Ghanshyam Nandlal Popat HUF Vs CA Damodar Shivraj Sarda (ICAI Disciplinary Committee)
Management Representation Alone Insufficient: ICAI Fines Auditor for Undisclosed Rent Dispute
Summary: The Disciplinary Committee of the Institute of Chartered Accountants of India (ICAI), Bench-II, in Ghanshyam Nandlal Popat HUF Vs CA Damodar Shivraj Sarda, held that a statutory auditor cannot rely exclusively on a management representation to justify the non-disclosure of a disputed contractual liability when other available evidence indicates that the obligation remains unresolved. In its final order dated 15 October 2026, the Committee reprimanded CA Damodar Shivraj Sarda, Membership No. 044952, partner of D A V A & Associates, Chandrapur, and imposed a fine of ₹25,000 payable within 60 days from receipt of the order. The disciplinary action arose from the statutory audit of Samadhaan Marketing & Merchandise Private Limited for FY 2017-18. The Committee’s findings dated 29 August 2026 established professional misconduct under Clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949, relating to failure to exercise due diligence or gross negligence in professional work. Importantly, the Committee examined two separate allegations and did not uphold both. The auditor was expressly found not guilty of the allegation concerning non-deduction or non-deposit of tax deducted at source (TDS), whereas the allegation relating to non-disclosure of disputed lease-rent and compensation obligations was sustained. The decision therefore turns on the distinction between an unproved statutory-compliance allegation and a demonstrated failure to obtain sufficient appropriate audit evidence concerning a potential financial-statement liability.
The dispute originated from a lease deed dated 13 October 2016 executed between Samadhaan Marketing & Merchandise Private Limited and a group of property owners, including the complainant, Ghanshyam Nandlal Popat HUF. The arrangement also involved compensation payable to former directors of the company, who were members of the lessors’ family. Under the agreement, the company was required to make payments towards lease rent and compensation, and post-dated cheques were issued to the respective beneficiaries. The disciplinary record referred to contractual amounts of ₹1,25,000 towards lease rent and ₹1,25,000 towards compensation. A fire occurred at the leased premises on 30 October 2016, after which disagreements arose concerning the condition of the premises, the landlords’ obligation to restore them and the company’s continued liability to make payments. The company maintained that the premises had become unsuitable for use and that the landlords had breached their contractual obligations. According to the company’s position, this justified discontinuation of rent and compensation payments from September 2017. The complainant, however, alleged that post-dated cheques had been dishonoured and that the company had neither recognised the corresponding obligations nor disclosed them as contingent liabilities in its financial statements for the year ended 31 March 2018. The respondent, as statutory auditor, was accused of failing to identify and report those omissions.
The first disciplinary charge related to alleged irregularities in tax deduction at source. The complainant alleged that the company had issued cheques after deducting applicable TDS but had not furnished tax deduction certificates and that the corresponding deductions were not reflected in the payees’ Form 26AS. The allegation was that the auditor had failed to report these deficiencies. The Director (Discipline), while forming the prima facie opinion on 21 March 2022, considered the auditor’s responsibilities under SA 250, Consideration of Laws and Regulations in an Audit of Financial Statements. This standard requires the auditor to obtain sufficient appropriate audit evidence regarding compliance with laws and regulations directly affecting material amounts and disclosures in the financial statements, including applicable tax laws. The Committee also recognised that a statutory auditor cannot simply disclaim responsibility for considering material tax-compliance issues. Nevertheless, the final determination depended on the actual transactions and evidence for FY 2017-18, rather than on the mere existence of post-dated cheques or the complainant’s assertion that TDS certificates were missing. The distinction between credit or payment and the mere execution of a lease agreement was material to the respondent’s defence.
In addressing the TDS allegation, the respondent explained that rent cheques had been honoured during April to August 2017 and that the corresponding TDS had been deducted and deposited with the Government. He stated that these transactions were reported in Form 3CD and reflected in the payees’ Form 26AS. For the subsequent disputed period, he submitted that no further rent payments were made and no rent expense or liability was recorded because the company considered the obligation contested following the fire and the dispute with the landlords. The Committee noted the respondent’s explanation and the material concerning the relevant payments. It also recorded that the Income Tax Department, on examining the complainant’s application, had reportedly found no liability on the company’s part. The Committee concluded that TDS had been deducted and deposited for the period during which rent payments were actually made and that no further TDS liability arose on the facts examined for the remaining period. Consequently, the respondent was held not guilty under Clause (7) of Part I of the Second Schedule in respect of the TDS allegation. This finding should not be interpreted as a general proposition that disputed or unpaid rent can never attract TDS; the conclusion was confined to the factual and accounting position accepted in these disciplinary proceedings.
