In a recent order, the Ministry of Corporate Affairs (MCA) imposed penalties on the statutory auditor of Rhino Finance Pvt. Ltd. for failing to include necessary qualifications in the audit report of the company for the financial year 2020-21. The adjudication process was conducted under Section 454(3) of the Companies Act, 2013, with the Registrar of Companies (RoC), Guwahati, serving as the adjudicating officer.
Background of the Case
Rhino Finance Pvt. Ltd., a private finance company based in Assam, was under scrutiny following a directive from the Ministry of Home Affairs (MHA). The inquiry revealed discrepancies in the financial statements of the company, specifically for the fiscal years 2019-20 and 2020-21. These discrepancies included incorrect classification and incomplete disclosures in the company’s financial statements, which the statutory auditor failed to address in his report.
The MCA initiated the inquiry based on Section 206(4) of the Companies Act, 2013, and found violations under Section 129(1) read with Section 133 and Schedule III of the Act.
Audit Report Omissions
The statutory auditor in question, CA Shubhash Chandra Sharma, a partner at Gupta Verma & Sethi, failed to make required qualifications regarding several key issues in the company’s financial statements:
- Short-Term Loans and Advances: The nature of the loans and advances disclosed in the financial statements was not clearly specified in accordance with Schedule III of the Companies Act, 2013.
- Other Payables: A sum of ₹2.18 crore was reported as “Other Payables” without proper classification or explanation, violating the requirements of Schedule III of the Act.
- Non-Current Investments: Investments worth ₹6.5 crore were not classified according to the prescribed standards, and there was no disclosure regarding the valuation of these investments.
- Related Party Transactions: The auditor failed to report all related party transactions. While a borrowing of ₹1.02 crore was disclosed, the fact that Profit Missile Technologies Pvt. Ltd. (PTPL) was also a creditor of Rhino Finance to the extent of ₹2.86 crore was omitted.
- Preliminary Expenses: The financial statements reported the continuation of preliminary expenses carried forward from previous years, which should have been written off as per Accounting Standard 26 (AS-26).
Auditor’s Response and Further Actions
The auditor was given an opportunity to respond to these findings under Section 206(4) of the Companies Act, 2013, via a notice dated April 20, 2022. However, the reply was deemed unsatisfactory by the competent authority, leading to a formal adjudication process.
In a subsequent notice dated June 7, 2024, the Registrar of Companies, Guwahati, called for a hearing on June 27, 2024, providing the company and the auditor another chance to present their case. The hearing was conducted at the office of the RoC, Guwahati, located at BSNL Bhawan, Pan Bazar.
Relevant Provisions of Law
The statutory obligations of an auditor are outlined under Section 143(3) of the Companies Act, 2013, which mandates auditors to:
- Seek and obtain all necessary information and explanations.
- Ensure that proper books of accounts are maintained by the company.
- Assess whether the financial statements comply with accounting standards.
- Include any qualifications or adverse remarks regarding the company’s financial statements or accounts.
In this case, the auditor’s report failed to reflect several of these critical aspects, including inadequate disclosures and non-compliance with accounting standards, as required under Section 129(1) and Section 133 of the Companies Act, 2013.
Penalty and Conclusion
After reviewing the findings, the RoC, Guwahati, imposed a penalty on the statutory auditor for violating the provisions of Section 143(1) of the Companies Act, 2013. The adjudicating officer emphasized that auditors play a critical role in ensuring transparency and accountability in corporate governance, and any lapse in their duties could have serious implications for stakeholders.
The MCA’s decision underscores the importance of strict adherence to statutory norms by auditors, especially in cases involving material discrepancies in financial reporting. Rhino Finance Pvt. Ltd. has been directed to rectify the issues in its financial statements, and the statutory auditor was held accountable for his failure to flag these critical violations.
