Case Law Details

Case Name : Ramchandra Y. Kulkarni Vs Disciplinary Committee of icai (Appellate Authority)
Appeal Number : Appeal No. 07/ICAI/2018
Date of Judgement/Order : 04/08/2018
Related Assessment Year : 2010-11

Ramchandra Y. Kulkarni Vs Disciplinary Committee of icai (Appellate Authority)

complainant is an Asset Reconstruction Company and the only grievance of the Complainant is that the Appellant who was auditor of M/s AV Forging Private Limited, a company which had taken loans from M/s Axis Bank amounting to Rs. 22.70 Crores approximately, which were taken over by the Complainant IARC from the said Bank by way of assignment and the same was intimated by them to Company vide letter dated 11thApril, 2011, but in the balance sheets of auditee for the years ended on 31.3.2011 and 31.3.2012, the same was not properly shown by the Appellant. In those balance sheets a sum of 10.48 crores were shown as due towards IARC Limited and the balance amount was still shown as payable to Axis Bank under different facilities, which according to the complainant is violative of statutory provisions and the Appellant, despite of his knowledge of irregularity, allowed the same.

Held by Appellate Authority

Appellant diligently performed his duties inter-alia when he sent his assistant to Axis Bank to verify the loan amount. The affidavit of said assistant before Disciplinary Committee remains uncontroverted by the Institute of Chartered Accountants of India or by the Complainant. The examination of Register of Charges maintained by the company was also proper diligence. Further the AVFL has also confirmed non intimation about the assignment of loan to the Appellant which has also not been replied by the Complainant. The verification of pendency of the Charges of Axis Bank against AVFL in the records of ROC till date also shows proper and diligent enquiry made by him.

In view of the above discussion, we agree with the Appellant that it may at worst be a technical error and therefore, it cannot be said that the due diligence was not exercised or there was any negligence, much less gross negligence. Accordingly, we find the appellant Not Guiltyunder clause (7) of Part-I of the Second Schedule to the Chartered Accountants Act, 1949.

As regards charge against the Appellant under Clause (8) of Part-I of the Second Schedule to the Chartered Accountants Act, 1949 is concerned, we find that no specific reason or basis of the same has been given by the Complainant nor it is mentioned in the Order of Disciplinary committee. The clause (8) reproduced supra mandates about failure to obtain sufficient information to express an opinion or exceptions being sufficiently material to negate the expression of such Under the circumstances of the present matter, we have noted that no case is made out by the Complainant that there is any exception to negate the expression of opinion as no instance is cited by him for the same. Coming to later part of clause as to whether the Appellant had obtained sufficient information to express of an opinion, as discussed above, the Appellant had made various enquiries and obtained the required information and explanations as he considered necessary. No deficiency in the same has been pointed out by the Complainant. Thus we are of the considered view that there is no substance in this charge also and we find the Appellant Not Guiltyunder Clause (8) of Part-I of the Second Schedule to the Chartered Accountants Act, 1949 also. However, considering the technical mistake on the part of the Appellant, we would like to direct the Appellant to be more cautious in future, while dealing with such cases.

FULL TEXT OF THE ORDER OF APPELLATE AUTHORITY

1. Being aggrieved by the Report dated 6th February, 2017 and Order dated 7th November, 2017 (Impugned Order), passed by the Disciplinary Committee of the Institute of Chartered Accountants of India under Section 21B (3) of the Chartered Accountants Act, 1949 read with Rule 19 (1) of the Chartered Accountants (Procedure of Investigation of Professional and Other Misconduct and Conduct of Cases) Rules, 2007, CA. Ramchandra Y. Kulkarni (M. No. 036596), a practicing Chartered Accountant, Appellant herein, has filed this appeal against the Institute of Chartered Accountants of India and others, challenging the impugned order, whereby, the Disciplinary Committee holding him guilty under Clauses (7) and (8) of Part-I of the Second Schedule to the Chartered Accountants Act, 1949 awarded punishment of removal of name of the Appellant from the Register of Members for a period of one year and also imposed a fine of Rs.50,000/- (Rupees fifty thousand only) upon him, to be paid within 30 days of the receipt of the aforesaid Order. The said Clauses (7) & (8) of Part-I of the Second Schedule of the Act reads as under:

PART-I: Professional misconduct in relation to chartered accountants in practice

A chartered accountant in practice shall be deemed to be guilty of Professional Misconduct, if he –

(7) does not exercise due diligence, or is grossly negligent in the conduct of his professional duties;

(8) fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion.”