The second charge concerned the company’s failure to recognise or disclose obligations relating to dishonoured cheques, lease rent and compensation. The respondent relied substantially on a Management Representation Letter dated 22 August 2018, in which management stated that there were no contingent liabilities as at the balance-sheet date. Management asserted that the landlords had failed to restore the premises to a usable condition after the fire, that this constituted a breach of the lease arrangement and that the company’s liability to pay rent or compensation had consequently ceased. On that basis, the company did not debit further rent or compensation to its profit and loss account and did not disclose any related contingent liability. The respondent defended his audit treatment as a bona fide exercise of professional judgment, stating that preparation of the financial statements and compliance with accounting standards were primarily management’s responsibilities. He also relied on the principle that a statutory audit provides reasonable assurance rather than absolute assurance. However, the Committee considered that these explanations did not resolve the central audit question: whether management’s assertion of complete cessation of liability had been independently tested against the lease deed, dishonoured cheques, court proceedings and other available evidence.
A decisive factor was the order dated 15 July 2017 of the Civil Judge, Senior Division, Chandrapur. The company had approached the civil court seeking directions restraining the lessors from recovering rent and encashing cheques already issued towards rent. The court declined to grant the requested interim relief, observing that it would be inappropriate to restrain recovery at that stage without entering into the merits. The Committee treated this order as evidence that the company’s obligation remained a matter of active legal contention and had not been conclusively extinguished. The refusal of interim relief was not treated as a final judicial determination that all rent claimed by the landlords was payable; rather, it undermined management’s assertion that no possible obligation remained. The existence of pending litigation, dishonoured cheques and unresolved contractual claims meant that the auditor was required to examine whether the financial statements should recognise a provision or disclose a contingent liability. The respondent’s acceptance of management’s view without adequate corroboration was central to the finding of professional misconduct.
The Committee placed particular reliance on SA 580, Written Representations, which recognises written representations as necessary audit evidence in appropriate circumstances but makes clear that they do not, by themselves, constitute sufficient appropriate audit evidence about the matters represented. Accordingly, even a formally signed management representation stating that no liability existed could not replace examination of contradictory documents and external evidence. The respondent had access to the lease deed, was aware of the dispute and had knowledge of the court proceedings. Moreover, he was personally named in the lease deed as one of seven persons whose declaration or consent could be relevant to specified decisions concerning the premises. The Committee considered these circumstances significant in assessing his awareness of the contractual arrangement. It concluded that the respondent should have sought corroborative evidence, evaluated the legal and contractual position and considered the consequences for financial-statement disclosure. His failure to do so demonstrated insufficient professional scepticism and due diligence. The finding was not based merely on an unsuccessful commercial judgment by management but on the auditor’s failure to respond appropriately to evidence inconsistent with management’s representation.
The financial-reporting question was examined under Accounting Standard (AS) 29, Provisions, Contingent Liabilities and Contingent Assets. The Committee referred specifically to paragraph 10.4, defining a contingent liability, and paragraph 68, which requires disclosure of a contingent liability unless the possibility of an outflow of resources is remote. A contingent liability may arise where a possible obligation results from past events and its existence depends on uncertain future events outside the enterprise’s complete control. In this case, the lease deed and issued cheques represented past events, while the ultimate outcome of the litigation remained uncertain. The Committee found that the potential outflow could not reasonably be treated as remote merely because management believed that the landlords had breached the contract. It therefore concluded that the disputed lease-rent and compensation obligations required appropriate contingent-liability disclosure in the financial statements for the year ended 31 March 2018. The company’s failure to disclose the matter, combined with the auditor’s failure to report it, constituted the established audit lapse. The finding illustrates the need to distinguish a liability that is disputed from one that has demonstrably ceased to exist.
The respondent also argued that the amount in dispute was comparatively small and that the disciplinary proceedings arose from a single disclosure issue in one audit engagement. During the punishment stage, he referred to disputed rent of ₹26,565, describing it as insignificant relative to the company’s sales, assets, capital and reserves and profit. He emphasised that he had more than three decades of professional experience, a clean disciplinary record and no personal benefit from the alleged omission. He denied any fraud, misappropriation or collusion and maintained that his understanding of the management representation and court order had been bona fide. These submissions were considered alongside the Committee’s findings. The Committee nevertheless regarded the absence of adequate audit evidence and the non-disclosure of the unresolved obligation as sufficiently serious to establish professional misconduct. The amount of the disputed rent and the absence of personal enrichment did not, in the Committee’s assessment, displace the auditor’s obligation to exercise due diligence when evaluating a disputed liability.
The procedural history also demonstrates that the matter underwent a substantive disciplinary examination. The complaint was filed on 20 May 2019, and the respondent submitted his written statement on 13 August 2019. The Director (Discipline) formed a prima facie opinion on 21 March 2022, and the Disciplinary Committee agreed to proceed with the matter on 8 April 2022. Hearings took place on 9 June 2023 and, following changes in the Committee’s composition, on 11 May 2026, when the parties opted for a fresh hearing. The Committee took its decision on 25 July 2026 and pronounced its findings on 29 August 2026. Those findings expressly recorded the respondent as not guilty on the TDS charge and guilty on the contingent-liability disclosure charge. At the subsequent punishment hearing on 15 October 2026, the respondent appeared personally, admitted his mistake and sought leniency. The Committee considered his written submissions dated 17 September 2026, his oral representations and the established misconduct before deciding the appropriate sanction.
