YASHWANT VARMA, J.

TABLE OF CONTENTS Preface .................................................................................................... 8 Disciplinary Procedure as per the CA Act ....................................... 12 Section 132 : A Legislative History .................................................... 31 Broad Structure under the CA Act ................................................... 96 NFRA Rules ....................................................................................... 109 Additional Disclosures by NFRA ..................................................... 116 Auditing Industry : Executive Deliberations .................................. 150 The Vicarious Liability Argument .................................................. 171 Section 132 and its retroactive operation........................................ 232 NFRA Rules : Lack of Procedural Safeguards .............................. 322 Divisions : Separation of Functions ................................................. 384 SCNs: The Scar of Pre-determination ............................................ 437 Peripheral Issues ............................................................................... 456 Statement of Conclusions ................................................................. 457 Disposition .......................................................................................... 474 PREFACE

1. This batch of writ petitions instituted by individual Chartered W.P.(C) 1065/2021 & other connected matters Page 8 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Accountants 1 as well as auditing firms assail the validity of Section 132(4) of the Companies Act, 2013 2. A challenge is additionally raised to Rules 3, 8, 10 and 11 of the National Financial Reporting Authority Rules, 20183.

2. For the purposes of the challenge which stands raised to the statutory provisions aforenoted, the petitioners seek a declaration that those provisions be struck down as being unconstitutional on the ground of being arbitrary and ultra vires. In the alternative, the petitioners seek an appropriate declaration to the effect that Section 132(4) of the Companies Act as well as Rules 3, 8 10 and 11 of the NFRA Rules be held not to apply to any audit completed before 01 October 2018. The prayer in the alternative essentially calls upon the Court to read down those provisions as being inapplicable to audits that may have been completed prior to the introduction of Section 132 in the Companies Act and thus avoid a declaration of invalidity being rendered.

3. The petitioners in this batch have individually impugned the notices issued by the National Financial Regulatory Authority 4 in terms of which proceedings were sought to be initiated by the respondent for commencement of disciplinary action in respect of perceived acts of "professional or other misconduct" and for consequential imposition of penalties. In some of the writ petitions, final orders of punishment including that of debarment had also come to be passed and which too have been impugned in the instant writ 1 CAs 2 Companies Act 3 NFRA Rules 4 NFRA W.P.(C) 1065/2021 & other connected matters Page 9 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 petitions.

4. The challenge on the basis of constitutional invalidity is founded on a retroactive operation of Section 132 of the Companies Act and which is viewed as empowering the NFRA to initiate disciplinary proceedings not just against individual partners and CAs' but also auditing firms in respect of any audit that may have been conducted including those commenced and concluded prior to the introduction of that provision in the Companies Act .

5. Section 132 came to be incorporated in the Companies Act by virtue of Act 18 of 2013 and came to be operationalized in terms of a notification issued on 01 October 2018. In terms of that notification, the Union Government designated the said date as the point of commencement as well as the date of constitution of the NFRA. It is in the aforesaid backdrop that the petitioners contend that Section 132 and its retrospective operation would be rendered unconstitutional and invalid since it contemplates the imposition of penalties as well as disciplinary action in terms which were not contemplated by the statute prior to 01 October 2018. The challenge to Section 132 also proceeds on the ground of an alleged lack of procedural due process as well as the deprivation of rights and safeguards which were conferred upon a CA or a firm while facing disciplinary action under the Chartered Accountants Act, 1949 5 read along with the Chartered Accountants Regulations, 1988 6 and the Chartered Accountants (Procedure of Investigations of Professional and Other 5 CA Act .

1988 Regulations W.P.(C) 1065/2021 & other connected matters Page 10 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Misconduct and Conduct of Cases) Rules, 20077.

6. The action of the respondents which stands impugned in this batch is also based on the various provisions contained in Section 132 itself as well as the NFRA Rules. This facet of the challenge is based on the petitioners arguing that in terms of the statutory provisions aforenoted, the NFRA is envisaged to discharge its functions and duties through various independent and separate "divisions". According to the writ petitioners, the statute itself envisages the functions of monitoring and enforcement of accounting standards, overseeing quality of service, suggesting measures, the power to investigate as well as to undertake disciplinary action is contemplated to be discharged by separate divisions of the NFRA. According to the writ petitioners, in the facts of these cases it is apparent that the body which oversaw the audits in question was the same which came to the conclusion that there was a failure to comply with accounting standards itself and initiated proceedings for taking disciplinary action. They thus contend that the very same body that had drawn a report on the basis of which the disciplinary proceedings are sought to be initiated and undertaken has essentially donned the role of both prosecutor and judge. This, according to the petitioners, is sufficient to hold the initiation of action as being in clear violation of fair and due process and in breach of Article 14 of the Constitution.

7. While we had concluded the hearing on this batch of writ petitions on 22 July 2024, the pronouncement of the present judgment was delayed primarily on account of written submissions being 7 Rules 2007.

tendered by NFRA only on 06 October 2024. The Court was thereafter constrained to await any response that the petitioners may have wished to submit since those submissions were circulated amongst learned counsels for the petitioners only around that time.

DISCIPLINARY PROCEDURE AS PER THE CA ACT

8. Having noticed the principal grounds of challenge, it becomes appropriate to note that prior to the introduction of Section 132 of the 2013 Act, disciplinary proceedings against a CA was regulated by the provisions contained in the CA Act read along with the 1988 Regulations and the Misconduct Rules 2007. The CA Act incorporated provisions in Chapter V for the purposes of undertaking disciplinary proceedings against a member or a firm. Prior to certain amendments which were introduced in the CA Act in 2006 and 2022, disciplinary proceedings against a member of a firm were to be undertaken by a Disciplinary Directorate which was a body charged with undertaking a preliminary examination of a complaint, a Board of Discipline which was to try cases of professional or other misconduct specified in the First Schedule of the CA Act and the Disciplinary Committee in respect of members found to be guilty of professional or other misconduct mentioned in either the Second Schedule or both the First and the Second Schedules forming part of the CA Act, 1949 .

9. By virtue of amendments which came to be ushered by Act 12 of 2022, various amendments came to be introduced in Sections 2 which also and alongside saw the introduction of Sections 21A and 21B in the CA Act . Act 12 of 2022 also introduced provisions pertaining to the registration of firms. As the provisions stood in the CA Act around the W.P.(C) 1065/2021 & other connected matters Page 12 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 time when Section 132 came to be introduced, the Council as contemplated under Section 9 of the CA Act, stood empowered to establish a Disciplinary Directorate headed by an officer designated as the Director Discipline for undertaking investigations in respect of any information or complaint received by the Council. In terms of Section 21 , the Director Discipline was firstly charged with analyzing the information or complaint and arrive at a prima facie opinion with respect to the alleged misconduct. Wherever a Director Discipline were to form the opinion that a member was guilty of any professional or other misconduct specified in the First Schedule, it was required to place the matter before the Board of Discipline. If the Director Discipline were to be of the opinion that the misconduct would be classifiable either in the Second Schedule or both the Schedules, it was obliged to place the matter before the Disciplinary Committee.

10. The Board of Discipline by virtue of Section 21A of the CA Act was to comprise of persons with experience in law and having knowledge of disciplinary matters, two members of which one would be a member of the Council elected by the said body itself and the other being a member nominated by the Union Government from amongst persons of eminence having experience in the field of law, economics, business, finance or accountancy. The Director Discipline in terms of Section 21A was to function as the Secretary of the Board of Discipline. By virtue of Section 21A(3) , the Board of Discipline upon coming to the conclusion that a member was guilty of professional or other misconduct mentioned in the First Schedule, could impose one or more of the following punishments:-

11. The Disciplinary Committee in terms of Section 21B was comprised of the President or the Vice President of the Council to act as the Presiding Officer and two members to be elected from amongst the members of the Council. The Disciplinary Committee was also envisaged to comprise of two members nominated by the Union Government from amongst persons of eminence having experience in the field of law, economics, business, finance or accountancy. It thus became a five-member body which upon coming to the conclusion that a member was guilty of professional or a misconduct mentioned in the Second Schedule or both the Schedules could proceed to take any one or more of the following actions namely:-

permanently or for such period as it may think fit C. Impose such fine as deemed appropriate and which could extend to INR 5 lakhs.

12. Post promulgation of Act 12 of 2022, the Director Discipline came to be empowered by statute to undertake an investigation either suo moto or on receipt of information or complaint. In the course of undertaking that investigation, where the Director Discipline were to find that the case merited further inquiry, it was obliged to provide an W.P.(C) 1065/2021 & other connected matters Page 14 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 opportunity to the member or the firm as the case may be, to submit a written statement. Upon the Director Discipline finding prima facie that a case for professional or other misconduct mentioned in the First Schedule was made out, it was required to submit a preliminary examination report to the Board of Discipline. Similarly, if it came to the prima facie conclusion that a professional or other misconduct was found to be established and would fall either in the Second Schedule or both the Schedules, it was required to transmit its preliminary examination report to the Disciplinary Committee.

13. Section 21 further contemplated that if a Director Discipline were to come to form the opinion that no prima facie case was made out either against the member or the firm, it was required to transmit the complaint along with all relevant documents to the Board of Discipline and if that body were to concur with the findings of the Director Discipline, it could direct a closure of the proceedings. If it were to disagree and continue action upon the complaint itself, it could refer the matter either to the Disciplinary Committee or even advise the Director Discipline to undertake a further investigation. Sections 21A and 21B thus encapsulated the procedure which was liable to be adhered to by the Board of Discipline and the Disciplinary Committee while exercising their respective powers to undertake disciplinary action against a member of the firm.

14. Professional or other misconduct was defined in Section 22 of the CA Act which in turn bids one to proceed to the First and the Second Schedules which set out the various acts or omissions which would amount to misconduct. For purposes of lucidity, we deem it W.P.(C) 1065/2021 & other connected matters Page 15 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 appropriate to extract Sections 21 , 21A and 21B in the form of a comparative table and which captures how those set of provisions read prior to and after their substitution by Act 12 of 2022:-

opinion that a member is guilty of Provided that the Director any professional or other(Discipline) may call for misconduct mentioned in the additional information from the Second Schedule** or in both the complainant or the informant, as Schedules, he shall place the the case may be, by giving matter before the Disciplinary fifteen days time before deciding Committee. whether the case is actionable or (4) In order to make investigations non-actionable:

Disciplinary Committee, and the said Board or Committee may, if it (3) While making investigation is of the view that the into a case which is found to be circumstances so warrant, permit actionable, the Director the withdrawal at any stage.] (Discipline) shall give an opportunity to the member or the firm, as the case may be, to submit a written statement within twenty-one days which may further be extended by another twenty-one days, for reasons to be recorded in writing.

(4) Upon receipt of the written statement under sub-section (3), if any, the Director (Discipline) shall send a copy thereof to the complainant or the informant, as the case may be, and the complainant or the informant shall, within twenty-one days of the receipt of such written statement, submit his rejoinder.

(5) Upon receipt of the written statement under sub-section (3) and rejoinder under sub-section (4), the Director (Discipline) shall submit a preliminary examination report within thirty days, if a prima facie case is made out against a member or a firm, as the case may be.

(6) In case a prima facie case is made out for any professional or other misconduct mentioned in the First Schedule, the Director (Discipline) shall submit the preliminary examination report W.P.(C) 1065/2021 & other connected matters Page 17 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 to the Board of Discipline and where prima facie case is made out for any professional or other misconduct mentioned in the Second Schedule or in both the First Schedule and the Second Schedule, he shall submit a preliminary examination report to the Disciplinary Committee:

disciplinary matters and the (a) a person, not being a member profession, to be its presiding of the Institute, with experience officer; in law and having knowledge of

(b) two members one of whom disciplinary matters and the shall be a member of the Council profession, to be nominated by elected by the Council and the the Central Government as its other member shall be nominated Presiding Officer, from out of a by the Central Government from panel of persons prepared and amongst the persons of eminence provided by the Council in such having experience in the field of manner as may be prescribed; law, economics, business, finance (b) one member, who is a person or accountancy; of eminence having experience

(c) the Director (Discipline) shall in the field of law, economics, function as the Secretary of the business, finance or accountancy and not being a member of the Board.

Institute, to be nominated by the (2) The Board of Discipline shall Central Government from out of follow summary disposal a panel of persons prepared and procedure in dealing with all cases provided by the Council in such before it. manner as may be prescribed;

(3) Where the Board of Discipline (c) one member to be nominated is of the opinion that a member is by the Council from out of a guilty of a professional or other panel of members of the Institute misconduct mentioned in the First W.P.(C) 1065/2021 & other connected matters Page 19 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Schedule, it shall afford to the to be prepared by the Council, in member an opportunity of being such manner as may be heard before making any order prescribed;

against him and may thereafter (d) an officer of the Institute not take any one or more of the below the rank of a Deputy following actions, namely :− Secretary shall function as the

(a) reprimand the member; Secretary of the Board of

(b) remove the name of the Discipline:

submit before the Board of Discipline all information and (2) The Board of Discipline complaints where he is of the shall, while considering the opinion that there is no prima facie cases placed before it, follow case and the Board of Discipline such procedure including may, if it agrees with the opinion faceless proceedings and virtual of the Director (Discipline), close hearings as may be specified. the matter or in case of (3) The Board of Discipline disagreement, may advise the shall, on receipt of preliminary Director (Discipline) to further examination report from investigate the matter. Director (Discipline), require the member or the firm, as the case may be, against whom such preliminary examination report has been filed, to submit a written statement within twenty-

one days which may further be extended by another twenty one days, in exceptional circumstances, for reasons to be recorded in writing.

(4) The Board of Discipline shall conclude its inquiry within ninety days of the receipt of preliminary examination report from the Director (Discipline).

(5) Upon inquiry, if the Board of Discipline finds that such member is guilty of a W.P.(C) 1065/2021 & other connected matters Page 20 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 professional or other misconduct mentioned in the First Schedule, it may pass an order within thirty days of such finding, after providing an opportunity of being heard to the member, taking any one or more of the following actions, namely--

(a) reprimand the member and record it in the Register of members;

(b) remove the name of the member or members from the Register of members up to a period of six months;

(c) impose such fine as it may think fit which may extend to two lakh rupees.

(6) Where on the basis of evidence brought on record or during the course of an inquiry pertaining to a member, the Board of Discipline is of the opinion that any such member who is a partner or owner of a firm, has been repeatedly found guilty of misconduct mentioned in the First Schedule during the last five years, the following action may also be taken against such firm, namely--

(a) prohibit the firm from undertaking any activity or activities relating to the profession of a chartered accountant in practice for such period not exceeding one year;

(b) impose such fine as it may think fit, which may extend to twenty-five lakh rupees.

(7) Where a member or a firm fails to pay the fine imposed W.P.(C) 1065/2021 & other connected matters Page 21 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 under sub-section (5) or sub-

section (6) within such time as may be specified, the Council shall remove the name of such member or firm from the Register of members or Register of firms, as the case may be, for such period as it may think fit.

(8) The Presiding Officer and members of the Board of Discipline shall be paid such allowances as may be prescribed.] S. 21B (1) The Council shall constitute a (1) The Council shall, by Disciplinary Committee consisting notification, constitute one or of the President or the Vice- more Disciplinary Committees, President of the Council as the each consisting of-- Presiding Officer and two (a) a person, not being a member members to be elected from of the Institute, with experience amongst the members of the in law and having knowledge of Council and two members to be disciplinary matters and the nominated by the Central profession, to be nominated by Government from amongst the the Central Government as its persons of eminence having Presiding Officer, from out of a experience in the field of law, panel of persons prepared and economics, business, finance or provided by the Council in such accountancy: manner as may be prescribed;

Provided that the Council may (b) two members, who are constitute more Disciplinary persons of eminence having Committees as and when it experience in the field of law, considers necessary. economics, business, finance or accountancy and not being a member of the Institute, to be (2) The Disciplinary Committee, nominated by the Central while considering the cases placed Government from out of a panel before it shall follow such of persons prepared and procedure as may be specified.

provided by the Council in such (3) Where the Disciplinary manner as may be prescribed; Committee is of the opinion that a

(c) two members to be member is guilty of a professional nominated by the Council from or other misconduct mentioned in out of a panel of members of the the Second Schedule or both the Institute to be prepared by the First Schedule and the Second Council in such manner as may Schedule, it shall afford to the W.P.(C) 1065/2021 & other connected matters Page 22 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 member an opportunity of being be prescribed:

permanently or for such period, as (2) The Disciplinary Committee it thinks fit; shall, while considering the

(c) impose such fine as it may cases placed before it, follow think fit, which may extend to such procedure including faceless proceedings and virtual rupees five lakhs.

hearings as may be specified.

(4) The allowances payable to the members nominated by the (3) The Disciplinary Committee Central Government shall be such shall, on receipt of preliminary examination report from as may be specified.

Director (Discipline), require the member or the firm, as the case may be, against whom such preliminary examination report has been filed, to submit a written statement within twenty-

one days, which may further be extended by another twenty-one days in exceptional circumstances, for reasons to be recorded in writing.

(4) The Disciplinary Committee shall conclude its inquiry within one hundred and eighty days of receipt of the preliminary examination report from the Director (Discipline).

(5) Upon inquiry, if the Disciplinary Committee finds that a member is guilty of a professional or other misconduct mentioned in the Second Schedule or in both the First Schedule and the Second Schedule, it may pass an order within thirty days of such a finding, after providing an W.P.(C) 1065/2021 & other connected matters Page 23 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 opportunity of being heard to the member, taking any one or more of the following actions, namely--

(a) reprimand the member and record it in the Register of members; or

(b) remove the name of the member from the Register of members permanently or for such period, as it may think fit;

(c) impose such fine as it may think fit, which may extend to ten lakh rupees.

(6) Where on the basis of evidence brought on record or during the course of an inquiry pertaining to a member, the Disciplinary Committee is of the opinion that any such member, who is a partner or owner of a firm has been repeatedly found guilty of misconduct mentioned in the Second Schedule or in both the First Schedule and the Second Schedule, during the last five years, the following actions may also be taken against such firm, namely--

(a) prohibit the firm from undertaking any activity or activities relating to the profession of a chartered accountant in practice for such period not exceeding two years;

(b) suspend or cancel the registration of the firm and remove its name from the Register of firms permanently or for such period as it may think fit; or W.P.(C) 1065/2021 & other connected matters Page 24 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26

(c) impose such fine as it may think fit, which may extend to fifty lakh rupees.

(7) Where a member or a firm fails to pay the fine imposed under sub-section (5) or sub-

section (6) within the specified time, the Council shall remove the name of such member or firm from the Register of members or Register of firms, as the case may be, for such period, as it may think fit.

(8) The Presiding Officer and members of the Disciplinary Committee shall be paid such allowances as may be prescribed.]

15. At this juncture we deem it apposite to note that even though the amendments came to be introduced vide Sections 21 , 22 and 23 of the Act No. 12 of 2022, however the same have not been notified till date. In this regard, reference may be made to Notification dated 10 May 2022 and which reads as under:-

16. Of equal significance are the First and Second Schedules of the CA Act which specify with sufficient clarity and precision acts that would amount to professional or other misconduct. Those Schedules are reproduced hereinbelow: -

Explanation.--In this item, "partner" includes a person residing outside India with whom a chartered accountant in practice has entered into partnership which is not in contravention of Item (4) of this Part;

(3) accepts or agrees to accept any part of the profits of the professional work of a person who is not a member of the Institute:

Part II Professional misconduct in relation to members of the Institute in service A member of the Institute (other than a member in practice) shall be deemed to be guilty of professional misconduct, if he being an W.P.(C) 1065/2021 & other connected matters Page 28 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 employee of any company, firm or person--

(1) pays or allows or agrees to pay directly or indirectly to any person any share in the emoluments of the employment undertaken by him;

(2) accepts or agrees to accept any part of fees, profits or gains from a lawyer, a chartered accountant or broker engaged by such company, firm or person or agent or customer of such company, firm or person by way of commission or gratification.

Part III Professional misconduct in relation to members of the Institute generally A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct, if he-- (1) not being a fellow of the Institute, acts as a fellow of the Institute;

(2) does not supply the information called for, or does not comply with the requirements asked for, by the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority;

(3) while inviting professional work from another chartered accountant or while responding to tenders or enquiries or while advertising through a write up or anything as provided for in Items (6) and (7) of Part I of this Schedule, gives information knowing it to be false.

Part IV Other misconduct in relation to members of the Institute generally A member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he-- (1) is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term not exceeding six months;

(2) in the opinion of the Council, brings disrepute to the profession or the Institute as a result of his action whether or not related to his professional work.] SCHEDULE II Part I Professional misconduct in relation to chartered accountants in practice W.P.(C) 1065/2021 & other connected matters Page 29 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he--

(1) discloses information acquired in the course of his professional engagement to any person other than his client so engaging him, without the consent of his client or otherwise than as required by any law for the time being in force;

(2) certifies or submits in his name, or in the name of his firm, a report of an examination of financial statements unless the examination of such statements and the related records has been made by him or by a partner or an employee in his firm or by another chartered accountant in practice;

(3) permits his name or the name of his firm to be used in connection with an estimate of earnings contingent upon future transactions in a manner which may lead to the [belief that he or his firm] vouches for the accuracy of the forecast; (4) expresses his opinion on financial statements of any business or enterprise in which he, his firm, or a partner in his firm has a substantial interest;

(5) fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity; (6) fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity;

(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;

(9) fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances;

(10) fails to keep moneys of his client other than fees or remuneration or money meant to be expended in a separate banking account or to use such moneys for purposes for which they are intended within a reasonable time.

Part II Professional misconduct in relation to members of the Institute generally A member of the Institute, whether in practice or not, shall be W.P.(C) 1065/2021 & other connected matters Page 30 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 deemed to be guilty of professional misconduct, if he-- (1) contravenes any of the provisions of this Act or the regulations made thereunder or any guidelines issued by the Council; (2) being an employee of any company, firm or person, discloses confidential information acquired in the course of his employment except as and when required by any law for the time being in force or except as permitted by the employer;

(3) includes in any information, statement, return or form to be submitted to the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority any particulars knowing them to be false;

(4) defalcates or embezzles moneys received in his professional capacity.

[(5) acts as an auditor of the company in contravention of the provisions of the Companies Act, 2013 (18 of 2013).] Part III Other misconduct in relation to members of the Institute generally A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional other misconduct, if he is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term exceeding six months."

SECTION 132 : A LEGISLATIVE HISTORY

17. For the purposes of appreciating the challenge that stands raised as also to understand the imperatives which informed the introduction of Section 132, it would be apposite to step back in point of time and refer to some of the executive and legislative deliberations which preceded the incorporation of that section in the statute book. In terms of the disclosures that are made by NFRA in these proceedings, it would appear that the Union Government had for some time been contemplating the setting up and establishment of an appropriate regulatory mechanism to ensure monitoring and compliance of accounting and auditing standards as well as to oversee the quality of W.P.(C) 1065/2021 & other connected matters Page 31 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 service rendered by professionals associated with compliance.

18. The first of those steps can be traced back to the introduction of Section 210A in the Companies Act, 1956 which empowered the Union Government to constitute the National Advisory Committee on Accounting Standards 8 to advise it on the formulation and laying down of accounting policies and standards for companies or classes of companies. Section 210A as it stood in the erstwhile companies legislation is reproduced hereinbelow: -

19. The Standing Committee of Parliament on Finance in its 21st Report while commenting upon the Companies Bill, 2009 made the following significant recommendations:-

35. On being asked, the Ministry examined the afore-said suggestions in detail, particularly in the light of provisions of clause 118 of the Bill, which seeks to provide for widening the role of NACAAS (established at present under section 210A of the Companies Act) to recommend both accounting as well as auditing standards. The Ministry, while agreeing to the different suggestions, have submitted as follows :

36. The Ministry have also suggested in this regard that :

37. The Committee acknowledge the Ministry's acceptance of the Committee's views and suggestions for ensuring independence of auditors, providing safeguards to retain credibility of the audit process and creation of a supervisory mechanism for this purpose. The Committee would recommend that the proposed body namely, NACAAS would be given sufficient mandate not only to set and oversee auditing and accounting standards, but also to monitor the quality of audit W.P.(C) 1065/2021 & other connected matters Page 35 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 undertaken across the corporate sector. It should, therefore, be manned by professionals. Its role may be expanded depending upon experience gained."

20. The need to sufficiently empower the NACAS also appears to have formed the subject matter of consideration of that Committee as would be evident from the following extracts of the 57th Report of the Standing Committee on Finance (2011-12):-

The Authority shall consider the International Financial Reporting Standards and other internationally accepted accounting and auditing policies and standards while making recommendations on such matters to the Central Government which will improve the competitiveness of our companies with other companies. The Authority is also proposed to be empowered with quasi judicial powers to ensure independent oversight over professionals."

21. The then Hon'ble Minister of State in the Ministry of Corporate Affairs in the course of discussion which ensued in the Lok Sabha, which was considering the motion for passing of the Companies Bill, 2011, explained the proposed mandate of the NFRA as follows:-

22. However, the NFRA as a regulatory body, did not come into being until much later. From the material that has been placed for our W.P.(C) 1065/2021 & other connected matters Page 36 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 consideration, it further transpires that comments with respect to the proposed conferment of disciplinary power upon the NFRA were also sought from the Institute of Chartered Accountants of India 9. The ICAI appears to have expressed various reservations with respect to such a power being vested in the NFRA. The comments of the ICAI appear to have been duly examined by the Companies Law Committee which had been set up by the Ministry of Corporate Affairs in June 2015 and which in its report submitted on 1 February 2016 observed as under:-

The constitution of NFRA needs to be re-examined in the mentioned contexts where relevant mechanisms and units have been enabled by and/or within the ICAI organisation to deliver the twin objectives of robust policy making and unbiased enforcement in a timely manner.

c) Relevance of NFRA in the context of the Companies Act 2013: The objective of NFRA is to regulate audit quality and protect public interest. These, in any case, are also the main objectives of ICAI which strives to be a world class regulator. It is pertinent to note that the new Companies Act 2013 has significantly enhanced provisions, pertaining to Accounts, Audit and Corporate Governance which can deliver the above objectives very well.

ICAI W.P.(C) 1065/2021 & other connected matters Page 37 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Specific aspects to regulate audit quality include integration of financial statement reporting with Internal Financial Controls, restrictions on auditors rendering conflicting services, audit rotation, audit limits and penalties on the audit profession have been included in the new Act. Similarly entity level discipline is sought to be enhanced by significant controls over related party transactions, acceptance of deposits, code of independent directors, mandatory internal audits for large enterprises, enhanced board responsibility etc. These controls enshrined in the Act, in addition to the efforts of ICAI will enable higher audit quality especially for public interest entities. Incremental benefits by creating NFRA need to be reexamined before notification of Section 132.

d) Auditing Standards: ICAI as a world class regulator would be more aligned to market needs, international practices and risks to be able to define and improve Auditing standards rather than NFRA.

e) Disciplinary Mechanism: The Disciplinary Committee of ICAI normally completes the process in a reasonable period of about three to four years.

f) International benchmarks: The Public Companies Accounting Oversight Board (PCAOB) of the US may be regarded as a possible closely comparable body to NFRA, if notified. It is relevant to note that PCAOB has evoked mixed responses in its ability to improve audit quality. The PCAOB budget for 2016 is estimated at $250 million and is enabled by 750 audit staff. The Challenges of availability of trained and qualified audit staff and the cost thereof may need to be appreciated ahead of the decision to notify NFRA.

g) NFRA reporting and market perception: As a regulatory oversight body, it would be incumbent on NFRA to share their findings, at least in part, on their audits to the public. A particular issue would be on the ability and maturity of stakeholders and markets to distinguish between audit defects as identified by NFRA (highly likely) and a total audit failures (less likely).

h) Uniform administration: Scale based differentiation of regulating authority may result in conflicting judgements on the same issue. Seamless coordination may always not be possible between NFRA and ICAI due to the multiplicity of disciplinary issues that may be handled by both agencies.

i) Challenges in adjudication : The setting up and managing a standard setting, review and quasi-judicial authority requires sustained effort on timely availability of adequate competent personnel which may be a challenge for NFRA.

3.20. Further ICAI offered their following suggestions on the above:-

23. The proposed introduction of Section 132 again formed subject matter of consideration of the Standing Committee on Finance which in its 37th Report observed as follows:-

24. In terms of a Press Release which thereafter came to be issued on 01 March 2018, the Union Cabinet is stated to have approved the establishment of the NFRA. This was followed by a notification dated 21 March 2018 in terms of which sub-section (3) and (11) of Section 132 came to be enforced. The delay in the constitution of the NFRA also appears to have formed the subject matter of debate and discussion in the Lok Sabha in its proceedings which were held on 23 March 2018. This becomes apparent from the consideration of the discussion surrounding question no. 4799. Similar queries were raised in the Rajya Sabha on 03 April 2018. Responding to the questions so raised, the then Minister of Corporate Affairs made the following statement:-

The draft rules w.r.t. such section were prepared and public consultation was done during 2013-14 alongwith various other rules being considered under Companies Act, 2013 at that stage. In view of reservations and apprehensions expressed by the Institute of Chartered Accountants of India (ICAI), it was decided to establish such body after examining/addressing relevant issues including through consultation with ICAI. The matter was also considered by Companies Law Committee set up during June 2015 which submitted its report in February 2016 and The Hon'ble Standing Committee on finance (which examined the Companies (Amendment) Bill, 2016). After due examination and necessary approvals, the Government has approved the proposal for establishment of National Financial Reporting Authority (NFRA) and creation of one post of Chairperson, three posts of full-time Members and one post of Secretary for NFRA on 28th February, 2018. The Provisions of subsection (3) and (11) of section 132 of the Act have been brought into force w.e.f. 21.03.2018 alongwith NFRA (Manner of appointment and other Terms and Conditions of Service of Chairperson and Members) Rules, 2018."

It was thereafter on 01 October 2018 that the NFRA came to be finally constituted.

25. Of significant importance is the judgment rendered by the Supreme Court in S. Sukumar vs. The Secretary, Institute of Chartered Accountants of India 10 wherein the following directions were passed: -

26. That takes us to the report of the Committee of Experts 11 which came to be constituted by the Ministry of Finance pursuant to the aforenoted direction in S. Sukumar. That report which came to be submitted on 25 October 2018 includes the following instructive passages with respect to the imperative need for the constitution of an independent audit regulator as well as the global trend of audit regulation and oversight being no longer tethered to peer review: -

Determining whether an auditor is independent in fact as well as in appearance is complex. This is especially so because audit firms across jurisdictions often provide services as part of one common `network'. Consequently, separate firms belonging to the same network could provide audit as well as non-audit services to the same audit client or its holding company or subsidiaries across the same or different countries. This can give rise to the problem of conflict of interest where independence of the auditor may be compromised. Therefore, measures like sufficient disclosure on total fees, imposing cap on non-audit fees from the audit client, revisiting the scope of prohibited non-audit services are needed to address the issue of conflict of interest, especially at the network level.

These networking arrangements also create an impression that the Indian audit firms which are affiliated with these international networks constitute Multi- national Accounting Firms (MAFs). However, on closer scrutiny it turns out that these Indian audit firms are set up as partnerships or Limited Liability Partnerships (LLPs) under Indian laws and all their partners are members of the ICAI. Therefore, there is neither any violation of section 29 (reciprocity) nor any violation of section 25 (companies not to engage in accountancy) of the Chartered Accountants Act, 1949 . Neither can such Indian audit firms simply be equated to multi- national corporations. Consequently, the term `MAF' is a misnomer.

However, such Indian audit firms admittedly follow various internal processes, policies and methodology adopted by their respective networks internationally. This is aimed at maintaining consistent standards in audit quality globally within a network. While such networks bring better business opportunities in a global economy, they should be subject to necessary checks and balances. Legal measures need to be supplemented with adequate institutional reforms. Time and again corporate scandals and accounting frauds have nudged institutional reforms across jurisdictions. One such fundamental reform that has happened globally in the last two decades is a shift away from the Self- Regulatory Organisation (SRO) model towards an independent regulatory structure for the audit profession. In the aftermath of Enron, the U.S. enacted the Sarbanes Oxley Act, W.P.(C) 1065/2021 & other connected matters Page 42 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 2002. The Supreme Court in its judgment dated February 23, 2018 has referred to this statute to examine the need of an oversight mechanism for the audit profession. This law inter alia provided for the setting up of the Public Company Accounting Oversight Board (PCAOB) as an independent audit regulator to oversee the audits of public companies. Similarly, U.K., also has a two-tier structure, where the Financial Reporting Council (FRC) is the independent regulator for the audit profession.

In the Indian context, the Satyam incident has been a wake-up call for policy- makers. Pursuant to the global trend of shift from SRO model to an independent regulatory model for audit profession, the Companies Act, 2013 provided for the setting up of the National Financial Reporting Authority (NFRA).

However, the continued opposition to the establishment of NFRA has delayed the implementation of this critical reform. Consequently, although Companies Act, 2013 was enacted in August 2013, the section establishing NFRA was notified only on March 21, 2018 along with the NFRA Chairperson and Members Appointment Rules, 2018. Once NFRA becomes fully operational, it will be adequately equipped to handle the contemporary challenges in relation to auditors, audit firms and networks operating in India.

Finally, it is important to facilitate a business-friendly environment for corporates as well as professionals in India. It is therefore vital that Indian laws and regulations on professional services keep pace with changing market dynamics. Opening up professional services to competition is necessary and therefore, audit firms should be allowed to advertise with some restrictions. Further, in a global economy use of international brand names for audit firms must be allowed. Laws must be rationalised to promote Multi-Disciplinary Practices (MDPs) to allow firms to offer a bouquet of high quality professional services at par with international standards. The Advocates Act, 1961 needs to be rationalised to facilitate development of Indian law firms as well as Indian audit firms into MDPs. Adopting these three measures i.e., advertising, branding and MDPs will not only enhance the standards of services offered to corporates, but also facilitate the audit firms to expand in size/operation enabling them to compete internationally."

27. It is the aforesaid legislative interventions which ultimately led to the NFRA coming to be established with the avowed objective of monitoring and enforcing compliance of companies auditing standards, W.P.(C) 1065/2021 & other connected matters Page 43 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 reviewing quality of service, suggesting measures required for improvement in the quality of service rendered by persons associated with the audit profession, the framing of recommendations pertaining to formulation and laying down of accounting and auditing policies, standards connected therewith and additionally being empowered to investigate either suo motu or on a reference made by the Union Government and to take and draw such proceedings as may be warranted to examine matters pertaining to professional or other misconduct.

28. In order to holistically examine the challenge which stands raised, we place hereinbelow a table which captures the various amendments which came to be made to Section 132 over the course of time and commencing from the introduction of Act 18 of 2013: -

30. As is evident from Rule 3 extracted hereinabove, the NFRA stands empowered to monitor and enforce compliance with accounting and auditing standards, overseeing the quality of service which is a function envisaged under Section 132(2) or undertake an investigation in terms of sub-section (4) of that provision and exercise regulatory powers on the following five classes of companies and bodies:-

31. Pursuant to the provisions contained in clauses (2) and (3) of Rule 3, every existing body corporate other than a company governed by that Rule is obliged to furnish the particulars of its auditors in Form NFRA-I.

32. Apart from the various functions and obligations which have been placed upon the NFRA by virtue of Section 132(2), one of its principal statutory responsibilities is to undertake an investigation and inquiry in respect of professional or other misconduct. This power flows from sub-section (4) of Section 132 which empowers the NFRA to undertake disciplinary action against a member or firm of chartered accountants registered under the CA Act . By virtue of the Proviso appended to Section 132(4), no institute or body is entitled to initiate or continue proceedings in respect of misconduct once the NFRA has commenced an investigation in terms of that Section. Section 132(4) thus confers a power upon the NFRA to initiate an investigation either suo moto or on a reference made to it by the Union Government. The penalties which it could impose, in case where professional or other misconduct is proved, is set out in Section 132(4)(c). As is manifest from a reading of that provision, the NFRA stands empowered to impose not just monetary penalties but also debar a member or the firm from being appointed as an auditor, internal auditor or undertaking an audit in respect of financial statements of any company or body corporate for a minimum period of six months or such larger period not exceeding 10 years as may be determined by the NFRA.

33. It becomes pertinent to note that the expression "professional or other misconduct" is not separately or independently defined or W.P.(C) 1065/2021 & other connected matters Page 59 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 explained by Section 132. In terms of the Explanation appearing at the end of sub-section (4), the said expression is to be understood and draw meaning from Section 22 of the CA Act. By virtue of Section 132(5) a person aggrieved by any order passed by the NFRA and traceable to Section 132(4)(c) is entitled to institute an appeal before the appellate tribunal.

34. It would be relevant to note that post amendments which had come to be introduced in Sections 21 , 21A and 21B of the CA Act, the said statute enabled the Director (Discipline) as well as the Board of Discipline and the Disciplinary Committee to require the member or the firm as the case may be to participate in proceedings that those authorities would have commenced in the course of investigation and inquiry. This is evident from a reading of Section 21(3) , 21A (3) and 21B(3) of the CA Act. Although and by virtue of Act 12 of 2022, Chapter IVA came to be incorporated in the CA Act which required every firm to be registered with the Council and for a register of firms to be maintained, the CA Act did not independently incorporate any provision in terms of which a firm could be prohibited or debarred from undertaking an audit or be subjected to penalties that are envisaged under Section 132(4)(c).

35. Section 20C of the CA Act, while stipulating situations where a name of a firm could be removed from the register did not envisage that power to be exercised basis a decision that may have been taken by either the Board of Discipline or the Disciplinary Committee. The only contingencies in which a firm could be prohibited or be subjected to a fine were those which find mention in Sections 21A(6) and 21B(6) . As W.P.(C) 1065/2021 & other connected matters Page 60 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 is manifest from a reading of those provisions, a firm could be visited with those penalties in case where it were found that a member who was a partner or owner of a firm had been repeatedly found guilty of misconduct.

FACTUAL MATRIX

36. Having broadly sketched out the statutory scheme which prevails, this would constitute an appropriate juncture to notice some of the salient facts which preceded the institution of the present writ petitions.

37. Deloitte Haskins & Sells LLP 12 had issued an audit report for IL & SL Finance Service Limited 13 for Financial Year14 2017-18 on 28 May 2018. The audit of IFIN was stated to be a joint audit which it conducted along with BSR and Associates LLP15 and the audit report itself being jointly signed by DHS and BSR. On 12 February 2019, NFRA addressed an email to DHS requiring it to submit the audit file and audit report drawn by it in respect of IFIN for FY 2017-18. In terms of a subsequent mail, the aforesaid request was reiterated by NFRA with it being observed that the aforesaid audit file was required to enable it to perform and undertake an initial review of the compliance by DHS with the applicable auditing standards. The audit record is stated to have been submitted by DHS to NFRA on 11 March 2019. On 28 June 2019, NFRA conveyed its prima facie observations and conclusions to DHS. DHS submitted a response dated 03 August 12 DHS 13 IFIN 14 FY 15 BSR W.P.(C) 1065/2021 & other connected matters Page 61 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 2019 refuting the various prima facie observations which had been conveyed by NFRA.

38. Post the exchange of the aforesaid communications, the NFRA furnished the Draft Audit Quality Review Report16 on 25 September 2019. It was in this report that NFRA asserted that it had on due consideration come to form the opinion that acts of professional and other misconduct stood committed by DHS, Mr. Udayan Sen, an erstwhile partner of the firm and who was the engagement and signing partner, Mr. Shrenik Baid, the additional partner on the IFIN Audit and Mr. Rukshad Daruvala, the Engagement Quality Control Review 17 Partner. On the very same date, the Union Government is stated to have issued an order referring to various aspects relating to the affairs of IFIN as well as its subsidiary and associate companies for investigation by the NFRA in terms as contemplated under Section 132(4) of the 2013 Act.

39. On 30 October 2019 some of the engagement team members who had performed the IFIN audit for FY 2017-18 made a representation before the NFRA. This was followed by written submissions being tendered by DHS to the NFRA in response to the various observations, comments and conclusions appearing in the DAQRR. NFRA, thereafter, circulated the Audit Quality Review Report18 where significant conclusions relating to fraud and collusion with IFIN management came to be alleged. On 17 January 2020, based on the conclusions contained in the aforenoted AQRR, NFRA issued a Show 16 DAQRR 17 EQCR 18 AQRR W.P.(C) 1065/2021 & other connected matters Page 62 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Cause Notice 19 under Section 132(4) upon Mr. Udayan Sen. Separate SCNs dated 24 and 28 January 2020 came to be issued against Mr. Shrenik Baid and Mr. Rukshad Daruvala, respectively. The aforenoted partners of DHS assailed the validity of the SCNs by filing writ petitions before this Court. Those writ petitions also questioned the constitutional validity of Section 132(4) of the Companies Act as well as the jurisdiction of NFRA to investigate matters of professional and other misconduct in respect of audits which had come to be concluded prior to Section 132 coming into force.

40. On 01 May 2020, NFRA furnished a Draft Supplementary Audit Quality Review Report20 to Mr. Udayan Sen pertaining to the audit conducted in respect of IFIN where additional allegations came to be levelled. A copy of the DSAQRR was also forwarded to DHS on 14 May 2020. DHS on receipt of DSAQRR filed its reply on 25 July 2022. This was followed by NFRA issuing yet another Supplementary Audit Quality Review Report 21 in which it alleged that the appointment of DHS as the statutory auditor of IFIN was void. It was further alleged that the writ petitioner was not only guilty of professional and other misconduct but also that it had colluded with IFIN management. This was followed by the issuance of the notice dated 06 January 2021 under Section 132(4) in terms of which investigation was commenced.

41. The aforesaid action came to be assailed by way of a CM filed in the pending writ petition on which the following order came to be passed on 12 March 2021:-

42. The same was made absolute in terms of our order passed on 14 November 2022 as seen hereinbelow:-

43. It is apposite to note that the original DAQRR and which culminated in the issuance of the AQRR dated 12 December 2019 apart from laying allegations pertaining to violation of SA570 and the issues emanating from the treatment of the audit of that entity as a going concern, additional allegations pertaining to the independence of the audit firm also came to be levelled. This becomes evident from a reading of the following parts of the AQRR:-

(b) The Audit Firm has been in serious breach of the Code of Ethics;

(c) These violations have continued over several years;

(d) The violations have undoubtedly fatally compromised the independence in mind required of the Audit Firm; 2.4 Role of Engagement Partner (EP) 2.4.1 The prima facie conclusion of the NFRA, on the above matter, vide its communication dated 28th June, 2019, was that the Engagement Partner, CA. Udayan Sen, being the Engagement Partner as defined by para 6(b) of SQC1, had signed the audit report notwithstanding the documented facts that he had completely failed in discharging his obligations as Engagement Partner. 2.4.2 This prima facie conclusion of the NFRA was based on the list of work papers reviewed by CA. Udayan Sen, which clearly shows that almost all the important work of audit, i.e., W.P.(C) 1065/2021 & other connected matters Page 67 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 independence evaluation, risk assessment, audit plan, audit procedures, audit evidence, communications with management or those charged with governance (TCWG) was not directed/supervised/reviewed by CA. Sen.

2.4.3 Further, the date-wise schedule of hours charged by CA. Udayan Sen to the engagement as Engagement Partner was not provided, nor was any reference in the Audit File provided in support thereof. The NFRA further noted that the Audit Firm's statement that "Udayan Sen has spent about 180 hours (though manually noted as 80 hours in the Audit File)" was self- contradictory and therefore, bereft of any meaning.

xxxx xxxx xxxx 2.4.5 NFRA has examined the above contentions of the Audit Firm and has concluded as follows:

(c) Para 42(a) of SQC1 provides that policies and procedures should ensure that "the identity and role of the engagement partner are communicated to key members of the client's management and those charged with governance". Para 42(c) says procedures should ensure that "the responsibilities of the engagement partner are clearly defined and communicated to that partner". Assuming only for the sake of argument, and not in any way accepting the stand of the Audit Firm that there can be more than one Engagement Partner for an engagement in view of its patent illegality, the Audit Firm has not been able to show any provision in its policies relating to para 42(a) and 42(c) quoted above, or communications to TCWG, or the partners concerned, pursuant to these paras, in the Audit File that support its stand that there could be more than one Engagement Partner for any Engagement.

(d) The definition of Engagement Partner clearly refers to a single individual (this is so in all the cases where SQC1 or SAs use this term) who bears ultimate responsibility for the performance of the engagement and the report that is issued on behalf of the firm. SA 220 clearly provides that the Engagement Partner shall take responsibility for the overall quality on each audit engagement to which the partner is assigned (para 8). Further paras in the same SA elaborate on the responsibilities of the Engagement Partner. Having more than one Engagement Partner may or may not enhance audit quality. In the present case, the failure to discharge the role of Engagement Partner by CA. Udayan Sen clearly shows that audit quality has badly suffered.

(e) The "integral" designation of Shrenik Baid as the engagement/review partner also discloses a great confusion and lack of clarity about the respective roles of an Engagement Partner and a review partner.

(f) For all the above reasons, NFRA considers that CA. Udayan Sen alone can be accepted as Engagement Partner for this engagement in terms of the definition provided in SQC1 and the SAs.

2.4.6 NFRA has further examined the matter relating to aspects of the engagement that were directed/supervised/reviewed by CA. Udayan Sen in his capacity as Engagement Partner. Contrary to the statement made at document 5/page 10 of the Audit Firm's response, WP No. 29702 (Manual) Closing Procedures Check list has not been initialed by CA. Udayan Sen. CA. Udayan Sen's initials are seen only in that part of the WP No. 29702 which is designated as the closing memorandum. This is in the form of a report sent by CA. Shrenik. Baid to CA. Udayan Sen. This paper is a summary of the procedures adopted during the course of the audit. The very fact that CA. Shrenik Baid had to send such a memorandum to CA. Udayan Sen is itself proof that CA. Udayan Sen had not participated in any of the audit processes listed therein. This is for reason that if CA. Sen had indeed participated in the listed procedures etc., his presence there would have been automatically recorded and the need for such a closing procedures memorandum would not have arisen. No further evidence has been provided by the Audit Firm to counter the conclusions of the NFRA that CA. Udayan Sen was not involved with almost all the important work of the audit engagement.

2.4.7 Also, the Audit Firm's submission to the NFRA vide letter dated July 17, 2019 states that CA. Udayan Sen was not using the time recording system and hence his time spent on this assignment is not available. No estimate of the same was given as it was said to W.P.(C) 1065/2021 & other connected matters Page 69 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 relate to a period many years back. Hence, the Audit Firm and the Engagement Partner are found noncompliant with requirement of keeping records for minimum seven years as per paras 82- 83 of SQC1, and monitoring the workload and availability of the EP as per para 43. Further, the familiarity threat and violation of para 27 of SQC1 cannot be ruled out based on the submitted responses. 2.4.8 On consideration of all the above facts, the NFRA

(a) is reinforced in its conclusion that CA. Udayan Sen, being the Engagement Partner as defined in para 6(b) of SQC1, had signed the audit report notwithstanding the documented facts that he had completely failed in discharging his obligations as Engagement Partner;

(b) Concludes that the Audit Firm committed a grievous violation of SQC1 and SA 220 in naming two partners as Engagement Partners for this Engagement, thereby leading to disastrous loss of accountability and total disregard of all principles of Quality Control.

