Case Law Details
Pankaj Mahajan Vs Serious Fraud Investigation Office (Delhi High Court)
The role of the petitioner a practicing Chartered Accountant is that of the Stock Auditor wherein the Stock verifications of the documents and statements as submitted by the Company to the Banks was carried out by the accused. The main accusations against him are that he did not conduct the Stock Audits diligently and did not raise red flag about the inconsistency as submitted in the documents to the Banks by the Companies. Further, the primary accused, namely, Mr. Neeraj Singhal and Mr. Nitin Johari have already been granted interim bail. The allegations pertain to years-2014-2015 and 2015-2016 and the petitioner neither before nor after has been involved in any criminal offence. Considering all the circumstances, the petitioner is hereby admitted to bail on submitting a Bail Bond and Surety Bond in the sum of Rs.1,00,000/- (one lakh) to the satisfaction of the trial court/Special Judge.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. The present second bail application under Section 439, The Code of Criminal Procedure, 1973 has been filed on behalf of the Accused, Mr. Pankaj Mahanjan.
2. The facts in brief are that the Accused, Mr. Pankaj Mahajan is practicing Chartered Accountant since the year 1994. He joined the Firm, founded by his father, namely, M/s. A.C. Gupta & Associates, as a partner in the year 1988. It is explained that a Partnership Firm- M/s. A.C. Gupta & Associates, Chartered Accountants, of which the Accused is one of the partners, was appointed by the State Bank of India and the Punjab National Bank to conduct the stock audit of BSL for the Financial Year’s 2014-2015 and 2015-2016 respectively. The Accused had no role whatsoever over the filing of the actual stock statements. The role of the Accused was only limited to data aggregation by physically visiting the various locations of the Company and verifying the stocks and debtors’ report in the stock statement, which was duly signed by the senior officials of the Company and have already been submitted to the Banks. Upon the completion of the said assignment, the Report was submitted by the Accused to Punjab National Bank and State Bank of India. While the applicant has been made as accused, but SFIO has failed to array as accused, the erring officials of Punjab National Bank and State Bank of India, who were the employers of the accused. Despite being aware that the accused has conducted the Stock Audit solely on the basis of the information provided by the Companies. The Central Government/Ministry of Corporate Affairs (“MCA”) in exercise of powers under Section 212(1) (c) and 219 of the Companies Act, 2013 initiated investigation in the affairs of M/s. Bhushan Steel Ltd(“BSL”) and other Companies associated with ex-promoters of BSL. The investigation was carried out by SFIO and they submitted an Investigation Report on 27.06.2019 to Ministry of Corporate Affairs (MCA). On the basis of the Investigation Report, a Criminal Complaint bearing No. 770/2019 was filed by SFIO before the learned Trial Court. The applicant herein was arraigned as an accused No. 199.
3. The learned Trial Court after taking cognizance of the complaint vide Order dated 16.08.2019 issued notice to the accused for the offences under Sections 36 (C) read with 447 of the Companies Act, 2013 and Section 227, 233 read with 628 of the Companies Act, 1956 for the stock audits of BSL. According to the Investigation Report, BSL alongwith its associated Companies and its officials have allegedly connived with each other and have inflated some figures of the Stock in Transit in order to avail Drawing Power (“DP”) facilities from the cash credit accounts.
4. The Accused was summoned by the SFIO on 29.06.2018, 27.09.2018, 29.10.2018 and 20.03.2019. The accused joined the investigation and detailed interrogations were carried out.
5. The accused filed a Bail Application before the learned Trial Court to which reply was filed by SFIO. The Hon’ble Supreme Court vide Orders dated 04.09.2018 and 18.08.2021 granted interim bail to Neeraj Singhal (Accused No. 159) and Mr. Nitin Johari (Accused No. 160), who were the prime accused, being ex-promoter/Director and Ex-Chief Financial Officer/Whole Time Director (Finance) in BSL.
6. The Applicant has submitted that he was a partner in M/s. A.C. Gupta & Associates and had not enriched himself or his firm, in any manner and he is entitled to bail on the grounds of parity.
7. It is asserted that M/s. A.C. Gupta & Associates was awarded the assignment to conduct the stock audit of BSL, subsequent to date when officials of BSL had already submitted duly signed stock and debtor statements and the Banks had already allowed continuation credit limits by way of working capital funds based upon inflated Drawing Power.
8. The role of the Accused was that he conducted stock audits based on the information and documents provided by the Companies and by no stretch of imagination can it be said that the accused had colluded with the officers of BSL, as alleged.
