IN THE HIGH COURT OF GUJARAT AT AHMEDABAD CHARTER ACCOUNTANT REFERENCE No 1 of 2004 For Approval and Signature: HON'BLE MR.JUSTICE D.A.MEHTA and HON'BLE MS.JUSTICE H.N.DEVANI ============================================================ 1. Whether Reporters of Local Papers may be allowed : NO to see the judgements? 2. To be referred to the Reporter or not? : YES 3. Whether Their Lordships wish to see the fair copy : NO of the judgement? 4. Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the concerned : NO Magistrate/Magistrates,Judge/Judges,Tribunal/Tribunals? -------------------------------------------------------------- COUNCIL OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA Versus MILIND KANTILAL SHAH, CHARTERED ACCOUNTANT -------------------------------------------------------------- Appearance: 1. CHARTER ACCOUNTANT REFERENCE No. 1 of 2004 MR SN SOPARKAR, SR. ADVOCATE WITH MRS SWATI SOPARKAR for the Petitioner MR AK CLERK for Respondent -------------------------------------------------------------- CORAM : HON'BLE MR.JUSTICE D.A.MEHTA and HON'BLE MS.JUSTICE H.N.DEVANI Date of decision: ___/__/2005 CAV JUDGEMENT (Per : HON'BLE MS.JUSTICE H.N.DEVANI for the Court) 1. This reference is made under Section 21(5) of the Chartered Accountants Act, 1949 (the Act), by which the Council of the Institute of Chartered Accountants of India (the Council), who has forwarded the case to this Court after finding the respondent, a Member of the Institute of Chartered Accountants of India, guilty of professional misconduct within the meaning of Clauses (5), (6) and (7) of Part I of the Act read with Sections 21 and 22 of the said Act. 2. The matter arises out of a complaint filed by Shri R. Banerjee, Managing Director of the Gujarat State Financial Corporation (GSFC) against the respondent - Shri Milind Kantilal Shah, who is a practising Chartered Accountant and who had issued a certificate which the complainant - Corporation relied upon in order to disburse the loan to a Company named M/s Maimoon Textiles Pvt. Ltd. The complainant made the following allegations against the respondent : "1.1 Based on the certificate dated 26-09-1994 of the Respondent, the Complainant Corporation worked out the amount of eligible disbursement of Rs.11,25,000/- for M/s Maimoon Textiles (P) Ltd., Surat. The certificate submitted by the Respondent is false because as per the inspection conducted by the staff members of the Complainant Corporation, the aforesaid unit had not constructed the factory and the land was an agricultural land. As per the Respondent's certificate, the unit incurred an expenditure of Rs.5.73 lacs on the construction of factory building. As there was no factory building, there was no machinery on the site; whereas, as per the Respondent's certificate, the unit had purchased machineries and accessories of Rs.16.53 lacs and the same were brought on site. Also, the Respondent had mentioned in the certificate that the certificate was issued after personally verifying the assets of the unit. On the other hand, as per the inspection carried out by the officers of the complainant Corporation, the assets were not in existence. 1.2 Therefore, as per the complaint, the Respondent is guilty of professional misconduct falling under Classes (5), (6) and (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949." 2.1 A copy of the said compliant was sent to the respondent vide the Institute's letter dated 16th August, 1996 with a request to send his written statement to the Institute. The respondent submitted his written statement on 25th September 1996. The complainant submitted his rejoinder on 29th October, 1996. The respondent submitted his comments on 11th February, 1997. In accordance with the provisions contained in Regulation 12(11) of the Chartered Accountants Regulations, the aforesaid papers containing the complaint, the written statement, the rejoinder and the comments were considered by the Council at its meeting held in April 1997 at New Delhi. The Council was prima facie of the opinion that the respondent was guilty of professional and / or other misconduct and accordingly, referred the case to the Disciplinary Committee constituted under the Act, for inquiry. 2.2 On perusal of the documents on record and after recording the submissions of the complainant and the respondent, and after examination of the witnesses, the Committee submitted its report dated 11th December, 2001. The Committee came to the conclusion that the respondent was guilty of professional misconduct within the meaning of Clauses (5), (6) and (7) of Part I of the Second Schedule to the Act read with Sections 21 and 22 of the Act. 2.3 A copy of the report of the Disciplinary Committee was forwarded to both the parties vide the Institute's letter dated 30th July, 2002 and they were informed that the said report would be considered by the Council at one of its forthcoming meetings. The parties were requested to send their written representations, if any, in the matter and were informed that if they so desire, they may appear before the Council either in person or through a Member of the Institute, duly authorized by them and make their submissions. 