2.5 Communication with Those Charged With Governance (TCWG) 2.5.1 The prima facie conclusion of the NFRA on the above matter, vide its communication dated 28th June, 2019 was that:

Where matters have been communicated in writing, the auditor shall retain a copy of the communication as part of the audit documentation. Documentation of oral communication may include a copy of the minutes prepared by the entity retained as part of the audit documentation where those minutes are an appropriate record of the communication".

(d) Apart from the fact that matters that were required to be communicated (para 10 to 13 of SA 260) had not, in fact, been communicated, this was also a case where there were serious issues arising out of the RBI's inspection report that needed to be brought to the attention of TCWG and discussed with them before final decisions on audit evidence, presentation and disclosure in the financial statement etc. were taken. No facts have been provided by the Audit Firm that the requirements of SA 260 and other relevant SAs have been complied with by the Audit Firm.

(e) Similarly, as regards the argument that all work was done in the company's office, and hence communication with the management was on a daily basis, is concerned, this argument, logically, would mean that no documentation at all would be required. Hence, the unacceptability of such an argument is obvious. 2.5.4 NFRA is, therefore, reinforced in its conclusion that the Audit Firm has grossly failed in complying with the Requirements of the SAs pertaining to communications with TCWG and the management.

2.6 Evaluation of Risk of Material Misstatement (ROMM) Matters 2.6.1 In its prima facie conclusions dated 28th June, 2019, NFRA had, inter-alia, stated that:

There are significant contradictions in the assessment of ROMM which lead to the conclusion that the assessment has been carried out in a very casual manner as to result in a complete sham.

(d) WP No.13501 on ROMM provides a staggering conclusion "No fraud risk factors or engagement risk have been identified".

(e) Evidence of mismatch in the date of meeting and the date of communication between the Engagement Team and Engagement Partner has proved that assessment of ROMM is a complete sham. Study of WP No.13501 shows that while the meeting for discussion took place on 13th October 2017, the matters were already communicated to all concerned in September 2017.

(f) Based upon the analysis of the working papers, it was observed that certain important issues having been identified from the whistle blower complaints and RBI inspection reports have not been evaluated at all for the purpose of evaluation of ROMM.

(g) The Audit Firm has changed the risk assessment of the audit assignment from "Normal" to "Greater than Normal" (GTN) through a memo for change in engagement risk to GTN, taking into consideration four factors. Considering the sequence of events relating to the RBI inspections, it must have been assessed as "Much Greater Than Normal" (MGTN) in the previous FY 2016- 17 itself.

(h) It was observed that the audit responses planned to reduce or mitigate the identified risks and the actions taken based on the audit responses to such identified risks are insufficient, improper and inadequately carried out.

(i) Numerous details from the working papers have been provided to substantiate the above conclusions of the NFRA. For the sake of brevity and avoiding unnecessary repetition, the details of the same are not extracted and re-produced here.

(a) The Audit Firm has clearly indulged in a deliberate misrepresentation of a material fact;

(b) There has been a complete lack of clarity, and utter confusion has prevailed, in the ROMM assessment;

(c) Important aspects of the auditee company's situation, such as its SI-NBFC status, the very disturbing RBI Inspection Reports on the company, the wide discrepancies in reporting of NPAs, etc., have not been given adequate importance in the ROMM assessment;

(d) Accordingly, the audit responses have been grossly inadequate;

(e) Such procedures as have been performed have had no link to the real ROMM;

(f) In crucial matters, the Audit Firm has relied completely on the management's representations;

(g) The Audit Firm has totally failed in communicating to TCWG/the management the key issues arising out of the audit. 2.7 RBI Inspection Matters - TTSL Shares and Derivatives Assets 2.7.1 With regard to the above matter, the NFRA had communicated the following prima facie observations/comments/conclusions in its letter dated 28th June, 2019:

2.8 RBI Inspection Matters : NOF - CRAR W.P.(C) 1065/2021 & other connected matters Page 74 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 2.8.1 With regard to the above matter, the NFRA had communicated the following prima facie observations/comments/conclusions in its letter dated 28th June, 2019:

2.9 Management's Written Representations relating to RBI Inspections 2.9.1 In its prima facie conclusions dated 28th June, 2019, the NFRA has stated that:

Furthermore, the fact that the management has provided reliable written representations does not affect the nature or extent of other audit evidence that the auditor obtains about the fulfilment of management's responsibilities, or about specific assertions (para 3).

(ii) In particular, if written representations are inconsistent with other audit evidence, the auditor shall perform audit procedures to attempt to resolve the matter (para 16).

(iii) The Auditor shall disclaim an opinion on the financial statements in accordance with SA 705, if there is sufficient doubt that the written representations are not reliable (para 19).

(c) Clearly, the requirements of SA 580 needed the Auditor to obtain corroborating evidence for the matters covered by the written representation before accepting the same. Clearly, the claims of the management about the outcomes of the meetings that they had with RBI were completely inconsistent with the stand of the RBI that had been in evidence throughout the period when this matter was under discussion. In other words, the written representation forwarding the unacknowledged minutes of the meetings with the RBI officers was inconsistent with this overwhelming past evidence, and the Auditor was duty bound in terms of para 3 and para 16 of SA 580 to perform other audit procedures to attempt to resolve the matter. And in the event of being unable to resolve the matter, a disclaimer of opinion needed to have been made in line with para 19 of SA 580.

2.9.4 The Audit Firm has said that the Audit Committee had considered the management update on their meetings with RBI officials and as such, the Audit Firm is entitled to rely on the information provided to them. It is seen that the said Audit Committee meeting was held on 28.05.2018, the date on which the financial statements were approved by the Audit Committee and the Board and also communicated to the Stock Exchange (after having duly notified the Stock Exchange in advance about the date and agenda of such meetings). Clearly, no significance can be W.P.(C) 1065/2021 & other connected matters Page 77 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 attached to the supposed "ratification" by the Audit Committee of the management update as at this stage.

2.10 Evaluation of the work of Management's Expert 2.10.1In its prima facie conclusions dated 28th June, 2019, NFRA had, inter-alia, stated that:

2.10.3The NFRA has examined the above contentions of the Audit Firm and has concluded as follows:

2.10.4 With reference to the compliance with the requirements of SA 500 in relation to using the work of a management's expert, NFRA has examined the working papers referred in the response of the Audit Firm. The Audit Firm has provided the memos prepared by the Internal Fair Value Specialists of the Firm or Associate Concern of the firm as well the valuation report provided by the various valuation experts.

2.10.5 On a consideration of all the above, NFRA does not wish to pursue this matter further at this stage. However, if, on a further examination of the matter, it becomes necessary to take any action, the matter will be considered at that stage.

2.11 Evaluation of the Going Concern Assumption:

The discussion with the management and enquiry with them by the SA required, had to be complied with and the same had to be documented as per the requirements of the SA relating to documentation. By their own admission, the Audit Firm has not conducted any such discussions and enquiry, neither is any proof of such discussion and enquiry available in the Audit File.

(d) The attempt to draw support for what the Audit Firm has done from para A8 of SA 570 (the para stands renumbered as A9 in The Revised SA 570 only) it itself a gross distortion of what is contemplated and permitted by that paragraph. The context referred to is only a situation where management has not made any detailed analysis. It does not cover a situation as this where, admittedly, no analysis at all was available.

(e) The contention of the Audit Firm that the Independent Directors of the company were, by all, by all accounts knowledgeable in financial and accounting matters, and that the Audit Firm had the right to rely on them and that it was, in any case, their (Independent Directors) responsibility to alert the auditors in case they had any doubt about the going concern assumptions is clearly evidence of the Audit Firm's gross dereliction of duty. Taken to its logical conclusion, this argument can be used to support a complete abdication of its prescribed duties by Audit Firm. 2.11.4 As far as action plan for compliance with the RBI guidelines on NOF is concerned, the Audit Firm had initially informed the NFRA that they had discussed with the management and understood the plans. They (the Management) had proposed to comply with the RBI Requirements by March 31st, 2019. Since no such plan is available in the Audit File, this claim of the Audit Firm was dismissed by NFRA as being false. The Audit Firm has replied saying that the said plan was placed before the Audit Committee and approved by them and thereafter placed before the Board on May 28, 2018. However, since the Board wanted to submit a more W.P.(C) 1065/2021 & other connected matters Page 80 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 detailed plan to the RBI, they had sought time till June 30, 2018. The Audit Firm contends that this cannot be construed to imply that the plan did not exist on May 28, 2018. In this connection, it is being clarified (though a plain reading of NFRA's earlier contention should not require any clarification at all) that it was never contended by NFRA that a plan did not exist on May 28, 2018. This issue had not come up for NFRA's consideration at all. What was instead asserted by NFRA is that no such plan was found in the Audit File and therefore could not have been discussed with the management on the grounds that any discussion about such a plan between the Audit Firm and the management would also have had to be documented appropriately in the Audit File and the Audit Firm's conclusion thereon also duly recorded. Since no such evidence was available in the Audit File, NFRA had concluded that the Audit Firm's claim that they had discussed the plans with the management and understood the same, was patently false. Some details of the alleged plan have been placed at pages 51 and 52 in response to para 11 and repeated again at pages 68 to 69 of the same response. Both these references and details have to be considered only as an afterthought and a subsequent creation of audit evidence since there is no substance of these matters in the Audit File. The NFRA, therefore, is reinforced in its conclusion that the statement about discussions with the management on the compliance plan is false.

2.11.5 On a consideration of all the above, NFRA concludes that the Audit Firm has completely failed to obtain sufficient, appropriate audit evidence to assess the management's use of the going concern assumption.

2.12 Documentation of EQCR Processes 2.12.1 The prima facie conclusions of the NFRA on the above matter vide its communication dated 28th June, 2019, inter-alia, were that

(a) The work papers do not identify or document any discussion about significant matters between EQCR team and the Engagement Partner.

(b) The EQCR was not carried out in a timely manner at appropriate stages during the engagement.

(c) The EQCR required an in-depth examination to be made of the issues arising out of the RBI inspection and directions. Documenting the EQCR process in this connection, and the conclusions arrived at could not be reduced to mere check box "Yes" or "No" responses.

(d) Modification carried out in the RoMM mentioning the same as both "adverse" and "EOM" is internally inconsistent and self- contradictory.

(e) The EQCR has not noted the absence of any communication at all between the ET and TCWG.

(f) A major inconsistency between the time said to have been spent on the EQCR by the partner and the Director compared with the dates of the EQCR indent and the documents said to have been reviewed by them.

xxxx xxxx xxxx 2.12.3 The NFRA has examined the above contentions of the Audit Firm and has concluded as follows:

2.12.4 NFRA, therefore, concludes that the Engagement Quality Control Review was not carried out in the manner stipulated by SQC1 and other applicable SAs."

44. The DSAQRR which thereafter came to be issued on 01 May 2020 proceeded to lay various allegations with respect to the treatment of investments and a purported violation of the obligations flowing from SA500 and SA200. These allegations pertained to the valuation ascribed to investments and related party transactions as well the acceptance of those declarations in the course of an audit.

45. The writ petitions which initially came to be preferred before this Court were those instituted by Mr. Udayan Sen and Mr. Shrenik Baid, who were Engagement Partners in DHS in respect of the audit and Mr. Rukhsad Daruvala who was the EQCR Partner in respect of the said audit. When those writ petitions were initially entertained by the Court, on 21 May 2020 interim orders were passed to the effect that if any final orders come to be framed by the NFRA pursuant to the SCNs under Section 132(4) of the 2013 Act, the same would not be given effect to till the next date. On 26 June 2020 the order of 21 May 2020 thereafter came to be extended further.

46. On the writ petition preferred by DHS, the Court on 28 January 2021 had initially provided that any action that may be taken by the respondents would be subject to the outcome of the writ petition. On 12 March 2021 while considering CM No. 9896/2021, however, the Court provided that the respondents would stand restrained from precipitating the matter till the next date of listing. It is these interim orders which have continued on the writ petition.

47. It would also be apposite to briefly take note of the facts as they obtain in WP(C) 11737/2021. SRBC & Co LLP22, the writ petitioner, is a firm of CAs which was appointed as the joint auditor of IN&FS Transportation Networks Limited 23 for FY 2017-18. It is its case, that since certain other entities stood appointed as statutory auditors, a limited review alone for the quarter ending 30 June 2018 was performed by it jointly with those auditors. It is further disclosed that in the Annual General Meeting held on 29 August 2017 the other joint auditor rotated out and as a result of which SRBC came to be appointed as the statutory auditor for FY 2017-18.

48. It is its case that in the course of undertaking the limited review for the quarter ending 30 June 2018, SRBC had observed that ITNL had incurred losses with no significant progress being made with respect to re-financing of loans, realization of claims and monetization of assets. It had also alluded to the subsidiaries of ITNL who had filed notices of cure before relevant authorities and being unable to service their debt resulting in defaults and which in turn had led to the credit rating of the company being downgraded by ICRA. It further asserts that it had in its limited review report itself included a paragraph highlighting material uncertainties relating to ITNL's ability to continue as a going concern and was one of the first auditing firms to highlight this issue. SRBC then alludes to the audit quality review which was initiated by the NFRA in February 2019.

49. Pursuant to the initiation of that review, the petitioner is stated to have submitted the audit file and records to NFRA on 22 March 2019.

SRBC 23 ITNL W.P.(C) 1065/2021 & other connected matters Page 84 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 This was followed by communications of 17 May 2019 and 03 July 2019 by NFRA calling upon SRBC to respond to the various queries raised therein. After a detailed exchange of correspondence in the course of that audit quality review the NFRA issued its Prima Facie Conclusions on 24 March 2020. This was followed by Supplementary Prima Facie Conclusions which were issued on 17 April 2020. The summary of the Prima Facie Conclusions are reproduced hereinbelow:-

The integrity of the Audit File is questionable due to tampering and inconsistency pointed out at several places in the PFC Report."

50. The Supplementary Prima Facie Conclusions then proceeded to observe as under:-

Oct-2019. Following are the key responses:

7. Further, NFRA observed the following from examination of the Audit Firm's working papers in CANVAS, and the Audit File :

8. Based on the above-mentioned observations, NFRA communicated to the Audit Firm vide letter dated 24-Jan-2020, that NFRA would be engaging NFRA's IT consultants to examine the Audit firm's IT systems, and processes related thereto, to verify the integrity of the electronic portion of Audit File. NFRA, through its IT consultants, conducted an in-person review of the Audit Firm's IT systems and procedures of Audit File documentation and archival, along with the respective controls and monitoring procedures. The Audit Firm's IT experts as well as Audit Partner were present to demonstrate and respond to NFRA's queries. The Audit Firm's team was asked the queries as listed in Annexure IV, for which the Audit Firm's team requested time to come back stating the following reasons:

b. The Audit Firm requires time to consult with the global IT team, in order to respond to NFRA's queries. Subsequently the Audit Firm had provided replies to the queries vide their emails dated 25- Feb-2020 and 13-Mar-2020.

9. During the in-person review, and after examining the replies furnished, the NFRA's IT consultants observed following vulnerabilities in the electronic platform (EY Canvas Application) with respect to the attributes mentioned in the aforesaid Para 3:

10. It is, therefore, evident from the above that EY Canvas application, which is the only audit documentation system used by the Audit Firm, completely fails to ensure even the minimum controls essential to meet the requirements of SQC 1 and SA 230 as detailed in Para 1 above. The fundamental aspects of integrity of Audit Files, accountability of the firm and its personnel, maintaining sufficient appropriate audit evidence for the audit planning, performance and basis for conclusions for achieving audit objectives are seriously compromised as a result.

11. As discussed above, NFRA had pointed out several discrepancies in audit documentation that raised doubts about the authenticity and reliability of the audit documentation. The details given above show that the deficiencies are systemic and structural in nature and arise substantially from a complete disregard for basic principles of IT security in the software used. This renders the audit documentation completely unfit for the intended purpose

12. NFRA, further, concludes that there is a complete failure of the Audit Firm's SQC policy to monitor and control the integrity of the audit files. Consequently, the audit files maintained by the auditor are not found to meet the compliance requirements of SA 230. In having not rectified these deficiencies, the Audit firm is guilty of serious professional misconduct."

51. This led to the issuance of the DAQRR on 08 March 2021. The petitioner is stated to have submitted response to the DAQRR on 10 July 2021. An oral hearing in connection with the above is stated to have been held on 08 September 2021 and whereafter the AQRR came to be published on 23 September 2021. The summary of the AQRR is, as captured in para 1.8, extracted hereinbelow:-

52. Since the facts which formed the subject matter of the writ petition preferred by Rukshad Daruvala have been taken note of while dealing with the writ petition preferred by DHS, we do not propose to reiterate the chronology of events preceding the issuance of the SCN under Section 132(4) of the 2013 Act.

BROAD STRUCTURE UNDER THE CA ACT

53. Before we proceed to chronicle the rival submissions which were addressed before us, it would perhaps be apposite to take note of the salient statutory provisions in the context of which the challenge stands raised. We had in the preceding parts of this decision noticed the relevant provisions of the CA Act which are concerned with the subject of misconduct and the procedure for taking disciplinary action against a member of the Council. Although we had an occasion to notice the existence of the Misconduct Rules, 2007 and the 1988 Regulations, this would appear to be an appropriate juncture to notice some of the provisions incorporated in those statutory instruments. The Misconduct Rules, 2007 define a "firm" to be one registered with the ICAI under the relevant 1988 Regulations. As was noticed by us hereinabove, the Chapter pertaining to registration of firms had come to be introduced in the CA Act by virtue of Act 12 of 2022. In terms of Rule 3 of the Misconduct Rules, 2007 a complaint referable to Section 21 of the CA W.P.(C) 1065/2021 & other connected matters Page 96 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Act was to be filed and presented before the Director (Discipline) in Form I. Rule 3 reads as follows:-

Explanation. − In the case of a bank or financial institution, the general resolution or power of attorney authorizing an officer holding a particular position to file complaints on behalf of the bank or financial institution, shall be deemed to be the specific resolution passed by the bank or financial institution concerned, for the purposes of these rules.

(5) In case of complaints filed by any Government, statutory authority, bank or financial institution, a change in the name of complainant at any later stage, shall be duly supported by a specific authorization made by an officer holding a post equivalent to that of the original complainant.

(6) Every complaint received by the Directorate shall be acknowledged by ordinary post together with an acknowledgement number."

54. As is evident from a reading of Rule 3(1) a complaint under Section 21 of CA Act was envisaged to be one directed against the conduct of either a member or a firm. In terms of sub-rule (2) and (3) of Rule 3, a complaint could also be preferred by the Union or State Governments or even by a statutory authority, such as, the Reserve Bank of India or the Securities and Exchange Board of India.

55. Rule 5 of the Misconduct Rules, 2007 proceeds to spell out the requirements for registration of the complaint and a preliminary examination thereof by the Director (Discipline). Apart from a written complaint, which could be entertained by the Director (Discipline), Rule 7 also expanded the scope of the investigation or inquiry that could be undertaken by providing for any written information containing allegations against a member or a firm being treated as information received under Section 21 of the CA Act and consequently liable to be processed accordingly.

56. The procedure of investigation was set out in Chapter 3 of the Misconduct Rules, 2007. Rule 8 made the following pertinent provisions guiding the consideration of a complaint by the Director (Discipline) either against an individual member or a firm:-

(5) On perusal of the complaint, the respondent's written statement, if any, and rejoinder of the complainant, if any, the Director may call for such additional particulars or documents connected therewith either from the complainant or the respondent or any third party or parties, as he may consider appropriate:

57. Upon conclusion of examination of the complaint the Director (Discipline) was enjoined to follow the procedure as stipulated in Rule

9. The said provision is extracted hereinbelow:-

58. In terms of Rule 14 the Board of Discipline was required to follow a summary procedure for disposal of cases as is evident from the following:-

Explanation 1.− For the purpose of this rule, the appearance includes, unless and otherwise directed, appearance by an advocate or through any authorized representative, who may be a Chartered Accountant, Cost Accountant or Company Secretary. [Explanation 2 - For the purpose of this rule, the appearance also includes the appearance through video-conference, modalities for which may be as formulated by the Institute from time to time.] (7) On the date of hearing, if the respondent, in spite of the service of notice, under sub-rule (6), does not appear either in person 1[or through video conference in terms of the modalities formulated under these Rules] or through his authorized representative, the Board of Discipline may proceed ex-parte and pass such orders as it may think fit or direct fresh notice to be served. (8) The Board of Discipline may, on such terms as it thinks fit, and at any stage of the proceedings, adjourn the hearing:

59. By virtue of Rule 15, once the Board of Discipline had come to arrive at a finding of guilt in terms contemplated under Rule 14(9), the said authority was obligated to afford an opportunity of hearing to the respondent before proceeding to pass an order of punishment as contemplated under Section 21A(3) of the CA Act. The functioning of the Disciplinary Committee was regulated by similar provisions enshrined in the Misconduct Rules, 2007. Since it would be Rule 18 which would be pertinent for our purposes, the same is extracted hereunder:-

[Explanation 1. - For the purpose of this rule, the appearance includes, unless and otherwise directed, appearance by an advocate or through any authorized representative, who may be a Chartered Accountant, Cost Accountant or Company Secretary. [Explanation 2. - For the purpose of this rule, the appearance also includes the appearances through video-conference, modalities for which may be as formulated by the Institute from time to time.] (7) During the first hearing, the Committee shall read out the charge or charges to the respondent along with the summary of prima facie opinion arrived at by the Director, and ask the respondent whether he pleads guilty to the charge or charges made against him:

60. Proceeding on lines akin to Rule 15 the Disciplinary Committee, upon arriving at a finding of guilt, was enjoined to follow the procedure as prescribed in Rule 19 and which reads as under: -

61. Turning then to the 1988 Regulations, of relevance would be Regulation 12 and which was concerned with the complaints and inquiries relating to misconduct pertaining to proceedings initiated or pending prior to 17 November 2006. Regulation 12 is extracted hereinbelow:-

Explanation - A notice to the firm shall be deemed to be a notice to all the members who are partners or employees of that firm. (7) A member against whom the complaint is made (hereinafter referred to as the Respondent) may, within fourteen days of the service of a copy of the complaint under sub-regulation (6), or within such time as may be extended by the Secretary, forward to the Secretary in triplicate, a written statement in his defence verified in the same manner as the complaint.

(8) On receipt of the written statement, if any, the Secretary shall send a copy thereof to the Complainant and the Complainant may, W.P.(C) 1065/2021 & other connected matters Page 107 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 within 14 days of the service of a copy of the written statement, or within such time as may be extended by the Secretary, forward to the Secretary, in triplicate, his rejoinder on the written statement, duly verified in the same manner as the complaint. (9) On receipt of the Complainant's rejoinder, if any, the Secretary shall send a copy thereof to the Respondent and the Respondent may within 14 days of the service of a copy of the rejoinder, or within such time as may be extended by the Secretary, forward to the Secretary, in triplicate, his comments on the rejoinder, duly verified in the same manner as the complaint.

(10) On a perusal of the complaint, the written statement, if any, the Complainant's rejoinder on the written statement, if any, and the Respondent's comments on the Complainant's rejoinder, if any, the President may call for such additional particulars or documents connected therewith either from the complainant or the Respondent as he may consider expedient.

(11) (i) If on a perusal of the complaint, the written statement, if any, the Complainant's rejoinder to the written statement, if any, and the Respondent's comments on the Complainant's rejoinder, if any, and other relevant documents, the Council is prima facie of opinion that the Respondent is guilty of professional and or other misconduct, the Council shall cause an enquiry to be made in the matter by the Disciplinary Committee.

(ii) If, on the other hand, the Council is prima facie of opinion that the Respondent is not guilty of any professional or other misconduct, the complaint shall be filed and the Complainant and the Respondent shall be informed accordingly. (12) (i) Any notice issued by the Secretary under this regulation shall be sent to the member or the firm, as the case may be, by registered post with acknowledgement due.

(ii) If any such notice is returned unserved with an endorsement to the effect that the addressee had refused to accept the notice, the notice shall be deemed to have been served.

(iii) If the notice is returned with an endorsement to the effect that the addressee cannot be found at the address given, the Secretary shall ask the Complainant to supply to him the correct address of the member or the firm, as the case may be.

(iv) A fresh notice shall be issued to the member or the firm at the correct address.

(13) The provision relating to a notice shall apply 'mutatis mutandis' to a letter."

62. Although supplementary and additional provisions pertaining to inquiries and disciplinary action stood embodied in Regulations 15, 16 & 17, we do not deem it appropriate to extract those provisions here since those too were confined to proceedings initiated or pending prior to 17 November 2006.

63. While we had an occasion to notice Section 132 as embodied in the Companies Act in the earlier parts of this decision, for purposes of completeness we now turn our gaze upon the NFRA Rules and to the salient provisions contained therein. Rule 2 which constitutes the definition clause defines the word "division" in clause (g) as under:-

64. The functions and duties of the NFRA are elaborated upon and spelt out in Rule 4 which reads as follows:-

65. Rule 7 speaks of the functions which the authority is obliged to discharge for the purposes of monitoring and enforcing compliance with Accounting Standards. That provision reads as under:-

compliances on its website and in such other manner as it considers fit, unless it has reasons not to do so in the public interest and it records the reasons in writing.

(4) Where the Authority finds or has reason to believe that any accounting standard has or may have been violated, it may decide on the further course of investigation or enforcement action through its concerned Division."

66. As an extension of the power that stands conferred upon the NFRA by virtue of Section 132(2)(b) of the Companies Act which is concerned with the monitoring and enforcement of compliance with Accounting Standards, Rule 8 makes the following provisions:-

complainces on its website and in such other manner as it considers fit, unless it has reasons not to do so in the public interest and it records the reasons in writing.

(6) The Authority shall not publish proprietary or confidential information, unless it has reasons to do so in the public interest and it records the reasons in writing.

(7) The Authority may send a separate report containing proprietary or confidential information to the Central Government for its information.

(8) Where the Authority finds or has reason to believe that any law or professional or other standard has or may have been violated by an auditor, it may decide on the further course of investigation or enforcement action through its concerned Division."

67. Similarly, with regard to the statutory obligation of the NFRA to oversee the quality of service rendered by professionals associated with auditing, Rule 9 provides as follows:-

68. The power of investigation and the conduct of disciplinary proceedings are regulated by Rules 10 and 11, which are reproduced hereinbelow:-

11. Disciplinary proceedings. (1) Based on the reference received from the Central Government or findings of its monitoring or enforcement or oversight activities, or on the basis of material otherwise available on record, if the Authority believes that sufficient cause exists to take actions permissible under sub-section (4) of section 132, it shall refer the matter to the concerned W.P.(C) 1065/2021 & other connected matters Page 113 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 division, which shall cause a show-cause notice to be issued to the auditor.

(2) The show-cause notice shall be in writing, and shall, inter alia, state-

(a) the provisions of the Act or rules under which it has been issued;

auditing standards thereunder allegedly violated, or the manner in which the public interest is allegedly affected;

(e) the actions that the Authority proposes to take or the directions it proposes to issue if the allegations are established;

(f) the time limit and the manner in which the auditor is required to respond to the show-cause notice;

(g) the consequences of failure to respond to the show-cause notice; and

(h) the procedure to be followed for disposal of the show-cause notice.

(3) The show-cause notice shall enclose copies of documents relied upon and extracts of relevant portions from the report of investigation or other records.

(4) The show-cause notice shall be served on the auditor in the following manner, namely -

(a) by sending it to the auditor at the address provided by him or provided by the Institute of Chartered Accountants of India (if required by the Authority) by registered post with acknowledgement due; or

(b) by an appropriate electronic means to the email address of the auditor provided by him or it or provided by the Institute of Chartered Accountants of India (if required by the Authority):

banking finance company to the Reserve Bank of India;

(iv) in the case of a bank or a non-banking finance company to the Reserve Bank of India;

(v) in the case of an insurance company to the Insurance Regulatory and Development Authority of India;

(vi) in case the auditor is resident outside India to concerned regulator of such country; and the same shall be published on the website of the Authority."

ADDITIONAL DISCLOSURES BY NFRA

69. Pausing here, we also take note of a salient aspect which was noticed by us in our order of 12 September 2023. It becomes pertinent to note that during the course of hearing of this batch of writ petitions it had been alleged by the petitioners that the complement of persons which had formed the opinion that disciplinary proceedings were liable to be initiated against the petitioners was the same or identical to that which had authored the AQRR. The petitioners had in that context laid stress upon the expression "division" as it occurs in various parts of Section 132 of the Companies Act as well as the NFRA Rules to contend that the statute clearly contemplated a division of functions between the review of an audit and the formation of opinion to initiate disciplinary proceedings.

70. The respondents, on the other hand, had contended that the executive body of the NFRA was clearly entitled in law to discharge all functions and duties as placed upon the NFRA as a whole. It was in the aforesaid context that we had called upon the respondents to file an additional affidavit and to disclose complete details of the personnel who had penned the AQRR in each case as well as the complement of persons who had initiated action under Section 132(4).

71. The order dated 12 September 2023 is reproduced hereinbelow:-

72. Pursuant to the aforesaid order an additional affidavit came to be filed by the NFRA and where the following disclosures are made:-

c) NFRA's letter dated 25.04.2019 was sent to the Engagement Partner seeking a list of related parties and Audit/Non-Audit revenue m stipulated format on Affidavit.

d) NFRA's letter dated 02.05.2019, containing a Questionnaire on matters observed in the Audit File, was sent via email on 02.05.2019 to the Engagement Partner seeking replies to the same.

e) Reply of the Engagement Partner dated 08.05.2019 to NFRA letter dated 25.04.2019 was received on W.P.(C) 1065/2021 & other connected matters Page 119 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 affidavit and also received via email from CA Shrenik Baid, Partner DHS.

f) Reply by the Engagement Partner to NFRA's Letter dated 02.05.2019 received on 13.05.2019.

g) NFRA issued a letter dated 28.06.2019 to the Engagement Partner conveying its prima facie observations/comments/conclusions (PFC) on the various issues in the Questionnaire. Also, NFRA requested that the Engagement Partner, Sh. Udayan Sen, and the EQCR Partner, Sh. Rukshad Daruvala, or their respective authorised representative from the Engagement Team and the EQCR Team respectively, be present in person in the NFRA office to explain replies to PFC.

h) Auditor requested NFRA through his letter dated 02.07.2019 to grant time till 30.07.2019 to provide comprehensive responses, after which to provide a date for an in-

person meeting at which they may assist with any further clarifications if required.

i) NFRA issued a letter dated 05.07.2019 granting time up to 5.8.2019 and the opportunity to explain the issues in person.

j) Through letter dated 02.08.2019, Engagement Partner replied to NFRA's prima facie observations in its letter dated 28.06.2019.

k) Draft AQRR Note was initiated by Secretary-NFRA on 25.09.2019 and put up for approval of EB.

l) The EB NFRA granted approval vta notes dated 25.09.2019 for Draft AQRR and approval of providing an opportunity to the Engagement W.P.(C) 1065/2021 & other connected matters Page 120 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Partner to appear in person before the Authority.

m) Draft AQR Report (DAQRR) of NFRA dated 25.9.2019 sent to the Engagement Partner via email dated 25.9.19.

n) NFRA issued letter dated 17.10.2019 to DHS seeking clarification regarding Audit documentation and IT ISSUEs.

o) NFRA's letter dated 21.10.2019 containing additional Questionnaire, sent via email on 21.10.2019 to CA Udayan Sen seeking replies to the same.

p) On 23.10.2019 DHS requested for extension of time up to 4.11.2020 for submission of response of NFRA's Letter dated 21.10.2019.

q) NFRA emailed on 24.10.2019 granting extension of time up to 4.11.2020 as requested by DHS.

r) In person Presentation to NFRA was made by the Engagement Team members from DHS on 30.10.19.

s) Written replies were furnished by the Engagement Partner vide letter dated 4.11.19 to NFRA's observations in the DAQRR.

t) On 15.11.2019 DHS provided its Reply to NFRA letter dated 17.10.2019 and 21.10.2019 w.r.t Audit Documentation/ IT issues and additional questionnaire.

u) AQR Note was initiated by Secretary-NFRA on 11.12.2019 and put up for approval of EB.

v) It was then approved by the EB for the issue vide note dated 11.12.2019. w) AQR Report, approved by the EB, was issued by W.P.(C) 1065/2021 & other connected matters Page 121 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 the Secretary NFRA on 12.12.2019.

x) On 23.01.2020, NFRA issued a letter to DHS for scheduling a meeting on 27.01.2020 regarding the IT application used for maintaining Audit Files.

y) Presentation was given by the DHS team on 28.01.2020 regarding the IT application used for maintaining Audit Files at NFRA office and email sent by DHS regarding points to be clarified by DHS on IT related issues.

z) NFRA Team with IT consultants visited office of Deloitte Haskins & Sells LLP (Auditor) at Gurugram on 29.01.2020 for further detailed understanding of their IT platform used for audit documentation.

aa)Email of NFRA dated 07.02.2020 was sent to CA Udayan Sen seeking reply to additional requirements/ queries. The same were related to IT aspects of audit documentation.

Reply was sought by 11.2.2020.

bb )DHS emailed NFRA on 10.02.2020 seeking time to reply NFRA's letter dated 7.2.2020 by 21.2.2020.

cc) Reply on the additional requirements from DHS received via letter dated 21.02.2020.

dd)Draft Supplementary Audit Quality Review Report (DSAQRR) was issued to DHS on 01.05.2020.

ee) On 23.05.2020, DHS requested NFRA to permit the filing of an interim reply to the DSAQRR by 25th June, 2020 and a supplemental reply to the DSAQRR within a reasonably practicable time from the date the lockdown is lifted in W.P.(C) 1065/2021 & other connected matters Page 122 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Mumbai.

ff) NFRA's letter dated 2.06.2020 was issued to DHS for filing of Final Reply to Draft Supplementary Audit Quality Review Report (DSAQRR) by 25.06.2020.

gg)On 23.06.2020, DHS requested NFRA to file comprehensive reply to DSAQRR by 25.07.2020. DHS also offered to alternatively, file their responses to the DSAQRR in a fragmented manner dealing with the issues covered therein in several parts and to file the first of such responses on 25th June, 2020 and the final one no later than 25th July, 2020.

hh)On 26.06.2020, Part Reply was furnished by DHS in respect of the DSAQRR. ii) NFRA emailed on 27.06.2020 for granting extension of time upto 25.07.2020 to DHS for submission of consolidated response to the DSAQRR.

jj) In respect of DSAQRR, Final Reply was furnished by DHS on 25.07.2020.

kk)On 01.09.2020, NFRA sent a letter to DHS for oral hearing on 09.09.2020 regarding DSAQRR.

ll.) On 03.09.2020, DHS sent a letter requesting for the date of hearing for any time after 2.10.2020.

mm) On 05.10.2020, NFRA granted the request for extension of time.

nn) On 28.10.2020 - Oral hearing was conducted on DSAQRR.

oo )On 20.11.2020, DHS provided written clarifications after Oral hearing on DSAQRR.

pp)On 07.12.2020, EB approved for issue of Supplementary AQRR W.P.(C) 1065/2021 & other connected matters Page 123 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 covering IT related control deficiencies in audit documentation by DHS and this was issued by the Secretary NFRA.

2 Who has As decided by the EB, the SCN conducted the followed the detailed AQR process investigation? as detailed above. The chronology is as follows: -

After the issuing the AQRR, EB with the assistance of a team under a Chief General Manager, NFRA ("CGM"), who was not part of the AQR team, examined the observations in the AQRR and prepared draft SCN to the Audit Firm and Partners. The SCNs were approved for issue by the EB.

a) On 02.01.2021, CGM initiated a note for EB's approval for issue of SCN to DHS.

b) On 03.01.2021, EB approved to issue the SCN.

c) On 06.01.2021, SCN issued to DHS. d) After that the DHS approached the court and matter is pending before the Hon'ble Delhi High Court.

3 Which The AQR of the ILPS groups was authority/official started suo-motu as decided by the has authorized EB. Later, a reference from the the initiation of central Government was also action? received by NFRA on the same matter.

4 Who had heard SCN was issued to DHS on and conducted 06.01.2021. After that the DHS the proceedings? approached the Court and matter is pending before the Hon'ble Delhi High Court.

Hence, further proceedings are at hold.

2. WP(C) No. 1524 of2020 (Udayan Sen), W.P.(C) 1065/2021 & other connected matters Page 124 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26

3. WP(C) No. 1522 of 2020 (Rukshad Daruvala),

4. WP(C) No. 1525 of 2020 (Shrenik Baid) SI No. Question Answer 1 By whom AQR The AQR report was prepared by the was prepared Executive Body (EB) NFRA. A team of Staff in NFRA, consisting of the Secretary, one Executive Director, and three Chartered Accountants (Professionals) assisted EB in scrutiny of Audit file however EB examined all the relevant documents contained in the audit file and after consideration of all relevant legal conditions, prepared and signed the AQRR, which was finally, with the approval of EB, issued by Secretary NFRA. The chronology of preparing the AQRR is as follows:

c) NFRA's letter dated 25.04.2019 was sent to the Engagement Partner seeking a list of related parties and Audit/Non-Audit revenue in stipulated format on Affidavit.

d) NFRA's letter dated 02.05.2019, containing a Questionnaire on matters observed in the Audit File, was sent via email on 02.05.2019 to the Engagement Partner seeking replies to the same.

e) Reply of the Engagement Partner dated 08.05.2019 to NFRA letter dated 25.04.2019 was received on affidavit and also received via email from CA Shrenik Baid, Partner DHS.

f) Reply by the Engagement Partner W.P.(C) 1065/2021 & other connected matters Page 125 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 to NFRA's Letter dated 02.05.2019 received on 13.05.2019.

g) NFRA issued a letter dated 28.06.2019 to the Engagement Partner conveying its prima facie observations/comments/conclusions (PFC) on the various issues in the Questionnaire. Also, NFRA requested that the Engagement Partner, Sh. Udayan Sen, and the EQCR Partner, Sh. Rukshad Daruvala, or their respective authorised representative from the Engagement Team and the EQCR Team respectively, be present in person in the NFRA office to explain replies toPFC.

h) Auditor requested NFRA through his letter dated 02.07.2019 to grant time till 30.07.2019 to provide comprehensive responses, after which to provide a date for an in-

person meeting at which they may assist with any further clarifications if required.

i) NFRA issued a letter dated 05.07.2019 granting time up to 5.8.2019 and the opportunity to explain the issues in person.

j) Through letter dated 02.08.2019, Engagement Partner replied to NFRA's prima facie observations in its letter dated 28.06.2019.

k) Draft AQRR Note was initiated by Secretary-NFRA on 25.09.2019 and put up for approval ofEB.

1) The EB NFRA granted approval via notes dated 25.09.2019 for Draft AQRR and approval of providing an opportunity to the Engagement Partner to appear in person before the Authority.

m) Draft AQR Report (DAQRR) of W.P.(C) 1065/2021 & other connected matters Page 126 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 NFRA dated 25.9.2019 sent to the Engagement Partner via email dated 25.9.19.

n) NFRA issued letter dated 17.10.2019 to DHS seeking clarification regarding Audit documentation and IT issues.

o) NFRA's letter dated 21.10.2019 containing additional Questionnaire, was sent via email on 21.10.2019 to CA Udayan Sen seeking replies to the same. p) On 23.10.2019 DHS requested for extension of time up to 4.11.2020 for submission of response of NFRA's Letter dated 21.10.2019.

q) NFRA emailed on 24.10.2019 granting extension of time up to 4.11.2020 as requested by DHS.

r) In person Presentation to NFRA was made by the Engagement Team members from DHS on 30.10.19.

s) Written replies were furnished by the Engagement Partner vide letter dated 4.11.19 to NFRA's observations in the DAQRR.

t) AQR Note was initiated by secretary-NFRA on 11.12.2019 and put up for approval of EB.

u) It was then approved by the EB for the issue vide note dated 11.12.2019.

v) AQR Report, approved by the EB, was issued by the Secretary NFRA on 12.12.2019.

2. Who has As decided by the EB, the SCN conducted the followed the detailed AQR process investigation? as detailed above. The chronology is as follows: - After the issuing the AQRR, EB with the assistance of a team under a CGM, who was not part of the AQR team, examined the observations in the AQRR and prepared draft SCN to the Audit W.P.(C) 1065/2021 & other connected matters Page 127 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Firm and Partners. The SCNs were approved for issue by the EB.

a) On 28-01-20, NFRA issued the Show cause Notice (SCN) to Rukshad Daruwala, wherein the last date for replying to the SCN was mentioned as 29-02-2020.

b) On 07-02-20, a Writ Petition was filed by Rukshad Daruvala in Delhi High Court.

c) On 14-02-20, a Letter was sent by R Daruvala informing NFRA that he will not be filing the reply to SCN, owing to the WP filed.

d) On18-03-20, NFRA issued a letter to Rukshad Daruvala regarding filing of reply to SCN as there is no stay on NFRA proceeding by the Court.

e) On 20-03-20, Reply from R Daruvala was received by NFRA that he shall not be filing a reply to the SCN due to the pendency of proceeding in Delhi High Court.

f) On 29-04-20, NFRA sent a letter to R Daruvala, giving him time up to 1Oth May 2020 to file the reply.

g) On 13-05-20, NFRA wrote a letter to R Daruvala, granting him additional time upto 20-05-2020 and also offering an opportunity of personal hearing.

h) On 17-05-20, R Daruvala requested NFRA that he will file interim reply by 10-06-20.

i) On 18-05-20, NFRA rejected R Daruvala's request for extension of time as a considerable time had already passed and there was no stay granted by the Delhi High Court.

j) On 21-05-20, Delhi High Court granted R Daruvala time upto 10-06- W.P.(C) 1065/2021 & other connected matters Page 128 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 20 to file reply to the SCN.

k) On 27-05-20, NFRA sent a letter for rescheduling oral hearing on 11- 06-20.

1) On 10-06-20, R Daruvala submitted Interim Reply to the SCN.

m) On 11-06-20, Oral hearing was conducted before EB.

n) On 13-06-20, R Daruvala provided his written submissions post oral hearing.

o) On 20-07-20, R Daruvala submitted supplemental reply to the SCN.

p) On 23-07-20, EB signed the order and approved for issue of same under the signature of Secretary NFRA.

*Identical process for AQRR and Investigation (SCN) was followed for Shrenik Baid and Udayan Sen as well.

5. W.P.(C) 11737/2021- SRBC Vs. UNION OF INDIA & ANR ,

6. W.P.(C) 11738/2021- Vinayak Pujare Vs. UNION OF INDIA & ANR .

7. W.P.(C) 11739/2021- Ravi Bansal Vs. UNION OF INDIA & ANR SI Question Answer NO.

1 By whom AQR The AQR report was prepared by the was protected Executive Body (EB) was prepared NFRA. A team of Staff in NFRA, consisting of the Secretary, one Executive Director, one CGM and three Chartered Accountants (Professionals) assisted EB in scrutiny of Audit file, however EB examined all the relevant documents contained in the audit file and after consideration of all relevant legal conditions, prepared and signed the AQRR, which was finally, with the approval of EB, issued by Secretary NFRA. The chronology of preparing the AQRR is as follows:

d) On 14.06.2019, SRBC sent a letter to NFRA providing details sought by NFRA vide its email dated 17.05.2019.

e) On 03.07.2019, NFRA sent its pt Questionnaire to SRBC.

f) On 17.07.2019, NFRA sent an email seeking Affidavit w.r.t the information received by NFRA on14.06.2019.

g) On 19.07.2019, NFRA sent its 2nd Questionnaire to SRBC.

h) On 22.07.2019, SRBC provided its response to NFRA's 1st Questionnaire.

i) On 23.07.2019, SRBC submitted Affidavit dated 23.07.2019 in support of information sent on 14.6.2019.

j) On 29.07.2019, SRBC provided its response to NFRA's 2nd Questionnaire.

k) On 09.08.2019, NFRA sent an email to SRBC, seeking audit file references and page numbers for hard files.

l) On 19.09.2019, SRBC sent a letter, providing details as sought by NFRA in its email dated 09.08.2019 alongwith SQC-1 Policy, 3 Limited Review Files.

m) On 17.10.2019, NFRA sent a letter to SRBC for verifying dates of audit files and procedures pertaining to integrity of dating.

n) On 23.12.2019, NFRA sent a letter seeking engagement letters for audit and non-audit services to ITNL for the FYs 2014-15 to 2018-19.

o) On 10.01.2020, SRBC sent a letter providing the details sought by NFRA on 23.12.2019.

p) On 22.01.2020, NFRA requested the Audit firm for submission of Memorandum, analysis, presentations, and other material incorporating the impact of transition from IGAAP to lnd AS.

q) On 29.01.2020, SRBC submitted details as requested by NFRA on 22.01.2020.

r) On 24.03.2020, NFRA issued its Prima-Facie Conclusions (PFC) on AQR of Statutory audit of ITNL.

s) On 17.04.2020, NFRA issued Supplementary PFC (SPFC) on Integrity of audit file and Audit Firm's IT Controls Review.

t) On 03.07.2020, SRBC submitted its response to PFC and SPFC.

u) On 28.12.2020, NFRA asked the Audit Firm for additional documents

- copy of audit committee and Board Meeting minutes for appointment of SRBC & Co LLP for FY 2016-17, Audit Engagement Acceptance Letter 20 16-17, Minutes of Audit committee 29 May 2018, Underlying agreement 2012-13.

v) On 02.01.2021, SRBC provided its response to information sought by NFRA on 28.12.2020 with five annexures.

w) On 08.03.2021, NFRA issued the Draft Audit Quality Review Report (DAQRR).

x) On 10.07.2021, Written replies were furnished by SRBC, w.r.t NFRA's observations in the DAQRR.

y) On 08.09.2021, Engagement team members of SRBC made a presentation to NFRA.

z) On 23.09.2021, the EB approved the issue of AQR.

aa) On 23.09.2021, as authorised by EB, the Secretary NFRA issued AQR Report for ITNL's audit done by SRBC for the Financial Year 2017-18.

2 Who had As decided by the EB, the SCN conducted the followed the detailed AQR process investigation? as detailed above:

3 Which The AQR of the ILFS group was authority/official started suo-motu as decided by the the initiation of EB. Later, a reference from the action? Central Government was also received by NFRA on the same matter.

4 Who had heard The oral hearing was before the EB ( and conducted the Chairperson and Full-time the proceedings? Member).

Orders are yet to be issued.

