haskins & Sells LLP (Auditor) at Gurugram on 29.01.2020 for further detailed understanding of their IT platform used for audit documentation. aa) Email of NFRA dated 07.02.2020 was sent to CA Udayan Sen seeking reply to additional requirements/ queries. The same were related to IT aspects of audit documentation. Reply was sought by 11.2.2020. bb) DHS emai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... note for EB's approval for issue of SCN to DHS. b) On 03.01.2021, EB approved to issue the SCN. c) On 06.01.2021, SCN issued to DHS. d) After that the DHS approached the court and matter is pending before the Hon'ble Delhi High Court. 3 Which authority/official has authorized the initiation of action? The AQR of the ILPS groups was started suo-motu as decided by the EB. Later, a reference from the central Government was also received by NFRA on the same matter. 4 Who had heard and conducted the proceedings? SCN was issued to DHS on 06.01.2021. After that the DHS approached the Court and matter is pending before the Hon'ble Delhi High Court. Hence, further proceedings are at hold. 2. WP(C) No. 1524 of2020 (Udayan Sen), 3. WP(C) No. 1522 of 2020 (Rukshad Daruvala), 4. WP(C) No. 1525 of 2020 (Shrenik Baid) SI.No. Question Answer 1 By whom AQR was prepared The AQR report was prepared by the Executive Body (EB) NFRA. A team of Staff in NFRA, consisting of the Secretary, one Executive Director, and three Chartered Accountants (Professionals) assisted EB in scrutiny of Audit file however EB examined all the relevant documents contained in the audit f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment Partner via email dated 25.9.19. n) NFRA issued letter dated 17.10.2019 to DHS seeking clarification regarding Audit documentation and IT issues. o) NFRA's letter dated 21.10.2019 containing additional Questionnaire, was sent via email on 21.10.2019 to CA Udayan Sen seeking replies to the same. p) On 23.10.2019 DHS requested for extension of time up to 4.11.2020 for submission of response of NFRA's Letter dated 21.10.2019. q) NFRA emailed on 24.10.2019 granting extension of time up to 4.11.2020 as requested by DHS. r) In person Presentation to NFRA was made by the Engagement Team members from DHS on 30.10.19. s) Written replies were furnished by the Engagement Partner vide letter dated 4.11.19 to NFRA's observations in the DAQRR. t) AQR Note was initiated by secretary-NFRA on 11.12.2019 and put up for approval of EB. u) It was then approved by the EB for the issue vide note dated 11.12.2019. v) AQR Report, approved by the EB, was issued by the Secretary NFRA on 12.12.2019. 2. Who has conducted the investigation? As decided by the EB, the SCN followed the detailed AQR process as detailed above. The chronology is as follows: - After the issuing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the EB (the Chairperson and Full-time Member). Thereafter, the EB signed the orders and approved for issue of same under the signature of Secretary NFRA and the Secretary issued the orders. 5. W.P.(C) 11737/2021- SRBC Vs. UNION OF INDIA & ANR, 6. W.P.(C) 11738/2021- Vinayak Pujare Vs. UNION OF INDIA & ANR. 7. W.P.(C) 11739/2021- Ravi Bansal Vs. UNION OF INDIA & ANR SI.No. Question Answer 1 By whom AQR was protected The AQR report was prepared by the Executive Body (EB) was prepared NFRA. A team of Staff in NFRA, consisting of the Secretary, one Executive Director, one CGM and three Chartered Accountants (Professionals) assisted EB in scrutiny of Audit file, however EB examined all the relevant documents contained in the audit file and after consideration of all relevant legal conditions, prepared and signed the AQRR, which was finally, with the approval of EB, issued by Secretary NFRA. The chronology of preparing the AQRR is as follows: a) On 22.02.2019, NFRA sent an email to the Audit firm requesting for the Audit file of ILF &S Transportation Networks Limited (ITNL) for the Financial Year 2017- 18. b) On 22.03.2019, the Audit firm submitted Audit Files of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.12.2020 with five annexures. w) On 08.03.2021, NFRA issued the Draft Audit Quality Review Report (DAQRR). x) On 10.07.2021, Written replies were furnished by SRBC, w.r.t NFRA's observations in the DAQRR. y) On 08.09.2021, Engagement team members of SRBC made a presentation to NFRA. z) On 23.09.2021, the EB approved the issue of AQR. aa) On 23.09.2021, as authorised by EB, the Secretary NFRA issued AQR Report for ITNL's audit done by SRBC for the Financial Year 2017-18. 2 Who had conducted the investigation? As decided by the EB, the SCN followed the detailed AQR process as detailed above: After the issuing the AQRR, EB with the assistance of a team under a CGM, examined the observations in the AQRR and prepared draft SCN to the Audit Firm and Partners. The SCNs were approved for issue by the EB. The chronology is as follows: a) On 27.09.2021, EB approved the issue of SCN to CA Vinayak Pujare,EQCR. b) On 28.09.2021, As approved by the EB, the Secretary NFRA issued the SCN to CA Vinayak Pujare. c) On 28.09.2021, EB approved the issue of SCN to CA Ravi Bansal, EP and SRBC & Co. LLP, Audit Firm. d) On 28.09.2021, As approved by the EB, the SecretaryNFRA is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , NFRA received the RBI Inspection Reports from IL&FS Limited. k) On 5.10.2019, NFRA received a response for email dated 17.10.2019 regarding the date of the audit file and procedures/IT safeguards pertaining to the integrity of dates. l) On 19.11.2019, NFRA issued a Questionnaire to SRBC. m) On 30.12.2019, SRBC provided its response to Questionnaire issued on 19.11.2019 by NFRA. n) On 26.08.2020, NFRA issued a Supplementary questionnaire. o) On 6.9.2020, NFRA received a response to the supplementary questionnaire issued by it on 26.8.2020. p) On 16.10.2020, NFRA requested IL&FS Limited to confirm whether SRBC was appointed as concurrent auditor of the company? q) On 19.10.2020, NFRA received a response from IL&FS Limited to its communication dated 16.10.2020. r) On 2.12.2020, NFRA requested clarification from SRBC regarding General Contingency Provision (GCP). s) On 2.12.2020, NFRA requested IL&FS Limited for certain information w.r.t.- Board Meeting for FY17, FY18, FY19 and Audit Committee Meeting for FY19. t) On 10.12.2020, NFRA received information from IL&FS Limited regarding BM and ACM as requested on 2.12.2020. u) On 12.12.2020, NFRA received a response ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to these so called Branch Audit reports in its Independent Audit report of DHFL. The EB examined the work of these 33 EPs, including Snehal Muzoomdar, under section 132 (4) of the Companies Act, 2013 and observed non compliances in the acceptance of Audit engagement by the Branch Auditors and non- compliance of Standards on Auditing (SAs) in conducting the audit by them. Thereafter, the SCNs were approved for issue by the EB. a) On 10.08.2022, EB approved for initiation of action under Section 132 (4) of the Companies Act, 2013. b) On 10.08.2022, as approved by the EB, the Secretary-NFRA sent letters and emails to Snehal Muzoomdar, EP for submission of audit file. c) On 25.08.2022, EP submitted the audit file and EB examined the audit file. d) On 16.11.2022, EB approved for the issue of the SCN to CA Snehal Muzoomdar,EP. e) On 21.11.2022, as approved by the EB, the secretary-NFRA issued the SCN. 3 Which authority/official has authorized the initiation of action? The action against the EP was initiated suo-motu by the EB. a) On 21.11.2022, as approved by the EB, the secretary-NFRA issued the SCN giving 30 days time for reply. b) On 19.12.2022, EP requested f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Secretary NFRA. The chronology of preparing the AQRR is as follows: a) On 12.02.2019, NFRA sent an email to Auditors of ILF &S Limited requesting for the Audit file of ILF &S Limited for the Financial Year 2017-18. ) On 25.03.2019, Auditors of IL&FS Limited submitted the Audit File. b) On 25.03.2019, Auditors of IL&FS Limited submitted the Audit File. c) On 1.10.2019 and 6.10.2019, NFRA requested IL&FS Limited to submit documents. e) On 7.10.2019, IL&FS Limited submitted the requested documents to NFRA. f) On 11.10.2019, NFRA requested SRBC to submit an Affidavit regarding list of related parties, audit & non-audit fees, peer review report, hours logged for FY 17-18latest by 25th Oct 2019. g) On 17.10.2019, NFRA requested SRBC to verity the dates of the audit file and procedures/IT safeguards pertaining to the integrity of dates. h) On 26.10.2019, NFRA received the response from SRBC for its email dated 11.10.2019. i) On 31.10.2019, NFRA requested IL&FS Limited to submit certain Investigation reports, RBI Inspection reports, Forensic audit reports. j) On 2.11.2019, NFRA received the RBI Inspection Reports from IL&FS Limited. k) On 5.10.20 19, NFRA received a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SCN. He also requested NFRA to make available him the audit file to submit his reply to the SCN. d) On 15.09.2022, NFRA allowed CA Natrajan Ramkrishna to visit the office of NFRA to collect the audit file. e) On 24.09.2022, CA Natrajan Ramkrishna stated that he is not in position to visit the office of NFRA due to bad health and requested NFRA to allow his authorized representative to visit on his behalf to collect all the relevant files and documents in relation to the SCN. f) On 12.10.2022, NFRA allowed CA Natrajan Ramkrishna to send his authorised representative to office of NFRA any day between 17th October, 2022 to 201h October, 2022, with prior intimation to NFRA, to collect the copy of the documents relating to SCN. g) On 19.10.2022, one person claiming to be the authorised representative of CA Natrajan Ramkrishna came to NFRA asking for the copy of the documents. However, that person came without any prior intimation and valid authorisation and affidavit from CA Natrajan Ramkrishna, requirement of which was specifically mentioned by NFRA in email dated 12.10.2022. In the absence of proper authorisation and identity, relevant documents could not be provided. h) On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted the file to EB through Chairperson with a proposal to call audit files and other records from the Auditor and Magnum for investigation u/s 132 (4) of the Companies Act 2013 (Act). d) On 20.06.2022, EB through Chairperson approved the proposal and Auditor was advised to submit audit files within 30 days. e) On 14.07.2022 Auditor sought extension of time till 30.09.2022. f) On 26.07.2022, NFRA allowed extension of 15 days' time i.e., till 05.08.2022. g) On 02.08.2022, Auditor sought extension of time till 31.10.2022. NFRA allowed extension of 15 days' time i.e., till 20.08.2022. h) On 19.08.2022, Auditor submitted audit files after 60 days. i) Thereafter, the EB, with the assistance of an Executive Director & his team examined the financial statements of Magnum ventures Ltd and audit files of M/s Aggarwal and Rampal for the relevant period. Based on such examination, sufficient cause existed to initiate action u/s 132( 4) of the Companies Act, 2013 against CA Vinay Aggarwal, engagement partner of M/s Aggarwal and Rampal. 3 Which authority/official had authorized the initiation of action? a) The EB through the Chairperson, NFRA authorized initiation of actio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompletion of the examination by the EB, there were reasons to believe that sufficient cause existed to initiate action u/s 132 (4) of the Companies Act, 2013 against CA Adarsh Ranka, Engagement Partner (EP) of S. R. Batliboi & Associates LLP. 3 Which authority/official had authorized the initiation of action? f) On 04.06.2021, the Executive Body (EB) NFRA, through its Chairperson, authorised calling audit files and on 09.08.2021, under Section 132 of the Companies Act, 20 13 read with NFRA Rules asked the auditor to submit the audit file. g) On 05.01.2023, EB (Chairperson and two full time members), after due application of mind, approved for issue of a Show Cause Notice (SCN) to CA Adarsh Ranka, asking him to submit reply to the SCN within 30 days' time and he was also offered to avail opportunity of personal hearing. h) On 07.02.2023, Auditor submitted reply to SCN i.e., after 33 days of issue of SCN. 4 Who had heard and conducted the proceedings? a) On 07.02.2023, CA Adarsh Ranka submitted reply to SCN and requested for Personal Hearing. b) NFRA considered his request for personal hearing and c) On 02.06.202, NFRA issued a communication to the auditor intimatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Sarbanes Oxley Act, 2002 and Dodd Frank Wall Street Reform and Consumer Protection Act, 2010 in US or any other appropriate mechanism for oversight of profession of the auditors. Question whether on account of conflict of interest of auditors with consultants, the auditors profession may need an exclusive oversight body may be examined. The Committee may examine the Study Group and the Expert Group Reports referred to above, apart from any other material. It may also consider steps for effective enforcement of the provisions of the FDI policy and the FEMA Regulations referred to above. It may identify the remedial measures which may then be considered by appropriate authorities. The Committee may call for suggestions from all concerned. Such Committee may be constituted within two months. Report of the Committee may be submitted within three months thereafter. The UOI may take further action after due consideration of such report." 76. Pursuant to the aforesaid directive, a three-member expert committee came to be constituted. The remit of that committee can be gathered from the terms of reference which is extracted below:- "No. 1/4/2018- PI GOVERNMENT OF INDIA MINISTRY OF CO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties. The Committee may call for suggestions from all concerned. (vii) Any other matter to be considered the Committee of Experts. 3. The Committee of Experts shall complete its work and submit its report within three months of its constitution. 4. This issues with the approval of Competent Authority. (G. Vaidheeswaran) Deputy Secretary to the Govt, of India" 77. By the time the COE came to be constituted, markets as well as regulatory authorities across the globe had come to adequately acknowledge the necessity of financial information being accurate and trustworthy. In fact, as the COE itself recognized the availability of trustworthy financial information on the performance of companies had come to be accepted as a necessary requirement of the efficiency of the securities markets itself. By this time, markets as well as regulatory authorities across the globe had come to accept the imperatives of financial information being accurate, trustworthy and for a more effective and robust regulatory regime being created. This was essentially prompted by major financial scams which had occurred in various parts of the world including India and which had seen corporate behemoths ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds. It is also enabled by that legislation to inspect auditing firms and the reports of its inspection being placed in the public domain in case deficiencies are not addressed within 12 months. The PCAOB also stands empowered to inspect registered public accounting firms located in foreign jurisdictions. 81. The Sarbanes-Oxley legislation was followed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010 and which in turn armed the PCAOB with powers which expanded its regulatory control and oversight over brokers and dealers registered with the SEC. 82. The tremors of Enron were not confined to the American continent alone. Taking a cue from the steps which were taken in the United States, in 2002 the Government of the United Kingdom [UK] also undertook a detailed review of its regulatory regime. This saw the setting up of the Financial Regulatory Commission in April 2004 and which was conferred the status of an independent regulator in respect of corporate reporting and governance. As the COE records, the UK today follows a two-tier structure, comprising of an independent audit regulator assisted by multiple front line self regulatory organizations. Insofar as r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be introduced in the Companies Act between 2013 to 2018. 86. However, and as was noted in the previous sections of this decision, the apprehensions of a perceived conflict between the CA Act and the role envisaged to be discharged by the NFRA arose for discussion on more than one occasion. Dealing with these aspects, the COE observed: - "4.1. Whether India has an appropriate mechanism for oversight of the audit profession? 1. The COE is of the view that establishment of NFRA creates no inconsistency between the provisions of the Companies Act, 2013 and the Chartered Accountants Act, 1949. 2. The COE observes that with the recent move towards establishment of NFRA, India has adopted the current global best practice in this regard which can address the problems experienced with self-regulation of the audit profession. 3. The COE observes that NFRA has been structured on the lines of international best practices followed by other independent audit regulators in advanced jurisdictions. 4. The COE recommends that NFRA could be further strengthened and therefore, the rules which are presently being formulated, must provide powers to NFRA to publish audit inspection results, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... internationally recognised. There are numerous reasons behind this shift towards independent oversight like, financial frauds, trust deficit arising out of auditor's failure to act as gate-keepers and lack of accountability. For instance, after the Enron and WorldCom frauds in U.S., several jurisdictions gradually shifted towards an independent regulator for auditors. Further, the globalisation of economy fuelled demand for standardisation of financial reporting to protect the interest of global investors." 87. Speaking on the subject of consistency between legislations, the report of the COE observed: - "The COE has noted that creation of independent regulatory oversight through NFRA is in addition to the existing tier of SRO and does not contradict the Chartered Accountants Act, 1949. From the information available in the public domain, the COE noted that under the framework of Companies Act, 2013, NFRA would regulate auditors of only listed companies, and public companies beyond a certain threshold. On the other hand, ICAI as SRO under the Chartered Accountants Act, 1949 would continue to regulate the auditors of public companies below a certain threshold and private c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nconsistency between the provisions of the Companies Act, 2013 and Chartered Accountants Act, 1949. The COE believes that creation of NFRA would have dual benefits. First, NFRA would align the Indian regulatory architecture in the auditing landscape with the global trend; and second, it is expected to address the problems associated with the current SRO mechanism under ICAI" 88. The COE in unambiguous terms recommended that there was sufficient justification for strengthening the NFRA. This becomes apparent from a reading of the following passages of its report:- "The COE observed that globally there has been a growing acceptance of independent audit regulators, because they are expected to restore investor's confidence and bring more transparency and accountability in the auditing profession. In light of this, creation of NFRA is a positive development. While NFRA as an audit regulator has been vested with necessary powers, drawing inferences from global best practices may help in creating a more robust regulator. The COE noted that independent audit regulators in other jurisdictions have been empowered to publish the results of audit inspection. For instance, the Sarbane ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... _le a declaration with NFRA stating that revenue earned from non-audit services is not in excess of 50% of the statutory audit fee earned by its network from that listed auditee company or its holding company or subsidiary companies in a financial year. 3. The prohibited list of non-audit services under section 144 of the Companies Act, 2013 must include all kinds of taxation, valuation and restructuring services provided to the auditee company or its holding company or subsidiary companies. For this, the appropriate rules should be made. 4. Details of approval given by audit committee or the board of directors to auditors for providing non-audit services should be separately disclosed in the board report of the auditee company or its holding company or subsidiary companies. The board report should also contain a description of the necessary safe-guards in place to protect the independence and objectivity of such auditors providing non-audit services to the auditee company or its holding company or subsidiary companies. This will require necessary rules under section 134 of the Companies Act, 2013. Explanation: Entities in the network should include: • Entities covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on has been adopted in jurisdictions like U.K. and Australia. Policymakers globally have also intensely debated the need to impose a cap on the non-audit fees of audit firms. For instance, the SEC has long been concerned about the potential impact of audit and non-audit fees on auditor independence. It has repeatedly asserted that auditors must be independent in fact and in appearance. Independence-in-fact is defined by SEC as the auditor's mental state lacking any bias, while independence-in-appearance is a public perception that the auditor is objective and unaffected by a financial interest in the client. However, a recent study has argued that auditors' independence-in-appearance is related to client importance (total fees from a client as a percentage of the total revenues of the audit firm) rather than non-audit fee ratio (non-audit to total fees from a client). The Indian debate on conflict of interest related to non-audit services was triggered immediately after the Enron scandal. In 2002, the committee headed by Naresh Chandra deliberated over the issue of non-audit services and recommended the position adopted in U.S. under the Sarbanes Oxley Act, 2002. Conseq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee paid to the auditor by the listed auditee company or its holding or subsidiary company. Further, there is no provision in the Companies Act, 2013 which mandates disclosure of non-audit fee earned by the auditor in the financial statements of the auditee company. Recently in 2018, SEBI amended regulations which would now require a listed company to disclose total fees for all services paid by the listed entity and its subsidiaries, on a consolidated basis, to the statutory auditor and all entities in the network firm/network entity of which the statutory auditor is a part. However, this disclosure obligation is on the listed entity. The COE recommends that a statutory auditor must separately disclose to NFRA the audit as well as non-audit fees earned from each of its auditee company or its holding or subsidiary companies. From the information available in the public domain, the COE noted that under the current Indian framework, NFRA would regulate auditors of all listed companies, and public companies beyond a certain threshold, as prescribed by the government. The COE noted that under the Companies Act, 2013, an auditor has to obtain prior approval of the audit committee or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The COE on the issue of network liability recommends that NFRA should be explicitly empowered by law to impose civil liability in the form of monetary penalties on the international network/entity with whom/which the Indian audit firm has entered into networking/membership, if any audit failure or fraud is found to have been caused due to any faulty methodology being followed by that particular network. Explanation: The amount of penalty to be imposed on such international network/entity shall be upto five (5) times the amount of penalty imposed on the audit firm. 3. To enable NFRA to perform this function, every auditor and audit firm, which is operating in India as a part/member of an international network, must submit an Annual Transparency Report to NFRA, disclosing the following: • A description of the network, its legal and structural arrangements, including payment of any fees, costs, grants, etc between the Indian audit firm and its network entities, directly or indirectly; • Details of ownership and management structure of the out- side entity or entities constituting the network; • The name and registered office, central administration or pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onments with moderate legal regime, as compared to environments with relatively strong or relatively weak legal regime. Taking into account the pros and cons of legal liability on auditors, the COE is of the view that it is important that the Indian legal regime on auditors' liability should take a balanced approach. From this perspective, the COE analysed the current Indian legal regime on auditors' liability to identify the nature of sanctions that could be imposed against individual auditors as well as audit firms in case of a fraud. The COE reviewed the relevant provision under Chartered Accountants Act, 1949 as shown in Table 4.3 and those under Companies Act, 2013 as shown in Table 4.4. Sections Application Criminal Sanction Civil sanction 21A CA found guilty of professional or other misconduct under Schedule I NA Board of Discipline can reprimand the CA, remove the name of the CA from the register up to a period of 3 months, and/or impose fine up to Rs. 1 lakh 21B CA found guilty of professional or other misconduct under Schedule II or both Schedules I and II NA Disciplinary Committee can reprimand the CA, remove the name of the CA from the register p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the power to extend the liability on the network. Therefore, the COE recommends that NFRA should be explicitly empowered by law to impose civil liability in the form of monetary penalties on the international network/entity with who/which the Indian audit firm has entered into networking/membership agreement, if any audit failure or fraud is found to have been caused due to any faulty methodology being followed by that particular network. The COE observed that European Union has imposed a higher liability on auditors of listed companies. To achieve this, the Regulation (EU) No 537/2014 Of the European Parliament and of the Council has imposed legal obligations on auditors and audit firms to disclose financial information at the level of the network to which such auditors belong. The COE is of the opinion that a similar disclosure obligation has to be placed on all members of a network operating in India to enable NFRA to impose monetary penalty on such members in the event of a process failure at the network level leading to an audit failure or fraud. The COE recommends that every auditor and audit firm, which is operating in India as a member/part of an international network, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Companies Act itself, it was firstly contended that the provision is liable to be invalidated since it amounts to the creation of a vicarious liability on audit firms as well and its constituent partners who may have in no manner been connected with the audit itself. The petitioners contended that Section 132 proceeds to impose a liability upon Limited Liability Partnerships [LLPs] and which could themselves comprise of numerous partners and employees. 