Council Of The Institute Of … vs B.K. Nagaraj, Chartered … on 10 January, 1991

Karnataka High Court
Council Of The Institute Of … vs B.K. Nagaraj, Chartered … on 10 January, 1991
Equivalent citations: AIR 1991 Kant 380, 1991 (1) KarLJ 278
Author: K Shivashankarabhat
Bench: K Shivashankarabhat, R Ramakrishna


K. Shivashankarabhat, J.

1. This is matter which has come to this Court under Section 21(5) of the Chartered Accountant Act, 1949 (for short `the Act’). The respondent is a Chartered Accountant.For the take of convenience the Council of the Institute of Chartered Accountants of India is referred as the petitioner. A complaint was lodged against the respondent by the Joint Chief Controller of Imports and Exports alleging that respondent has issued a fictious certificate of purchases turnover of books for Rupees 22,00,000/- to M/s.Vengateswara Book House,Bangalore April-March 1980-81 period. The complaiant stated that the respondent was guilty of professional imsconduct under Clause (7) of Part I of Second Schedule to the Chartered Accountants Act, 1949.

2. It seems relying on the certificate issued by the respondent, an Import Licence was issued to M/s.Vengateshwara Book House on 7th August, 1981.Subsequently on realising that it is a non existing one, this licence was cancelled.Therefore, the complainant asserted that:

“The respondent i guilty of wilfully and deliberately issuing a false certificate of purchase, turnover of books with a view to mislead, this office which lead to the grant of an import licence in favour of the above said non-existing firm.”

Notice was issued to the respondent on receipt of the complaint.The respondent in his written statement dated 13th August, 1983 stated that he was not aware of the misuser of the certificate issued by him and the certificate was issued by him on a representation made to the respondent that it was required for the purpose of obtaining bank loan.According to the respondent, one Mr. D.Sambasivan introduced the proprietor of the firm(M/s.Venkgateshwara Book House), with a request to issue the said certificate. Respondent has stated that Sambashivan was his neighbour and they were friends and that the respondent had no doubt about the integrity of Mr. Sambasivan.In paragraph 4 he has stated thus:

“When I was requested to issue the certificate as it was a very strange and stray case, I was very cautious and careful in issuing the above certificate. I asked the person to produce the following documents in support of the turnover figures:

(a) Books of accounts maintained with details of purchases,

(b) Purchase invoices,

(c) Particulars of sales tax registration and assessment,

(d) Bank pass book,

(e) Details of permanent account number and income-tax assessment records(as the turnover was huge).”

Thereafter, he stated that firm was not registered under the provisions of Sales Tax Act, as books were exempted from taxation and therefore, Item (c) referred above was not necessary. The account was also not furnished and he accepted the explanation of the proprietor of the firm, when the respondent was told that the nature of the business was such that the firm was acting as purchase agent for libraries, institutions etc.,on a commission a half per cent and consequently bank account had not been opened and that the proprietor wanted to start regular book house for which the bank was requested for finance.Hence,the certificate was sought from the auditor.The income of the institution was stated to be Rs.11,000/- per annum and therefore, the firm was not an assessee under the provisions of Income-tax and consequently there was no permanent account number in income-tax assessment records pertaining to the firm-this explanation offered was also accepted by the auditor-respondent.According to the respondent, the proprietor of the firm cam with Mr.Sambasivan and produced the following documents:

“a) Purchase and Sales day book containing the purchases and sales details.

b) Original invoice from various publications, from various places and towns(all printed ones) raised in favour of M/s. Vengateswara Book House, T. M. Road Cross, Bangalore totalling to very slightly (negligently)above the certified figure.

c) Carbon copies of the sales bill (cash bills)”.

Respondent has stated that on verification of this, he issued the certificate in question.The respondent realised that the firm was non-existent in view of the finding given by the complainant that it was non-existent firm.The respondent has stated that he had no reason to suspect the person introduced to him by his friend Mr. Sambasivan and at no tine he suspected that he issued a certificate to non-existent firm.The respondent also expressed his regret for the untoward thing that has happened,but, assured the Institute (petitioner)that he has been in continuous practice for the last 10 years and built up good reputation, goodwill and dignity and he had been always cautious in the discharge of his functions as an auditor.According to him he was in no way connected with any import or export licence affairs and in the instant case he had charged a nominal fee of Rs. 100/- for the issue of certificate in question.The respondent further pointed out that he shifted his office to Bangalore recently.