2. The brief facts of the instant appeal, as narrated in the aforesaid Report of the Disciplinary Committee of the Institute of Chartered Accountants of India, are as under:

2.1 Shri Satish K. Arora, President & COO of M/s International Asset Reconstruction Company Private Limited, Mumbai (hereinafter referred to as the “Complainant”) has filed complaint in Form Idated 25th October, 2013 against CA. Ramchandra Yashwant Kulkarni & Associates, Pune, Appellant herein, alleging that M/s International Asset Reconstruction Company Private Limited (IARC) is a Reserve Bank of India licensed Securitization Company (SR/RC) registered under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). RCs have been set up with the objective of managing and recovering illiquid NPAs, RCs, after acquiring financial assets from banks/financial institution, act as dedicated resolution companies with a view to resolve the debt and thereby resurrect productive assets.

2.2 Pursuant to Section 5 of the said SARFAESI Act, IARC has acquired the entire debts of AV Forging Private Limited, CIN U74210PN 1984PTC 033477 and having its Registered Office at Plot No 320, J Block, MIDC Bhosari, Pune, Maharashtra-411026 from Axis Bank limited vide a Registered Assignment Agreement dated 31.03.2011. Upon assignment under section 5 of the SARFAESI Act, all interest and rights in such NPA accounts along with underlying securities are assigned in favour of IARC and the IARC becomes the full and absolute legal owner and the only legal entity to recover and receive all amounts due, including the right to file suits/initiate such other recovery proceedings in its own name and to exercise all other rights of the bank/financial institution in relation thereto. 

2.3 IARC has become the secured creditors of the borrower Company in place of Axis Bank Limited upon assignment of debt by Axis Bank to IARC. The facilities which have been so acquired by IARC from Axis Bank are;

Nature of Facility Amount (in Rs.)
Cash Credit 16,00,00,000/-
Term Loan-1 4,50,00,000/-
Term Loan-2 4,30,00,000

The fact of the said assignment was advised to the Borrower Company by both Axis Bank Limited and IARC vide letter No. AXISBK/RWC/004/2011-12, dated 11.04.2011 and IARC/MUM/RES/11-12/82, dated 15.04.2011 respectively.

2.4 The above mentioned facilities were being recognized as secured liabilities of the Borrower Company every year in their balance sheet. With the assignment of above debts to IARC, IARC becomes and therefore is to be shown as the Secured lender in place of Axis Bank in the financial statements of the Company for the year 2011 onwards in respect of the entire amount of outstanding. However, in spite of the clear statutory provisions in this regard, the Respondent (Appellant herein) has chosen to ignore the same and have instead chosen to allow misrepresenting IARCs dues at a lower amount and still showing Axis Bank as their secured lender in respect of the various facilities, year after year. An extract of the borrower Company for the years 2010-11 and 2011-12 is reproduced below: 

Particulars As at 31st March, 2012 As at 31st March, 2011
Term Loan from Axis Bank Ltd (Hypothecation of Machinery) 3,76,01,058.25 3,76,01,058.25
Term Loan from Axis Bank Ltd (Hypothecation of Machinery) 2,95,09,272/- 2,95,09,272/-
IARC Limited 10,48,00,000/- 10,48,00,000/-
Short Term Borrowings  
Cash Credit from Axis Bank limited

(Hypothecation of Stocks and Book debts)

5,51,03,249.52 5,51,03,249.52

2.5 The Respondent (Appellant herein) in spite of clearly being in knowledge of facts of the said assignment has chosen to allow to misrepresent facts and has not disclosed the correct liability of the Borrower Company with respect to IARC, the disclosure of which is necessary, thereby giving rise to professional misconduct in relation to Chartered Accountants in practice in terms of Clauses (5), (6) and (7) of Part I of Second Schedule to the Chartered Accountants Act, 1949.

3. Accordingly, this complaint was taken up for consideration by the Director (Discipline), who vide Order dated 4th December, 2015 found the Appellant Prima Facie guilty of the professional misconduct falling within the meaning of Clauses (7) and (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.

