A Practicing CA cannot carry on Business through Companies, Trusts and Firms: Delhi HC – TaxUp India

A Practicing CA cannot carry on Business through Companies, Trusts and Firms: Delhi HC - TaxUp India

 

IN THE HIGH COURT OF DELHI AT NEW DELHI

% Judgment Reserved on : February 14, 2017

Judgment Delivered on : February 16, 2017

+ CHAT.A.REF.2/2010

COUNCIL OF INSTT. OF CHARTERED

ACCOUNTANTS OF INDIA .....Petitioner

Represented by: Mr.Rakesh Agarwal, Advocate

with Mr.Pulkit Agarwal, Advocate

versus

SUBODH GUPTA & ANR. .....Respondents

Represented by: Ms.Manita Verma, Advocate with

Ms.Riha Deb and Mr.Prateek

Gaurav, Advocates

CORAM:

HON'BLE MR. JUSTICE PRADEEP NANDRAJOG

HON'BLE MR. JUSTICE YOGESH KHANNA

PRADEEP NANDRAJOG, J.

1. The Institute of Chartered Accountants has made the instant

Reference under Section 21(5) of the Chartered Accountants Act, 1949 in

respect of the respondent being indicted for a misconduct other than such

misconduct which is referred to in sub-Section (4) of Section 21. It needs

to be noticed at this stage that with respect to the misconduct for which

the respondent has been indicted falling within sub-Section (4) of Section

21 the penalty levied : of removal of the name from the Member of

Register for a period of six months was challenged by the respondent in

Chat.A.C.No.5/2012 which he withdrew. Thus, we shall be referring to

such facts as would be relevant to decide the present Chat.A.Ref.

2. If we affirm the findings returned by the Disciplinary Committee

constituted by the Institute of Chartered Accountants which has been

 

Chat.A.Ref.No.2/2010 Page 2 of 10

accepted by the Council, the charge proved would be that of a

misconduct.

3. A complaint was received from the Punjab National Bank alleging

that the respondent : a practicing Chartered Accountant, had incorporated

three companies and a trust, with he being the founder director/president

and had opened accounts in the name of the companies and the trust with

the complainant’s branch at Agra. The three companies incorporated

were : M/s.Seeroo Foods Pvt. Ltd., M/s.G.K.Consultant Ltd. and

M/s.Jagrook Builders Pvt. Ltd. The trust set up was M/s.Nirogi

Charitable and Medical Research Trust. It was further alleged that in

connivance with the Branch Manager, funds were diverted to companies

and firms in which the respondent was associated directly as a director or

as a partner. The said entities were : M/s.Radha Raman Plastic Concern

Ltd., M/s.Himalayan Production & Estate (P) Ltd., M/s.A.B.Metal

Industries (P) Ltd., M/s.SAMD Cast (P) Ltd., M/s.Pratikar Finlease Pvt.

Ltd., M/s.Subodh Gupta & Associates, M/s.Utkarsh International and

M/s.Formex Forms (P) Ltd.

4. Copy of the complaint was sent to the respondent on June 06,

2007. He submitted a written statement of defence on July 17, 2002. The

complainant submitted the rejoinder on August 22, 2012. The respondent

submitted his comments on the rejoinder on September 18, 2002.

5. In accordance with the provisions of Regulation 12(11) of the

Chartered Accountant Regulations, 1988 the complaint, written

statement, rejoinder and respondent’s comments on the rejoinder were

placed before the Council, which at its meeting held in April, 2004

opined that prima-facie case was made out to proceed ahead for an

inquiry to be made by the Disciplinary Committee of the Council.

6. The Disciplinary Committee issued notice to the respondent to

appear before the Committee. The record of the Disciplinary Committee

 

Chat.A.Ref.No.2/2010 Page 3 of 10

would show that from August 25, 2004 the respondent, on one pretext or

the other, took adjournments and successfully managed to drag on the

proceedings till July 29, 2006. On a date which is not emerging from the

record the Committee heard the complainant and the respondent and

submitted a report on October 03, 2006 holding the respondent guilty of

professional misconduct within the meaning of Clause 11 of the First

Schedule to the Chartered Accountants Act, 1949 and with respect to the

charge of other misconduct observed that the same shall be decided after

the outcome of the verdict by the CBI Court. The reason being that

investigation qua the fraud committed by the Branch Manager was

investigated by CBI and a charge sheet was filed in the Court of

Competent Jurisdiction in which amongst others, the respondent was

named as an accused.