3. An enquiry was held at Bangalore by the Disciplinary Committee.The complaint as well as the respondent were asked to take oath and thereafter both of them were examined.Complainant produced certain documents according to the list supplied to the complainant by the Disciplinary Committee but nothing turns out of those documents.Respondent has stated that he issued the certificate question on the assumption that it was required for obtaining the bank loan, that he did not maintain any working paper notes concerning the audit he has done before issuing the certificate and that he was not maintaining such papers.To a specific question from the Vice-President:

“But are you not contesting that point made by the complainant with regard to the Certificate?”

Respondent answered:

“As far as the facts are concerned, I do not have to say anything.”


Question:Do you not have to contest?


Answer: No.

When the respondent was asked about the books of account referred to him as having been examined,he stated that they were purchase and sale books, and not cash books and ledger books.To the next quetion:

“Question: Whether books of accounts would mean ledger and expenditure books also?

Question:Why did you not mention that it was from sales and purchase books that you gave the certificate?

Answer:He wanted the certificate in that fashion.I mentioned books of account”

The respondent quite strangely asserts, books of accounts means purchase and sales books, instead of cash book and ledger book.The payment made by the firm were stated to be in cash even though the bills pertains to Rs. 4,000/-.There are several other similar questions and answer which indicate that the respondent was not cautious at all and only if he had been prudent to probe the matter further, probably the nature of the firm that the firm was really not in existence and that turn over of Rs. 22,00,000/- was not at all genuine would have been notice by him. Ultimately the respondent has stated that:

“I could not take the due care because I believed in the integrity of Mr. Sambasivan and I knew him for many years and I was introduced by him.I thought he was a genuine man”.

4. It is on record that this Sambasivan is not traced by the respondent who landed him in the present predicament.Form the aforesaid material on record,the Disciplinary Committee opined that the respondent has failed to verify the books of accounts and supporting papers required to be done before the issue of certificate of this nature.He has also failed to produce before the Committee any material whatsoever to indicate that he did verify the Books of Accounts.In fact it is quite apparent that M/s.Vengateswara Book House was a non-existent firm,for which a certificate has been issued by the respondent without any verification. Therefore, the Disciplinary Committee concluded that he was guilty of professional misconduct within the meaning of Section 21 read with Section 22 of the Act and Clause (7) of Part I of the Second Schedule to the Act.This report was accepted by the Council.The respondent did not participate n the proceedings before the Council,but made a written representation.After accepting the Committiee’s findings, the Council recommended that the name of the respondent be removed from the register of Members for a period of 15 days from such date as the High Court will indicate.Hence,this reference.

5. A perusal of the material on record prima facie justifies the finding recorded by the Disciplinary Committee and the Council.However,Mr.Ram Bhat,the learned counsel for the respondent contended that the proceedings are vitiated by the failure to follow the principles of natural justice, mainly because the respondent who is in the nature of `accused’ was directed to take oath and further that the Members of the Committee freely engaged in questioning the respondent, therefore they functioned as prosecutors.

6. The entrustment of disciplinary power to body comprised of the members who are engaged in that very profession is to enable the professional men themselves to judge their fellow members;they are in a better position than others to appreciate and understand the system under which the particular profession has to be carried on;the measure of the ethical value ils largely left to them, though broad heads of misconducts are statutorily indicated.

7. The person against whom a complaint is lodged cannot be fully equated with an `accused’. The Disciplinary Committee has to find out the various aspects of a transaction or a conduct which occassioned the compliant;a complainant may not be fully aware of the intricacies of the manner in which the professional man should have functioned in a given case.Therefore,power of the Members of the Disciplinary Committee to question and elicit information from the delinquent (i.e., the person who is the subject of complaint) should not be limited by applying the standards governing a Court or other quasijudicial Tribunals.So long as the proceedings do not contravene the principles of natural justice(a concept, scope of which is again would vary with the situation and the subject), the proceedings cannot be nullified by the application of strict rules of procedural law governing the Court.

8. In the instant case the question posed to the respondent were clarificatory in nature,to find out the manner in which respondent acted while issuing the certificate in question,the questions were absolutely necessary to elicit answers to throw light on the transaction.Hence, it cannot be said that the Members functioned more as prosecutors rather than as Members of an unbiassed body.