4. Pursuant to forming of the Prima Facie Opinion, the Director (Discipline), in terms of the requirements of Section 21 (3) of the Act read with rules as applicable, placed his Prima Facie Opinion before the Disciplinary Committee of the Institute for consideration, which, in turn, on examination of the said complaint, written statements, evidence written as well as oral, further replies Prima Facie Opinion and after hearing the parties, while agreeing with the Prima facie Opinion decided to proceed further in the matter and accordingly gave the findings as hereunder:

4.1 The Committee noted that the Company has taken a loan of Rs. 248 Crores (sic) from Axis bank Limited which becomes NPA as on 31.03.2011. The Axis bank under SARFAESI Act, entered into an agreement with IARC for assignment of loan and pursuant to which amount of Rs. 10.48 Crores was credited to the loan account of the Company as on 31.03.2011. The Respondent (Appellant herein) has shown the said amount due to IARC in the audited balance sheet as on 31.03.2011 under the category of secured loan.

4.2 The Committee further noted that the Respondent (Appellant herein) has taken the plea that he was not aware of the said agreement of assignment of loan as neither the Company nor IARC informed him. As per the Complainant, they submitted Form 8 with the ROC for modifications of charges. The issue before the Committee is that the amount of Rs. 10.48 Crores was already there in the loan account of the Company before 31.03.2011. The Respondent (Appellant herein) was aware that the loan account has become NPA. The Committee is not convinced with the reasoning given by the Respondent (Appellant herein) that he was not aware of the agreement or any such arrangements under SARFAESI Act. The Respondent (Appellant herein) as a matter of abundant caution and keeping in view the fact that the loan account has already become NPA should have enquired how the material amount of Rs. 10.48 Crores has come into the loan account of the Company on 31.03.2011.

4.3 The Respondent (Appellant herein) as a matter of abundant caution and while exercising due diligence should have disclosed the fact in his audit report that the loan account has become NPA and the IARC has entered into arrangement with Axis Bank for takeover of loan and the said arrangement has been disputed by the Company AVFL. Rather accepting his mistake, the Respondent (Appellant herein) tried to take plea that he was not aware of the said arrangement and the said information was not disclosed to him. The Committee was surprised to record that Respondent (Appellant herein) took plea of ignorance and on other hand, he was shown Rs. 10.48 Crores in the name of IARC limited which indicates that in spite of being aware about the transaction of arrangement, neither bother to inquire about the nature of transaction nor bother to point out the fact that the aforesaid arrangement has been challenged by the Company before the concerned court of law. Further, no disclosure has been made in the financial statements in this regard.

4.4 The Respondent (Appellant herein) has himself submitted a letter dated 30.12.2013 wherein it was mentioned that the Company did not accept and approve the actions of Axis Bank under SARFAESI Act and the company has filed a suit in the court of law against the said arrangement. After the perusal of letter dated 30.12.2013, the Respondent (Appellant herein) has neither qualified the Audit Report nor has made any disclosure in the financial statements. Accordingly, the Committee is of the view that the Respondent (Appellant herein) failed to disclose the proper facts in the audited Balance Sheet and is therefore, guilty of professional misconduct.

5. Thus, based on the above findings, the Disciplinary Committee held the Appellant guilty of professional misconduct and awarded the punishment as mentioned under Para (1) of this Order

6. We have observed that the complainant is an Asset Reconstruction Company and the only grievance of the Complainant is that the Appellant who was auditor of M/s AV Forging Private Limited, a company which had taken loans from M/s Axis Bank amounting to Rs. 22.70 Crores approximately, which were taken over by the Complainant IARC from the said Bank by way of assignment and the same was intimated by them to Company vide letter dated 11thApril, 2011, but in the balance sheets of auditee for the years ended on 31.3.2011 and 31.3.2012, the same was not properly shown by the Appellant. In those balance sheets a sum of 10.48 crores were shown as due towards IARC Limited and the balance amount was still shown as payable to Axis Bank under different facilities, which according to the complainant is violative of statutory provisions and the Appellant, despite of his knowledge of irregularity, allowed the same.