9. It is claimed that the assignment given by the Punjab National Bank and the State Bank of India to accused was carried out diligently by adhering to the highest standards of work and have duly followed the guidelines/ standards/ guidance notes issued by Institute of Chartered Accountants of India (“ICAI”) of which the applicant was a member. The accused was never involved in any inducement to creditors or lenders. The Stock Audit was conducted using professional scepticism, as is required for conducting stock audits. The Guidance Notice issued by the Institute of Chartered Accountants of India (“ICAI”) regarding the conduct of Stock Audits categorically provides that conducting Stock Audit does not necessarily guarantee absolute veracity of the stock records or even healthy financial position. It also provides that the Auditors appointed cannot be expected to be aware of the industry scenario precisely. The scope of the auditor’s work is limited and is not allowed to delve deep into the technical aspects. Moreover, it is not humanely possible for the Auditor to be conversant with the technical details. Furthermore, the Guidance Note observes that the system of allocation of Stock Audit is not based on a well worked out methodology and the audit should be designed in such a manner that if the inventories are large, an extensive check should be made of the material control system.
10. The accused during the course of investigation had categorically explained his limited role and stated that the Stock Audit was solely conducted on the basis of the information and documents provided by the Companies. The accused has claimed that his Firm has been established in the year 1988 and has carried out several assignments including the statutory audits and there have never been any questions about the quality or the integrity of the Firm in regard to any audit conducted by it.
11. The accused further explained that his counsel Ms. Kamlesh Mahajan met her untimely demise on 08.05.2022 and the present counsel was engaged to represent the accused before the Court. The complete files and records could not be provided to the present counsel as they were not immediately traceable and were solely within the knowledge of Ms. Kamlesh Mahajan. On 01.06.2022, the present counsel apprised the learned Trail Court that they need some time to argue the bail application. The learned Trail Court, without taking into the account the same, proceeded to send the accused into judicial custody.
12. It is submitted that accused has the responsibility of the son, wife and father, who is 82 years old. Accused is a sole bread winner of the family and there is absolutely no one to take care of the needs of the family. His son is suffering from severe heart ailments, which further necessitate the requirement of the accused to look after the family. It is submitted that the accused has always actively participated in the investigation and has never tampered with the evidence and has not tried to influence any witness and certainly is not a flight risk. No purpose would be served by incarcerating him in jail. It is submitted that the first bail application of the petitioner has been dismissed by the learned ASJ by order dated 02.06.2022. A prayer is therefore made that an interim bail may be granted.
13. Learned Counsel for the petitioner has placed reliance on Vivek Hari Vyasi vs. Serious Fraud Investigation Office’ reported as [2019 SCCOnline P&H 4989], Gaurav Kumar v. Serious Fraud Investigation Office’ and ‘Sachin Jain vs.Serious Fraud Investigation Office’ , ‘Ritika Agnihotri Vs. Serious Fraud Investigation Office, ‘The State of Telangana Vs. M/s. Heera Gold Exim pvt. Ltd. & Ors, Siddharth vs. State of Uttar Pradesh reported as (2022) 1 SCC 676,’ Aman Preet Singh vs. C.B.I through Director’ reported as [2021 SCCOnline SC 941], Anil Kumar Yadav vs. State (NCT of Delhi)’ reported as [(2018) 12 SCC 129], ‘Neeru Yadav vs. State of Uttar Pradesh’ reported as [(2016) 15 SCC 422], ‘Prasanta Kumar Sarkar vs. Ashish Chaterjee and Anr. ‘reported as [(2010) 14 SCC 496], ‘CBI vs. K. Narayan Rao’ reported as [((2012) 9 SCC 512)}
14. The respondent in its reply has explained that the investigations revealed that ex-promoters of BSL namely Neeraj Singal and Brij Bhushan Singal were controlling directly or indirectly 157 Companies including BSL, which were under investigation. The promoters of BSL needed to infuse capital in the Company in order to avail credit facilities from lender Banks for its steel plant, for which purpose they required a level of debt equity, therefore, the ex-promoters assisted by their employees and close associates, through a serious of concerted actions, using a complex web of Companies and financial transactions, siphoned off funds from BSL and Bhushan Energy Limited (BEL) starting from the year 2009-2010 and also used the fund to purchase immovable and movable properties.
