JUDGMENT
K. Shivashankar Bhat, J.
1. The petitioner is a chartered accountant. He was a partner of a firm at Shimoga. A complaint was lodged against him before the first respondent by the original second respondent. The original third respondent is a company which had appointed the second respondent as its auditor. The petitioner is questioning the reference of the complaint by the Council to its Disciplinary Committee after expressing that the Council was prima facie of the opinion that the petitioner was guilty of professional and/or other misconduct.
2. The notice issued to the second respondent has not come back. Neither the papers sent, the envelop nor the acknowledgement returned. In the circumstances, in view of Order 5, rule 19 of the Civil Procedure Code, it can be assumed that notice on the original second respondent was sufficient. However, learned counsel for the petitioner has given up respondents Nos. 2 and 3 so that the writ petition could be disposed of early and in view of the fact that respondents Nos. 2 and 3 are not necessary parties now.
3. The third respondent-company received the special notice of a resolution under section 225 of the Companies Act (“the Act” for short) read with section 190 thereof, proposing to remove the original second respondent and appoint the firm of which the petitioner was a partner as the auditor of the company. The resolution was passed. According to the original second respondent, the petitioner accepted the appointment as the auditor in place of the second respondent without ascertaining that the requirements of section 225 were duly complied with by the third respondent-company.
4. The petitioner had filed his explanation before the first respondent and relied on several papers including the correspondence. According to him and the third respondent-company, the requisite notices were sent under certificate of posting and further the second respondent himself had indicated the knowledge of the proposal. It is further contended that under section 225 the notices need not be sent to the outgoing auditor by registered post at all. In addition to this, the petitioner also had obtained legal opinions as to the requirements to be complied with by the incoming auditor. One opinion is dated December 31, 1990, given by an advocate, Sri M. R. C. Ravi. Another opinion is by Sri Jayaraman, an advocate, who is well-known as a consultant in company law. His opinion was obtained on December 21, 1990. Mr. Jayaraman had given his opinion to the third respondent-company stating that the requirements were complied with. It is further pointed out that the resolution proposing the change of the auditor was contained in the notice of the annual general meeting itself which was also sent to the outgoing auditor. This apart, before accepting the appointment, the petitioner had written to the outgoing auditor and the substantial objection of the outgoing auditor was that the company had to pay him certain amounts towards the fees and when the petitioners enquired with the company, the company pointed out that all amounts were regularly paid and if any amount is still due and it is proved as due, the company would pay the same.
5. The basis for the Council to say that it was prima facie of opinion that the petitioner was guilty of professional and/or other misconduct is not stated in the communication sent to the petitioner. In the statement of objections filed by the first respondent it is stated that the petitioner was guilty of misconduct referred to in clause (9) of the First Schedule to the Chartered Accountants Act. Since the company had not sent the notices by registered post as provided for in the code of conduct circulated by the Institute and the petitioner knew about this failure and accepted the appointment in spite of this failure, it was contended that prima facie the petitioner was guilty of misconduct.
6. Mr. Naganand, learned counsel for the first respondent, raised a preliminary objection contending that the writ petition is premature and that the petitioner has an effective alternative remedy of participating before the Disciplinary Committee which would consider all aspects objectively and expeditiously. Therefore, it was contended that this court should not exercise its writ jurisdiction. Mr. A. G. Holla, learned counsel for the petitioner, contended that on admitted facts it was impossible for the company to be prima facie of opinion that there was a misconduct on the part of the petitioner and, therefore, this court should restrain the first respondent from proceedings with the matter.
7. Section 21(1) of the Chartered Accountants Act, 1949, provides for the Council of the Institute to refer the case to the Disciplinary Committee, where the Council is “prima facie of opinion” that any member has been guilty of any professional or other misconduct and, thereafter, the Disciplinary Committee shall hold an inquiry and report the result to the Council. As per section 21(3), when the Council finds the member guilty of misconduct on receipt of such report, a finding is to be recorded and then proceed in the prescribed manner, which requires as per section 21(4) affording of an opportunity to the member of being heard, etc., in the case of misconduct specified in the First Schedule and in other cases, forwarding of the case to the High Court as per section 21(5).
8. The First Schedule has three parts; the Second Schedule has two parts. In the instant case, the compliant against the petitioner is stated to be one falling under item 9 of Part I of the First Schedule according to the statement of objections filed by the respondent. The respondent has specifically confined the head of misconduct to this item and has not tried to bring the alleged misconduct within any other kind of misconduct and, therefore, it is unnecessary for me to examine the case by reference to other heads of misconduct. For example, Part II of the Second Schedule refers to a member who “is guilty of such other acts or omissions as may be specified by the Council in this behalf, by notification is the Gazette of India”. The requirement to act in a particular manner, while accepting the appointment of an auditor by a company, in the place of an outgoing auditor, as referred to in the guidelines issued by the respondent, was not notified in the Gazette and it is not its case also that the alleged misconduct is traced to this part of the Second Schedule.