GOVERNMENT OF INDIA
Ministry Of Corporate Affairs
Office of the Registrar of Companies, North Eastern Region
1st Floor, BSNL Bhawan, Pan Bazar
Guwahati- 781001
Order File No. ROC/GHY/ADJ /RHINO/ 454/2024-25/966 Dated: 17/10/2024
BEFORE THE ADUDICATING OFFICER
REGISTRAR OF COMPANIES, GUWAHATI
ORDER IN THE MATTER OF ADJUDICATION OF PENALTY UNDER SECTION 454(3) OF THE COMPANIES ACT, 2013 READ WITH RULE 3 OF THE COMPANIES (ADJUDICATION OF PENALTIES)RULES, 2014 FOR VIOLATION OF SECTION 1430F THE COMPANIES ACT, 2013.
IN THE MATTER OF M/S RHINO FINANCE PRIVATELIMITED
(CIN —U67120A51996PTC004705)
Appointment of Adjudication Authority: –
1. The Ministry of Corporate Affairs vide its Gazette Notification No. A42011/112/2014-Ad. II dated 24.03.2015 has appointed the undersigned as Adjudicating Officer in exercise of the powers conferred under section 454 of the Companies Act, 2013 [hereinafter known as Act] read with Companies (Adjudication of Penalties) Rules, 2014 (Notification No. GSR 254(E) dated 31.03.2014) for adjudging penalties under the provisions of the Companies Act, 2013.
Company:
2. M/S RHINO FINANCE PVT LTD (herein referred to as ‘the company’) is a company having its registered office at “R Dutta Market, Second Floor, A.T Road, Guwahati, Assam-781001” and is registered under the provisions of the Companies Act, 1956 on 29.02.1996. The CIN of the Company is U67120AS1996PTC004705.
Facts About the Case
3. That the Ministry of Corporate Affairs vide letter no. CL-II-08/131/2021— 0/o DGCoA-MCA dated 19.01.2022, in exercise of its power under Section 206(4) of the Companies Act, 2013, directed the inquiry of books and papers of M/s RHINO FINANCE PRIVATE LIMITED on the basis of input from MHA. During the course of inquiry, it was observed that the company has made following violations:
a) The Statutory Auditor i.e., CA Shubhash Chandra Sharma, Chartered Accountants Partner of Gupta Verma & Sethi, has not made qualification remarks in his audit report for following non compliance of section 129(1) read with section 133 & Schedule III of the Companies Act,2013(as applicable) by the company for F.Y 2020-21:
i. The company has disclosed loan & Advances given, under Schedule III to the Companies Act, 2013 in the financial statements in FY 2019-20 and FY 2020-21. However, the company has not specified the nature of Other Short-Term Loans and Advances in manner as specified in Schedule III r/w Section 129 of Companies Act, 2013.
ii. In the financial statements for FY 2019-20, under Note 5 Other Payables, the company has reported an amount of Rs. 2,18,14,209 As per Schedule III of the Companies Act, 2013 the nature of such other payables is required to be specified. However, the company has not specified the nature of such other payables.
iii. In the financial statements for FY 2020-21, under Note 12 Non-Current Investment, the company has reported an amount of Rs. 6,50,00,000/- as investments. However, company has not classified the non-current investments as per Schedule III of the Companies Act, 2013. Further, the company has also failed to disclose the valuation of the investments in financial statements.
iv. In financial statements of FY 2020-21, under Note No. 22 Related Party Disclosures, the company had made partial disclosure of transactions with Prof it missile Technologies Private Limited (PTPL). The company has only disclosed short term borrowings of Rs. 1,02,15,480/- received from PTPL but it has not disclosed that PTPL is also a creditor of the company for an amount of Rs. 2,86,54,651/- in related party disclosures.
v. Company has stated that the preliminary expenses as reported in the financial statements for the FY 2019-20 and 2020-21 are carried forward (opening balance) since earlier years. In F.Y 2019-20 and 2020-21,the company has written off Rs. 42,800 and Rs. 45,800 respectively being preliminary expenses. However, as per AS-26, preliminary expenses cannot be carried forward in the balance sheet and these are to be written off immediately in Profit and Loss Account. Hence the company has violated the provisions of Section 129 of the Companies Act, 2013 r/w Section 133 of the Companies Act, 2013
b) A reasonable opportunity was given to the Statutory Auditor vide notice under section 206(4) of the Companies Act, 2013 vide letter no. ROC/GHY/Rhino/97-103 dated 20.04.2022.However, the reply submitted by the auditor was not satisfactory and the competent authority has directed to adjudicate the matter.