2.4 The report of the Disciplinary Committee was placed before the Council which consisted of 17 members (including the members of the Committee), and was taken up for consideration in its 230th Meeting held on 26th and 28th December, 2002. On consideration of the report of the Disciplinary Committee along with the written representations received from the Complainant Corporation dated 27th August, 2002 and 4th October, 2002 and written representations received from the respondent dated 10th October, 2002, 16th October, 2002, 31st October, 2002 and 19th December 2002, the Council decided to accept the report of the Disciplinary Committee, and accordingly found the respondent guilty of professional misconduct within the meaning of Clauses (5), (6) and (7) of Part I of the Second Schedule to the Act read with Sections 21 and 22 of the Act. The Council also decided to recommend to the High Court that the name of the respondent be removed from the Register of Members for a period of one year. 2.5 The disciplinary case was forwarded by the Council to this Court in terms of Section 21(5) of the Act. 3. Mr.S.N.Soparkar, learned Senior Advocate appearing for the Institute, contended that the Council had found the respondent guilty of professional misconduct within the meaning of Clauses (5), (6) and (7) of Part I of the Second Schedule to the Act read with Sections 21 and 22 of the Act on the basis of the material on record gathered during the inquiry conducted by the Disciplinary Committee, which has been statutorily constituted. It was submitted that the recommendation of the Council be accepted and the name of the respondent be removed from the Register of Members for a period of one year. 3.1 The learned Senior Advocate invited the attention of the Court to the evidence of the witnesses, namely, Shri Tahir Ali Vasi, a director of M/s Maimoon Textiles Pvt. Ltd., Shri A.H.Nasir, Shri Sirajuddin Khasi, an Advocate and Notary, Shri Ishwarbhai Patel, the Sarpanch of Masma village, Shri Vasi, a Director of M/s Maimoon Textiles Pvt. Ltd., Shri R.L.Patil, an engineer of the GSFC, Shri Buch, an employee of the GSFC, Shri R.T.Jadav, Senior Inspector with the GSFC and the respondent Shri Milind Shah. The learned Senior Advocate submitted that, from the evidence of the witnesses, it appears that one Shri Hanif Memon had an important role to play in the matter. However, for reasons best known to the respondent, he had chosen not to examine Shri Hanif Memon. Had Shri Hanif Memon been examined, all facts, which would ultimately give a complete scenario, would have come on the record. 3.2 The learned Senior Advocate submitted that GSFC disburses funds on the strength of the certificate issued by the Chartered Accountant. That GSFC had not carried out any inspection, as it had relied upon the certificate of the Chartered Accountant. The attention of the Court was invited to the certificate issued by the respondent and it was submitted that the discrepancy as to capital was indefensible. It was contended that if the respondent had verified Form No.2, he could have easily found the amount of share capital raised by the Company. It was pointed out that, when admittedly the capital was of Rs.4,000/-, the respondent had given the certificate for Rs.5 lakhs. It was contended that the basic document which the respondent was supposed to verify for the purpose of deciding how much share capital the company has raised, was Form No.2; however, as stated by the respondent in his deposition, he had not verified Form No.2. It was submitted that the respondent has acted with sheer callousness. 3.3 The learned Senior Advocate submitted that if the certificate is to be accepted at face value, the person who issues it must do so with due care and caution. If he does not do so, the credibility of the certificate is affected. It was submitted that even though the respondent may not be involved in the fraud, he has permitted the fraud to be perpetuated. It was argued that, as regards the share capital, incorporation and bank transactions, the respondent has no answer, so his say that he was shown some some other place is belied. It was argued that the respondent had not even bothered to verify the books of account prior to issuance of the certificate. Referring to the Memorandum of Association of the Company, the learned Senior Advocate pointed out that the Company was incorporated on 13-5-1993. The learned Senior Advocate referred to the deposition of the respondent wherein he had stated that when he had verified the books of account, he saw that the major part of the expenditure was incurred from 1-1-1993. It was contended that the respondent could not have verified the books of account as the Company was not incorporated on that date. It was submitted that this was not a case of mere carelessness, but was a case of gross negligence. 