93. For instance, Mr. Sibal pointed out that DHS has approximately 139 partners and more than 3,900 employees across India. According to learned senior counsels, holding a LLP liable for consequences flowing from Section 132 would have the effect of imposing a liability upon each partner of the firm irrespective of whether that partner was involved in the concerned audit or had performed an audit function. According to the petitioners, such partners would thus face liabilities even though they may have had no participative role in the alleged fraud, negligence or misconduct. It was thus argued that the affirmation of such a liability not only amounts to the placement of an unreasonable restriction on the fundamental right of the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to defraud creditors of the limited liability partnership or any other person, or for any fraudulent purpose, the liability of the limited liability partnership and partners who acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the limited liability partnership: Provided that in case any such act is carried out by a partner, the limited liability partnership is liable to the same extent as the partner unless it is established by the limited liability partnership that such act was without the knowledge or the authority of the limited liability partnership. (2) Where any business is carried on with such intent or for such purpose as mentioned in sub-section (1), every person who was knowingly a party to the carrying on of the business in the manner aforesaid shall be punishable with imprisonment for a term which may extend to 29[five years] and with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees. (3) Where a limited liability partnership or any partner or designated partner or employee of such limited liability partnership has conducted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e US SC 66 and where the following principles came to be enunciated: - "5. We recognized in Scales v. United States, 367 U.S. 203, 229, 81 S.Ct. 1469, 1486, 6 L.Ed.2d 782, that 'quasi-political parties or other groups * * * may embrace both legal and illegal aims.' We noted that a 'blanket prohibition of association with a group having both legal and illegal aims' would pose 'a real danger that legitimate political expression or association would be impaired.' The statute with which we dealt in Scales the so-called 'membership clause' of the Smith Act (18 U.S.C. § 2385), was found not to suffer from this constitutional infirmity because, as the Court construed it, the statute reached only 'active' membership (id., at 222, 81 S.Ct. at 1482) with the 'specific intent' of assisting in achieving the unlawful ends of the organization (id., at 229--230, 81 S.Ct. at 1522). The importance of this limiting construction from a constitutional stand-point was emphasized in Noto v. United States, 367 U.S. 290, 299--300, 81 S.Ct. 1517, 6 L.Ed.2d 836, decided the same day: '(It should also be said that this element of the membership cri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstruction, 368 U.S. 278, 287, 82 S.Ct. 275, 281, 7 L.Ed.2d 285. Would a teacher be safe and secure in going to a Pugwash Conference? [ The Pugwash Conferences, A Staff Analysis, Subcommittee to Investigate the Administration of the Internal Security Act, Senate Committee on the Judiciary, Committee Print, 87th Cong., 1st Sess. (1961); Rabinowitch, Pugwash--History and Outlook, 13 Bull. Atomic Sci. 243 (1957); Topchiev, Comments on Pugwash: From the East, 14 Bull. Atomic Sci. 118 (1958); Thirring, Comments on Pugwash: From the West, id., at 121; Rabinowitch, The Stowe Conferences, 17 Bull. Atomic Sci. 382 (1961); Statement of International Pugwash Continuing Committee: Pugwash XIII, Bull. Atomic Sci. 43--45 (December 1964); Documents of Second Pugwash Conference of Nuclear Scientists (March 31--April 11, 1958).] Would it be legal to join a seminar group predominantly Communist and therefore subject to control by those who are said to believe in the overthrow of the Government by force and violence? Juries might convict though the teacher did not subscribe to the wrongful aims of the organization. And there is apparently no machinery provided for getting clearance in advance. [ Pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case [(2011) 3 SCC 377] squarely applies in this case. 6. In our judgment in State of Kerala v. Raneef [(2011) 1 SCC 784 : (2011) 1 SCC (Cri) 409] we had referred to the judgment of the US Supreme Court in Elfbrandt v. Russell [16 L Ed 2d 321 : 384 US 11 (1965)] which rejected the doctrine of "guilt by association". xxxx xxxx xxxx 8. In Scales case [6 L Ed 2d 782 : 367 US 203 (1960)] Mr Harlan, J. of the US Supreme Court observed: (L Ed pp. 801-02) "The clause [in the McCarran Act, 1950] does not make criminal all association with an organisation which has been shown to engage in illegal advocacy. There must be clear proof that a defendant 'specifically intend[s] to accomplish [the aims of the organisation] by resort to violence'. … a person may be foolish, deluded, or perhaps merely optimistic, but he is not by this statute made a criminal." (emphasis supplied) 9. Elfbrandt case [16 L Ed 2d 321 : 384 US 11 (1965)] also relied on the US Supreme Court decisions in Aptheker v. Secy. of State [12 L Ed 2d 992 : 378 US 500 (1963)] , Baggett v. Bullitt [12 L Ed 2d 377 : 377 US 360 (1963)] , Cramp v. Board of Public Instruction [7 L Ed 2d 285 : 368 US 278 (1961)], Gibson ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ul Activities (Prevention) Act which on their plain language make mere membership of a banned organisation criminal have to be read down and we have to depart from the literal rule of interpretation in such cases, otherwise these provisions will become unconstitutional as violative of Articles 19 and 21 of the Constitution. It is true that ordinarily we should follow the literal rule of interpretation while construing a statutory provision, but if the literal interpretation makes the provision unconstitutional we can depart from it so that the provision becomes constitutional." 100. Controverting those submissions, Mr. Hossain appearing for the NFRA, firstly invited our attention to some of the relevant provisions contained in the Companies Act to submit that the said statute itself contemplates an auditor to be either an individual or a firm. According to Mr. Hossain, a partner of a firm which has been appointed as an auditor acts as a representative and agent of such an entity. Mr. Hossain, firstly cited Section 139 of the Companies Act and which provision reads as under:- "139. Appointment of auditors.--(1) Subject to the provisions of this Chapter, every company shall, at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company held, within the period specified under sub-section (1) of Section 96, after three years from the date of commencement of this Act:] Provided also that, nothing contained in this sub-section shall prejudice the right of the company to remove an auditor or the right of the auditor to resign from such office of the company. (3) Subject to the provisions of this Act, members of a company may resolve to provide that-- (a) in the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be resolved by members; or (b) the audit shall be conducted by more than one auditor. (4) The Central Government may, by rules, prescribe the manner in which the companies shall rotate their auditors in pursuance of sub-section (2). Explanation.--For the purposes of this Chapter, the word "firm" shall include a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008 (6 of 2009). (5) Notwithstanding anything contained in sub-section (1), in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government or G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting; (ii) in the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Comptroller and Auditor-General of India within thirty days: Provided that in case the Comptroller and Auditor-General of India does not fill the vacancy within the said period, the Board of Directors shall fill the vacancy within next thirty days. (9) Subject to the provisions of sub-section (1) and the rules made thereunder, a retiring auditor may be reappointed at an annual general meeting, if-- (a) he is not disqualified for reappointment; (b) he has not given the company a notice in writing of his unwillingness to be reappointed; and (c) a special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be reappointed. (10) Where at any annual general meeting, no auditor is appointed or reappointed, the existing auditor shall continue to be the auditor of the company. (11) Where a company is required to constitute an Audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant information to enable the functioning of that part of the firm's system of quality control relating to independence. 4. Engagement teams are entitled to rely on the firm's system of quality control, unless information provided by the firm or other parties suggests otherwise. (Ref: Para. A2) xxxx xxxx xxxx Monitoring 23. An effective system of quality control includes a monitoring process designed to provide the firm with reasonable assurance that its policies and procedures relating to the system of quality control are relevant, adequate, and operating effectively. The engagement partner shall consider the results of the firm's monitoring process as evidenced in the latest information circulated by the firm and, if applicable, other network firms and whether deficiencies noted in that information may affect the audit engagement. (Ref: Para A32- A34)" 103. The obligation of the auditing firm to lay in place a system of quality control so that it is reasonably assured that its members assigned to undertake the audit comply with professional standards as well as regulatory requirements, Mr. Hossain pointed out, is a prescription which also stands mirrored in SQC 1 and mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dialogue, mission statements, newsletters, or briefing memoranda. They are incorporated in the firm's internal documentation and training materials, and in partner and staff appraisal procedures such that they will support and reinforce the firm's view on the importance of quality and how, practically, it is to be achieved. xxxx xxxx xxxx 14. The firm should establish policies and procedures designed to provide it with reasonable assurance that the firm and its personnel comply with relevant ethical requirements. xxxx xxxx xxxx 23. At least annually, the firm should obtain written confirmation of compliance with its policies and procedures on independence from all firm personnel required to be independent in terms of the requirements of the Code." 105. In view of the above, it was contended by Mr. Hossain that the work of a constituent of an auditing firm is inextricably linked with the policies laid in place by that firm pertaining to compliance with auditing standards and standards of quality control. On a compendious reading of the various SAs', Mr. Hossain submitted, it would be apparent that the discharge of functions by a member of an auditing firm is not liable to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force, for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally. [Provided that in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable.]" 107. In view of the aforesaid, learned counsel submitted that it would be wholly incorrect for the petitioners to assert that the introduction of a provision pertaining to disciplinary proceedings against a firm would amount to the introduction of a liability which did not exist or could be described to be vicarious in character. 108. More importantly, according to Mr. Hossain, one must also bear in consideration the indisputable position o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 54 : 1956 SCR 154 : (1956) 2 ITR 535] strikes a contrary note. We quote: "In some systems of law this separate personality of a firm apart from its members has received full and formal recognition as, for instance, in Scotland. That is, however, not the English common law conception of a firm. English lawyers do not recognise a firm as an entity distinct from the members composing it. Our partnership law is based on English law and we have also adopted the notions of English lawyers as regards a partnership firm." The life of the Indian law of partnership depends on its own terms although habitually courts, as a hangover of the past, have been referring to the English law on the point. The matter is concluded by the further observations of this Court: "It is clear from the foregoing discussion that the law, English as well as Indian, has, for some specific purposes, some of which are referred to above, relaxed its rigid notions and extended a limited personality to a firm. Nevertheless, the general concept of a partnership, firmly established in both systems of law, still is that a firm is not an entity or 'person' in law but is merely an association of individuals and a firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that the business of a firm was business of the partners, that the profits of the firm were profits of the partners and that the expenditure incurred by partners in earning such share was admissible for deduction in arriving at the total income under Section 10(1). 21. Contrary views are not wanting in some rulings, but a catalogue of cases on the other side may be productive of confusion and not resolution of conflict. We abstain from that enterprise and confine ourselves to the statement of the law that although, for purposes of the Income Tax Act, a firm has certain attributes simulative of personality, we have to take it that a partnership is not a person but a plurality of persons. 22. Coming to basics over again, this Court, in Karimtharuvi Tea Estates [Karimtharuvi Tea Estates Ltd. v. State of Kerala, 1963 Supp 1 SCR 823 : (1963) 48 ITR 83 : AIR 1963 SC 760.] and in Anglo-American Direct Tea Trading Co. [Anglo American Direct Tea Trading Co Ltd. v. CAg IT, AIR 1968 SC 1213 : (1968) 2 SCR 745 : (1968) 69 ITR 667, 671] has set out the nature of and manner of assessment of composite income tax derived by the sale of tea: "In Karimtharuvi Tea Estates Ltd. v. State of Ker ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tea plants grown on the land to a particular manufacturing process in the factory of the tea company. Rule 24 prescribes the formula which should be adopted for apportioning the income realised as a result of the sale of tea after it is grown and subjected to the manufacturing process in the factory. Sixty per cent is taken to be agricultural income and the same consists of the first element or component, while 40 per cent represents non-agricultural income and the same comprises the second element or component." We are fortified in the above conclusion by two decisions of this Court in the cases of Karimtharuvi Tea Estates Ltd. v. State of Kerala and Anglo-American Direct Tea Trading Co. Ltd. v. Commissioner of Agricultural Income Tax. In the case of Karimtharuvi Tea Estates Ltd. it was observed while dealing with the income derived from the sale of tea grown and manufactured by the seller in the context of Rule 24: "Of the income so computed, 40 per cent is, under Rule 24, to be treated as income liable to income tax and it would follow that the other 60 per cent only will be deemed to he 'agricultural income' within the meaning of that expression in the Income Tax Act." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uty which all the partners, or some of the partners acting for all, are required to do by the law relating to partnership. The matter may be looked at another way too. In law, a partner cannot be employed by his firm, for a man cannot be his own employer. A contract can only be bilateral and the same person cannot be a party on both sides, particularly in a contract of personal employment. A supposition that a partner is employed by the firm would involve that the employee must be looked upon as occupying the position of one of his own employers, which is legally impossible. Consequently, when an arrangement is made by which a partner works and receives sums as wages for services rendered, the agreement should in truth be regarded as a mode of adjusting the amount that must be taken to have been contributed to the partnership's assets by a partner who has made what is really a contribution in kind, instead of contribution in money. Hence, all the aforesaid payments are non-deductible." The contrary view favoured by Mathew Abraham proceeds on the reasoning: "Though for purposes of computation of income his share income of the firm is clubbed along with the allowance and co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led a "person". 11. There is no definition of the word "person" in the Partnership Act. The General Clauses Act, 1897, however, by Section 3(42) provides that "person shall include any company or association or body of individuals whether incorporated or not". The firm is not a company but is certainly an association or body of individuals. The argument is that applying that definition to the word "persons" occurring in Section 4, one can at once say that an unincorporated association or body of persons, like a firm, can enter into a partnership just as by the application of that definition to Section 4 of the Indian Partnership Act a company can become a partner in a firm. The definitions given in Section 3 of the General Clauses Act, 1897, however, apply when there is nothing repugnant in the subject or context. It is difficult to say that there is anything repugnant in the context of Section 4 itself which will exclude the application of that definition to the word "persons" occurring in Section 4. Is there, however, anything repugnant in the subject of partnership law, which will exclude the application of that definition to Section 4? 12. As pointed out in Lindley on Partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partner in such surplus is applied in payment of his separate debts, if any, or paid to him. Conversely, separate property of a partner is applied first in the payment of his separate debts and the surplus, if any is utilised in meeting the debts of the firm (see Section 49 of the Indian Partnership Act, 1932). In the Indian Income Tax Act itself a firm is, by Section 3, which is the charging section, made a unit of assessment. 14. It is clear from the foregoing discussion that the law, English as well as Indian, has, for some specific purposes, some of which are referred to above, relaxed its rigid notions and extended a limited personality to a firm. Nevertheless, the general concept of partnership, firmly established in both systems of law, still is that a firm is not an entity or "person" in law but is merely an association of individuals and a firm name is only a collective name of those individuals who constitute the firm. In other words, a firm name is merely an expression, only a compendious mode of designating the persons who have agreed to carry on business in partnership. According to the principles of English jurisprudence, which we have adopted, for the purposes of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a partnership with another firm or Hindu undivided family or individual. In this view of the matter there can arise no question of registration of a partnership purporting to be one between three firms, a Hindu undivided family business and an individual as a firm under Section 26-A of the Act. 16. The learned Advocate for the appellant then urges that, at any rate, the partnership was not illegal, for there was no legal impediment in the way of all the members of all the three constituent firms and the karta of the Hindu undivided family and the individual entering into an agreement and that, therefore, a valid partnership was constituted by the deed of partnership under consideration. Assuming that this contention is possible in view of the language which has been used in this deed for describing the parties, the position of the appellant will not improve, for in order to be entitled to the benefit of registration under the Act, it will have to be shown that the shares of all individual partners are specified in the deed and that all the partners have personally signed the application for registration as required by Section 26-A of the Act read with Rule 2. The deed specifies t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gagement of an auditor. As is manifest from a reading of Section 139 of the Companies Act, every company is entitled to appoint either an individual or a firm as its auditor. By virtue of Section 141 of the said enactment, the statute proceeds to prescribe conditions in respect of eligibility and the qualifications which must be held by an auditor appointed by a company. In terms of Section 141 (1), a person would be eligible to be appointed as an auditor of a company, if he be a CA. The Proviso to Section 141 (1) proceeds further to hold that a firm whose majority of partners are also qualified for appointment, may be appointed as an auditor in its own name. Similar prescriptions appear in Section 141 (2) and which prescribes the condition subject to which an LLP may be appointed as an auditor. 112. Section 141 is extracted hereunder:- "141. Eligibility, qualifications and disqualifications of auditors.--(1) A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant: Provided that a firm whereof majority of partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purposes of this clause, the term "directly or indirectly" shall have the meaning assigned to it in the Explanation to Section 144.] (4) Where a person appointed as an auditor of a company incurs any of the disqualifications mentioned in sub-section (3) after his appointment, he shall vacate his office as such auditor and such vacation shall be deemed to be a casual vacancy in the office of the auditor." 113. It is thus evident that an individual, a partnership firm or an LLP can be appointed as an auditor of a company. The appointment, prescriptions and the nature of services which could be rendered by it are further prescribed and regulated by Section 144 of the Companies Act. The Explanation to Section 144 proceeds to explain and provide a definition to the expression "directly or indirectly" as appearing therein. Section 144 reads as follows:- "144. Auditor not to render certain services.--An auditor appointed under this Act shall provide to the company only such other services as are approved by the Board of Directors or the audit committee, as the case may be, but which shall not include any of the following services (whether such services are rendered directly or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilfully to have acted with an intent to deceive the company or its shareholders. Similar provisions are thereafter engrafted in sub-section (5) and which in unambiguous terms stipulates that even in the case of an audit having been undertaken by an audit firm, if it is proved that its partner or partners had acted in a fraudulent manner, it would result in the imposition of a civil or criminal liability upon such partner or partners including the firm. The dual liability which would come to be attached is further amplified when sub-section (5) employs the phrase "and of the firm jointly and severally". Of equal significance is the Proviso to sub-section (5) and which declares that in case of criminal liability of an audit firm and which be one other than that of a monetary fine, it would be the concerned partner or partners who had acted in a fraudulent manner or abetted in the commission of that crime, who alone would be liable. 115. It is thus manifest that the Companies Act makes provisions in terms of which both the firm as well as its engagement partners are held liable and could face the spectre of incarceration as well as the imposition of monetary fines. Section 147 existe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act but is inherently derivative of the firm's appointment as the auditor. The firm acts as the central organ, and its members function as its limbs, carrying out its obligations and responsibilities. The firm's designation as the auditor inherently extends to its members, who act on its behalf. 119. Since the overarching liability and indivisible accountability vests upon the audit firm, the SAs' place it under an obligation to continually monitor, regulate and control the quality of the audit itself. It would therefore be wholly untenable in law to hold that the firm could shrug off the liability which would come to be attached consequent to the acts of omission or commission of its individual partners. 120. The fact that the audit firm is to act through its individual members becomes further evident from the following provisions which are made in the SAs:- "SQC 1 1. The purpose of this Standard on Quality Control (SQC) is to establish standards and provide guidance regarding a firm's responsibilities for its system of quality control for audits and reviews of historical financial information, and for other assurance and related services engagements. This SQC is to be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal competence and due care; (d) Confidentiality; and (e) Professional behavior xxxx xxxx xxxx Independence 18. The firm should establish policies and procedures designed to provide it with reasonable assurance that the firm, its personnel and, where applicable, others subject to independence requirements (including experts contracted by the firm and network firm personnel), maintain independence where required by the Code. Such policies and procedures should enable the firm to: (a) Communicate its independence requirements to its personnel and, where applicable, to others subject to them; and (b) Identify and evaluate circumstances and relationships that create threats to independence, and to take appropriate action to eliminate those threats or reduce them to an acceptable level by applying safeguards, or, if considered appropriate, to withdraw from the engagement. 19. Such policies and procedures should require: (a) Engagement partners to provide the firm with relevant information about client engagements, including the scope of services, to enable the firm to evaluate the overall impact, if any, on independence requirements; (b) Personnel to promptly notify ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es before accepting an engagement with a new client, when deciding whether to continue an existing engagement, and when considering acceptance of a new engagement with an existing client. Where issues have been identified, and the firm decides to accept or continue the client relationship or a specific engagement, it should document how the issues were resolved. xxxx xxxx xxxx Assignment of Engagement Teams 42. The firm should assign responsibility for each engagement to an engagement partner. The firm should establish policies and procedures requiring that: (a) The identity and role of the engagement partner are communicated to key members of the client's management and those charged with governance; (b) The engagement partner has the appropriate capabilities, competence, authority and time to perform the role; and (c) The responsibilities of the engagement partner are clearly defined and communicated to that partner. xxxx xxxx xxxx 44. The firm should also assign appropriate staff with the necessary capabilities, competence and time to perform engagements in accordance with professional standards and regulatory and legal requirements, and to enable the firm or eng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation xxxx xxxx xxxx Retention of Engagement Documentation 82. The firm should establish policies and procedures for the retention of engagement documentation for a period sufficient to meet the needs of the firm or as required by law or regulation. 83. The needs of the firm for retention of engagement documentation, and the period of such retention, will vary with the nature of the engagement and the firm's circumstances, for example, whether the engagement documentation is needed to provide a record of matters of continuing significance to future engagements. The retention period may also depend on other factors, such as whether local law or regulation prescribes specific retention periods for certain types of engagements, or whether there are generally accepted retention periods in the jurisdiction in the absence of specific legal or regulatory requirements. In the specific case of audit engagements, the retention period ordinarily is no shorter than seven years8 from the date of the auditor's report, or, if later, the date of the group auditor's report. 84. Procedures that the firm adopts for retention of engagement documentation include those that: Enable the retri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvised by a partner with sufficient and appropriate experience and authority within the firm but who is not otherwise involved in the engagement, and includes involving legal counsel as necessary. Small firms and sole practitioners may use the services of a suitably qualified external person or another firm to carry out the investigation. Complaints, allegations and the responses to them are documented. 105. Where the results of the investigations indicate deficiencies in the design or operation of the firm's quality control policies and procedures, or non-compliance with the firm's system of quality control by an individual or individuals, the firm takes appropriate action as discussed in paragraph 95. SA 200 - Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing 13(d) Auditor - "Auditor" is used to refer to the person or persons conducting the audit, usually the engagement partner or other members of the engagement team, or, as applicable, the firm. Where an SA expressly intends that a requirement or responsibility be fulfilled by the engagement partner, the term "engagement partner" rather than "auditor" is used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering deficiencies that may affect the audit engagement, the engagement partner may have regard to measures the firm took to rectify the situation that the engagement partner considers are sufficient in the context of that audit. A34. A deficiency in the firm's system of quality control does not necessarily indicate that a particular audit engagement was not performed in accordance with professional standards and regulatory and legal requirements, or that the auditor's report was not appropriate. SA 230 - Audit Documentation A23. SQC 1 requires firms to establish policies and procedures for the retention of engagement documentation. The retention period for audit engagements ordinarily is no shorter than seven years from the date of the auditor's report, or, if later, the date of the group auditor's report" 121. Having noticed the relevant provisions of the Companies Act and which contemplate an auditor to be either a partnership firm, LLP or an individual, it becomes apparent that the statutory enactments do not seek to create a distance between the auditing firm and its members or partners who may undertake the actual audit. There is no separation or disengagement be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d through its partners. It is this unity of operation and accountability that ensures the trustworthiness and reliability of auditing services. Any attempt to artificially separate liability between the firm and its members creates a false dichotomy and erodes the principles of collective accountability and diligence that underpin the profession. 126. In essence, the relationship between a firm and its members while delivering auditing services is one of complete integration, where roles and responsibilities overlap to ensure the highest levels of professional service. The nature of such services does not permit a firm to distance itself from the actions of its partners, especially when those actions are performed in furtherance of the firm's obligations. Therefore, liability, whether incurred by the firm or its members, cannot operate in silos but is instead a shared and unified responsibility that reflects the cohesive nature of their engagement. Such an arrangement is neither supported by the provisions contemplated within the LLP Act as well as the Companies Act. 127. This would constitute an appropriate juncture to also notice the position which would emerge upon a considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceed to evaluate the submission which was addressed, bearing in mind the provisions contained in Section 27. That provision stands engrafted in the statute in the following terms:- "27. Extent of liability of limited liability partnership .- (1) A limited liability partnership is not bound by anything done by a partner in dealing with a person if- (a) the partner in fact has no authority to act for the limited liability partnership in doing a particular act; and (b) the person knows that he has no authority or does not know or believe him to be a partner of the limited liability partnership. (2) The limited liability partnership is liable if a partner of a limited liability partnership is liable to any person as a result of a wrongful act or omission on his part in the course of the business of the limited liability partnership or with its authority. (3) An obligation of the limited liability partnership whether arising in contract or otherwise, shall be solely the obligation of the limited liability partnership. (4) The liabilities of the limited liability partnership shall be met out of the property of the limited liability partnership." 