ROC Karnataka Imposes Penalty on Statutory Auditor for Failing to Report Non-Provisioning of Terminal Benefits under Section 143 of the Companies Act, 2013
Summary: SDU Holdings Private Limited engaged M/s Sundaresha & Associates as statutory auditors for FY 2017-18 and 2018-19. During inspection under section 206(5) of the Companies Act, 2013, the Registrar of Companies, Karnataka noticed that the company had not made provision for terminal benefits as at 31.03.2018, stated to be contrary to Accounting Standard 15 read with section 129, and that the statutory auditor had not qualified the audit report under section 143(3)(h). The auditor contended that the amount was not material. The reply was not accepted and adjudication followed. The ROC proceeded under section 450 after noting the changed penal framework following the Companies (Amendment) Act, 2020. By order dated 16.07.2026, a penalty of Rs. 10,000 was imposed on Mr. Pradeepa Chandra C, signing partner, for FY 2017-18. The order requires payment within 90 days, filing of Form INC-28 thereafter, and permits an appeal to the Regional Director within 60 days in Form ADJ.
- Background of this case
- Provisions relating to this case under the Companies Act, 2013
- Consequences of default: action from the Regulator
- Details of the company
- Facts of the case
- Action taken by ROC: issue of show cause notice
- Response from the statutory auditor
- Hearing on this case
- Conclusion of the Registrar of Companies/Adjudicating Officer
- The order
- Despatch of the order
- The complete order for reading
- Conclusion
- Practical Suggestions to Avoid Recurrence
- References
Background of this case
SDU Holdings Private Limited (CIN U70100KA2010PTC055245), a company incorporated on 21.09.2010 within the jurisdiction of the Registrar of Companies, Karnataka, engaged M/s Sundaresha & Associates, Chartered Accountants (FRN 008012S), as its statutory auditors for the financial years 2017-18 and 2018-19. The audit reports for those years were signed by Mr. Pradeep C Chandra, Partner, holding Membership No. 216133. On inspection of the company’s records under section 206(5) of the Companies Act, 2013, it came to light that the company had not made any provision for terminal benefits in its financial statements as at 31.03.2018, a departure from Accounting Standard 15 read with section 129 of the Act, and that the statutory auditor had not qualified the audit report on this account, thereby not reporting the matter under section 143(3)(h) of the Act. The Registrar of Companies, Karnataka, acting as Adjudicating Officer, has by order dated 16.07.2026 imposed a penalty of Rs. 10,000 on Mr. Pradeepa Chandra C, the signing partner, under section 450 of the Act.
Provisions relating to this case under the Companies Act, 2013
The default and the resulting penalty in this matter turn on the following provisions of the Act:
| Section | Provision |
|---|---|
| 129(1) | The financial statements shall give a true and fair view of the state of affairs of the company, shall comply with the accounting standards notified under section 133, and shall be in the form provided in Schedule III. |
| 143(3)(h) | The auditor’s report shall also state any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith. |
| 147 (pre-amendment) | Where an auditor of a company contravened any of the provisions of section 139, section 143, section 144 or section 145, the auditor was punishable with fine of not less than twenty-five thousand rupees, extendable to five lakh rupees or four times the auditor’s remuneration, whichever is less. Section 143 was removed from this penal provision by the Companies (Amendment) Act, 2020 with effect from 21.12.2020. |
| 450 | Where no specific penalty or punishment is provided elsewhere in the Act for a contravention of its provisions, the company, every officer in default and any other person shall be liable to a penalty of ten thousand rupees, and, in case of a continuing contravention, a further penalty of one thousand rupees for each day after the first, subject to a maximum of two lakh rupees for a company and fifty thousand rupees for an officer in default or any other person. |
It may be noted that section 143 originally carried its own penal consequence through section 147 of the Act. That penal linkage was removed with effect from 21.12.2020, when the Companies (Amendment) Act, 2020 took section 143 out of the ambit of section 147. Since the default in this case was already under examination and no other provision of the Act separately penalises a contravention of section 143(3)(h), the Adjudicating Officer proceeded under the residuary provision, section 450 of the Act.