3.4 The decision in case of Council of Institute of Chartered Accountants of India v. P.C.Parekh, reported in (2003) 129 Taxman 80 (Gujarat) was cited to point out that a large section of public relies on the objectivity and integrity of professional accountants to maintain the orderly functioning of commerce. The Members of the Institute are bound to act in a manner consistent with the good reputation of the profession and that, they should refrain from any conduct which might bring discredit to the Institute. If the professional bodies do not take strong steps to not only policing their members but also to ensure that the public believes that they are doing so, it would call for increasing governmental policing. 3.5 It was submitted that such great credibility was attached to a certificate bearing the signature of a Chartered Accountant that it was the basis of issuance of funds by GSFC. It was submitted that if the Institute does not take action it diminishes the credibility of the members of the Institute. It was contended that the very purpose of obtaining a certificate is frustrated if the certificate cannot be relied upon. It was submitted that the respondent ought to have known that the certificate issued by him was false and that it was a fact that he had reason to believe that it was false but did not make necessary inquiry. 3.6 The learned Senior Advocate referred to the written statement of the respondent wherein, in defence, the respondent had denied that the unit was disbursed money on the basis of his certificate only, since it was the procedure of the GSFC to obtain legal clearance of their own full fledged Legal Department armed with experts in the legal field and only thereafter, the money was released. It was submitted that the petitioner Institute is not concerned with as to whether GSFC is at fault, but the Institute is primarily concerned with the conduct of its own members. 3.7 The decision in the case of Council of Institute of Chartered Accountants v. M.R.Shah, reported in (2004)2 GLH 610 was cited wherein this Court, after referring to the Scheme of the Act as well as the provisions of the Income Tax Act, 1961, observed that the said provisions are indicative of the extent that a Chartered Accountant is looked upon by the society, with special reference to the corporate world, as being competent to discharge various statutory duties and responsibilities as a qualified professional. The Court observed that the said position of law clearly demonstrates the faith that various Government Departments have in the professional qualifications, competency and integrity of a Chartered Accountant and hence, the various statutory duties and responsibilities cast upon a Chartered Accountant under various provisions of the Act. It was stated that there are other statutes like Co-operative Societies Act, Bombay Public Trusts Act etc. where also, the importance of the report of the Chartered Accountants has been statutorily recognized and accepted. The Court observed that it is, in the aforesaid context, that the conduct of the respondent has to be tested and appreciated in the light of the evidence placed on record. 3.8 The decision of the Hon'ble Supreme Court in the case of In re "P" An Advocate, reported in AIR 1963 SC 1313, was cited for bringing out the distinction between "negligence" and "gross negligence". It was held that mere negligence or error of judgement on the part of the Advocate would not amount to professional misconduct. It was observed that error of judgement cannot be completely eliminated in all human affairs and mere negligence may not necessarily show that the Advocate who was guilty of it can be charged with misconduct. It was held that different considerations arise where the negligence of the Advocate is gross. It may be that before condemning an Advocate for misconduct, courts are inclined to examine the question as to whether such gross negligence involves moral turpitude or delinquency. In dealing with this aspect of the matter, however, it is of utmost importance to remember that the expression "moral turpitude or delinquency" is not to receive a narrow construction. It was held that, wherever conduct proved against an Advocate is contrary to honesty, or opposed to good morals, or is unethical, it may be safely held that it involves moral turpitude. A wilful and callous disregard for the interests of the client may, in a proper case, be characterized as conduct unbefitting an Advocate. It was observed that in dealing with matters of professional propriety, one cannot ignore the fact that the profession of law is an honourable profession and it occupies a place of pride in the liberal professions of the country. Any conduct which makes a person unworthy to belong to the noble fraternity of lawyers or makes an advocate unfit to be entrusted with the responsible task of looking after the interests of the litigant, must be regarded as conduct involving moral turpitude. 