130. As was noticed in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here personal liability comes to be attached upon a partner by virtue of a wrongful act or omission. It proceeds further to significantly provide that a partner would in turn not become personally liable for the wrongful act or omission of any other partner of the LLP. Section 28(2), however, would have to be construed, bearing in mind the admitted position of the audit firm itself having been appointed as the auditor of the corporate entity and the engagement and involvement of its partners and members being indelibly and inextricably connected with the discharge of that function. 134. While Section 28(2) insulates a partner from being held personally liable for the wrongful act or omission of any other partner, the protection so accorded would clearly not apply in case the wrongful act or omission were viewed as being that of the audit firm itself. As was explained by us in the preceding paragraphs of this judgment, the issue of accrual of liability arises in the context of the engagement of a firm or an LLP as an auditor. Surely such an entity cannot discharge and perform its obligations concerned with audit unless it were acting through its members and partners. It is this ine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 132 is neither an overreach nor can it be said to be arbitrary; it is a necessary mechanism to enforce professional accountability. The firm's designation as an auditor inherently includes the collective responsibilities of its members, making the imposition of a vicarious liability a logical and justified extension of its statutory obligations. Therefore, the contention that the provision is unconstitutional lacks merit and proceeds in ignorance of the operational and legal realities of an audit firm's engagement. 139. Since the full spectrum of auditing services would be carried out under the aegis of a firm when it is engaged as an "auditor," it would be wholly untenable to abruptly sever the alignment between the firm and its members. The proposition to the contrary disregards the very essence of the firm's operational structure and undermines the objective sought to be achieved by Section 132. The essence of auditing lies in the collective responsibility of the firm and its members who work in unison to ensure compliance with accounting standards and deliver services of the highest professional integrity. Any attempt to isolate the liability of the firm from the actions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sages that firm being called upon to disclose the name or names of its "member/ members concerned" as well as for it being apprised of the particulars of the alleged acts of omission or commission. Rule 8 further prescribes that upon a requisite disclosure being made by the firm, it would be the member or members concerned who would become responsible for answering the complaint. Similarly, the Explanation to Rule 8 stipulates that a notice to the firm would be deemed to be a notice to all members who are partners or employees of that firm as on the date of registration of the complaint. 144. It is this statutory position which then stands mirrored in the Proviso to Rule 11 of the NFRA Rules and which reads as follows: "11. Disciplinary proceedings.--(1) Based on the reference received from the Central Government or findings of its monitoring or enforcement or oversight activities, or on the basis of material otherwise available on record, if the Authority believes that sufficient cause exists to take actions permissible under sub-section (4) of Section 132, it shall refer the matter to the concerned division, which shall cause a show-cause notice to be issued to the auditor. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assignment through a summary procedure as may be specified by the Authority, by a reasoned order in adherence to the principles of natural justice including where necessary or appropriate an opportunity of being heard in person, and after considering the submissions, if any, made by the auditor, the relevant facts and circumstances, and the material on record; [Provided that where the disposal does not take place within the said period, the Division shall record the reasons for not disposing off the show-cause notice within the said period, and the chairperson, may, after taking into account the reasons so recorded, extend the aforesaid period by such additional period not exceeding ninety days as he may consider necessary: Provided further that the chairperson may, if he thinks fit, grant the said extension of period more than once.] (6) The order disposing of a show-cause notice may provide for-- (a) no action; (b) caution; (c) action for imposing penalty against auditor under sub- clause (A) of clause (c) of sub-section (4) of Section 132 or for debarring the auditor from engaging as such under sub- clause (B) of clause (c) of sub-section (4) of Section 132 or bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doption and resonance in the decision of the Supreme Court in Arup Bhuyan vs. State of Assam and Anr. (2011) 3 SCC 377 and which was reiterated in Indra Das, we take note of the judgment rendered by three learned Judges of the Supreme Court in Arup Bhuyan vs. State of Assam and Anr. [Arup Bhuyan-2] (2023) 8 SCC 745 and where the Supreme Court ultimately came to hold that the decisions of the US Supreme Court would be inapplicable bearing in mind the principles enshrined in Article 19 of the Constitution and the principle of reasonable restriction adopted by our Constitution as moderating that right. As is manifest from a reading of Para 8 of the report in Arup Bhuyan-2, the principal issue which had arisen for consideration was whether active membership is required to be proven over and above the membership of a banned organization. The second important question which stood posited in Arup Bhuyan-2 was with respect to the correctness of the view expressed in the earlier judgments of the Supreme Court and which had proceeded to interpret the ambit of Article 19 on the basis of the principles enunciated by the US Supreme Court. 148. In Arup Bhuyan-2, the Supreme Court noticed the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forenoted decision and which are extracted hereinbelow:- "Distinction between the Indian and American Constitutions 118. In view of the above discussion, one now proceeds to consider the First Amendment of the American Constitution which is extracted as under: "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances." 119. The contradistinction between the rights created by the First Amendment of the American Constitution and Article 19 of the Indian Constitution is the power given to the State to make laws reasonably restricting such freedoms in India. Conversely, in the United States of America, restrictions have been imposed by the judiciary in instances, as relied upon in Arup Bhuyan [Arup Bhuyan v. State of Assam, (2011) 3 SCC 377 : (2011) 1 SCC (Cri) 855] and Indra Das [Indra Das v. State of Assam, (2011) 3 SCC 380 : (2011) 1 SCC (Cri) 1150], however no such explicit power is available with the legislature. 120. This distinction has been enunciated by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can Supreme Court has included "expression" as part of freedom of speech and this Court has included "the press" as being covered under Article 19(1)(a), so that, as a matter of judicial interpretation, both the US and India protect the freedom of speech and expression as well as press freedom. Insofar as abridgement and reasonable restrictions are concerned, both the US Supreme Court and this Court have held that a restriction in order to be reasonable must be narrowly tailored or narrowly interpreted so as to abridge or restrict only what is absolutely necessary. It is only when it comes to the eight subject-matters that there is a vast difference. In the US, if there is a compelling necessity to achieve an important governmental or societal goal, a law abridging freedom of speech may pass muster. But in India, such law cannot pass muster if it is in the interest of the general public. Such law has to be covered by one of the eight subject-matters set out under Article 19(2). If it does not, and is outside the pale of Article 19(2), Indian courts will strike down such law. 18. … American judgments have great persuasive value on the content of freedom of speech and expres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TS RETROACTIVE OPERATION 153. Taking the discussion forward we propose to now evaluate the challenge raised by the writ petitioners on the ground of Section 132 operating retrospectively and thus impacting valuable vested rights. The petitioners had urged that although sub-sections (2) and (4) of Section 132 came to be enforced with effect from 24 October 2018 and the NFRA Rules on 13 November 2018, the NFRA seeks to apply those provisions retrospectively to audits concluded and completed prior to the dates aforenoted. The petitioners submitted that we must bear in mind the well settled precept that statutes ordinarily and as a general proposition are assumed to operate prospectively unless retrospectivity is expressly or impliedly provided for. It was their contention that the provisions as introduced by Section 132 not only ushers in a new procedure for purposes of trial of allegations of professional misconduct, it also creates new disabilities apart from imposing new obligations on transactions already accomplished. Viewed in that light it was their submission that the provision can only be applied prospectively. 154. It was contended that prior to the introduction of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. It was submitted that while the section undoubtedly introduces procedural changes, it also affects vested rights which had come to be perfected and this too would necessarily warrant the Court rendering a declaration that Section 132 can only have prospective application. 157. Arguments were then addressed in great detail on behalf of the writ petitioners with learned senior counsels referring to the various procedural safeguards which formed part of the CA Act including provisions for leading of evidence, cross-examination of witnesses and all of which have been completely done away with and the NFRA being empowered by statute to adopt such summary procedure as it may deem fit. A retroactive application of Section 132 was also assailed on the basis of Article 20 (1) of the Constitution. 158. The petitioners also questioned the correctness of the stand taken by NFRA and which had urged us to recognize the Proviso to Section 132 (4) as being the embodiment of a legislative intent of those provisions applying even to past misdemeanors. It was submitted that the Proviso to Section 132 (4) stands confined to the initiation or continuance of an investigation in the event NFRA were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he basis of the retrospective effect purported to have been given to the explanation referred to earlier by the notification, dated February 16, 1963, (Exh. P-12) for obvious reasons. The rule making authority had not been vested with the power under the Central Excise and Salt Act to make rules with retrospective effect. Therefore the retrospective effect purported to be given under Exh. P-12 was beyond the powers of the rule-making authority." 11. In the case of ITO v. M.C. Ponnoose [(1969) 2 SCC 351 : (1970) 1 SCR 678] this Court dealt with a notification, dated August 14, 1963, which empowered the revenue officials, including the Tehsildar, to exercise the powers of a tax recovery officer under the Income Tax Act, 1961 in respect of arrears. The notification was given retrospective effect. Question which arose for determination was whether the State Government could invest the Tehsildar with such powers retrospectively. Answering this question in the negative, this Court observed: "The Parliament can delegate its legislative power within the recognised limits. Where any rule or regulation is made by any person or authority to whom such powers have been delegated by the Legi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of construction that no statute shall be construed to have a retrospective operation unless such a construction appears very clear in the terms of the Act or arises by necessary and distinct implication. An offshoot of this rule is that if the enactment is expressed in the language which is fairly capable of either interpretation, it ought to be construed as prospective only and that there is a presumption against a retrospective operation if, when so operated, it would prejudicially affect the vested rights or the legality of past transactions. Section 39 imposes an obligation to intimate the nomination within three months thereof. The effect of giving it a retrospective operation would be to divest a nominated trustee of his vested right of succession, even where Section 39 would be impossible of compliance by reason of three months having elapsed since nomination and before enactment of Section 39 of the Act. Further it would result in altering the pre-existing situation of parties and interfering with the antecedent rights of the trustees in depriving them of their trusteeship and placing the institution under the direct control of the Commissioner. Adoption of a Chela or nomi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sablement, payable in the event of there being no proof of fault, should be raised adequately to meet the current situation." 12. In Padmavathy [1990 ACJ 751 (Ker)] the Kerala High Court held : (ACJ p. 756, paras 11-12) "11. The said suggestion of the Supreme Court was given due respect by the law-making machinery when the Bill was finally introduced in Parliament. This fact can be discerned from the Statement of Objects and Reasons prefaced in the new Act. Therefore, in effect Parliament has only retained the same right which was conferred on the victims through Chapter VII-A of the repealed Act. The difference in the quantum of compensation is only intended to make the right realistic and on a par with the amount fixed earlier. Hence Section 6 of the General Clauses Act would not impede the enforcement of Section 140 of the new Act in relation to an accident which occurred prior to the coming into force of the new Act. 12. For yet another reason, we can support the said conclusion. Section 6 of the General Clauses Act permits switching over to the repealed Act only if a different intention does not appear in the new statute. Such a different intention can be discerned from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to a claim in litigation at the time when the Act was passed." 18. The question was considered by this Court in Gajraj Singh v. STAT [(1997) 1 SCC 650] and the law was stated in the following terms : (SCC pp. 664-66, paras 22-24) "22. Whenever an Act is repealed it must be considered, except as to transactions past and closed, as if it had never existed. The effect thereof is to obliterate the Act completely from the record of Parliament as if it had never been passed; it never existed except for the purpose of those actions which were commenced, prosecuted and concluded while it was an existing law. Legal fiction is one which is not an actual reality and which the law recognises and the court accepts as a reality. Therefore, in case of legal fiction the court believes something to exist which in reality does not exist. It is nothing but a presumption of the existence of the state of affairs which in actuality is non-existent. The effect of such a legal fiction is that a position which otherwise would not obtain is deemed to obtain under the circumstances. Therefore, when Section 217(1) of the Act repealed Act 4 of 1939 w.e.f. 1-7-1989, the law in Act 4 of 1939 in effect c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to such a case unless contrary intention can be gathered from the repealing Act. Section 6 would be applicable in such cases unless the new legislation manifests intention inconsistent with or contrary to the application of the section. Such incompatibility would have to be ascertained from all relevant provisions of the new Act. Therefore, when the repeal is followed by a fresh legislation on the same subject, the Court would undoubtedly have to look to the provisions of the new Act only for the purpose of determining whether the new Act indicates different intention. The object of repeal and re- enactment is to obliterate the repealed Act and to get rid of certain obsolete matters." 19. In Ramesh Singh v. Cinta Devi [(1996) 3 SCC 142 : 1996 SCC (Cri) 467] it has clearly been held that Section 217 of the 1988 Act does not expressly or by necessary implication make the relevant provision retrospective in operation. 20. In Zile Singh v. State of Haryana [(2004) 8 SCC 1] a three-Judge Bench of this Court stated the law thus : (SCC p. 10, para 17) "17. Maxwell states in his work on Interpretation of Statutes (12th Edn.) that the rule against retrospective operation is a presump ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ospective effect thereby saddling him with heavy financial burden in respect of the past period where he had drawn and consumed power on the faith of the orders extending to him the benefit of clubbing." 23. In Madishetti Bala Ramul v. Land Acquisition Officer [(2007) 9 SCC 650 : (2007) 8 Scale 184] this Court observed : (SCC p. 656, para 19) "19. In Land Acquisition Officer-cum-DSWO v. B.V. Reddy and Sons [(2002) 3 SCC 463] this Court opined that Section 25 being not a procedural provision will have no retrospective effect, holding : (SCC p. 471, para 6) '6. Coming to the second question, it is a well-settled principle of construction that a substantive provision cannot be retrospective in nature unless the provision itself indicates the same. The amended provision of Section 25 nowhere indicates that the same would have any retrospective effect. Consequently, therefore, it would apply to all acquisitions made subsequent to 24-9-1984, the date on which Act 68 of 1984 came into force. The Land Acquisition (Amendment) Bill of 1982 was introduced in Parliament on 30-4-1982 and came into operation with effect from 24-9-1984.' " 24. In Ashok Lanka v. Rishi Dixit [(2005) 5 SCC 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Development Bank of India (Sidbi). Network of such services would be set up throughout the country and operated through commercial banks. A suitable legislation will be introduced to ensure prompt payment of small industries' bills." 36. Keeping in view the above object, the Act was enacted by Parliament. Before such enactment, it is required to examine rights of the supplier qua the buyer prior to the commencement of the Act. In case of delayed payment, the supplier, prior to the commencement of the Act, was required to file a suit for the payment of the principal amount, and could claim interest along with the principal amount. The supplier could avail of the same under Section 34 of the Code of Civil Procedure, 1908 (hereinafter referred to as "CPC"), Section 61 of the Sale of Goods Act, 1930 and Section 3 of the Interest Act, 1978. 37. In other words, the supplier whose payment was delayed by the buyer prior to the commencement of the Act, could file a suit for payment of the principal amount along with the interest. The supplier, thus, had the vested right to claim the principal amount along with interest thereon in case of a delay in payment by the buyer and it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y a tenure subject to no contingency; complete; established by law as a permanent right; vested interests.'" 41. A statute creating vested rights is a substantive statute. This Court, in Dhenkanal Minor Irrigation Division v. N.C. Budharaj [(2001) 2 SCC 721], opined: (SCC p. 742, para 23) "23. … 'Substantive law', is that part of the law which creates, defines and regulates rights in contrast to what is called adjective or remedial law which provides the method of enforcing rights. Decisions, including the one in Jena case [Deptt. of Irrigation v. Abhaduta Jena, (1988) 1 SCC 418] while adverting to the question of substantive law has chosen to indicate by way of illustration laws such as Sale of Goods Act, 1930 [Section 61(2)], Negotiable Instruments Act, 1881 (Section 80), etc. The provisions of the Interest Act, 1839, which prescribe the general law of interest and become applicable in the absence of any contractual or other statutory provisions specially dealing with the subject, would also answer the description of substantive law." 41. A statute creating vested rights is a substantive statute. This Court, in Dhenkanal Minor Irrigation Division v. N.C. Budharaj [(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substituted is declaratory and, therefore, has retroactive operation. Ordinarily when an enactment declares the previous law, it requires to be given retroactive effect. The function of a declaratory statute is to supply an omission or to explain a previous statute and when such an Act is passed, it comes into effect when the previous enactment was passed. The legislative power to enact law includes the power to declare what was the previous law and when such a declaratory Act is passed, invariably it has been held to be retrospective. Mere absence of use of the word 'declaration' in an Act explaining what was the law before may not appear to be a declaratory Act but if the court finds an Act as declaratory or explanatory, it has to be construed as retrospective. Conversely where a statute uses the word 'declaratory', the words so used may not be sufficient to hold that the statute is a declaratory Act as words may be used in order to bring into effect new law." 44. In Katikara Chintamani Dora v. Guntreddi Annamanaidu [(1974) 1 SCC 567] this Court held: (SCC p. 582, para 50) "50. It is well settled that ordinarily, when the substantive law is altered during the pendency of an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment or necessary intendment.' (See Delhi Cloth and General Mills Co. Ltd. v. CIT[(1926- 27) 54 IA 421] , IA p. 425.) The second is that a right of appeal being a substantive right the institution of a suit carries with it the implication that all successive appeals available under the law then in force would be preserved to the parties to the suit throughout the rest of the career of the suit. There are two exceptions to the application of this rule viz. (1) when by competent enactment such right of appeal is taken away expressly or impliedly with retrospective effect and (2) when the court to which appeal lay at the commencement of the suit stands abolished (see Garikapati Veeraya v. N. Subbiah Choudhry [AIR 1957 SC 540] and Colonial Sugar Refining Co. Ltd. v. Irving[1905 AC 369 : (1904-07) All ER Rep Ext 1620 (PC)] )." 47. In K. Kapen Chako v. Provident Investment Co. (P) Ltd. [(1977) 1 SCC 593] this Court discussing the dicta of the English courts on the aspect of retrospectivity observed: (SCC pp. 602-03, paras 37- 39) "37. A statute has to be looked into for the general scope and purview of the statute and at the remedy sought to be applied. In that connection the form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or other why they should not be. In other words, if a statute deals merely with the procedure in an action, and does not affect the rights of the parties it will be held to apply prima facie to all actions, pending as well as future." 48. In Dahiben v. Vasanji Kevalbhai [1995 Supp (2) SCC 295] this Court held: (SCC pp. 299-300, para 12) "12. As the amendment in question is not to a procedural law, it may be stated that the settled principle of interpretation, where substantive law is amended, is that the same does not operate retrospectively unless it is either expressly provided or the same follows by necessary implication. Lest it be thought that a vested right cannot be taken away at all by retrospective legislation, reference may be made to Rafiquennessa v. Lal Bahadur Chetri [AIR 1964 SC 1511] where it was stated that even where vested rights are affected, legislature is competent to take away the same by means of retrospective legislation; and retrospectivity can be inferred even by necessary implication." 49. In Zile Singh v. State of Haryana [(2004) 8 SCC 1] this Court examined the various authorities on statutory interpretation and concluded: (SCC pp. 8-9, paras 13- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding liability is imposed on the buyer. This Court, time and again, has observed that any substantive law shall operate prospectively unless retrospective operation is clearly made out in the language of the statute. Only a procedural or declaratory law operates retrospectively as there is no vested right in procedure. 52. In the absence of any express legislative intendment of the retrospective application of the Act, and by virtue of the fact that the Act creates a new liability of a high rate of interest against the buyer, the Act cannot be construed to have retrospective effect. Since the Act envisages that the supplier has an accrued right to claim a higher rate of interest in terms of the Act, the same can only be said to accrue for sale agreements after the date of commencement of the Act i.e. 23-9-1992 and not any time prior." 164. It would, however, be relevant to note that Purbanchal Cables came to be subsequently overruled by the Supreme Court in Shanti Conductors (P) Ltd. vs. Assam SEB (2019) 19 SCC 529 as would be evident from a reading of paras 60, 61 and 62 of the report and which are extracted hereunder:- "60. The judgment of this Court in Purbanchal Cables & C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent after the supply, on or before the day agreed upon between the supplier and buyer or before the appointed day. Payments were not made both to 'A' and 'B' as required by Section 3. Can the buyer who has received supplies from supplier 'A' escape from his statutory liability to make payment of interest under Section 3 read with Section 4? The answer has to be No. Two suppliers who supply goods after the enforcement of the Act, become entitled to receive payment after the enforcement of the Act one supplier cannot be denied the benefit of the statutory protection on the pretext that the agreement in his case was entered prior to enforcement of the Act. When the date of agreement is not referred as material or incidence for fastening the liability, by no judicial interpretation the said date can be treated as a date for fastening of the liability. The 1993 Act being beneficial legislation enacted to protect small scale industries and statutorily ensure by mandatory provision for payment of interest on the outstanding money, accepting the interpretation as put by the learned counsel for the Board that the day of agreement has to be subsequent to the enforcement of the Act, the entir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and completed transaction; or (iii) affecting accrued rights and remedies; or (iv) affecting procedure. Words and Phrases, Permanent Edn., Vol. 37-A, pp. 224-25, defines a "retrospective or retroactive law" as one which takes away or impairs vested or accrued rights acquired under existing laws. A retroactive law takes away or impairs vested rights acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability, in respect to transactions or considerations already past. 21. In Advanced Law Lexicon by P. Ramanatha Aiyar (3rd Edn., 2005) the expressions "retroactive" and "retrospective" have been defined as follows at p. 4124, Vol. 4: 'Retroactive.--Acting backward; affecting what is past. (Of a statute, ruling, etc.) extending in scope or effect to matters that have occurred in the past. --Also termed retrospective. (Black's Law Dictionary, 7th Edn., 1999) "Retroactivity" is a term often used by lawyers but rarely defined. On analysis it soon becomes apparent, moreover, that it is used to cover at least two distinct concepts. The first, which may be called "true retroactivity", consists in the application of a new rule of law to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is retroactive in operation. The 1993 Act is clearly prospective in operation and it is not necessary to term it as retroactive in operation. We, thus, do not subscribe to the opinion dated 31-8-2016 [Shanti Conductors (P) Ltd. v. Assam SEB, (2016) 15 SCC 13] of one of the Hon'ble Judges holding that the 1993 Act is retroactive." 166. The judgment in Katta Sujatha Reddy and Anr. vs. Siddamsetty Infra Projects Private Limited and Ors. (2023) 1 SCC 355 had dealt with the question of whether some of the amendments introduced in the Specific Relief Act, 1963 [SRA], in 2018 could be said to have retrospective application. The Supreme Court in Katta Sujatha Reddy held that Section 10 of the SRA could not be viewed as being merely procedural since it also affected substantive principles underlying contracts in general. The issue was thus answered as under: - "47. The High Court, in the impugned order, has taken a different approach in categorising the Specific Relief Act, 1963 as procedural and holding that the 2018 Amendment is also a procedural provision which requires to be given retrospective effect. The High Court places reliance on an old case of Radheshyam Kamilav. Kiran Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmance. 54. Having come to the conclusion that the 2018 Amendment was not a mere procedural enactment, rather it had substantive principles built into its working, this Court cannot hold that such amendments would apply retrospectively. 55. In Shyam Sunder v. Ram Kumar [Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24] , this Court held as under : (SCC pp. 42-43, para 28) "28. From the aforesaid decisions the legal position that emerges is that when a repeal of an enactment is followed by a fresh legislation, such legislation does not affect the substantive rights of the parties on the date of the suit or adjudication of the suit unless such a legislation is retrospective and a court of appeal cannot take into consideration a new law brought into existence after the judgment appealed from has been rendered because the rights of the parties in an appeal are determined under the law in force on the date of the suit. However, the position in law would be different in the matters which relate to procedural law but so far as substantive rights of parties are concerned, they remain unaffected by the amendment in the enactment. We are, therefore, of the view that where a repeal of provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dments ought to be retrospective or not. 57. In the light of the aforesaid discussion, it is clear that ordinarily, the effect of amendment by substitution would be that the earlier provisions would be repealed, and amended provisions would be enacted in place of the earlier provisions from the date of inception of that enactment. However, if the substituted provisions contain any substantive provisions which create new rights, obligations, or take away any vested rights, then such substitution cannot automatically be assumed to have come into force retrospectively. In such cases, the legislature has to expressly provide as to whether such substitution is to be construed retrospectively or not. 58. In the case at hand, the Amendment Act contemplates that the said substituted provisions would come into force on such date as the Central Government may appoint, by notification in the Official Gazette, or different dates may be appointed for different provisions of the Act. It may be noted that 1-10-2018 was the appointed date on which the amended provisions would come into effect. 