7. During the proceedings of this Appeal before us, Shri S. G. Gokhale, the Learned Counsel appearing on behalf of the Appellant took various grounds of defence, which are being dealt with and disposed of as below.

8. The first ground of appeal taken on behalf of the Appellant is regarding the constitution of the bench of the Disciplinary Committee. However, at the very commencement of the arguments, the learned counsel for appellant informed that the appellant is not pressing this ground. Hence the same is rejected by us as “not pressed”.

9. The second ground of appeal is regarding not considering of certain evidence by the Disciplinary Committee. We allowed placing such evidence before us. Accordingly, we have examined all such evidences.

10. All other grounds of Appeal are about justification on the part of the Appellant about due diligence exercised by him and the manner in which the information was disclosed in the accounts audited by him, which are also being dealt with by us in this Order.

11. Shri S. G. Gokhale, the Learned Counsel appearing on behalf of the Appellant submitted before us that while it is correct that the amount shown due towards the Complainant, in the accounts of M/s A. V. Forgings Limited (AVFL) was not correct but it was not due to his fault as he had no knowledge of the assignment of the debt of Axis Bank to the Complainant. Neither the complainant nor the AVFL intimated him about the same. He also submitted that he had exercised due care and diligence while conducting the audit.

12. Further, it was submitted that during the course of his examination, the Appellant came to know about Rs. 10.48 Crores being credited in the Axis Bank loan account of AVFL, which was not out of repayment made by AVFL. On enquiry about the same the AVFL informed him that it was an amount paid by IARC. Accordingly this amount was transferred by company AVFL in the name of IARC from Axis Bank. Additionally, the Appellant deputed his one assistant namely Mr. Sukumar Kondekar, to visit the Axis Bank and to enquire the nature of credit from them. The affidavit of Mr. Sukumar Kondekar was also filed before the Disciplinary Committee and produced before us as well to this effect. The said Mr. Sukumar has affirmed that on enquiry in Axis Bank also no further information was given by them, except the deposit of Rs. 10.48 Crores by IARC in the bank account. Furthermore, it was submitted that thereafter he examined the Register of Charges maintained by AVFL, in which also there was no mention of IARC assignment. The Appellant also produced a letter from AVFL before the Disciplinary Committee, mentioning that they had not accepted the assignment and hence not carried out the changes in their books and records. He further submitted that if the account of AVFL had become NPA in the record of Axis Bank, it has no bearing on his report or disclosures.

13. Learned Counsel appearing on behalf of the Appellant also submitted that when the Appellant examined the records of Registrar of Companies (ROC), he found that in the details of Charges registered with ROC, the name of Axis Bank was still appearing. Vide his letter dated 28.04.2016 filed before Disciplinary Committee, he attached the printouts of the official website of the Ministry of Corporate Affairs (MCA) as on 25.4.2016, wherein the Charge against the loan of Axis Bank was still appearing. Even during the course of hearings before us, on 13th July, 2018, he showed that the official website of MCA was still showing the charge against the loan of Axis Bank pending. He thus submitted that it was not possible to draw an inference that all the loans of Axis Bank to AVFL have been transferred to IARC, the complainant. Additionally, it was submitted by him before the Disciplinary Committee as well as before us that the loan towards Axis Bank and IARC were shown as secured loans only and their character was not altered and therefore, the true and fair view was not impaired at all and at the worst, it can only be described as a technical error which does not constitute professional misconduct on the part of the Appellant.

14. The Learned Counsel appearing on behalf of the Appellant vehemently argued that the said technical error in no way affected any right or remedy of the Complainant and it is wrong to term the same as material misstatement. No loss whatsoever was caused to the Complainant or to any other person. He further submitted that the true and fair view of the financial statements was also not impaired in any manner. The Appellant has exercised all due care and diligence and cannot be said to be grossly negligent in the conduct of his professional duties and he had obtained sufficient information to warrant the expression of his opinion as given.

15. Further, in respect of Clause (8) also, the Learned Counsel submitted before us that there was no material on record to show that the Appellant had not obtained necessary information or has given a wrong opinion. Thus, a technical mistake on the part of the Appellant is not sufficient to hold him guilty of professional misconduct under the provisions of the Chartered Accountants Act, 1949, as held by the Disciplinary Committee.