15. During the year 2009-2010 and 2010-2011, an amount of Rs. 1150.58 Crore was transferred to different Companies and the ex-promoters invested these amounts in preference shares of BSL. During this period, BSL and BEL extended capital advances amounting to Rs. 1208.50 Crore to 18 Category B and Rs. 561.45 Crore 14 Category C Companies, controlled by the ex-promoters. The funds were transferred from the various Accounts of BSL and BEL. These Companies further transferred the funds to Category B and Category C Companies in the smaller amounts as loans and advances or as investments. The Companies further layered funds received to the tune of Rs. 1150.58 Crore, in single or multiple layers of another set of Category B o r Category C Companies, before these were consolidated into the bank accounts of 19 Category B Companies of the ex-promoters. These 19 Category B Companies and the ex-promoters transferred the funds as investment in BSL, against which preference shares were issued in the respective names of the Companies/promoters.
16. BSL and BEL transferred the ‘capital advances’ to ‘CWIP’ during the F.Y. 2013-14 and 2014-15 in their books of accounts and thereby adjusted the receivables from the 18 Category B and 14 Category C Companies. These Companies, who were given the capital advances and had further transferred these to other Companies and continued to show them as Current/ Non-Current Liabilities with matching assets in the form of loans & Advances/ Investments as reflected in Financial Statements of the years 2009-2010 and 2010-2011. During the period of receiving of Capital Advances till the Financial Year 2013-2014 and 2014-2015, when the adjustments were done, these Companies have not shown any expenditure or revenue evidencing supply or execution of any work in their financial statements.
17. It is asserted that the ex-promoters of Bhushan Steel Limited had established the fraudulent process for booking inflated entries of stock in Transit in the books of BSL. The fraudulently manipulated figures reported in the Financial statements for the Year 2013-2014 were presented to the lender banks for enhancement of working capital facilities for the Financial Year 2014-2015 and 2015-2016. The lead Bank for working capital i.e. Punjab National Bank based on these stock statements, allocated the sanctioned limit/DP to each of the lending consortium member banks, who required them to adhere to the sanctioned limit. The Banks reviewed the Drawing Power limits against the credit facilities using financial statements, and the periodic stock statements submitted by the Company to banks, and reports submitted by its appointed Stock Auditor in the subsequent periods/years.
18. The SIT figures in the books of accounts and in the stock statements were found to be inflated. The Stock Auditor did not raise any red flag or alarm in respect of inflated stock position and hereby huge amount of public money of the banks were lost since the banks were made to believe that the actual stock existed. The finances were given to the BSL on the basis of falsified and fabricated documents including the inflated SIT.
19. It is further asserted that during the course of investigation, the bank officers of the Punjab National Bank and the State Bank of India stated that they have relied on Stock Audit Report submitted by the Stock Auditor and the financial statements audited by Statutory Auditor for sanctioning of Drawing Power. It is submitted that the very purpose of conducting of Stock Audit was not fulfilled as the auditor failed to raise the red flag and also failed to verify the supporting documents to substantiate the claim of huge amount shown as SIT by the Company. The auditor relied upon the figures provided by the management without independently verifying the actual position of stock at various plant of BSL. The Stock Auditor failed to perform his duties independely and diligently by not verifying the stock in transit and thereby colluded with the officers of BSL in providing and using the wrong information to calculate the DP figures wrongly based on the figures given by the BSL management.
20. It is asserted that the very purpose of conducting Stock Audit was not justified and he relied solely upon the figures provided by the Management.
The Auditor in the in his statement recorded on Oath under the provisions of Section 217 (4) of the Companies Act, 2013 has stated that BSL was noted to be under financial stress; this concern was shared with Banks informally and the Management. However, he was told to show the Audit on the higher side to cover the Drawing Power and to expedite the submission Report, which clearly manifests that he had the knowledge of Company’s irregular state of affairs. He had further stated that Official of the Company i.e. Pankaj Tewari, who accompanied them during the Stock Audit along with the bank officials, was informed that there was shortage of stock but they requested the petitioner to somehow manage the stock position (DP) to the extent to cover the liability outstanding under the working capital of the bank.
21. It is thus asserted that as per the statement of the petitioner himself it is evident that he was actively involved in the commission of offence and has been declined bail by the learned Special Court. The provision of Section 212(6) of the Companies Act, starts with non-obstante clause and the twin conditions stipulated under this Section are mandatory in nature. These conditions are that the Public Prosecutor must be given an opportunity to oppose the application and the court has to be satisfied that there are reasonable grounds for believe that the accused is not guilty of such offence and that he is not likely to commit any offence while on bail.