c) Accordingly, The Registrar of companies, Guwahati, Adjudicating officer vide letter ROC/GHY/U/5454/311 dated 07.06.2024 issued notice under section 454(4) of the Companies Act,2013 in respect of hearing at 1 st floor, BSNL Bhawan, Pan Bazar, Guwahati-781001, Assam on 27.06.2024 at 11:30 AM to the company and its officers in default for violation of the provisions of the act as mentioned in para “a” above.
Relevant Provisions of the Companies Act, 2013
Section 143(1) of the Companies Act, 2013
Every auditor of a company shall have a right of access at all times to the books of account and vouchers of the company, whether kept at the registered office of the company or at any other place and shall be entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as auditor and amongst other matters inquire into the following matters, namely:—
(a) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members;
(b) whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company;
(c) where the company not being an investment company or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;
(d) whether loans and advances made by the company have been shown as deposits;
(e) whether personal expenses have been charged to revenue account;
(f) where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading:
Provided that the auditor of a company which is a holding company shall also have the right of access to the records of all [its subsidiaries and associate companies] in so far as it relates to the consolidation of its financial statements with that of [its subsidiaries and associate companies]
Section 143(3) of the Companies Act, 2013
The auditor’s report shall also state—
(a) whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements;
(b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him;
(c) whether the report on the accounts of any branch office of the company audited under sub-section (8) by a person other than the ,company’s auditor has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report;
(d) whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns;
(e) whether, in his opinion, the financial statements comply with the accounting standards;
(f) the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company;
(g) whether any director is disqualified from being appointed as a director under subsection (2) of section 164;
(h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith;
[(i) whether the company has adequate[internal financial controls with reference to financial statements] in place and the operating effectiveness of such controls,
(j) such other matters as may be prescribed.
Section 129 (1) of the Companies Act, 2013
The financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under section133 and shall be in the form or forms as may be provided for different class or classes of companies in Schedule III:
Provided that the items contained in such financial statements shall be in accordance with the accounting standards:
Provided further that nothing contained in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company:
Provided also that the financial statements shall not be treated as not disclosing a true and fair view of the state of affairs of the company, merely by reason of the fact that they do not disclose—
(a) in the case of an insurance company, any matters which are not required to be disclosed by the Insurance Act, 1938, or the Insurance Regulatory and Development Authority Act, 1999;
(b) in the case of a banking company, any matters which are not required to be disclosed by the Banking Regulation Act, 1949;
(c) in the case of a company engaged in the generation or supply of electricity, any matters which are not required to be disclosed by the Electricity Act, 2003;
(d) in the case of a company governed by any other law for the time being in force, any matters which are not required to be disclosed by that law.
Section 450 of the Companies Act, 2013
Punishment Where No Specific Penalty or Punishment is Provided.
If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be [liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person]
Section 454(3) of the Companies Act, 2013
The adjudicating officer may, by an order-
(a) impose the penalty on the company, the officer who is in default, or any other person, as the case may be, stating therein any non-compliance or default under the relevant provisions of this Act; and
(b) direct such company, or officer who is in default, or any other person, as the case may be, to rectify thethe default, wherever he considers fit.
Provided that in case the default relates to non-compliance of sub-section (4) of section 92 or sub-section (1) or sub-section (2) of section 137 and such default has been rectified either prior to, or within thirty days of the issue of the notice by the adjudicating officer, no penalty shall be imposed in this regard and all proceedings under this section in respect of such default shall be deemed to be concluded.