16. The Appellant who was also personally present, humbly submitted before us that he is of 68 years and in his professional career has never violated the ethics of the profession and in his twilight years of profession when he came to know about the fact of the complete information not being given by AVFL to the auditor, he got very upset and left the assignment of the said audit immediately.

17. Per Contra, Shri Amit Sharma, Advocate appearing on behalf of the Institute of Chartered Accountants of India vehemently supported the Impugned Order passed by the Disciplinary Committee. However, despite notice issued to Mr. Satish Kumar Arora, President and Chief Operating Officer of the M/s. International Asset Reconstruction Co. (P). Ltd., Original Complainant, he has not appeared before us on any date of the proceedings of this Appeal.

18. We have heard all the parties in detail, examined all pleadings on records in addition to perusing all relevant documents and evidence produced before us as well as before the Disciplinary Committee.

19. Thus, on careful consideration of all the facts and the evidence on record, we observed that in his written statement dated 28.4.2016 before the Director (Discipline) and subsequently before the Disciplinary Committee; the Appellant had raised all the issues as discussed above. However, no suitable rebuttal of the same was given by the Complainant. The Complainant failed to point out as to how the true and fair view was impaired, or how any statutory compliance was violated or how his rights were affected in any manner whatsoever. In fact, the Learned Counsel appearing on behalf of the Institute of Chartered Accountants fairly admitted that there is no charge of impairment of true and fair view of financial statements.

20. We have also observed that the issue of compliance of SA 505 raised by Director (Discipline) in his Prima Facie Opinion has also not been raised by the Disciplinary Committee and appears to have been dropped. Thus no violation of the law has been pointed out in the impugned Order passed by the Disciplinary Committee nor has any charge of impairment of true and fair view been levied. The fact of account of AVFL becoming NPA in Axis Bank is also of no relevance for the purpose of audit either for true and fair view or disclosure. Even there is no charge framed on this account.

21. We also find that the Appellant diligently performed his duties inter-alia when he sent his assistant to Axis Bank to verify the loan amount. The affidavit of said assistant before Disciplinary Committee remains uncontroverted by the Institute of Chartered Accountants of India or by the Complainant. The examination of Register of Charges maintained by the company was also proper diligence. Further the AVFL has also confirmed non intimation about the assignment of loan to the Appellant which has also not been replied by the Complainant. The verification of pendency of the Charges of Axis Bank against AVFL in the records of ROC till date also shows proper and diligent enquiry made by him.

22. In view of the above discussion, we agree with the Appellant that it may at worst be a technical error and therefore, it cannot be said that the due diligence was not exercised or there was any negligence, much less gross negligence. Accordingly, we find the appellant Not Guiltyunder clause (7) of Part-I of the Second Schedule to the Chartered Accountants Act, 1949.

23. As regards charge against the Appellant under Clause (8) of Part-I of the Second Schedule to the Chartered Accountants Act, 1949 is concerned, we find that no specific reason or basis of the same has been given by the Complainant nor it is mentioned in the Order of Disciplinary committee. The clause (8) reproduced supra mandates about failure to obtain sufficient information to express an opinion or exceptions being sufficiently material to negate the expression of such Under the circumstances of the present matter, we have noted that no case is made out by the Complainant that there is any exception to negate the expression of opinion as no instance is cited by him for the same. Coming to later part of clause as to whether the Appellant had obtained sufficient information to express of an opinion, as discussed above, the Appellant had made various enquiries and obtained the required information and explanations as he considered necessary. No deficiency in the same has been pointed out by the Complainant. Thus we are of the considered view that there is no substance in this charge also and we find the Appellant Not Guiltyunder Clause (8) of Part-I of the Second Schedule to the Chartered Accountants Act, 1949 also. However, considering the technical mistake on the part of the Appellant, we would like to direct the Appellant to be more cautious in future, while dealing with such cases.

24. In view of the aforesaid, the impugned Report dated 6th February, 2017 and Order dated 7th November, 2017, passed by the Disciplinary Committee of the Institute of Chartered Accountants of India are set aside. Interim orders, if any are vacated. In case, the Appellant has deposited the amount with the Institute towards fine during the stay proceedings, the same shall be refunded to him within 60 days from the date of receipt of this Order. No Order as to costs.

25. With this the present Appeal is allowed.

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