59. In view of the above discussion, we do not have any hesitation in holding that the 2018 Amendme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act ceased to apply to land within the municipal boroughs, but the intention disclosed by the proviso to Section 43-C was to declare that all rights acquired by persons as tenants under the principal Act were to continue to remain available to them in respect of lands within the Municipal Boroughs as if Act 33 of 1952 were never enacted. The "Amending Act of 1955" is no other than Act 13 of 1956 [see the definition of "permanent tenant" in Section 2(10-A) added to the Principal Act and Section 1(1) of Act 13 of 1956]. The legislature has by referring to the Amending Act of 1955 sought also to protect, save as expressly provided in Section 43-D, the rights acquired under Act 67 of 1948, notwithstanding the amendments made by Act 13 of 1956. By Section 48 of Act 13 of 1956, the scheme of exemption from the operation of the Act of certain provisions thereof was extensively amended in respect of different classes of land. Section 88 of Act 67 of 1948 as originally enacted substituted by Sections 88, 88-A, 88-B, 88-C & 88-D. But this modified scheme of exemption and other provisions of the Act were by virtue of the proviso to Section 43-C not to affect the rights of tenants acquired ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construed with reference to the preceding parts of the clause to which it is appended. (c) Where the proviso is directly repugnant to a section, the proviso shall stand and be held a repeal of the section as the proviso speaks the latter intention of the makers. (d) Where the section is doubtful, a proviso may be used as a guide to its interpretation: but when it is clear, a proviso cannot imply the existence of words of which there is no trace in the section. (e) The proviso is subordinate to the main section. (f) A proviso does not enlarge an enactment except for compelling reasons. (g) Sometimes an unnecessary proviso is inserted by way of abundant caution. (h) A construction placed upon a proviso which brings it into general harmony with the terms of section should prevail. (i) When a proviso is repugnant to the enacting part, the proviso will not prevail over the absolute terms of a later Act directed to be read as supplemental to the earlier one. (j) A proviso may sometimes contain a substantive provision. 31. In the case of Local Government Board v. South Stoneham Union [1909 AC 57 : 99 LT 896 (HL)] Lord Macnaghten made the following observation: "I thin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9) 4 All ER 464 : 162 LT 1 (HL)] where it was observed thus: "We must now come to the proviso, for there is, I think, no doubt that, in the construction of the section, the whole of it must be read, and a consistent meaning, if possible, given to every part of it. The words are:... 'provided that such licence shall be granted only for premises situate in the ward or district electoral division in which such increase in population has taken place...' There seems to be no doubt that the words "such increase in population" refer to the increase of not less than 25 per cent of the population mentioned in the opening words of the section." 36. While interpreting a proviso care must be taken that it is used to remove special cases from the general enactment and provide for them separately. 37. In short, generally speaking, a proviso is intended to limit the enacted provision so as to except something which would have otherwise been within it or in some measure to modify the enacting clause. Sometimes a proviso may be embedded in the main provision and becomes an integral part of it so as to amount to a substantive provision itself. 38. Apart from the authorities referred to above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [(1973) 1 SCC 216 : 1973 SCC (Tax) 307] this Court made the following observations: [SCC para 22, p. 224: SCC (Tax) p. 315] "Ordinarily a proviso to a section is intended to take out a part of the main section for special treatment. It is not expected to enlarge the scope of the main section. But cases have arisen in which this Court has held that despite the fact that a provision is called proviso, it is really a separate provision and the so-called proviso has substantially altered the main section." 43. We need not multiply authorities after authorities on this point because the legal position seems to be clearly and manifestly well established. To sum up, a proviso may serve four different purposes: (1) qualifying or excepting certain provisions from the main enactment: (2) it may entirely change the very concept of the intendment of the enactment by insisting on certain mandatory conditions to be fulfilled in order to make the enactment workable: (3) it may be so embedded in the Act itself as to become an integral part of the enactment and thus acquire the tenor and colour of the substantive enactment itself; and (4) it may be used merely to act as an optional add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time for completion of the investigation. Does the Amendment Act No. 43 of 1993 have retrospective operation and does the amendment apply to the cases which were pending investigation on the date when the Amendment Act came into force? There may be cases where on 22-5-1993 the period of 180 days had already expired but the period of one year was not yet over. In such a case, the argument of learned counsel for the appellant is that the Act operates retrospectively and applies to pending cases and therefore the accused should be forthwith released on bail if he is willing to be so released and is prepared to furnish the bail bonds as directed by the court, an argument which is seriously contested by the respondents. 26. The Designated Court has held that the amendment would operate retrospectively and would apply to the pending cases in which investigation was not complete on the date on which the Amendment Act came into force and the challan had not till then been filed in the court. From the law settled by this Court in various cases the illustrative though not exhaustive principles which emerge with regard to the ambit and scope of an Amending Act and its retrospective operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect of the Central Amendment Act was that the West Bengal Amendment Act stood impliedly repealed with effect from April 1, 1976 and the question is whether the previous operation of the repealed West Bengal Amendment Act in respect of any liability incurred thereunder is preserved by Section 8 of the Bengal General clauses Act, 1899 which is pari materia with Section 6 of the General clauses Act, 1897 both as to procedure for trial of such offences and the nature of punishment liable to be imposed. xxxx xxxx xxxx 17. It is strenuously argued on behalf of the appellant that Section 16-A of the Act is not retrospective in operation, and that it does not deal with procedure alone but touches a substantive right. The submission is that in view of clauses (c), (d) and (e) of sub-section (1) of Section 8 of the Bengal General clauses Act, 1899 which provide that if any law is repealed then unless a different intention appears, the repeal shall not affect any liability incurred under any enactment so repealed or affect any legal proceeding or remedy in respect of such liability, penalty or punishment as aforesaid. It is said that there was a liability incurred by the commission of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be ascertained from a consideration of all the relevant provisions of the new Act and the mere absence of a saving clause is not by itself material. The Court therefore held that the provisions of Section 6 of the General clauses Act will apply to a case of repeal even if there is simultaneous enactment unless a contrary intention can be gathered from the new enactment. Of course, the consequences laid down in Section 6 of the General clauses Act will apply only when a statute or regulation having the force of a statute is actually repealed. It has no application when a statute which is of a temporary nature automatically expires by efflux of time. The principles laid down by the Court in Mohar Singh case [AIR 1955 SC 84: (1955) 1 SCR 893: 1955 SCJ 25 : 1955 Cri LJ 254], have consistently been followed in subsequent cases. The old doctrine of extinguishing or effacing the repealed law for all purposes and intents except for the acts past and closed has now given way to the principles enunciated by the Court in Mohar Singh case [AIR 1955 SC 84: (1955) 1 SCR 893: 1955 SCJ 25 : 1955 Cri LJ 254]. xxxx xxxx xxxx 21. Lastly, the learned Judge refers to the new offences created by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cto statute. "Every ex post facto law…" said Chase, J., in the American case of Calder v. Bull [3 US (3 Dall) 386: 1 L Ed 648 (1798)] "must necessarily be retrospective, but every retrospective law is not an ex post facto law. Every law that takes away or impairs rights vested agreeably to existing laws is retrospective, and is generally unjust and may be oppressive; it is a good general rule that a law should have no retrospect, but in cases in which the laws may justly and for the benefit of the community and also of individuals relate to a time antecedent to their commencement: as statutes of oblivion or of pardon. They are certainly retrospective, and literally both concerning and after the facts committed. But I do not consider any law ex post facto within the prohibition that mollifies the rigour of the criminal law, but only those that create or aggravate the crime, or increase the punishment or change the rules of evidence for the purpose of conviction.... There is a great and apparent difference between making an unlawful act lawful and the making an innocent action criminal and punishing it as a crime." 23. To illustrate, if Parliament were to reenact Section 302 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the same offence as the one punishable under Section 16(1)(a) and provided for a reduced punishment, the accused must have the benefit of the reduced punishment. We wish to make it clear that anything that we have said shall not be construed as giving to the Central Amendment Act a retrospective operation insofar as it creates new offences or provides for an enhanced punishment." 172. In support of the aforesaid proposition, the petitioner also additionally drew our attention to the following paragraphs forming part of the judgment of the Bombay High Court in Balu Shankar Patil vs. State of Maharashtra [2007] (5) Mh. LJ 675:- "10. Mr. Murtaza Najmi the learned counsel for the applicant contended that it is ex-post facto law with retrospective operation and, therefore, it will be applicable to all the accused persons, who were undergoing life imprisonment on the date, when this amendment came into force. At the outset, it may be stated that Mr. Kumbhakoni also took the same stand. However, before coming to the conclusion, it will be necessary to refer to the law settled in different cases by the Supreme Court. In Punjab Tin Supply Co. Ltd. v. Central Government, (1984) 1 SCC 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ested rights acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability, in respect to transactions or considerations already past." 13. Their Lordships further observed in paragraph 21 as follows: "21. In Advanced Law Lexicon by P. Ramanath Aiyar (3rd Edn., 2005) the expressions "retroactive" and "retrospective" have been defined as follows at p. 4124, Vol. 4; "Retroactive. -- Acting backward; affecting what is past. (Of a statute, ruling, etc.) extending in scope or effect to matters that have occurred in the past. -- Also termed retrospective. (Black's Law Dictionary, 7th Edn., 1999) "Retroactivity" is a term often used by lawyers but rarely defined. On analysis it soon becomes apparent, moreover, that it is used to cover at least two distinct concepts. The first, which may be called "true retroactivity", consists in the application of a new rule of law to an act or transaction which was completed before the rule was promulgated. The second concept, which will be referred to as "quasi- retroactivity", occurs when a new rule of law is applied to an act or transaction in the process of completion…. The foundation of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -2003 to suggest that the amendment is retrospective. The amendment in sub-clause (iii) and simultaneously in Explanation 4(a) carried out enlarges the scope of penalty under Section 271 (1) (c) to include even cases where assessment has been completed at loss. The same being in the nature of a substantive amendment would be prospective, in the absence of any indication to the contrary. 55. Explanation 4 to Section 271 (1) (c) as it stood prior to its amendment by the Finance Act, 2002, requires to be carefully compared with the said Explanation as amended by the Finance Act, 2002. The comparison of the Explanation as it stood before 2002 and after 2002 by itself shows clearly that it is only after the amendment made by the Finance Act, 2002 that the Explanation dealt with the situation of an assessee having returned a loss and where, even after addition of concealed income by the assessee, the end result was still an assessed loss. This situation was not dealt with at all by the Explanation to Section 271 (1) (c) as it stood prior to its amendment by the Finance Act, 2002. Further, a plain reading of Clause (a) of Explanation 4 to Section 271 as it stood prior to the 2002 Amendm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amendment brought about in the statute with effect from 1-4-2003, it is contended that the legislature has now deliberately enacted such provision to fill in the lacuna in law and also to put an end to the controversy which existed between the High Courts in interpreting the laws after 1-4-1976. The amended provision of law is not available prior to 1-4-2003, as the same is not enacted with retrospective effect. That this amendment is declaratory and applies to all pending cases, as held by the Bombay High Court in CIT v. Chemiequip Ltd. [(2004) 265 ITR 265 (Bom)] is untenable for the following reasons: (a) There is nothing in the statute to suggest to that effect. The interpretation that it is clarificatory as per the Notes on Clauses do not advance the Revenue's case, because of its specific omission to that effect. It is purely a case of amendment to the statute. (b) Amendment is not retrospective and there is no assumption as to its retrospectivity. Retrospectivity has to be enacted specifically in the fiscal statute and it is more so in the case of penal provisions, otherwise it would be contradictory or derogatory to Article 20 (1) of the Constitution. This Court has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the expression "professional or other misconduct" would have the same meaning as assigned to that phrase by the CA Act. 177. It was further submitted that the obligation to comply with SAs too was one which existed even prior to the introduction of Section 132 as would be manifest from a reading of Section 143(9) of the Companies Act alongside Section 147(2) thereof. It was argued that by virtue of the aforenoted two statutory provisions, non-compliance with SAs was a criminal offence which existed and stood recognized by law even prior to 2018 when Section 132 came to be introduced. It was thus submitted by Mr. Hossain that it would be wholly incorrect to suggest that either a vested right had come to be infringed or that the provisions of Section 132 violated rights and the protection flowing from Article 20 (1) of the Constitution. 178. Mr. Hossain then vehemently argued that Article 20 (1) can clearly have no application since the expression penalty as appearing therein is used in a narrow sense and stands confined to a criminal prosecution. It was thus argued that the said provision is clearly inapplicable to a civil penalty arising out of disciplinary proceedings. Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also termed as a penalty even though it is not being recovered pursuant to an order finding the person concerned guilty of a crime. In Article 20 (1) the expression "penalty" is used in the narrow sense as meaning a payment which has to be made or a deprivation of liberty which has to be suffered as a consequence of a finding that the person accused of a crime is guilty of the charge. xxxx xxxx xxxx 31. After giving an anxious consideration to the points urged before us, we feel that the word 'penalty' used in Article 20 (1) cannot be construed as including a 'penalty' levied under the sales tax laws by the departmental authorities for violation of statutory provisions. A penalty imposed by the Sales Tax Authorities is only a civil liability, though penal in character. It may be relevant to notice that sub-section (2-A) of Section 9 of the Act specifically refers to certain acts and omissions which are offences for which a criminal prosecution would lie and the provisions relating to offences have not been given retrospective effect by Section 9 of the Amending Act. The argument based on Article 20 (1) of the Constitution is, therefore, rejected." 179. Proceeding along these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Register permanently or for such period, as it thinks fit; (c) impose such fine as it may think fit, which may extend to rupees five lakhs. S. 132 (4) (c) Companies Act, 2013 Where professional or other misconduct is proved, have the power to make order for-- (A) imposing penalty of-- (I) not less than one lakh rupees, but which may extend to five times of the fees received, in case of individuals; and (II) not less than ten lakh rupees, but which may extend to ten times of the fees received, in case of firms; (B) debarring the member or the firm from-- I. being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate; or II. performing any valuation as provided under Section 247, for a minimum period of six months or such higher period not exceeding ten years as may be determined by the National Financial Reporting Authority.] Explanation. --For the purposes of this sub section, the expression "professional or other misconduct" shall have the same meaning assigned to it under section 22 of the Chartered Accountants Act, 1949 (3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent from the following extracts of that judgment:- "5. On the plain language of Sections 110-A and 110-F there should be no difficulty in taking the view that the change in law was merely a change of forum i.e. a change of adjectival or procedural law and not of substantive law. It is a well-established proposition that such a change of law operates retrospectively and the person has to go to the new forum even if his cause of action or right of action accrued prior to the change of forum. He will have a vested right of action but not a vested right of forum. If by express words the new forum is made available only to causes of action arising after the creation of the forum, then the retrospective operation of the law is taken away. Otherwise the general rule is to make it retrospective. The expressions "arising out of an accident" occurring in sub-section (1) and "over the area in which the accident occurred", mentioned in sub-section (2) clearly show that the change of forum was meant to be operative retrospectively irrespective of the fact as to when the accident occurred. To that extent there was no difficulty in giving the answer in a simple way. But the provision of limita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it is presumed to be retrospective in nature unless the amending statute provides otherwise. This determination emerges from the decision of this Court in Hitendra Vishnu Thakur v. State of Maharashtra [Hitendra Vishnu Thakur v. State of Maharashtra, (1994) 4 SCC 602 : 1994 SCC (Cri) 1087] ; Ranbir Yadav v. State of Bihar [Ranbir Yadav v. State of Bihar, (1995) 4 SCC 392 : 1995 SCC (Cri) 728] and Kamlesh Kumar v. State of Jharkhand [Kamlesh Kumar v. State of Jharkhand, (2013) 15 SCC 460 : (2014) 6 SCC (Cri) 489] , as well as, a number of further judgments noted above. 50. We have also no doubt, that alteration of "forum" has been considered to be procedural, and that, we have no hesitation in accepting the contention advanced on behalf of the SEBI, that change of "forum" being procedural, the amendment of the "forum" would operate retrospectively, irrespective of whether the offence allegedly committed by the accused was committed prior to the amendment." 186. Proceeding then to the Proviso to Section 132 (4) itself, it was Mr. Hossain's contention that a plain reading of the Proviso would establish that the legislative intendment clearly was to debar any authority other than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e intention of the legislature to affect existing rights, it is deemed to be prospective only -- "nova constitutio futuris formam imponere debet non praeteritis" -- a new law ought to regulate what is to follow, not the past. (See Principles of Statutory Interpretation by Justice G.P. Singh, 9th Edn., 2004 at p. 438.) It is not necessary that an express provision be made to make a statute retrospective and the presumption against retrospectivity may be rebutted by necessary implication especially in a case where the new law is made to cure an acknowledged evil for the benefit of the community as a whole (ibid., p. 440). 14. The presumption against retrospective operation is not applicable to declaratory statutes…. In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is "to explain" an earlier Act, it would be without object unless construed retrospectively. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the gross mistake of the omission of the weight, for which the sum expressed was to have been payable, occasioned the amendment made by the subsequent Act: but that had reference to the former statute as soon as it passed, and they must be taken together as if they were one and the same Act;" (Price at p. 392) 17. Maxwell states in his work on Interpretation of Statutes (12th Edn.) that the rule against retrospective operation is a presumption only, and as such it "may be overcome, not only by express words in the Act but also by circumstances sufficiently strong to displace it" (p. 225). If the dominant intention of the legislature can be clearly and doubtlessly spelt out, the inhibition contained in the rule against perpetuity becomes of doubtful applicability as the "inhibition of the rule" is a matter of degree which would "vary secundum materiam" (p. 226). Sometimes, where the sense of the statute demands it or where there has been an obvious mistake in drafting, a court will be prepared to substitute another word or phrase for that which actually appears in the text of the Act (p. 231). 18. In a recent decision of this Court in National Agricultural Coop. Marketing Feder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Rep 7a : 76 ER 637] was decided that-- '… for the sure and true interpretation of all statutes in general (be they penal or beneficial, restrictive or enlarging of the common law) four things are to be discerned and considered-- 1st. What was the common law before the making of the Act. 2nd. What was the mischief and defect for which the common law did not provide. 3rd. What remedy Parliament hath resolved and appointed to cure the disease of the Commonwealth, and 4th. The true reason of the remedy; and then the office of all the judges is always to make such construction as shall suppress the mischief, and advance the remedy, and to suppress subtle inventions and evasions for continuance of the mischief, and pro privato commodo, and to add force and life to the cure and remedy, according to the true intent of the makers of the Act, pro bono publico.' " 21. In Allied Motors (P) Ltd. v. CIT [(1997) 3 SCC 472] certain unintended consequences flowed from a provision enacted by Parliament. There was an obvious omission. In order to cure the defect, a proviso was sought to be introduced through an amendment. The Court held that literal construction was liable to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CA Act envisages is INR 5 lakhs. The statement so made thus and to an extent impacts the challenge which was mounted to the validity of Section 132 (4) on the ground of it having introduced penalties which were more onerous and greater than those existing under the CA Act. 192. The second without prejudice statement, and clearly one which was of greater import and consequence, was that NFRA would not proceed against any firms in respect of an audit that may have been conducted prior to 20 October 2018. The aforesaid statement was made by Mr. Hossain notwithstanding his submission that the obligations of firms to comply with the law as well as the SAs predated the introduction of Section 132 in the Companies Act. However, and since that statement is duly taken on board and accepted, it obviates the Court ruling on the challenge raised by auditing firms to Section 132 (4) insofar as it was sought to be extended to audits completed prior to October 2018 and the argument of it being retroactive. 193. However, the Court would still be required to deal with the challenge to its validity insofar as individual CAs' and pre-2018 audits to which they were a party is concerned. The rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guage of the provision indicates a clear or even implicit intent of being intended to have retrospective operation, Courts would give full effect to that intent, recognizing that legislative power extends not only to regulating future conduct but also to rectifying past anomalies. The necessity that may have prompted the enactment is another crucial factor. Often, laws are introduced to address pressing concerns, to correct that which has persisted for long due to outdated legal frameworks, or to fill gaps that have led to uncertainty or unfair advantage. In such cases, applying the law prospectively alone would fail to remedy the mischief the Legislature sought to address, rendering the enactment ineffective in achieving its true objective. 196. While innumerable decisions were cited by learned counsels appearing for respective sides in this regard, in our considered opinion the legal position has remained unaltered and our understanding of the application and operation of statutes has over the centuries continued to be guided by the precepts culled out above. 197. A challenge to a statute on the ground of it being retrospective, however, is invariably and indelibly linked to ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar [(1996) 9 SCC 516 : AIR 1996 SC 1936] and J.S. Yadav v. State of U.P. [(2011) 6 SCC 570 : (2011) 2 SCC (L&S) 140] ) 13. Thus, vested right is a right independent of any contingency and it cannot be taken away without consent of the person concerned. Vested right can arise from contract, statute or by operation of law. Unless an accrued or vested right has been derived by a party, the policy decision/scheme could be changed. [Vide Kuldeep Singh v. Govt. (NCT of Delhi). [(2006) 5 SCC 702 : AIR 2006 SC 2652]]" As is evident from the aforesaid passages, the word "vested" was defined and explained by the Supreme Court as pertaining to rights which could be said to have become fixed, absolute and complete. Those rights would fall in the category of assertions and protections which could be claimed and not being contingent or subject to be defeated by a condition precedent. It was, however, also pertinently observed that mere expectancy of future benefits and interests which may be contingent, or an anticipated continuance of existing laws would not constitute vested rights. The word "vested" was thus explained to mean a right which is not dependent on any contingency and which in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, as applicable to their case on the date of making an application for sanction and the fixed period allotted by the Court for its consideration, it had a "legitimate" or "settled expectation" to obtain the sanction. In our considered opinion, such "settled expectation", if any, did not create any vested right to obtain sanction. True it is, that the respondent Company which can have no control over the manner of processing of application for sanction by the Corporation cannot be blamed for delay but during pendency of its application for sanction, if the State Government, in exercise of its rule-making power, amended the Building Rules and imposed restrictions on the heights of buildings on G.T. Road and other wards, such "settled expectation" has been rendered impossible of fulfilment due to change in law. The claim based on the alleged "vested right" or "settled expectation" cannot be set up against statutory provisions which were brought into force by the State Government by amending the Building Rules and not by the Corporation against whom such "vested right" or "settled expectation" is being sought to be enforced. The "vested right" or "settled expectation" has been nullifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal is always a creature of statute. The change of the forum for appeal by enactment may not affect the right of appeal itself. In the instant case we are concerned with the right to contest and not with the right to appeal as such. There is also no dispute as to the propositions of law regarding vested rights being not taken away by an enactment which is ex facie or by implication not retrospective. But merely because an Act envisages a past act or event in the sweep of its operation, it may not necessarily be said to be retrospective. Retrospective, according to Black's Law Dictionary, means looking backward; contemplating what is past; having reference to a statute or things existing before the Act in question. Retrospective law, according to the same dictionary, means a law which looks backward or contemplates the past; one which is made to affect acts or facts occurring, or rights occurring, before it came into force. Every statute which takes away or impairs vested rights acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability in respect to transactions or considerations already past. Retroactive statute means a statute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obviously competent for the legislature, in its wisdom, to make the provisions of an Act of Parliament retrospective, and no one denies the competency of the legislature to pass retrospective statutes if they think fit, and many times they have done so. Before giving such a construction to an Act of Parliament one would require that it should either appear very clearly in the terms of the Act or arise by necessary and distinct interpretation, and perhaps no rule of construction is more firmly established than this -- that a retrospective operation is not to be given to a statute so as to impair an existing right or obligation otherwise than as regards matter of procedure, unless that effect cannot be avoided without doing violence to the language of the enactment." We agree with the above statement of law. However, applying the Amending Act of 1973 to alienations prior to January 23, 1973 does not necessarily mean its retrospective operation." 