Show Cause Notice reply and Personal Hearing
a) The provisions of section 454(3) of the Act and rules made there under inter alia stipulate the manner for adjudging penalties for non-compliance of the relevant provisions of this Act. Accordingly, in the interest of natural justice, before imposing the penalty on the company, the officer who is in default, or any other person, as the case may be, a reasonable opportunity of being heard was given to them by issuing a Notice dated 07.06.2024 for hearing under sub-section 4 of Section 454 the Act on 27.06.2024. The statutory auditor through his authorised representative Advocate Vinayak Trivedi appeared on 30.07.2024 and submitted his response. Further, Statutory Auditor vide letter dated 27.08.2024 submitted his submission for the violation as mentioned in Para 3(a) above.
b) Having considered the facts and circumstances of the case, reply of the Statutory Auditor is not satisfactory. As the said violation has already been concluded by I0 during the course of Inquiry, it is clear that there is violation of section 143(3)(h) of of the Companies Act, 2013.
ORDER
1. Having considered the facts and circumstances of the case and submissions made by Statutory Auditor (Company namely Rhino Finance Private Limited), CA Shubhash Chandra Sharma and after taking into accounts the factors above, it has been concluded that Statutory auditor has violated the provision of section 143(3)(h) read with section 133, section129 of the Companies Act,2013 and read with Schedule III of Companies Act,2013 and AS-26. I hereby imposed following penalty on Statutory Auditor of the company as prescribed under Section 450 of the Companies Act, 2013 for violation of Section 143(3)(h) of the Companies Act, 2013, which is commensurate with the aforesaid failure committed by the Noticee
A:-
| Nature of default | Violation of Section of the Companies Act 2013 | Company/ Officers to whom penalty imposed | No. of delays in default | Total Penalty (Maximum) | Penalty imposed |
| 1 | 2 | 3 | 4 | 5 | 7 |
| Default in providing remarks in audit report for FY 2020-21 by the Statutory Auditor of the Company. | Section 143(3)(h) of the Companies Act, 2013 | Statutory Auditor namely CA Shubhash Chandra Sharma, Partner of Gupta Verma & Sethi. |
NA | F.Y 2020-21 Rs.10,000 X 5 (Violation) = 50,000 |
Rs. 50,000 |
(* Default made under section 143 (3) (h) of the Companies Act, 2013 for F.Y 2020-21)
2. The noticee shall pay the amount of penalty individually for the company and its officers from their personal sources/income by way of e-payment available on Ministry website mca.gov.in under “Pay Miscellaneous Fees” category in MCA fees and Payment Services under Rule 3(14) of Company(Adjudication of Penalties) (Amendment) Rules, 2019 within 90 days from the date of receipt of this order and copy of this Adjudication order and Challan/SRN generated after payment of penalty through online mode shall be filed in INC-28 under the MCA portal without further reference.
3. On deposit of penalty through online and filing of INC-28 under MCA21 Portal, all proceedings under this section in respect of such default shall be deemed to be concluded in terms of first proviso of Sub-section 3 of Section 454 of the Companies Act, 2013 as the case may be.
4. However, Appeal against this order may be filed in writing with the Regional Director, North Eastern Region, Ministry of Corporate Affairs, 1St Floor, BSNL Bhawan, Pan Bazar, Guwahati-781001, Assam, within a period of sixty days from the date of receipt of this order in Form ADJ setting forth the grounds of appeal and shall be accompanied by the certified copy of this order. [Section 454(5) & 454(6) of the Companies Act, 2013 read with the Companies (Adjudicating of Penalties) Rules, 2014 as amended by Companies (Adjudicating of Penalties) Amendment Rules, 2019].
5. Your attention is also invited to Section 454(8) (i) and 454(8) (ii) of the Companies Act, 2013, which state that in case of non-payment of penalty, the company shall be punishable with fine which shall not be less than Twenty five thousand rupees but which may extend to Five lakh rupees, and officer in default shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.
The adjudication proceeding stands disposed of with this order.
(DIP NARAYAN CHOWDHURY)
REGISTRAR OF COMPANIES &
ADJUDICATING OFFICER
MINISTRY OF CORPORATE AFFAIRS
GUWAHATI