7. The report of the Disciplinary Committee was considered by the

Council which referred the matter to the Disciplinary Committee for

further inquiry and to submit a complete report.

8. In the remanded proceedings the respondent was heard. The

Committee gave its report on February 02, 2009 and the findings are in

paragraphs 13 to 23 of the report which read as under:-

“13. The Committee noted that the respondent was signing

the Balance Sheet of various companies i.e.

M/s.G.K.Consultants Limited, M/s.Seeroo Foods Private

Limited, M/s.Radha Raman Plastic Concern Ltd. etc. in the

capacity of as a Director of the said Companies. Further, it

is an admitted fact that the respondent was also operating

the bank account of the Companies.

14. The Committee noted that and it is an admitted fact

that the respondent was Director in several companies i.e.

M/s.Seeroo Foods (p) Ltd., M/s.Nirogi Charitable &

Medical Research Ltd., M/s.G.K.Consultant Ltd. etc.

However, the respondent have taken permission from the

 

Chat.A.Ref.No.2/2010 Page 4 of 10

Institute to be a Director only in one Company i.e.

M/s.G.K.Consultant Ltd.

15. The respondent submitted that he was honorary

Director in all the Companies and for that no specific

permission was required from the Institute. But the

Committee is not convinced with the contention of the

respondent as the respondent was actively involved in the

day to day operation of the Companies as he was involved in

signing the balance Sheets of the various Companies in the

capacity of a Director, operating the Bank account9s)

signing the Loan application/documents etc. The

Complainant has submitted the copies of resolution of the

Companies, authorizing the respondent to operate the Bank

accounts, Copies of the Memorandum & Article of

Association of various Companies in which the respondent

was shown as a promoter of the Companies. Further, the

respondent was actively involved in the Company‟s activities

relating to bank‟s transaction and he signed the documents

for over draft facility as well.

16. In view of the above, it is evident that the respondent

was involved in day to day activities of various Companies

namely, M/s.Seeroo Foods (P) Ltd., M/s.Nirogi Charitable

& Medical Research Trust, M/s.G.K.Consultant Ltd.,

M/s.Jagrook Builders (P) Ltd., M/s.Radha Raman Plastic

Concern Ltd., M/s.Himalayan Production & Estate (P) Ltd.,

M/s.A.B.Metal Industries (P) Ltd., M/s.SAMD Cast (P) Ltd.,

M/s.Pratikar Finlease Pvt. Ltd., M/s.Subodh Gupta &

Associates, M/s.Utkarsh International and M/s.Formex

Forms (P) Ltd. without obtaining the prior permission of the

Institute.

17. Thus, in view of above the Committee holds the

respondent guilty of professional misconduct falling with the

meaning of Clause (11) of Par 1 of First Schedule to the

Chartered Accountants Act, 1949.

18. The Committee noted that the second charges is that

the respondent is connivance with the then Branch Manager

had defrauded the Bank. It is an admitted fact that the Bank

has been cheated by the Companies in which the Respondent

was the Director and the branch manager was actively

 

Chat.A.Ref.No.2/2010 Page 5 of 10

involved in the said fraud. The Committee noted that the

bank has been defrauded to the tune of `3.50 crores and for

the same the Bank has filed recovery suit. The said suit has

been withdrawn as the Bank has entered into a compromise

with the Companies. The Committee noted that the Branch

manager had allowed the clean overdraft to the Companies

superseding his statutory powers.

19. The Committee noted that the criminal suit is still

pending in the Court and the charges have not been framed

despite the fact that more than 9 years have elapsed. The

Committee noted that the Respondent‟s contention was that

he was given clean overdraft based on the creditworthiness

of the Companies and he has not furnished any wrong

document.

20. The Committee observed that the contention raised by

the Respondent is not at all tenable as the charge sheet

which has been filed by the CBI wherein the Respondent is

one of the accused along with others, namely, Deepak

Kumar Nayyar, Manager, Punjab National Bank, (under

suspension). It has been pointed out in the charge-sheet that

Nirogi Charitable & Medical Research Trust was neither

availing any credit facility/loan nor there was any OD

account in the name of the said Society in the Punjab

National Bank, Kamla Nagar Branch, Agra. Further, it was

mentioned that Mr.Deepak Kumar Nayyar, Manager,

Punjab National Bank had abused his position as Branch

Manager by conspiring with the respondent to cause

wrongful loss to the Bank and wrongful gain to themselves

by fraudulent means and in furtherance of the said

conspiracy, the said Branch Manager debited a sum of

`85,12,750/- to a non-existence OD account of the Society

on 27th April, 1998 and got issued 11 demand drafts for a

total sum of `85 lacs drawn on CDPC, New Delhi favouring

various beneficiaries of Delhi on the basis of draft

application forms submitted by the respondent.