8. W.P.(C) 11987/2022 Jayesh Gandhi Vs. UNION OF INDIA & ANR W.P.(C) 1065/2021 & other connected matters Page 133 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 SI. Question Answer NO 1 By whom AQR The AQR report was prepared by the was prepared Executive Body (EB) NFRA. A team of Staff in NFRA, consisting of the Secretary, one Executive Director, one CGM and four Chartered Accountants (Professionals) assisted EB in scrutiny of Audit file, however EB examined all the relevant documents contained in the audit file and after consideration of all relevant legal conditions, prepared and signed the AQRR, which was finally, with the approval of EB, issued by Secretary NFRA. The chronology of preparing the AQRR is as follows:

was prepared 2 Who has At the time of carrying out an Audit conducted the Quality Review (AQR) of the investigation? statutory audit of Dewan Housing Finance Corporation Limited (DHFL) for FY 2017-18 conducted by Chaturvedi & Shah LLP (C&S) , a Mumbai based Audit Firm, the EB noticed that 33 Engagement Partners (EPs) or branch auditors had signed the "Independent Branch Auditors' Report" for nearly 250 branches, without a valid appointment. The Statutory Auditor of the Company viz. M/s Chaturvedi and Shah LLP W.P.(C) 1065/2021 & other connected matters Page 137 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 had referred to these so called Branch Audit reports in its Independent Audit report of DHFL.

The EB examined the work of these 33 EPs, including Snehal Muzoomdar, under section 132 ( 4) of the Companies Act, 2013 and observed non compliances in the acceptance of Audit engagement by the Branch Auditors and non-

compliance of Standards on Auditing (SAs) in conducting the audit by them. Thereafter, the SCNs were approved for issue by the EB.

a) On 10.08.2022, EB approved for initiation of action under Section 13 2 ( 4) of the Companies Act, 2013 .

b) On 10.08.2022, as approved by the EB, the Secretary-NFRA sent letters and emails to Snehal Muzoomdar ,EP for submission of audit file.

c) On 25.08.2022, EP submitted the audit file and EB examined the audit file.

d) On 16.11.2022, EB approved for the issue of the SCN to CA Snehal Muzoomdar ,EP.

e) On 21.11.2022, as approved by the EB, the secretary-NFRA issued the SCN.

3 Which The action against the EP was authority/official initiated suo-motu by the EB.

has authorized a) On 21.11.2022, as approved by the the initiation of EB, the secretary-NFRA issued the action? SCN giving 30 days time for reply.

b) On 19.12.2022, EP requested for extension of time for submitting reply to the SCN.

c) On 26.12.2022, on behalf of EB, the Chairperson approved the extension of time.

d) On 27.12.2022, email was sent to EP granting extension of time.

e) On 18.01.2023, EP submitted his reply to the SCN dated 21.11.2022.

f) On 10.02.2023, a letter was sent to EP conveying the date and time for oral hearing on 17.02.2023 but this date was rescheduled by EB for 07.03.2023.

g) On 06.03.2023, EP requested for reschedule of the oral hearing due to his mother's demise.

h) The EB rescheduled the hearing on 27.03.2023.

i) EB again, on EP's request, rescheduled the hearing on 10.04.2023.

j) On 10.04.2023, first oral hearing ofEP was held.

k) On 14.04.2023, EP submitted additional written submissions subsequent to the 1st oral hearing.

1) On 19.05.2023, email was sent to EP for intimating his willingness to avail the additional oral hearing along with his legal counsel.

m) On 23.05.2023, EP confirmed his willingness for additional hearing.

n) The hearing was scheduled on 02.06.2023.

o) On 29.05.2023, EP requested for rescheduling of personal hearing due to his hearing in Supreme Court.

p) On 31.05.2023, EB approved for rescheduling the personal hearing. q) On 06.06.2023, the oral hearing was adjourned after its commencement since the EP was not accompanied by a legal counsel. r) On 12.06.2023, personal hearing, before EB, was held along with his legal W.P.(C) 1065/2021 & other connected matters Page 139 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 representative.

s) On 15.06.2023, EP submitted additional written submissions subsequent to the hearing.

t) On 29.09.2023, EB signed the Order and authorised Secretary NFRA to issue the same. The Secretary NFRA issued the Order.

4 Who had heard The oral hearing was before the EB ( and conducted the Chairperson and Two Full-time the proceedings? Members).

10. W.P. (C) No. 1650 of 2023 Natrajan Ram Krishna v/s UOI & NFRA SI. Question Answer NO 1 By whom AQR The AQR report was prepared by the was prepared Executive Body was prepared (EB) NFRA. A team of Staff in NFRA, consisting of the Secretary, one Executive Director, one CGM and four Chartered Accountants (Professionals) assisted EB in scrutiny of Audit file, however EB examined all the relevant documents contained in the audit file and after consideration of all relevant legal conditions, prepared and signed the AQRR, which was finally, with the approval of EB, issued by Secretary NFRA. The chronology of preparing the AQRR is as follows:

11. W.P. (C) No. 10303 of2023- CA Vinay Aggarwal SI Question Reply NO.

1 By whom the No Audit Quality Review Report Audit Quality was prepared in this case.

Review Report W.P.(C) 1065/2021 & other connected matters Page 145 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 was prepared?

2 Who had a) On 30.05.2022, NFRA received conducted the SEBI's letter dated 19.05.2022 investigation? regarding report on examination/ analysis of Annual Reports of Magnum Ventures Ltd (Magnum).

b) On 02.06.2022, the Secretary NFRA submitted this matter to EB through Chairperson NFRA and on 03.06.2022, EB initiated the examination in this case. For scrutiny of the documents, the EB was assisted by an Executive Director & his team.

c) On 16.06.2022, the Executive Director submitted the file to EB through Chairperson with a proposal to call audit files and other records from the Auditor and Magnum for investigation u/s 132(4) of the Companies Act 2013 (Act).

d) On 20.06.2022, EB through Chairperson approved the proposal and Auditor was advised to submit audit files within 30 days.

e) On 14.07.2022 Auditor sought extension of time till 30.09.2022.

f) On 26.07.2022, NFRA allowed extension of 15 days' time i.e., till 05.08.2022.

g) On 02.08.2022, Auditor sought extension of time till 31.10.2022.

NFRA allowed extension of 15 days' time i.e., till 20.08.2022.

h) On 19.08.2022, Auditor submitted audit files after 60 days.

i) Thereafter, the EB, with the assistance of an Executive Director & his team examined the financial statements of Magnum ventures Ltd and audit files of M/s Aggarwal and Rampal for the relevant period.

Based on such examination, sufficient cause existed to initiate action u/s 132( 4) of the Companies Act, 2013 against CA Vinay Aggarwal, engagement partner of M/s Aggarwal and Rampal.

3 Which a) The EB through the Chairperson, authority/official NFRA authorized initiation of action had authorized on 20.06.2022 (for calling audit files) the initiation of under section 132( 4) of the action? Companies Act the initiation of

b) The Executive Body (Chairperson and two full time action? members) of NFRA authorised issue of two Show Cause Notices to CA Vinay Aggarwal on 15.06.2023 with the advice to submit reply within 30 days' time.

c) On 10.07.2023, Auditor sought extension of time till 05.08.2023 for submission of reply to SCN. NFRA allowed time till 25.07.2023.

d) On 20.07.2023, Auditor sought extension of time till 05.08.2023 for submission of reply to SCN, which was allowed.

e) On 05.08.2023, Auditor submitted reply to one SCN and sought 10 days' time for submission of reply to second SCN. Reply to 2nd SCN has also been submitted by him.

4 Who had heard CA Vinay Aggarwal has submitted and conducted reply to one SCN and requested for the proceedings? Personal Hearing. Reply to second SCN has also been received. The Executive Body (EB) of NFRA will hear CA Vinay Aggarwal and advocate, if any, and conduct the proceedings.

12. W.P. (C) No. 2194 of2023: CA Adarsh Ranka Sr No Question Reply W.P.(C) 1065/2021 & other connected matters Page 147 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 1 By whom the No Audit Quality Review Report Audit Quality was prepared in this case.

Review Report was prepared?

2 Who had a) A letter dated 11.05.2021 from conducted the SEBI was received by NFRA investigation? regarding the irregularities in the financial statements of Sobha Limited.

b) On 31.05.2021, matter was submitted to the EB through Chairperson.

c) On 04.06.2021, the Executive Body (EB), through chairperson, approved for calling of Audit File. In this case, the EB is assisted by an ED & him team.

d) On 09.08.2021, Auditor was asked to submit the audit file.

e) On 23.08.2021, Auditor sought 06 weeks extension of time till 05.10.2021.

f) Extension as sought was granted by NFRA.

g) On 04.10.2021, Auditor submitted audit files after 57 days of initial notice to submit the audit file (Whereas SAs mandates freezing of audit file within 60 days of signing of the audit report)

h) On 10.02.2022, NFRA sought comments on the SEBI observations from the auditor and requested to submit the reply within 15 days.

i) On 21.02.2022, Auditor sought extension for additional 01 month to submit his comments.

j) Extension as sought was again granted by NFRA.

k) On 24.03.2022, Auditor submitted his comments.

I) Comments of the auditor was considered by the EB and on completion of the examination by the EB, there were reasons to believe that sufficient cause existed to initiate action u/s 132(4) of the Companies Act, 2013 against CA Adarsh Ranka, Engagement Partner (EP) of S. R. Batliboi & Associates LLP.

3 Which f) On 04.06.2021, the Executive authority/official Body (EB) NFRA, through its had authorized Chairperson, authorised calling audit the initiation of files and on 09.08.2021, under action? Section 132 of the Companies Act, 20 13 read with NFRA Rules asked the auditor to submit the audit file.

g) On 05.01.2023, EB (Chairperson and two full time members), after due application of mind, approved for issue of a Show Cause Notice (SCN) to CA Adarsh Ranka, asking him to submit reply to the SCN within 30 days' time and he was also offered to avail opportunity of personal hearing.

h) On 07.02.2023, Auditor submitted reply to SCN i.e., after 33 days of issue of SCN.

4 Who had heard a) On 07.02.2023, CA Adarsh Ranka and conducted submitted reply to SCN and the proceedings? requested for Personal Hearing.

b) NFRA considered his request for personal hearing and

c) On 02.06.202, NFRA issued a communication to the auditor intimating the date of personal hearing scheduled to be held on 26.06.2023. Initially 24 days' time was granted, in addition to the time granted to reply the SCN, to the auditor for preparation of personal hearing.

d) On 12.06.2023, Auditor sought 3 weeks extension from the date of this communication.

e) On 22.06.2023, NFRA granted 18 days extension rescheduling the hearing on 14.07.2023. So, total42 days were granted to the auditor for the preparation of / Personal Hearing.

f) On 14.07.2023, Personal Hearing was held before the EB.

g) Final order is yet to be issued.

AUDITING INDUSTRY : EXECUTIVE DELIBERATIONS

73. Before we proceed further to chronicle and record the erudite submissions which were addressed by learned senior counsels appearing for respective sides, it would be appropriate to briefly pause and take note of the salient and significant events which appear to have led to Section 132 of the Companies Act being introduced in the statute book.

74. As was noticed in the preceding parts of this decision, the provision itself came to be introduced in the Act by virtue of Act No. 18 of 2013. The provision, however, came to be energized only on 01 October 2018. The proposed structure of Section 132 also formed the subject matter of consideration of the Standing Committee on Finance and stands noted in its Thirty Seventh report. The subject of regulation of audit firms and networks also formed part of deliberations of prior Standing Committees and some of which have been noticed in the former parts of this judgment. While the imperative need to regulate auditing firms and to align auditing norms with global standards formed W.P.(C) 1065/2021 & other connected matters Page 150 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 subject matter of discussion of constituents of the Union Government at different points of time, concrete steps in that direction appear to have been prompted by the direction issued by the Supreme Court on 23 February 2018 in S. Sukumar.

75. The direction which the Supreme Court framed on that occasion read thus:-

76. Pursuant to the aforesaid directive, a three-member expert committee came to be constituted. The remit of that committee can be gathered from the terms of reference which is extracted below:-

3. The Committee of Experts shall complete its work and submit its report within three months of its constitution.

4. This issues with the approval of Competent Authority.

(G. Vaidheeswaran) Deputy Secretary to the Govt, of India"

87. Speaking on the subject of consistency between legislations, the report of the COE observed: -

88. The COE in unambiguous terms recommended that there was sufficient justification for strengthening the NFRA. This becomes apparent from a reading of the following passages of its report:-

89. The COE also appears to have deliberated upon the issue of a conflict of interest when viewed in light of non-audit services that may be undertaken by auditing firms. It proceeded to formulate the following recommendations in this respect:-

Explanation: Entities in the network should include:

90. While speaking on the adequacy of the regulatory mechanism in respect of liability of auditors in audit firms, the COE observed:-

91. It is the aforesaid considerations which appear to have weighed upon Parliament while structuring Section 132 of the Companies Act and the Union Government proceeding to frame supportive rules to enable the NFRA to discharge its statutory obligations. Having set out the essential matrix of facts, the legislative history and the broad ranged debate and discussion which acted as the precursor to the insertion of Section 132 in the Companies as well as the relevant statutory provisions in the context of which the present challenge has come to be laid before us, the stage is thus set to commence consideration of the legal submissions which were addressed before us.

THE VICARIOUS LIABILITY ARGUMENT

92. Appearing from the side of the writ petitioners, arguments were led by Mr. Kapil Sibal, Mr. Jayant Mehta and Mr. Girish Kathpalia, learned senior counsels. Assailing the action initiated by the NFRA and the validity of Section 132 of the Companies Act itself, it was firstly contended that the provision is liable to be invalidated since it amounts to the creation of a vicarious liability on audit firms as well and its constituent partners who may have in no manner been connected with the audit itself. The petitioners contended that Section 132 proceeds to impose a liability upon Limited Liability Partnerships 31 and which could themselves comprise of numerous partners and employees.

93. For instance, Mr. Sibal pointed out that DHS has approximately 139 partners and more than 3,900 employees across India. According to learned senior counsels, holding a LLP liable for consequences flowing from Section 132 would have the effect of imposing a liability upon each partner of the firm irrespective of whether that partner was involved in the concerned audit or had performed an audit function. According to the petitioners, such partners would thus face liabilities even though they may have had no participative role in the alleged fraud, negligence or misconduct. It was thus argued that the affirmation of such a liability not only amounts to the placement of an unreasonable restriction on the fundamental right of the LLP and its partners to practice their profession and which stands guaranteed and protected under Article 19(1)(g) of the Constitution it would also amount to the imposition of a disproportionate penalty which would clearly be 31 LLPs W.P.(C) 1065/2021 & other connected matters Page 171 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 violative of Article 14.

94. It was argued that the principle of vicarious liability does not permit an act of fraud to be attributed to either the partner of a partnership firm or an LLP as the case may be, who are in no manner involved in or had participated in the fraud which is alleged. Reliance in this respect was also placed on Sections 27 , 28 and 30 of the Limited Liability Partnership Act, 2008 32 and which are extracted hereinbelow: -

28. Extent of liability of partner.--(1) A partner is not personally liable, directly or indirectly for an obligation referred to in sub- section (3) of Section 27 solely by reason of being a partner of the limited liability partnership.

LLP Act W.P.(C) 1065/2021 & other connected matters Page 172 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 (2) The provisions of sub-section (3) of Section 27 and sub-section (1) of this section shall not affect the personal liability of a partner for his own wrongful act or omission, but a partner shall not be personally liable for the wrongful act or omission of any other partner of the limited liability partnership.

xxxx xxxx xxxx

30. Unlimited liability in case of fraud.--(1) In the event of an act carried out by a limited liability partnership, or any of its partners, with intent to defraud creditors of the limited liability partnership or any other person, or for any fraudulent purpose, the liability of the limited liability partnership and partners who acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the limited liability partnership:

We dealt there with a statute which provided that no member of a Communist organization ordered by the Subversive Activities Control Board to register shall apply for or use a passport. We concluded that the statute would not permit a narrow reading of the sort we gave § 2385 in Scales. See 378 U.S., at 511, n. 9, 84 S.Ct. at 1666. The statute, as we read it, covered membership which was 33 1966 SCC OnLine US SC 66 W.P.(C) 1065/2021 & other connected matters Page 175 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 not accompanied by a specific intent to further the unlawful aims of the organization, and we held it unconstitutional.

7. The oath and accompanying statutory gloss challenged here suffer from an identical constitutional infirmity. One who subscribes to this Arizona oath and who is, or thereafter becomes, a knowing member of an organization which has as 'one of its purposes' the violent overthrow of the government, is subject to immediate discharge and criminal penalties. Nothing in the oath, the statutory gloss, or the construction of the oath and statutes given by the Arizona Supreme Court, purports to exclude association by one who does not subscribe to the organization's unlawful ends. Here as in Baggett v. Bullitt, supra, the 'hazard of being prosecuted for knowing but guiltless behavior' (id., 377 U.S. at 373, 84 S.Ct. at 1323) is a reality. People often label as 'communist' ideas which they oppose; and they often make up our juries. '(P)rosecutors too are human.' Cramp v. Board of Public Instruction, 368 U.S. 278, 287, 82 S.Ct. 275, 281, 7 L.Ed.2d 285. Would a teacher be safe and secure in going to a Pugwash Conference? [ The Pugwash Conferences, A Staff Analysis, Subcommittee to Investigate the Administration of the Internal Security Act, Senate Committee on the Judiciary, Committee Print, 87th Cong., 1st Sess. (1961); Rabinowitch, Pugwash--History and Outlook, 13 Bull. Atomic Sci. 243 (1957); Topchiev, Comments on Pugwash: From the East, 14 Bull. Atomic Sci. 118 (1958); Thirring, Comments on Pugwash: From the West, id., at 121; Rabinowitch, The Stowe Conferences, 17 Bull. Atomic Sci. 382 (1961); Statement of International Pugwash Continuing Committee: Pugwash XIII, Bull. Atomic Sci. 43--45 (December 1964); Documents of Second Pugwash Conference of Nuclear Scientists (March 31--April 11, 1958).] Would it be legal to join a seminar group predominantly Communist and therefore subject to control by those who are said to believe in the overthrow of the Government by force and violence? Juries might convict though the teacher did not subscribe to the wrongful aims of the organization. And there is apparently no machinery provided for getting clearance in advance. [ Petitioner would, of course, have a hearing at a perjury trial, after the event. And one member of the Arizona Supreme Court felt that petitioner, having tenure, would be entitled to a hearing before she was discharged from her teaching position. See Elfbrandt v. Russell, 94 Ariz. 1, 17--18, 381 P.2d 554, 565 (Bernstein, C.J., concurring). But even that is not authoritatively decided by the court; indeed, another opinion states this to be a minority view, 94 Ariz., at 18, 381 P.2d at 566 (separate opinion of Jennings, J.).] W.P.(C) 1065/2021 & other connected matters Page 176 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26

8. Those who join an organization but do not share its unlawful purposes and who do not participate in its unlawful activities surely pose no threat, either as citizens or as public employees. Laws such as this which are not restricted in scope to those who join with the 'specific intent' to further illegal action impose, in effect, a conclusive presumption that the member shares the unlawful aims of the organization. See Aptheker v. Secretary of State, supra, 378 U.S. at 511, 84 S.Ct. at 1666. The unconstitutionality of this Act follows a fortiori from Speiser v. Randall, 357 U.S. 513, 78 S.Ct. 1332, 2 L.Ed.2d 1460, where we held that a State may not even place on an applicant for a tax exemption the burden of proving that he has not engaged in criminal advocacy."

99. Mr. Sibal then referred to the judgment of our Supreme Court in Indra Das vs. State of Assam 34 which had cited the decision in Elfbrandt as well as certain other judgments of the US Supreme Court to hold that mere membership of an organization would not expose an individual to penal consequences. Our attention was specifically drawn to the following passages as appearing in Indra Das:-

(emphasis supplied)

9. Elfbrandt case [16 L Ed 2d 321 : 384 US 11 (1965)] also relied on the US Supreme Court decisions in Aptheker v. Secy. of State [12 L Ed 2d 992 : 378 US 500 (1963)] , Baggett v. Bullitt [12 L Ed 2d 377 : 377 US 360 (1963)] , Cramp v. Board of Public Instruction [7 L Ed 2d 285 : 368 US 278 (1961)] , Gibson v. Florida Investigation Committee [9 L Ed 2d 929 : 372 US 539 (1962)] , etc.

10. In Noto v. United States [6 L Ed 2d 836 : 367 US 290 (1960)] , US at pp. 297-98 Mr Harlan, J. of the US Supreme Court observed:

11. In Noto case [6 L Ed 2d 836: 367 US 290 (1960)] Mr Hugo Black, J. in a concurring judgment wrote: (L Ed p. 843) "In 1799, the English Parliament passed a law outlawing certain named societies on the ground that they were engaged in 'a traitorous conspiracy ... in conjunction with the persons from time to time exercising the powers of Government in France....' One of the many strong arguments made by those who opposed the enactment of this law was stated by a member of that body, Mr Tierney:

includes reappointment.

(2) No listed company or a company belonging to such class or classes of companies as may be prescribed, shall appoint or reappoint--

(a) an individual as auditor for more than one term of five consecutive years; and

(b) an audit firm as auditor for more than two terms of five consecutive years:

section (2).

Explanation.--For the purposes of this Chapter, the word "firm" shall include a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008 (6 of 2009). (5) Notwithstanding anything contained in sub-section (1), in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, the Comptroller and Auditor-General of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within a period of one hundred and eighty days from the commencement of the financial year, who shall hold office till the conclusion of the annual general meeting.

(6) Notwithstanding anything contained in sub-section (1), the first auditor of a company, other than a Government company, shall be appointed by the Board of Directors within thirty days from the date of registration of the company and in the case of failure of the Board to appoint such auditor, it shall inform the members of the company, who shall within ninety days at an extraordinary general W.P.(C) 1065/2021 & other connected matters Page 181 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 meeting appoint such auditor and such auditor shall hold office till the conclusion of the first annual general meeting. (7) Notwithstanding anything contained in sub-section (1) or sub- section (5), in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government, or Governments, or partly by the Central Government and partly by one or more State Governments, the first auditor shall be appointed by the Comptroller and Auditor-General of India within sixty days from the date of registration of the company and in case the Comptroller and Auditor-General of India does not appoint such auditor within the said period, the Board of Directors of the company shall appoint such auditor within the next thirty days; and in the case of failure of the Board to appoint such auditor within the next thirty days, it shall inform the members of the company who shall appoint such auditor within the sixty days at an extraordinary general meeting, who shall hold office till the conclusion of the first annual general meeting.

(8) Any casual vacancy in the office of an auditor shall--

(i) in the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Board of Directors within thirty days, but if such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting;

(ii) in the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Comptroller and Auditor-General of India within thirty days:

101. Mr. Hossain also took us through the various Accounting Standards35 in order to underscore his submission that a partner of an audit firm appointed in terms of Section 139, owes his engagement and involvement in the audit to the appointment of the firm itself. It was submitted that the SAs' require the appointed auditor to exercise, control and oversight in respect of the functions discharged by its individual partners in the course of an audit.

102. Mr. Hossain submitted that the auditor is required to exercise quality control during the entire audit process in order to ensure that its participating members discharge their functions and duties in accordance with the statutory obligations which apply. Learned counsel firstly referred us to SA 230 and which mandates the auditor to ensure that the audit exercise is conducted in accordance with the stipulations contained in SQC 1. Proceeding further, learned counsel placed for our consideration SA 220 and where the following provisions stand incorporated:-

This SA is premised on the basis that the firm is subject to SQC 1. (Ref: Para.A1)

3. Within the context of the firm's system of quality control, engagement teams have a responsibility to implement quality control procedures that are applicable to the audit engagement and provide the firm with relevant information to enable the functioning of that part of the firm's system of quality control relating to independence.

4. Engagement teams are entitled to rely on the firm's system of quality control, unless information provided by the firm or other parties suggests otherwise. (Ref: Para. A2) xxxx xxxx xxxx Monitoring

23. An effective system of quality control includes a monitoring process designed to provide the firm with reasonable assurance that its policies and procedures relating to the system of quality control are relevant, adequate, and operating effectively. The engagement partner shall consider the results of the firm's monitoring process as evidenced in the latest information circulated by the firm and, if applicable, other network firms and whether deficiencies noted in that information may affect the audit engagement. (Ref: Para A32- A34)"

104. We also deem it apposite to extract the following additional Paragraphs from SQC 1:-

105. In view of the above, it was contended by Mr. Hossain that the work of a constituent of an auditing firm is inextricably linked with the policies laid in place by that firm pertaining to compliance with auditing standards and standards of quality control. On a compendious reading of the various SAs', Mr. Hossain submitted, it would be apparent that the discharge of functions by a member of an auditing firm is not liable to be viewed as distinct or removed from the engagement and appointment of the firm as an auditor itself.

106. Mr. Hossain then took us through the provisions contained in Section 147 of the Companies Act and which contemplates the imposition of punishment upon a firm as well as its member. The relevant parts of Section 147 are extracted hereinbelow:-

five thousand rupees but which may extend to five lakh rupees 236[or four times the remuneration of the auditor, whichever is less]:

[Provided that in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable.]"

107. In view of the aforesaid, learned counsel submitted that it would be wholly incorrect for the petitioners to assert that the introduction of a provision pertaining to disciplinary proceedings against a firm would amount to the introduction of a liability which did not exist or could be described to be vicarious in character.

108. More importantly, according to Mr. Hossain, one must also bear in consideration the indisputable position of partnership firms not being liable to be viewed as separate juristic entities. Although this position is by now fairly well settled, in order to buttress his submissions, Mr. Hossain firstly relied upon the following passages as appearing in Commissioner of Income Tax vs. R.M. Chidambaram Pillai 36:-

any change amongst them destroys the identity of the firm; what is called the property of the firm is their property, and what are called the debts and liabilities of the firm are their debts and their liabilities. In point of law, a partner may be the debtor or the creditor of his co-partners, but he cannot be either debtor or creditor of the firm of which he is himself a member, nor can he be employed by his firm, for a man cannot be his own employer."

16. The Indian law of partnership is substantially the same and the reference in counsel's submissions to the Scottish view of a firm being a legal entity is neither here nor there. Primarily our study must zero on the Indian Partnership Act and not borrow courage from foreign systems. In Bhagwanji Morarji Gokuldas [AIR 1948 PC 100 : (1948) 18 Comp Cas 205, 209] the Privy Council ruled that the Indian Partnership Act went beyond the English Partnership Act, 1890, the law in India attributing personality to a partnership being more in accordance with the law of Scotland. Even so, Sir John Beaumont , in that case , pointed out that the Indian Act did not make a firm a corporate body. Moreover, we are not persuaded by that ruling of the Privy Council, particularly since a pronouncement of this Court in Dulichand [Dulichand Laksminarayan v. CIT , AIR 1956 SC 354 : 1956 SCR 154 : (1956) 2 ITR 535] strikes a contrary note. We quote:

The life of the Indian law of partnership depends on its own terms although habitually courts, as a hangover of the past, have been referring to the English law on the point. The matter is concluded by the further observations of this Court:

In Narayanappa [Addanki Narayanappa v. Bhaskara Krishtappa , AIR 1966 SC 1300, 1303 : (1966) 3 SCR 400] the view taken by this Court accords with the position above stated.

17. The necessary inference from the premise that a partnership is only a collective of separate persons and not a legal person in itself leads to the further conclusion that the salary stipulated to be paid to a partner from the firm is in reality a mode of division of the firm's profits, no person being his own servant in law since a contract of service postulates two different persons.

18. Counsel for the respondent cited the "Australian Income Tax Law and Practice by F.C. Bock and F.F. Mannix [ 1968 Edn, Vol. 3, p. 3092] in Support of the proposition that a partner's salary is but a portion of the profits:

19. In an early Madras case CIT v. B.S. Mines [(1922) 1 ITC 176, 177 (FB)(Mad)] the Madras High Court had held, with reference to the 1918 Income Tax Act :

20. Other cases from Other High Courts have been brought to our notice but strong reliance was placed on Ramniklal Kothari [CIT v. Ramniklal Kothari , (1969) 1 SCC 757 : (1969) 74 W.P.(C) 1065/2021 & other connected matters Page 190 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 ITR 57] of this Court for reaching the conclusion that the business of a firm was business of the partners, that the profits of the firm were profits of the partners and that the expenditure incurred by partners in earning such share was admissible for deduction in arriving at the total income under Section 10(1) .

21. Contrary views are not wanting in some rulings, but a catalogue of cases on the other side may be productive of confusion and not resolution of conflict. We abstain from that enterprise and confine ourselves to the statement of the law that although, for purposes of the Income Tax Act , a firm has certain attributes simulative of personality, we have to take it that a partnership is not a person but a plurality of persons.

22. Coming to basics over again, this Court, in Karimtharuvi Tea Estates [Karimtharuvi Tea Estates Ltd. v. State of Kerala , 1963 Supp 1 SCR 823 : (1963) 48 ITR 83 : AIR 1963 SC 760.] and in Anglo-American Direct Tea Trading Co. [Anglo American Direct Tea Trading Co Ltd. v. CAg IT, AIR 1968 SC 1213 : (1968) 2 SCR 745 : (1968) 69 ITR 667, 671] has set out the nature of and manner of assessment of composite income tax derived by the sale of tea:

In Tea Estates India [Tea Estates India (P) Ltd v. CIT , (1976) 4 SCC 446: (1976) 103 ITR 785, 795] this Court summarised the scope and implications of Rule 24:

We are fortified in the above conclusion by two decisions of this Court in the cases of Karimtharuvi Tea Estates Ltd. v. State of Kerala and Anglo-American Direct Tea Trading Co. Ltd. v. Commissioner of Agricultural Income Tax . In the case of Karimtharuvi Tea Estates Ltd. it was observed while dealing with the income derived from the sale of tea grown and manufactured by the seller in the context of Rule 24:

In the case of Anglo-American Direct Tea Trading Co. Ltd. the Constitution Bench of this Court held that income from the sale of tea grown and manufactured by the assessee is derived partly from business and partly from agriculture. This income has to be computed as if it were income from business under the Central Income Tax Act and the Rules made thereunder. Forty per cent of the income so computed is deemed to be income derived from business and assessable to non-agricultural income tax. The balance of 60 per cent of the income so computed is agricultural income within the meaning of the Central Income Tax Act .

23. It follows that by statutory dichotomy, 60% of the tea income is agricultural in character and central income tax cannot break into its inviolability. This conceded, the flexible arrangement among partners regarding distribution of this sum may take many forms but the essential agricultural character and consequential legislative immunity cannot be lost because of tags and labels:

24. With ideological clarity, this legal position has been set forth by a learned Author whom we refer to [ Law of Income Tax by AC Sampath Iyengar, 6th Edn, 1973, pp 1063-1064 (Vol II)] (by no means, rely on) compendious as his summary is:

The contrary view favoured by Mathew Abraham proceeds on the reasoning:

25. We regard this conclusion as unsound, the source of the error being a failure to appreciate that the salary of a partner is but an alias for the return, by way of profits, for the human capital -- sweat, skill and toil are, in our socialist republic, productive investment -- he has brought in for common benefit. The immediate reason for payment of salary was service contract but the causa causans in partnership."

109. The position in law so enunciated also finds resonance in Dulichand Laxminarayan vs. Commissioner of Income Tax 37 and where the Supreme Court had observed:-

This section clearly requires the presence of three elements, namely (1) that there must be an agreement entered into by two or more persons; (2) that the agreement must be to share the profits of a business; and (3) that the business must be carried on by all or any of those persons acting for all. According to this definition "persons" who have entered into partnership with one another are collectively called a "firm" and the name under which their business is carried on is called the "firm name". The first question that arises is as to whether a firm as such can enter into an agreement with another firm or individual. The answer to the question would depend on whether a firm can be called a "person".

11. There is no definition of the word "person" in the Partnership Act . The General Clauses Act, 1897 , however, by Section 3(42) provides that "person shall include any company or association or body of individuals whether incorporated or not". The firm is not a company but is certainly an association or body of individuals. The argument is that applying that definition to the word "persons" occurring in Section 4 , one can at once say that an unincorporated association or body of persons, like a firm, can enter into a partnership just as by the application of that definition to Section 4 of the Indian Partnership Act a company can become a partner in a firm. The definitions given in Section 3 of the General Clauses Act, 1897, however, apply when there is nothing repugnant in the subject or context. It is difficult to say that there is anything repugnant in the context of Section 4 itself which will exclude the application of that definition to the word "persons" occurring in Section 4 . Is there, however, anything repugnant in the subject of partnership law, which will exclude the application of that definition to Section 4 ?

12. As pointed out in Lindley on Partnership, 11th Edn, at p. 153, merchants and lawyers have different notions respecting the nature of a firm. Commercial men and accountants are apt to look upon a W.P.(C) 1065/2021 & other connected matters Page 195 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 firm in the light in which lawyers look upon a corporation i.e. as a body distinct from the members composing it. In other words merchants are used to regard a firm, for purposes of business, as having a separate and independent existence apart from its partners. In some systems of law this separate personality of a firm apart from its members has received full and formal recognition, as, for instance, in Scotland. That is, however, not the English Common Law conception of a firm. English lawyers do not recognize a firm as an entity distinct from the members composing it. Our partnership law is based on English law and we have also adopted the notions of English lawyers as regards a partnership firm.

13. Some of the mercantile usages relating to a firm have, however, found their way into the law of partnership. Thus in keeping accounts, merchants habitually show a firm as a debtor to each partner for what he brings into the common stock and each partner is shown as a debtor to the firm for all that he takes out of that stock. But under the English Common Law, a firm, not being a legal entity, could not sue or be sued in the firm name or sue or be sued by its own partner, for one cannot sue oneself. Later on this rigid law of procedure, however, gave way to considerations of commercial convenience and permitted a firm to sue or be sued in the firm name, as if it were a corporate body (see Code of Civil Procedure , Order 30 corresponding to rules of the English Supreme Court Order 48-A). The law of procedure has gone to the length of allowing a firm to sue or be sued by another firm having some common partners or even to sue or be sued by one or more of its own partners (see Order 30, Rule 9 of the Code of Civil Procedure ), as if the firm is an entity distinct from its partners. Again in taking partnership accounts and in administering partnership assets, the law has, to some extent, adopted the mercantile view and the liabilities of the firm are regarded as the liabilities of the partners only in case they cannot be met and discharged by the firm out of its assets. The creditors of the firm are, in the first place, paid out of the partnership assets and if there is any surplus then the share of each partner in such surplus is applied in payment of his separate debts, if any, or paid to him. Conversely, separate property of a partner is applied first in the payment of his separate debts and the surplus, if any is utilised in meeting the debts of the firm (see Section 49 of the Indian Partnership Act, 1932). In the Indian Income Tax Act itself a firm is, by Section 3 , which is the charging section, made a unit of assessment.

14. It is clear from the foregoing discussion that the law, English as well as Indian, has, for some specific purposes, some of which are referred to above , relaxed its rigid notions and extended a limited personality to a firm. Nevertheless, the general concept of W.P.(C) 1065/2021 & other connected matters Page 196 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 partnership, firmly established in both systems of law, still is that a firm is not an entity or "person" in law but is merely an association of individuals and a firm name is only a collective name of those individuals who constitute the firm. In other words, a firm name is merely an expression, only a compendious mode of designating the persons who have agreed to carry on business in partnership. According to the principles of English jurisprudence, which we have adopted, for the purposes of determining legal rights "there is no such thing as a firm known to the law" as was said by James L.J. in Ex parte Corbett, In re Shand [(1880) LR 14 Ch 122, 126] . In these circumstances to import the definition of the word "person" occurring in Section 3(42) of the General Clauses Act, 1897 into Section 4 of the Indian Partnership Act will, according to lawyers, English or Indian, be totally repugnant to the subject of partnership law as they know and understand it to be. It is in this view of the matter that it has been consistently held in this country that a firm as such is not entitled to enter into partnership with another firm or individuals. It is not necessary to refer in detail to those decisions many of which will be found cited in Jabalpur Ice Manufacturing Association v. CIT, Madhya Pradesh [(1955) 27 ITR 88] to which a reference has already been made. We need only refer to the case of Bhagwanji Morarji Goculdas v. Alembic Chemical Works Co. Ltd. [AIR 1948 PC 100] where it has been laid down by the Privy Council that Indian Law has not given legal personality to a firm apart from the partners. This view finds support from and is implicit in the observations made by this Court in the CIT v. A.V. Figgies & Co. [(1954) SCR 171 : 1953 ITR 405]

15. In Jai Dayal Madan Gopal [(1933) ITR 186] Sulaiman, C.J. followed the Calcutta decisions and was not prepared to dissent from the view that the word "person" in Section 239 of the Indian Contract Act, 1872 should not be interpreted so as to include a firm. The learned Chief Justice, however, expressed the view that it was difficult to say that there was anything in Section 239 itself which made the application to that section of the definition of "person" as given in General Clauses Act in any way repugnant. The learned Chief Justice, however, does not appear to have considered whether there was anything repugnant in the subject of partnership law, as it prevails in this country, which operates to exclude the application of that definition to the word "person" occurring in Section 239 of the Indian Contract Act. In our opinion, the word "persons" in Section 4 of the Indian Partnership Act, which has replaced Section 239 of the Indian Contract Act, contemplates only natural or artificial i.e. legal persons and for the reasons stated above, a firm is not a "person" and as such is not entitled to enter into a partnership with another firm or Hindu undivided family or individual. In this view of the matter there can W.P.(C) 1065/2021 & other connected matters Page 197 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 arise no question of registration of a partnership purporting to be one between three firms, a Hindu undivided family business and an individual as a firm under Section 26-A of the Act.

16. The learned Advocate for the appellant then urges that, at any rate, the partnership was not illegal, for there was no legal impediment in the way of all the members of all the three constituent firms and the karta of the Hindu undivided family and the individual entering into an agreement and that, therefore, a valid partnership was constituted by the deed of partnership under consideration. Assuming that this contention is possible in view of the language which has been used in this deed for describing the parties, the position of the appellant will not improve, for in order to be entitled to the benefit of registration under the Act, it will have to be shown that the shares of all individual partners are specified in the deed and that all the partners have personally signed the application for registration as required by Section 26-A of the Act read with Rule 2. The deed specifies that each of the five constituent parties is entitled to an equal i.e. 1/5 share but it does not specify the individual shares of each of the partners of each of the three smaller constituent firms. Further all the members of those three firms have not signed the application for registration personally. It is said that each of the three persons who executed the deed for the three smaller firms must be regarded as having the authority of their co-partners in their respective firms to sign the application for registration just as they had their authority to execute the deed itself for them. Even if they had such authority -- as to which there is no evidence at all on the record -- the section and Rule 2 require that each partner (not being minors) must sign personally. That admittedly has not been done, and, therefore, the application was not in proper form. In our judgment the answer given by the High Court to the question is correct. This appeal must, therefore, be dismissed with costs."

110. Mr. Hossain also relied upon the provisions introduced by virtue of Sections 25 and 26 of the Indian Partnership Act, 1932 and in terms of which every partner is held liable jointly with all other partners as also severally for all acts of the firm and the firm in turn being held liable to the same extent as the partner. According to learned counsel, the aforenoted provisions in clear and unambiguous terms provide for the partner as well as the firm being equally liable for the wrongful acts W.P.(C) 1065/2021 & other connected matters Page 198 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 or omission of either. According to Mr. Hossain, any doubt that could have possibly been harboured stands laid to rest by Section 27(2) of the LLP Act and which expressly holds an LLP to be liable in respect of any wrongful act or omission of a partner. According to learned counsel, the phrase "liable to any person" as appearing in Section 27(2) would necessarily include the legal liability which comes to be incurred under the LLP Act towards investor shareholders and other stakeholders and thus the legal consequence of such liability being liable to be suffered. In view of the aforesaid, Mr. Hossain submitted that the argument of vicarious liability is clearly misconceived.

111. Having noticed the rival submissions which were addressed on this score, we firstly turn our gaze on the principal provisions which are contained in the Companies Act and deal with the appointment and engagement of an auditor. As is manifest from a reading of Section 139 of the Companies Act, every company is entitled to appoint either an individual or a firm as its auditor. By virtue of Section 141 of the said enactment, the statute proceeds to prescribe conditions in respect of eligibility and the qualifications which must be held by an auditor appointed by a company. In terms of Section 141(1), a person would be eligible to be appointed as an auditor of a company, if he be a CA. The Proviso to Section 141(1) proceeds further to hold that a firm whose majority of partners are also qualified for appointment, may be appointed as an auditor in its own name. Similar prescriptions appear in Section 141 (2) and which prescribes the condition subject to which an LLP may be appointed as an auditor.

112. Section 141 is extracted hereunder:-

[(i) a person who, directly or indirectly, renders any service referred to in Section 144 to the company or its holding company or its subsidiary company.

Explanation.--For the purposes of this clause, the term "directly or indirectly" shall have the meaning assigned to it in the Explanation to Section 144.] (4) Where a person appointed as an auditor of a company incurs any of the disqualifications mentioned in sub-section (3) after his appointment, he shall vacate his office as such auditor and such vacation shall be deemed to be a casual vacancy in the office of the auditor."

113. It is thus evident that an individual, a partnership firm or an LLP can be appointed as an auditor of a company. The appointment, prescriptions and the nature of services which could be rendered by it are further prescribed and regulated by Section 144 of the Companies Act. The Explanation to Section 144 proceeds to explain and provide a definition to the expression "directly or indirectly" as appearing therein. Section 144 reads as follows:-

114. As is manifest from the Explanation appended to that provision, the statute makes appropriate provisions providing for both contingencies, namely, where the auditor be an individual or a firm. A firm when appointed as an auditor, cannot possibly be expected to act otherwise than through its members and partners. It is perhaps conscious of this facet concerning the engagement of a partnership firm or an LLP which guides the provisions made in Section 147(2). Sub- Section (2) firstly uses the word "auditor" and which must necessarily be conferred a compendious meaning bearing in mind the indisputable position of an auditor of a company being either an individual, a partnership firm or an LLP. The Proviso thereto proceeds further to W.P.(C) 1065/2021 & other connected matters Page 202 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 prescribe the punishments which could be imposed upon an auditor if it were found to have contravened the law or knowingly or wilfully to have acted with an intent to deceive the company or its shareholders. Similar provisions are thereafter engrafted in sub-section (5) and which in unambiguous terms stipulates that even in the case of an audit having been undertaken by an audit firm, if it is proved that its partner or partners had acted in a fraudulent manner, it would result in the imposition of a civil or criminal liability upon such partner or partners including the firm. The dual liability which would come to be attached is further amplified when sub-section (5) employs the phrase "and of the firm jointly and severally". Of equal significance is the Proviso to sub-section (5) and which declares that in case of criminal liability of an audit firm and which be one other than that of a monetary fine, it would be the concerned partner or partners who had acted in a fraudulent manner or abetted in the commission of that crime, who alone would be liable.

115. It is thus manifest that the Companies Act makes provisions in terms of which both the firm as well as its engagement partners are held liable and could face the spectre of incarceration as well as the imposition of monetary fines. Section 147 existed on the statute book even before the NFRA came to be operationalized. The validity of that provision is not questioned before us. The said provision gets attracted the moment the provisions of Sections 139 to 146 are found to have been contravened. It is thus evident that the Act does not make any distinction insofar as the issue of liability is concerned. A liability in terms of the Companies Act could accrue or come to be suffered by W.P.(C) 1065/2021 & other connected matters Page 203 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 both the firm as well as its partners.

116. It would thus be wholly incorrect to hold that Section 132 creates a liability which is foreign to or uncontemplated by the various other provisions forming part of that statute. The Companies Act clearly contemplates a firm suffering a liability as a consequence of the action of its Engagement Partners and constituents who may be involved in the conduct of the audit. Thus, both the audit firm as well as its individual partners would be exposed to a statutory liability if Sections 139 to 146 were found to have been violated.

117. Therefore, and in our considered opinion the liability which is suffered by an audit firm by virtue of the actions of its partners engaged in an audit can neither be said to be abhorrent to the constitutional scheme or violative of Article 14. It would be wholly impermissible for an audit firm to disavow or seek to distance itself from the actions of its members. This we hold bearing in mind the indubitable fact that members come to be engaged in the conduct of the audit solely on account of the firm being appointed as an auditor of a company. The appointment of those members is not an independent engagement for it is the firm, be it a partnership or an LLP, which comes to be designated as the auditor. The individual members of those firms discharge functions and carry out duties in accordance with the directives issued by the audit firm.

118. This reasoning aligns closely with the principles of the organic theory which views the firm and its members as a single, inseparable unit for the purposes of legal and professional obligations. This indivisibility reflects the theory's premise that the firm and its members W.P.(C) 1065/2021 & other connected matters Page 204 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 are one and their roles are interdependent and unified. Thus, the appointment of the firm as an auditor naturally encompasses the actions of its members. The engagement of members in the conduct of an audit is not an independent or isolated act but is inherently derivative of the firm's appointment as the auditor. The firm acts as the central organ, and its members function as its limbs, carrying out its obligations and responsibilities. The firm's designation as the auditor inherently extends to its members, who act on its behalf.

119. Since the overarching liability and indivisible accountability vests upon the audit firm, the SAs' place it under an obligation to continually monitor, regulate and control the quality of the audit itself. It would therefore be wholly untenable in law to hold that the firm could shrug off the liability which would come to be attached consequent to the acts of omission or commission of its individual partners.

120. The fact that the audit firm is to act through its individual members becomes further evident from the following provisions which are made in the SAs:-

7. The firm's system of quality control should include policies and procedures addressing each of the following elements:

Such policies and procedures should enable the firm to:

23. At least annually, the firm should obtain written confirmation of compliance with its policies and procedures on independence from all firm personnel required to be independent in terms of the requirements of the Code.

xxxx xxxx xxxx

28. The firm should establish policies and procedures for the acceptance and continuance of client relationships and specific engagements, designed to provide it with reasonable assurance that it will undertake or continue relationships and engagements only where it:

The firm should obtain such information as it considers necessary in the circumstances before accepting an engagement with a new client, when deciding whether to continue an existing engagement, and when considering acceptance of a new engagement with an existing client. Where issues have been identified, and the firm decides to accept or continue the client relationship or a specific engagement, it should document how the issues were resolved.

xxxx xxxx xxxx Assignment of Engagement Teams W.P.(C) 1065/2021 & other connected matters Page 208 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26

42. The firm should assign responsibility for each engagement to an engagement partner. The firm should establish policies and procedures requiring that:

Such policies and procedures should:

102. Complaints and allegations (which do not include those that are clearly frivolous) may originate from within or outside the firm. They may be made by firm personnel, clients or other third parties. They may be received by engagement team members or other firm personnel.

103. As part of this process, the firm establishes clearly defined channels for firm personnel to raise any concerns in a manner that enables them to come forward without fear of reprisals.