202. As is apparent from the aforesaid discussion, while delving on the subject of retrospectivity of a legislation the Supreme Court had pertinently observed that while it is true that an enactment would not be construed as having retrosp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and things which come into existence after its operation and the rule may well result in virtual nullification of most of the statutes." (emphasis supplied) 100. In Vineeta Sharma v. Rakesh Sharma [Vineeta Sharma v. Rakesh Sharma, (2020) 9 SCC 1 : (2021) 1 SCC (Civ) 119] this Court described the nature of prospective, retrospective, and retroactive laws : (SCC p. 53, para 61) "61. The prospective statute operates from the date of its enactment conferring new rights. The retrospective statute operates backwards and takes away or impairs vested rights acquired under existing laws. A retroactive statute is the one that does not operate retrospectively. It operates in futuro. However, its operation is based upon the character or status that arose earlier. Characteristic or event which happened in the past or requisites which had been drawn from antecedent events." 101. The terms "retrospective" and "retroactive" are often used interchangeably. However, their meanings are distinct. This Court succinctly appreciated the difference between these concepts in State Bank's Staff Union (Madras Circle) v. Union of India [State Bank's Staff Union (Madras Circle) v. Union of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 32 is liable to be struck down on the ground that it operates retrospectively and impacts rights which may have been perfected or completed. It becomes relevant to note that the Explanation to Section 132 (4) in unambiguous and explicit terms provides that the expression "professional or other misconduct" would have the same meaning as assigned to that phrase by Section 22 of the CA Act. Section 132 therefore, does not create a new species of misconduct nor does it create a liability which was otherwise not contemplated under a pre-existing legislation. "Professional or other misconduct" already stood defined by Section 22 of the CA Act and thus all actions of CAs and auditors were liable to be tested on the basis thereof. It would thus be wholly incorrect to contend that Section 132 creates a new liability with respect to a misconduct or misdemeanor committed prior to October 2018. 206. The principal issue which weighs upon us and compels us to hold that the argument of retrospectivity is unmerited is the facet of professional misconduct having remained unaltered and only the manner and ambit of the inquiry having been amended for a particular class of audits. As noted hereinabov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be viewed as having retroactive operation merely because it draws upon an event or act which preceded its promulgation. Acts of misconduct committed prior to October 2018 were neither accorded nor conferred a shield of immunity. Section 132 does not create a new disqualification or create a novel set or category of misdemeanors to constitute professional or other misconduct. The conduct of an audit, an individual or a firm remains liable to be enquired into based on the obligations and duties which held the field even prior to the introduction of Section 132. The conduct of an audit would continue to be examined and evaluated based on those legal obligations and set of rules which existed earlier. 210. The scrutiny, test and rigor of conduct in the rendering of services as a professional or auditor is a well-understood, rooted and an accepted reality. To raise objections to the new and evolved rigors under Section 132 on the ground that it exposes them to an unprecedented level of scrutiny and that they were previously protected from such rigors would be to incorrectly assume the existence of an immunity prior to Section 132. Therefore, any contention that Section 132 unfairly int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s unable to accept the submissions of the writ petitioners addressed on this score. 214. On a consideration of the legislative history preceding the introduction of Section 132 clearly suggests a pre-existing regulatory deficiency or gap was sought to be addressed through the introduction of Section 132 aligning with the broader objective of strengthening oversight mechanisms and enhancing the quality of professional services rendered by audit firms. This measure was implemented not to create new liabilities but to bridge an existing gap in enforcement, ensuring that standards of professional conduct and accountability evolve in tandem with global best practices. 215. The enactment of Section 132 thus represents a progressive regulatory shift, aimed at reinforcing compliance, raising the bar for audit quality, and ensuring that no aspect of professional misconduct or deficiency in service remains unchecked or unsupervised. By instituting a more structured and stringent framework, Section 132 ensures that audit firms and professionals adhere to internationally recognized standards, thereby fostering greater transparency, accountability, and confidence in financial reporting. 216. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... class of bodies corporate and persons. Cases which are thus taken over by the NFRA would then be liable to be investigated by it exclusively. Such category of cases shall be liable to be tried only by that statutory authority. 220. However, and as was observed earlier, NFRA does not assume authority for the purposes of enquiring into a newly created specie of misconduct. Misconduct continues to be an act as defined by Section 22 of the CA Act. It is only the enquiry which would now be undertaken by the NFRA and which represents the new forum for the aforesaid purpose. In New India Assurance the Supreme Court had observed that amendments of procedure which may compel one to institute an action before a newly minted forum would not be unconstitutional. Their Lordships had pertinently observed that what vests in an individual is "a right of action but not a vested right of forum". Of course, whether the procedure prescribed under the amended regime is fair, reasonable and does not cause prejudice is a separate issue altogether and the challenge mounted on that score by the writ petitioners is presently kept aside and shall be dealt with in the latter parts of this judgment. 221. Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s : it does not enjoin the employers to do anything before closure. Section 31(2) of the Act which imposes penal liability for contravention of the provisions of the Act can therefore have no application to failure to make payment of compensation and wages for the period of notice under Section 25-FFF(1). The amending Act was, it is true, passed in June 1957, and liability to pay compensation arises in respect of all undertakings closed on or after November 28, 1956. But, if liability to pay compensation is not a condition precedent to closure, by failing to discharge the liability to pay compensation and wages in lieu of notice, the employer does not contravene Section 25-FFF(1). A statute may prohibit or command an act and in either case, disobedience thereof will amount to contravention of the statute. If the statute fixes criminal liability for contravention of the prohibition or the command which is made applicable to transactions which have taken place before the date of its enactment the protection of Article 20 (1) may be attracted. But Section 25-FFF(1) imposes neither a prohibition nor a command. Under Section 25-F, there is a distinct prohibition against an employer agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... General Clauses Act, 1897 shall apply for the interpretation of the Constitution as it does for the interpretation of an Act. 27. If we look at the definition of "offence" under the General Clauses Act, 1897 it shall mean any act or an omission made punishable by any law for the time being in force. Therefore, the order of restrain for a specified period cannot be equated with punishment for an offence as has been defined under the General Clauses Act. 28. Under the Criminal Procedure Code, "offence" has been defined under Section 2(n) as follows: "2. (n) 'offence' means any act or omission made punishable by any law for the time being in force and includes any act in respect of which a complaint may be made under Section 20 of the Cattle-Trespass Act, 1871 (1 of 1871);" 29. On a comparison of the aforesaid two definitions we find that there are common links between the two. An offence would always mean an act of omission or commission which would be punishable by any law for the time being in force. 30. Article 20 (1) was interpreted by the Court in Rao Shiv Bahadur Singh v. State of Vindhya Pradesh [(1953) 2 SCC 111 : AIR 1953 SC 394 : 1953 Cri LJ 1480]. Jagannadha Das, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stors in the capital market by giving them some protection. 34. The said Act is pre-eminently a social welfare legislation seeking to protect the interests of common men who are small investors. It is a well-known canon of construction that when the court is called upon to interpret provisions of a social welfare legislation the paramount duty of the court is to adopt such an interpretation as to further the purposes of law and if possible eschew the one which frustrates it. Keeping this principle in mind if we analyse some of the provisions of the Act it appears that the Board has been established under Section 3 as a body corporate and the powers and functions of the Board have been clearly stated in Chapter IV and under Section 11 of the said Act." 225. In Yogendra Kumar Jaiswal vs. State of Bihar (2016) 3 SCC 183, the Supreme Court was faced with a similar challenge contained in a statute promulgated by the Legislature of the State of Orissa and which had contemplated confiscation of properties. Following the line of precedents rendered in the context of Article 20 (1), the Supreme Court held that confiscation was clearly not a punishment which would attract Article 20 (1). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and where the final judgment or order of the criminal courts has imposed or upheld a sentence of fine on the said person (whether alone or in conjunction with any other punishment), the District Judge may order, without prejudice to any other mode of recovery, that the said fine shall be recovered from the residue of the said attached property or of the security given in lieu of attachment." 148. The learned counsel for the appellants would submit that under the 1988 Act the accused were liable to face attachment during trial and forfeiture after conviction but by virtue of the Orissa Act they are compelled to face confiscation as a consequence of which they are deprived of the possession and the property goes to the State Government. The learned counsel for the State would submit that the forfeiture is provided after the conviction as the property has to be forfeited and embezzled amount requires to be realised but it does not debar the legislature to provide confiscation of property as an interim measure by providing an adequate adjudicatory process. It is also submitted that the offence under Section 13(1)(e) has its gravity and, therefore, the stringent interim measure is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The offence with which the appellant had been charged was cheating punishable under Section 420 of the Penal Code which was certainly a law in force at the time of the commission of the offence. The sentence of imprisonment which was imposed upon the appellant was certainly not greater than that permitted by Section 420. The sentence of fine also was not greater than that which might have been inflicted under the law which had been in force at the time of the commission of the offence, as a fine unlimited in extent could be imposed under the section.'" (K. Satwant Singh case [K. Satwant Singh v. State of Punjab, AIR 1960 SC 266 : 1960 Cri LJ 410] , AIR p. 275, para 28) 150. Thereafter, the Court referred to Maya Rani Punj v. CIT [Maya Rani Punj v. CIT, (1986) 1 SCC 445 : 1986 SCC (Tax) 220] , K. Satwant Singh [K. Satwant Singh v. State of Punjab, AIR 1960 SC 266 : 1960 Cri LJ 410] and Tiwari Kanhaiyalal v. CIT [Tiwari Kanhaiyalal v. CIT, (1975) 4 SCC 101 : 1975 SCC (Cri) 312 : 1975 SCC (Tax) 214] and eventually held : (Gandhi case [State of A.P. v. Gandhi, (2013) 5 SCC 111 : (2013) 2 SCC (Cri) 884] , SCC p. 135, para 51) "51. … The order of compulsory retirement is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conversion, disposition or movement of property by an order issued by the court." 152. The legislature has thought it proper to change the nature and character of the interim measure. The property obtained by ill-gotten gains, if prima facie found to be such by the authorised officer, is to be confiscated. An accused has no vested right as regards the interim measure. He is not protected by any constitutional right to advance the plea that he cannot be made liable to face confiscation proceedings of the property which has been accumulated by illegal means. That being the litmus test, the filament of reasoning has to rest in favour of confiscation and not against it. Therefore, we are of the considered view that the provision does not violate any constitutional assurance." 226. The precedents thus rendered in the context of Article 20 (1) clearly appear to exclude civil liabilities or penalties that may come to be imposed from the ambit of that constitutional prohibition. The scope of Article 20 (1) has thus been consistently explained to be confined to crimes and punishments as generally understood. In any event, an act of professional misconduct was liable to be penalised and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AL SAFEGUARDS 230. The validity of Section 132 (4) as well as the procedure adopted by the NFRA was then assailed on the ground of the latter having deprived the petitioners of various significant rights and procedural safeguards which were otherwise provisioned for under the CA Act and the subordinate rules governing the conduct of disciplinary proceedings. It was submitted that the Act as well as the NFRA Rules merely provide for that authority evolving such procedure as may be considered expedient in the facts of a particular case. The statute, the petitioners argued, neither lays in place a codified procedure for the conduct of disciplinary proceedings nor do its provisions provide any guidance to the NFRA to adhere to a procedure which would be commensurate with the constitutional imperatives of fairness and natural justice. Our attention was also drawn to Rule 11(5) with the petitioners highlighting the fact that the said rule merely enjoins a division of the NFRA to dispose of the SCN proceedings through a summary procedure albeit while adhering to the principles of natural justice. 231. The note submitted by DHS enclosed a chart which sought to highlight the substantive d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. - Evidence to be given by the Director. (Discretion to permit cross-examination of any witnesses or re- call of any witness for further cross- examination.) [Rule 18 (11)] - 11. - Opportunity to the complainant to present evidence [Rule 18(12)] - 12. - Evidence to be given by the Respondent. [Rule 18(13)] - 13. - Power to issue notice to any witnesses along with directions to attend or produce any documents or material evidence (on an application from the Respondent) [Rule 18(14)] - 14. - After presentation of Evidence, arguments to be made before the Committee by the Director, Respondent and the Complainant. [Rule 18(16)] - 15. Discretion to serve of fresh notice, in case the person against whom the complaint is made does not appear for the hearing. [Rule 14(7)] - 16. Power to adjourn the proceedings at any stage. [Rule 14(8)] Power to adjourn the proceedings at any stage [Rule 18(18)] - 17. Further, if the Board arrives at a finding that the respondent is guilty of professional or other misconduct a further opportunity is given to the respondent to be heard before such an order is passed. [Rule 15] Further, if the Committee arrives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ie opinion of the Director; and (b) Particulars of documents relied upon by the Director, if any, for forming prima facie opinion. [Rule 18 (2) of ICAI Rules] A copy of the Order instituting proceedings shall be issued by the Board which shall include a which statement of matters of fact and law to be considered and determined with respect to each person charged including the conduct alleged to have violated the Act and the rule, statute or standard violated. [Rule 5201 (a) and (b) of PCAOB Rules] Where the Tribunal is to hold a hearing, the notice of hearing shall state: (a) Date, time and venue; (b) Allegations; (c) Warning that the Tribunal may proceed with the hearing in the absence of any party. [Rule 34 of FRC Audit Enforcement Procedure] Reply The respondent shall file a written statement within such time as may be specified by the Board. [Rule 14 (3) of ICAI Rules] The respondent shall file a written statement within such time as the Committee may specify. [Rule 18 (3) of ICAI Rules] A party may be required by the Board vide the order instituting proceedings or a party may elect to file an answer to each of the allegations levelled in the order instituting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unce its decision [Rule 53 of FRC Audit Enforcement Procedure] Evidence Summary procedure and therefore no provision for leading evidence. The Board shall consider the written Representation s including written statements, rejoinder and supporting documents and oral submissions and arrive at its finding on whether the respondent is guilty or not of professional or other misconduct. [Rule 14 (1) read with Rule 14 (9) of ICAI Rules] If at the first hearing the respondent does not plead guilty, the Committee shall fix a date for examination of witnesses and production of documents. On the date so fixed the Committee shall proceed to take evidence produced by the Director including oral examination of witnesses and production of documents. The Committee may permit cross examination of witnesses. After presenting of evidence by the Director, the complainant shall be given an opportunity to present any additional evidence. Thereafter the respondent shall be called upon to enter his defence and produced his evidence. [Rule 18 (9) to (13) of ICAI Rules] A party may present its case or defence by oral or Documentary evidence, submit rebuttal evidence, and conduct such cross- examination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s restricted to construct a defense based solely on the audit record. 234. It was argued that the insistence of NFRA to restrict responses to the audit file clearly deprives the petitioners of the right to effectively respond to allegations of professional misconduct and causes immense prejudice. It was in this respect submitted that SA 230 and more particularly Para A7 thereof itself acknowledges the fact that it would neither be practicable nor is it necessary for an auditor to document every matter considered or professional judgment made. It was thus argued that since the SA itself takes note of the impracticality of every document being included and made part of the audit file, the restriction so placed by the NFRA is wholly arbitrary and illegal. It was then contended that the restriction of the disciplinary proceedings to the audit file is violative of Rule 11(5) itself and which speaks of the procedure being in consonance with the principles of natural justice, the respondents being obliged to provide an opportunity of hearing and on consideration of the submissions made by the auditor as well as all relevant facts and circumstances. 235. SRBC had additionally argued that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an auditor would not be liable to be taken into consideration nor would they "represent adequate support for the work auditor performed or conclusions the auditor reached". Oral explanations, Mr. Hossain submitted in terms of Para A5 can only be used to explain or clarify information contained in the audit documentation. It was thus submitted that the NFRA is clearly justified in restricting the enquiry proceedings to the audit file and excluding the introduction of additional evidence. 240. Mr. Hossain then contended that merely because the statute speaks of a summary procedure, the same cannot lead to a presumption being drawn that the proceedings would inevitably be in violation of the fundamental precepts of fair play or for that matter the principles of natural justice. Mr. Hossain submitted that such a course is adopted even by the PCAOB as would be evident from a reading of Rule 5427(d) which makes the following provisions:- "Rule 5427. Motion for Summary Disposition xxxx xxxx xxxx (d) Decision on Motion The hearing officer shall promptly grant a motion for summary disposition if the pleadings, depositions, and admissions on file, together with the affidavits, if an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heques were deposited and because the cheques could not cleared on that day and subsequently I appeared before the SEBI they told me that you should have subsequently withdrawn the certificate if you had come to know that the cheques are not cleared. I told them that that is the work of Merchant Bank and they are monitoring the day to day movement of the funds. I cannot go and monitor the day to day movement of the funds in their Company and based on their track record whatever cheques they have earlier deposited got cleared that is only one time that Rs. 37 lacs cheques not cleared. That was the only plea which I took before the SEBI and I also taking before the Disciplinary Committee." 242. The aforesaid principles as enunciated in Mukesh Gang, according to Mr. Hossain, would, a fortiori, apply to disciplinary proceedings under the NFRA Rules. Mr. Hossain submitted that the degree of proof or evidence which is required in disciplinary proceedings that may be initiated by the NFRA, is not expected to meet the test of guilt being proven beyond reasonable doubt and which is the fundamental test governing criminal trials. Disciplinary proceedings, learned counsel submitted are conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the final decision of the Board as to that party upon issuance of a notice of finality by the Secretary. (2) Subject to subparagraph (3) of this paragraph, the Secretary shall issue a notice of finality no later than 20 days after the lapsing of the time period for filing a petition for review of the initial decision. (3) The Secretary shall not issue a notice of finality as to any party (i) who has filed a timely petition for review; or (ii) with respect to whom the Board has ordered review of the initial decision pursuant to Rule 5460(b)." 243. It was then contended that it would be wholly incorrect to seek similarity in the procedure that was prescribed under the CA Act with the Rules which regulate the conduct of disciplinary proceedings by the NFRA. It was submitted that the Council under the CA Act is also enjoined to try complaints that may be made against members. NFRA proceedings on the other hand, it was explained, are merely concerned with monitoring the quality of service related to the audit. Those proceedings, Mr. Hossain submitted, can be initiated either suo moto or upon a reference being received by the NFRA from an appropriate authority. Viewed in that l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es sufficient guidance to NAA to determine the methodology on a case by case basis depending upon peculiar facts of each case and the nature of the industry and its peculiarities. Consequently, so long as the methodology determined by NAA is fair and reasonable, the petitioners cannot raise the objection that the specifics of the methodology adopted are not prescribed." 245. This would constitute an appropriate juncture to additionally notice some of the decisions that were cited for our consideration by respective sides. From the side of the writ petitioners reliance was firstly placed on an Advocate vs. Bar Council of India 1989 Supp (2) SCC 25 and where the Supreme Court while examining Section 35 of the Advocates Act had held as follows:- "4. At this juncture, it is appropriate to articulate some basic principles which must inform the disciplinary proceedings against members of the legal profession in proceedings under Section 35 of the Advocates Act, read with the relevant Rules: "(i) essentially the proceedings are quasi-criminal in character inasmuch as a member of the profession can be visited with penal consequences which affect his right to practise the profession a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ractitioner carrying reasonable workload. A line will have to be drawn between tolerable negligence and culpable negligence in the sense of negligence which can be treated as professional misconduct exposing a member of the profession to punishment in the course of disciplinary proceedings. In forming the opinion on this question the standards of professional conduct and etiquette spelt out in Chapter 2 of Part VI of the Rules governing advocates, framed under Section 60(3) and Section 49(1)(g) of the Act, which form a part of the Bar Council of India Rules may be consulted. As indicated, in the preamble of the Rules, an advocate shall, at all times compose himself in a manner befitting his status as an officer of the court, a privileged member of the community and a gentleman bearing in mind what may be lawful and moral for one who is not a member of the Bar may still be improper for an advocate and that his conduct is required to conform to the rules relating to the duty to the court, the duty to the client, to the opponent, and the duty to the colleagues, not only in letter but also in spirit. It is in the light of these principles the Disciplinary Committee would be required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . They could be the result of an attempt to give a semblance of truth to a coloured and exaggerated version. It is also true that the appellant had been most unwise in not sending a registered letter in reply to the registered notice received by him on January 8, 1971 by the complainant. His version that he spoke to the complainant on the telephone and sent a letter in reply on January 15, 1971, of which- a copy was Ex. R-1, had been rejected by the committee on the ground that the advocate's conduct did not appear to be above board. We cannot help thinking that the committee had been unduly swayed by the unsavoury background of the appellant so that it could not see its way to giving the appellant even the benefit of doubt in the instant case." 247. The petitioners had also sought to invoke the principle of manifest arbitrariness in the context of Rule 11(5) failing to incorporate appropriate safeguards and defining the content of the summary procedure that the NFRA is obliged to adopt. In order to explain the precept of manifest arbitrariness and which has now become an indelible part of our jurisprudence insofar as constitutional validity of statutes is concerned, the petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate, the impugned provision, as applied to the latter purpose, was covered by clause (2) of Article 19 and must, it was said, be held to be valid. We are unable to accede to this contention. Where a law purports to authorise the imposition of restrictions on a fundamental right in language wide enough to cover restrictions both within and without the limits of constitutionally permissible legislative action affecting such right, it is not possible to uphold it even so far as it may be applied within the constitutional limits, as it is not severable. So long as the possibility of its being applied for purposes not sanctioned by the Constitution cannot be ruled out, it must be held to be wholly unconstitutional and void. In other words, clause (2) of Article 19 having allowed the imposition of restrictions on the freedom of speech and expression only in cases where danger to the State is involved, an enactment, which is capable of being applied to cases where no such danger could arise, cannot be held to be constitutional and valid to any extent." 248. With respect to the aspect of vagueness of a statute the petitioners sought to draw sustenance from the following observations appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., in A.K. Gopalan v. State of Madras [1950 SCC 228 : (1950) SCR 88] to the effect that a law cannot be declared void because it is opposed to the spirit supposed to pervade the Constitution but not expressed in words, the conclusion above set out is reiterated. The learned Judge, however, adds that the words "cattle fair" in act there considered, are sufficiently clear and there is no vagueness. 