21. The Committee also observed that it was alleged in

the charge-sheet that M/s.Seeroo Foods Pvt. Ltd.

represented by the respondent as its Director was having an

Anupam Fixed Deposit Account No.489 and corresponding

OD account which was operated by the respondent himself.

 

Chat.A.Ref.No.2/2010 Page 6 of 10

On 16th December, 1997 while the Anupam Account was

showing a credit balance of `2,25,98,910/-, Mr.Nayyar

fraudulent made an excess credit of `7,11,715/- as interest

on 19.9.97. The said Manager further two fake credits for

`5,24,96,50/- on 13.11.97 and `80,50,000/- on 18.11.97

showing the same as being the amounts against FDR

No.589/97 and FDR No.603/97 respectively. It was further

alleged that all the aforesaid three entries were made by

Mr.D.K.Nayyar in connivance with the Respondent without

receipt of funds from or on behalf of M/s.Seeroo Foods Pvt.

Ltd. and the amount was withdrawn from Anupam OD

A/c.No.49 on the various dates by the respondent.

22. On perusal of the aforestated charge-sheet and the

involvement of the respondent in the entire matter, the

Committee felt that the respondent‟s contention that he was

not at all involved in this entire episode is not acceptable.

The Committee further noted that the respondent at each

stage was aware of the fact as to how the amounts were

credited to the Society‟s account and only at his instance 11

demand drafts were issued to various beneficiaries for

which the respondent himself had submitted the draft

applications.

23. Though the Committee noted that the Complainant

has not submitted any specific document before the

Committee yet the Committee on perusal of the charge-sheet

along with the various correspondence which has been

exchanged by the respondent with the Bank is of the view

that the respondent was dealing with the bank on day to day

basis and he was well aware about the security available to

the Bank and despite knowing that he enjoyed the clean

overdraft facility in contravention of the Rules of the Bank.

It is apparent that the Respondent was in connivance with

the then branch Manager and enjoyed the clean overdraft

facility without any security. Therefore, the Committee is of

the view that the Respondent is guilty of „Other Misconduct‟

under Section 22 read with Section 21 of the Chartered

Accountants Act, 1949.”

9. Considering the report of the Disciplinary Committee the Council

held that the respondent was : (a) guilty of professional misconduct

 

Chat.A.Ref.No.2/2010 Page 7 of 10

falling within the meaning of Clause (11) of the Part 1 of the 1st Schedule

to the Chartered Accountants Act, 1949; (b) guilty of other misconduct

under Section 22 read with Section 21 of the Chartered Accountants Act,

1949. Pertaining to the respondent being held guilty of other misconduct

the Council decided to recommend to the High Court that the name of the

respondent be removed from the Register of Members for a period of two

years.

10. At the hearing held by us on February 14, 2017 learned counsel for

the respondent urged that the respondent was an honorary director in the

three companies : M/s.Seeroo Foods Pvt. Ltd., M/s.G.K.Consultant Ltd.

and M/s.Jagrook Builders Pvt. Ltd. and associated in an honorary

capacity with the trust : M/s.Nirogi Charitable and Medical Research

Trust. As per learned counsel similar was the respondents association

with the companies and firms to which the funds were allegedly

transferred.

11. There is evidence on record that the respondent was operating the

bank accounts of the three companies. There is evidence on record that

the respondent was signing the balance sheet of various companies in the

capacity as a director and was also operating the bank accounts and

signing various applications submitted to the bank. Memorandum and

article of associations of various companies show the respondent to be the

promoter of the companies. There is also evidence that the respondent

had signed as the introducer when accounts of other companies were

opened and significantly the address of these other companies was the

same from where the respondent carried on his profession as a Chartered

Accountant. We shall be noting, in some detail, one such act of the

respondent which is indicative of what he was indulging in.

12. Relevant would it be to highlight that pertaining to the indictment

of having committed other misconduct, there is evidence that the

 

Chat.A.Ref.No.2/2010 Page 8 of 10

applications to issue eleven demand drafts were submitted by the

respondent. The trust was not enjoying any credit or loan or an overdraft

facility. There being no money in the account. The manager debited a

sum of `85,12,750/- in the account treating the same as having an

overdraft facility. Eleven demand drafts were issued favouring various

facilities.