104. The firm investigates such complaints and allegations in accordance with established policies and procedures. The investigation is supervised by a partner with sufficient and appropriate experience and authority within the firm but who is not otherwise involved in the engagement, and includes involving legal counsel as necessary. Small firms and sole practitioners may use the services of a suitably qualified external person or another firm to carry out the investigation. Complaints, allegations and the responses to them are documented.

105. Where the results of the investigations indicate deficiencies in the design or operation of the firm's quality control policies and procedures, or non-compliance with the firm's system of quality control by an individual or individuals, the firm takes appropriate action as discussed in paragraph 95.

SA 200 - Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing 13(d) Auditor - "Auditor" is used to refer to the person or persons conducting the audit, usually the engagement partner or other members of the engagement team, or, as applicable, the firm. Where an SA expressly intends that a requirement or responsibility be fulfilled by the engagement partner, the term "engagement partner" rather than "auditor" is used. "Engagement partner" and "firm" are to be read as referring to their public sector equivalents where relevant.

SA 220 - Quality Control for an Audit of Financial Statements

2. Quality control systems, policies and procedures are the responsibility of the audit firm. Under SQC 1, the firm has an obligation to establish and maintain a system of quality control to provide it with reasonable assurance that:

Differences of Opinion

22. If differences of opinion arise within the engagement team, with those consulted or, where applicable, between the engagement partner and the engagement quality control reviewer, the engagement team shall follow the firm's policies and procedures for dealing with and resolving differences of opinion. Acceptance and Continuance of Client Relationships and Audit Engagements (Ref: Para. 12) A8. SQC 1 requires the firm to obtain information considered necessary in the circumstances before accepting an engagement with a new client, when deciding whether to continue an existing engagement, and when considering acceptance of a new engagement with an existing client6. Information such as the following assists the engagement partner in determining whether the conclusions reached regarding the acceptance and continuance of client relationships and audit engagements are appropriate:

section (1) shall be laid in draft before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and 38 LLP Act .

if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in disapproving the issue of the notification or both Houses agree in making any modification in the notification, the notification shall not be issued or, as the case may be, shall be issued only in such modified form as may be agreed upon by both the Houses. "

128. As is manifest from the above, the provisions contained in the LLP Act are ordained to be in addition to as opposed to being in derogation of the provisions contained in any other law for the time being in force. They are thus not intended to override or supersede the provisions of the Companies Act . Thus, both the provisions contained under the Companies Act as well as the LLP statute, would have to be harmoniously construed.

129. It is in the aforesaid backdrop that we then proceed to evaluate the submission which was addressed, bearing in mind the provisions contained in Section 27 . That provision stands engrafted in the statute in the following terms:-

130. As was noticed in the preceding parts of this decision, Section 27(1) essentially adopts the well-known precept of ultra vires. It thus seeks to insulate the LLP from the acts of its partners if it were to be established that they had not been authorized to do a particular act by that entity. This is subject to the added qualification of the third party being cognizant of the partner of the LLP having been conferred no such authority or being aware of that partner not being associated with the LLP.

131. However, of significance is sub-section (2), when it provides that the LLP would be liable if its partner becomes liable to a person as a result of a wrongful act or omission in the course of the business of the LLP or with its authority. There could have been no starker acknowledgement of an LLP in law being liable for the acts of its partners or members. Section 27(2) thus stretches to an act of omission or commission of a member of the LLP acting within the scope of its authority and "in the course of the business" of the LLP. An audit conducted by a firm or a LLP would undoubtedly be "in the course of the business" of that entity.

132. We thus find ourselves unable to construe Section 132 of the Companies Act creating a vicarious liability which is otherwise not envisaged in cognate statutes and which are neither assailed nor W.P.(C) 1065/2021 & other connected matters Page 218 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 asserted to be invalid. This quite apart from the audit firm being enabled to act through its designated members, engagement partners to undertake the actual audit. We thus find ourselves unable to comprehend how that audit firm could disavow, disclaim or disown their acts.

133. In terms of Section 27(2) of the LLP Act, the statute postulates that an LLP would be liable to another person only if its partner be guilty of a wrongful act or omission committed on its part in the course of business. This provision thus is a reiteration of the LLP becoming liable for acts of its partners. Section 28 of the LLP Act proceeds further to then deal with contingencies where a partner may, if at all, become liable. It prescribes that a partner would, on a fundamental plane, not be viewed as being personally liable solely on account of being a partner of the LLP. Sub-section (2) of Section 28 , however, provides that Section 27(3) which broadly stipulates that the obligations arising out of contract or otherwise would be solely that of the LLP, would not apply where personal liability comes to be attached upon a partner by virtue of a wrongful act or omission. It proceeds further to significantly provide that a partner would in turn not become personally liable for the wrongful act or omission of any other partner of the LLP. Section 28(2) , however, would have to be construed, bearing in mind the admitted position of the audit firm itself having been appointed as the auditor of the corporate entity and the engagement and involvement of its partners and members being indelibly and inextricably connected with the discharge of that function.

134. While Section 28(2) insulates a partner from being held W.P.(C) 1065/2021 & other connected matters Page 219 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 personally liable for the wrongful act or omission of any other partner, the protection so accorded would clearly not apply in case the wrongful act or omission were viewed as being that of the audit firm itself. As was explained by us in the preceding paragraphs of this judgment, the issue of accrual of liability arises in the context of the engagement of a firm or an LLP as an auditor. Surely such an entity cannot discharge and perform its obligations concerned with audit unless it were acting through its members and partners. It is this ineffaceable connection which cannot possibly be erased or ignored while examining the challenge raised in the context of vicarious liability.

135. We also find ourselves unable to countenance the submission of persons disconnected with the actual audit coming to be impacted as a consequence of the audit firm suffering disciplinary action. This submission again firstly proceeds on the premise of a member having a standing distinct from that of the firm and which we have already negated in the preceding parts of this decision. Secondly, such a contingency is neither unknown nor unique. It cannot possibly be viewed as a fallout peculiar to Section 132 alone. A penal action against a corporate entity would invariably have a repercussion upon an individual in that firm's employment or engagement.

136. However, that disqualification or adverse consequence could occur even in a situation where a firm were to be debarred under any other law. Such a consequence could, for instance, occur if an entity were to be blacklisted. What thus must be borne in mind is that a person disconnected with the actual audit suffers the consequences of punishment imposed upon its employer only as long as the individual W.P.(C) 1065/2021 & other connected matters Page 220 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 remains associated with that entity and proposes to practise the profession under its aegis only. A punishment that may come to be imposed upon a firm by virtue of Section 132(4), therefore, cannot possibly be said to be violative of Article 19 of the Constitution.

137. We thus find no merit in the contention that Section 132 of the Companies Act is liable to be held as unconstitutional basis the audit firm or its individual partners and members becoming vicariously liable. In light of the above, the challenge to the constitutionality of Section 132 on the grounds of vicarious liability is without merit. The provision aligns with the fundamental principles of accountability and collective responsibility that governs the auditing profession. The firm's role as an auditor, coupled with its reliance on its partners and members to execute its obligations, makes it inevitable that liability whether arising from negligence, misconduct, or breach of statutory duties must extend to both the entity and the individuals involved. This structure not only ensures accountability but also upholds the integrity and trust essential to the auditing profession.

138. We also hold that Section 132 is neither an overreach nor can it be said to be arbitrary; it is a necessary mechanism to enforce professional accountability. The firm's designation as an auditor inherently includes the collective responsibilities of its members, making the imposition of a vicarious liability a logical and justified extension of its statutory obligations. Therefore, the contention that the provision is unconstitutional lacks merit and proceeds in ignorance of the operational and legal realities of an audit firm's engagement.

139. Since the full spectrum of auditing services would be carried out W.P.(C) 1065/2021 & other connected matters Page 221 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 under the aegis of a firm when it is engaged as an "auditor," it would be wholly untenable to abruptly sever the alignment between the firm and its members. The proposition to the contrary disregards the very essence of the firm's operational structure and undermines the objective sought to be achieved by Section 132. The essence of auditing lies in the collective responsibility of the firm and its members who work in unison to ensure compliance with accounting standards and deliver services of the highest professional integrity. Any attempt to isolate the liability of the firm from the actions of its members would result in a fragmentation of accountability, contrary to the statutory intent and purpose of ensuring public trust in financial reporting.

140. The liability in question pertains exclusively to the firm's adherence to accounting standards and its performance of auditing services, which are fundamental to maintaining the credibility and transparency of financial statements. These obligations are not abstract; they are explicitly tied to the professional judgment and diligence exercised by the firm's members in executing their duties. Thus, it cannot be construed that holding the firm and its members liable in this context would infringe upon their constitutional rights flowing Article

19. The assertion that such a liability violates the fundamental rights overlooks the reasonable restrictions imposed by statutory mandates designed to uphold public interest and ensure accountability in financial practices.

141. Moreover, statutory liability in this context is not an arbitrary imposition but a necessary mechanism to enforce adherence to regulatory standards and professional ethics. The NFRA, as the W.P.(C) 1065/2021 & other connected matters Page 222 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 governing authority, has been established to regulate and ensure the accountability of auditors and auditing firms in order to safeguard public interest. The statutory framework does not infringe upon the right to practice a profession. It merely regulates the profession in a manner that ensures its integrity and aligns with larger public interest concerns. The argument that liability under the NFRA framework falls foul of Article 19 must, therefore, be unequivocally rejected.

142. By virtue of the firm being appointed as an auditor, the firm and its members willingly undertake responsibilities that come with a clear expectation of compliance with accounting standards and the assurance of professional diligence. The alignment between the firm and its members, particularly in the discharge of auditing services, is integral and inseparable. Liability arising from statutory breaches, including those regulated by the NFRA, is both reasonable and necessary to ensure the firm's adherence to professional obligations.

143. The argument of vicarious liability equally fails when tested on the anvil of the 2007 Misconduct Rules. As is manifest from a reading of Rule 8 if a complaint comes to be lodged before the Council against a firm, the statute envisages that firm being called upon to disclose the name or names of its "member/ members concerned" as well as for it being apprised of the particulars of the alleged acts of omission or commission. Rule 8 further prescribes that upon a requisite disclosure being made by the firm, it would be the member or members concerned who would become responsible for answering the complaint. Similarly, the Explanation to Rule 8 stipulates that a notice to the firm would be deemed to be a notice to all members who are partners or employees of W.P.(C) 1065/2021 & other connected matters Page 223 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 that firm as on the date of registration of the complaint.

144. It is this statutory position which then stands mirrored in the Proviso to Rule 11 of the NFRA Rules and which reads as follows:

[Provided that where the disposal does not take place within the said period, the Division shall record the reasons for not disposing off the show-cause notice within the said period, and the chairperson, may, after taking into account the reasons so recorded, extend the aforesaid period by such additional period not exceeding ninety days as he may consider necessary:

clause (A) of clause (c) of sub-section (4) of Section 132 or for debarring the auditor from engaging as such under sub- clause (B) of clause (c) of sub-section (4) of Section 132 or both.

(7) The order passed under sub-rule (6) shall not become effective W.P.(C) 1065/2021 & other connected matters Page 225 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 until thirty days have elapsed from the date of issue of the order unless the Division states otherwise in the order along with the reason for the same.

(8) The order passed under sub-rule (6) shall be served on the auditor in the manner specified in sub-rule (3) and a copy of the same shall be sent--

(i) in all cases to (a) the Central Government; and (b) the Institute of Chartered Accountants of India;

(ii) in the case of a company referred to in sub-section (5) of Section 139 to the Comptroller and Auditor General of India;

(iii) in the case of a listed company to the Securities and Exchange Board of India; (iv) in the case of a bank or a non-banking finance company to the Reserve Bank of India;

(iv) in the case of a bank or a non-banking finance company to the Reserve Bank of India;

(v) in the case of an insurance company to the Insurance Regulatory and Development Authority of India;

(vi) in case the auditor is resident outside India to concerned regulator of such country;

and the same shall be published on the website of the Authority."

145. Rule 11 thus makes provisions identical to those contained in Rule 8 of the 2007 Misconduct Rules. A conjoint reading of the aforesaid statutory provisions leads us to the inevitable conclusion that it would be wholly incorrect to either assume or countenance the statutory scheme seeking to draw a distinction between the auditing firm and its constituent members. The members of the auditing firm act as its arms and sinews since an incorporated body can only act through its constituents and integral components.

146. As was noticed by us hereinabove, members or employees of an auditing firm do not come to be named or engaged in the work of audit in their individual capacity. Such a member becomes involved in the W.P.(C) 1065/2021 & other connected matters Page 226 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 audit of a corporate entity by virtue of being an employee of the auditing firm and having been designated for the purposes of discharging the obligations of audit that are proposed to be undertaken by that firm. This position clearly emerges also from the various SAs' which were noticed hereinbefore.

147. We also find the submission resting on the view expressed by the US Supreme Court flowing from Elfbrandt to be wholly unmerited. While it is true that some of the observations rendered by the US Supreme Court found adoption and resonance in the decision of the Supreme Court in Arup Bhuyan vs. State of Assam and Anr. 39 and which was reiterated in Indra Das, we take note of the judgment rendered by three learned Judges of the Supreme Court in Arup Bhuyan vs. State of Assam and Anr. [Arup Bhuyan-2] 40 and where the Supreme Court ultimately came to hold that the decisions of the US Supreme Court would be inapplicable bearing in mind the principles enshrined in Article 19 of the Constitution and the principle of reasonable restriction adopted by our Constitution as moderating that right. As is manifest from a reading of Para 8 of the report in Arup Bhuyan-2, the principal issue which had arisen for consideration was whether active membership is required to be proven over and above the membership of a banned organization. The second important question which stood posited in Arup Bhuyan-2 was with respect to the correctness of the view expressed in the earlier judgments of the Supreme Court and which had proceeded to interpret the ambit of Article 19 on the basis of the principles enunciated by the US Supreme 39 (2011) 3 SCC 377 40 (2023) 8 SCC 745 W.P.(C) 1065/2021 & other connected matters Page 227 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Court.

148. In Arup Bhuyan-2, the Supreme Court noticed the distinction which is liable to be acknowledged to exist between Article 19 of our Constitution and the position which prevails in the US. Dealing with this aspect, it was pertinently observed as follows: -

149. This distinction stood further highlighted in paragraphs 118 to W.P.(C) 1065/2021 & other connected matters Page 228 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 120 as well as 125 of the aforenoted decision and which are extracted hereinbelow:-

119. The contradistinction between the rights created by the First Amendment of the American Constitution and Article 19 of the Indian Constitution is the power given to the State to make laws reasonably restricting such freedoms in India. Conversely, in the United States of America, restrictions have been imposed by the judiciary in instances, as relied upon in Arup Bhuyan [Arup Bhuyan v. State of Assam , (2011) 3 SCC 377 : (2011) 1 SCC (Cri) 855] and Indra Das [Indra Das v. State of Assam, (2011) 3 SCC 380 : (2011) 1 SCC (Cri) 1150] , however no such explicit power is available with the legislature.

120. This distinction has been enunciated by this Court as well. In Babulal Parate v. State of Maharashtra[Babulal Parate v. State of Maharashtra, 1961 SCC OnLine SC 48 : (1961) 3 SCR 423 : AIR 1961 SC 884] , as submitted by the Union of India, a Constitution Bench of this Court (five-Judge Bench) while upholding the constitutional validity of Section 144CrPC has held that whatever may be the position in the United States, the anticipatory action under Section 144CrPC is permissible under clauses (2) and (3) of Article 19 , which allow the legislature to make laws placing reasonable restrictions on the rights conferred by these clauses of Article 19. Importantly, this Court further observed that there is nothing in the American Constitution corresponding to clauses (2) to (6) of Article 19 of the Indian Constitution. It was further observed that the framework of the Indian Constitution is different from the American Constitution.

125. In Shreya Singhal [Shreya Singhal v. Union of India , (2015) 5 SCC 1 : (2015) 2 SCC (Cri) 449] , this Court speaking through R.F. Nariman, J. highlighted on the differences between the US First Amendment and freedom of speech and expression under Article 19(1)(a) read with Article 19(2) in the following words : (SCC pp. 131-32, paras 15 & 17-18) "15. It is significant to notice first the differences between W.P.(C) 1065/2021 & other connected matters Page 229 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 the US First Amendment and Article 19(1)(a) read with Article 19(2). The first important difference is the absoluteness of the US First Amendment--Congress shall make [Ed. : The words between two asterisks have been emphasised in original.] no law[Ed. : The words between two asterisks have been emphasised in original.] which abridges the freedom of speech. Second, whereas the US First Amendment speaks of freedom of speech and of the press, without any reference to "expression", Article 19(1)(a) speaks of freedom of speech and expression without any reference to "the press". Third, under the US Constitution, speech may be abridged, whereas under our Constitution, reasonable restrictions may be imposed. Fourth, under our Constitution such restrictions have to be in the interest of eight designated subject-matters--that is, any law seeking to impose a restriction on the freedom of speech can only pass muster if it is proximately related to any of the eight subject-matters set out in Article 19(2). ***

17. So far as the second apparent difference is concerned, the American Supreme Court has included "expression" as part of freedom of speech and this Court has included "the press" as being covered under Article 19(1)(a) , so that, as a matter of judicial interpretation, both the US and India protect the freedom of speech and expression as well as press freedom. Insofar as abridgement and reasonable restrictions are concerned, both the US Supreme Court and this Court have held that a restriction in order to be reasonable must be narrowly tailored or narrowly interpreted so as to abridge or restrict only what is absolutely necessary. It is only when it comes to the eight subject-matters that there is a vast difference. In the US, if there is a compelling necessity to achieve an important governmental or societal goal, a law abridging freedom of speech may pass muster. But in India, such law cannot pass muster if it is in the interest of the general public. Such law has to be covered by one of the eight subject-matters set out under Article 19(2). If it does not, and is outside the pale of Article 19(2) , Indian courts will strike down such law.

18. ... American judgments have great persuasive value on the content of freedom of speech and expression and the tests laid down for its infringement. It is only when it comes to subserving the general public interest that there is a world of difference."

(emphasis supplied) "

SECTION 132 AND ITS RETROACTIVE OPERATION

153. Taking the discussion forward we propose to now evaluate the challenge raised by the writ petitioners on the ground of Section 132 operating retrospectively and thus impacting valuable vested rights. The petitioners had urged that although sub-sections (2) and (4) of Section 132 came to be enforced with effect from 24 October 2018 and the NFRA Rules on 13 November 2018, the NFRA seeks to apply those provisions retrospectively to audits concluded and completed prior to the dates aforenoted. The petitioners submitted that we must bear in mind the well settled precept that statutes ordinarily and as a general proposition are assumed to operate prospectively unless retrospectivity is expressly or impliedly provided for. It was their contention that the provisions as introduced by Section 132 not only ushers in a new procedure for purposes of trial of allegations of professional misconduct, it also creates new disabilities apart from imposing new obligations on transactions already accomplished. Viewed in that light it was their submission that the provision can only be applied W.P.(C) 1065/2021 & other connected matters Page 232 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 prospectively.

154. It was contended that prior to the introduction of Section 132 there was no provision under the CA Act in terms of which an LLP or a firm could have been held guilty of acts of professional or other misconduct purportedly committed by any of its partners. Taking us through those provisions, the petitioners sought to highlight the fact that any action consequent to a determination of guilt connected to professional or other misconduct could have only exposed a partner to punishments under the CA Act . It is in the aforesaid backdrop that they contend that it was Section 132 which for the first time proceeded to create a liability and contemplates penal action against an LLP and a firm. It was submitted that the CA Act read alongside the Misconduct Rules, 2007 had never provisioned for the debarment of a firm. In view of the above, it was submitted that the provisions of Section 132 cannot be invoked in respect of audits that had been undertaken or completed prior to the dates from which the new regime came into force.

155. Learned senior counsels appearing for the writ petitioners then took us through some of the provisions made in the Companies Act including Section 139 and which according to them contemplates either an individual or a firm being appointed as an auditor. Insofar as an individual auditor is concerned, it was pointed out that the maximum monetary penalty prescribed for professional misconduct under the CA Act [prior to the amendments made therein in 2022] for Schedule I offences was stipulated to be INR 1 lakh while the penalties that could be imposed for Schedule II offences was INR 5 lakhs. It was submitted that Section 132(4)(c), however, now prescribes a penalty in the case of W.P.(C) 1065/2021 & other connected matters Page 233 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 individuals to be not less than INR 1 lakh and which could extend to five times the fee received. Similarly, in the case of firms the monetary penalty is prescribed to be not less than INR 5 lakhs and which could extend to 10 times the fee received. These monetary penalties, according to the writ petitioners, are in stark contrast to what prevailed under the CA Act . They would thus contend that since the monetary penalties are far greater than those that were provided for under the CA Act , Section 132 cannot validly be enforced retrospectively.

156. The writ petitioners also questioned the stand taken by NFRA and which had alluded to the scheme underlying Section 132 as merely contemplating a change of forum and procedure. It was submitted that while the section undoubtedly introduces procedural changes, it also affects vested rights which had come to be perfected and this too would necessarily warrant the Court rendering a declaration that Section 132 can only have prospective application.

157. Arguments were then addressed in great detail on behalf of the writ petitioners with learned senior counsels referring to the various procedural safeguards which formed part of the CA Act including provisions for leading of evidence, cross-examination of witnesses and all of which have been completely done away with and the NFRA being empowered by statute to adopt such summary procedure as it may deem fit. A retroactive application of Section 132 was also assailed on the basis of Article 20(1) of the Constitution.

158. The petitioners also questioned the correctness of the stand taken by NFRA and which had urged us to recognize the Proviso to Section 132(4) as being the embodiment of a legislative intent of those W.P.(C) 1065/2021 & other connected matters Page 234 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 provisions applying even to past misdemeanors. It was submitted that the Proviso to Section 132(4) stands confined to the initiation or continuance of an investigation in the event NFRA were to take cognizance of the same. It was thus submitted that were NFRA not to initiate any investigation in relation to the audit of a company, the Council or any other authority enabled by the CA Act would continue to retain the right to initiate or continue an investigation. It was thus submitted that the word "continue" as appearing in the Proviso to Section 132(4) is to be read in that light and cannot possibly be construed as being indicative of an express or implied intent of the Legislature to confer retroactivity upon Section 132.

159. Reference was also made to the stand as taken by the NFRA in its affidavit filed in these proceedings and where it had sought to explain the ambit of the Proviso to Section 132(4) as being solely for the purposes of interdicting parallel investigations. This admission, according to the writ petitioners, supports their contention that the Section would not operate retrospectively.

160. For purposes of explaining the well settled precepts of substantive law operating prospectively unless a contrary intention is manifest or could be inferred from the language of the statute, the writ petitioners drew our attention to the following passages from the decision of the Supreme Court in Hukum Chand vs. Union of India and Ors. 42:-

11. In the case of ITO v. M.C. Ponnoose [(1969) 2 SCC 351 : (1970) 1 SCR 678] this Court dealt with a notification, dated August 14, 1963, which empowered the revenue officials, including the Tehsildar, to exercise the powers of a tax recovery officer under the Income Tax Act, 1961 in respect of arrears. The notification was given retrospective effect. Question which arose for determination was whether the State Government could invest the Tehsildar with such powers retrospectively. Answering this question in the negative, this Court observed:

Reference was made in the above cited case to an earlier decision of this Court in B.S. Vadera, etc. v. Union of India [AIR 1969 SC 118 :

12. We are, therefore, of the opinion that the Explanation added to Rule 49 in the present case cannot be given retrospective operation."

161. The judgment of the Orissa High Court in Krushna Chandra vs. Commr. of Endowments and Ors. 43 was also cited in this respect and where the legal position was summarized in the following words: -

162. As was noticed hereinabove, the petitioners had laid great emphasis on the presumption of statutes having prospective application and the same being construed as intended to operate retrospectively only if the legislative body were to consciously couch that provision in a manner which could be countenanced as demonstrative of an express intent or intended implication. In order to buttress the aforesaid contention, the petitioners cited the decision of the Supreme Court in State of Punjab and Ors. vs. Bhajan Kaur and Ors. 44, relevant extracts whereof are reproduced hereinbelow: -

Ltd. v. Padmavathy [1990 ACJ 751 (Ker)] . The Kerala High Court referred to a decision of this Court in M.K. Kunhimohammed v. P.A. Ahmedkutty [(1987) 4 SCC 284 : 1987 SCC (Cri) 703 : AIR 1987 SC 2158] wherein the following observations were made : (SCC p. 295, para 14) "14. ... Having regard to the inflationary pressures and the consequent loss of purchasing power of the rupee we feel that the amount of Rs 15,000 and the amount of Rs 7500 in the above provisions appear to have become unrealistic. We, therefore, suggest that the limits of compensation in respect of death and in respect of permanent disablement, payable in the event of there being no proof of fault, should be raised adequately to meet the current situation."

12. In Padmavathy [1990 ACJ 751 (Ker)] the Kerala High Court held : (ACJ p. 756, paras 11-12) "11. The said suggestion of the Supreme Court was given due respect by the law-making machinery when the Bill was finally introduced in Parliament. This fact can be discerned from the Statement of Objects and Reasons prefaced in the new Act. Therefore, in effect Parliament has only retained the same right which was conferred on the victims through Chapter VII-A of the repealed Act. The difference in the quantum of compensation is only intended to make the right realistic and on a par with the amount fixed earlier. Hence Section 6 of the General Clauses Act would not impede the enforcement of Section 140 of the new Act in relation to an accident which occurred prior to the coming into force of the new Act.

12. For yet another reason, we can support the said conclusion. Section 6 of the General Clauses Act permits switching over to the repealed Act only if a different intention does not appear in the new statute. Such a different intention can be discerned from the new Act. It is in Chapter X of the new Act that provisions regarding 'no fault liability' have been included. The Chapter starts with Section 140 and ends with Section 144. The last section reads as follows:'The provisions of this Chapter shall have effect notwithstanding anything contained in any other W.P.(C) 1065/2021 & other connected matters Page 239 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 provision of this Act or of any other law for the time being in force.' The different intention manifested in the new Act is that the provisions in Chapter X should get predominance over all other laws. The provisions contained in that Chapter must be given effect to notwithstanding any contrary provision in any other law including Section 6 of the General Clauses Act. All other provisions, therefore, must yield to the provisions contained in Chapter X of the new Act. This is the legislative intention manifested through Section 144 of the new Act."

In the decision of the Punjab and Haryana High Court in Mosmi [1992 ACJ 192 (P&H)] , reliance has been placed upon the judgment of the Kerala High Court. With the greatest of respect to the learned Judges of the Kerala and Punjab and Haryana High Courts, we could not persuade ourselves to agree with the said view.

13. No reason has been assigned as to why the 1988 Act should be held to be retrospective in character. The rights and liabilities of the parties are determined when cause of action for filing the claim petition arises. As indicated hereinbefore, the liability under the Act is a statutory liability. The liability could, thus, be made retrospective only by reason of a statute or statutory rules. It was required to be so stated expressly by Parliament. Applying the principles of interpretation of statute, the 1988 Act cannot be given retrospective effect, more particularly, when it came into force on or about 1-7-1989.

xxxx xxxx xxxx

16. It is now well-settled that a change in the substantive law, as opposed to adjective law, would not affect the pending litigation unless the legislature has enacted otherwise, either expressly or by necessary implication.

17. In Garikapati Veeraya v. N. Subbiah Choudhry [AIR 1957 SC 540] the law is stated thus : (AIR p. 553, para 25) "25. ... The golden rule of construction is that, in the absence of anything in the enactment to show that it is to have retrospective operation, it cannot be so construed as to have the effect of altering the law applicable to a claim in litigation at the time when the Act was passed."

18. The question was considered by this Court in Gajraj Singh v. STAT [(1997) 1 SCC 650] and the law was stated in the following terms : (SCC pp. 664-66, paras 22-24) W.P.(C) 1065/2021 & other connected matters Page 240 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 "22. Whenever an Act is repealed it must be considered, except as to transactions past and closed, as if it had never existed. The effect thereof is to obliterate the Act completely from the record of Parliament as if it had never been passed; it never existed except for the purpose of those actions which were commenced, prosecuted and concluded while it was an existing law. Legal fiction is one which is not an actual reality and which the law recognises and the court accepts as a reality. Therefore, in case of legal fiction the court believes something to exist which in reality does not exist. It is nothing but a presumption of the existence of the state of affairs which in actuality is non-existent. The effect of such a legal fiction is that a position which otherwise would not obtain is deemed to obtain under the circumstances. Therefore, when Section 217(1) of the Act repealed Act 4 of 1939 w.e.f. 1-7-1989, the law in Act 4 of 1939 in effect came to be non-existent except as regards the transactions, past and closed or saved.

23. In Crawford's Interpretation of Law (1989) at p. 626, it is stated that:

24. When there is a repeal and simultaneous re-enactment, Section 6 of the GC Act would apply to such a case unless contrary intention can be gathered from the repealing Act. Section 6 would be applicable in such cases unless the new legislation manifests intention inconsistent with or contrary to the application of the section. Such incompatibility would have to be ascertained from all relevant provisions of the new Act. Therefore, when the repeal is followed by a fresh legislation on the same subject, the Court would undoubtedly have to look to the provisions of the new Act only for the purpose of determining whether the new Act indicates different intention. The object of repeal and re- enactment is to obliterate the repealed Act and to get rid of certain obsolete matters."

19. In Ramesh Singh v. Cinta Devi [(1996) 3 SCC 142 : 1996 SCC (Cri) 467] it has clearly been held that Section 217 of the 1988 Act does not expressly or by necessary implication make the relevant provision retrospective in operation.

20. In Zile Singh v. State of Haryana [(2004) 8 SCC 1] a three-Judge Bench of this Court stated the law thus : (SCC p. 10, para 17) "17. Maxwell states in his work on Interpretation of Statutes (12th Edn.) that the rule against retrospective operation is a presumption only, and as such it 'may be overcome, not only by express words in the Act but also by circumstances sufficiently strong to displace it' (p. 225). If the dominant intention of the legislature can be clearly and doubtlessly spelt out, the inhibition contained in the rule against perpetuity becomes of doubtful applicability as the W.P.(C) 1065/2021 & other connected matters Page 242 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 'inhibition of the rule' is a matter of degree which would 'vary secundum materiam' (p. 226). Sometimes, where the sense of the statute demands it or where there has been an obvious mistake in drafting, a court will be prepared to substitute another word or phrase for that which actually appears in the text of the Act (p. 231)."

21. In Lohia Machines Ltd. v. Union of India [(1985) 2 SCC 197 :

22. In Indian Metals and Ferro Alloys Ltd. v. State of Orissa [(1987) 3 SCC 189] it was opined : (SCC p. 204, para 25) "25. ... we hold that the High Court was not right in observing that the orders under Section 22-B of the Act imposing restrictions on consumption of power could not legally and validly be passed by the Government 'with retrospective effect' in the middle of a water year. But the position regarding disallowance of clubbing stands on an entirely different footing. If a consumer had been allowed the benefit of clubbing previously, that benefit cannot be taken away with retrospective effect thereby saddling him with heavy financial burden in respect of the past period where he had drawn and consumed power on the faith of the orders extending to him the benefit of clubbing."

23. In Madishetti Bala Ramul v. Land Acquisition Officer [(2007) 9 SCC 650 : (2007) 8 Scale 184] this Court observed : (SCC p. 656, para 19) W.P.(C) 1065/2021 & other connected matters Page 243 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 "19. In Land Acquisition Officer-cum-DSWO v. B.V. Reddy and Sons [(2002) 3 SCC 463] this Court opined that Section 25 being not a procedural provision will have no retrospective effect, holding : (SCC p. 471, para 6) '6. Coming to the second question, it is a well-settled principle of construction that a substantive provision cannot be retrospective in nature unless the provision itself indicates the same. The amended provision of Section 25 nowhere indicates that the same would have any retrospective effect. Consequently, therefore, it would apply to all acquisitions made subsequent to 24-9-1984, the date on which Act 68 of 1984 came into force. The Land Acquisition (Amendment) Bill of 1982 was introduced in Parliament on 30-4-1982 and came into operation with effect from 24-9-1984.' "

163. Similar principles appear in Purbanchal Cables & Conductors (P) Ltd. v. Assam SEB 45, which was yet another decision cited on behalf of the writ petitioners and where the following pertinent observations appear:-

34. The general scope of the Act has been discussed above. The remedy sought to be applied by the Act is made clear in the Statement of Objects and Reasons, in which, it is stated that due to the delayed payments by buyers to the small-scale industries, their working capital was being affected, causing great harm to the small- scale industries in general. This Act was passed by Parliament to impose a heavy interest on the buyers who delayed the payments of the small-scale industries, in order to deter the buyers from delaying the payments after accepting the supplies made by the suppliers.

35. The policy statement of the Ministry of Micro, Small and Medium Enterprises dated 6-8-1991, reads:

36. Keeping in view the above object, the Act was enacted by Parliament. Before such enactment, it is required to examine rights of the supplier qua the buyer prior to the commencement of the Act. In case of delayed payment, the supplier, prior to the commencement of the Act, was required to file a suit for the payment of the principal amount, and could claim interest along with the principal amount. The supplier could avail of the same under Section 34 of the Code of Civil Procedure, 1908 (hereinafter referred to as " CPC "), Section 61 of the Sale of Goods Act, 1930 and Section 3 of the Interest Act, 1978.

37. In other words, the supplier whose payment was delayed by the buyer prior to the commencement of the Act, could file a suit for payment of the principal amount along with the interest. The supplier, thus, had the vested right to claim the principal amount along with interest thereon in case of a delay in payment by the buyer and it was the discretion of the court to award this interest.

38. The court has the discretion to award interest along with the principal amount and the same is clear from the use of the word "may" in all the three provisions cited above. Section 34 CPC is the main provision under which interest could be awarded by the court and Section 61 of the Sale of Goods Act, 1930 is an offshoot of Section 34 CPC. Section 3 of the Interest Act, 1978 also makes the Interest Act subject to the provision of Section 34 CPC. Hence, we can safely deduce that the interest awarded is a discretion exercised by the court, on the principal amount claimed, in case of a suit for recovery of payment by the supplier if such payment is delayed by the buyer.

39. With the commencement of the Act, a new vested right exists with the supplier, that being, if there is delay in payment after the acceptance of the goods by the buyer, the supplier can file a suit for claiming interest at a higher rate, as prescribed by the Act. This position has been approved by this Court in Modern Industries [(2010) 5 SCC 44 : (2010) 2 SCC (Civ) 280] . If a suit for interest simpliciter is maintainable as held by this Court in Modern Industries [(2010) 5 SCC 44 : (2010) 2 SCC (Civ) 280] , then a new liability qua the buyer is created with the commencement of the Act giving a vested right to the supplier in case of delayed payment. In other words, if there is a delayed payment by the buyer, then a right to claim a higher rate of interest as prescribed by the Act accrues to the supplier.

40. The phrase "vested right" has been defined by this Court in Bibi Sayeeda v. State of Bihar [(1996) 9 SCC 516] as: (SCC p. 527, para

17) "17. The word 'vested' is defined in Black's Law Dictionary (6th Edn.) at p. 1563 as:

It is trite law that every statute is prospective unless it is expressly or by necessary implication made to have retrospective operation.

24. Right of appeal may be a substantive right but the procedure for filing the appeal including the period of limitation cannot be called a substantive right, and an aggrieved person cannot claim any vested right claiming that he should be governed by the old provision pertaining to period of limitation. Procedural law is retrospective meaning thereby that it will apply even to acts or transactions under the repealed Act."

43. In Shyam Sunder v. Ram Kumar [(2001) 8 SCC 24] , a Constitution Bench of this Court discussing the scope and ambit of a declaratory law has observed: (SCC p. 49, para 39) "39. Lastly, it was contended on behalf of the appellants that the amending Act whereby new Section 15 of the Act has been substituted is declaratory and, therefore, has retroactive operation. Ordinarily when an enactment declares the previous law, it requires to be given retroactive effect. The function of a declaratory statute is to supply an omission or to explain a previous statute and when such an Act is passed, it comes into effect when the previous enactment was passed. The legislative power to enact law includes the power to declare what was the previous law and when such a declaratory Act is passed, invariably it has been held to be retrospective. Mere absence of use of the word 'declaration' in an Act explaining what was the law before may not appear to be a declaratory Act but if the court finds an Act as declaratory or explanatory, it has to be construed as retrospective. Conversely where a statute uses the word 'declaratory', the words so used may not be sufficient to hold that the statute is a declaratory Act as words may be used in order to bring into effect new law."

44. In Katikara Chintamani Dora v. Guntreddi Annamanaidu [(1974) 1 SCC 567] this Court held: (SCC p. 582, para 50) "50. It is well settled that ordinarily, when the substantive law is altered during the pendency of an action, rights of the parties are decided according to law, as it existed when the action was begun unless the new statute shows a clear intention to vary such rights (Maxwell on Interpretation of Statutes, 12th Edn. 220). That is to say, 'in the absence of anything in the Act, to say that it is to have retrospective W.P.(C) 1065/2021 & other connected matters Page 248 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 operation, it cannot be so construed as to have the effect of altering the law applicable to a claim in litigation at the time when the Act is passed'."

45. In Govind Das v. ITO [(1976) 1 SCC 906 : 1976 SCC (Tax) 133] this Court speaking through P.N. Bhagwati, J. (as he then was) held:

46. In Jose Da Costa v. Bascora Sadasiva Sinai Narcornim [(1976) 2 SCC 917] this Court held: (SCC p. 925, para 31) "31. Before ascertaining the effect of the enactments aforesaid passed by the Central Legislature on pending suits or appeals, it would be appropriate to bear in mind two well-established principles. The first is that '... while provisions of a statute dealing merely with matters of procedure may properly, unless that construction be textually inadmissible, have retrospective effect attributed to them, provisions which touch a right in existence at the passing of the statute are not to be applied retrospectively in the absence of express enactment or necessary intendment.' (See Delhi Cloth and General Mills Co. Ltd. v. CIT [(1926-

27) 54 IA 421] , IA p. 425.) The second is that a right of appeal being a substantive right the institution of a suit carries with it the implication that all successive appeals available under the law then in force would be preserved to the parties to the suit throughout the rest of the career of the suit. There are two exceptions to the W.P.(C) 1065/2021 & other connected matters Page 249 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 application of this rule viz. (1) when by competent enactment such right of appeal is taken away expressly or impliedly with retrospective effect and (2) when the court to which appeal lay at the commencement of the suit stands abolished (see Garikapati Veeraya v. N. Subbiah Choudhry [AIR 1957 SC 540] and Colonial Sugar Refining Co. Ltd. v. Irving[1905 AC 369 : (1904-07) All ER Rep Ext 1620 (PC)] )."

47. In K. Kapen Chako v. Provident Investment Co. (P) Ltd. [(1977) 1 SCC 593] this Court discussing the dicta of the English courts on the aspect of retrospectivity observed: (SCC pp. 602-03, paras 37-

39) "37. A statute has to be looked into for the general scope and purview of the statute and at the remedy sought to be applied. In that connection the former state of the law is to be considered and also the legislative changes contemplated by the statute. Words not requiring retrospective operation so as to affect an existing statutory provision prejudicially ought not be so construed. It is a well-recognised rule that statute should be interpreted if possible so as to respect vested rights. Where the effect would be to alter a transaction already entered into, where it would be to make that valid which was previously invalid, to make an instrument which had no effect at all, and from which the party was at liberty to depart as long as he pleased, binding, the prima facie construction of the Act is that it is not to be retrospective. (See Gardner v. Lucas [(1878) 3 AC 582 (HL)] .)

38. In Moon v. Durden [(1848) 2 Ex 22 : 154 ER 389] a question arose as to whether Section 18 of the Gaming Act, 1845 which came into effect in August 1845 was retrospective so as to defeat an action which had been commenced in June 1845. The relevant section provided that no suit shall be brought or maintained for recovering any such sum of money alleged to have been won upon a wager. It was held that it was not retrospective. Parke, B. said: (ER p. 398) 'It seems a strong thing to hold, that the legislature could have meant that a party, who, under a contract made prior to the Act, had as perfect a title to recover a sum of money, as he had to any of his personal property, should be totally deprived of it without compensation.' W.P.(C) 1065/2021 & other connected matters Page 250 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26

39. Again in Smithies v. National Assn. of Operative Plasterers [(1909) 1 KB 310 : (1908-10) All ER Rep 455 (CA)] Section 4 of the Trade Disputes Act, 1906 which enacted that an action for tort against a trade union shall not be entertained by any court was held not to prevent the courts from hearing and giving judgment in actions of that kind begun before the passing of the Act. It is a general rule that when the legislature alters the rights of parties by taking away or conferring any right of action, its enactments, unless in express terms they apply to pending actions, do not affect them. But there is an exception to this rule, namely, where enactments merely affect procedure and do not extend to rights of action. See Suche (Joseph) & Co. Ltd., In re [(1875) 1 Ch D 48] . If the legislature forms a new procedure alterations in the form of procedure are retrospective unless there is some good reason or other why they should not be. In other words, if a statute deals merely with the procedure in an action, and does not affect the rights of the parties it will be held to apply prima facie to all actions, pending as well as future."

48. In Dahiben v. Vasanji Kevalbhai [1995 Supp (2) SCC 295] this Court held: (SCC pp. 299-300, para 12) "12. As the amendment in question is not to a procedural law, it may be stated that the settled principle of interpretation, where substantive law is amended, is that the same does not operate retrospectively unless it is either expressly provided or the same follows by necessary implication. Lest it be thought that a vested right cannot be taken away at all by retrospective legislation, reference may be made to Rafiquennessa v. Lal Bahadur Chetri [AIR 1964 SC 1511] where it was stated that even where vested rights are affected, legislature is competent to take away the same by means of retrospective legislation; and retrospectivity can be inferred even by necessary implication."

49. In Zile Singh v. State of Haryana [(2004) 8 SCC 1] this Court examined the various authorities on statutory interpretation and concluded: (SCC pp. 8-9, paras 13-14) "13. It is a cardinal principle of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have a retrospective operation. But the rule in general is applicable where the object of the statute is to affect vested rights or to impose W.P.(C) 1065/2021 & other connected matters Page 251 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 new burdens or to impair existing obligations. Unless there are words in the statute sufficient to show the intention of the legislature to affect existing rights, it is deemed to be prospective only--'nova constitutio futuris formam imponere debet non praeteritis'--a new law ought to regulate what is to follow, not the past. (See Principles of Statutory Interpretation by Justice G.P. Singh, 9th Edn., 2004 at p. 438.) It is not necessary that an express provision be made to make a statute retrospective and the presumption against retrospectivity may be rebutted by necessary implication especially in a case where the new law is made to cure an acknowledged evil for the benefit of the community as a whole (ibid., p. 440).

14. The presumption against retrospective operation is not applicable to declaratory statutes.... In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is 'to explain' an earlier Act, it would be without object unless construed retrospectively. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended.... An amending Act may be purely declaratory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect (ibid., pp. 468-69)."

50. In State of Punjab v. Bhajan Kaur [(2008) 12 SCC 112 : (2009) 1 SCC (Cri) 328] this Court held: (SCC p. 116, para 9) "9. A statute is presumed to be prospective unless held to be retrospective, either expressly or by necessary implication. A substantive law is presumed to be prospective. It is one of the facets of the rule of law."

51. There is no doubt about the fact that the Act is a substantive law as vested rights of entitlement to a higher rate of interest in case of delayed payment accrues in favour of the supplier and a corresponding liability is imposed on the buyer. This Court, time and again, has observed that any substantive law shall operate prospectively unless retrospective operation is clearly made out in the language of the statute. Only a procedural or declaratory law operates retrospectively as there is no vested right in procedure.

52. In the absence of any express legislative intendment of the retrospective application of the Act, and by virtue of the fact that the Act creates a new liability of a high rate of interest against the buyer, the Act cannot be construed to have retrospective effect. Since the Act envisages that the supplier has an accrued right to claim a higher rate of interest in terms of the Act, the same can only be said to accrue for sale agreements after the date of commencement of the Act i.e. 23-9-1992 and not any time prior."

164. It would, however, be relevant to note that Purbanchal Cables came to be subsequently overruled by the Supreme Court in Shanti Conductors (P) Ltd. vs. Assam SEB 46 as would be evident from a reading of paras 60, 61 and 62 of the report and which are extracted hereunder:-

61. We have noticed above that the incidence of applicability of the liability under the Act is supply of goodsor rendering of service. In event the supply of goods and rendering of services is subsequent to 46 (2019) 19 SCC 529 W.P.(C) 1065/2021 & other connected matters Page 253 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 the Act, can liability to pay interest on delayed payment be denied on the ground that agreement in pursuance of which supplies were made were entered prior to enforcement of the Act? Entering into an agreement being not expressly or impliedly referred to in the statutory scheme as an incident for fastening of the liability, making the date of agreement as date for imposition of liability does not conform to the statutory scheme. This can be illustrated by taking an example. There are two small scale industries which received orders for supply of materials. 'A' received such orders prior to the enforcement of the Act and 'B' received the order after the enforcement of the Act. Both supplied the goods subsequent to enforcement of the Act and became entitled to receive payment after the supply, on or before the day agreed upon between the supplier and buyer or before the appointed day. Payments were not made both to 'A' and 'B' as required by Section 3 . Can the buyer who has received supplies from supplier 'A' escape from his statutory liability to make payment of interest under Section 3 read with Section 4 ? The answer has to be No. Two suppliers who supply goods after the enforcement of the Act, become entitled to receive payment after the enforcement of the Act one supplier cannot be denied the benefit of the statutory protection on the pretext that the agreement in his case was entered prior to enforcement of the Act. When the date of agreement is not referred as material or incidence for fastening the liability, by no judicial interpretation the said date can be treated as a date for fastening of the liability. The 1993 Act being beneficial legislation enacted to protect small scale industries and statutorily ensure by mandatory provision for payment of interest on the outstanding money, accepting the interpretation as put by the learned counsel for the Board that the day of agreement has to be subsequent to the enforcement of the Act, the entire beneficial protection of the Act shall be defeated. The existence of statutory liability depends on the statutory factors as enumerated in Section 3 and Section 4 of the 1993 Act. Factor for liability to make payment under Section 3 being the supplier supplies any goods or renders services to the buyer, the liability of buyer cannot be denied on the ground that the agreement entered into between the parties for supply was prior to the 1993 Act. To hold that liability of buyer for payment shall arise only when agreement for supply was entered into subsequent to enforcement of the Act, it shall be adding words to Section 3 which is not permissible under the principles of statutory construction.

62. We, thus, are of the view that the judgments in Purbanchal Cables & Conductors [Purbanchal Cables & Conductors (P) Ltd. v. Assam SEB, (2012) 7 SCC 462 : ( 2012) 4 SCC (Civ) 245] , Assam Small Scale Industries [Assam Small Scale Industries W.P.(C) 1065/2021 & other connected matters Page 254 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Development Corpn. Ltd. v. J.D. Pharmaceuticals , ( 2005) 13 SCC 19] and Shakti Tubes [Shakti Tubes Ltd. v. State of Bihar , (2009) 7 SCC 673 : (2009) 3 SCC (Civ) 258] which held that the 1993 Act shall be applicable only when the agreement to sale/contract was entered into prior/subsequent to the enforcement of the Act, does not lay down the correct law. We accept the submission of the learned counsel for the appellants that even if agreement of sale is entered into prior to enforcement of the Act, liability to make payment under Section 3 and liability to make payment of interest under Section 4 shall arise if supplies are made subsequent to the enforcement of the Act."