9. Since the parties have confined their respective contentions based on item 9 of Part I of the First Schedule, it is necessary to refer to the same; it says that a chartered accountant in practice shall be deemed to be guilty of professional misconduct if he “accepts an appointment as auditor of a company without first ascertaining from it whether the requirements of section 225 of the Companies Act, 1956, in respect of such appointment have been duly complied with”.
10. The essence of the allegation against the petitioner is that he has not ascertained from the company whether the requirement of section 225 of the Companies Act has been duly complied with.
11. To “ascertain” means, “to make certain, exact, or precise. To find out or learn with certainty”.
12. A casual inquiry by sending a query by itself may not be sufficient. The reply furnished by the company to the information sought for by the incoming auditor shall have to be verified in such a way that the latter should be satisfied that requirement of section 225 of the Companies Act was complied with while changing the auditor. In other words, accepting the assertion of the company that it had complied with the provisions of section 225 is not sufficient; the assertion shall have to be examined by a proper probe into the relevant facts. This involves examination of the facts. The conduct of the incoming auditor, in the matter of ascertaining the assertion of the company as to compliance with the requirement of section 225 of the Companies Act, is quite different from saying that the facts as revealed establish that the company has, in fact, complied with the said requirement. There is a difference between in investigation to be held before accepting the appointment and the inquiry that may be held subsequent thereto, though in both the cases the facts may lead to the same result of proof that requirement of section 225 was in fact complied with.
13. Acceptance without a proper ascertainment is the essence of the misconduct, though the vice of that misconduct may get diluted and may become negligible ultimately by proof of the fact that in fact the company had complied with the requirement of section 225, as revealed by the subsequent revelation.
14. Under section 225 of the Companies Act, the following are the requirements to be complied with, by the company, for appointing an auditor :
(i) Special notice of the resolution at the annual general meeting.
(ii) Copy of the notice of the resolution shall be sent to the retiring auditor, by the company.
(iii) If any representation is received from the retiring auditor, the same shall be notified to the members, if possible, in terms of section 225(3).
15. The mode of serving the above notice is not prescribed in the Companies Act. A reading of the said Act shows that wherever a particular mode is a statutory requirement, that mode is specifically stated. For example, (i) section 51 provides for the service of a document on the company under a certificate of posting or by registered post; (ii) section 53(2) permits the service either by sending it under a certificate of posting or by registered post; (iii) section 172(2) attracts section 53 as to the mode of sending a notice, which means, sending a notice by certificate of posting or by registered post; (iv) section 190 refers to the special notice of a resolution and as per its sub-section (2), the notice of the resolution shall be in the same manner as the notice of the meeting, which means, notice sent under certificate of posting or by registered post, apart from other modes referred to in the provision.
16. Therefore, a company can always rely on the fact that notice of the special resolution was sent under certificate of posting; law nowhere compels the company that it should send such a notice only by registered post. The Institute of Chartered Accountants has no control over the companies and the said institution cannot compel any company to send the relevant notice only in a particular manner; therefore, the Institute cannot expect its members to compel the company to adopt a particular mode to serve the notices in the guidelines issued by the Institute.
17. The Institute has issued guidelines called “Code of Conduct”, which are stated to be a set of professional ethical standards regulating the relationship of chartered accountants with their clients, employees, fellow-members, etc. After referring to clause (9) of the First Schedule to the Chartered Accountants Act, the following guidelines were issued by the Council for the purposes of clause (9). The relevant part of it, invoked in the present case, reads thus :
“9.9 (A) As regards the mode of sending the notice of the resolution to the members of the company as provided in sections 224 and 225, it should be noted that there is no provision that the notice should necessarily be sent by registered post. The notice can be sent by the company in accordance with the provisions contained in section 53. The relevant provisions of this section can be briefly summarised as under :
(i) The notice can be sent by ordinary post by preparing and posting the letter after putting proper address of the person concerned.
(ii) If the member or the person concerned has given specific direction to the company that the notice should be sent to him under certificate of posting or by registered post, with or without acknowledgement due, and has deposited with the company the sum sufficient to defray the expenses for this purpose, the notice should be sent in such specified manner.