3.9 It was submitted that, similarly, any conduct of the Chartered Accountant, which makes him unworthy of belonging to the noble fraternity of Chartered Accountants or makes him unfit to be entrusted with the various statutory duties cast upon him, must be regarded as conduct involving moral turpitude. 3.10 The learned Senior Advocate submitted that, in the facts of the present case, the respondent did not exercise due care and caution and had displayed a callous attitude towards his duties. It was urged that the certificate issued by the Chartered Accountant was recognized as a final word by the business world, hence, such conduct cannot be countenanced. It was submitted that, in taking an overall view of the facts of the case, the recommendation of the Council was required to be accepted and the name of the respondent was required to be removed from the Register of Members for a period of one year. 4. Mr.A.K.Clerk, the learned Counsel appearing for the respondent, referred to the written representation made by the respondent on the report of the Disciplinary Committee, wherein it is stated that the Disciplinary Committee has failed to appreciate the true facts and sequence of events. It was the respondent's case that the loanee had shown him premises at the site, but later on, it turned out to be some other premises. It was submitted that the Disciplinary Committee has not accepted the version and submission of the respondent on the ground that there was absence of any record, noting or other evidence which the respondent, according to the Disciplinary Committee, should have kept in his possession. It was contended that the Disciplinary Committee failed to appreciate that, in the circumstances of the case, there was no reason for the respondent to keep any record, noting or other evidence and that the Disciplinary Committee was wrong in holding that the respondent "should have kept in his possession" these records, noting or other evidence. It was submitted that the respondent took inspection of the factory premises in about August / September 1994. At that time, the respondent had all his records, notings etc. The respondent was taken by the loanee for a site visit to the factory in about the month of August 1994. The respondent was taken to a vast piece of land at Vadod Patiya, Village Masma, Taluka Olpad, Dist. Surat. The respondent found that there was a factory building and there were machineries also in the said factory building. That, he also saw some persons in the said factory building, and that he was introduced to some of them as Technicians of the loanee. The loanee also produced before the respondent various vouchers, receipts etc. It was submitted that it was only somewhere in February 1995 that officers of the complainant Corporation informed the respondent that there was something suspicious about the loanee; that the loanee appeared to be not having any land or factory, nor the loanee appeared to have purchased any machinery. It was submitted that the respondent immediately contacted the loanee and the loanee ultimately paid the entire dues of the Corporation by March 1995, and informed the respondent that the dispute with the Corporation was settled. It was submitted that even the officers of the complainant Corporation appreciated the respondent's efforts and thanked the respondent for getting the full repayment of the dues from the loanee. It was contended that the respondent was not aware that the complaint was filed on 3-4-1996, more than a year after the Corporation was fully paid its dues. The respondent came to know about the complaint having been filed only when he received the notice about the complaint in about the month of August 1996, i.e. about 17 months after the Corporation was fully repaid its dues in March 1995. It was submitted that since the dues of the complainant - Corporation were already paid up, and since the respondent was informed and even thanked by the officers of the complainant Corporation, that their dues were fully paid by the loanee, the respondent considered the matter to have come to an end and there was no reason for the respondent to keep any record, noting etc. about the matter. 