165. Of equal significance are the following passages forming part of Shanti Conductors and where the aspect of retroactive application was explained in the following words:-

when used with reference to an enactment may mean (i) affecting an existing contract; or (ii) reopening up of past, closed and completed transaction; or (iii) affecting accrued rights and remedies; or (iv) affecting procedure. Words and Phrases, Permanent Edn., Vol. 37-A, pp. 224-25, defines a "retrospective or retroactive law" as one which takes away or impairs vested or accrued rights acquired under existing laws. A retroactive law takes away or impairs vested rights acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability, in respect to transactions or considerations already past.

21. In Advanced Law Lexicon by P. Ramanatha Aiyar (3rd Edn., 2005) the expressions "retroactive" and "retrospective" have been defined as follows at p. 4124, Vol. 4:

66. Further in Jay Mahakali Rolling Mills v. Union of India [Jay Mahakali Rolling Mills v. Union of India, (2007) 12 SCC 198] , explaining retroactive and retrospective the following has been laid down: (SCC p. 200, para 8) "8. "Retrospective" means looking backward, contemplating what is past, having reference to a statute or things existing before the statute in question. Retrospective law means a law which looks backward or contemplates the past; one, which is made to affect acts or facts occurring, or rights occurring, before it comes into force. Retroactive statute means a statute, which creates a new obligation on transactions or considerations or destroys or impairs vested rights."

67. Retroactivity in the context of the statute consists of application of new rule of law to an act or transaction which has been completed before the rule was promulgated.

68. In the present case, the liability of buyer to make payment and day from which payment and interest become payable under Sections 3 and 4 does not relate to any event which took place prior to the 1993 Act, it is not even necessary for us to say that the 1993 Act is retroactive in operation. The 1993 Act is clearly prospective in operation and it is not necessary to term it as retroactive in operation. We, thus, do not subscribe to the opinion dated 31-8-2016 [Shanti Conductors (P) Ltd. v. Assam SEB, (2016) 15 SCC 13] of one of the Hon'ble Judges holding that the 1993 Act is retroactive."

166. The judgment in Katta Sujatha Reddy and Anr. vs. Siddamsetty Infra Projects Private Limited and Ors.47 had dealt with the question of whether some of the amendments introduced in the Specific Relief Act, 1963 48, in 2018 could be said to have retrospective application. The Supreme Court in Katta Sujatha Reddy held that Section 10 of the SRA could not be viewed as being merely procedural since it also affected substantive principles underlying contracts in general. The issue was thus answered as under: -

52. This provision, which remained in the realm of the courts' discretion, was converted into a mandatory provision, prescribing a power the courts had to exercise when the ingredients were fulfilled. This was a significant step in the growth of commercial law as the sanctity of contracts was reinforced with parties having to comply with contracts and thereby reducing efficient breaches.

53. Under the pre-amended Specific Relief Act , one of the major considerations for grant of specific performance was the adequacy of damages under Section 14(1)(a) . However, this consideration has now been completely done away with, in order to provide better compensation to the aggrieved party in the form of specific performance.

54. Having come to the conclusion that the 2018 Amendment was not a mere procedural enactment, rather it had substantive principles built into its working, this Court cannot hold that such amendments would apply retrospectively.

55. In Shyam Sunder v. Ram Kumar [Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24] , this Court held as under : (SCC pp. 42-43, para

28) W.P.(C) 1065/2021 & other connected matters Page 258 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 "28. From the aforesaid decisions the legal position that emerges is that when a repeal of an enactment is followed by a fresh legislation, such legislation does not affect the substantive rights of the parties on the date of the suit or adjudication of the suit unless such a legislation is retrospective and a court of appeal cannot take into consideration a new law brought into existence after the judgment appealed from has been rendered because the rights of the parties in an appeal are determined under the law in force on the date of the suit. However, the position in law would be different in the matters which relate to procedural law but so far as substantive rights of parties are concerned, they remain unaffected by the amendment in the enactment. We are, therefore, of the view that where a repeal of provisions of an enactment is followed by fresh legislation by an amending Act, such legislation is prospective in operation and does not affect substantive or vested rights of the parties unless made retrospective either expressly or by necessary intendment. We are further of the view that there is a presumption against the retrospective operation of a statute and further a statute is not to be construed to have a greater retrospective operation than its language renders necessary, but an amending Act which affects the procedure is presumed to be retrospective, unless the amending Act provides otherwise. We have carefully looked into the new substituted Section 15 brought in the parent Act by the Amendment Act, 1995 but do not find it either expressly or by necessary implication retrospective in operation which may affect the rights of the parties on the date of adjudication of the suit and the same is required to be taken into consideration by the appellate court. In Shanti Devi v. Hukum Chand [Shanti Devi v. Hukum Chand, (1996) 5 SCC 768] this Court had occasion to interpret the substituted Section 15 with which we are concerned and held that on a plain reading of Section 15 , it is clear that it has been introduced prospectively and there is no question of such section affecting in any manner the judgment and decree passed in the suit for pre-emption affirmed by the High Court in the second appeal. We are respectfully in agreement with the view expressed in the said decision and hold that the substituted Section 15 in the absence of anything in it to show that it is retrospective, does not affect the right of the parties which accrued to them on the date of the suit or on the date of passing of the decree by the court of first instance. We are also of the view that the present appeals are unaffected by change in law insofar it related to W.P.(C) 1065/2021 & other connected matters Page 259 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 determination of the substantive rights of the parties and the same are required to be decided in the light of the law of pre-emption as it existed on the date of passing of the decree."

56. From the aforesaid decision in Shyam Sunder case [ Shyam Sunder v. Ram Kumar , (2001) 8 SCC 24] , it is clear that when a substantive law is brought about by amendment, there is no assumption that the same ought to be given retrospective effect. Rather, there is a requirement for the legislature to expressly clarify whether the aforesaid amendments ought to be retrospective or not.

57. In the light of the aforesaid discussion, it is clear that ordinarily, the effect of amendment by substitution would be that the earlier provisions would be repealed, and amended provisions would be enacted in place of the earlier provisions from the date of inception of that enactment. However, if the substituted provisions contain any substantive provisions which create new rights, obligations, or take away any vested rights, then such substitution cannot automatically be assumed to have come into force retrospectively. In such cases, the legislature has to expressly provide as to whether such substitution is to be construed retrospectively or not.

58. In the case at hand, the Amendment Act contemplates that the said substituted provisions would come into force on such date as the Central Government may appoint, by notification in the Official Gazette, or different dates may be appointed for different provisions of the Act. It may be noted that 1-10-2018 was the appointed date on which the amended provisions would come into effect.

59. In view of the above discussion, we do not have any hesitation in holding that the 2018 Amendment to the Specific Relief Act is prospective and cannot apply to those transactions that took place prior to its coming into force."

167. The petitioners while questioning the extent to which the Proviso to Section 132(4) could be stretched, also bid us to bear in consideration that a Proviso is in a sense an exception and cannot be interpreted so as to expand the meaning of the principal provision. This well settled legal proposition was lucidly explained by the Supreme W.P.(C) 1065/2021 & other connected matters Page 260 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Court in Ishverlal Thakorelal Almaula vs. Motibhai Nagjibhai 49 a decision cited on behalf of the petitioners in this respect and relevant passages whereof are extracted hereunder: -

168. The petitioners then drew our attention to the judgment in S. Sundaram Pillai vs. V.R. Pattabiramanb50 , and where the purpose of a proviso was explained more elaborately as would become apparent from a reading of the following passages: -

29. Odgers in Construction of Deeds and Statutes (5th Edn.) while referring to the scope of a proviso mentioned the following ingredients:

p. 318. Though framed as a proviso, such a clause may exceptionally have the effect of a substantive enactment."

30. Sarathi in Interpretation of Statutes at pages 294-295 has collected the following principles in regard to a proviso:

31. In the case of Local Government Board v. South Stoneham Union [1909 AC 57 : 99 LT 896 (HL)] Lord Macnaghten made the following observation:

32. In Ishverlal Thakorelal Almaula v. Motibhai Nagjibhai [(1966) 1 SCR 367 : AIR 1966 SC 459 : (1967) 1 SCJ 41] it was held that the main object of a proviso is merely to qualify the main enactment. In Madras and Southern Mahrata Railway Co. Ltd. v. Bezwada Municipality [AIR 1944 PC 71 : 71 IA 113 : 218 IC 333] Lord Macmillan observed thus:

33. The above case was approved by this Court in CIT v. Indo Mercantile Bank Ltd. [1959 Supp (2) SCR 256 : AIR 1959 SC 713] where Kapur, J. held that the proper function of a proviso was merely to qualify the generality of the main enactment by providing an exception and taking out, as it were, from the main enactment a portion which, but for the proviso, would fall within the main enactment. In Shah Bhojraj Kuverji Oil Mills and Ginning Factory v. Subbash Chandra Yograj Sinha [(1962) 2 SCR 159 : AIR 1961 SC 1596 : (1962) 1 SCJ 377] Hidayatullah, J., as he then was, very aptly and succinctly indicated the parameters of a proviso thus:

34. In West Derby Union v. Metropolitan Life Assurance Society [1897 AC 647 : 66 LJ Ch 726 : 77 LT 284 (HL)] while guarding against the danger of interpretation of a proviso, Lord Watson observed thus:

35. A very apt description and extent of a proviso was given by Lord Oreburn in Rhondda Urban District Council v. Taff Vale Railway Co. [1909 AC 253 : 100 LT 713 (HL)] where it was pointed out that insertion of a proviso by the draftsman is not always strictly adhered to its legitimate use and at times a section worded as a proviso may wholly or partly be in substance a fresh enactment adding to and not merely excepting something out of or qualifying what goes before. To the same effect is a later decision of the same Court W.P.(C) 1065/2021 & other connected matters Page 264 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 in Jennings v. Kelly [1940 AC 206 : (1939) 4 All ER 464 : 162 LT 1 (HL)] where it was observed thus:

36. While interpreting a proviso care must be taken that it is used to remove special cases from the general enactment and provide for them separately.

37. In short, generally speaking, a proviso is intended to limit the enacted provision so as to except something which would have otherwise been within it or in some measure to modify the enacting clause. Sometimes a proviso may be embedded in the main provision and becomes an integral part of it so as to amount to a substantive provision itself.

38. Apart from the authorities referred to above, this Court has in a long course of decisions explained and adumbrated the various shades, aspects and elements of a proviso. In State of Rajasthan v. Leela Jain [(1965) 1 SCR 276 : AIR 1965 SC 1296 :

39. In the case of STO, Circle-I, Jabalpur v. Hanuman Prasad [(1967) 1 SCR 831 : AIR 1967 SC 565 : (1967) 19 STC 87] Bhargava, J. observed thus:

40. In Commissioner of Commercial Taxes v. R.S. Jhaver [(1968) 1 SCR 148 : AIR 1968 SC 59 : 20 STC 453] this Court made the following observations:

41. In Dwarka Prasad v. Dwarka Das Saraf [(1976) 1 SCC 128 :

*** If the rule of construction is that prima facie a proviso should be limited in its operation to the subject-matter of the enacting clause, the stand we have taken is sound. To expand the enacting clause, inflated by the proviso, sins against the fundamental rule of construction that a proviso must be considered in relation to the principal matter to which it stands as a proviso. A proviso ordinarily is but a proviso, although the golden rule is to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other and result in a harmonious construction."

42. In Hiralal Rattanlal v. State of U.P. [(1973) 1 SCC 216 : 1973 SCC (Tax) 307] this Court made the following observations: [SCC para 22, p. 224: SCC (Tax) p. 315] "Ordinarily a proviso to a section is intended to take out a part of the main section for special treatment. It is not expected to enlarge the scope of the main section. But cases have arisen in which this Court has held that despite the fact that a provision is called proviso, it is really a separate provision and the so-called proviso has substantially altered the main section."

43. We need not multiply authorities after authorities on this point because the legal position seems to be clearly and manifestly well established. To sum up, a proviso may serve four different purposes:

169. It was then contended that even if a statute were construed to be procedural if its operation were to affect vested rights adversely, it would be liable to be held to have prospective application only. In support of the aforesaid proposition the petitioners cited the decision of the Supreme Court in Garikapati Veeraya vs. N. Subbaih Choudhry and Ors51 and where the legal position was summarized as follows:-

170. Further, reliance was also placed on the decision in Hitendra Vishnu Thakur and Ors. vs. State of Maharashtra 52, where while dealing with the Terrorist and Disruptive Activities (Prevention) Act, 1987 , the Supreme Court had held:-

171. It was then lastly urged that a statute which imposes penal consequences cannot be recognized to have a retroactive application since conferment of such a construction would clearly violate Article 20(1) of the Constitution. The petitioners sought to draw sustenance in this respect from the following paragraphs of the judgment in T. Barai vs. Henry Ah Hoe53 :-

In State of Punjab v. Mohar Singh [AIR 1955 SC 84: (1955) 1 SCR 893: 1955 SCJ 25 : 1955 Cri LJ 254] , this Court has elaborately dealt with the effect of repeal. In the case of a simple repeal, there is scarcely any room for expression of a contrary opinion. But when the repeal is followed by fresh legislation on the same subject, the court would undoubtedly have to look to the provisions of the new W.P.(C) 1065/2021 & other connected matters Page 270 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Act, but only for the purpose of determining whether they indicate a different intention. "The line of inquiry would be, not whether the new Act expressly keeps alive old rights and liabilities", in the words of Mukherjea, J., "but whether it manifests an intention to destroy them." The Court held that it cannot subscribe to the broad proposition that Section 6 of the General clauses Act is ruled out when there is repeal of an enactment followed by fresh legislation. Section 6 would be applicable in such cases also unless the new legislation manifests an intention incompatible with or contrary to the provisions of the section. Such incompatibility would have to be ascertained from a consideration of all the relevant provisions of the new Act and the mere absence of a saving clause is not by itself material. The Court therefore held that the provisions of Section 6 of the General clauses Act will apply to a case of repeal even if there is simultaneous enactment unless a contrary intention can be gathered from the new enactment. Of course, the consequences laid down in Section 6 of the General clauses Act will apply only when a statute or regulation having the force of a statute is actually repealed. It has no application when a statute which is of a temporary nature automatically expires by efflux of time. The principles laid down by the Court in Mohar Singh case [AIR 1955 SC 84: (1955) 1 SCR 893: 1955 SCJ 25 : 1955 Cri LJ 254] , have consistently been followed in subsequent cases. The old doctrine of extinguishing or effacing the repealed law for all purposes and intents except for the acts past and closed has now given way to the principles enunciated by the Court in Mohar Singh case [AIR 1955 SC 84: (1955) 1 SCR 893: 1955 SCJ 25 : 1955 Cri LJ 254] .

xxxx xxxx xxxx

21. Lastly, the learned Judge refers to the new offences created by the Central Amendment Act, one of them being that under Section 16(1)(b) of the Act with regard to manufacturing for sale, or storing, or selling, or distributing any adulterant which was not in the Act at any time before. Accordingly, he holds that it is not possible to give retrospective effect to the other parts of the Act and observes that it could never have been the intention of the legislature nor was it possible to give retrospective effect to the Act. According to him, Article 20(1) of the Constitution stands in the way of giving retrospective effect to Section 16(1)(b) of the Act and thus renders the act which was otherwise innocent at the time when it was done to be an offence by later enactment. We are not concerned with new offences created by the Central Amendment Act or with offences for which an enhanced punishment is provided for and therefore there is no question of Article 20(1) of the Constitution being attracted. We are here concerned with the same offence, namely, an offence W.P.(C) 1065/2021 & other connected matters Page 271 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 punishable under Section 16(1)(a) of the Act for which a reduced punishment is provided for.

22. It is only retroactive criminal legislation that is prohibited under Article 20(1). The prohibition contained in Article 20(1) is that no person shall be convicted of any offence except for violation of a law in force at the time of the commission of the act charged as an offence prohibits nor shall he be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence. It is quite clear that insofar as the Central Amendment Act creates new offences or enhances punishment for a particular type of offence no person can be convicted by such ex post facto law nor can the enhanced punishment prescribed by the amendment be applicable. But insofar as the Central Amendment Act reduces the punishment for an offence punishable under Section 16(1)(a) of the Act, there is no reason why the accused should not have the benefit of such reduced punishment. The rule of beneficial construction requires that even ex post facto law of such a type should be applied to mitigate the rigour of the law. The principle is based both on sound reason and common sense. This finds support in the following passage from Craies on Statute Law, 7th Edn., at pp. 388-89:

23. To illustrate, if Parliament were to reenact Section 302 of the Penal Code, 1860 and provide that the punishment for an offence of murder shall be sentence for imprisonment for life instead of the present sentence of death or imprisonment for life, then it cannot be that the courts would still award a sentence of death even in pending cases.

24. In Rattan Lal v. State of Punjab [AIR 1965 SC 444: (1964) 7 SCR 676: (1965) 1 SCJ 779: (1965) 1 Cri LJ 360] , the question that fell for consideration was whether an appellate court can extend the benefit of Probation of Offenders Act, 1958 which had come into force after the accused had been convicted of a criminal offence. The Court by majority of 2: 1 answered the question in the affirmative. Subba Rao, J. who delivered a majority opinion, concluded that in considering the question, the rule of beneficial construction required that even ex post facto law of the type involved in that case should be applied to reduce the punishment.

25. It is settled both on authority and principle that when a later statute again describes an offence created by an earlier statute and imposes a different punishment, or varies the procedure, the earlier statute is repealed by implication. In Michell v. Brown [(1958) 120 ER 909, 912: 32 LTOS 146 : 7 WR 80] Lord Campbell put the matter thus:

The rule is however subject to the limitation contained in Article 20(1) against ex post facto law providing for a greater punishment and has also no application where the offence described in the later Act is not the same as in the earlier Act i.e. when the essential ingredients of the two offences are different.

26. In the premises, the Central Amendment Act having dealt with the same offence as the one punishable under Section 16(1)(a) and provided for a reduced punishment, the accused must have the benefit of the reduced punishment. We wish to make it clear that anything that we have said shall not be construed as giving to the Central Amendment Act a retrospective operation insofar as it creates new offences or provides for an enhanced punishment."

172. In support of the aforesaid proposition, the petitioner also additionally drew our attention to the following paragraphs forming part of the judgment of the Bombay High Court in Balu Shankar Patil vs. State of Maharashtra 54:-

11. In State Bank's Staff Union v. Union of India , (2005) 7 SCC 584, Their Lordships observed as follows in paragraph 19.

[2007] (5) Mh. LJ 675 W.P.(C) 1065/2021 & other connected matters Page 274 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 "19. Every sovereign legislature possesses the right to make retrospective legislation. The power to make laws includes the power to give it retrospective effect. Craies on Statute Law (7th Edn.) at p. 387 defines retrospective statutes in the following words:

12. Their Lordships observed that every sovereign legislature possesses the right to make retrospective legislation and then considered what the "retrospective" means. Their Lordships observed as follows in paragraph 20 as follows:

when used with reference to an enactment may mean (i) affecting an existing contract; or (ii) reopening up of past, closed and completed transaction; or (iii) affecting accrued rights and remedies; or (iv) affecting procedure. Words and Phrases, Permanent Edn., Vol. 37-A, pp. 224-25, defines a "retrospective or retroactive law" as one which takes away or impairs vested or accrued rights acquired under existing laws. A retroactive law takes away or impairs vested rights acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability, in respect to transactions or considerations already past."

13. Their Lordships further observed in paragraph 21 as follows:

14. In T. Barai v. Henry Ah Hoe , (1983) 1 SCC 177 : AIR 1983 SC 150, the Supreme Court observed as follows in paragraph 22:

15. In view of this authority, it becomes clear that the act, which was not prohibited or not offence at the time of commission would not be made an offence by some legislation with retrospective effect and nor a penalty greater than which might have been inflicted under the law in force could be made applicable to the act committed at a particular time by making a law later on with retrospective effect. Therefore, the retrospective or retroactive law, which takes away or impairs vested or accrued rights under the existing law or which creates a new obligation or imposes a new duty or attaches a new disability or which makes an act, which was not an offence before the act, an offence under the Act, or which provides a punishment higher than that obtaining at the time of commission of the offence, is prohibited under Article 20(1) of the Constitution. However, if the law mollifies the rigour of the criminal law and thereby give certain benefits to the accused, that law is not prohibited under Article 20(1) of the Constitution of India."

173. While various other decisions were also cited in this respect and which have essentially reiterated the legal position as enunciated in the judgments aforenoted, we for the sake of completeness also deem it apposite to reproduce the following paragraphs which appear in the decision of the Supreme Court in Virtual Soft Systems Ltd. vs. W.P.(C) 1065/2021 & other connected matters Page 276 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Commissioner of Income Tax 55:-

Ltd. [(1995) 4 SCC 485 : (1995) 215 ITR 165] The Allahabad High Court has also taken the same view in Zam W.P.(C) 1065/2021 & other connected matters Page 278 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Zam Tanners [(2005) 279 ITR 197 (All)] . Notes on Clauses on the amendment introduced by the Finance Act, 2002 makes specific mention inter alia of the amendment to be effective from 1-4-2003 of which the Bombay High Court has failed to take notice in its judgment in CIT v. Chemiequip Ltd. [(2004) 265 ITR 265 (Bom)]"

174. Mr. Hossain, learned counsel appearing for the respondents, however, questioned the soundness of the arguments on retrospectivity and addressed the following submissions. Learned counsel firstly reminded us of the debate and deliberations which had ensued both at the level of the executive arm of the Union as well as the legislative bodies and all of which had found an imperative necessity to revamp the regulatory regime with respect to auditing firms. According to Mr. Hossain, since a peer review was found to be clearly flawed and unresponsive, Parliament had deliberately intervened by introducing Section 132 in the statute book so as to remedy the mischief of errant companies and auditing firms having failed to adequately regulate their activities.

175. According to Mr. Hossain, no CA or auditing firm can claim to have a vested right to commit professional or other misconduct and not be tried. It was pointed out that misconduct already stood defined in the CA Act and made such conduct unlawful right from the time of the commencement of that statute in 1949. It was thus submitted that since professional or other misconduct was always triable under the CA Act , the petitioners are clearly incorrect when they argue that a vested right had been taken away by Section 132(4) of the Act.

176. Mr. Hossain laid great emphasis on the fact that Section 132(4) does not create a new category of misconduct since it merely W.P.(C) 1065/2021 & other connected matters Page 279 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 incorporates the definition of professional or other misconduct as appearing in Section 22 of the CA Act. It was thus submitted that a misdemeanor which would fall within the meaning of professional or other misconduct had remained unaltered with Section 132(4) merely providing that the expression "professional or other misconduct" would have the same meaning as assigned to that phrase by the CA Act .

177. It was further submitted that the obligation to comply with SAs too was one which existed even prior to the introduction of Section 132 as would be manifest from a reading of Section 143(9) of the Companies Act alongside Section 147(2) thereof. It was argued that by virtue of the aforenoted two statutory provisions, non-compliance with SAs was a criminal offence which existed and stood recognized by law even prior to 2018 when Section 132 came to be introduced. It was thus submitted by Mr. Hossain that it would be wholly incorrect to suggest that either a vested right had come to be infringed or that the provisions of Section 132 violated rights and the protection flowing from Article 20(1) of the Constitution.

178. Mr. Hossain then vehemently argued that Article 20(1) can clearly have no application since the expression penalty as appearing therein is used in a narrow sense and stands confined to a criminal prosecution. It was thus argued that the said provision is clearly inapplicable to a civil penalty arising out of disciplinary proceedings. According to Mr. Hossain while this proposition is well settled, since the petitioners have repeatedly alluded to an infraction of Article 20(1) , it would be apposite to refer to the following enunciation of the legal position as it appears in Shiv Dutt Rai Fateh Chand vs. Union of W.P.(C) 1065/2021 & other connected matters Page 280 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 India 56:-

section (2-A) of Section 9 of the Act specifically refers to certain acts and omissions which are offences for which a criminal prosecution would lie and the provisions relating to offences have not been given retrospective effect by Section 9 of the Amending Act. The argument based on Article 20(1) of the Constitution is, therefore, rejected."

179. Proceeding along these lines, Mr. Hossain submitted that Section 132 neither introduces a new or novel concept of misconduct nor does NFRA seek to levy a penalty greater than the quantum of penalty envisaged under the CA Act and which is a fine which may extend to INR 5 lakhs for all cases pertaining to the period prior to 2018. It was his submission that even the penalty of debarment is lesser when compared to the specter of permanent removal from the register by the Council as was envisioned under the CA Act . The challenge according to Mr. Hossain based on Article 20(1) of the Constitution is thus wholly misconceived.

180. It was further submitted that the essence of Section 132(4) of the Companies Act is essentially a change in the regulatory mechanism pertaining to audits and auditing standards driven by the legislative policy of bringing a certain class of auditors engaged in the audit of financial statements to be overseen by an expert body in public interest. It was his contention that Section 132 now envisages those cases being examined by an independent regulatory body in line with global practices and thus following the trend of the self- regulatory model which had earlier prevailed having been jettisoned the world over. Mr. Hossain submitted that Section 132(4) thus merely represents a change W.P.(C) 1065/2021 & other connected matters Page 282 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 in forum. Mr. Hossain submitted that the legislative amendments represented by Section 132 are also in sync with the observations of the Supreme Court and which had held that accounting firms can no longer be left to self-regulate and had underscored the need for the creation of an adequate oversight mechanism.

181. Mr. Hossain also referred to the following chart and with the aid of which he sought to illustrate and lend clarity to the aforenoted submissions. The chart which seeks to highlight the similarity between Section 21B of the CA Act and Section 132(4)(c) is reproduced below:-

182. Mr. Hossain argued that while interpreting a statutory provision, Courts as is well-settled, are obliged to bear in mind the nature of the remedy and the mischief which a Legislature seeks to address. Learned counsel thus urged us to interpret Section 132(4) in a manner which suppresses the mischief and furthers the cure. He referred to the celebrated Heydon's principle which came to be expounded in Heydon's Case 57 and submitted that since the system of a peer review had been found to be inadequate, Parliament was compelled to step in and formulate a new regulatory mechanism which would be more robust and responsive. The statutory procedure now embodied in Section 132(4), according to learned counsel, was intended to overcome the various shortcomings which beset the earlier statutory regime and to learn from the bitter experiences of the past. Learned counsel thus submitted that there exists no justification for the Court to strike down Section 132(4) on grounds as suggested by the petitioners.

(1584) 76 ER 637 W.P.(C) 1065/2021 & other connected matters Page 284 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26

183. Mr. Hossain then contended that a statutory audit of a company was undoubtedly liable to be conducted in accordance with law and in compliance with the SAs which are binding on auditors by virtue of Section 143(9) of the Companies Act. These, according to learned counsel, were obligations which applied to auditors in general even prior to the introduction of Section 132(4). It was in the aforesaid light that Mr. Hossain submitted that the creation of the NFRA does not alter the liability of a statutory auditor. NFRA, according to Mr. Hossain, is merely envisaged to be an authority which would monitor and enforce compliance with existing SAs and which had themselves been formulated in accordance with law and were binding on statutory auditors. It was thus submitted that it would be wholly incorrect for the petitioners to argue that a new obligation stands created. This more so since NFRA would be obliged to examine allegations of misconduct on the anvil of SAs which already existed and which were liable to be adhered to by all statutory auditors in any case.

184. It was further argued that no person can claim to have a vested right in a particular forum. This principle, Mr. Hossain submitted, stands succinctly explained by the Supreme Court in New India Insurance Co. Ltd. vs. Shanti Misra58 as would be evident from the following extracts of that judgment:-

Otherwise the general rule is to make it retrospective. The expressions "arising out of an accident" occurring in sub-section (1) and "over the area in which the accident occurred", mentioned in sub-section (2) clearly show that the change of forum was meant to be operative retrospectively irrespective of the fact as to when the accident occurred. To that extent there was no difficulty in giving the answer in a simple way. But the provision of limitation of 60 days contained in sub-section (3) created an obstacle in the straight application of the well-established principle of law. If the accident had occurred within 60 days prior to the constitution of the tribunal then the bar of limitation provided in sub-section (3) was not an impediment. An application to the tribunal could be said to be the only remedy. If such an application, due to one reason or the other, could not be made within 60 days then the tribunal had the power to condone the delay under the proviso. But if the accident occurred more than 60 days before the constitution of the tribunal then the bar of limitation provided in sub-section (3) of Section 110-A on its face was attracted. This difficulty of limitation led most of the High Courts to fall back upon the proviso and say that such a case will be a fit one where the tribunal would be able to condone the delay under the proviso to sub- section (3), and led others to say that the tribunal will have no jurisdiction to entertain such an application and the remedy of going to the civil court in such a situation was not barred under Section 110- F of the Act. While taking the latter view the High Court failed to notice that primarily the law engrafted in Sections 110-A and 110-F was a law relating to the change of forum."

185. Yet another decision which was cited for our consideration in this respect was that of Securities and Exchange Board of India vs. Classic Credit Ltd. 59 and to Paras 49 and 50 of the report which are reproduced hereinbelow:-

And also, that generally change of "forum" of trial is procedural, and normally following the above proposition, it is presumed to be retrospective in nature unless the amending statute provides otherwise. This determination emerges from the decision of this Court in Hitendra Vishnu Thakur v. State of Maharashtra [Hitendra Vishnu Thakur v. State of Maharashtra, (1994) 4 SCC 602 : 1994 SCC (Cri) 1087] ; Ranbir Yadav v. State of Bihar [Ranbir Yadav v. State of Bihar, (1995) 4 SCC 392 : 1995 SCC (Cri) 728] and Kamlesh Kumar v. State of Jharkhand [Kamlesh Kumar v. State of Jharkhand, (2013) 15 SCC 460 : (2014) 6 SCC (Cri) 489] , as well as, a number of further judgments noted above.

50. We have also no doubt, that alteration of "forum" has been considered to be procedural, and that, we have no hesitation in accepting the contention advanced on behalf of the SEBI, that change of "forum" being procedural, the amendment of the "forum" would operate retrospectively, irrespective of whether the offence allegedly committed by the accused was committed prior to the amendment."

186. Proceeding then to the Proviso to Section 132(4) itself, it was Mr. Hossain's contention that a plain reading of the Proviso would establish that the legislative intendment clearly was to debar any authority other than the NFRA from initiating an investigation even in respect of matters relating to professional or other misconduct committed prior to Section 132(4) coming into force. According to learned counsel the expression "such matters of misconduct" would clearly mean misconduct which may have been committed prior to 24 October 2018, the date when Section 132(4) came into force. According to learned counsel, the language of the proviso leaves no room for doubt of the legislative intent being that allegations of professional misconduct arising out of audits falling within a specified class being examined exclusively by the NFRA. The fact that Parliament clearly intended for the NFRA to exclusively try such cases, W.P.(C) 1065/2021 & other connected matters Page 287 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 according to learned counsel, is further fortified by that provision in unambiguous terms also interdicting pending investigations and enquiries. The bar with respect to initiation as well as continuation of enquiries as created by that provision would, according to Mr. Hossain, lead one to the irrefutable conclusion of the statute intended to operate retroactively.

187. Mr. Hossain also commended for our consideration the concept of a continuing offense to submit that a misconduct even if committed in the past does not get effaced by mere passage of time. According to learned counsel, a misconduct is not governed by a statute of limitation on the basis of which the petitioners could have legitimately urged that a misdemeanor committed prior to 2018 cannot be enquired into. Learned counsel referred to the following definitions of the word "continue/continuing" as explained in the Black's Law Dictionary: -

188. Proceeding ahead to deal with the argument of retrospectivity, Mr. Hossain submitted that the fundamental principles which would govern the operation of statutes were lucidly enunciated by the Supreme Court in Zile Singh vs. State of Haryana60 in the following terms: -

and (iv) what it was the legislature contemplated. (p. 388) The rule against retrospectivity does not extend to protect from the effect of a repeal, a privilege which did not amount to accrued right. (p. 392)

16. Where a statute is passed for the purpose of supplying an obvious omission in a former statute or to "explain" a former statute, the subsequent statute has relation back to the time when the prior W.P.(C) 1065/2021 & other connected matters Page 289 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Act was passed. The rule against retrospectivity is inapplicable to such legislations as are explanatory and declaratory in nature. A classic illustration is the case of Attorney General v. Pougett [(1816) 2 Price 381 : 146 ER 130] (Price at p. 392). By a Customs Act of 1873 (53 Geo. 3, c. 33) a duty was imposed upon hides of 9s 4d, but the Act omitted to state that it was to be 9s 4d per cwt., and to remedy this omission another Customs Act (53 Geo. 3, c. 105) was passed later in the same year. Between the passing of these two Acts some hides were exported, and it was contended that they were not liable to pay the duty of 9s 4d per cwt., but Thomson, C.B., in giving judgment for the Attorney General, said: (ER p. 134) "The duty in this instance was, in fact, imposed by the first Act; but the gross mistake of the omission of the weight, for which the sum expressed was to have been payable, occasioned the amendment made by the subsequent Act: but that had reference to the former statute as soon as it passed, and they must be taken together as if they were one and the same Act;" (Price at p. 392)

17. Maxwell states in his work on Interpretation of Statutes (12th Edn.) that the rule against retrospective operation is a presumption only, and as such it "may be overcome, not only by express words in the Act but also by circumstances sufficiently strong to displace it"

(p. 226). Sometimes, where the sense of the statute demands it or where there has been an obvious mistake in drafting, a court will be prepared to substitute another word or phrase for that which actually appears in the text of the Act (p. 231).

18. In a recent decision of this Court in National Agricultural Coop. Marketing Federation of India Ltd. v. Union of India [(2003) 5 SCC 23] it has been held that there is no fixed formula for the expression of legislative intent to give retrospectivity to an enactment. Every legislation whether prospective or retrospective has to be subjected to the question of legislative competence. The retrospectivity is liable to be decided on a few touchstones such as: (i) the words used must expressly provide or clearly imply retrospective operation; (ii) the retrospectivity must be reasonable and not excessive or harsh, otherwise it runs the risk of being struck down as unconstitutional;

(iii) where the legislation is introduced to overcome a judicial decision, the power cannot be used to subvert the decision without removing the statutory basis of the decision. There is no fixed W.P.(C) 1065/2021 & other connected matters Page 290 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 formula for the expression of legislative intent to give retrospectivity to an enactment. A validating clause coupled with a substantive statutory change is only one of the methods to leave actions unsustainable under the unamended statute, undisturbed. Consequently, the absence of a validating clause would not by itself affect the retrospective operation of the statutory provision, if such retrospectivity is otherwise apparent.

19. The Constitution Bench in Shyam Sunder v. Ram Kumar [(2001) 8 SCC 24] has held: (SCC p. 49, para 39) "Ordinarily when an enactment declares the previous law, it requires to be given retroactive effect. The function of a declaratory statute is to supply an omission or to explain a previous statute and when such an Act is passed, it comes into effect when the previous enactment was passed. The legislative power to enact law includes the power to declare what was the previous law and when such a declaratory Act is passed, invariably it has been held to be retrospective. Mere absence of use of the word 'declaration' in an Act explaining what was the law before may not appear to be a declaratory Act but if the court finds an Act as declaratory or explanatory, it has to be construed as retrospective." (p. 2487).

20. In Bengal Immunity Co. Ltd. v. State of Bihar [(1955) 2 SCR 603 : AIR 1955 SC 661] , Heydon case [(1584) 3 Co Rep 7a : 76 ER 637] was cited with approval. Their Lordships have said: (SCR pp. 632-33) "It is a sound rule of construction of a statute firmly established in England as far back as 1584 when Heydon case [(1584) 3 Co Rep 7a : 76 ER 637] was decided that-- '... for the sure and true interpretation of all statutes in general (be they penal or beneficial, restrictive or enlarging of the common law) four things are to be discerned and considered--

1st. What was the common law before the making of the Act.

2nd. What was the mischief and defect for which the common law did not provide.

3rd. What remedy Parliament hath resolved and appointed to cure the disease of the Commonwealth, and 4th. The true reason of the remedy; and then the office of all the judges is always to make such construction as shall suppress the mischief, and advance the remedy, and to suppress subtle inventions and evasions for continuance of W.P.(C) 1065/2021 & other connected matters Page 291 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 the mischief, and pro privato commodo, and to add force and life to the cure and remedy, according to the true intent of the makers of the Act, pro bono publico.' "

21. In Allied Motors (P) Ltd. v. CIT [(1997) 3 SCC 472] certain unintended consequences flowed from a provision enacted by Parliament. There was an obvious omission. In order to cure the defect, a proviso was sought to be introduced through an amendment. The Court held that literal construction was liable to be avoided if it defeated the manifest object and purpose of the Act. The rule of reasonable interpretation should apply.

189. Mr. Hossain submitted that a presumption against a retrospective applicability can only arise when a vested right is impaired. According to learned counsel, the petitioners have clearly failed to prove or establish that this primordial benchmark has been violated. It was Mr. Hossain's submission that no CA can possibly claim to have a vested right not to be tried for a misconduct. According to learned counsel, it would be preposterous to accept the argument of the petitioners that they acquired a perfected right to be tried for professional misconduct only in accordance with the procedure prescribed by the CA Act .

190. This more so since professional or other misconduct in any case in light of Section 22 of the CA Act already stood prohibited and statutorily declared to be illegal. It was submitted that the said statute itself envisaged an enquiry into allegations of misconduct and the consequential possibility of a CA being exposed to disciplinary action. Mr. Hossain thus submitted that absent any vested right being infringed W.P.(C) 1065/2021 & other connected matters Page 292 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 or impacted, the argument of retrospectivity is clearly misconceived and untenable.

191. It would be appropriate to preface our evaluation of the challenge to Section 132(4) on the basis of its perceived retroactive operation as well as Article 20(1) of the Constitution by taking note of the following two significant statements which were made by Mr. Hossain. Learned counsel firstly stated that NFRA has taken the considered position that it would impose no fines which exceed INR 5 lakhs in respect of any audit conducted prior to October 2018. It was in this regard further stated that any orders if passed by NFRA violating the aforenoted statement would be duly recalled to the aforesaid extent. It becomes pertinent to note that this statement assumes significance since undisputedly the maximum penalty which the CA Act envisages is INR 5 lakhs. The statement so made thus and to an extent impacts the challenge which was mounted to the validity of Section 132(4) on the ground of it having introduced penalties which were more onerous and greater than those existing under the CA Act .

192. The second without prejudice statement, and clearly one which was of greater import and consequence, was that NFRA would not proceed against any firms in respect of an audit that may have been conducted prior to 20 October 2018. The aforesaid statement was made by Mr. Hossain notwithstanding his submission that the obligations of firms to comply with the law as well as the SAs predated the introduction of Section 132 in the Companies Act . However, and since that statement is duly taken on board and accepted, it obviates the Court ruling on the challenge raised by auditing firms to Section 132(4) W.P.(C) 1065/2021 & other connected matters Page 293 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 insofar as it was sought to be extended to audits completed prior to October 2018 and the argument of it being retroactive.

193. However, the Court would still be required to deal with the challenge to its validity insofar as individual CAs' and pre-2018 audits to which they were a party is concerned. The related facet of the common challenge raised before us which too would survive for consideration would be the validity of Section 132(4) as applicable to audits that may be undertaken post its promulgation and as voiced by the two categories of writ petitioners before us. Having broadly delineated the contours of the challenge which survives, we proceed ahead to evaluate the submissions which were advanced in the context of the perceived retrospective operation of Section 132(4).

194. There cannot possibly be a cavil of doubt with respect to the well-established precept that statutes are generally presumed to be prospective in their operation. That presumption, undoubtedly, constitutes the starting point from which a court would embark upon its analysis. Equally well-settled is the principle of that presumption being dispelled only if a court were to find from the language of an enactment or a provision that the law maker intended otherwise. The intention of the legislative body can be discerned either from the express language in which a provision is couched or if it be not explicitly stated, where it is implicitly evident that it was intended to apply to events and acts of the past.

195. As Maxwell eloquently explains in his seminal work on Interpretation of Statutes [12th Edition], the rule against retrospective operation is only a presumption and as such "it may be overcome, not W.P.(C) 1065/2021 & other connected matters Page 294 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 only by express words in the Act but also by circumstances sufficiently strong to displace it." The rule as expounded by Maxwell was quoted with approval by our Supreme Court in Zile Singh and where it was pertinently observed that "If the dominant intention of the legislature can be clearly and doubtlessly spelt out, the inhibition contained in the rule against perpetuity becomes of doubtful applicability as the inhibition of the rule is a matter of degree......". What needs to be acknowledged is that the retrospective application of laws is not an aberration but a well-established and necessary tool to correct historical oversights, address legal vacuums, and ensure that legislative objectives are met in their true spirit. The determination of retrospectivity is guided by several factors, foremost among them being the intent of the Legislature, which may be discerned from the statutory language and the circumstances leading upto the law's enactment. Where the language of the provision indicates a clear or even implicit intent of being intended to have retrospective operation, Courts would give full effect to that intent, recognizing that legislative power extends not only to regulating future conduct but also to rectifying past anomalies. The necessity that may have prompted the enactment is another crucial factor. Often, laws are introduced to address pressing concerns, to correct that which has persisted for long due to outdated legal frameworks, or to fill gaps that have led to uncertainty or unfair advantage. In such cases, applying the law prospectively alone would fail to remedy the mischief the Legislature sought to address, rendering the enactment ineffective in achieving its true objective.

196. While innumerable decisions were cited by learned counsels W.P.(C) 1065/2021 & other connected matters Page 295 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 appearing for respective sides in this regard, in our considered opinion the legal position has remained unaltered and our understanding of the application and operation of statutes has over the centuries continued to be guided by the precepts culled out above.

197. A challenge to a statute on the ground of it being retrospective, however, is invariably and indelibly linked to how it impacts or infringes the rights of an individual or entity. The issue of retrospectivity thus becomes liable to be examined in the backdrop of how the enactment operates and affects the rights which inhere or may have come to be perfected prior to its promulgation. What we seek to emphasize is that the argument of retrospectivity cannot be evaluated in an abstract dimension. That submission has to be necessarily tested on what we find at the crossroads and intersection where the statute meets with the expanse of the bundle of rights which are asserted to exist.

198. The challenge to Section 132(4) and its retrospective application too would thus have to be appreciated on the assertion of certain rights, procedural or substantive, which could be said to have become absolute and fixed. The petitioners had essentially contended that the creation of penalties as well as the shifting of the adjudicatory function from the Council to the NFRA in respect of audits conducted prior to October 2018 would lead one to necessarily come to the irresistible conclusion that the statute impacts rights retrospectively.

199. We at the outset note that the presumption against retrospectivity is founded on the jurisprudential principle of rights not being impaired by statutes which may come to be promulgated after the former have accrued or become absolute. We find a detailed explanation on the W.P.(C) 1065/2021 & other connected matters Page 296 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 meaning liable to be ascribed to the word 'vested' in MGB Gramin Bank vs. Chakrawarti Singh61 and which would be of relevance:-

12. In Webster's Comprehensive Dictionary (International Edition) at p. 1397, "vested" is defined as law held by a tenure subject to no contingency; complete; established by law as a permanent right; vested interest. ( Vide Bibi Sayeeda v. State of Bihar [(1996) 9 SCC 516 : AIR 1996 SC 1936] and J.S. Yadav v. State of U.P. [(2011) 6 SCC 570 : (2011) 2 SCC (L&S) 140] )

13. Thus, vested right is a right independent of any contingency and it cannot be taken away without consent of the person concerned. Vested right can arise from contract, statute or by operation of law. Unless an accrued or vested right has been derived by a party, the policy decision/scheme could be changed. [ Vide Kuldeep Singh v. Govt. (NCT of Delhi ). [(2006) 5 SCC 702 : AIR 2006 SC 2652] ]"

Vested rights were thus explained to mean those which would remain unimpacted by any future change in the legal position. Regard must be had to the fact that if the right hinges on an unsecured or contingent foundation, susceptible to modification by a change in the legislative scheme, then such a right was never truly vested, as it lacked the essential characteristics of being absolute, fixed, or immune to future alteration.

200. In Howrah Municipal Corporation. vs. Ganges Rope Co. Ltd 62, the Supreme Court was called upon to consider the correctness of a submission that an application for obtaining sanction to undertake construction would be governed by the law as it existed on the date when that application was made. Negating that contention, the Supreme Court held that it would be the law as prevalent on the date when the application arises for consideration which would apply. It was observed in Howrah Municipal Corporation that a person could not claim a "settled expectation" of an application for sanction being decided within a particular time. It proceeded further to hold that even such a settled expectation would not constitute a vested right. We deem it apposite to extract para 37 of that decision hereunder:-

201. This would constitute an appropriate juncture to view the celebrated enunciation of the principle of retrospectivity which is found in Halsbury's Laws of England and which has been repeatedly quoted with approval in various judgments handed down by the Supreme Court. The Halsbury's Law of England while defining the expression W.P.(C) 1065/2021 & other connected matters Page 299 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 "retrospective" had stated that a statute would not be construed as retrospective merely because a part of the requisites for its action is drawn from a time antecedent to its passing. The aforesaid proposition as mooted in that authoritative work was cited with approval by the Supreme Court in Darshan Singh vs. Ram Pal Singh63 and where the following observations appear:-

The change of the forum for appeal by enactment may not affect the right of appeal itself. In the instant case we are concerned with the right to contest and not with the right to appeal as such. There is also no dispute as to the propositions of law regarding vested rights being not taken away by an enactment which is ex facie or by implication not retrospective. But merely because an Act envisages a past act or event in the sweep of its operation, it may not necessarily be said to be retrospective. Retrospective, according to Black's Law Dictionary, means looking backward; contemplating what is past; having reference to a statute or things existing before the Act in question. Retrospective law, according to the same dictionary, means a law which looks backward or contemplates the past; one 63 1992 Supp (1) SCC 191 W.P.(C) 1065/2021 & other connected matters Page 300 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 which is made to affect acts or facts occurring, or rights occurring, before it came into force. Every statute which takes away or impairs vested rights acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability in respect to transactions or considerations already past. Retroactive statute means a statute which creates a new obligation on transactions or considerations already past or destroys or impairs vested rights.