(iii) When there are joint holders of shares in a company, the notice is to be sent to the joint holder whose name appears first in the register of members.
(B) If it is not practicable to send the notice of the resolution to the members by post, such notice can be given either by advertisement in a newspaper having an appropriate circulation or in any other mode allowed by the articles of association of the company.
(C) In order to ascertain whether notice of the resolution has been sent to the members, the incoming auditor should ascertain whether there is sufficient evidence with the company to indicate that the notice has been sent by any of the modes stated in (A) or (B) above. The despatch register, postage register, postal certificate (if notice is sent under postal certificate) or such other satisfactory evidence available with the company should be verified.
(D) As regards the mode of sending the notice of the resolution to the retiring auditor as provided in sections 224 and 225, attention is invited to the Department of Company Affairs circular dated October 17, 1981, issued to all chambers of commerce, which is reproduced below :
‘I am directed to say that it has been reported by the Institute of Chartered Accountants of Indian that difficulties are being experienced by retiring auditors in the operation of the provisions of section 225 of the Companies Act, 1956, whenever any appointment of a new auditor takes place. Such difficulties arise because of the fact that the copy of the special notice required to be served under section 225(2) of the Act on the retiring auditors are not effectively served and proof of such service is not available. To obviate such difficulties, therefore, it is advisable that the copy of the special notice under section 225(2) of the Act should be sent to the retiring auditors by registered A/D post.’
(E) Accordingly, it is necessary for the incoming auditor to satisfy himself that the notice provided for in sections 224 and 225 has been effectively served on the outgoing auditor (e.g., by seeing that the notice has been duly served through hand delivery or by registered post with A.D.). Production of a certificate of posting by the company would not be adequate for the purpose of the incoming auditor satisfying himself about compliance with section 224/225. Acknowledgment received from the outgoing auditor would be one of the forms in which such satisfaction can be obtained.”
18. The above requirements sought to be enforced casts a higher burden on an incoming auditor to see that the notices under section 225 of the Companies Act are served in a particular manner, not prescribed by the Companies Act; the incoming auditor even before he is appointed as the auditor of the company is required to impose his will on the company. The incoming auditor is made to guide the company to act in a particular manner even before he is vested with any responsibility in conducting the affairs of the company.
19. There is no dispute that this guidelines issued by the Institute has no statutory force. Clause (9) of the First Schedule to the Chartered Accountants Act nowhere prescribed that the incoming auditor shall not accept the appointment unless notices under section 225 of the Companies Act were sent by the company by registered post. The nature of misconduct stated in clause (9) of the First Schedule to the Chartered Accountants Act cannot be enlarged by the Institute, in the guise of issuing guidelines. The misconduct referred to in the said clause (9) is a statutory concept, to be understood and enforced only to the extent stated in the Act.
20. Therefore, it is not possible to hold that failure on the part of the incoming auditor to get the notices under section 225 of the Companies Act issued only by registered post would be a misconduct falling within the First Schedule to the Chartered Accountants Act.
21. But, this does not mean that the petitioner is entitled to succeed in this writ petition. The basic question is whether he had “ascertained” from the company that the latter had complied with the requirements of section 225; this “ascertainment” is not just making a casual inquiry or sending a query to the company and being satisfied with the answer of the company; the auditor has to inquire into the matter in such a way that reasonably he must be satisfied that steps taken by the company were sufficient to comply with the requirements of section 225 of the Companies Act. He may have to be satisfied, by reference to the existing material on record, that the company acted reasonably while acting under section 225 of the Companies Act, with reference to the mode of service of the notices. This is essentially a question of fact. If the Council thinks it necessary that, prima facie, it is a case for investigation as to whether the incoming auditor acted properly or not, this court at this stage of the proceedings before the Institute, should not venture to interfere with the said proceedings.