Consequences of default: action from the Regulator
The Registrar of Companies, Karnataka, in exercise of powers conferred under section 454 of the Act read with rule 3 of the Companies (Adjudication of Penalties) Rules, 2014, passed an order of adjudication of penalty against the statutory auditor. The order carries the reference F.No. ROCB/Adj.454-143/SDU Holdings (Sundaresha & Associates)/Co.No.0552455/2026 and is dated 16.07.2026.
Details of the company
SDU Holdings Private Limited was incorporated on 21.09.2010 and falls within the jurisdiction of the Registrar of Companies, Karnataka. Its registered office, as per MCA records, is situated at No. 1/23, Raja Mansion, 12th Cross, Swimming Pool Extension, Malleswaram, Bangalore-560003, Karnataka.
Facts of the case
1. (a) During the course of inspection carried out under section 206(5) of the Act, it was noticed that as per the notes to the financial statements as at 31.03.2018, the company had not made any provision for terminal benefits, resulting in a violation of Accounting Standard 15 read with section 129 of the Act.
1. (b) A preliminary findings letter No. ROCV/Insp/Sec206(5)/Co.No.055245/DROC(VA)/2019/1560 dated 21.10.2020 was issued to the statutory auditor, calling for an explanation as to why this matter had not been qualified in the audit report.
1. (c) The statutory auditor replied vide letter dated 04.11.2020, taking the position that Accounting Standard 15, read with the General Instructions in Part A of the Annexure to the notification, applies only to material items, that the amount involved was not material, and that the audit report was accordingly not qualified, so that there was no violation of Accounting Standard 15 read with section 129.
1. (d) The reply was not found acceptable. The Inquiry Officer identified a violation, and the finding was accepted by the Competent Authority, which directed the Registrar of Companies to initiate necessary penal action.
Action taken by ROC: issue of show cause notice
Pursuant to the direction of the Competent Authority, the Registrar of Companies issued show cause notice Nos. ROCB/INSP/S.143/SDU Holdings/2021/3101 and 3102 dated 04.10.2021 to the statutory auditor.
Response from the statutory auditor
The statutory auditor replied to the show cause notice vide letter dated 12.10.2021.
Hearing on this case
An adjudication hearing notice was thereafter issued to M/s Sundaresha & Associates on 14.07.2025, and a physical hearing was held on 21.07.2025. Mr. Pradeepa Chandra C, Chartered Accountant of M/s Sundaresha & Associates, appeared before the Adjudicating Officer and made submissions on behalf of the firm.
Conclusion of the Registrar of Companies/Adjudicating Officer
Having considered the submissions, the Adjudicating Officer proceeded to adjudicate the matter under section 450 of the Act, on the finding that the auditor’s failure to report the non-provisioning of terminal benefits under section 143(3)(h) was a contravention for which no specific penalty is provided elsewhere in the Act, and accordingly imposed a penalty on the signing partner of the statutory auditor for the financial year 2017-18.
The order
The penalty imposed by the order is set out below:
| Sr. No. | Penalty imposed upon | Rectification of default required | Penalty amount | Additional penalty | Maximum penalty | Penalty imposed |
|---|---|---|---|---|---|---|
| 1 | Mr. Pradeepa Chandra C, Chartered Accountant and Partner, M/s Sundaresha & Associates, Statutory Auditors (for F.Y. 2017-18) | Not applicable, the default related to a completed audit report of a prior financial year | Rs. 10,000 | Nil (no continuing contravention found) | Rs. 50,000 | Rs. 10,000 |
The order directs Mr. Pradeepa Chandra C to pay the penalty within 90 days from the date of receipt of the order and to thereafter file Form INC-28, enclosing a copy of the order and the payment challan. Payment is to be made online through the website www.mca.gov.in under the ‘Miscellaneous’ head, specifying the details of the order and the noticee making the payment. An appeal against the order, if any, lies to the Regional Director (South West Region), Bangalore, within 60 days of receipt of the order, in Form ADJ, setting out the grounds of appeal, accompanied by a certified copy of the order. The order further draws attention to section 454(8) of the Act, under which non-compliance with the order will invite further penal action without any additional notice.