9. Mr. Ram Bhat further contended that the respondent was obviously carried away by the words of his friend Mr. Sabasivan and there is no finding that the respondent was aware of the real purpose for which the certificate was obtained and he was not in any manner party to the fraud played upon the Government and the Department by the nonexistent firm.That is so.But the question here is : whether in issuing the certificate the respondent had discharged his role as required of him as an auditor and in this regard primarily it is the decision of the professional only body like the petitioner that has to be considered. It has been brought out that an auditor will have to normally maintain working papers, that he has to examine cash books and the ledger (concept of cash book and ledger is known even to a common man) and a firm having a turn-over or Rs.22,00,000/-will normally have a bank account and all these factors were not properly appreciated by the respondent and certainly he was not prudent in just issuing the certificate on the basis of his friend’s advice and relying only some books and bills.It is in this background the finding of the petitioner that the respondent was grossly negligent in the discharge of his professional duties will have to be viewed. In Chief Controller of Exports v.G.P. Acharya , certain inaccurate statements were made by the auditor who issued the certificate. Words of an earlier decision of the same court in the case of S.Ganesan v.A.K.Joscelyne’ ,regarding the concept of misconduct were repeated to say :

“Gross negligence in the conduct of professional duties is specially scheduled to be a misconduct under the Chartered accountants Act.What is gross negligence for the purpose of professional duties in primarily and basically a question of fact.Primarily again, the professional bodes charged with the task of maintaining the standards and discipline of the members of the profession are the best primary judges to determine what such conduct or standard should be. The finding here of that professional body is that the Chattered Accountant in this case is guilty on gross negligence in the performance of his professional duties”.

Regarding the power of this Court under Sec. 21, the Bench observed earlier as follows :

“Wide are powers,therefore, of this Court in dealing with References under Section 21 of the Chartered Accountants Act.Nevertheless appear that some well-settled principles should guide this Court in exercising this ample power.It is essential to remember that this Court in such jurisdiction as under S. 21 of the Chartered Accountants Act is dealing with not so much private dispute or private litigation but i dealing with the findings of a findings of a professional body of people who are intended to be the best judges of what their own standard of professional conduct should be.Unless, therefore,there is a gross violation or disregard of the provisions of the Charted Accountants Act or the Regulations made thereunder or a gross and utter disregard of certain well known principles or natural justice and fairness or obvious disregard or essential considerations so flaw or fact,this High Court should not be too eager to interfere with the findings of professional bodies like the Council of the Chartered Accountants of India and its Disciplinary Committee.”

Almost similar view is expressed in the case of Council of the Institute of Chartered Accountants v.B.Mukherjea which has been referred in the aforesaid Calcutta decision.What is most relevant in the decision of the Supreme Court is (at p. 78 of AIR):

“Besides, in the present case, no such technical considerations can really come into operation because the material facts have not been in dispute between the parties at any stage of the proceedings.”

Applying the very test, we have already found that the respondent has been certainly negligent in not insisting upon the production of relevant books such a s cash books, ledger and the bank account at least and that he failed to maintain the working papers and these were not indispute.

10. The next question is, what consequence should follow from the above finding? The Institute has recommended that the respondent should be removed from the register of Members for a period of 15 days from such date as the High Court will indicate.In this regard, the petition has not considered one important aspect to the effect that the respondent was throughout practising in a small town at Tiptur.Obviously he could not have gained much practise in the art of accountancy.probably he was appearing in sales tax and small income tax case.He, recently came to Bangalore and within one year thereafter this incident took place. According to the respondent this is the solitary incident where he had issued such a certificate and that the he was persuaded mainly by the introduction given to him by his friend Mr. Sambasivan.Further,in his answer given to the Disciplinary Committee,the respondent was quite candid about his understanding of the situation and expressed regret of the manner in which he issued the certificate.In these circumstances, we are of the opinion that the respondent must have realised already the need to be more vigilant in the discharge of his functions and a serious punishment is not called for against him.Since a definite finding has been given that he gas been guilty of misconduct, we cannot just exonerate him.Interest of justice will be met by reprimanding the respondent which in no way would affect his continuation in the profession.We substitute the penalty of reprimand in the place of the punishment recommended by the petitioner. Consequently,we,hereby reprimand the respondent.Petition is allowed,accordingly.No order as to costs.

11.Petition allowed.

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