36. In Halsbury's Laws of England (4th edn., Vol. 44, at paragraph

921) we find:

37. We are inclined to take the view that in the instant case legislature looked back to January 23, 1973 and not beyond to put an end to the custom and merely because on that cut off date some contests were brought to abrupt end would not make the Amendment Act retrospective. In other words, it would not be retrospective merely because a part of the requisites for its action was drawn from a time antecedent to the Amendment Act coming into force. We are also of the view that while providing that "no person shall contest any alienation of immovable property whether ancestral or non- ancestral or any appointment of an heir to such property", without preserving any right to contest such alienations or appointments as were made after the coming into force of the Principal Act and before the coming into force of the Amendment Act, the intention of the legislature was to cut off even the vested right; and that it was so by implication as well. There is no dispute as to the proposition that retrospective effect is not to be given to an Act unless, the legislature made it so by express words or necessary implication. But in the instant case it appears that this was the intention of the legislature. Similarly courts will construe a provision as conferring power to act retroactively when clear words are used. We find both the intention and language of the Amendment Act clear in these respects.

38. Craies on Statute Law (7th edn., page 389) has stated as under:

We agree with the above statement of law. However, applying the Amending Act of 1973 to alienations prior to January 23, 1973 does not necessarily mean its retrospective operation."

202. As is apparent from the aforesaid discussion, while delving on the subject of retrospectivity of a legislation the Supreme Court had pertinently observed that while it is true that an enactment would not be construed as having retrospective operation unless such be the position which could be countenanced either on account of an express provision or by implication, merely because the statute takes into consideration a past act or event, that would not necessarily lead one to conclude that it be said to operates retrospectively. The Supreme Court in Darshan Singh, went even further to observe that a statute would be deemed to be retroactive only if it created a new obligation on transactions or considerations already past or where its application would result in the destruction or impairment of vested rights.

203. The rules so enunciated also find resonance in the following passages of the judgment of the Supreme Court in Securities and W.P.(C) 1065/2021 & other connected matters Page 302 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Exchange Board of India vs. Rajkumar Nagpal and Ors.64 :-

(emphasis supplied)

100. In Vineeta Sharma v. Rakesh Sharma [Vineeta Sharma v. Rakesh Sharma, (2020) 9 SCC 1 : (2021) 1 SCC (Civ) 119] this Court described the nature of prospective, retrospective, and retroactive laws : (SCC p. 53, para 61) "61. The prospective statute operates from the date of its enactment conferring new rights. The retrospective statute operates backwards and takes away or impairs vested rights acquired under existing laws. A retroactive statute is the one that does not operate retrospectively. It operates in futuro.

(2023) 8 SCC 274 W.P.(C) 1065/2021 & other connected matters Page 303 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 However, its operation is based upon the character or status that arose earlier. Characteristic or event which happened in the past or requisites which had been drawn from antecedent events."

101. The terms "retrospective" and "retroactive" are often used interchangeably. However, their meanings are distinct. This Court succinctly appreciated the difference between these concepts in State Bank's Staff Union (Madras Circle) v. Union of India [State Bank's Staff Union (Madras Circle) v. Union of India , (2005) 7 SCC 584 :

102. Many decisions of this Court define "retroactivity" to mean laws which destroy or impair vested rights. In real terms, this is the definition of "retrospectivity" or "true retroactivity". "Quasi- retroactivity" or simply "retroactivity" on the other hand is a law which is applicable to an act or transaction that is still underway. Such an act or transaction has not been completed and is in the process of completion. Retroactive laws also apply where the status or character of a thing or situation arose prior to the passage of the law. Merely because a law operates on certain circumstances which are antecedent to its passing does not mean that it is retrospective."

204. Hereto, the Supreme Court apart from revisiting the succinct exposition of the legal principle as propounded in Halsbury's Laws of England, it, and in addition, quoted with approval the view penned by the celebrated author G.P. Singh in 'Principles of Statutory Interpretation' and who had opined that if a statute were to be W.P.(C) 1065/2021 & other connected matters Page 304 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 acknowledged as being retrospective merely because it were found to draw from actions taken or completed prior to its passing, every statute would necessarily have to be presumed to apply only to persons born and things which had come into existence after its promulgation. The essential characteristics of a retroactive statute were further explained with the Supreme Court holding that although such an enactment would operate in futuro, its operation itself could be based upon a character or status that had arisen earlier.

205. Tested on the aforesaid principles, we find ourselves unable to sustain the argument that Section 132 is liable to be struck down on the ground that it operates retrospectively and impacts rights which may have been perfected or completed. It becomes relevant to note that the Explanation to Section 132(4) in unambiguous and explicit terms provides that the expression "professional or other misconduct" would have the same meaning as assigned to that phrase by Section 22 of the CA Act. Section 132 therefore, does not create a new species of misconduct nor does it create a liability which was otherwise not contemplated under a pre-existing legislation. "Professional or other misconduct" already stood defined by Section 22 of the CA Act and thus all actions of CAs and auditors were liable to be tested on the basis thereof. It would thus be wholly incorrect to contend that Section 132 creates a new liability with respect to a misconduct or misdemeanor committed prior to October 2018.

206. The principal issue which weighs upon us and compels us to hold that the argument of retrospectivity is unmerited is the facet of professional misconduct having remained unaltered and only the W.P.(C) 1065/2021 & other connected matters Page 305 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 manner and ambit of the inquiry having been amended for a particular class of audits. As noted hereinabove, the argument of retrospectivity is liable to be rejected also because it does not introduce new categories of misconduct or liabilities. Instead, it relies on the pre-existing definition of "professional or other misconduct" under Section 22 of the CA Act. Since the legal characterization of misconduct remains unchanged, the only discernible difference is the manner and scope of the inquiry under Section 132.

207. Suffice it to note that no auditor can possibly claim or assert a vested right having come to be created in respect of professional misconduct that may have been committed prior to Section 132 coming into force. We find ourselves unable to comprehend any right, leave alone a vested right, that could have been claimed to have come into existence in respect of professional conduct which would have fallen within the scope of Section 22 of the CA Act prior to the introduction of Section 132. Vested rights, as was observed in the preceding parts of this decision, would be those which had come to accrue, settle or had become absolute.

208. Vested rights are those which come to be perfected and would remain unimpacted by any contingency. Surely an auditor cannot possibly assert that it had acquired a settled expectation to not be tried in respect of professional or other misconduct merely because that act had come to be completed prior to Section 132 coming into force. Acceptance of the contention as broadly canvassed on behalf of the writ petitioners would essentially mean that professional or other misconduct if committed prior to October 2018 would stand insulated W.P.(C) 1065/2021 & other connected matters Page 306 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 and not be liable to be tried or inquired into under Section 132. We find ourselves unable to countenance that submission since a CA or an auditor cannot justifiably in law argue or assert that it is not liable to be tried for an act of misconduct. We do so observe conscious of the separate contention of the petitioners pertaining to the procedural safeguards which Section 132 allegedly does away with and which is an aspect that we propose to deal with in a subsequent segment of this decision.

209. We are thus of the firm opinion, that no right, let alone a vested right, accrued in favour of the writ petitioners and which could be said to be entitled to be insulated from the reach of Section 132(4). As was pertinently observed by the Supreme Court, a statute is not liable to be viewed as having retroactive operation merely because it draws upon an event or act which preceded its promulgation. Acts of misconduct committed prior to October 2018 were neither accorded nor conferred a shield of immunity. Section 132 does not create a new disqualification or create a novel set or category of misdemeanors to constitute professional or other misconduct. The conduct of an audit, an individual or a firm remains liable to be enquired into based on the obligations and duties which held the field even prior to the introduction of Section 132. The conduct of an audit would continue to be examined and evaluated based on those legal obligations and set of rules which existed earlier.

210. The scrutiny, test and rigor of conduct in the rendering of services as a professional or auditor is a well-understood, rooted and an accepted reality. To raise objections to the new and evolved rigors W.P.(C) 1065/2021 & other connected matters Page 307 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 under Section 132 on the ground that it exposes them to an unprecedented level of scrutiny and that they were previously protected from such rigors would be to incorrectly assume the existence of an immunity prior to Section 132. Therefore, any contention that Section 132 unfairly introduces a novel and retrospective burden on auditors fails to acknowledge that the foundational principles of professional accountability have always remained intact. The only change is in the manner and extent of enforcement and not in the fundamental obligation of auditors to uphold professional and ethical standards.

211. Regard must also be had to the fact that the CA Act incorporated no provision for a firm being held liable for an audit that may have been conducted. The only contingency in which a firm could have been penalised were those envisaged in Sections 21A and 21B and which in turn stood confined to repeat offenses committed by the partner or member. Thus, even though the firm may have been appointed as an auditor, it was the individual partners who alone could have been proceeded against and punished. We have while dealing with the argument of vicarious liability already held that a firm cannot in law disavow or disassociate itself from the actions of its partners and members. They after all act in discharge of the principal obligation which stands placed upon the firm to undertake the audit. This was a serious lacuna and shortcoming in the CA Act .

212. Parliament as well as the expert groups which were formed had after undertaking an exhaustive review of global practices and norms ultimately come to the firm conclusion that peer review and self- corrective or in-house models had neither been found to be effective W.P.(C) 1065/2021 & other connected matters Page 308 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 nor efficacious. Section 132, viewed in that light, therefore borrows, learns and seeks to build upon regulatory regimes prevalent in other parts of the world and thus sync our regulatory practices with global norms. With the spread of international commerce and upon India becoming part of the globalized world order, Parliament appears to have acted in acknowledgement of the imperative need to review the regulatory scheme relating to audits as prevalent in different jurisdictions.

213. Parliament appears to have borne in consideration the indubitable necessity of financial statements being compliant with standards and best practices accepted as the benchmark in different jurisdictions. The system of audit and review in India had to necessarily keep abreast with the winds of change. The amendments embodied in Section 132 are thus a reflection of this change in policy and in that sense clearly remedial. We consequently find ourselves unable to accept the submissions of the writ petitioners addressed on this score.

214. On a consideration of the legislative history preceding the introduction of Section 132 clearly suggests a pre-existing regulatory deficiency or gap was sought to be addressed through the introduction of Section 132 aligning with the broader objective of strengthening oversight mechanisms and enhancing the quality of professional services rendered by audit firms. This measure was implemented not to create new liabilities but to bridge an existing gap in enforcement, ensuring that standards of professional conduct and accountability evolve in tandem with global best practices.

215. The enactment of Section 132 thus represents a progressive W.P.(C) 1065/2021 & other connected matters Page 309 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 regulatory shift, aimed at reinforcing compliance, raising the bar for audit quality, and ensuring that no aspect of professional misconduct or deficiency in service remains unchecked or unsupervised. By instituting a more structured and stringent framework, Section 132 ensures that audit firms and professionals adhere to internationally recognized standards, thereby fostering greater transparency, accountability, and confidence in financial reporting.

216. This regulatory evolution does not operate retrospectively in a punitive sense but rather brings India's auditing and financial oversight framework in line with global standards, ensuring that all professional conduct meets the highest levels of scrutiny and quality assurance. The underlying objective is to create a more robust and reliable regulatory ecosystem, where professional standards are continuously refined to prevent any compromise in audit quality or integrity

217. Of equal import is the Proviso to Section 132 (4) (a) and which prohibits any other institute or body to initiate or continue an investigation once the same has been taken over by the NFRA. The Proviso thus clearly seeks to operate both in respect of proceedings which may be either pending or under contemplation. In our considered opinion, the provision is a clear essay of the intent of Parliament to vest exclusive authority in the NFRA to investigate allegations of misconduct and to bring even pending proceedings within the scope of its investigation.

218. Regard may additionally be had to the fact that the power which is conferred upon the NFRA is available to be exercised only in respect of a particular class of bodies corporate or persons. Those are bodies W.P.(C) 1065/2021 & other connected matters Page 310 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 which are specified in Rule 3 of the NFRA Rules. The statute thus insofar as entities falling within the ambit of Rule 3 are concerned clearly removes such cases from the remit of any other council or body which could have under a pre-existing law investigated or initiated disciplinary action. One also cannot possibly ignore the non obstante clause which introduces sub-section (4) into the statute book and by virtue of which its provisions are ordained to apply notwithstanding any other law which may have been in force.

219. There is thus ample clarity with respect to the legislative intent which informs Section 132(4) and the NFRA having been conferred with an overriding power to initiate and take over enquiries and investigations. It is in this respect that the decision of the Supreme Court in New India Assurance assumes importance and which was an authority cited by Mr. Hossain in aid of his submission that Section 132(4) amounted to a mere change of forum. We find that Section 132(4) is fundamentally intended to confer an overarching authority upon the NFRA to investigate and enquire into matters relating to a particular class of bodies corporate and persons. Cases which are thus taken over by the NFRA would then be liable to be investigated by it exclusively. Such category of cases shall be liable to be tried only by that statutory authority.

220. However, and as was observed earlier, NFRA does not assume authority for the purposes of enquiring into a newly created specie of misconduct. Misconduct continues to be an act as defined by Section 22 of the CA Act. It is only the enquiry which would now be undertaken by the NFRA and which represents the new forum for the aforesaid W.P.(C) 1065/2021 & other connected matters Page 311 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 purpose. In New India Assurance the Supreme Court had observed that amendments of procedure which may compel one to institute an action before a newly minted forum would not be unconstitutional. Their Lordships had pertinently observed that what vests in an individual is "a right of action but not a vested right of forum". Of course, whether the procedure prescribed under the amended regime is fair, reasonable and does not cause prejudice is a separate issue altogether and the challenge mounted on that score by the writ petitioners is presently kept aside and shall be dealt with in the latter parts of this judgment.

221. However, the aforesaid discussion is liable to be appreciated subject to the following caveat. Our understanding of the imperatives underlying the introduction of Section 132(4) and which stands elucidated in the immediately preceding paragraphs was in the context of the broad challenge to the validity of that section which was addressed before us. This we state since NFRA has taken a principled stand that it does not propose to subject any firm or LLP to an action referrable to Section 132(4) for an audit undertaken prior to October 2018. Our observations rendered hereinabove are thus liable to be appreciated solely from the perspective of the foundational validity of that provision and which could extend to firms and LLPs' for audits undertaken after the date when the section came into being.

222. That then takes us to the argument based on Article 20(1) of the Constitution and in terms of which it was sought to be contended that Section 132(4) is an ex post facto law and creates a punishment for an act or omission which had occurred prior to its enforcement. Controverting the submissions that were advanced by the petitioners, W.P.(C) 1065/2021 & other connected matters Page 312 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Mr. Hossain had cited for our consideration the decision of the Supreme Court in Shiv Dutt. The decision assumes significance in view of how the Supreme Court construed offences and punishment in the context of Article 20. In Shiv Dutt it was held that a penalty imposed under a Sales Tax legislation is only a civil liability albeit having the attributes of being penal. However, the Supreme Court held that such penalties would not fall within the ken of Article 20(1) and which would have to be narrowly interpreted as relating to a payment made in the context of deprivation of liberty or as a consequence of a finding of guilt coming to be returned against a person accused of a crime.

223. The principle that a civil liability would not fall within the meaning of the word offense as it appears in Article 20(1) of the Constitution came to be reiterated by a Constitution Bench of the Supreme Court in Hathising Manufacturing Co. Ltd. vs. Union of India 65, with Shah J. observing as under:-

224. This position came to be reaffirmed by the Supreme Court in Securities and Exchange Board of India vs. Ajay Agarwal 66 and which again held that a penalty imposed in the context of adjudicatory proceedings would not fall within the ambit of Article 20(1) of the Constitution. While reiterating the legal position which had been enunciated in Rao Shiv Bahadur Singh vs. State of Vindhya Pradesh 67, the Supreme Court held that even if penalty had come to be imposed in the context of adjudicatory proceedings, Article 20(1) would have no application since the person foisted with the penalty cannot be called an accused. We deem it apposite to extract the following paragraphs from the decision in Ajay Agarwal:

27. If we look at the definition of "offence" under the General Clauses Act, 1897 it shall mean any act or an omission made punishable by any law for the time being in force. Therefore, the order of restrain for a specified period cannot be equated with punishment for an offence as has been defined under the General Clauses Act .

28. Under the Criminal Procedure Code , "offence" has been defined under Section 2(n) as follows:

29. On a comparison of the aforesaid two definitions we find that there are common links between the two. An offence would always mean an act of omission or commission which would be punishable by any law for the time being in force.

30. Article 20(1) was interpreted by the Court in Rao Shiv Bahadur Singh v. State of Vindhya Pradesh [(1953) 2 SCC 111 : AIR 1953 SC 394 : 1953 Cri LJ 1480] . Jagannadha Das, J. speaking for the Constitution Bench, on a comparison of similar provisions in English law and the American Constitution, opined that the language used in Article 20 is in much wider terms. This Court held that: (AIR p. 398, para 8) "8. ... what is prohibited is the conviction of a person or his subjection to a penalty under 'ex post facto' laws. The prohibition under the article is not confined to the passing or the validity of the law, but extends to the conviction or the sentence and is based on its character as an 'ex post facto' law."

The ratio of this judgment has again been affirmed in State of W.B. v. S.K. Ghosh [AIR 1963 SC 255 : (1963) 1 Cri LJ 252] , wherein another Constitution Bench of this Court speaking through Wanchoo, J., as His Lordship then was, held that a forfeiture by a District Judge under Section 13(3) of the Criminal Laws Amendment Ordinance of 1944 cannot be equated to a forfeiture under Section 53 IPC inasmuch as forfeiture under Section 13(3) of the Ordinance involved embezzlement of government money or property and the same is not a punishment or penalty within the meaning of Article 20(1) of the Constitution (see paras 14 and 15 of the judgment).

31. Even if penalty is imposed after an adjudicatory proceeding, persons on whom such penalty is imposed cannot be called an accused. It has been held that proceedings under Section 23 (1- A) of the Foreign Exchange Regulation Act, 1947 are adjudicatory in character and not criminal proceedings [see Director of Enforcement v. MCTM Corpn. (P) Ltd. [(1996) 2 SCC 471 : 1996 SCC (Cri) 344] ]. Persons who are subjected to such penalties are also not entitled to the protection under Article 20(1) of the Constitution.

32. Following the aforesaid ratio, this Court cannot hold that protection under Article 20(1) of the Constitution in respect of ex post facto laws is available to the respondent in this case.

33. If we look at the legislative intent for enacting the said Act, it transpires that the same was enacted to achieve the twin purposes of promoting orderly and healthy growth of securities market and for protecting the interest of the investors. The requirement of such an enactment was felt in view of substantial growth in the capital market by increasing the participation of the investors. In fact such enactment was necessary in order to ensure the confidence of the investors in the capital market by giving them some protection.

34. The said Act is pre-eminently a social welfare legislation seeking to protect the interests of common men who are small investors. It is a well-known canon of construction that when the court is called upon to interpret provisions of a social welfare legislation the paramount duty of the court is to adopt such an interpretation as to further the purposes of law and if possible eschew the one which frustrates it. Keeping this principle in mind if we analyse some of the provisions of the Act it appears that the Board has been established under Section 3 as a body corporate and the powers and W.P.(C) 1065/2021 & other connected matters Page 316 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 functions of the Board have been clearly stated in Chapter IV and under Section 11 of the said Act."

225. In Yogendra Kumar Jaiswal vs. State of Bihar68 , the Supreme Court was faced with a similar challenge contained in a statute promulgated by the Legislature of the State of Orissa and which had contemplated confiscation of properties. Following the line of precedents rendered in the context of Article 20(1) , the Supreme Court held that confiscation was clearly not a punishment which would attract Article 20(1). We extract the following passages from that decision hereinbelow:

148. The learned counsel for the appellants would submit that under the 1988 Act the accused were liable to face attachment during trial and forfeiture after conviction but by virtue of the Orissa Act they are compelled to face confiscation as a consequence of which they are deprived of the possession and the property goes to the State Government. The learned counsel for the State would submit that the forfeiture is provided after the conviction as the property has to be forfeited and embezzled amount requires to be realised but it does not debar the legislature to provide confiscation of property as an interim measure by providing an adequate adjudicatory process. It is also submitted that the offence under Section 13(1)(e) has its gravity and, therefore, the stringent interim measure is the requisite. Alternatively, it is argued that when forfeiture was prescribed, and attachment of property was provided as an interim measure, different arrangement, may be a stringent one, can always be provided by the legislature.

149. We have already held that confiscation is not a punishment and hence, Article 20(1) is not violated. The learned counsel for the State would lay stress on the decision in State of A.P. v. Gandhi [State of A.P. v. Gandhi, (2013) 5 SCC 111 : (2013) 2 SCC (Cri) 884] . In that case, the issue that arose for consideration was : when the disciplinary proceeding was initiated one type of punishment was imposable and when the punishment was imposed due to amendment of rule, a different punishment, which was a greater one, was imposed. The High Court opined that the punishment imposed under the amended rule amounted to imposition of two major penalties which was not there in the old rule. Dealing with the issue W.P.(C) 1065/2021 & other connected matters Page 318 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 the Court referred to the rule that dealt with major penalties and the rule-making power. Reference was made to the decision in Pyare Lal Sharma v. J&K Industries Ltd. [Pyare Lal Sharma v. J&K Industries Ltd., (1989) 3 SCC 448 : 1989 SCC (L&S) 484] wherein it has been stated that no one can be penalised on the ground of a conduct which was not penal on the date it was committed. Thereafter, the two-Judge Bench referred to the authority in K. Satwant Singh v. State of Punjab [K. Satwant Singh v. State of Punjab, AIR 1960 SC 266 : 1960 Cri LJ 410] wherein it has been held thus : ( Gandhi case [ State of A.P. v. Gandhi , (2013) 5 SCC 111 : (2013) 2 SCC (Cri) 884] , SCC pp. 133-34, para 46) "46. ... '28. ... In the present case a sentence of imprisonment was, in fact, imposed and the total of fines imposed, whether described as 'ordinary' or 'compulsory', was not less than the amount of money procured by the appellant by means of his offence. Under Section 420 of the Penal Code an unlimited amount of fine could be imposed. Article 20(1) of the Constitution is in two parts. The first part prohibits a conviction of any person for any offence except for violation of law in force at the time of the commission of the act charged as an offence. The latter part of the article prohibited the imposing of a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence. The offence with which the appellant had been charged was cheating punishable under Section 420 of the Penal Code which was certainly a law in force at the time of the commission of the offence. The sentence of imprisonment which was imposed upon the appellant was certainly not greater than that permitted by Section 420. The sentence of fine also was not greater than that which might have been inflicted under the law which had been in force at the time of the commission of the offence, as a fine unlimited in extent could be imposed under the section.'" (K. Satwant Singh case [ K. Satwant Singh v. State of Punjab , AIR 1960 SC 266 : 1960 Cri LJ 410] , AIR p. 275, para 28)

150. Thereafter, the Court referred to Maya Rani Punj v. CIT [Maya Rani Punj v. CIT, (1986) 1 SCC 445 : 1986 SCC (Tax) 220] , K. Satwant Singh [K. Satwant Singh v. State of Punjab , AIR 1960 SC 266 : 1960 Cri LJ 410] and Tiwari Kanhaiyalal v. CIT [Tiwari Kanhaiyalal v. CIT, (1975) 4 SCC 101 : 1975 SCC (Cri) 312 : 1975 SCC (Tax) 214] and eventually held : ( Gandhi case [ State of A.P. v. Gandhi , (2013) 5 SCC 111 : (2013) 2 SCC (Cri) 884] , SCC p. 135, para 51) W.P.(C) 1065/2021 & other connected matters Page 319 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 "51. ... The order of compulsory retirement is a lesser punishment than dismissal or removal as the pension of a compulsorily retired employee, if eligible to get pension under the Pension Rules, is not affected. Rule 9(vii) was only dealing with reduction or reversion but issuance of any other direction was not a part of it. It has come by way of amendment. The same being a lesser punishment than the maximum, in our considered opinion, is imposable and the disciplinary authority has not committed any error by imposing the said punishment, regard being had to the nature of charges. It can be looked from another angle. The rule-making authority has split Rule 9(vii) into two parts-- one is harsher than the other, but, both are less severe than the other punishments, namely, compulsory retirement, removal from service or dismissal. The reason behind it, as we perceive, is not to let off one with simple reduction but to give a direction about the condition of pay on restoration and also not to impose a harsher punishment which may not be proportionate. In our view, the same really does not affect any vested or accrued right. It also does not violate any constitutional protection."

151. We are absolutely conscious that the said judgment was delivered in a different context. What is prohibited under Article 20(1) is imposition of greater punishment that might have been imposed and prohibition of a conviction of any person for violation of law at the time of commission of the act. We repeat at the cost of repetition that confiscation being not a punishment does not come in either of the categories. Thus viewed, the property of an accused facing trial under the 1988 Act could be attached and there can be administration by third party of the said property and eventual forfeiture after conviction. The term "attachment" has been understood by this Court in Kerala State Financial Enterprises Ltd. v. Official Liquidator [Kerala State Financial Enterprises Ltd. v. Official Liquidator, (2006) 10 SCC 709] in the following manner : (SCC p. 713, para 11) "11. The word 'attachment' would only mean 'taking into the custody of the law the person or property of one already before the court, or of one whom it is sought to bring before it'. It is used for two purposes : (i) to compel the appearance of a defendant; and (ii) to seize and hold his property for the payment of the debt. It may also mean prohibition of transfer, conversion, disposition or movement of property by an order issued by the court."

152. The legislature has thought it proper to change the nature and character of the interim measure. The property obtained by ill-gotten gains, if prima facie found to be such by the authorised officer, is to be confiscated. An accused has no vested right as regards the interim measure. He is not protected by any constitutional right to advance the plea that he cannot be made liable to face confiscation proceedings of the property which has been accumulated by illegal means. That being the litmus test, the filament of reasoning has to rest in favour of confiscation and not against it. Therefore, we are of the considered view that the provision does not violate any constitutional assurance."

226. The precedents thus rendered in the context of Article 20(1) clearly appear to exclude civil liabilities or penalties that may come to be imposed from the ambit of that constitutional prohibition. The scope of Article 20(1) has thus been consistently explained to be confined to crimes and punishments as generally understood. In any event, an act of professional misconduct was liable to be penalised and punishment meted out even earlier and had existed as such decades prior to the insertion of Section 132 in the Companies Act . Section 132, as noticed hereinabove, merely adopts the meaning assigned to misconduct by the CA Act for the purposes of proceedings that may be initiated thereunder. The argument based on Article 20(1) is thus liable to be rejected on this score alone.

227. We thus come to the conclusion that the present case does not fall within the ambit of Article 20(1) as it neither involves the creation of a new offence nor the imposition of a criminal penalty with retrospective effect. The disciplinary consequences for professional misconduct had always existed under the CA Act and Section 132 merely reinforces and formalizes the enforcement framework without altering the substantive nature of misconduct. Since Article 20(1) W.P.(C) 1065/2021 & other connected matters Page 321 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 applies exclusively to criminal offences and punishments, and the present case pertains to civil and regulatory disciplinary proceedings, its invocation is clearly misconceived. Moreover, professional misconduct was always subject to scrutiny and Section 132 does not introduce an unprecedented liability but only refines the mechanism for inquiry and enforcement. Thus, the challenge based on Article 20(1) is without merit.

228. While it is true that the monetary penalties that are imposed by Section 132(4) could exceed those which were prescribed under the CA Act , the challenge so raised in any case remains of little significance in light of the statement made by Mr. Hossain and who had submitted that no monetary penalties exceeding INR 5 Lakhs would be imposed in respect of any audit conducted prior to 2018.

229. Regard must also be had to the fact that the debarment which may come to be imposed upon a member or the firm could run for a minimum period of six months or such higher period not exceeding ten years as may be determined by the NFRA. This may be contrasted with the position which prevails under the CA Act and contemplates the name of a CA or an auditor being removed permanently from the register of members. The removal from the register thus had the potential of depriving a CA from practicing the profession for all times to come. The punishment thus which has now come to be introduced clearly cannot be said to be greater than that which could have been imposed under the CA Act .

NFRA RULES : LACK OF PROCEDURAL SAFEGUARDS

230. The validity of Section 132(4) as well as the procedure adopted W.P.(C) 1065/2021 & other connected matters Page 322 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 by the NFRA was then assailed on the ground of the latter having deprived the petitioners of various significant rights and procedural safeguards which were otherwise provisioned for under the CA Act and the subordinate rules governing the conduct of disciplinary proceedings. It was submitted that the Act as well as the NFRA Rules merely provide for that authority evolving such procedure as may be considered expedient in the facts of a particular case. The statute, the petitioners argued, neither lays in place a codified procedure for the conduct of disciplinary proceedings nor do its provisions provide any guidance to the NFRA to adhere to a procedure which would be commensurate with the constitutional imperatives of fairness and natural justice. Our attention was also drawn to Rule 11(5) with the petitioners highlighting the fact that the said rule merely enjoins a division of the NFRA to dispose of the SCN proceedings through a summary procedure albeit while adhering to the principles of natural justice.

231. The note submitted by DHS enclosed a chart which sought to highlight the substantive differences between the disciplinary procedure as existing under the CA Act with how proceedings would unfold under the NFRA Rules. That chart is reproduced hereinbelow:-

237. It becomes pertinent to note that Rule 8 though cited in this regard is principally concerned with the power of the NFRA to monitor and enforce compliance with auditing standards. Although not directly connected with disciplinary proceedings since the same was referred to, we only note that the argument essentially was that since the authority stands empowered to review working papers including audit plans, other audit documents and communications related to audit coupled with the power conferred upon the authority by Rule 8(3) enabling NFRA to call for and seek additional information or explanation in connection with the conduct of an audit, there exists no plausible justification for the defense of the auditor being confined to the audit file alone.

238. Resisting the aforesaid arguments, Mr. Hossain contended that the challenge based on the inquiry being restricted to the audit file documentation is thoroughly misconceived since the said limitation binds and operates upon the NFRA also. Quite apart from the above, Mr. Hossain submitted that not only Section 143(9) but the specific SAs themselves lay emphasis on the audit record being comprehensive and including all material forming part of the audit exercise itself. Reference in this respect was specifically made to the provisions contained in SA 230, SA 500 and SQC1. It was Mr. Hossain's submission that the essential purpose of all records pertaining to the W.P.(C) 1065/2021 & other connected matters Page 335 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 audit being preserved and maintained is to enable external inspection and review. It was submitted that the completeness of the audit file is an aspect which is duly highlighted and underscored by SA 230.

239. It was further submitted that in fact Para A5 of SA 230 itself provides that oral explanations that may be proffered by an auditor would not be liable to be taken into consideration nor would they "represent adequate support for the work auditor performed or conclusions the auditor reached". Oral explanations, Mr. Hossain submitted in terms of Para A5 can only be used to explain or clarify information contained in the audit documentation. It was thus submitted that the NFRA is clearly justified in restricting the enquiry proceedings to the audit file and excluding the introduction of additional evidence.

240. Mr. Hossain then contended that merely because the statute speaks of a summary procedure, the same cannot lead to a presumption being drawn that the proceedings would inevitably be in violation of the fundamental precepts of fair play or for that matter the principles of natural justice. Mr. Hossain submitted that such a course is adopted even by the PCAOB as would be evident from a reading of Rule 5427(d) which makes the following provisions:-

241. It was thus argued that since the only proof accepted is the audit file, a summary procedure can neither be said to be arbitrary nor violative of the basic principles of fair play which must imbue all actions of an administrative authority. Learned counsel in this context also relied upon the decision of the Hyderabad High Court in Institute of Chartered Accountants of India vs. Mukesh Gang71 which while speaking of the procedure liable to be followed under the CA Act which respect to disciplinary proceedings had held as follows:-

242. The aforesaid principles as enunciated in Mukesh Gang, according to Mr. Hossain, would, a fortiori, apply to disciplinary proceedings under the NFRA Rules. Mr. Hossain submitted that the degree of proof or evidence which is required in disciplinary proceedings that may be initiated by the NFRA, is not expected to meet the test of guilt being proven beyond reasonable doubt and which is the fundamental test governing criminal trials. Disciplinary proceedings, learned counsel submitted are concerned solely with preponderance of probabilities. It was submitted that other regulatory bodies including the PCAOB and the FRC also follow a similar criterion of deciding charges of professional misconduct based on persuasive evidence. Our attention in this respect was invited to Rule 5204 which guides the PCAOB in the conduct of disciplinary proceedings and is extracted hereunder:-

Note: Unless the Board has directed otherwise, the Board expects hearing officers in proceedings instituted pursuant to Rule 5200(a)(1) or Rule 5200(a)(2) to prepare initial decisions within 60 days after the deadline for filing post-hearing briefs or other submissions; the Board expects hearing officers in proceedings instituted solely pursuant to Rule 5200(a)(3) to prepare initial decisions within 30 days after the deadline for filing post-hearing briefs; and the Board expects hearing officers in proceedings pursuant to Rule 5500 to prepare initial decisions within 45 days after the deadline for filing post-hearing briefs or other submissions.

(c) Filing, Service and Publication The hearing officer shall file the initial decision with the Secretary. The Secretary shall promptly serve the initial decision upon the parties. In a public proceeding, the Secretary shall as soon as practicable thereafter publish the initial decision, unless the Board otherwise directs.

decision of the Board as to that party upon issuance of a notice of finality by the Secretary.

(2) Subject to subparagraph (3) of this paragraph, the Secretary shall issue a notice of finality no later than 20 days after the lapsing of the time period for filing a petition for review of the initial decision.

(3) The Secretary shall not issue a notice of finality as to any party

(i) who has filed a timely petition for review; or

(ii) with respect to whom the Board has ordered review of the initial decision pursuant to Rule 5460(b)."

243. It was then contended that it would be wholly incorrect to seek similarity in the procedure that was prescribed under the CA Act with the Rules which regulate the conduct of disciplinary proceedings by the W.P.(C) 1065/2021 & other connected matters Page 339 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 NFRA. It was submitted that the Council under the CA Act is also enjoined to try complaints that may be made against members. NFRA proceedings on the other hand, it was explained, are merely concerned with monitoring the quality of service related to the audit. Those proceedings, Mr. Hossain submitted, can be initiated either suo moto or upon a reference being received by the NFRA from an appropriate authority. Viewed in that light, it was his contention, that it would be wholly incorrect to view the disciplinary proceedings as being adversarial and consequently obliging the NFRA to factor in an opportunity of cross-examination or recordal of evidence.

244. It was lastly urged that a statute is not rendered unconstitutional merely if it fails to stipulate a procedure or prescribe a code for the conduct of disciplinary proceedings. The submission was that as long as an authority adheres to a procedure which is reasonable and compliant with the principles enshrined in Article 14 of the Constitution, the statute itself would not be liable to be struck down. Reliance in this respect was placed upon a decision handed down by a Division of the Court in Reckitt Benckiser India Private Limited vs. Union of India Through : Its Secretary & Ors 72 where the Court had observed as under:-

245. This would constitute an appropriate juncture to additionally notice some of the decisions that were cited for our consideration by respective sides. From the side of the writ petitioners reliance was firstly placed on an Advocate vs. Bar Council of India 73 and where the Supreme Court while examining Section 35 of the Advocates Act had held as follows:-

A disciplinary proceeding by a statutory body of the members of the profession which is statutorily empowered to impose a punishment including a punishment of such immense proportions is quasi- criminal in character;

(ii) as a logical corollary it follows that the Disciplinary Committee empowered to conduct the enquiry and to inflict the punishment on behalf of the body, in forming an opinion must be guided by the doctrine of benefit of doubt and is under an obligation to record a finding of guilt only upon being satisfied beyond reasonable doubt. It would be impermissible to reach a conclusion on the basis of preponderance of evidence or on the basis of surmise, conjecture or suspicion. It will also be essential to consider the dimension regarding mens rea."

This proposition is hardly open to doubt or debate particularly having regard to the view taken by this Court in L.D. Jaisinghani v. Naraindas N. Punjabi [(1976) 1 SCC 354] wherein Ray, C.J., speaking for the Court has observed: (SCC p. 358, para 9) "In any case, we are left in doubt whether the complainant's version, with which he had come forward with considerable delay was really truthful. We think that in a case of this nature, involving possible disbarring of the advocate concerned, the evidence should be of a character which should leave no reasonable doubt about guilt. The Disciplinary Committee had not only found the appellant guilty but had disbarred him permanently."

(emphasis added)

(iii) in the event of a charge of negligence being levelled against an advocate, the question will have to be decided whether negligence simpliciter would constitute misconduct. It would also have to be considered whether the standard expected from an advocate would have to answer the test of a reasonably equipped prudent practitioner carrying reasonable workload. A line will have to be drawn between tolerable negligence and culpable negligence in the sense of negligence which can be treated as professional misconduct exposing a member of the profession to punishment in the course of disciplinary proceedings. In forming the opinion on this question the standards of professional conduct and etiquette spelt out in Chapter 2 of Part VI of the Rules governing advocates, framed under Section W.P.(C) 1065/2021 & other connected matters Page 342 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 60(3) and Section 49(1)(g) of the Act, which form a part of the Bar Council of India Rules may be consulted. As indicated, in the preamble of the Rules, an advocate shall, at all times compose himself in a manner befitting his status as an officer of the court, a privileged member of the community and a gentleman bearing in mind what may be lawful and moral for one who is not a member of the Bar may still be improper for an advocate and that his conduct is required to conform to the rules relating to the duty to the court, the duty to the client, to the opponent, and the duty to the colleagues, not only in letter but also in spirit.

It is in the light of these principles the Disciplinary Committee would be required to approach the question as regards the guilt or otherwise of an advocate in the context of professional misconduct levelled against him. In doing so apart from conforming to such procedure as may have been outlined in the Act or the Rules, the Disciplinary Authority would be expected to exercise the power with full consciousness and awareness of the paramount consideration regarding principles of natural justice and fair play."

246. The petitioners then pressed into aid the judgment of the Supreme Court in L.D Jaisinghani vs. Naraindas Punjabi74 which too was in respect of disciplinary action taken against an advocate. In that decision, the Supreme Court had observed:-

247. The petitioners had also sought to invoke the principle of manifest arbitrariness in the context of Rule 11(5) failing to incorporate appropriate safeguards and defining the content of the summary procedure that the NFRA is obliged to adopt. In order to explain the precept of manifest arbitrariness and which has now become an indelible part of our jurisprudence insofar as constitutional validity of statutes is concerned, the petitioners relied upon the following passages from the celebrated decision of the Supreme Court in Shreya Singal vs. Union of India 75:-

98. The submission is vague : the learned Additional Solicitor General does not indicate which part or parts of Section 66-A can possibly be saved. This Court in Romesh Thappar v. State of Madras [Romesh Thapparv. State of Madras, 1950 SCR 594 : 1950 SCC 436 : AIR 1950 SC 124 : (1950) 51 Cri LJ 1514] repelled a contention of severability when it came to the courts enforcing the fundamental right under Article 19(1)(a) in the following terms :

The learned Judge refers to the practice of the Supreme Court of the United States in Claude C. Caually v. General Construction Co. [(1926) 70 L Ed 332] where it was observed:

The learned Judge observes in relation to this as follows:

Relying on the observations of Kania, C.J., in A.K. Gopalan v. State of Madras [1950 SCC 228 : (1950) SCR 88] to the effect that a law cannot be declared void because it is opposed to the spirit supposed to pervade the Constitution but not expressed in words, the conclusion above set out is reiterated. The learned Judge, however, adds that the words "cattle fair" in act there considered, are sufficiently clear and there is no vagueness.

45. These observations which are clearly obiter are apt to be too generally applied and need to be explained. While it is true that the principles evolved by the Supreme Court of the United States of America in the application of the Fourteenth Amendment were eschewed in our Constitution and instead the limits of restrictions on each fundamental right were indicated in the clauses that follow the first clause of the nineteenth article, it cannot be said as an absolute principle that no law will be considered bad for sheer vagueness. There is ample authority for the proposition that a law affecting fundamental rights may be so considered. A very pertinent example is to be found in State of Madhya Pradesh and Another v. Baldeo Prasad [(1961) 1 SCR 970 at 979] where the Central Provinces and Berar Goondas Act, 1946 was declared void for uncertainty. The condition for the application of Sections 4 and 4-A was that the person sought to be proceeded against must be a Goonda but the definition of Goonda in the Act indicated no tests for deciding which person fell within the definition. The provisions were therefore held to be uncertain and vague.

46. The real rule is that if a law is vague or appears to be so, the court must try to construe it, as far as may be, and language permitting, the construction sought to be placed on it, must be in accordance with the intention of the Legislature. Thus if the law is W.P.(C) 1065/2021 & other connected matters Page 347 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 open to diverse construction, that construction which accords best with the intention of the Legislature and advances the purpose of legislation, is to be preferred. Where however the law admits of no such construction and the persons applying it are in a boundless sea of uncertainty and the law prima facie takes away a guaranteed freedom, the law must be held to offend the Constitution as was done in the case of the Goonda Act . This is not application of the doctrine of due process. The invalidity arises from the probability of the misuse of the law to the detriment of the individual. If possible, the Court instead of striking down the law may itself draw the line of demarcation where possible but this effort should be sparingly made and only in the clearest of cases."

249. Another argument that was addressed by the writ petitioners was of Section 132(4) suffering from the vice of invidious discrimination. It was argued that while auditors generally are guaranteed salutary rights under the CA Act when faced with allegations of professional misconduct, auditors and firms falling within Rule 3 would face the specter of a trial in accordance with a summary procedure and thus deprived of the right to lead evidence, cross-examination and the various other procedural safeguards which otherwise imbue enquiries conducted under the CA Act . This according to the writ petitioners results in hostile discrimination amongst members otherwise forming part of a homogenous class. The petitioners also assailed the validity of the procedure followed by the NFRA arguing that the denial of legal assistance which could otherwise be availed of under the CA Act has been done away with and which renders the impugned provisions wholly arbitrary and liable to be struck down.

250. Controverting the aforenoted submissions, Mr. Hossain submitted that a right of cross examination cannot be elevated to the status of an inviolable facet of natural justice. Learned counsel in this respect cited for our consideration the decision of the Supreme Court in W.P.(C) 1065/2021 & other connected matters Page 348 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 M/s Kanugo & Company vs. Collector of Customs 77 and where the following observations appear:-

251. Mr. Hossain then argued that the principles of natural justice, as is well settled, are not mantras or incantations but a set of fundamental rules of fair play which we have recognised as being applicable to a varied nature of proceedings. However, it was submitted that their application would depend upon the character of the proceedings. It was his contention that since the proceedings envisaged under Section 132(4) do not entail the NFRA relying upon any oral evidence, the right of cross examination as claimed is thoroughly misconceived. Learned counsel also questioned the challenge to the provisions on the ground of NFRA refusing lawyers to represent auditors and submitted that legal assistance in such enquiries has never been recognised to be a fundamental right. It was his submission that the writ petitioners, in any case, were not pitted against legal experts but members of the NFRA having domain knowledge in finance and accounting. It was thus argued that no prejudice had been caused to the petitioners in this 77 (1973) 2 SCC 438 W.P.(C) 1065/2021 & other connected matters Page 349 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 respect.

252. It was further submitted that NFRA had subsequent to the commencement of the proceedings impugned before us decided to permit auditors to be represented by lawyers before it. Notwithstanding the above, for the purposes of lending support to his submission with respect to a right to legal representation, Mr. Hossain relied upon the judgment of the Supreme Court in Hyderabad Vanaspati Limited vs. A.P State Electricity Board 78 and to the following observations rendered therein:-

The penal assessment, as we have stated already, is restricted to a limited period. Such an assessment was made after the Department itself was satisfied with regard to the theft of electricity committed by the consumer concerned. Hence, it cannot be said that the appeal provided under Condition No. 34 is an illusory one."

We agree with the above opinion.

43. The principle "nemo judex in causa sua" will not apply in this case as the officers have no personal lis with the consumers. As pointed out by learned Senior Counsel for the Board, they are similar to income tax or sales tax officials. There is nothing wrong in their adjudicating the matter especially when the consumers may be represented by an advocate and the formula for making provisional assessment is fixed in the clause itself. An argument has been advanced that the Board has recently deleted the provision enabling the consumer to be represented by a power-of-attorney agent. It is contended that the consumer is thereby deprived of the assistance of an expert which may be required in technical matters. We do not agree. When the consumer is represented by a lawyer, he can certainly get such assistance as may be needed from a technical expert. It is stated by the Board's learned counsel that the provision was deleted as there was frequent misuse of the same. Whatever may be the reason for deleting the provision, the existing part of the clause enables the consumer to be represented by an advocate. That is sufficient safeguard for the consumer."

253. From the recordal of submissions addressed by respective sides, it becomes apparent that the primary challenge under this head was of the NFRA not being bound to follow a fair and just procedure while conducting an enquiry. That submission rested on the perceived lack of due process contemplated in Rule 11 of the NFRA Rules when contrasted with the procedure which was liable to be adhered to in the case of an inquiry under the CA Act read along with the Misconduct Rules, 2007. It was this perceived and asserted distinction in the procedure prescribed which was sought to be highlighted by both the W.P.(C) 1065/2021 & other connected matters Page 351 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 DHS and SRBC with the aid of the charts which have been referred to hereinabove. The petitioners had essentially referred to the provisions contained in Rules 14, 18 and 19 of the Misconduct Rules, 2007 to highlight the nature of rights which according to them CAs' and firms stand deprived of in the course of proceedings that may unfold before the NFRA.

254. In order to evaluate the soundness of that submission, it would be appropriate to advert to the Misconduct Rules, 2007. As is evident from Rule 7, the proceedings that may come to be initiated could have commenced upon the receipt of any written information containing allegations against a member or a firm. On receipt of such an application, the Director in terms of Rule 9 was obliged to examine the complaint, the written statements submitted by the CA or the firm as well as other additional particulars or documents in order to come to a prima facie conclusion of guilt in respect of the member or the firm. It was that prima facie opinion of the Director which would, in terms of the procedure prescribed, be thereafter transmitted to the Board of Discipline or the Disciplinary Committee.

255. It becomes pertinent to note that in terms of Rule 14(1), the Board of Discipline was statutorily enjoined to follow a summary disposal procedure while dealing with cases laid before it. It was required, by virtue of Rule 14(2), to supply a copy of the prima facie opinion formed by the Director as well as particulars and documents relied upon by that authority for the purposes of formation of that opinion to the arrayed respondent as well as the complainant. Since the complainant was envisaged to be a party to those proceedings, it was W.P.(C) 1065/2021 & other connected matters Page 352 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 also entitled to respond to any written statement that would have been submitted by a respondent in terms of Rule 14(5). The Board of Discipline was enjoined to consider the written representations, written statements, documents as well as oral submissions, if any made by the complainant as well as the respondent while arriving at a finding on whether the charge of professional or other misconduct was made out.