45. These observations which are clearly obiter are apt to be too generally applied and need to be explained. While it is true that the principles evolved by the Supreme Court of the United States of America in the application of the Fourteenth Amendment were eschewed in our Constitution and instead the limits of restrictions on each fundamental right were indicated in the clauses that follow the first clause of the nineteenth article, it cannot be said as an absolute principle that no law will be considered bad for sheer vagueness. There is ample authority for the proposition that a law affecting fundamental rights may be so considered. A very pertinent example is to be found in State of Madhya Pradesh and Another v. Baldeo Prasad [(1961) 1 SCR 970 at 979] where the Central Provinces an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruck down. 250. Controverting the aforenoted submissions, Mr. Hossain submitted that a right of cross examination cannot be elevated to the status of an inviolable facet of natural justice. Learned counsel in this respect cited for our consideration the decision of the Supreme Court in M/s Kanugo & Company vs. Collector of Customs (1973) 2 SCC 438 and where the following observations appear:- "12. We may first deal with the question of breach of natural justice. On the material on record, in our opinion, there has been no such breach. In the show-cause notice issued on August 21, 1961, all the material on which the Customs Authorities have relied was set out and it was then for the appellant to give a suitable explanation. The complaint of the appellant now is that all the persons from whom enquiries were alleged to have been made by the authorities should have been produced to enable it to cross-examine them. In our opinion, the principles of natural justice do not require that in matters like this the persons who have given information should be examined in the presence of the appellant or should be allowed to be cross-examined by them on the statements made before the Customs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity. The condition clearly states as to the procedure that has to be adopted for the purpose of questioning the departmental action in levying penal charges. It has also been made clear in the condition as to the limit to which the Department can go for the purpose of assessing the theft of electricity. In no case the Department can go beyond a period of six months, according to this condition. In Condition No. 34, we are able to see that manner of assessment also has been specified. If all these steps are taken by the Department, the condition itself states that the consumer has a remedy by filing an appeal to the appropriate authority within a specified time. Thus, a conjoint reading of this condition and the purpose for which it is intended, clearly makes out that such a condition is not arbitrary or unreasonable, but within the powers of the Board and, in our opinion, it does not offend any of the articles of the Constitution. The argument as if the imposition of penal assessment before filing an appeal is harsh and makes the appeal illusory cannot be appreciated. The penal assessment, as we have stated already, is restricted to a limited period. Such an assessment was made aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to evaluate the soundness of that submission, it would be appropriate to advert to the Misconduct Rules, 2007. As is evident from Rule 7, the proceedings that may come to be initiated could have commenced upon the receipt of any written information containing allegations against a member or a firm. On receipt of such an application, the Director in terms of Rule 9 was obliged to examine the complaint, the written statements submitted by the CA or the firm as well as other additional particulars or documents in order to come to a prima facie conclusion of guilt in respect of the member or the firm. It was that prima facie opinion of the Director which would, in terms of the procedure prescribed, be thereafter transmitted to the Board of Discipline or the Disciplinary Committee. 255. It becomes pertinent to note that in terms of Rule 14(1), the Board of Discipline was statutorily enjoined to follow a summary disposal procedure while dealing with cases laid before it. It was required, by virtue of Rule 14(2), to supply a copy of the prima facie opinion formed by the Director as well as particulars and documents relied upon by that authority for the purposes of formation of that opin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriate by providing an opportunity of hearing to the charged entity in person. By virtue of Rule 11(5), the division of the NFRA is obliged to pass an order after considering all submissions made and taking into account the material on record as well as all other relevant facts and circumstances. The NFRA Rules, however, do not speak of or appear to envisage oral testimony being recorded in the course of proceedings that may ensue. 259. The reason for this is clearly not far to discern since the proceedings themselves would have been commenced based either on a suo motu decision taken by the NFRA or on receipt of a reference made to it either by the Union Government or any other competent authority. The NFRA thus commences proceedings not on the basis of a written complaint or at the behest of a complainant and which was a possibility envisaged under the CA Act and the Misconduct Rules, 2007. Even though the Union Government itself is enabled to make a reference to the NFRA to undertake an investigation, the said entity merely stands in the shoes of an informant or a body which provides material for the NFRA to investigate. The proceedings thus are clearly not adversarial and whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment that may have been recorded. In fact, the only testimony which appears to have been borne in consideration was the responses submitted by the writ petitioners as well as the statements of representatives, members and partners made and recorded. We thus find ourselves unable to appreciate the assertion of a right of cross examination which was vehemently canvassed before us. 263. We also bear in mind the undisputed fact of both Rules 14 and 18 of the Misconduct Rules, 2007 themselves envisaging a summary procedure of disposal being adopted by the Board of Discipline and the Disciplinary Committee. Both those rules only placed those authorities under the over-arching obligation of ensuring that proceedings were undertaken in consonance with the principles of natural justice. It was in terms of Rule 18(9) alone that oral examination and recordal of testimony were contemplated. The aforesaid provision clearly appears to have been engrafted since the Disciplinary Committee would be considering a complaint made by an individual against a CA or a firm. Since the complainant could have introduced oral testimony in such proceedings, the rules proceeded to incorporate a right of cross- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank of India, there must be an investigation into the charges consistent with the requirements of the situation in accordance with the principles of natural justice as far as these were applicable to a particular situation. So whether a particular principle of natural justice has been violated or not has to be judged in the background of the nature of charges, the nature of the investigation conducted in the background of any statutory or relevant rules governing such enquiries. Here the infraction of the natural justice complained of was that he was not given an opportunity to rebut the materials gathered in his absence. As has been observed in On Justice by J.R. Lucas, the principles of natural justice basically, if we may say so, emanate from the actual phrase "audi alteram partem" which was first formulated by St. Augustine (De Duabus Animabus, XIV, 22 J.P. Migne, PL. 42, 110). 30. In dealing with particular situation we must formulate the actual principles to be applied in a particular situation. Hence it may be illustrated as J.R. Lucas -- On Justice (p. 86) has done it, thus: "Hence, when we are judging deeds, and may find that a man did wrong, there is a requirement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a party aggrieved by an order, by absence of any formal opportunity of cross-examination per se does not invalidate or vitiate the decision arrived at fairly. This is more so when the party against whom an order has been passed does not dispute the facts and does not demand to test the veracity of the version or the credibility of the statement. 33. The party who does not want to controvert the veracity of the evidence from record or testimony gathered behind his back cannot expect to succeed in any subsequent demand that there was no opportunity of cross-examination specially when it was not asked for and there was no dispute about the veracity of the statements. Where there is no dispute as to the facts, or the weight to be attached on disputed facts but only an explanation of the acts, absence of opportunity to cross-examination does not create any prejudice in such cases. 34. The principles of natural justice will, therefore, depend upon the facts and circumstances of each particular case. We have set out hereinbefore the actual facts and circumstances of the case. The appellant was associated with the preliminary investigation that was conducted against him. He does not d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the persons who had given information against him, then different considerations would have applied and in those circumstances, refusal to give an opportunity to cross-examine the persons giving information against him or to lead evidence on his own part to rebut the facts would have been necessary and denial of such opportunity would have been fatal. But such is not the case here as we have mentioned hereinbefore." 265. In Transmission Corporation. of A.P. Ltd. vs. Sri Rama Krishna Rice Mill (2006) 3 SCC 74, a question arose as to whether the statement of officers that may come to form the basis for action that the Board may initiate was liable to be tested by providing a right of cross-examination to the consumer. Negating the assertion of such a right, the Supreme Court held:- "5. In response, learned counsel for the respondent submitted that clause 39.9.2 provides for grant of a "reasonable opportunity" to the consumer. If the statements of the officers are to be relied upon without being tested by cross-examination, the consumer will be highly prejudiced and, therefore, the right to cross-examine them is inbuilt in clause 39.9.2 of the Terms and Conditions of Supply. Cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that merely because the departmental authority was adjudicating there was no prejudice involved. Those principles are not of any assistance in the present case. In the case at hand without even granting of an opportunity to the respondent, the final order of assessment was passed. Merely taking note of the objection filed cannot be said to be compliance with the provisions contained in clause 39.9.2. Therefore, the respondent had made a prayer before the Appellate Authority. The parameters of the principles of natural justice cannot be covered by any straitjacket formula. It would vary depending upon the circumstances involved. It is true that the Terms and Conditions of Supply did not contemplate anything like recording oral or documentary evidence in the way as is normally done in the courts of law. But clause 39.9.2 itself provides for a reasonable opportunity being granted. What would be a reasonable opportunity would also depend upon the fact situation. In Advanced Law Lexicon by P. Ramanatha Aiyar (3rd Edn., Vol. 4, pp. 3959 and 3968) the word "reasonable" has been described as follows: (i) "[What is] fair, proper, or moderate under the circumstances…." (ii) "The e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ority who shall have to either grant the request or pass a reasoned order if he chooses to reject the application. In that event an adjudication being concluded, it shall be certainly open to the consumer to establish before the Appellate Authority as to how he has been prejudiced by the refusal to grant an opportunity to cross-examine any official. As has been rightly noted by the High Court in the impugned judgment where the reliance is only on accounts prepared by a person, cross-examination is not necessary. But where it is based on reports alleging tampering or pilferage, the fact situation may be different. Before asking for cross-examination the consumer may be granted an opportunity to look into the documents on which the adjudication is proposed. In that event, he will be in a position to know as to the author of which statement is necessary to be cross- examined. The applications for cross-examination are not to be filed in a routine manner and equally also not to be disposed of by an adjudicator in casual or routine manner. There has to be application of mind by him. Similarly, as noted above, the consumer has to show as to why cross-examination is necessary." Of signif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of natural justice. On the material on record, in our opinion, there has been no such breach. In the show-cause notice issued on August 21, 1961, all the material on which the Customs Authorities have relied was set out and it was then for the appellant to give a suitable explanation. The complaint of the appellant now is that all the persons from whom enquiries were alleged to have been made by the authorities should have been produced to enable it to cross-examine them. It our opinion, the principles of natural justice do not require that in matters like this the persons who have given information should be examined in the presence of the appellant or should be allowed to be cross-examined by them on the statements made before the Customs Authorities. Accordingly, we hold that there is no force in the third contention of the appellant." 268. In Hyderabad Vanaspati the Supreme Court was called upon to consider the submission of a right of cross-examination in the context of energy theft. Negating that submission, the Supreme Court observed as follows:- "43. The principle "nemo judex in causa sua" will not apply in this case as the officers have no personal lis with the consum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd which as per Rule 11(2) must necessarily make available to the charged CA or firm a detail of the allegations that are laid together with the evidence in support thereof as well as an appropriate disclosure with respect to the provisions of the Act, Rules or the SAs which are found to have been allegedly violated. Rule 11(2) further enjoins the SCN to broadly indicate the action that the NFRA proposes to take or the directions that it may be constrained to frame if the allegations were to be ultimately established. By virtue of Rule 11(3) the authority is also statutorily obliged to enclose all copies of documents relied upon as well as to make available the extracts of reports of investigation or other records which are proposed to be used for proving the allegation levelled. In terms of Rule 11(4) the SCN must be served upon the auditor as well as the firm dependent upon the action which the authority proposes to initiate. The statute thus adopts and incorporates appropriate measures and safeguards to ensure that the procedure that it adopts is in accord with the principles of fair play and natural justice. 271. We are also of the firm opinion that the proceedings which the N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 21 (5), the High Court can examine the correctness of the findings recorded by the statutory bodies in that behalf. The High Court can even refer the matter back for further inquiry by the Council, and record a fresh finding. It is not as if the High Court is bound in every case to consider the merits of the finding as it has been recorded, and to either accept or reject the said finding. If, in a given case, it appears to the High Court that, on the facts alleged and proved, an alternative finding may be recorded, the High Court can as well send the case back to the Council with appropriate directions in this regard. The powers of the High Court, under Section 21 (3), are undoubtedly wide enough to enable it to adopt any course which, in its opinion, will enable it to render justice to the parties. 24. In Institute of Chartered Accountants of India v. L.K. Ratna (referred supra) the Apex Court discussed the scope of an enquiry in a reference under Section 21(5) of the Act, and held that it was apparent that, in the scheme incorporated in Section 21 of the Act, there were separate functionaries, the Disciplinary Committee, the Council and, in certain cases, the Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the finding by the Council is the jurisdictional springboard for the penalty proceeding which follows. 25. At this point, it is necessary to advert to the nature of the power conferred on the Council. The Council is empowered to find a member guilty of misconduct. The penalty which follows is so harsh that it may result in the removal of a members name from the Register for several years which would deprive him of the right to a certificate of practice. As is clear from Section 6(1) of the Act, he cannot practice without such a certificate. In the circumstances there is every reason to presume in favour of an opportunity being given to the member of being heard by the Council before it proceeds to pronounce upon his guilt. As seen, the finding by the Council operates with finality in the proceeding, and it constitutes the foundation for the penalty imposed by the Council on him. The power to find and record whether a member is guilty of misconduct has been specifically entrusted by the Act to the entire Council itself and not to a few of its members who constitute the Disciplinary Committee. It is the character and complexion of the proceeding, considered in conjunction with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another penalty. For example, a court has the right to punish actions or omissions of a party in a child support case as if they were a criminal, penalizing the parent with a sentence of jail term. Quasi-criminal proceedings include a wide variety of matters, including prosecution for a violation of the law or ordinance, psychiatric matters, motor vehicle law, status offences, family court actions, and equity proceedings such as a Writ. 49. In criminal cases, generally, Courts try cases following the prescribed procedure, and impose punishment either of a sentence or a fine or both, but in disciplinary proceedings, more particularly under the Act, the punishment which may be imposed is not a jail term or fine like any other criminal proceeding. The punishment which may be imposed under Section 21 of the Act, if the respondent is found guilty of misconduct, cannot be equated to a sentence or a fine imposed on a person being found guilty in a criminal prosecution. The standard of proof required in criminal cases and civil cases also vary. 50. In S.A.L. Narayan Row v. Ishwarlal Bhagwandas the Supreme Court held that, generally speaking, a proceeding is a civil proceeding only if i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered Accountant is a professional whose expertise in accountancy is acknowledged. He is a member of an expert body and of a premier institute in India. The certificate issued by an Auditor has its own impact on the public at large, as it is largely on the basis of this certificate that the general public subscribe to the shares of the company. Reckless certification by an Auditor, which has resulted in the public being misled into subscribing to the shares of the company in the public issue, would undoubtedly amount to gross negligence. Large sections of society rely on the certification by the Chartered Accountants for taking many vital decisions. It is imperative that utmost care and caution is exercised in issuing such certificates, and the objectivity, integrity, reliability and credibility of the information therein is ensured. Of late, several instances have come to light where, due to the erroneous/ambiguous advice tendered by Chartered Accountants, borrowal accounts have had to face quick mortality resulting in huge losses for banks and financial institutions. To ensure public faith and protect gullible small investors from being cheated of their life savings, the Institute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but poorly endowed with physical and mental capacities can easily take. H.L.A. Hart, Negligence, Mens Rea and Criminal Responsibility, in Punishment and Responsibility 136, 149 (1968). 128. Gross Negligence. As it originally appeared, this was very great negligence, or the want of even slight or scant care. It has been described as a failure to exercise even that care which a careless person would use. Several courts, however, dissatisfied with a term so nebulous. have construed gross negligence as requiring willful, wanton, or reckless misconduct, or such utter lack of all care as will be evidence thereof. But it is still true that most courts consider that gross negligence falls short of a reckless disregard of the consequences, and differs from ordinary negligence only in degree, and not in kind. 129. Similarly, in Law Lexicon by P. Ramanatha Aiyar the word gross negligence is defined as follows: 130. Gross negligence, sometimes called wilful blindness is the same thing as negligence, with the additional of a vituperative epithet. 131. The term gross neglect means and involves a failure on the part of a person to take such reasonable precautions against the risk of an in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n inducing the general public to subscribe to the share capital of the company. Taking a lenient view, or exonerating such professionals, would encourage others to indulge in similar acts, and completely erode the faith of the general public in the impartiality and integrity of the members of the Institute, and bring the Institute itself into disrepute. 179. The Council of the Institute has recommended removal of the name of the respondent from the Register of the Institute for a period of three (3) years i.e. suspending him from practicing as a Chartered Accountant for a period of three (3) years. The recommendation of the Institute, regarding the nature of the punishment, is not binding on this Court and, in exercise of the wide powers conferred on it by the Act, this Court can impose a different punishment. In a similar situation, the Division Bench of this Court, in Council of the Institute of Chartered Accountants of India v. V.I. Oommen (referred supra), imposed a higher punishment than the one recommended by the Institute. 180. In the light of the above discussion, after anxious consideration of the matter, we find it appropriate that the respondent herein should be susp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibed under the NFRA Rules when they restrict the inquiry to the audit file. 275. Yet another submission which was advanced in challenge to the procedure contemplated under the NFRA Rules was on the basis of a procedure distinct from the Misconduct Rules, 2007 being made applicable only to a particular class of auditors and firms. The submission was that since an investigation or inquiry by the NFRA would only be in respect of a class of companies, which are spoken of in Rule 3, the same would lead to a situation where only auditors of such companies would be subjected to disciplinary proceedings undertaken in accordance with the NFRA Rules. All other auditors and firms, according to the writ petitioners, would continue to be governed by the CA Act and the Rules framed thereunder. 276. The aforenoted submission is clearly misconceived since it proceeds on the premise that the NFRA Rules are far more stringent and onerous when compared to the Misconduct Rules, 2007. However, we have already in the preceding parts of this judgment found that the aforesaid contention is clearly untenable. Both the Misconduct Rules, 2007, as well as Rule 11 (5) enjoin disciplinary proceedings to be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gations (1) Order of Formal Investigation Upon the recommendation of the Director of Enforcement and Investigations or the Director of Registration and Inspections, or upon the Board's own initiative, or otherwise, the Board may issue an order of formal investigation when it appears that an act or practice, or omission to act, by a registered public accounting firm or any person associated with a registered public accounting firm may violate any provision of the Act, the Rules of the Board, the provisions of the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants with respect thereto, including the rules of the Commission issued under the Act, or professional standards. (2) Designation of Staff In an order of formal investigation, the Board may designate members, or groups of members, of the Board's staff to issue accounting board demands to, and otherwise require or request cooperation of, any person pursuant to Section 105(b)(2) of the Act, and the Board's Rules thereunder, to the extent the information sought is relevant to the matters described in the Board's order of investigation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gistered public accounting firm subject to an accounting board demand shall designate one or more individuals who consent to testify on its behalf, and shall set forth, for each individual designated, the matters on which the individual will testify. The individuals so designated shall testify as to matters known or reasonably available to the registered public accounting firm. (d) Transcript A witness shall have 15 days, or such longer period as the Director of Enforcement and Investigations may allow, after being notified by the reporter that the transcript, or, where applicable, video or other recording, is available in which to review the transcript or other recording and, if there are changes in form or substance, to sign a statement reciting such changes and the reasons given by the witness for making them. The reporter shall make a certificate in writing to accompany the transcript, which shall indicate - (1) that the witness was duly sworn by the officer and that the transcript is a true record of the testimony given by the witness; and (2) whether the witness requested to review the transcript and, if so, that the reporter has appended any changes made by the witne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uant to Rule 5111. Rule 5200. Commencement of Disciplinary Proceedings (a) Grounds for Commencement of Disciplinary Proceedings The Board may commence a disciplinary proceeding when - (1) it appears to the Board, as the result of an investigation or otherwise, that a hearing is warranted to determine whether a registered public accounting firm, or an associated person of such a firm, has engaged in any act or practice, or omitted to act, in violation of the Act, the Rules of the Board, the provisions of the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants with respect thereto, including the rules of the Commission issued under the Act, or professional standards; (2) it appears to the Board, as the result of an investigation or otherwise, that a hearing is warranted to determine whether a registered public accounting firm, or any person who is, or at the time of the alleged failure reasonably to supervise was, a supervisory person of such firm, has failed reasonably to supervise an associated person, either as required by the Rules of the Board relating to auditing or quality control standards, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in these Rules, considering and ruling upon all procedural and other motions; (9) preparing an initial decision as provided in Rule 5204; (10) upon notice to all parties, reopening any hearing prior to the filing of an initial decision therein, or, if no initial decision is to be filed, prior to the time fixed for the filing of final briefs with the Board; (11) informing the parties as to the availability of one or more alternative means of dispute resolution, and encouraging the use of such methods; and (12) scheduling hearing dates, except that a hearing officer may not, absent the approval of the Board, change a hearing date set by Board order. (d) Separation of Functions The staff of the Division of Enforcement and Investigations may not participate or advise in the decision, or in Board review of the decision, in any proceeding in which the Division of Enforcement and Investigations is the interested division, except as a witness or counsel in the proceeding. Any other employee or agent of the Board engaged in the performance of investigative or prosecutorial functions for the Board in a proceeding may not, in that proceeding or one that is factually related, par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amongst separate units of the NFRA is clearly evident from the statutory scheme underlying the NFRA Rules and which at more than one place speak of the "concerned division". 280. For instance, they referred to Rule 7 (4) and which postulates that if the NFRA has reason to believe that any accounting standard has been violated, it may take a decision on the further course of investigation or action liable to be undertaken "through its concerned division". The petitioners underscore the fact that the dichotomy of functions which are envisaged to be performed by different divisions of the NFRA stands replicated in Rule 8 (8). The said Rule too enjoins the authority to chart a future course of investigation or enforcement "through its concerned division". Similar provisions are found in Rule 10 and which entails the NFRA forwarding a particular case for investigation or a reference received by the Union Government or even where it were to suo moto decided to commence an investigation to a division dealing with enforcement. The aforesaid position again stands reiterated in Rule 11 and which in unequivocal terms provides that based on the findings of the NFRA in the course of discharge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and place to the Director, respondent and complainant and require them to appear before it in person to make oral submissions, if any. Explanation 1. − For the purpose of this rule, the appearance includes, unless and otherwise directed, appearance by an advocate or through any authorized representative, who may be a Chartered Accountant, Cost Accountant or Company Secretary. 