13. There is evidence that M/s.Seeroo Foods Pvt. Ltd. of which the

respondent was acting as a director had an Anupam Fixed Deposit

Account No.489 in which account, on December 16, 1997 there was a

credit balance of `2,25,98,910/-. Excess credit of interest in sum of

`7,11,715/- was made in the account on September 19, 1997. Two other

credits in sum of `52,49,650/- and `80,50,000/- were made against two

fixed deposit receipts. The money was withdrawn from the Anupam

Accounts on various dates without actual receipt of funds.

14. It is thus not a case where the respondent has established his

involvement with the companies in an honorary capacity.

15. The second contention urged by learned counsel for the respondent

was that trial before the CBI Court is not get over. Nothing turns on that

because the charge in the criminal proceedings is one of conspiracy and

cheating. Instant proceedings relate to the charge of the respondent being

a Chartered Accountant and without permission from the Institute of

Chartered Accountant acting as a director in various companies. No doubt

the professional misconduct encompasses the acts of cheating, but that

was the subject matter of a separate indictment against which the appeal

filed by the respondent in this Court was withdrawn.

16. To bring home one illustrative point as to how the respondent was

involved, overlooking the names of the persons who were responsible, for

the reason this would relate to the charge of conspiracy, evidence shows

that on advise from Foreign Exchange Office of PNB, two FDRs under

 

Chat.A.Ref.No.2/2010 Page 9 of 10

FCNR Account No.12 were issued in sum of `99,62,526/- and

`47,34,921/- in the name of Tajinder Singh Sahni and Mrs.Jasbeer Kaur

Sahni. Two parallel sets of FDRs in same amount were also issued but

pertaining to FCNR Account No.11. The modus operandi was to tag the

name of Mrs.Jasbeer Kaur Sahni, wife of Surinderpal Singh and that of

Tajinder Singh Sahni. The actual beneficiaries ought to have been

Tajinder Singh and Jasbeer Kaur. A document was then introduced in the

record, allegedly pointing out aforesaid anomaly and the result was five

FDRs being issued in the correct names. The two sets of FDRs in the

joint name of Tajinder Singh and Jasbeer Kaur, which were required to be

cancelled outright, were not cancelled. Who did what would not be

relevant for the purposes of the present proceedings, but relevant would

be the fact that this siphoned-off funds was used for making 11 demand

drafts, 9 out of which in sum of `81 lacs were deposited in Current

Account No.130 maintained by Indian Overseas Bank, Preet Vihar in the

name of M/s S.A.Casting Industries Pvt.Ltd. The respondent was the

person who introduced the account holder. The address of M/s

S.A.Casting Industries Pvt.Ltd. is the same as that of M/s Seeroo Foods

Pvt.Ltd., which account with Indian Overseas Bank, being Current

Account No.117, was operated by the respondent. Aforesaid shows

respondent actively participating in businesses, which as a practicing

Chartered Accountant the respondent could not indulged in.

17. The third submission advanced by learned counsel for the

respondent was predicated on a decision dated August 16, 2016 delivered

by a Division Bench of this Court in Chat.A.Ref.No.4/2012 Council of

The Institute of Chartered Accountants of India Vs. Gurvinder Singh &

Anr. in which the view taken was that a Chartered Accountant would not

be amenable to any disciplinary proceedings while acting as an individual

and dealing with a complainant in a commercial matter. To wit : a

 

Chat.A.Ref.No.2/2010 Page 10 of 10

Chartered Accountant enters into an agreement to sell and receives an

earnest money which he claims to have forfeited alleging default by the

buyer. The buyer takes the stand that the Chartered Accountant never

intended to sell the property and thus has cheated the buyer. This dispute

cannot form the subject matter of a disciplinary proceedings because the

Chartered Accountant is not acting as a Chartered Accountant. He is

acting as the owner of the property.

18. In the instant case the admitted position is that the respondent is

registered with the Council to practice as a Chartered Accountant. He

cannot be a director of a company without the permission of the Council.

The appellant is the promoter of various companies of which he is a

director as per the evidence on record. Being a Chartered Accountant the

respondent cannot actively carry on business through companies, trusts

and firms. There is evidence that the respondent is doing so.

19. Affirming the verdict of guilt and keeping in view the gravity of

the misconduct we answer the reference by imposing the penalty of

removal of respondent’s name from the Register of Members of the

Institute of Chartered Accountants for a period of two years.

(PRADEEP NANDRAJOG)

JUDGE

(YOGESH KHANNA)

JUDGE

FEBRUARY 16, 2017

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