256. Similarly, and in terms of Rule 18, the Disciplinary Committee was cautioned to ensure that all proceedings undertaken by it were in accord with the principles of natural justice. This statutory command stands embodied in Rule 18(1). By virtue of Rule 18(2), the Disciplinary Committee is enjoined to provide a copy of the prima facie opinion of the Director together with documents relied upon by that authority to both the complainant and the respondent. The respondent as well as the complainant were thereafter entitled to submit their written statements and replies for the consideration of the Disciplinary Committee. Rule 18(9) then dealt with a contingency where the respondent was to deny the allegations of professional misconduct and on such a stand being struck, the Disciplinary Committee being obliged to fix a date for the examination of witnesses and for the production of documents. In terms of Rule 18(11), the Disciplinary Committee could take evidence as led before it as well as the statement of witnesses that may have been recorded in the course of such oral examination. The Proviso to Rule 18(11) gives an indication of the Disciplinary Committee also being obliged to permit cross-examination of witnesses whose testimony may have come to be recorded in the course of those proceedings.

257. According to the writ petitioners, it is some of these facets or the procedure which the Board of Discipline and the Disciplinary Committee were enjoined to follow which have been completely done away with in proceedings that may unfold before the NFRA.

258. As we view Rule 11 of the NFRA Rules, it becomes apparent that the statute clearly commands that authority to ensure that the disciplinary proceedings are undertaken in accordance with the principles of natural justice including where deemed necessary and appropriate by providing an opportunity of hearing to the charged entity in person. By virtue of Rule 11(5), the division of the NFRA is obliged to pass an order after considering all submissions made and taking into account the material on record as well as all other relevant facts and circumstances. The NFRA Rules, however, do not speak of or appear to envisage oral testimony being recorded in the course of proceedings that may ensue.

259. The reason for this is clearly not far to discern since the proceedings themselves would have been commenced based either on a suo motu decision taken by the NFRA or on receipt of a reference made to it either by the Union Government or any other competent authority. The NFRA thus commences proceedings not on the basis of a written complaint or at the behest of a complainant and which was a possibility envisaged under the CA Act and the Misconduct Rules, 2007. Even though the Union Government itself is enabled to make a reference to the NFRA to undertake an investigation, the said entity merely stands in the shoes of an informant or a body which provides material for the NFRA to investigate. The proceedings thus are clearly not adversarial W.P.(C) 1065/2021 & other connected matters Page 354 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 and which was a possible scenario under the Misconduct Rules 2007.

260. We further note that the NFRA itself initiates and undertakes the inquiry on the basis of the audit file and record which may have been gathered in the course of an audit quality review. Those proceedings are thus not triggered or based upon the oral testimony of a complainant or person. As is thus manifest from a reading of Rule 10, the investigative process would commence either with the NFRA receiving a reference or where it decides itself to undertake an investigation into any matter based on its review of audit and oversight functions. In terms of Rule 10(1)(c), it could also initiate an investigation suo motu if it were for reasons recorded come to form a preliminary opinion that a matter pertaining to professional or other misconduct which comes to light merits an inquiry. Thus, the commencement of an inquiry by the NFRA is premised entirely on either a reference that may be made to it by the Union Government or where the said body were to initiate an investigation suo motu or in light of facts that may be gathered in the course of its supervisory role envisaged in Rules 7, 8 and 9.

261. In the absence of those proceedings being based on the version of an individual complaint or testimony, we fail to appreciate the submission that the denial of a right of cross-examination is liable to be viewed as a factor which renders the procedure prescribed under the NFRA Rules to be arbitrary. A right to cross examine could have been claimed provided the NFRA were to rely upon the oral testimony of an individual or such a statement constituting material that it took into consideration for the purposes of formation of an opinion to commence proceedings referrable to Section 132(4) of the Act. However, and on W.P.(C) 1065/2021 & other connected matters Page 355 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 facts, we find that none of the impugned SCNs' are based on a complaint of an individual or a statement made by a person. At least the petitioners have woefully failed to establish that such was the case.

262. The position which thus emerges from the record is of the SCNs' being prompted by the prima facie conclusions which were recorded and the AQRRs'. It is that material alone which constituted the basis for initiation of the action impugned before us. It was not the case of the petitioners that the disciplinary action was prompted by a complaint submitted by a person or based upon a statement that may have been recorded. In fact, the only testimony which appears to have been borne in consideration was the responses submitted by the writ petitioners as well as the statements of representatives, members and partners made and recorded. We thus find ourselves unable to appreciate the assertion of a right of cross examination which was vehemently canvassed before us.

263. We also bear in mind the undisputed fact of both Rules 14 and 18 of the Misconduct Rules, 2007 themselves envisaging a summary procedure of disposal being adopted by the Board of Discipline and the Disciplinary Committee. Both those rules only placed those authorities under the over-arching obligation of ensuring that proceedings were undertaken in consonance with the principles of natural justice. It was in terms of Rule 18(9) alone that oral examination and recordal of testimony were contemplated. The aforesaid provision clearly appears to have been engrafted since the Disciplinary Committee would be considering a complaint made by an individual against a CA or a firm. Since the complainant could have introduced oral testimony in such W.P.(C) 1065/2021 & other connected matters Page 356 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 proceedings, the rules proceeded to incorporate a right of cross- examination. However, and undisputedly the NFRA rules do not contemplate oral testimony or evidence for the purposes of the investigation or inquiry that may be undertaken.

264. Regard must also be had to the well-settled precept of the principles of natural justice being essentially concerned with adherence to a fair procedure and the provision of an adequate opportunity to the charged person to contest the allegations leveled. Rules of natural justice, as has been repeatedly held, cannot be applied or viewed as operating as a straight jacketed formula. They are neither rigid nor are they liable to be viewed as inviolable conditions etched in stone. Way back in the decision of K.L. Tripathi vs. State Bank of India 79, the Supreme Court had pertinently held that a right of cross-examination would inevitably arise if the version or the statement of a person who has tendered testimony is sought to be disputed or challenged. However, their Lordships pertinently observed that absent such a situation, the right of cross-examination cannot be acknowledged to be a necessary ingredient of the principles of natural justice. We deem it apposite to extract the following passages from that decision:-

31. Wade in his Administrative Law, 5th Edn. at pp. 472-475 has observed that it is not possible to lay down rigid rules as to when the principles of natural justice are to apply: nor as to their scope and extent. Everything depends on the subject-matter, the application of principles of natural justice, resting as it does upon statutory implication, must always be in conformity with the scheme of the W.P.(C) 1065/2021 & other connected matters Page 358 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Act and with the subject-matter of the case. In the application of the concept of fair play there must be real flexibility. There must also have been some real prejudice to the complainant; there is no such thing as a merely technical infringement of natural justice. The requirements of natural justice must depend on the facts and the circumstances of the case, the nature of the inquiry, the rules under which the tribunal is acting, the subject-matter to be dealt with, and so forth.

32. The basic concept is fair play in action administrative, judicial or quasi-judicial. The concept of fair play in action must depend upon the particular lis, if there be any, between the parties. If the credibility of a person who has testified or given some information is in doubt, or if the version or the statement of the person who has testified, is, in dispute, right of cross-examination must inevitablly form part of fair play in action but where there is no lis regarding the facts but certain explanation of the circumstances there is no requirement of cross-examination to be fulfilled to justify fair play in action. When on the question of facts there was no dispute, no real prejudice has been caused to a party aggrieved by an order, by absence of any formal opportunity of cross-examination per se does not invalidate or vitiate the decision arrived at fairly. This is more so when the party against whom an order has been passed does not dispute the facts and does not demand to test the veracity of the version or the credibility of the statement.

33. The party who does not want to controvert the veracity of the evidence from record or testimony gathered behind his back cannot expect to succeed in any subsequent demand that there was no opportunity of cross-examination specially when it was not asked for and there was no dispute about the veracity of the statements. Where there is no dispute as to the facts, or the weight to be attached on disputed facts but only an explanation of the acts, absence of opportunity to cross-examination does not create any prejudice in such cases.

34. The principles of natural justice will, therefore, depend upon the facts and circumstances of each particular case. We have set out hereinbefore the actual facts and circumstances of the case. The appellant was associated with the preliminary investigation that was conducted against him. He does not deny or dispute that. Information and materials undoubtedly were gathered not in his presence but whatever information was there and gathered namely, the versions of the persons, the particular entries which required examination were shown to him. He was conveyed the information given and his explanation was asked for. He participated in that investigation. He gave his explanation but he did not dispute any of the facts nor did he ask for any opportunity to call any evidence to W.P.(C) 1065/2021 & other connected matters Page 359 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 rebut these facts. He did ask for a personal hearing, as we have mentioned hereinbefore and he was given such opportunity of personal hearing. His explanations were duly recorded. He does not allege that his version has been improperly recorded nor did he question the veracity of the witnesses or the entries or the letters or documents shown to him upon which the charges were framed and upon which he was found guilty. Indeed it may be mentioned that he was really consulted at every stage of preliminary investigation upon which the charges were based and upon which proposed action against him has been taken. In that view of the matter, we are of the opinion, that it cannot be said that in conducting the enquiry or framing of the charges or arriving at the decision, the authorities concerned have acted in violation of the principles of natural justice merely because the evidence was not recorded in his presence or that the materials, the gist of which was communicated to him, were not gathered in his presence. As we have set out hereinbefore, indeed he had accepted the factual basis of the allegations. We have set out hereinbefore in extenso the portions where he had actually admitted the factual basis of these allegations against him, where he has not questioned the veracity of the witness of the facts or credibility of the witnesses or credibility of the entries on records. Indeed he has given explanation namely, he was overworked, he had consulted his superiors and sought their guidance, his conduct has not actually, according to him caused any financial risk or damage to the bank concerned. Therefore, in our opinion, in the manner in which the investigation was carried out as a result of which action has been taken against him cannot be condemned as bad being in violation of the principles of natural justice. Had he, however, denied any of the facts or had questioned the credibility of the persons who had given information against him, then different considerations would have applied and in those circumstances, refusal to give an opportunity to cross-examine the persons giving information against him or to lead evidence on his own part to rebut the facts would have been necessary and denial of such opportunity would have been fatal. But such is not the case here as we have mentioned hereinbefore."

265. In Transmission Corporation. of A.P. Ltd. vs. Sri Rama Krishna Rice Mill 80, a question arose as to whether the statement of officers that may come to form the basis for action that the Board may initiate was liable to be tested by providing a right of cross-examination to the consumer. Negating the assertion of such a right, the Supreme 80 (2006) 3 SCC 74 W.P.(C) 1065/2021 & other connected matters Page 360 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Court held:-

Therefore, the respondent had made a prayer before the Appellate Authority. The parameters of the principles of natural justice cannot be covered by any straitjacket formula. It would vary depending upon the circumstances involved. It is true that the Terms and Conditions of Supply did not contemplate anything like recording oral or documentary evidence in the way as is normally done in the courts of law. But clause 39.9.2 itself provides for a reasonable opportunity being granted. What would be a reasonable opportunity would also depend upon the fact situation. In Advanced Law Lexicon by P. Ramanatha Aiyar (3rd Edn., Vol. 4, pp. 3959 and 3968) the word "reasonable" has been described as follows:

You must have the particular facts of each case established before you can ascertain what is meant by reasonable under the circumstances--Lord Romilly, M.R., Labouchere v. Dawson [(1872) LR 13 Eq 322 : 25 LT 894] ."

7. In Khem Chand v. Union of India [1958 SCR 1080 : AIR 1958 SC 300] a Constitution Bench of this Court explained the meaning of "reasonable opportunity" thus in the context of Article 311(2) of the Constitution of 1950 (in short "the Constitution") : (SCR pp. 1096-97) "(a) an opportunity to deny his guilt and establish his innocence....

(b) an opportunity to defend himself by cross-examining the witnesses produced against him and by examining himself or any other witnesses in support of his defence; and finally

(c) an opportunity to make his representation as to why the proposed punishment should not be inflicted on him...."

8. The nature of adjudication under clause 39.9.2 of the Terms and Conditions of Supply is somewhat different from an enquiry under Article 311(2) of the Constitution. It cannot be laid down as a rule of universal application that whenever the statement of the departmental officer is pressed into service for the purpose of adjudication, a right of cross-examination is inbuilt. On the other hand, what was said in Bakshi case [1966 Supp SCR 401 : AIR 1967 SC 122] has also really no relevance because that was a case where no penal consequences were involved and the Commission was only a fact-finding Commission and, therefore, is clearly distinguishable of facts.

9. In order to establish that the cross-examination is necessary, the consumer has to make out a case for the same. Merely stating that the statement of an officer is being utilised for the purpose of adjudication would not be sufficient in all cases. If an application is made requesting for grant of an opportunity to cross-examine any official, the same has to be considered by the adjudicating authority who shall have to either grant the request or pass a reasoned order if he chooses to reject the application. In that event an adjudication being concluded, it shall be certainly open to the consumer to establish before the Appellate Authority as to how he has been prejudiced by the refusal to grant an opportunity to cross-examine any official. As has been rightly noted by the High Court in the impugned judgment where the reliance is only on accounts prepared by a person, cross-examination is not necessary. But where it is based on reports alleging tampering or pilferage, the fact situation may be different. Before asking for cross-examination the consumer may be granted an opportunity to look into the documents on which the adjudication is proposed. In that event, he will be in a position to know as to the author of which statement is necessary to be cross- examined. The applications for cross-examination are not to be filed in a routine manner and equally also not to be disposed of by an adjudicator in casual or routine manner. There has to be application of mind by him. Similarly, as noted above, the consumer has to show as to why cross-examination is necessary."

Of significance is the observation rendered in Transmission Commission when their Lordships held that a right of cross- examination cannot be elevated to the status of a rule of universal application whenever the statement of a departmental officer is made the basis of an adjudication. It further held that even if a consumer were W.P.(C) 1065/2021 & other connected matters Page 363 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 denied the opportunity to cross-examine an official, it would still be incumbent upon it to prove and establish the prejudice that may have been caused.

266. Reverting then to the varied situations in which an investigation or an inquiry may be commenced by the NFRA, we fail to discern any possibility of oral testimony being made the basis for disciplinary action. In fact, it was the categorical and unequivocal stand of that body that any proceedings that it may initiate would stand confined to the audit record only. We thus fail to find any merit in the submission that the denial of a right to cross examine would result in the violation of the principles of natural justice. That right would in any event be liable to be claimed provided the action were based on the testimony and statement of an individual. The petitioners have failed to dislodge the stand of the NFRA that its action was founded solely on the audit record and the inferences and findings that formed part of the AQRR. The statements and material that it appears to have taken into consideration were only the responses submitted by the writ petitioners and the statements attributed to their members. The arguments addressed on this score are thus wholly unmerited.

267. We also bear in consideration the following succinct observations entered in Kanugo and Co. and where too the Supreme Court had negated a contention of a right of cross-examination being an inviolable principle of natural justice. The relevant extracts from Kanugo are reproduced hereinbelow:-

268. In Hyderabad Vanaspati the Supreme Court was called upon to consider the submission of a right of cross-examination in the context of energy theft. Negating that submission, the Supreme Court observed as follows:-

The aforenoted observations are clearly apt and relevant in the context of the character of proceedings that may be undertaken by virtue of Section 132(4) and which are neither adversarial nor one which could be said to entail a resolution of a lis.

269. It is also pertinent to note that the mere usage of the word 'summary' cannot lead one to presume that the procedure that the NFRA may ultimately adhere to, would be violative of the principles of natural justice. When Rule 11(5) uses the expression 'summary procedure' all that the rule-making authority perhaps intended to convey was that disciplinary proceedings would not be liable to be conducted in accordance with a procedure or rules of evidence which a court of law may be obliged to follow while trying a lis. In fact, that rule itself enjoins the authority to ensure adherence to the principles of natural justice. It also places it under the duty to provide an opportunity of hearing to a person in cases where circumstances may so warrant. The statute thus provides enough guidance for the authority to ensure that the disciplinary proceedings are conducted in a manner which is fair, transparent and in consonance with the broad, basic and fundamental principles of natural justice.

270. The proceedings in terms of Rule 11 are envisaged to commence with the issuance of a SCN and which as per Rule 11(2) must necessarily make available to the charged CA or firm a detail of the allegations that are laid together with the evidence in support thereof as well as an appropriate disclosure with respect to the provisions of the W.P.(C) 1065/2021 & other connected matters Page 366 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Act, Rules or the SAs which are found to have been allegedly violated. Rule 11(2) further enjoins the SCN to broadly indicate the action that the NFRA proposes to take or the directions that it may be constrained to frame if the allegations were to be ultimately established. By virtue of Rule 11(3) the authority is also statutorily obliged to enclose all copies of documents relied upon as well as to make available the extracts of reports of investigation or other records which are proposed to be used for proving the allegation levelled. In terms of Rule 11(4) the SCN must be served upon the auditor as well as the firm dependent upon the action which the authority proposes to initiate. The statute thus adopts and incorporates appropriate measures and safeguards to ensure that the procedure that it adopts is in accord with the principles of fair play and natural justice.

271. We are also of the firm opinion that the proceedings which the NFRA would undertake are not liable to conform to the requirement of guilt being proved beyond reasonable doubt and which is a test which primarily applies to criminal trials. The proceedings under Section 132(4) are essentially disciplinary proceedings and which are governed and guided by the well-accepted principle of the charge being liable to be proved on the basis of preponderance of probabilities. While dealing with the nature of the inquiry, which Section 21 of the CA Act envisaged, the Supreme Court in Mukesh Gang had upon an exhaustive review of the scheme of that statute observed as follows:-

If, in a given case, it appears to the High Court that, on the facts alleged and proved, an alternative finding may be recorded, the High Court can as well send the case back to the Council with appropriate directions in this regard. The powers of the High Court, under Section 21(3) , are undoubtedly wide enough to enable it to adopt any course which, in its opinion, will enable it to render justice to the parties.

24. In Institute of Chartered Accountants of India v. L.K. Ratna (referred supra) the Apex Court discussed the scope of an enquiry in a reference under Section 21(5) of the Act, and held that it was apparent that, in the scheme incorporated in Section 21 of the Act, there were separate functionaries, the Disciplinary Committee, the Council and, in certain cases, the High Court. The controlling authority was the Council, which was only logical for the Council is the governing body of the Institute. When the Council receives information or a complaint alleging that a member of the Institute is guilty of misconduct, and it is prima facie of the opinion that there is substance in the allegations it refers the case to the Disciplinary Committee. The Disciplinary Committee plays a subordinate role. It conducts an inquiry into the allegations. Since the inquiry is into the W.P.(C) 1065/2021 & other connected matters Page 368 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 allegations of misconduct by the member, it possesses the character of a quasi-judicial proceeding. The Disciplinary Committee, thereafter, submits a report of the result of the inquiry to the Council. The Disciplinary Committee is merely a Committee of the Institute, with its functions specifically limited by the provisions of the Act. As a subordinate body, it reports to the Council, the governing body. The report will contain a statement of the allegations, the defence entered by the member, a record of evidence and the conclusions upon that material. The conclusions are the conclusions of the Committee. They are only tentative. They cannot be regarded as 'findings'. The Disciplinary Committee is not vested by the Act with power to render any findings. It is the Council which is empowered to find whether the member is guilty of misconduct. Both Section 21(2) and Section 21(3) are clear as to that. If, on receipt of the report, the Council finds that the member is not guilty of misconduct, Section 21(2) requires it to record its finding accordingly, and to direct that the proceedings shall be filed or the complaint shall be dismissed. If, on the other hand, the Council finds that the member is guilty of misconduct, Section 21(3) requires it to record a finding accordingly, and thereafter to proceed in the manner laid down in the succeeding sub-sections. The finding by the Council is the determinative decision as to the guilt of the member, and because it is determinative, the Act requires it to be recorded. A responsibility as grave as the determination that a member is guilty of misconduct, and recording of that finding, has been specifically assigned by the Act to the governing body, the Council. It is also apparent that it is only upon a finding being recorded by the Council that the Act moves forward to the final stage of penalisation. The recording of the finding by the Council is the jurisdictional springboard for the penalty proceeding which follows.

25. At this point, it is necessary to advert to the nature of the power conferred on the Council. The Council is empowered to find a member guilty of misconduct. The penalty which follows is so harsh that it may result in the removal of a members name from the Register for several years which would deprive him of the right to a certificate of practice. As is clear from Section 6(1) of the Act, he cannot practice without such a certificate. In the circumstances there is every reason to presume in favour of an opportunity being given to the member of being heard by the Council before it proceeds to pronounce upon his guilt. As seen, the finding by the Council operates with finality in the proceeding, and it constitutes the foundation for the penalty imposed by the Council on him. The power to find and record whether a member is guilty of misconduct has been specifically entrusted by the Act to the entire Council itself and not to a few of its members who constitute the Disciplinary Committee. It is the character and complexion of the proceeding, considered in conjunction with the structure of power constituted by the Act, which W.P.(C) 1065/2021 & other connected matters Page 369 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 leads to the conclusion that the member is entitled to a hearing by the Council before it can find him guilty.

26. In Institute of Chartered Accountants of India v. Price Waterhouse (referred supra) the Apex Court held that a combined reading of the relevant provisions in Section 21 and Regulation 16 did indicate that recording of a finding of guilt or non-guilt by the Council was mandatory to take further action or to dismiss the complaint or for further process. The Council was required to consider independently the explanation submitted by the member and the evidence adduced in the enquiry before the Disciplinary Committee, and the report of the Disciplinary Committee. It provided an in-built mechanism under which the Council itself was required to examine the case of the professional or other misconduct of a member of the Institute or associate member, taking the aid of the report submitted by the Disciplinary Committee, the evidence adduced before the Committee, and the explanation offered by the delinquent member. The entire material constitutes the record of the proceeding before the Council to reach a finding whether or not the delinquent member had committed professional or other misconduct. Otherwise, the primacy accorded to the report of the Disciplinary Committee would attain finality, denuding the Council of the power of discipline over the members of the Institute, and that would have a deleterious effect on the maintenance of discipline among the members or associate members of the Institute.

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48. The phrase Quasi-criminal mean a lawsuit or equity proceeding that has some, but not all, of the qualities of a criminal prosecution. It may appear either in a Common law or a Civil law jurisdiction. It refers to a courts right to punish for actions or omissions as if they were criminal. The origins of the phrase comes from the Latin word, quasi, meaning somewhat, sort-of, alike or akin to criminal law, as in Quasi-contract. The word Quasi is used to indicate that one subject resembles another, with which it is compared, in certain characteristics, but there are intrinsic and material differences between them. During a civil or equity trial, a court may act as if it were a criminal case to punish a person for contempt of court. In some cases, a court may impose asset forfeiture or another penalty. For example, a court has the right to punish actions or omissions of a party in a child support case as if they were a criminal, penalizing the parent with a sentence of jail term. Quasi-criminal proceedings include a wide variety of matters, including prosecution for a violation of the law or ordinance, psychiatric matters, motor vehicle law, status offences, family court actions, and equity proceedings such as a Writ.

49. In criminal cases, generally, Courts try cases following the prescribed procedure, and impose punishment either of a sentence or a fine or both, but in disciplinary proceedings, more particularly under the Act, the punishment which may be imposed is not a jail term or fine like any other criminal proceeding. The punishment which may be imposed under Section 21 of the Act, if the respondent is found guilty of misconduct, cannot be equated to a sentence or a fine imposed on a person being found guilty in a criminal prosecution. The standard of proof required in criminal cases and civil cases also vary.

50. In S.A.L. Narayan Row v. Ishwarlal Bhagwandas the Supreme Court held that, generally speaking, a proceeding is a civil proceeding only if it relates to a civil right whether resting on common law or created by statute. The nature of the proceeding depends not upon the nature of the tribunal which is invested with the authority to grant relief, but upon the nature of the right violated, and the appropriate relief which may be claimed. A civil proceeding is, therefore, one in which a person seeks to enforce, by appropriate relief, the alleged infringement of his civil rights against another person or the State, and which if the claim is proved would result in the declaration, express or implied, of the right claimed and relief such as payment of debt, damages, compensation, delivery of specific property, enforcement of personal rights, determination of status etc. There is thus a marked difference between Civil Proceeding and Criminal Proceeding.

51. If the principles laid down in S.A.L. Narayan Row v. Ishwarlal Bhagwandas (referred supra) is applied to the facts of the present case, the proceedings before this Court, before the Council and Committee are not criminal proceedings, and the rules of evidence applicable to criminal cases cannot be applied to the disciplinary proceedings initiated against the respondent.

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60. It is apparent from the above definitions that the Indian Evidence Act applies the same standard of proof in all civil cases. It makes no difference between cases in which charges of fraudulent or criminal character are made and cases in which such charges are not made. But this is not to say that the Court will not, while striking the balance of probability, keep in mind the presumption of honesty or innocence or the nature of the crime or fraud charged. In our opinion, Woodroffe, J., was wrong in insisting that such charges must be proved clearly and beyond reasonable doubt.

61. In view of the law laid down by the Constitution Bench of the Apex Court, in Gulabchand v. Kudilal (referred supra), and the Judgment of the Privy Council in A, a pleader v. The Judges of the High Court of Madras (referred supra), it must be held that the standard of proof required to establish a charge, in a disciplinary W.P.(C) 1065/2021 & other connected matters Page 371 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 proceedings, is on a preponderance of probabilities, and cannot be equated with the standard of proof in a criminal prosecution, wherein a charge is required to be proved beyond reasonable doubt. Accordingly, this point is decided.

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114. The Chartered Accountant is a professional whose expertise in accountancy is acknowledged. He is a member of an expert body and of a premier institute in India. The certificate issued by an Auditor has its own impact on the public at large, as it is largely on the basis of this certificate that the general public subscribe to the shares of the company. Reckless certification by an Auditor, which has resulted in the public being misled into subscribing to the shares of the company in the public issue, would undoubtedly amount to gross negligence. Large sections of society rely on the certification by the Chartered Accountants for taking many vital decisions. It is imperative that utmost care and caution is exercised in issuing such certificates, and the objectivity, integrity, reliability and credibility of the information therein is ensured. Of late, several instances have come to light where, due to the erroneous/ambiguous advice tendered by Chartered Accountants, borrowal accounts have had to face quick mortality resulting in huge losses for banks and financial institutions. To ensure public faith and protect gullible small investors from being cheated of their life savings, the Institute should ensure that its members possess competence of a high order, their character is above board, and their integrity beyond reproach. Chartered Accountants are responsible to the public for their actions, as heavy reliance is placed on their credibility by the general public consisting of investors, banks, financial institutions, governments etc. The Chartered Accountants duty is not merely to his client, but extends to various segments of society, more particularly in the commercial field, on whose expertise, integrity and impartiality they rely on in taking various decisions.

115. Larger public interest would be served only if Chartered Accountants maintain high ethical standards apart from her standards of expertise in accountancy and related fields. In the rare instances where Auditors are found to lack integrity, objectivity, professional competence, and to have failed to exercise due care and caution in issuing certificates, larger public interest would be served only if they are sternly dealt with. The certificate issued by the auditor is, in this case, the basis for the general public subscribing to the shares of the company. The present case best illustrates how a false and misleading certification by the Auditors, has resulted in the general public being cheated into believing that the promoters of the company had invested Rs. 2.25 crores in its capital, before the public at large were invited to invest in the share capital of the company.

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125. As seen from Clause (7) of Part I of Schedule II read with Section 21(5) and 22 of the Act, mere negligence by itself would not constitute misconduct, as the word negligence is prefixed with the word gross. What is gross negligence is a question required to be decided by us.

126. The Act does not define gross negligence, but it is defined in Black Law Dictionary as follows:

127. Negligence is gross if the precautions to be taken against harm are very simple, such as persons who are but poorly endowed with physical and mental capacities can easily take. H.L.A. Hart, Negligence, Mens Rea and Criminal Responsibility, in Punishment and Responsibility 136, 149 (1968).

128. Gross Negligence. As it originally appeared, this was very great negligence, or the want of even slight or scant care. It has been described as a failure to exercise even that care which a careless person would use. Several courts, however, dissatisfied with a term so nebulous. have construed gross negligence as requiring willful, wanton, or reckless misconduct, or such utter lack of all care as will be evidence thereof. But it is still true that most courts consider that gross negligence falls short of a reckless disregard of the consequences, and differs from ordinary negligence only in degree, and not in kind.

129. Similarly, in Law Lexicon by P. Ramanatha Aiyar the word gross negligence is defined as follows:

130. Gross negligence, sometimes called wilful blindness is the same thing as negligence, with the additional of a vituperative epithet.

131. The term gross neglect means and involves a failure on the part of a person to take such reasonable precautions against the risk of an innocent person being deceived in the circumstances of the particular case.

132. Gross negligence means some culpable default, not arising merely from want of foresight or mistake of judgment.

133. Negligence marked by total or nearly total disregard for the rights of others and by total or nearly total indifference to the consequences of an act.

134. For an act of negligence to constitute gross negligence, it must be in reckless disregard of a legal duty and of the consequences to another party, or wilful or voluntary or wanton omission. Negligence is the failure to take reasonable care as an ordinary prudent man, depending upon the circumstances of the case, would take.

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155. The Supreme Court also held that the Auditor holds a position of trust and it is his bounden duty to honour that trust by being candid with the shareholders, and telling them frankly and fully everything with regard to the affairs of the company which has come to his knowledge and which it is material for the shareholders to know; if an Auditor does not do what it is his duty to do, it is no defence for him to say in a disciplinary proceeding, started under the Chartered Accountants Act , that he had told the shareholders that he had not done it. The lapse is constituted by his failure to perform a duty without which an audit is meaningless and it is not excused by giving information of the omission to the share-holders. The reason is that the object of the Act is to ensure in public interest that those who practise the profession of Auditors shall perform, in their actual practice, at least the essential duties of an audit and shall bring to bear on their work attention to matters to which their duty requires them to pay attention, and the examination of accounts involves thorough and exhaustive testing of every account in the general ledger. If such negligence would cause no damage to anyone, such negligence cannot be termed as gross negligence within the definition of Section 22 of the Act.

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178. The professional misconduct attributed to the respondent is grave and serious in nature which affects public confidence, and their faith in the integrity and impartiality of the Chartered Accountants and the Institute of which they are members. A false certification by the respondent has enabled the promoters of the company to squander public money, on inducing the general public to subscribe to the share capital of the company. Taking a lenient view, or exonerating such professionals, would encourage others to indulge in similar acts, and completely erode the faith of the general public in the impartiality and integrity of the members of the Institute, and bring the Institute itself into disrepute.

179. The Council of the Institute has recommended removal of the name of the respondent from the Register of the Institute for a period W.P.(C) 1065/2021 & other connected matters Page 374 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 of three (3) years i.e. suspending him from practicing as a Chartered Accountant for a period of three (3) years. The recommendation of the Institute, regarding the nature of the punishment, is not binding on this Court and, in exercise of the wide powers conferred on it by the Act, this Court can impose a different punishment. In a similar situation, the Division Bench of this Court, in Council of the Institute of Chartered Accountants of India v. V.I. Oommen (referred supra), imposed a higher punishment than the one recommended by the Institute.

180. In the light of the above discussion, after anxious consideration of the matter, we find it appropriate that the respondent herein should be suspended from practising as a Chartered Accountant for a period of three years from 01.11.2016 to 31.10.2019."

181. Accordingly, the referred case is disposed of directing the respondent's membership with the Institute of Chartered Accountants of India shall stand suspended from 01.11.2016 to 31.10.2019, and, consequently, during that period he shall not practice or function as a Chartered Accountant. There shall be no order for costs."

272. As is evident from a reading of the conclusions rendered in Mukesh Gang the Supreme Court had in unequivocal terms found that the rules of evidence which otherwise inform criminal trials cannot be imputed to or held to govern proceedings initiated under the CA Act . It was held that the standard of proof required to establish a charge in those proceedings cannot be equated to that which applies to a criminal prosecution. It would thus be wholly incorrect for the proceedings in question being held to necessarily be in conformity with proof of evidence and the standard of beyond reasonable doubt and which are principles concerned with criminal trials alone.

273. That then takes us to the assertion of the petitioners being deprived of an opportunity to effectively meet the charges levelled in light of the proceedings being restricted to the audit file. We in the preceding parts of this judgment had an occasion to notice some of the provisions contained in the SAs and which had repeatedly laid W.P.(C) 1065/2021 & other connected matters Page 375 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 emphasis on the audit file and record being comprehensive and incorporating all material which may have constituted the basis for the conclusions appearing in the audit report. Suffice it to state that the charge of professional misconduct which may come to be laid against a CA or a firm would have to be necessarily proved and established on the basis of that audit record alone. The restriction of the proceedings to the audit record thus binds not only the person charged with misconduct but the NFRA itself.

274. Of course that is not to state, that an auditor or a firm is precluded from referring to material or standards that may be sought to be referred to in order to lend credence or support to the conclusions contained in the audit report. However, since the charge is to be proved solely on the basis of the audit record and the reports of investigation and other records, we find no merit in the challenge to the procedure prescribed under the NFRA Rules when they restrict the inquiry to the audit file.

275. Yet another submission which was advanced in challenge to the procedure contemplated under the NFRA Rules was on the basis of a procedure distinct from the Misconduct Rules, 2007 being made applicable only to a particular class of auditors and firms. The submission was that since an investigation or inquiry by the NFRA would only be in respect of a class of companies, which are spoken of in Rule 3, the same would lead to a situation where only auditors of such companies would be subjected to disciplinary proceedings undertaken in accordance with the NFRA Rules. All other auditors and firms, according to the writ petitioners, would continue to be governed W.P.(C) 1065/2021 & other connected matters Page 376 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 by the CA Act and the Rules framed thereunder.

276. The aforenoted submission is clearly misconceived since it proceeds on the premise that the NFRA Rules are far more stringent and onerous when compared to the Misconduct Rules, 2007. However, we have already in the preceding parts of this judgment found that the aforesaid contention is clearly untenable. Both the Misconduct Rules, 2007, as well as Rule 11(5) enjoin disciplinary proceedings to be conducted in accordance with the principles of natural justice and to follow a summary procedure of disposal. The Misconduct Rules, 2007 speak of oral examination and testimony only since proceedings under those rules could commence on the basis of information supplied or submitted by a complainant or an individual against an auditor or a firm. It is only to cater to such contingencies that those rules incorporate provisions of oral testimony and cross-examination. However, and as was noted hereinabove, disciplinary proceedings commenced on the basis of Section 132(4) are not concerned with individual complaints or the testimony of persons. Those proceedings commence either upon a reference by the Union Government or on information that may be available with the NFRA or the opinion formed by it in the course of discharge of its various statutory functional obligations contemplated under Rules 8, 9 and 10 of the NFRA Rules.

277. As was noted in the prefatory parts of this decision, Section 132(4) and the consequential rules framed to enable NFRA to discharge its functions, represent a policy decision taken by Parliament to bring the regulation of audits in tune with global practices. The statute thus W.P.(C) 1065/2021 & other connected matters Page 377 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 seeks to borrow from and adopt some of the best practices which inform the functioning of other regulatory bodies including the PCAOB and the FRC. The PCAOB is guided by the following Rules in the conduct of investigations:-

Rule 5101. Commencement and Closure of Investigations

(a) Commencement of Investigations (1) Order of Formal Investigation Upon the recommendation of the Director of Enforcement and Investigations or the Director of Registration and Inspections, or upon the Board's own initiative, or otherwise, the Board may issue an order of formal investigation when it appears that an act or practice, or omission to act, by a registered public accounting firm or any person associated with a registered public accounting firm may violate any provision of the Act, the Rules of the Board, the provisions of the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of W.P.(C) 1065/2021 & other connected matters Page 378 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 accountants with respect thereto, including the rules of the Commission issued under the Act, or professional standards.

(2) Designation of Staff In an order of formal investigation, the Board may designate members, or groups of members, of the Board's staff to issue accounting board demands to, and otherwise require or request cooperation of, any person pursuant to Section 105(b)(2) of the Act, and the Board's Rules thereunder, to the extent the information sought is relevant to the matters described in the Board's order of investigation.

(b) Closure of Investigations Upon the recommendation of the Director of Enforcement and Investigations, or on its own initiative, the Board may issue an order terminating or suspending, for a specified period of time, a formal investigation.

Rule 5102. Testimony of Registered Public Accounting Firms and Associated Persons in Investigations

(a) General The Board, and the staff of the Board designated in an order of formal investigation, may require the testimony of any registered public accounting firm or any person associated with a registered public accounting firm, with respect to any matter that the Board considers relevant or material to an investigation.

(b) Accounting Board Demand for Testimony The Board, and the staff of the Board designated in an order of formal investigation, shall require testimony by serving an accounting board demand that -

(1) gives reasonable notice of the time and place for the taking of testimony;

(2) states the method or methods by which the testimony shall be recorded, which may be by sound or sound-and-visual, but shall include by stenographic means; and (3) if the person to be examined is a registered public accounting firm, a description with reasonable particularity of the matters on which examination is requested.

Before testifying, every witness shall be required to declare that the witness will testify truthfully, by oath or affirmation administered in a form calculated to awaken the witness's conscience and impress the witness's mind with the duty to do so.

(2) General Examinations shall be conducted before a reporter designated by the Board's staff.

(3) Persons Permitted to be Present Persons permitted to be present at an examination pursuant to this Rule are limited to -

(i) the person being examined and his or her counsel, subject to Rule 5109(b);

(ii) any Board member or member of the staff of the Board;

designated in the order of formal investigation, determine are appropriate to permit to be present; provided, however, that in no event shall a person other than the witness who has been or is reasonably likely to be examined in the investigation be present.

(4) Examinations of Registered Public Accounting Firms A registered public accounting firm subject to an accounting board demand shall designate one or more individuals who consent to testify on its behalf, and shall set forth, for each individual designated, the matters on which the individual will testify. The individuals so designated shall testify as to matters known or reasonably available to the registered public accounting firm.

(d) Transcript A witness shall have 15 days, or such longer period as the Director of Enforcement and Investigations may allow, after being notified by the reporter that the transcript, or, where applicable, video or other recording, is available in which to review the transcript or other recording and, if there are changes in form or W.P.(C) 1065/2021 & other connected matters Page 380 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 substance, to sign a statement reciting such changes and the reasons given by the witness for making them. The reporter shall make a certificate in writing to accompany the transcript, which shall indicate -

(1) that the witness was duly sworn by the officer and that the transcript is a true record of the testimony given by the witness; and (2) whether the witness requested to review the transcript and, if so, that the reporter has appended any changes made by the witness during the period allowed.

Rule 5105. Requests for Testimony or Production of Documents from Persons Not Associated With Registered Public Accounting Firms

(a) Testimony The Board, and the staff of the Board designated in an order of formal investigation, may issue an accounting board request for the testimony of any person, including any client of a registered public accounting firm, that the Board considers relevant or material to an investigation.

(1) Requests for Testimony An accounting board request for testimony pursuant to subparagraph (a) of this Rule shall -

(i) give appropriate notice, subject to the needs of the investigation of the time and place for the taking of testimony;

(ii) state the method or methods by which the testimony shall be recorded, which may be by sound or sound-and-visual, but shall include by stenographic means; and

(iii) if the person to be examined is an issuer, broker, dealer, partnership, association, governmental agency, or other organized entity, provide a description with reasonable particularity of the matters on which examination is requested.

(2) Conduct of Examination and Transcript An examination requested pursuant to this Rule shall be conducted consistent with Rules 5102(c) and a transcript shall be prepared consistent with Rule 5102(d). If the person to be examined is an issuer, broker, dealer, partnership, association, or governmental agency, the person to be examined shall designate one or more individuals who consent to testify on its behalf and shall set forth, for each individual designated, the matters on which the individual will testify. The individuals so designated shall testify as to matters known or reasonably available to the organization.

(b) Documents The Board, and the staff of the Board designated in an order of formal investigation, may issue an accounting board request to any person, including any issuer, broker, or dealer for the production of any document that is relevant or material to an investigation, with appropriate notice, subject to the needs of the investigation. A request issued pursuant to this Rule shall set forth a reasonable time and place for production, subject to the needs of the investigation. Note: Failure to comply with an accounting board request pursuant to Rule 5105 may result in a Board request for the issuance of a Commission subpoena, pursuant to Rule 5111.

Rule 5200. Commencement of Disciplinary Proceedings

(a) Grounds for Commencement of Disciplinary Proceedings The Board may commence a disciplinary proceeding when -

(1) it appears to the Board, as the result of an investigation or otherwise, that a hearing is warranted to determine whether a registered public accounting firm, or an associated person of such a firm, has engaged in any act or practice, or omitted to act, in violation of the Act, the Rules of the Board, the provisions of the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants with respect thereto, including the rules of the Commission issued under the Act, or professional standards;

(2) it appears to the Board, as the result of an investigation or otherwise, that a hearing is warranted to determine whether a registered public accounting firm, or any person who is, or at the time of the alleged failure reasonably to supervise was, a supervisory person of such firm, has failed reasonably to supervise an associated person, either as required by the Rules of the Board relating to auditing or quality control standards, or otherwise, with a view to preventing violations of this Act, the Rules of the Board, the provisions of the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants with respect thereto, including the rules of the Commission under the Act, or professional standards, and that such associated person has committed a violation of the Act, or of any such rules, laws, or standards;

(3) it appears to the Board that a hearing is warranted pursuant to Rule 5110.

[Effective pursuant to SEC Release No. 34-49704, File No. PCAOB- 2003-07 (May 14, 2004); and SEC Release No. 34-72087, File No. PCAOB-2013-03 (May 2, 2014)]

(b) Presiding Official All proceedings shall be presided over by the Board or, if the Board orders, by a hearing officer.

(c) Assignment of a Hearing Officer Subject to Rule 5200(b), as soon as practicable after the Board has issued an order instituting proceedings, or after a registration applicant has requested a hearing pursuant to Rule 5500(b), the Secretary shall assign a hearing officer to preside over the proceeding and shall serve the parties with notice of the hearing officer's assignment. Subject to Rules 5402 and 5403, the hearing officer shall have the authority to do all things necessary and appropriate to discharge his or her duties. The powers of the hearing officer include, but are not limited to, the following -

(1) obtaining a court reporter to administer oaths and affirmations;

(2) issuing accounting board demands pursuant to Rule 5424;

(3) receiving relevant evidence and ruling upon the admission of evidence and offers of proof;

(4) regulating the course of a proceeding and the conduct of the parties and their counsel;

(5) holding prehearing and other conferences and requiring the attendance at any such conference of at least one representative of each party who has authority to negotiate concerning the resolution of issues in controversy;

(6) recusing himself or herself upon motion made by a party or upon his or her own motion;

(7) ordering, in his or her discretion, in a proceeding involving more than one respondent, that the interested division indicate, on the record, at least one day prior to the presentation of any evidence, each respondent against whom that evidence will be offered;

(8) subject to any limitations set forth elsewhere in these Rules, considering and ruling upon all procedural and other motions;

(9) preparing an initial decision as provided in Rule 5204; (10) upon notice to all parties, reopening any hearing prior to the filing of an initial decision therein, or, if no initial decision is W.P.(C) 1065/2021 & other connected matters Page 383 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 to be filed, prior to the time fixed for the filing of final briefs with the Board;

(11) informing the parties as to the availability of one or more alternative means of dispute resolution, and encouraging the use of such methods; and (12) scheduling hearing dates, except that a hearing officer may not, absent the approval of the Board, change a hearing date set by Board order.

(d) Separation of Functions The staff of the Division of Enforcement and Investigations may not participate or advise in the decision, or in Board review of the decision, in any proceeding in which the Division of Enforcement and Investigations is the interested division, except as a witness or counsel in the proceeding. Any other employee or agent of the Board engaged in the performance of investigative or prosecutorial functions for the Board in a proceeding may not, in that proceeding or one that is factually related, participate or advise in the decision, or in Board review of the decision, except as a witness or counsel in the proceeding. A hearing officer may not be responsible to or subject to the supervision or direction of an employee or agent engaged in the performance of investigative or prosecuting functions for the Board.

(e) Consolidation of Proceedings By order of the Board or a hearing officer, proceedings involving a common question of law or fact may be consolidated for hearing of any or all the matters at issue in such proceedings. The Board or the hearing officer may make such orders concerning the conduct of such proceedings as it deems appropriate to avoid unnecessary cost or delay. Consolidation shall not prejudice any rights under these Rules and shall not affect the right of any party to raise issues that could have been raised if consolidation had not occurred. For purposes of this Rule, no distinction is made between joinder and consolidation of proceedings."

A consideration of the above would establish that the NFRA Rules are broadly in consonance with the above. The departure occurs only on account of oral testimony being excluded.

DIVISIONS : SEPARATION OF FUNCTIONS

278. That takes us to the next segment of our decision and which W.P.(C) 1065/2021 & other connected matters Page 384 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 pertains to the contention that the NFRA failed to follow the statutory scheme itself and with a common complement of people authoring the AQRR which contained damning findings of guilt and the same body thereafter taking a decision to commence disciplinary proceedings. Our attention was firstly drawn to Section 132(1)(a) and which prescribes that the NFRA would perform its functions through such divisions as may be prescribed. The petitioners also invited our attention to Section 132(3)(a) and which stipulates that each division of the NFRA would be presided over by its Chairperson or a full time member authorized by the former. The petitioners lay stress on the clear and distinct role which is assigned to the Executive Body on the other hand and whose composition is spelt out in Section 132(3)(b).

279. Proceeding then to the Rules, the petitioners alluded to Rule 2(g) and which defines that word to mean a division including one headed by a Chairperson or a full time member established for the purpose of organizing and carrying out its functions and duties. It was submitted that the broad division of functions amongst separate units of the NFRA is clearly evident from the statutory scheme underlying the NFRA Rules and which at more than one place speak of the "concerned division".

280. For instance, they referred to Rule 7(4) and which postulates that if the NFRA has reason to believe that any accounting standard has been violated, it may take a decision on the further course of investigation or action liable to be undertaken "through its concerned division". The petitioners underscore the fact that the dichotomy of functions which are envisaged to be performed by different divisions of W.P.(C) 1065/2021 & other connected matters Page 385 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 the NFRA stands replicated in Rule 8(8). The said Rule too enjoins the authority to chart a future course of investigation or enforcement "through its concerned division". Similar provisions are found in Rule 10 and which entails the NFRA forwarding a particular case for investigation or a reference received by the Union Government or even where it were to suo moto decided to commence an investigation to a division dealing with enforcement. The aforesaid position again stands reiterated in Rule 11 and which in unequivocal terms provides that based on the findings of the NFRA in the course of discharge of its monitoring, enforcement or oversight functions, if sufficient cause were found to exist warranting action being taken under Section 132(4), the matter would be referred to the concerned division which shall thereafter dispose of the SCN proceedings. This is a position which also emerges from a reading of sub-rule (5) of Rule 11.

281. Reference in this respect was also made to Rules 14 and 18 of the Misconduct Rules, 2007 and which are extracted hereinbelow: -

Explanation 1. − For the purpose of this rule, the appearance includes, unless and otherwise directed, appearance by an advocate or through any authorized representative, who may be a Chartered Accountant, Cost Accountant or Company Secretary. 1 [Explanation 2 - For the purpose of this rule, the appearance also includes the appearance through video-conference, modalities for which may be as formulated by the Institute from time to time.] (7) On the date of hearing, if the respondent, in spite of the service of notice, under sub-rule (6), does not appear either in person 1 [or through video conference in terms of the modalities formulated under these Rules] or through his authorized representative, the Board of Discipline may proceed ex-parte and pass such orders as it may think fit or direct fresh notice to be served. (8) The Board of Discipline may, on such terms as it thinks fit, and at any stage of the proceedings, adjourn the hearing: Provided that such adjournment shall not be given more than once at any stage of the proceedings.