Despatch of the order
The order was despatched to Mr. Pradeepa Chandra C, Partner (Membership No. 216133), M/s Sundaresha & Associates, Statutory Auditor (FRN 008012S), for the financial years 2017-18 and 2018-19, at 27/7, Professional Court, 1st Floor, 15th Cross, 3rd Block, Jayanagar, Bengaluru-560011, and was signed by Mr. A. K. Bunkar, Registrar of Companies, Karnataka and Adjudicating Officer.
The complete order for reading
The readers may like to read the complete adjudication order bearing F.No. ROCB/Adj.454-143/SDU Holdings (Sundaresha & Associates)/Co.No.0552455/2026 dated 16.07.2026, passed by the Registrar of Companies, Karnataka, at the MCA website at https://www.mca.gov.in/content/mca/global/en/data-and-reports/rd-roc-info/roc-adjudication-orders.html
Conclusion
This order is a reminder that section 143(3)(h) places an independent reporting duty on the statutory auditor, distinct from the company’s own duty to comply with the applicable accounting standards under section 129. A view taken by the auditor on materiality, even one taken in good faith and explained in writing, does not by itself protect against a finding of default once the Registrar takes a different view during inspection. With the removal of section 143 from the penal sweep of section 147 with effect from 21.12.2020, such lapses by auditors now fall to be dealt with under the residuary provision, section 450 of the Act, which, though modest in the amount it prescribes for a single instance, still exposes the signing partner personally, in his own name, to a penalty and to an adverse order on record.
Practical Suggestions to Avoid Recurrence
- Document the materiality assessment contemporaneously. Where an item such as a provision for employee/terminal benefits is consciously left unprovided or unqualified on grounds of materiality, that assessment, and the basis for it, should be recorded in the audit working papers at the time of signing the report, not reconstructed later in response to a regulator’s query.
- Treat AS-15/Ind AS 19 provisioning as a standing checklist item. Non-provisioning of terminal or retirement benefits is a recurring inspection theme; firms should build a specific sign-off step for employee benefit provisioning into the audit closure checklist for every engagement, rather than relying on general materiality judgment alone.
- Respond to section 206(5) preliminary findings with actuarial or documentary support, not argument alone. Where materiality is the defence, quantify it against the relevant benchmarks (net worth, profit, or turnover) in the reply itself, rather than relying on a bare assertion that the amount was not material.
- Track the audit engagement partner’s personal exposure separately from the firm’s. Since penalties of this kind attach to the signing partner by name, engagement letters and internal quality-review files should clearly record who signed each year’s report, so that any regulatory correspondence is routed to, and handled by, the correct partner without delay.
- Attend adjudication hearings in person and keep the reply trail complete. In this case the partner’s appearance at the hearing allowed the matter to be decided on merits rather than ex-parte; a complete, dated trail of every notice and reply strengthens the firm’s position at the appellate stage, should an appeal become necessary.
References
1. The Companies Act, 2013, sections 129, 143, 147, 450 and 454.
2. The Companies (Adjudication of Penalties) Rules, 2014, Rule 3.
3. Accounting Standard (AS) 15, Employee Benefits.
4. Order of Adjudication of Penalty in respect of SDU Holdings Private Limited under section 454 read with rule 3 of the Companies (Adjudication of Penalties) Rules, 2014, for violation of section 143 of the Companies Act, 2013, F.No. ROCB/Adj.454-143/SDU Holdings (Sundaresha & Associates)/Co.No.0552455/2026 dated 16.07.2026, Registrar of Companies, Karnataka.
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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at [email protected]).