22. In the present case, the applicant himself has admitted his role and once it affects the prima facie, admitted to have been committed by the petitioner, one of the mandatory condition of Section 212 (6) is not satisfied and the accused is not entitled to bail.
23. The reliance has been placed on ‘State of M.P vs. Kajad, (2001) 7 SCC 673’, which is under NDPS Act and contains a similar provision for bail under Section 37 of the NDPS Act. Reliance has also been placed on ‘Bijando Singh v. Md. lbocha (2004) 10 SCC 151’, ‘Union of India Vs. Rattan Mallik@ Habul-(2009) 2 SCC 624Narcotics ,’ ‘Control Bureau v. Kishan Lal (1991) 1 SCC 705,’ ‘Customs New Delhi v. Ahmadalieva Nodira 2004 3 SCC 549’, ‘Union of India v. Shiv Shanker Kesari – (2007) 7 SCC 798,’ ‘Satpal Singh v. State of Punjab (2018) 13 SCC 813’
24. It is further submitted that the offence committed is economic offence with deliberate design with an eye on personal profit regardless to the consequence to the community and is not entitled to bail in such white collar crimes as has been held in ‘State of Gujarat v. Mohanlal Jitamalji Porwal and others (1987) 2 SCC 364’, ‘Rohit Tandon v. Directorate of Enforcement, (2018) 11 SCC 46’, . The bail application is therefore opposed.
25. Submissions heard and my observations are as under;
26. The petitioner is a Chartered Accountant and a partner in M/s. A.C.Gupta & Company, Chartered Accountant. They were appointed as Stock Auditor for the Financial Year 2015-16 of Punjab National Bank to conduct stock audit of Bhushan Steel Limited first limited. The role of the petitioner is that of a data aggregator who conducted stock audit based on the information and the documents provided by the Company. The allegations against the petitioners are that they were negligent in conducting the audits by not verifying the documents diligently and to raise a red flag about the deficiencies in the documents in respect of the Bhushan Steel Limited Company.
27. It is significant to note that the accused had been summoned to appear before the Investigating Officer on 29.6.2018 and he thereafter, joined the investigation on 27.09.2018, 29.10.2018 and 20.03.2018. The statements of the petitioner were duly recorded under Section 207 of the Companies Act, 1956. It is evident that the petitioner had also co-operated and joined the investigations.
28. The, chargesheet had been filed in the court on 16.8.2019 when the cognizance was taken by the learned Trial Court. Even thereafter, the petitioner continued to appear before the learned trial court regularly. Bail application was filed by the petitioner on 7.11.2019 which and was heard on various dates till 01.06.2022. However, on the said date, the learned Trial Court directed the accused to be taken into judicial custody since he had no interim protection from any superior Court.
29. From the above narration, it is evident that the accused was not arrested either by the Investigating agency during the period of investigations or even thereafter when the chargesheet was filed in the Court. In fact, the bail application was heard for about three years and the accused was not taken into judicial custody despite being present in Court on every date. The respondent has nowhere averred that the custody of the accused was required for the purpose of the investigations or thereafter not any assertion was made for taking the petition into consideration. Interestingly, the petitioner had “no interim protection of any superior Court” during investigation or while his bail was being heard by the learned Trial Court after taking cognizance, but was never, taken into custody for three years and suddenly on 01.06.2022 when the allegations were still continuing, he was abruptly taken into custody for a reason which existed since last about three years. Moreover, being the Trial Court, it was competent to pass appropriate orders in the circumstances. The bail application was listed for further arguments for 02.06.2022 on which date the application was dismissed.
30.The accused has been appearing before the Investigating Officer and thereafter before the Court diligently and his custody was never sought by the respondent. The role of the petitioner is that of the Stock Auditor wherein the Stock verifications of the documents and statements as submitted by the Company to the Banks was carried out by the accused. The main accusations against him are that he did not conduct the Stock Audits diligently and did not raise red flag about the inconsistency as submitted in the documents to the Banks by the Companies. Further, the primary accused, namely, Mr. Neeraj Singhal and Mr. Nitin Johari have already been granted interim bail. The allegations pertain to years-2014-2015 and 2015-2016 and the petitioner neither before nor after has been involved in any criminal offence. Considering all the circumstances, the petitioner is hereby admitted to bail on submitting a Bail Bond and Surety Bond in the sum of Rs.1,00,000/- (one lakh) to the satisfaction of the trial court/Special Judge.
31. Application is accordingly allowed.