1 [Explanation 2 - For the purpose of this rule, the appearance also includes the appearance through video-conference, modalities for which may be as formulated by the Institute from time to time.] (7) On the date of hearing, if the respondent, in spite of the service of notice, under sub-rule (6), does not appear either in person 1 [or through video conference in terms of the modalities formulated under these Rules] or through his authorized representative, the Board of Discipline may proceed ex-parte and pass such orders as it may think fit or direct fresh notice to be served. (8) The Board of Discipline may, on such terms as it thinks fit, and at any stage of the proceedings, adjourn the hearing: Provided that such adjournment shall not be given more than once at any stage of the proceedings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to appear before it in person to make oral submissions, if any. [Explanation 1. - For the purpose of this rule, the appearance includes, unless and otherwise directed, appearance by an advocate or through any authorized representative, who may be a Chartered Accountant, Cost Accountant or Company Secretary. [Explanation 2. - For the purpose of this rule, the appearance also includes the appearances through video-conference, modalities for which may be as formulated by the Institute from time to time.]" 282. It becomes pertinent to note that by virtue of the Act and the NFRA Rules, all matters pertaining to investigation, monitoring, enforcement and disciplinary proceedings are to be decided by the Chairperson or any one or more of the full-time members acting through "one of the divisions". According to the petitioners, while a division may be headed by either a Chairperson or a full time Member, it would be clearly untenable in law for the same body of persons donning the dual role of examining compliance with auditing standards and thereafter using the said material to form an opinion as to whether disciplinary proceedings should be initiated. The writ petitioners would con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in an enquiry as well as act as the Inquiry Officer. Neither the NFRA as a body nor its Executive Body can possibly be construed as having acted as a witness in proceedings. 286. The decision cited by the writ petitioners in the matter of Institute of Chartered Accountants of India vs. LK Ratna and Ors. (1986) 4 SCC 537, however, would be more apt since the said judgment was rendered in the context of the CA Act and the disciplinary powers which stand vested in the Council. It would thus be appropriate to refer to the following passage of that decision: - "24. There can be no dispute that the function of the Disciplinary Committee of holding an enquiry under Section 21(1) of the Act into the conduct of the member calls for a recording of evidence by the Committee. Its duty does not end there. It must consider the evidence and come to its conclusions. As Section 21(2) of the Act plainly says, it must report "the result of its enquiry" to the Council. In the absence of express or implied statutory intendment to the contrary, it appears to us that the members of such a Committee would be disqualified from participating in the deliberations of the Council when it proceeds to consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... awn to the decision of the US Supreme Court in Williams vs. Pennsylvania 579 U.S. (2016) and where the following illuminating passages appear:- "Due process guarantees "an absence of actual bias" on the part of a judge. In re Murchison, 349 U. S. 133, 136 (1955). Bias is easy to attribute to others and difficult to discern in oneself. To establish an enforceable and workable framework, the Court's precedents apply an objective standard that, in the usual case, avoids having to determine whether actual bias is present. The Court asks not whether a judge harbors an actual, subjective bias, but instead whether, as an objective matter, "the average judge in his position is 'likely' to be neutral, or whether there is an unconstitutional 'potential for bias.'" Caperton, 556 U. S., at 881. Of particular relevance to the instant case, the Court has determined that an unconstitutional potential for bias exists when the same person serves as both accuser and adjudicator in a case. See Murchison, 349 U. S., at 136-137. This objective risk of bias is reflected in the due process maxim that "no man can be a judge in his own case and no man is permitted to try cases where he has an interest in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss; that the court or tribunal passing it observes, at least the minimal requirements of natural justice; is composed of impartial persons acting fairly and without bias and in good faith. A judgment which is the result of bias or want of impartiality is a nullity and the trial "coram non-judice". (See Vassiliades v. Vassiliades [AIR 1945 PC 38 : 221 IC 603] 17. As to the tests of the likelihood of bias what is relevant is the reasonableness of the apprehension in that regard in the mind of the party. The proper approach for the Judge is not to look at his own mind and ask himself, however, honestly, "Am I biased?"; but to look at the mind of the party before him. 18. Lord Esher in Allinson v. General Council of Medical Education and Registration [(1894) 1 QB 750, 758-59] said: "The question is not, whether in fact he was or was not biased. The court cannot inquire into that. . . . In the administration of justice, whether by a recognised legal court or by persons who, although not a legal public court, are acting in a similar capacity, public policy requires that, in order that there should be no doubt about the purity of the administration, any person who is to take part in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pable that, having regard to the antecedent events, the participation of Respondent 4 in the court-martial rendered the proceedings coram non-judice. xxxx xxxx xxxx 25. Judicial review generally speaking, is not directed against a decision, but is directed against the "decision-making process". The question of the choice and quantum of punishment is within the jurisdiction and discretion of the court-martial. But the sentence has to suit the offence and the offender. It should not be vindictive or unduly harsh. It should not be so disproportionate to the offence as to shock the conscience and amount in itself to conclusive evidence of bias. The doctrine of proportionality, as part of the concept of judicial review, would ensure that even on an aspect which is, otherwise, within the exclusive province of the court-martial, if the decision of the court even as to sentence is an outrageous defiance of logic, then the sentence would not be immune from correction. Irrationality and perversity are recognised grounds of judicial review. In Council of Civil Service Unions v. Minister for the Civil Service [(1984) 3 WLR 1174 (HL) : (1984) 3 All ER 935, 950] Lord Diplock said: "Judicia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O. OF FULL TIME MEMBERS ON DATE OF ISSUANCE DATE OF ISSUANC E-IL & FS WPC 11987/2021, WPC 1650/2023 NO. OF FULL TIME MEMBERS ON DATE OF ISSUANCE DATE OF ISSUAN CEWPC 2194/2023 NO. OF FULL TIME MEMBERS ON DATE OF ISSUANCE 1. Questionnaire-1 03.07.2019 (Annexure P-8, pg. 122-135) 1 (Prasenjit Mukherjee) 19.11.2019 (Annexure P-6, pg. 123-147) 1 (Prasenjit Mukherjee) -- -- 2. Questionnaire-2 19.07.2019 (Annexure P-10, pg. 138-141) 26.08.2020 (Supplementary Questionnaire) (Annexure P-8, pg. 340-348) -- -- 3. PFC 24.03.2020 (Annexure P-25, pg. 340 - 460) 21.12.2020 (Annexure P-10, pg. 651-899) -- -- 4. SPFC 17.04.2020 (Annexure P-26, pg. 461-481) -- -- -- 5. DAQRR 08.03.2021 Annexure P-27, pg. 482 - 839) 23.07.2021 Annexure P-11, pg. 900-1231) -- -- 6. 1st Oral Hearing AQRR 08.09.2021 17.05.2022 2 (Smita Jhingran, Praveen Kr. Tiwari) -- -- 7. Publication of AQRR 23.09.2021 (Annexure P-29, pg. 841 - 1183) 22.06.2022 (Annexure P- 15, pg. 1235- 1623) -- -- 8. SCN 29.09.2021 (Annexure P-31, pg. 1210 - 1585) 27.06.2022 (Annexure P-16 pg. 1624-2028) 05.01.2023 (Annexure P-15, pg. 168-202) 2 (Smita Jhingran, Praveen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E SECTIONS AND RULES SNO PROVISION CONTRADICTION 1. Section 132(3B), Companies Act: "There shall be an executive body of the National Financial Reporting Authority consisting of the Chairperson and fulltime Members of such Authority for efficient discharge of its functions under sub-section (2) other than clause (a) and sub-section (4)" The Affidavit gives no details about the composition or strength of the EB during the different stages in each case and such information is also not available on the NFRA website. The order directs NFRA to Complete details of the personnel who penned the AQRR in each particular case as well as the complement of persons who initiated action under Section 132 (4) and ultimately passed the orders impugned. It is not possible to ascertain whether the EB at each stage in different cases was composed in compliance with the requirements of Section 132 (3B). 2. Rule 3(1), NFRA (Manner of Appointment and other Terms and Conditions of Service of Chairperson and Members) Rules, 2018: Composition of Authority: (1) The Authority shall consist of the following persons to be appointed by the Central Government, namely:- (a) a chairperson; (b) three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been no investigation conducted by NFRA in this matter. Therefore, the Affidavit gives no clarity about who initiated action under Section 132(4) in this case as directed by the order. "reasons to believe that sufficient cause existed to initiate action u/s 132(4)" were not communicated to the Petitioner to provide a response. 292. Refuting the aforesaid submissions, Mr. Hossain argued that as is manifest from a reading of Section 132(3)(b), the statute requires the Executive Body to be involved in the monitoring, enforcement, inquiry and disciplinary proceedings that may be undertaken. It was his submission that quite apart from there being no challenge to that provision, the law recognizes no overarching principle which may postulate that enquiry and adjudicatory functions cannot be conferred on the same body. It was submitted that criminal legislation as well as various revenue laws incorporate innumerable instances where an assessing officer acts both as an investigator as well as the adjudicator. It was submitted that the division as defined in Rule 2(g) itself includes one which would be headed by the Chairperson or a full-time member. This, according to Mr. Hossain, is it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Discipline, it was pointed out, was only obliged to examine a complaint and to form a prima facie opinion as to whether information provided was actionable or liable to be examined in greater detail. Mr. Hossain also questioned the reliance placed upon the judgment of the Supreme Court in L.K. Ratna and submitted that the CA Act itself came to be amended thereafter and as a consequence of which an enquiry was to be conducted by the Disciplinary Committee and which in turn is empowered to pass a final order of punishment. This submission, however, has been noted mindful of the fact that neither Sections 21A nor 21B are yet to be brought into force. 296. Mr. Hossain then sought to sustain the procedure as adopted by referring to the doctrine of necessity. It was his submission that a mere overlap of investigative and adjudicative functions would not render a provision unconstitutional. In support of the aforesaid submission, Mr. Hossain firstly referred to the judgment of the Supreme Court in Election Commission of India vs. Subramaniam (1996) 4 SCC 104 and which had ultimately upheld the decision of the Election Commission by alluding to the doctrine of necessity. Yet another line ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision itself when the language of the Act clearly allows for an ostensible violation of the principles of natural justice including the principle that a person cannot be a judge in his own cause. In Union of India v. Tulsiram Patel [(1985) 3 SCC 398 : 1985 SCC (L&S) 672] in recognition of this principle this Court held: (SCC p. 479, para 101) "101. Not only, therefore, can the principles of natural justice be modified but in exceptional cases they can even be excluded. There are well-defined exceptions to the nemo judex in causa sua rule as also to the audi alteram partem rule. The nemo judex in causa sua rule is subject to the doctrine of necessity and yields to it as pointed out by this Court in J. Mohapatra & Co. v. State of Orissa [(1984) 4 SCC 103] ." xxxx xxxx xxxx 12. Ultimately, the question of bias will have to be decided on the facts of each case. If the assessee is able to establish that the assessing officer was in fact biased in the sense that he was involved or interested in his personal capacity in the outcome of the assessment or the procedure for assessment, no doubt, it would be a good ground for setting aside the assessment order. But to hold, as the Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch not only authored the AQRR, but it was the same body, albeit assisted by a supportive team, which then proceeded to form an opinion with respect to initiation of disciplinary proceedings and which in turn culminated in the issuance of the impugned SCNs. 300. As we view Section 132 of the Companies Act, there appears to be no doubt in our mind that the provision did and always contemplated the NFRA performing and discharging its functions through such divisions as may be constituted. While it is true that Rule 2(g), while defining the word 'division' includes one headed by a Chairperson or a full time Member, the Executive Body cannot possibly be construed to be a division in itself. A conjoint reading of sub-sections (3)(a) and (3)(b) appearing in Section 132 alongside the NFRA Rules, leads us to the irresistible conclusion that the statute clearly contemplated the discharge of functions enumerated in Rules 7 and 8 being undertaken by independent units or divisions of the NFRA. Mr. Hossain had submitted that by virtue of Section 132(3)(b), the Act clearly contemplates the Executive Body to be the pivotal authority to discharge the various functions which it has to perform. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised before us. While courts may accept a broad or loose overlap of investigative and adjudicatory functions being exercised by a singular authority, the aforenoted general precept would clearly not withstand the test of fairness when one of those bodies is expected to form an independent opinion of whether transgressions alleged to have been committed warrant further disciplinary measures being adopted. The judgments cited by Mr. Hossain and which pertained to the exercise of powers by authorities under the Income Tax Act is also misplaced since it is well settled that proceedings under a fiscal statute are neither akin to judicial proceedings nor are they concerned with an adjudication of a lis which may be said to exist between an assessee and the officer concerned. Those statutes by virtue of the inherent nature of the obligation that officers are enjoined to discharge contemplate those persons performing the dual function of investigation and assessment. Although this principle is by now well recognized, we deem it appropriate to take note of the succinct enunciation of the legal position in this respect which appears in Deepak Agro Foods vs. State of Rajasthan (2008) 7 SCC 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s held and the constitution of the Tribunal or body of persons appointed for that purpose. Whenever a complaint is made before a court that some principle of natural justice had been contravened, the court has to decide whether the observance of that rule was necessary for a just decision on the facts of that case." Prof. Wade in his Administrative Law has succinctly summarised the principle of natural justice to the following effect: "It is not possible to lay down rigid rules as to when the principles of natural justice are to apply: not as to their scope and extent. Everything depends on the subject-matter, the application for principles of natural justice, resting as it does upon statutory implication, must always be in conformity with the scheme of the Act and with the subject-matter of the case. In the application of the concept of fair play there must be real flexibility. There must also have been some real prejudice to the complainant; there is no such thing as a merely technical infringement of natural justice. The requirements of natural justice depend on the facts and the circumstances of the case, the nature of the enquiry, the rules under which the tribunal is acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including the said charge No. 12. Shri Maru Ram was interested in establishing the said charge. From the charge itself, it is apparent that he had a pre-disposition to decide against the appellant. It is really unfortunate that although the appellant raised an objection before the inquiry committee by clearly indicating that the said Shri Maru Ram was inimical towards him and he should not be a member in the inquiry committee, such objection was rejected on a very flimsy ground, namely, that since the said Shri Maru Ram was one of the members of the Managing Committee and was the representative of the teachers in the Managing Committee it was necessary to include him in the inquiry committee. It is quite apparent that the inquiry committee could have been constituted with other members of the Managing Committee and the rules of the inquiry are not such that Shri Maru Ram being teachers' representative was required to be included in the said inquiry committee so that the doctrine of necessity may be attracted. If a person has a pecuniary interest, such interest, even if very small, disqualifies such person. For appreciating a case of personal bias or bias to the subject-matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Shri Maru Ram and his acting as a judge of his own case by being a member of the inquiry committee was not specifically taken before the Deputy Commissioner and also before the appellate authority, namely, the Commissioner by the appellant and as such the said plea should not be allowed to be raised in writ proceeding, more so, when the case of prejudice on account of bias could be waived by the person suffering such prejudice. Generally, a point not raised before the tribunal or administrative authorities may not be allowed to be raised for the first time in the writ proceeding, more so when the interference in the writ jurisdiction which is equitable and discretionary is not of course a must as indicated by this Court in A.M. Allison v. B.L. Sen [AIR 1957 SC 227] particularly when the plea sought to be raised for the first time in a writ proceeding requires investigation of facts. But if the plea though not specifically raised before the subordinate tribunals or the administrative and quasi-judicial bodies, is raised before the High Court in the writ proceeding for the first time and the plea goes to the root of the question and is based on admitted and uncontroverted facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce affirmed by the Deputy Commissioner and the Commissioner. The observation of S.R. Das, C.J. in Mohd. Nooh case [1958 SCR 595 : AIR 1958 SC 86] may be referred to in this connection: "… Where the error, irregularity or illegality touching jurisdiction or procedure committed by an inferior court or tribunal of first instance is so patent and loudly obtrusive that it leaves on its decision an indelible stamp of infirmity or vice which cannot be obliterated or cured on appeal or revision. If an inferior court or tribunal of first instance acts wholly without jurisdiction or patently in excess of jurisdiction or manifestly conducts the proceedings before it in a manner which is contrary to the rules of natural justice and all accepted rules of procedure and which offends the superior court's sense of fair play, the superior court may, we think, quite properly exercise its power to issue the prerogative writ of certiorari to correct the error of the court or tribunal of first instance, even if an appeal to another inferior court or tribunal was available and recourse was not had to it or if recourse was had to it, it confirmed what ex facie was a nullity for reasons afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ginning with its classic decision in A.K. Kraipak v. Union of India [(1969) 2 SCC 262 : AIR 1970 SC 150] laid down the need of "fair play" or "fair hearing" in quasi-judicial and administrative matters. The hearing has to be by a person sitting with an unbiased mind. To the same effect is the decision in S.P. Kapoor (Dr) v. State of H.P. [(1981) 4 SCC 716 : 1982 SCC (L&S) 14 : AIR 1981 SC 2181] In an earlier decision in Mineral Development Ltd. v. State of Bihar [AIR 1960 SC 468 : (1960) 2 MLJ (SC) 16] it was held that the Revenue Minister, who had cancelled the petitioner's licence or the lease of certain land, could not have taken part in the proceedings for cancellation of licence as there was political rivalry between the petitioner and the Minister, who had also filed a criminal case against the petitioner. This principle has also been applied in cases under labour laws or service laws, except where the cases were covered by the doctrine of necessity. In Financial Commr. (Taxation), Punjab v. Harbhajan Singh [(1996) 9 SCC 281] the Settlement Commissioner was held to be not competent to sit over his own earlier order passed as Settlement Officer under the Displaced Persons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be confined to its proper sphere. Its proper significance, in my opinion, is to denote a departure from the standard of even- handed justice which the law requires for those who occupy judicial office, or those who are commonly regarded as holding a quasi-judicial office, such as an arbitrator. The reason for this clearly is that, having to adjudicate as between two or more parties, he must come to his adjudication with an independent mind, without any inclination or bias towards one side or other in the dispute." 30. Recently however, the English Courts have sounded a different note, though may not be substantial but the automatic disqualification theory rule stands to some extent diluted. The affirmation of this dilution however is dependent upon the facts and circumstances of the matter in issue. The House of Lords in the case of R. v. Bow Street Metropolitan Stipendiary Magistrate, ex p Pinochet Ugarte (No. 2) [(2000) 1 AC 119] observed: "… In civil litigation the matters in issue will normally have an economic impact; therefore a Judge is automatically disqualified if he stands to make a financial gain as a consequence of his own decision of the case. But if, as in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Africa in President of the Republic of South Africa v. South African Rugby Football Union [(1999) 4 SA 147] stated that it would be rather dangerous and futile to attempt to define or list the factors which may or may not give rise to a real danger of bias. The Court of Appeal continued to the effect that everything will depend upon facts which may include the nature of the issue to be decided. It further observed: "By contrast, a real danger of bias might well be thought to arise if there were personal friendship or animosity between the Judge and any member of the public involved in the case; or if the Judge were closely acquainted with any member of the public involved in the case, particularly if the credibility of that individual could be significant in the decision of the case; or if, in a case where the credibility of any individual were an issue to be decided by the Judge, he had in a previous case rejected the evidence of that person in such outspoken terms as to throw doubt on his ability to approach such person's evidence with an open mind on any later occasion; or if on any question at issue in the proceedings before him the Judge had expressed views, particularly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase [2000 QB 451] ." 308. More recently, the Constitution Bench in Central Organization for Railway Electrification vs. ECI SPIC 2024 SCC OnLine SC 3219 after a review of precedents relating to bias rendered by courts across jurisdictions had held as follows:- "76. The principles of natural justice principally consist of two rules: (i) no one shall be a judge in their own cause (nemo judex in causa sua); and (ii) no decision shall be given against a party without affording a reasonable opportunity of being heard. Adherence to the principles of natural justice is a facet of procedural fairness. A decision made by the State to the prejudice of a person must be after following the basic rules of justice and fair play. The principles of natural justice are applied because administrative or quasi-judicial proceedings can abridge or take away rights. Application of the principles of natural justice prevents miscarriage of justice. Natural justice has both an intrinsic and an instrumental function. The intrinsic function values natural justice as an end in itself. It values natural justice as an essential feature of fairness. In its instrumental element, natural justice is viewed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maximum extent possible. 131. In a three-member tribunal, each of the parties seeks to appoint a co-arbitrator. However, the third arbitrator is usually appointed by a process which allows equal participation of both parties in the appointment process. The equal participation of parties enables the appointment of an independent and impartial third arbitrator. Hence, any perceived tilt of an arbitrator in favour of the party which nominated that arbitrator is offset by the appointment of the third arbitrator in the course of a deliberative process involving both the arbitrators or as envisaged in the agreement between parties. Perkins (supra) rightly observed that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter-balanced by equal power with the other party. This counter-balancing will ideally apply only in situations where the arbitrators are appointed by the parties in the exercise of their genuine party autonomy. TRF (supra) and Perkins (supra) have been relied upon by this Court on numerous occasions, including in Glock Asia-Pacific Limited v. Union of India and Lombardi Engg Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd. 132. In Vo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he view so expressed by the majority and relating to equal treatment finds resonance in the part penned by Hrishikesh Roy J. who penned a concurring opinion. 311. What thus emerges from the aforesaid discussion is that a body must not only be fair and impartial, but it should also not be burdened by a predisposition or a predetermined state of mind. This aspect assumes significance insofar as we are concerned in light of a common complement of persons having rendered findings of alleged professional misconduct and thereafter sitting upon that very opinion to consider commencement of disciplinary action. A person charged by such an authority could be reasonably said to apprehend a reasonable likelihood of the opinion so formed being tainted by the proscription of a reasonable likelihood of bias. It is these principles which weighed upon the Supreme Court in L.K. Ratna to hold that a person who may have been a party to the preparation of the result of the enquiry would be disqualified from participating in the deliberations of the Council. 312. In De. Smith's Judicial Review [9th Edition], the test of bias was lucidly explained in the following words:- "12- 011 Whether a deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n appeal. A prior hearing may be better than a subsequent hearing, but a subsequent hearing is better than no hearing at all, and in some cases the courts have held that statutory provisions for an administrative appeal or even full judicial review on the merits are sufficient to negative the existence of any implied duty to have a hearing before the original decision is made. This approach may be acceptable where the original decision does not cause significant detriment to the person affected, or where there is also a paramount need for prompt action, or where it is otherwise impracticable to afford antecedent hearings. 10-55 The question of whether a decision vitiated by a breach of the rules of fairness can be made good by a subsequent hearing does not admit of a single answer applicable to all situations in which the issue may arise. In general the approach will depend upon an assessment of whether, in all the circumstances of the hearing and appeal, the procedure as a whole satisfied the requirements of fairness. Of particular importance are (1) the gravity of the error committed at first instance, (2) the likelihood that the prejudicial effects of the error may also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risation decision; all that fairness requires is that the prisoner have an opportunity to appeal the re-categorisation decision. It has also been held that unfairness in the context of school exclusion decisions are capable of being cured by means of statutory appeal, provided that the independent appeal body is entrusted with the task of dealing with the merits of the case fully and de novo, and that it does so in a way that is not open to challenge on normal judicial review grounds and the appeal process is not contaminated in some real sense by the defect in the earlier decision-making process . The curative principle also applies in the immigration context and in the context of care proceedings. It is not just appeal procedures which can cure an initial defective decision and defective decisions have been cured by a minister's lawful approval and later fair and open-minded reconsideration of the decision. Limits 10-58 There are, however, limits to the extent to which procedural unfairness can be "cured". There may be situations in which, although the provision of a right of appeal is not required, a court will be satisfied that nothing short of compliance with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y clearly overlap: a decision-maker with a strong prejudice again party is likely to approach the issues with a closed mind. It is therefore for the grounds to be considered together. 12-55 As with bias, courts are concerned both with actual predetermination appearance. A finding of actual predetermination will be made if the available evidence shows that a decision-maker in fact approached the issues without an open evidence. For example, a decision to refuse security clearance to the applicant was held to be unlawful in R. (on the application of Kind) v Secretary of State for the Home Department. Documentary evidence and email exchanges between officers demonstrated a "decision-making process which was designed to appear to tick the boxes" but the result of which was effectively prejudged. A finding of actual predetermination can overlap with other forms of legal error, such as a failure to undertake consultation at a formative stage. 