Subramanian Kalyana Raman Vs CA. Satish Purushottam Kalantri (ICAI Disciplinary Committee)
Use of Housing Society’s Reserve Fund for Conveyance Expenses Did Not Establish Professional Misconduct by the Auditor
Summary: The ICAI Disciplinary Committee, Bench II, held CA. Satish Purushottam Kalantri not guilty of professional misconduct under Clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949. The complaint arose from the statutory audit of Manavsthal Heights Co-operative Housing Society Ltd. for FY 2020–21. The society had debited ₹11,25,013 incurred on property conveyance directly to its Reserve Fund. Although the Director (Discipline) initially considered this inconsistent with the model bye-laws, the Committee examined section 66 of the Maharashtra Co-operative Societies Act, 1960, the society’s object of obtaining conveyance, and the 2016 General Body resolution authorising expenditure up to ₹15 lakh from the fund. It interpreted the permissive language of the bye-laws as not categorically excluding such expenditure, noted the disclosure in the financial statements, and found no established material misstatement, concealment or lack of due diligence. The proceedings were closed under Rule 19(2).
Background
The complaint concerned the statutory audit of Manavsthal Heights Co-operative Housing Society Ltd. for FY 2020–21 by CA. Satish Purushottam Kalantri.
The society incurred ₹11,25,013 towards conveyance of its property and adjusted the expenditure directly against its Reserve Fund. A member challenged this treatment, contending that the expenditure was capital in nature and that the Reserve Fund could be used only for repairs, maintenance and renewal of the society’s property.
According to the complainant, the auditor ought to have reported this alleged irregularity. His failure to do so was claimed to constitute lack of due diligence and professional negligence.
The proceedings examined the respondent’s conduct under Clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.
Prima Facie Opinion Treated the Utilisation as Impermissible
At the preliminary stage, the Director (Discipline) considered that conveyance expenditure related to transfer of title, rather than repairs, maintenance or renewal.
The Director also rejected the argument that approval by the General Body validated the adjustment. On that interpretation, members could approve utilisation only within the purposes permitted by the applicable bye-laws; a resolution could not authorise expenditure contrary to those restrictions.
The expenditure was considered material because the society’s surplus before appropriation to the Reserve Fund was ₹14,93,837, compared with conveyance expenditure of ₹11,25,013.
An adverse prima facie opinion was therefore formed, and the matter proceeded to a disciplinary hearing.
General Body Had Specifically Approved the Expenditure
The respondent explained that the society’s 8th AGM in 2016 approved expenditure of up to ₹15 lakh for obtaining conveyance, expressly authorising its utilisation from the Reserve Fund.
He submitted that securing conveyance from the owner or promoter was one of the society’s stated objects under Clause 5 of its bye-laws. Consequently, the expenditure directly furthered the society’s purpose.
He also relied on section 66 of the Maharashtra Co-operative Societies Act, 1960, which permits use of the Reserve Fund in the society’s business, subject to the applicable provisions.
The defence was therefore based on the combined reading of the Act, the society’s objects, the fund-utilisation provision and the specific General Body resolution.
“May” Was Read as Enabling Rather Than Exhaustively Restrictive
The Committee examined Clause 14(a) of the Model Bye-laws, which stated that the Reserve Fund “may be utilised” for repairs, maintenance and renewals of the society’s property.
It recognised that conveyance expenditure was capital in nature and did not fall within those three descriptions. However, after considering section 66 and the other relevant provisions, it did not regard the clause as categorically prohibiting utilisation for purposes aligned with the society’s primary objects.
The Committee interpreted “may” as enabling and inclusive, rather than as restricting utilisation exclusively to the listed purposes.
It also considered section 72, under which the General Body is the final authority of the society, subject to the Act and Rules. The specific approval for obtaining conveyance was therefore relevant when read with the wider statutory framework.
Conveyance Furthered the Society’s Legitimate Objects
The Committee noted that obtaining conveyance secured transfer of title in favour of the society and was directly connected with its affairs and business objectives.
The expenditure had been approved transparently by the General Body, with overwhelming support from members. The Reserve Fund had accumulated from members’ contributions, and the decision avoided an additional financial burden upon them.
On these facts, the Committee concluded that utilisation of the fund for conveyance was consistent with the applicable provisions and the society’s objects.
Accounting Treatment Had Been Disclosed
The Committee also examined the allegation concerning accounting treatment and transparency. It noted that the adjustment had been disclosed in the financial statements, and the auditor had acted on the General Body’s resolution and a bona fide interpretation of the governing provisions.
It found no established material misstatement, concealment or lack of due diligence. Concerns about accounting treatment did not, without evidence of a material irregularity or breach of a mandatory standard, establish professional misconduct.
Decision
The Committee held CA. Satish Purushottam Kalantri not guilty under Clause (7) of Part I of the Second Schedule and ordered closure of the proceedings under Rule 19(2).
Author’s Comments
The decision illustrates the importance of reading a fund-utilisation clause together with the governing statute and the society’s objects. The final conclusion differed from the prima facie view because the Committee accepted the wider statutory basis for using the Reserve Fund for conveyance.
However, General Body approval alone cannot cure a statutory prohibition. Here, the Committee found that the expenditure was supported by the statutory framework itself; the resolution reinforced that conclusion.
A further distinction deserves attention: permission to use a particular fund and the correct accounting treatment of expenditure are separate questions. This disciplinary exoneration should not be treated as a universal accounting rule permitting every capital expenditure to be debited directly to reserves.
The practical protection for an auditor lies in examining the applicable provisions, documenting the basis adopted and ensuring clear disclosure, rather than relying merely on the fact that members approved the transaction.