22. There is a complaint, the Council, on the material on record is “prima facie of opinion” that the member has been guilty of the misconduct falling within clause (9) of the First Schedule to the Chartered Accountants Act. The term “prima facie of opinion” is incapable of precise definition; the term is indicative of the existence of some material, which, at the outset, without deeper probe into the materials leads to an opinion that the complaint lodged is not frivolous, to be thrown out at the threshold. It is an opinion formed by the first impression only. Mr. Holla, learned counsel for the petitioner, contended that even if all the materials on record is taken into consideration, it is not possible to form this “prima facie opinion” in the instant case and relied on the decision of the Supreme Court in Calcutta Discount Co. Ltd. v. ITO . The Supreme Court was considering the scope of section 34(1) (a) of the Indian Income-tax Act, 1922. The main question was whether the words “omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment” would fasten in the disclosure of inferential facts as against the primary facts, the Supreme Court held that the duty is to disclose primary facts and not the inferences to be drawn therefrom; therefore, the assessee need not disclose his intention behind the particular transaction; the intention is to be inferred from the disclosed materials. Therefore, failure to disclose the intention cannot be considered as the basis for the “reason to believe” by the assessing authority to act under section 34. In this context, it was argued that the writ jurisdiction should not be extended to examine the correctness of the existence of the “reason to believe”; at page 380, the Supreme Court held (at page 207 of 41 ITR) :
“The scheme of the law clearly is that where the Income-tax Officer has reason to believe that an underassessment has resulted from non-disclosure he shall have jurisdiction to start proceedings for reassessment within a period of 8 years; and where he has reason to believe that an underassessment has resulted from other causes he shall have jurisdiction to start proceedings for reassessment within 4 years. Both the conditions, (i) the Income-tax Officer having reason to believe that there has been underassessment and (ii) his having reason to believe that such underassessment has resulted from non-disclosure of material facts, must co-exist before the Income-tax Officer has jurisdiction to start proceedings after the expiry of 4 years. The argument that the court ought not to investigate the existence of one of these conditions, viz., that the Income-tax Officer has reason to believe that underassessment has resulted from non-disclosure of material facts, cannot, therefore, be accepted.
Mr. Sastri next pointed out that at the stage when the Income-tax Officer issued the notices he was not acting judicially or quasi-judicially and so a writ of certiorari or prohibition cannot issue. It is well-settled, however, that though the writ of prohibition or certiorari will not issue against an executive authority, the High Courts have power to issue in a fit case an order prohibiting an executive authority from acting without jurisdiction. Where such action of an executive authority acting without jurisdiction subjects or is likely to subject a person to lengthy proceedings and unnecessary harassment, the High Courts, it is well-settled, will issue appropriate orders or directions to prevent such consequences.”
23. The fundamental facts for the “reason to believe” were absent in the said case; in such a situation the court opined that the assessee should not be exposed to a lengthy statutory and, consequently, the notice initiating the proceedings under section 34 was set aside.
24. Here, the court is concerned with the proceedings before a disciplinary body constituted to maintain certain standards in a learned profession. Primarily it is for the said body to examine the case objectively and fairly; the court cannot assume that this body comprising the very men carrying on this learned profession would conduct its proceedings in a manner resulting in harassment to the member whose conduct is under investigation. The proceedings, unlike the proceedings before the income-tax authorities under the Income-tax Act, cannot be “lengthy” in the very nature of the proceedings. The proceedings are governed by section 21(4) and, therefore, if any adverse finding is given against the petitioner, he has a right of immediate appeal to this court as per section 22A of the Chartered Accountants Act; in case of a serious punishment to be imposed, the matter has to be referred to this court under the proviso to section 21(4). Further, the phrase “reason to believe” is a stronger and narrower concept than the one conveyed by the phrase “is prima facie of opinion”.
25. The expression of the view that the council is “prima facie of opinion”, does not mean that, in the proceedings before the Disciplinary Committee, the burden of proving the contra is on the member against whom the proceedings are initiated. The proceedings are penal and quasi-criminal in nature and, therefore, the entire onus will be on the Disciplinary Committee to have the ingredients of the misconduct established before it sends its report to the Council to take any action against the member. The “first impression” of the Council which persuaded the Council to refer the case to the Disciplinary Committee cannot be considered as shifting the burden of proof on the member against whom proceedings are initiated.
26. A detailed reference to the material on record by me and expression of any opinion would necessarily affect the proceedings before the Disciplinary Committee and the Council. I am of the view that the matter should be left to the judicial conscience of the Disciplinary Committee to consider the case objectively and fairly for the present.
27. Before concluding, I am constrained to observe that the profession of chartered accountants is a profession of the learned; there should not be any feeling of professional rivalry or trade competitiveness amongst the members. The hurt feelings of an outgoing auditor shall not normally influence him to complain against an “incoming auditor”, only because the company thought it necessary to change its auditor; the charge of professional misconduct is a serious charge and the complainant also should remember that in this slippery world, some day, he too may commit some mistake which another may magnify and stigmatise as a misconduct; the member of every learned profession owes to himself and to the profession that his fellow member is not unduly and unnecessarily dragged into disciplinary proceedings.
28. Mr. Naganand, learned counsel for the Institute, assured the court that the proceedings against the petitioner would be concluded with utmost speed, without delay.
29. The writ petition is accordingly dismissed. No costs. Rule is discharged.