12-56 The lawful expression of a provisional view on a case is distinct from predetermination. While the law "certainly does not sanction the premature expression of factual conclusions or anything which may prematurely indicate a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ranch discharging dual and overlapping roles. This clearly exposes the authority to the charge of a predilection to affirm, the tendency to shut out a challenge to an opinion already formed and disregard the weight of argument aimed at convincing one to review and reappreciate. It would thus be akin to what we in law term as the useless formality theory- an appeal from Caesar to Caesar's wife. This in addition to such a procedure clearly becoming susceptible to the possibility of a person reasonably and justifiably viewing the same as being unfair and violating the golden principle of justice not only being done but being visibly and perceivably served. 317. As is evident from the various disclosures which were made by the NFRA before us, it was the Executive Body which was involved and engaged at all stages of the drawl of the AQRR as well as the formation of the opinion that action in terms of Section 132(4) was liable to be initiated. The mere fact that in the course of this exercise, it was assisted by certain other officers is, in our considered opinion, wholly irrelevant, since the ultimate formation of opinion was one which was of the Executive Body as a whole. The petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or office of the Board assigned primary responsibility by the Board to participate in a particular proceeding. " 322. Under Section 4, the task of undertaking an inspection is entrusted to the Division of Registration. This flows from a reading of Rules 4000, 4001 and 4002 and which are extracted hereinbelow: - "Section 4. Inspections Rule 4001. Regular Inspections In performing a regular inspection, the staff of the Division of Registration and Inspections and any other person authorized by the Board to participate in the inspection shall take such steps, and perform such procedures, as the Board determines are necessary or appropriate. Such steps and procedures must include, but need not be limited to, those set forth in Section 104(d)(1) and (2) of the Act and such other tests of the audit, supervisory, and quality control procedures of the firm as the Director of the Division of Registration and Inspections or the Board determines. Rule 4002. Special Inspections In performing a special inspection, the staff of the Division of Registration and Inspections and any other person authorized by the Board to participate in the inspection shall take such steps, and perfor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any act or practice, or omitted to act, in violation of the Act, the Rules of the Board, the provisions of the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants with respect thereto, including the rules of the Commission issued under the Act, or professional standards; (2) it appears to the Board, as the result of an investigation or otherwise, that a hearing is warranted to determine whether a registered public accounting firm, or any person who is, or at the time of the alleged failure reasonably to supervise was, a supervisory person of such firm, has failed reasonably to supervise an associated person, either as required by the Rules of the Board relating to auditing or quality control standards, or otherwise, with a view to preventing violations of this Act, the Rules of the Board, the provisions of the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants with respect thereto, including the rules of the Commission under the Act, or professional standards, and that such associated person has committed a violation of the Act, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailability of one or more alternative means of dispute resolution, and encouraging the use of such methods; and (12) scheduling hearing dates, except that a hearing officer may not, absent the approval of the Board, change a hearing date set by Board order. (d) Separation of Functions The staff of the Division of Enforcement and Investigations may not participate or advise in the decision, or in Board review of the decision, in any proceeding in which the Division of Enforcement and Investigations is the interested division, except as a witness or counsel in the proceeding. Any other employee or agent of the Board engaged in the performance of investigative or prosecutorial functions for the Board in a proceeding may not, in that proceeding or one that is factually related, participate or advise in the decision, or in Board review of the decision, except as a witness or counsel in the proceeding. A hearing officer may not be responsible to or subject to the supervision or direction of an employee or agent engaged in the performance of investigative or prosecuting functions for the Board. (e) Consolidation of Proceedings By order of the Board or a hearing officer, proceedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a fair opportunity being afforded to the person charged and above all justice appearing to have been truly served. These are surely not principles foreign to our jurisprudence. They are above all the command of Article 14 itself. The proceedings impugned before us, however, clearly falter and fall when tested on the aforenoted basic postulates. SCNS: THE SCAR OF PRE-DETERMINATION 328. As noticed above, it was the Executive Body which in the first instance came to record findings of guilt and violation of the SAs'. Those reports had come to conclude in no uncertain terms that the petitioners had violated the ethics standards required to be maintained and having acted in violation of the SAs' which applied. That very body proceeded to take a decision to commence disciplinary action based not an independent review of the facts that obtained but solely on the strength of what had been found in the AQRR. The composition of the body which penned the AQRR and that which issued the SCN remained unaltered. The proceedings have thus come to be stigmatized beyond repair and cannot in law be salvaged or saved. 329. This facet of the challenge attains added significance in light of the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b) There had been a complete lack of clarity, and utter confusion had prevailed, in the ROMM assessment; (c) Important aspects of the auditee company's situation, such as its SI-NBFC status, the very disturbing RBI Inspection Reports on the company, the wide discrepancies in reporting of NPAs, etc., had not been given adequate importance in the ROMM assessment; (d) Accordingly, the audit responses had been grossly inadequate; (e) Such procedures as had been performed have had no link to the real ROMM; (f) In crucial matters, the Audit Firm had relied completely on the management's representations; (g) The Audit Firm had totally failed in communicating to TCWG/the management the key issues arising out of the audit. xxxx xxxx xxxx 2.3.6 NFRA had further examined aspects of the engagement that were directed/supervised/reviewed by CA Udayan Sen in his capacity as EP. Contrary to the statement made at document 5/page 10 of the Audit Firm's response to the prima facie conclusions, WP No. 29702 (Manual) Closing Procedures Check list had not been initiated by CA Udayan Sen. CA Udayan Sen's initials were seen only in that part of the WP No. 29702 which is designated as the clo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all information was provided by the Management and hence would not require separate documentation. (e) All work was performed at the client's offices, and hence communication with the Management was on a daily basis. xxxx xxxx xxxx 2.6.4 For all the above reasons, the DAQRR concluded that it is very clear that the ET had completely failed to obtain sufficient appropriate audit evidence to satisfy itself about the credit risk associated with the fulfilment of the put option by SREPPL. 2.6.5 It is seen that the option Agreement was executed sometime in December 2015. If the argument of the Audit Firm that the option had a value of around Rs.180 crores was to be accepted, there was no reason why this was not reflected in the Balance Sheets as of 31st March, 2016, or 2017. The fact that this option contract was brought into the books as of 31st March, 2018, only served to confirm the prima facie conclusion of the NFRA that this action was only a method used by the management to inflate the profit, and that the Audit Firm did not display the required professional skepticism and challenge the evidence produced by the management 2.6.6 After considering all the above matters, NFR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ored only with reference to standards in force in India. The supposed equivalence of International Standard to, or their even greater rigour in comparison with, Indian Standards is entirely irrelevant for the purposes of NFRA; (b) Both the inadequacies of the QC policies and processes on the one hand, and the non compliance with such policies as exist on the other, have been clearly brought out in this AQRR. Specifically, NFRA wishes to draw attention to the large scale and serious violations of Independence requirements, the clear display of the lack of the required professional skepticism, the lack of insistence on obtaining sufficient appropriate audit evidence, the repeated assertions that there could be more than one EP for an engagement, the evident confusion in assessing the ROMM and its impacts on the Audit responses and evidence obtained, and the sham character of the EQCR, as evidence of the need to revamp the QC policies and processes of the Audit Firm; (c) The complete breakdown of QC system evident in this case is serious enough to support the suspicion that the Audit Firm had aligned itself completely with the interests of the management of the Auditee Company; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering and evaluating the effect of management override of controls on account of sanctioning of such loans and failed to evaluate the circumstances that required the company to sanction the loans manually instead of following the established policies and procedures. This preponderance of manual overrides should also have alerted the Audit Firm to the possibility of fraud that needed to be reported under Sec 143(12). However, nothing was done in this regard. Also, having analysed the COD listing of manual approvals, NFRA had come across various cases of sanctioning of loans/ modification in the conditions attached to existing loans which were subsequently pointed out by the RBI in their report. The audit documentation clearly indicates that the Audit Firm in such cases has relied on the management representations completely instead of performing adequate audit procedures. 2.5.18 To summarise, (a) The Audit Firm had clearly indulged in a deliberate misrepresentation of a material fact; (b) There had been a complete lack of clarity, and utter confusion had prevailed, in the ROMM assessment; (c) Important aspects of the auditee company's situation, such as its SI-NBFC st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll information was provided by the Management and hence would not require separate documentation. (e) All work was performed at the client's offices, and hence communication with the Management was on a daily basis. xxxx xxxx xxxx 2.6.4 For all the above reasons, the DAQRR concluded that it is very clear that the ET had completely failed to obtain sufficient appropriate audit evidence to satisfy itself about the credit risk associated with the fulfilment of the put option by SREPPL. 2.6.5 It is seen that the option Agreement was executed sometime in December 2015. If the argument of the Audit Firm that the option had a value of around Rs.180 crores was to be accepted, there was no reason why this was not reflected in the Balance Sheets as of 31st March, 2016, or 2017. The fact that this option contract was brought into the books as of 31st March, 2018, only served to confirm the prima facie conclusion of the NFRA that this action was only a method used by the management to inflate the profit, and that the Audit Firm did not display the required professional skepticism and challenge the evidence produced by the management. 2.6.6 After considering all the above matters, NFR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference to standards in force in India. The supposed equivalence of International Standard to, or their even greater rigour in comparison with, Indian Standards is entirely irrelevant for the purposes of NFRA; (b) Both the inadequacies of the QC policies and processes on the one hand, and the non compliance with such policies as exist on the other, have been clearly brought out in this AQRR. Specifically, NFRA wishes to draw attention to the large scale and serious violations of Independence requirements, the clear display of the lack of the required professional skepticism, the lack of insistence on obtaining sufficient appropriate audit evidence, the repeated assertions that there could be more than one EP for an engagement, the evident confusion in assessing the ROMM and its impacts on the Audit responses and evidence obtained, and the sham character of the EQCR, as evidence of the need to revamp the QC policies and processes of the Audit Firm; (c) The complete breakdown of QC system evident in this case is serious enough to support the suspicion that the Audit Firm had aligned itself completely with the interests of the management of the Auditee Company; (d) NFRA, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement, and has failed to disclose the overstatement of profit. xxxx xxxx xxxx 2.10.2 The above observations of NFRA are reinforced by various observations of NFRA in this SAQRR, which are as follows: a) In Para 2.3 above, it has been conclusively shown that the reappointment of the Audit Firm as Statutory Auditor of IFIN for the FY 2017-18 was ab initio illegal and void for violation of Section 141(3)(e) and Section 141(3)(i) of the Act. The declaration of eligibility submitted by the Audit Firm in terms of Proviso to Section 139(1) of the Act when read with Rule 4 of the Companies (Audit and Auditors) Rules, 2014, was false and invalid, with full knowledge of such illegality. The Audit Firm's compliance with the fundamental principles of the Code of Ethics was threatened by the self-interest threat. Thus, the EQCR Partner was guilty of professional misconduct arising out of gross violations of the law and Code of Ethics. b) As shown in Para 2.3.3.19, the ET and EQCR failed to verify the investments of the Company and their valuation with valid, sufficient, appropriate and reliable Audit Evidences and failed to comply with the applicable Accounting Framework. c) Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-audit services under the EY brand name is to be regarded as providing the said non-audit services indirectly, as contemplated by the explanation to Section 144 of the Act. The separate legal structure of the entities providing the non-audit services does not exclude them from being considered as services provided "indirectly" for the purposes of explanation (ii) to Sec 144. xxxx xxxx xxxx 2.19. Therefore, NFRA concludes that SRBC, EYLLP and EYMBS are covered under directly or indirectly related entities as per explanation (ii) to Sec 144 of the Act. Read with conclusions in section above, the non-audit services provided by these entities fall within the purview of the prohibited services, including management services, covered under section 144 of the Companies Act, 2013. xxxx xxxx xxxx 2.46. In view of the above observations, NFRA concludes that the EP and the EQCR Partner have been grossly negligent in complying with the requirements of Para 11 and Para 21 of SA 220. Para 11 of SA 220 stipulates that the EP shall obtain relevant information from the firm and, where applicable, network firms to identify and evaluate circumstances and relationships that create threats to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies (Audit and Auditors) Rules, 2014, was false and invalid, with full knowledge of such illegality. The Audit Firm had grossly violated the provisions of Section 144 of the Companies Act, 2013. iii. The Audit Firm had been in serious breach of the Code of Ethics. iv. The violations had undoubtedly fatally compromised the independence in mind and independence in appearance required of the Audit Firm. Independence in appearance stood destroyed since no unbiased person could conclude, on an objective assessment of the circumstances, that there had been no abridgement of the auditor's independence. xxxx xxxx xxxx 11.3. On consideration of all the above evidence, NFRA therefore reiterates its conclusions made in the PFC that: i. Based on the overall inadequacies in the audit done by the Engagement Team led by EP, it is apparent that the EQCR Partner has failed to bring to notice the key matters not appropriately dealt with during the audit. ii. The EQCR partner failed to report material misstatements known to him to appear in a financial statement with which he is concerned in his professional capacity. iii. The EQCR partner did not exercise due diligence to obtain suffic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al capacity, b) report a material misstatement known to them to appear in a financial statement with which SRBC is concerned in a professional capacity, c) exercise due diligence, and being grossly negligent in the conduct of professional duties, d) obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion, and e) invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances." 331. As is manifest from the above, those findings clearly appear to transgress the boundaries of a prima facie opinion or one which could be termed as being precursive. They ex facie verge if not cross the border of the conclusive. They are clearly imbued by notes of finality. It is these findings and conclusions rendered by the Executive Body which constituted the foundational material for the formation of opinion by it as to whether circumstances warranted disciplinary action being taken against the writ petitioners. The Executive Body thereafter is stated to have reviewed that very material in order to come to the conclusion that circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeded against a reasonable opportunity of defence. 32. Therefore, while issuing a show-cause notice, the authorities must take care to manifestly keep an open mind as they are to act fairly in adjudging the guilt or otherwise of the person proceeded against and specially when he has the power to take a punitive step against the person after giving him a show-cause notice. 33. The principle that justice must not only be done but it must eminently appear to be done as well is equally applicable to quasi- judicial proceeding if such a proceeding has to inspire confidence in the mind of those who are subject to it. xxxx xxxx xxxx 35. Going by the aforesaid test any man of ordinary prudence would come to a conclusion that in the instant case the alleged guilt of the appellant has been prejudged at the stage of show-cause notice itself." 333. We are thus of the firm opinion that the Executive Body could not have discharged the dual role of rendering findings of guilt and violation of the SAs' while authoring the SQARR/AQRR and thereafter don the mantle of the division which is contemplated under Rule 11. The assessment of whether circumstances warranted a disciplinary enquiry be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge ramifications. It is these facets which appear to have constituted the basis of classification. It would therefore be wholly incorrect to assert that the classification is not based on a rational criteria or nexus aimed at subserving a larger public interest. We have, in any case, found that there is no fundamental difference between the procedure contemplated under the CA Act and the NFRA Rules if matter being tried be based not on a complaint but on an investigation initiated either by the authority itself or on a reference made. 336. The argument of deprivation of the right of legal representation pales into insignificance in light of the statement made on behalf of NFRA and when it was stated that it had undertaken a course correction and taken a principled decision to permit legal assistance to a charged auditor or auditing firm. STATEMENT OF CONCLUSIONS 337. For sake of convenience and ease of reference we deem it appropriate to summarise our principal conclusions which form part of this judgment as under:- A. The Companies Act makes provisions in terms of which both the firm as well as its engagement partners are held liable and could face the spectre of incarceratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative of the firm's appointment as the auditor. The firm acts as the central organ, and its members function as its limbs, carrying out its obligations and responsibilities. The firm's designation as the auditor inherently extends to its members, who act on its behalf. E. To propose an arrangement where distinct spheres of liability operate independently for acts performed by a firm and for those same acts attracting liability on its partners is inherently flawed. Such a proposition assumes the existence of a framework in which the firm functions autonomously, separate from its members or constituents, while delivering auditing services. However, this assumption disregards the very essence and the nature of auditing work, where such disengagement is not only impractical but also fundamentally incompatible with the professional obligations involved. F. Auditing, by its very nature, requires an unbroken chain of diligence, monitoring, and oversight. The service itself is deeply collaborative, demanding seamless integration of expertise and accountability between the firm and its partners. It necessitates meticulous scrutiny of financial data, adherence to regulatory framework ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntinuance of existing laws would not constitute vested rights. K. Vested rights are those which would remain unimpacted by any future change in the legal position. Regard must be had to the fact that if the right hinges on an unsecured or contingent foundation, susceptible to modification by a change in the legislative scheme, then such a right was never truly vested, as it lacked the essential characteristics of being absolute, fixed, or immune to future alteration. L. A challenge to a statute on the ground of it being retrospective, however, is invariably and indelibly linked to how it impacts or infringes the rights of an individual or entity. The issue of retrospectivity thus becomes liable to be examined in the backdrop of how the enactment operates and affects the rights which inhere or may have come to be perfected prior to its promulgation. What we seek to emphasize is that the argument of retrospectivity cannot be evaluated in an abstract dimension. That submission has to be necessarily tested on what we find at the crossroads and intersection where the statute meets with the expanse of the bundle of rights which are asserted to exist. M. Tested on the aforesaid prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddressed through the introduction of Section 132 aligning with the broader objective of strengthening oversight mechanisms and enhancing the quality of professional services rendered by audit firms. This measure was implemented not to create new liabilities but to bridge an existing gap in enforcement, ensuring that standards of professional conduct and accountability evolve in tandem with global best practices. R. The enactment of Section 132 thus represents a progressive regulatory shift, aimed at reinforcing compliance, raising the bar for audit quality, and ensuring that no aspect of professional misconduct or deficiency in service remains unchecked or unsupervised. By instituting a more structured and stringent framework, Section 132 ensures that audit firms and professionals adhere to internationally recognized standards, thereby fostering greater transparency, accountability, and confidence in financial reporting. S. This regulatory evolution does not operate retrospectively in a punitive sense but rather brings India's auditing and financial oversight framework in line with global standards, ensuring that all professional conduct meets the highest levels of scrutiny and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... triggered or based upon the oral testimony of a complainant or person. Thus, the commencement of an inquiry by the NFRA is premised entirely on either a reference that may be made to it by the Union Government or where the said body were to initiate an investigation suo motu or in light of facts that may be gathered in the course of its supervisory role envisaged in Rules 7, 8 and 9. X. In the absence of those proceedings being based on the version of an individual complaint or testimony, we fail to appreciate the submission that the denial of a right of cross-examination is liable to be viewed as a factor which renders the procedure prescribed under the NFRA Rules to be arbitrary. Y. The mere usage of the word 'summary' cannot lead one to presume that the procedure that the NFRA may ultimately adhere to, would be violative of the principles of natural justice. When Rule 11(5) uses the expression 'summary procedure' all that the rule-making authority perhaps intended to convey was that disciplinary proceedings would not be liable to be conducted in accordance with a procedure or rules of evidence which a court of law may be obliged to follow while trying a lis. In fact, that r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h may come to be laid against a CA or a firm would have to be necessarily proved and established on the basis of that audit record alone. The restriction of the proceedings to the audit record thus binds not only the person charged with misconduct but the NFRA itself. CC. Of course that is not to state, that an auditor or a firm is precluded from referring to material or standards that may be sought to be referred to in order to lend credence or support to the conclusions contained in the audit report. However, since the charge is to be proved solely on the basis of the audit record, the reports of investigation and other records, we find no merit in the challenge to the procedure prescribed under the NFRA Rules when they restrict the inquiry to the audit file. DD. As we view Section 132 of the Companies Act, there appears to be no doubt in our mind that the provision did and always contemplated the NFRA performing and discharging its functions through such divisions as may be constituted. While it is true that Rule 2(g), while defining the word 'division' includes one headed by a Chairperson or a full time Member, the Executive Body cannot possibly be construed to be a divisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f impartiality and neutrality. The statute clearly envisaged separate and distinct branches of the NFRA discharging its functions of monitoring, oversight and adoption of disciplinary measures. But for the separation of those powers, one would be inevitably faced with the possibility of one branch discharging dual and overlapping roles. JJ. The principle of no man being a judge in its own cause was explained by the Supreme Court as mandating the deciding authority being one which was impartial and without bias. It also alluded to aspects such as a predisposition to decide for or against one party or where that authority may be inclined to disregard the true merits of the dispute by virtue of bias. KK. This clearly exposes the authority to the charge of a predilection to affirm, the tendency to shut out a challenge to an opinion already formed and disregard the weight of argument aimed at convincing one to review and reappreciate. It would thus be akin to what we in law term as the useless formality theory- an appeal from Caesar to Caesar's wife. This in addition to such a procedure clearly becoming susceptible to the possibility of a person reasonably and justifiably viewing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SCNs' proceed, they are replete with findings which clearly appear to transgress the boundaries of a prima facie opinion or one which could be termed as being precursive. They ex facie verge if not cross the border of the conclusive. They are clearly imbued by notes of finality. It is these findings and conclusions rendered by the Executive Body which constituted the foundational material for the formation of opinion by it as to whether circumstances warranted disciplinary action being taken against the writ petitioners. The Executive Body thus not only acted as the propounder of a prima facie finding of violation of SAs and the laws, it took its own opinion into consideration for the purposes of formation of the belief that sufficient cause existed to take action as contemplated under Section 132(4). QQ. We are thus of the firm opinion that the Executive Body could not have discharged the dual role of rendering findings of guilt and violation of the SAs' while authoring the SQARR/AQRR and thereafter don the mantle of the division which is contemplated under Rule 11. The assessment of whether circumstances warranted a disciplinary enquiry being initiated was statutorily liable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2020 28 July 2020 9. W.P.(C) 1650/2023 27 June 2022 - 10. W.P.(C) 2194/2023 5 January 2023 - 11. W.P.(C) 5842/2023 21 November 2022 29 September 2023 342. However, we leave it open to the NFRA to draw proceedings afresh if so chosen and advised from the stage of issuance of fresh notices based on the findings that have come to be recorded in the AQRRs'. The findings and conclusions appearing in the AQRRs' would be liable to viewed as merely being the expression of a prima facie opinion as opposed to definitive conclusions. Those findings and conclusions may be evaluated afresh for the purposes of formation of opinion whether disciplinary action is liable to be initiated. 343. The decision of whether disciplinary action is liable to be commenced shall be taken independently by a complement of the NFRA comprising of members who were disconnected and disassociated from the process of audit review and the drawl of the AQRRs'. ---------------------- Notes: 1. Conducts disciplinary proceedings in relation to offences under Schedule 1 of the Chartered Accountants Act, 1949. 2. Conducts proceeding in relation to offences under Schedule 2 of the Chartered Accountants Act ..... X X X X Extracts X X X X X X X X Extracts X X X X
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