4.1 The learned Counsel referred to page No.22 of the enclosure of the Complainant Corporation's disbursement note that all legal formalities were completed, and submitted that the sanction was earlier in point of time and that the respondent was in the picture only at the stage of disbursement. 4.2 The learned Counsel submitted that the intention behind GSFC filing the complaint did not appear to be bonafide. He submitted that no action had been taken against the officials of the GSFC. No criminal complaint had been filed and that, except for the present complaint, no other proceedings have been undertaken. It was submitted that the conduct of the parties also ought to be taken into consideration. The respondent, when he was approached in 1995, did not shirk from his responsibility to see to it that the amount due was repaid. It was contended that GSFC, on the other hand, having collected the money, after a year, filed a complaint wherein there is not a whisper about the money being returned back; on the contrary, it is the say of the Corporation that it has suffered a loss. It was submitted that GSFC conveniently omitted the fact that the loan was disbursed after completion of legal formalities. It was contended that GSFC is also equally at fault and that the loan is not disbursed only on the strength of the certificate issued by the respondent. It was submitted that, despite the fact that the money had been repaid, GSFC had suppressed the said fact from the Council. It was submitted that when the complaint is of such a serious nature, it was incumbent upon the Corporation to come forth with the correct facts. The learned Counsel referred to the complaint filed by GSFC and submitted that no explanation had come forth for the delay in filing the said complaint. 4.3 The learned Counsel submitted that various factors are required to be kept in mind prior to taking any action against the respondent. Firstly, the past record of the practice of the respondent is required to be considered. That the respondent had sixteen years of practice and there was no prior complaint. Secondly, the respondent had been dealing with such matters in more than a hundred projects, yet there was no complaint except the present one. Thirdly, as soon as it was brought to the notice of the respondent, he immediately took steps to see that the money is repaid. It was submitted that this conduct of the respondent shows his character, that he is concerned that no loss should be suffered by the Corporation, and that, his own reputation is not sullied. It was submitted that the respondent was not a crook and not the type who would take some illegal benefit. It was contended that the principal allegation against the respondent was that he was negligent in issuing the certificate. 4.4 The learned Counsel submitted that a professional body like the Council is in the position of loco parentis so far as its members are concerned and that the possibility of the respondent actually having been misled cannot be ignored. It was contended that the respondent's entire career should have been taken into account. It was submitted that his owning up to the responsibility shows his conduct. Referring to the written submissions dated 10th October, 2002 submitted by the respondent to the Council, the learned Counsel pointed out that, between 31st January, 1994 and 26th September, 1994, GSFC had shown that an amount of Rs.5 lakhs were given as advance, and submitted that may be formalities were not completed, so it may not have been shown in the balance sheet. It was contended that when GSFC note shows an advance of Rs.5 lakhs, there was no reason for the Chartered Accountant to disbelieve it. It was contended that GSFC has very conveniently forgotten that it has also undertaken the legal formalities. 5. During the course of inquiry, the Disciplinary Committee had recorded the evidence of various witnesses. Shri Tahir Ali Vasi, a Director of M/s Maimoon Textiles Pvt. Ltd. had stated that the Company was established in 1993 for the purpose of setting up a textile manufacturing unit, and that the land had been purchased at Masma, near Surat, for the said purpose. That thereafter, a loan was applied for from GSFC for the purpose of setting up the project. However, by the time the formalities of purchase of land and sanction of loan could be completed, the entire industry was in a recessionary phase. Ultimately, they decided that it would not be worthwhile in proceeding with the project. At that point of time, Shri Hanif Memon came into the picture with an offer by which the investors would be able to recover the amount invested by them by selling off the project to some other party. That, in this context, he was