(9) The Board of Discipline shall consider the written representations, including the written statements, rejoinder and supporting documents, and the oral submissions, if any made by the Director, the complainant and the respondent and arrive at a finding on whether the respondent is guilty or not of any professional or other misconduct.

xxxx xxxx xxxx

18. Procedure to be followed by the Committee (1) The Committee shall be guided by the principles of natural justice and shall follow the procedure in dealing with all cases before it, as laid down in this Chapter.

(2) If the Committee decides to proceed further under clause (b) of sub-rule (2) of rule 9 or if it receives a reference from Board of Discipline under clause (b) of sub-rule (3) of rule 9, it shall expeditiously cause to deliver to the respondent and the complainant, a copy each of the following, −

(a) prima facie opinion formed by the Director, and (b) particulars or documents relied upon by the Director, if any, during the course of formulation of prima facie opinion.

(3) The Committee shall inform the respondent, as the case may be to file a written statement, within such time as may be specified:

[Explanation 1. - For the purpose of this rule, the appearance includes, unless and otherwise directed, appearance by an advocate or through any authorized representative, who may be a Chartered Accountant, Cost Accountant or Company Secretary.

[Explanation 2. - For the purpose of this rule, the appearance also includes the appearances through video-conference, modalities for which may be as formulated by the Institute from time to time.]"

287. SRBC while advancing submissions similar to those canvassed by DHS had urged that it is manifest from the disclosures made by the 82 (1986) 4 SCC 537 W.P.(C) 1065/2021 & other connected matters Page 391 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 respondent that all functions had been bundled into one singular body, namely the Executive Body. It was contended that since Section 132(3)(b) clearly and specifically spells out the composition of the Executive Body, it would be wholly incorrect to equate it to a division and which is separately defined under the NFRA Rules quite apart from having been spoken of in the principal provision of the Act itself. The petitioners in this respect also sought to highlight the distinction and division of functions which are factored in and placed as salutary safeguards to guide proceedings taken by similar regulatory bodies including the PCAOB as well as the FRC. We propose to deal with some of those provisions and which regulate the functioning of those authorities in the latter parts of this decision.

288. It was thus contended that the overlapping of functions coupled with the admitted fact of a body of individuals having discharged a dual role and function despite the separation which is envisaged, gives rise to a reasonable apprehension of likelihood of bias. Our attention was in this context drawn to the decision of the US Supreme Court in Williams vs. Pennsylvania 83 and where the following illuminating passages appear:-

Caperton, 556 U. S., at 881. Of particular relevance to the instant 83 579 U.S. ___ (2016) W.P.(C) 1065/2021 & other connected matters Page 392 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 case, the Court has determined that an unconstitutional potential for bias exists when the same person serves as both accuser and adjudicator in a case. See Murchison, 349 U. S., at 136-137. This objective risk of bias is reflected in the due process maxim that "no man can be a judge in his own case and no man is permitted to try cases where he has an interest in the outcome." Id., at 136. The due process guarantee that "no man can be a judge in his own case" would have little substance if it did not disqualify a former prosecutor from sitting in judgment of a prosecution in which he or she had made a critical decision. This conclusion follows from the Court's analysis in In re Murchison. That case involved a "one-man judge grand jury" proceeding, conducted pursuant to state law, in which the judge called witnesses to testify about suspected crimes. Id., at 134. During the course of the examinations, the judge became convinced that two witnesses were obstructing the proceeding. He charged one witness with perjury and then, a few weeks later, tried and convicted him in open court. The judge charged the other witness with contempt and, a few days later, tried and convicted him as well. This Court overturned the convictions on the ground that the judge's dual position as accuser and decisionmaker in the contempt trials violated due process: "Having been a part of [the accusatory] process a judge cannot be, in the very nature of things, wholly disinterested in the conviction or acquittal of those accused." Id., at 137. No attorney is more integral to the accusatory process than a prosecutor who participates in a major adversary decision. When a judge has served as an advocate for the State in the very case the court is now asked to adjudicate, a serious question arises as to whether the judge, even with the most diligent effort, could set aside any personal interest in the outcome. There is, furthermore, a risk that the judge "would be so psychologically wedded" to his or her previous position as a prosecutor that the judge "would consciously or unconsciously avoid the appearance of having erred or changed position." Withrow, 421 U. S., at 57. In addition, the judge's "own personal knowledge and impression" of the case, acquired through his or her role in the prosecution, may carry far more weight with the judge than the parties' arguments to the court. Murchison, supra, at 138; see also Caperton, supra, at 881."

289. Yet another decision which was cited in this respect was that of the Supreme Court in Ranjit Thakur vs Union of India84 and which 84 (1987) 4 SCC 611 W.P.(C) 1065/2021 & other connected matters Page 393 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 had explained the concept of bias in the following words:-

(See Vassiliades v. Vassiliades [AIR 1945 PC 38 : 221 IC 603]

17. As to the tests of the likelihood of bias what is relevant is the reasonableness of the apprehension in that regard in the mind of the party. The proper approach for the Judge is not to look at his own mind and ask himself, however, honestly, "Am I biased?"; but to look at the mind of the party before him.

18. Lord Esher in Allinson v. General Council of Medical Education and Registration [(1894) 1 QB 750, 758-59] said:

19. In Metropolitan Properties Co. (F.G.C.) Ltd. v. Lannon [(1969) 1 QB 577, 599] Lord Denning M.R. observed:

20. Frankfurter, J. in Public Utilities Commission of the District of Columbia v. Pollak [343 US 451, 466-67 : 96 L Ed 1068, 1079] said:

21. Referring to the proper test, Ackner, L.J. in Regina v. Liverpool City Justices, ex parte Topping [(1983) 1 WLR 119 : (1983) 1 All ER 490, 494] said:

22. Thus tested the conclusion becomes inescapable that, having regard to the antecedent events, the participation of Respondent 4 in the court-martial rendered the proceedings coram non-judice.

xxxx xxxx xxxx

25. Judicial review generally speaking, is not directed against a decision, but is directed against the "decision-making process". The question of the choice and quantum of punishment is within the jurisdiction and discretion of the court-martial. But the sentence has to suit the offence and the offender. It should not be vindictive or unduly harsh. It should not be so disproportionate to the offence as to shock the conscience and amount in itself to conclusive evidence of bias. The doctrine of proportionality, as part of the concept of judicial review, would ensure that even on an aspect which is, otherwise, within the exclusive province of the court-martial, if the decision of the court even as to sentence is an outrageous defiance of logic, then the sentence would not be immune from correction. Irrationality and perversity are recognised grounds of judicial review. In Council of Civil Service Unions v. Minister for the Civil Service [(1984) 3 WLR 1174 (HL) : (1984) 3 All ER 935, 950] Lord Diplock said:

26. In Bhagat Ram v. State of Himachal Pradesh [(1983) 2 SCC 442 : 1983 SCC (L&S) 342 : AIR 1983 SC 454] this Court held: [SCC p. 453, SCC (L&S) p. 353, para 15] "It is equally true that the penalty imposed must be commensurate with the gravity of the misconduct, and that any penalty disproportionate to the gravity of the misconduct would be violative of Article 14 of the Constitution." The point to note, and emphasise is that all powers have legal limits.

27. In the present case the punishment is so strikingly disproportionate as to call for and justify interference. It cannot be allowed to remain uncorrected in judicial review."

290. Insofar as the facts are concerned, SRBC had additionally asserted that the proceedings which were undertaken and the hearings conducted were fatally flawed since the full complement of the authority was not even in place on the relevant dates. They have sought to highlight this aspect by drawing our attention to the following table in order to buttress their contention that at different stages of the impugned proceedings, the NFRA had not even been constituted in accordance with the Act. The table seeks to underscore the absence of the requisite number of full-time members who could have chaired and headed the committee which drew up the prima facie conclusions, the DAQRR, the AQRR and all of which ultimately culminated in the W.P.(C) 1065/2021 & other connected matters Page 396 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 issuance of the impugned SCNs'. That chart is reproduced hereinbelow:-

corporate or persons, in such manners may be prescribed into the matters of However, no communication in the above professional or other misconduct cases has been received by the Petitioners committed by any member or firm of from NFRA stating that NFRA initiated chartered accountants, registered under the said proceedings in suo moto exercise the Chartered Accountants Act, 1949 " of its powers.

[Page 33 of affidavit] Although the SCN in this case is based on the letter dated 11.05.2021 containing SEBI's findings, NFRA has neither cited suo moto initiation nor central government reference in this para of the affidavit and there has been no investigation conducted by NFRA in this matter. Therefore, the Affidavit gives no clarity about who initiated action under Section 132(4) in this case as directed by the order.

292. Refuting the aforesaid submissions, Mr. Hossain argued that as is manifest from a reading of Section 132(3)(b), the statute requires the W.P.(C) 1065/2021 & other connected matters Page 401 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Executive Body to be involved in the monitoring, enforcement, inquiry and disciplinary proceedings that may be undertaken. It was his submission that quite apart from there being no challenge to that provision, the law recognizes no overarching principle which may postulate that enquiry and adjudicatory functions cannot be conferred on the same body. It was submitted that criminal legislation as well as various revenue laws incorporate innumerable instances where an assessing officer acts both as an investigator as well as the adjudicator. It was submitted that the division as defined in Rule 2(g) itself includes one which would be headed by the Chairperson or a full-time member. This, according to Mr. Hossain, is itself indicative of the statute contemplating divisions to be constituted only for the purposes of internal administrative convenience.

293. It was then submitted that neither the Act nor the NFRA Rules contemplate that the person who investigates or conducts an inquiry would be different from the one who takes a final decision. According to Mr. Hossain, this is evident when one bears in mind Rule 11 and which contemplates the same division issuing the Show Cause Notice and taking a final decision in terms of sub-rule (5) thereof. It was further argued that Rule 14 is yet another indicator of the statute contemplating the involvement of the Executive Body in all matters including those pertaining to disciplinary proceedings. Mr. Hossain submitted that while Rule 7 does allude to a concerned division, the reference to that authority would be occasioned only if the NFRA were to form an opinion that accounting standards had been violated. This, in any case, according to the learned counsel, would lead to action being W.P.(C) 1065/2021 & other connected matters Page 402 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 taken either under Rule 10(2) or disciplinary proceedings under Rule 11 and thus it being evident that those Rules did not contemplate that the division which caused further investigation would be different from the one which issued the SCN.

294. Mr. Hossain also questioned the applicability of various precedents which had been cited on behalf of the writ petitioners and all of which pertained to service jurisprudence. It was submitted that unlike disciplinary authorities who may have an interest in the outcome of departmental inquiries, the Chairperson and Members of the NFRA are bound by the oath that they subscribe to in terms of Section 132(3) and are completely impartial while acting as constituents of the statutory authority. It was submitted that by virtue of the nature of the office held by the Chairperson and members, the possibility of bias is clearly ruled out. This according to learned counsel, quite apart from the fact that a review mechanism also stands put in place in the shape of an appeal being carried to a statutory tribunal which in turn is headed by a former Supreme Court Judge.

295. Reverting then to the provisions as they existed under the CA Act , it was Mr. Hossain's submission that the Board of Discipline as well as the Disciplinary Committee were not only conducting an inquiry but also imposing punishments. The Director Discipline, it was pointed out, was only obliged to examine a complaint and to form a prima facie opinion as to whether information provided was actionable or liable to be examined in greater detail. Mr. Hossain also questioned the reliance placed upon the judgment of the Supreme Court in L.K. Ratna and submitted that the CA Act itself came to be amended W.P.(C) 1065/2021 & other connected matters Page 403 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 thereafter and as a consequence of which an enquiry was to be conducted by the Disciplinary Committee and which in turn is empowered to pass a final order of punishment. This submission, however, has been noted mindful of the fact that neither Sections 21A nor 21B are yet to be brought into force.

296. Mr. Hossain then sought to sustain the procedure as adopted by referring to the doctrine of necessity. It was his submission that a mere overlap of investigative and adjudicative functions would not render a provision unconstitutional. In support of the aforesaid submission, Mr. Hossain firstly referred to the judgment of the Supreme Court in Election Commission of India vs. Subramaniam 85 and which had ultimately upheld the decision of the Election Commission by alluding to the doctrine of necessity. Yet another line of precedents which were cited by Mr. Hossain were those rendered in the context of income tax assessments and other revenue laws, including those in Anuj Chawla vs. Commissioner of Income Tax 86, Om Pal Singh vs. Union of India 87 and Union of India vs. Vipan Kumar Jain88 . These set of decisions have essentially held that there is nothing inherently unconstitutional in the Assessing Officer collating or gathering information and thereafter undertaking the assessment process itself. The relevant parts of the decision of the Supreme Court in Vipin Kumar Jain are reproduced hereinbelow:-

9. It is true that there may be cases where the outcome of the assessment may be influenced by the fact that the raiding assessing officer had himself in the course of the raid been witness to any incriminating material against the assessee. The assessing officer's decision on the basis of such material is not the final word in the matter. The assessment order is appealable under the provisions of the statute itself and ultimately by way of judicial review.

10. Finally, the courts cannot read in limitations to the jurisdiction conferred by statutes, in the absence of a challenge to the provision itself when the language of the Act clearly allows for an ostensible violation of the principles of natural justice including the principle that a person cannot be a judge in his own cause. In Union of India v. Tulsiram Patel [(1985) 3 SCC 398 : 1985 SCC (L&S) 672] in recognition of this principle this Court held: (SCC p. 479, para

101) "101. Not only, therefore, can the principles of natural justice be modified but in exceptional cases they can even be excluded. There are well-defined exceptions to the nemo judex in causa sua rule as also to the audi alteram partem rule. The nemo judex in causa sua rule is subject to the doctrine of necessity and yields to it as pointed out by this Court in J. Mohapatra & Co. v. State of Orissa [(1984) 4 SCC 103] ."

xxxx xxxx xxxx

12. Ultimately, the question of bias will have to be decided on the facts of each case. If the assessee is able to establish that the W.P.(C) 1065/2021 & other connected matters Page 405 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 assessing officer was in fact biased in the sense that he was involved or interested in his personal capacity in the outcome of the assessment or the procedure for assessment, no doubt, it would be a good ground for setting aside the assessment order. But to hold, as the High Court has that bias is established only because the authorised officer under Section 132 and the assessing officer are the same person is, in our view, an incorrect approach."

297. We, firstly and on facts find that it appears to be the conceded case of the NFRA that proceedings both at the stage of preparation of the SQARR as well as the AQRR were all undertaken by the Executive Body of the NFRA. This becomes evident from the disclosures which were made in the affidavit of compliance filed pursuant to our order of 12 September 2023. For instance, in the matter of DHS, it is disclosed that the AQRR was prepared by the Executive Body of the NFRA assisted by a team consisting of the Secretary, an Executive Director and three Chartered Accountants. It is then disclosed that a draft AQRR note was initiated by the Secretary NFRA on 25 September 2019 and which was thereafter placed for the approval of the Executive Body. This was accorded by the Executive Body on the same date itself pursuant to which the draft DAQRR came to be issued to the engagement partner.

298. Similar was the process which appears to have been followed for the drawl of the AQRR which was approved by the Executive Body on 11 December 2019. After the issuance of the AQRR, it is the same Executive Body which with the assistance of a team headed by a Chief General Manager examined the observations appearing therein and drew up a draft SCN proposed to be issued to DHS and its partners. This draft SCN prepared by the Executive Body was thereafter W.P.(C) 1065/2021 & other connected matters Page 406 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 approved by it and issued.

299. The NFRA followed a similar procedure in the case of Udayan Sen, Rukshad Daruvala and Shrenik Baid, petitioners in WP(C) No. 1524 of 2020, WP(C) No. 1522 of 2020 and WP(C) No. 1525 of 2020 respectively. Here again starting from the circulation of a prima facie conclusion leading upto the issuance of the AQRR by the Executive Body, the proceedings ultimately culminated in the issuance of a SCN. All that is additionally disclosed insofar as these writ petitioners are concerned is that post the issuance of the AQRR, the Executive Body with the assistance of a team working under a Chief General Manager who was not a part of the AQR team, examined the observations forming part of that report and prepared a draft SCN to be issued to the audit firm and its partners. It thus becomes apparent that it was the Executive Body which not only authored the AQRR, but it was the same body, albeit assisted by a supportive team, which then proceeded to form an opinion with respect to initiation of disciplinary proceedings and which in turn culminated in the issuance of the impugned SCNs.

300. As we view Section 132 of the Companies Act, there appears to be no doubt in our mind that the provision did and always contemplated the NFRA performing and discharging its functions through such divisions as may be constituted. While it is true that Rule 2(g), while defining the word 'division' includes one headed by a Chairperson or a full time Member, the Executive Body cannot possibly be construed to be a division in itself. A conjoint reading of sub-sections (3)(a) and (3)(b) appearing in Section 132 alongside the NFRA Rules, leads us to the irresistible conclusion that the statute clearly contemplated the W.P.(C) 1065/2021 & other connected matters Page 407 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 discharge of functions enumerated in Rules 7 and 8 being undertaken by independent units or divisions of the NFRA. Mr. Hossain had submitted that by virtue of Section 132(3)(b) , the Act clearly contemplates the Executive Body to be the pivotal authority to discharge the various functions which it has to perform. This position, according to Mr. Hossain, is further fortified by Rule 2(g) when it includes within its ambit a part, component or unit of the authority which could be headed by the Chairperson or a full-time member. Mr. Hossain submitted that the only function which the NFRA acting as a body as a whole is liable to discharge is that specified in sub-section (2)(a) of Section 132. It was the contention of the respondents that since the power to undertake disciplinary action is one which is placed in sub-section (4) and which too stands reserved in favour of the Executive Body, the dual role, if it were to be so acknowledged as having been discharged, would not invalidate the proceedings impugned before us.

301. We find ourselves unable to concur with the aforenoted contentions of Mr. Hossain since and although the Executive Body of the NFRA does stand conferred a status of pre-eminence in the overall hierarchical structure of that authority, the same would clearly not lend credence or be liable to be countenanced as sanctioning a dual role being discharged by the same body or complement of people. This we hold since it is imperative that the proceedings be not only fair in fact, but also liable to be perceived from the standpoint of a reasonable person as being fair and compliant with Article 14 of the Constitution.

302. Acceptance of the position as canvassed on behalf of the NFRA W.P.(C) 1065/2021 & other connected matters Page 408 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 would essentially mean that the very body which had come to render findings of guilt and infraction of the SAs' would be expected to independently form an opinion as to whether circumstances warranted initiation of disciplinary action. There would in such a situation hardly be a possibility of the matter being independently and dispassionately reviewed or examined. As has been repeatedly held by courts, proceedings expected to be in consonance with the principles of natural justice, must not only qualify the test of fairness in fact, but be expected to appear to be impartial and untainted by bias.

303. While various decisions were cited by the respondents in this respect, we note that the petitioners while questioning the validity of the procedure ultimately adopted by the NFRA have not alleged institutional bias. The various judgments which were cited for our consideration by Mr. Hossain are clearly of little relevance and do not appear to be germane to the challenge which stands raised before us. While courts may accept a broad or loose overlap of investigative and adjudicatory functions being exercised by a singular authority, the aforenoted general precept would clearly not withstand the test of fairness when one of those bodies is expected to form an independent opinion of whether transgressions alleged to have been committed warrant further disciplinary measures being adopted. The judgments cited by Mr. Hossain and which pertained to the exercise of powers by authorities under the Income Tax Act is also misplaced since it is well settled that proceedings under a fiscal statute are neither akin to judicial proceedings nor are they concerned with an adjudication of a lis which may be said to exist between an assessee and the officer concerned.

Those statutes by virtue of the inherent nature of the obligation that officers are enjoined to discharge contemplate those persons performing the dual function of investigation and assessment. Although this principle is by now well recognized, we deem it appropriate to take note of the succinct enunciation of the legal position in this respect which appears in Deepak Agro Foods vs. State of Rajasthan89 :-

304. That then takes us to review the constitutional requirements which we would expect administrative proceedings to adhere to. In Ratan Lal Sharma vs. Managing Committee 90, the Supreme Court, while broadly explaining the fundamental facets of natural justice, had this to say with respect to the principle of nemo debet esse judex in propria causa: -

It has been observed by this Court in Union of India v. P.K. Roy [(1968) 2 SCR 186 : AIR 1968 SC 850 : (1970) 1 LLJ 633] :

Similar view was also expressed in A.K. Kraipak case [(1969) 2 SCC 262 : (1970) 1 SCR 457] . This Court observed: (SCC pp. 272- 73, para 20) "... What particular rule of natural justice should apply to a given case must depend to a great extent on the facts and circumstances of that case, the framework of the law under which the enquiry is held and the constitution of the Tribunal or body of persons appointed for that purpose. Whenever a complaint is made before a court that some principle of natural justice had been contravened, the court has to decide whether the observance of that rule was necessary for a just decision on the facts of that case."

Prof. Wade in his Administrative Law has succinctly summarised the principle of natural justice to the following effect:

One of the cardinal principles of natural justice is nemo debet esse judex in propria causa (no man shall be a judge in his own cause). The deciding authority must be impartial and without bias. It has been held by this Court in Secretary to W.P.(C) 1065/2021 & other connected matters Page 411 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Government, Transport Department v. Munuswamy Mudaliar [1988 Supp SCC 651] that a predisposition to decide for or against one party without proper regard to the true merits of the dispute is bias. Personal bias is one of the three major limbs of bias namely pecuniary bias, personal bias and official bias. A classic case of personal bias was revealed in the decision of this Court in State of U.P. v. Mohd. Nooh [1958 SCR 595 : AIR 1958 SC 86] . In the said case, a departmental inquiry was held against an employee. One of the witnesses against the employee turned hostile. The officer holding the inquiry then left the inquiry, gave evidence against the employee and thereafter resumed to complete the inquiry and passed the order of dismissal. This Court quashed the order of dismissal by holding inter alia that the rules of natural justice were grievously violated."

305. The principle of no man being a judge in its own cause was explained by the Supreme Court as mandating the deciding authority being one which was impartial and without bias. It also alluded to aspects such as a predisposition to decide for or against one party or where that authority may be inclined to disregard the true merits of the dispute by virtue of bias. Ratan Lal Sharma was a case where the delinquent employee in the course of disciplinary proceedings had assailed the participation of an individual who not only was a member of the enquiry committee but had also appeared as a witness to prove the charges that had been laid. Deprecating such a procedure, the Supreme Court pertinently observed: -

Some of the observations which appear in para 12 of the report assume added significance in light of the Supreme Court holding that an illegality which taints administrative proceedings and leaves an "indelible stamp of infirmity" would not be salvaged merely because a review or an appeal avenue may have existed.

306. In explaining the rule of reasonable likelihood of bias, the Supreme Court in State of West Bengal vs. Shivananda Pathak91 observed :-

[See also Griffith and Street, Principles of Administrative Law (1973 Edn.), p. 155; Judicial Review of Administrative Action by de Smith (1980 Edn.), p. 272; II Administrative Law Treatise by Davis (1958 Edn.), p. 130.]

30. These remarks imply a distinction between prejudging of facts specifically relating to a party, as against preconceptions or predispositions about general questions of law, policy or discretion. The implication is that though in the former case, a judge would disqualify himself, in the latter case, he may not. But this question does not arise here and is left as it is.

31. This Court has already, innumerable times, beginning with its classic decision in A.K. Kraipak v. Union of India [(1969) 2 SCC 262 : AIR 1970 SC 150] laid down the need of "fair play" or "fair hearing" in quasi-judicial and administrative matters. The hearing 91 (1998) 5 SCC 513 W.P.(C) 1065/2021 & other connected matters Page 416 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 has to be by a person sitting with an unbiased mind. To the same effect is the decision in S.P. Kapoor (Dr) v. State of H.P. [(1981) 4 SCC 716 : 1982 SCC (L&S) 14 : AIR 1981 SC 2181] In an earlier decision in Mineral Development Ltd. v. State of Bihar [AIR 1960 SC 468 : (1960) 2 MLJ (SC) 16] it was held that the Revenue Minister, who had cancelled the petitioner's licence or the lease of certain land, could not have taken part in the proceedings for cancellation of licence as there was political rivalry between the petitioner and the Minister, who had also filed a criminal case against the petitioner. This principle has also been applied in cases under labour laws or service laws, except where the cases were covered by the doctrine of necessity. In Financial Commr. (Taxation), Punjab v. Harbhajan Singh [(1996) 9 SCC 281] the Settlement Commissioner was held to be not competent to sit over his own earlier order passed as Settlement Officer under the Displaced Persons (Compensation & Rehabilitation) Act, 1954 . The maxim nemo debet esse judex in propria sua causa was invoked in Gurdip Singh v. State of Punjab [(1997) 10 SCC 641 :

nevertheless, there must be a real likelihood of bias. Surmise or conjecture would not be enough. There must exist circumstances from which reasonable men would think it probable or likely that the inquiring officer will be prejudiced against the delinquent. The court will not inquire whether he was really prejudiced. If a reasonable man would think on the basis of the existing circumstances that he is likely to be prejudiced, that is sufficient to quash the decision [see per Lord Denning, M.R. in Metropolitan Properties Co. (F.G.C.) Ltd. v. Lannon [(1968) 3 WLR 694, 707 : (1969) 1 QB 577 :

29. Lord Thankerton however in Franklin v. Minister of Town and Country Planning [1948 AC 87 : (1947) 2 All ER 289 (HL)] had this to state:

30. Recently however, the English Courts have sounded a different note, though may not be substantial but the automatic disqualification theory rule stands to some extent diluted. The affirmation of this dilution however is dependent upon the facts and circumstances of the matter in issue. The House of Lords in the case of R. v. Bow Street Metropolitan Stipendiary Magistrate, ex p Pinochet Ugarte (No. 2) [(2000) 1 AC 119] observed:

31. Lord Brown-Wilkinson at p. 136 of the report stated:

32. Lord Hutton also in Pinochet case [(2000) 1 AC 119] observed:

33. Incidentally in Locabail [Locabail (U.K.) Ltd. v. Bayfield Properties Ltd. [2000 QB 451] ] the Court of Appeal upon a detail analysis of the oft-cited decision in R. v. Gough [1993 AC 646] together with the Dimes case[3 House of Lords Cases 759] , Pinochet case [(2000) 1 AC 119] , Australian High Court's decision in the case of J.R.L., ex p C.J.L., Re [(1986) 161 CLR 342 (Aus HC)] as also the Federal Court in Ebner, Re [(1999) 161 ALR 55] and on the decision of the Constitutional Court of South Africa in President of the Republic of South Africa v. South African Rugby Football Union [(1999) 4 SA 147] stated that it would be rather dangerous and futile to attempt to define or list the factors which may or may not give rise to a real danger of bias. The Court of Appeal continued to the effect that everything will depend upon facts which may include the nature of the issue to be decided. It further observed:

34. The Court of Appeal judgment in Locabail [2000 QB 451] though apparently as noticed above sounded a different note but in fact, in more occasions than one in the judgment itself, it has been clarified that conceptually the issue of bias ought to be decided on the facts and circumstances of the individual case -- a slight shift undoubtedly from the original thinking pertaining to the concept of bias to the effect that a mere apprehension of bias could otherwise be sufficient.

35. The test, therefore, is as to whether a mere apprehension of bias or there being a real danger of bias and it is on this score that the surrounding circumstances must and ought to be collated and necessary conclusion drawn therefrom -- in the event however the conclusion is otherwise inescapable that there is existing a real danger of bias, the administrative action cannot be sustained: If on W.P.(C) 1065/2021 & other connected matters Page 420 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 the other hand, the allegations pertaining to bias is rather fanciful and otherwise to avoid a particular court, Tribunal or authority, question of declaring them to be unsustainable would not arise. The requirement is availability of positive and cogent evidence and it is in this context that we do record our concurrence with the view expressed by the Court of Appeal in Locabail case [2000 QB 451] ."

308. More recently, the Constitution Bench in Central Organization for Railway Electrification vs. ECI SPIC 93 after a review of precedents relating to bias rendered by courts across jurisdictions had held as follows:-

The intrinsic function values natural justice as an end in itself. It values natural justice as an essential feature of fairness. In its instrumental element, natural justice is viewed as a means to achieving just outcomes.

77.⁠ ⁠The principle of nemo judex is based on the precept that justice should not only be done but manifestly and undoubtedly be seen to be done.145 The principle of nemo judex applies to judicial, quasi- judicial, and administrative proceedings.146 An adjudicator should be disinterested and unbiased.147 A bias is a predisposition to decide for or against one party, without proper regard to the true merits of the dispute.

xxxx xxxx xxxx

124. The doctrine of bias as evolved in English and Indian law emphasizes independence and impartiality in the process of adjudication to inspire the confidence of the public in the adjudicatory processes. Although Section 12 deals with the quality of independence and impartiality inherent in the arbitrators, the 93 2024 SCC OnLine SC 3219 W.P.(C) 1065/2021 & other connected matters Page 421 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 provision's emphasis is to ensure an independent and impartial arbitral process."

309. The attributes of equal treatment and impartiality were highlighted by Chandrachud, C.J. (whose opinion constituted the majority) in the following words:-

Union of India245 and Lombardi Engg Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd .

132. In Voestalpine (supra) and CORE (supra), one of the parties curated a panel of arbitrators and mandated the other party to select their arbitrator from the panel. Since the curation of the list is exclusively undertaken by one party, the other party is effectively excluded from the process of curating the panel from which exclusively, the appointment of an arbitrator is to be made. The other party has to mandatorily select its arbitrator from a curated panel, restricting their freedom to appoint an arbitrator of their choice. This is against the principle of equal treatment contained under Section

18. In this situation, there is no effective counter-balance because both parties do not participate equally in the process of appointing arbitrators. The party curating the panel can restrict the choice of the party only to a person who is on the panel selected by the other party and to no other person.

133. Many PSUs are regularly involved in arbitration disputes and constantly need the services of arbitrators. Such institutions often maintain a pool of potential arbitrators with the sole object of having a ready pool of qualified professionals who have committed their time and consented to act as arbitrators for fixed fees. The Arbitration Act does not prohibit parties to an arbitration agreement from maintaining a curated panel of potential arbitrators. However, the problem arises when the PSUs make it mandatory for other parties to select their nominees from the curated panel of arbitrators. When a PSU exercises its discretion to curate a panel, the very factor that the PSU is choosing only a certain number of persons as potential arbitrators and not others will raise a reasonable doubt in the mind of a fair-minded person. The PSUs may conceivably have nominated a person on the panel of potential arbitrators because they have a certain predisposition in favour of the former. This doubt is reinforced when the other party is given no choice but to select its arbitrator from the curated panel."

310. As was succinctly explained by Chandrachud CJ, bias is a predisposition to decide for or against one party disregarding the true merits of the dispute. It was pertinently observed that a unilateral appointment impinges upon the right of the other party to equal participation and could give rise to serious doubts with respect to the W.P.(C) 1065/2021 & other connected matters Page 423 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 impartiality of the tribunal itself. The view so expressed by the majority and relating to equal treatment finds resonance in the part penned by Hrishikesh Roy J. who penned a concurring opinion.

311. What thus emerges from the aforesaid discussion is that a body must not only be fair and impartial, but it should also not be burdened by a predisposition or a predetermined state of mind. This aspect assumes significance insofar as we are concerned in light of a common complement of persons having rendered findings of alleged professional misconduct and thereafter sitting upon that very opinion to consider commencement of disciplinary action. A person charged by such an authority could be reasonably said to apprehend a reasonable likelihood of the opinion so formed being tainted by the proscription of a reasonable likelihood of bias. It is these principles which weighed upon the Supreme Court in L.K. Ratna to hold that a person who may have been a party to the preparation of the result of the enquiry would be disqualified from participating in the deliberations of the Council.

312. In De. Smith's Judicial Review 94, the test of bias was lucidly explained in the following words:-

313. While commenting on whether an appeal could cure such a defect, the learned authors observe thus:-

314. The test which was propounded by the learned authors was that of the view that could be formed by a fair minded and informed observer and whether a real possibility of bias could have been legitimately inferred. It was further pertinently observed that a decision-making process which fails to satisfy the test of real possibility of bias is not saved merely because it is likely that a different decision W.P.(C) 1065/2021 & other connected matters Page 427 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 maker may have reached the same conclusion. The learned authors also expressed a doubt as to whether a subsequent fair hearing of appeal would cure proceedings which otherwise failed to meet the test of likelihood of bias. This reminds us of what our Supreme Court observed in Ratan Lal Sharma when they held that when the error or irregularity is "so patent and loudly obtrusive" it leaves "an indelible stamp of infirmity or vice which cannot be obliterated or cured on appeal or revision". The celebrated work also has the following elucidating passages on "predetermination" and which are relevant to the question which stands posed before us: -

315. We are in this respect also tempted to recall the theory of self- affirmation and lack of sensitivity to argument strength which is spoken of by psychologists. That theory proceeds on the premise that self- affirmation disables an individual to objectively evaluate information. It speaks of persons seeking to resist information that may conflict with an opinion harboured or a decision made. This, according to that theory, leads to a person being predisposed to affirm a view expressed or an opinion formed.

316. We are thus of the firm opinion that the bifurcation or division of functions which the statute envisaged could have neither been ignored nor disregarded. The underlying purpose of that separation of functions and roles was clearly intended to confer a real and discernible degree of W.P.(C) 1065/2021 & other connected matters Page 429 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 impartiality and neutrality. The statute clearly envisaged separate and distinct branches of the NFRA discharging its functions of monitoring, oversight and adoption of disciplinary measures. But for the separation of those powers, one would be inevitably faced with the possibility of one branch discharging dual and overlapping roles. This clearly exposes the authority to the charge of a predilection to affirm, the tendency to shut out a challenge to an opinion already formed and disregard the weight of argument aimed at convincing one to review and reappreciate. It would thus be akin to what we in law term as the useless formality theory- an appeal from Caesar to Caesar's wife. This in addition to such a procedure clearly becoming susceptible to the possibility of a person reasonably and justifiably viewing the same as being unfair and violating the golden principle of justice not only being done but being visibly and perceivably served.

317. As is evident from the various disclosures which were made by the NFRA before us, it was the Executive Body which was involved and engaged at all stages of the drawl of the AQRR as well as the formation of the opinion that action in terms of Section 132(4) was liable to be initiated. The mere fact that in the course of this exercise, it was assisted by certain other officers is, in our considered opinion, wholly irrelevant, since the ultimate formation of opinion was one which was of the Executive Body as a whole. The petitioners could have thus reasonably harboured an apprehension of lack of neutrality and potential bias.

318. As in all such situations, it is not our intent to even remotely suggest that the Executive Body was in fact biased or prejudiced W.P.(C) 1065/2021 & other connected matters Page 430 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 against the writ petitioners. It ultimately boils down to the view or opinion that a reasonable person may form. While it is true that the reasonableness of apprehension cannot be based on an unfounded belief or tenuous reasoning, as long as it is an opinion which could be said to be reasonably drawn, the test of reasonable likelihood of bias would be satisfied.

319. We also find ourselves unable to sustain the argument of necessity and which was canvassed for our consideration by Mr. Hossain. The doctrine of necessity applies where it is impermissible or impossible for a modified composition of a statutory body being enabled to undertake the decision-making inquiry. In fact, and as we have found on a review of the statutory scheme, the Legislature as well as the rule making authority appears to have consciously made appropriate provisions for the monitoring of compliance of SAs, enforcement of compliance, oversight, investigation and disciplinary proceedings being undertaken by different arms of the NFRA. The division of functions which the principles of due process and fairness would demand clearly appear to inform the statutory provisions when they speak of divisions performing different functions and obligations that stand placed.

320. It is these fundamental constructs which also stand adopted by authorities such as the PCAOB and the FRC. The Byelaws which govern and regulate the functioning of the PCAOB incorporate the following significant provisions. As per those rules, disciplinary proceedings are to be undertaken by a Hearing Officer who must and necessarily be a person other than a board member or staff of the W.P.(C) 1065/2021 & other connected matters Page 431 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 interested division. This becomes apparent from the manner in which those Rules define the phrase "hearing officer" in Rule 1001(h)(i):-

321. An interested division is defined by Rule 1000(i)(iv) as follows:-

322. Under Section 4 , the task of undertaking an inspection is entrusted to the Division of Registration. This flows from a reading of Rules 4000, 4001 and 4002 and which are extracted hereinbelow: -

323. The dichotomy of roles that may be discharged by separate W.P.(C) 1065/2021 & other connected matters Page 432 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 constituents of the PCAOB comes to the fore as we proceed to Section 5 and which is concerned with investigations and adjudications. The said Chapter speaks of a Director of Enforcement and Investigation which may undertake an informal inquiry in the first instance. It is upon the recommendation of the Director that the Board then proceeds to draw a formal order for commencement of an investigation. This becomes apparent from a reading of Rules 5000 and 5101 which are reproduced hereinbelow: -

324. The subject of disciplinary proceedings is spelt out in Rule 5200 and which reads as under: -

[Effective pursuant to SEC Release No. 34-49704, File No. PCAOB- 2003-07 (May 14, 2004); and SEC Release No. 34-72087, File No. PCAOB-2013-03 (May 2, 2014)]

(b) Presiding Official All proceedings shall be presided over by the Board or, if the Board orders, by a hearing officer.

(c) Assignment of a Hearing Officer Subject to Rule 5200(b), as soon as practicable after the Board has issued an order instituting proceedings, or after a W.P.(C) 1065/2021 & other connected matters Page 434 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 registration applicant has requested a hearing pursuant to Rule 5500(b), the Secretary shall assign a hearing officer to preside over the proceeding and shall serve the parties with notice of the hearing officer's assignment. Subject to Rules 5402 and 5403, the hearing officer shall have the authority to do all things necessary and appropriate to discharge his or her duties. The powers of the hearing officer include, but are not limited to, the following - (1) obtaining a court reporter to administer oaths and affirmations; (2) issuing accounting board demands pursuant to Rule 5424; (3) receiving relevant evidence and ruling upon the admission of evidence and offers of proof;

(4) regulating the course of a proceeding and the conduct of the parties and their counsel;

(5) holding prehearing and other conferences and requiring the attendance at any such conference of at least one representative of each party who has authority to negotiate concerning the resolution of issues in controversy;

(6) recusing himself or herself upon motion made by a party or upon his or her own motion;

(7) ordering, in his or her discretion, in a proceeding involving more than one respondent, that the interested division indicate, on the record, at least one day prior to the presentation of any evidence, each respondent against whom that evidence will be offered; (8) subject to any limitations set forth elsewhere in these Rules, considering and ruling upon all procedural and other motions; (9) preparing an initial decision as provided in Rule 5204; (10) upon notice to all parties, reopening any hearing prior to the filing of an initial decision therein, or, if no initial decision is to be filed, prior to the time fixed for the filing of final briefs with the Board;

(11) informing the parties as to the availability of one or more alternative means of dispute resolution, and encouraging the use of such methods; and (12) scheduling hearing dates, except that a hearing officer may not, absent the approval of the Board, change a hearing date set by Board order.

(d) Separation of Functions The staff of the Division of Enforcement and Investigations may not participate or advise in the decision, or in Board review of the decision, in any proceeding in which the Division of W.P.(C) 1065/2021 & other connected matters Page 435 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 Enforcement and Investigations is the interested division, except as a witness or counsel in the proceeding. Any other employee or agent of the Board engaged in the performance of investigative or prosecutorial functions for the Board in a proceeding may not, in that proceeding or one that is factually related, participate or advise in the decision, or in Board review of the decision, except as a witness or counsel in the proceeding. A hearing officer may not be responsible to or subject to the supervision or direction of an employee or agent engaged in the performance of investigative or prosecuting functions for the Board.

(e) Consolidation of Proceedings By order of the Board or a hearing officer, proceedings involving a common question of law or fact may be consolidated for hearing of any or all the matters at issue in such proceedings. The Board or the hearing officer may make such orders concerning the conduct of such proceedings as it deems appropriate to avoid unnecessary cost or delay. Consolidation shall not prejudice any rights under these Rules and shall not affect the right of any party to raise issues that could have been raised if consolidation had not occurred. For purposes of this Rule, no distinction is made between joinder and consolidation of proceedings."

325. Of significance is the statutory injunct of the staff of the Division of Enforcement and Investigation from having any participatory role at any stage of the proceedings that may be undertaken. Similar is the restraint which operates in respect of any other employee or agent of the Board who may have been engaged in the performance of investigative or prosecutorial functions at any prior stage of the proceedings that may have involved the auditor or the auditing firm.

326. A similar structure is followed by the FRC and which discharges its functions through an Executive Committee, the Audit and Risk Committee and the Conduct Committee amongst various others. As is apparent from a reading of the Terms of Reference 95 framed with respect to the Audit and Risk Committee, the said body is enjoined to 95 TOR W.P.(C) 1065/2021 & other connected matters Page 436 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 support and advise the Board by providing oversight of a company's financial reporting process, use of public funds, adherence to corporate government principles, audit process and internal controls. The TOR of the Conduct Committee exercises oversight over inquiries, investigations and enforcement functions that may be performed. The Enforcement Committee panel is enjoined to consider report submitted by audit quality review teams deciding whether a recognized auditor is liable to be sanctioned as well as considering representations that may be submitted in response to a notice proposing sanctions. The structure so put in place by the FRC too thus follows lines similar to those adopted by the PCAOB.

327. While we do not intend to suggest that the NFRA was obliged to punctiliously follow or adopt an identical structure, what we seek to highlight is that regulatory bodies appear to have universally formulated and attempted to adhere to a procedure which would meet the test of due process, of a fair opportunity being afforded to the person charged and above all justice appearing to have been truly served. These are surely not principles foreign to our jurisprudence. They are above all the command of Article 14 itself. The proceedings impugned before us, however, clearly falter and fall when tested on the aforenoted basic postulates.

SCNS: THE SCAR OF PRE-DETERMINATION

328. As noticed above, it was the Executive Body which in the first instance came to record findings of guilt and violation of the SAs'. Those reports had come to conclude in no uncertain terms that the petitioners had violated the ethics standards required to be maintained W.P.(C) 1065/2021 & other connected matters Page 437 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 and having acted in violation of the SAs' which applied. That very body proceeded to take a decision to commence disciplinary action based not an independent review of the facts that obtained but solely on the strength of what had been found in the AQRR. The composition of the body which penned the AQRR and that which issued the SCN remained unaltered. The proceedings have thus come to be stigmatized beyond repair and cannot in law be salvaged or saved.

329. This facet of the challenge attains added significance in light of the nature of findings which we find came to be reflected in the AQRR. Some of those findings and observations as appearing in the AQRR of WP(C) 1065 of 2021 are extracted hereinbelow:-

(b) There had been a complete lack of clarity, and utter confusion had prevailed, in the ROMM assessment;

(c) Important aspects of the auditee company's situation, such as its SI-NBFC status, the very disturbing RBI Inspection Reports on the company, the wide discrepancies in reporting of NPAs, etc., had not been given adequate importance in the ROMM assessment;

(d) Accordingly, the audit responses had been grossly inadequate;

(e) Such procedures as had been performed have had no link to the real ROMM;

(f) In crucial matters, the Audit Firm had relied completely on the management's representations;

(g) The Audit Firm had totally failed in communicating to TCWG/the management the key issues arising out of the audit.

xxxx xxxx xxxx 2.3.6 NFRA had further examined aspects of the engagement that were directed/supervised/reviewed by CA Udayan Sen in his capacity as EP. Contrary to the statement made at document 5/page 10 of the Audit Firm's response to the prima facie conclusions, WP No. 29702 (Manual) Closing Procedures Check list had not been initiated by CA Udayan Sen. CA Udayan Sen's initials were seen only in that part of the WP No. 29702 which is designated as the closing memorandum. This is in the form of a report sent by CA Shrenik Baid to CA Udayan Sen. This paper is a summary of the procedures adopted during the course of the audit. The very fact that CA Shrenik Baid had to send such a memorandum to CA Udayan Sen was itself proof that CA Udayan Sen had not participated in any W.P.(C) 1065/2021 & other connected matters Page 439 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 of the audit processes listed therein. This is for the reason that if CA Udayan Sen had indeed participated in the listed procedures etc., his presence there would have been automatically recorded and the need for such a closing procedures memorandum would not have arisen. No further evidence had been provided by the Audit Firm to counter the conclusions of the NFRA that CA Udayan Sen was not involved with almost all the important work of the audit engagement.

xxxx xxxx xxxx 2.3.18 The Audit Firm in their reply submits that IFIN classified its investment in RNEL as a long term investment, which, under AS 13, was measured at cost less any other than temporary diminution in value. The highest traded price of the shares of RNEL during FY 2017-18 was Rs.70.65, and there were many days during FY 17-18 where the closing traded price of shares of RNEL were more than the carrying value of the shares in the books of account of IFIN. Given such share prices and the general volatile nature of the RNEL share price, there certainly was no decline in value other than temporary as on 31st March, 2018. The Engagement Team documented important facts set forth in management's representation regarding the RNEL investment in WP 23150.01.05 including carrying cost and price movement, in the documentation of its testing reflected in WP 23150.01.01 "Investment In Equity and Preference Shares"- Refer Tab 'Valuation of listed shares'.

xxxx xxxx xxxx 2.4.2 The response of the Audit Firm was as follows:

2.6.5 It is seen that the option Agreement was executed sometime in December 2015. If the argument of the Audit Firm that the option had a value of around Rs.180 crores was to be accepted, there was no reason why this was not reflected in the Balance Sheets as of 31st March, 2016, or 2017. The fact that this option contract was brought into the books as of 31st March, 2018, only served to confirm the prima facie conclusion of the NFRA that this action was only a method used by the management to inflate the profit, and that the Audit Firm did not display the required professional skepticism and challenge the evidence produced by the management 2.6.6 After considering all the above matters, NFRA concluded as follows in the DAQRR:

2.5.16 NFRA had analysed the details given in Annexure 4.5, and its conclusions were as follows:

(b) There had been a complete lack of clarity, and utter confusion had prevailed, in the ROMM assessment;

(c) Important aspects of the auditee company's situation, such as its SI-NBFC status, the very disturbing RBI Inspection Reports on the company, the wide discrepancies in reporting of NPAs, etc., had not been given adequate importance in the ROMM assessment;

(d) Accordingly, the audit responses had been grossly inadequate;

(e) Such procedures as had been performed have had no link to the real ROMM;

(f) In crucial matters, the Audit Firm had relied completely on the management's representations;

(g) The Audit Firm had totally failed in communicating to TCWG/the management the key issues arising out of the audit.

2.3.6 NFRA had further examined aspects of the engagement that were directed/supervised/reviewed by CA Udayan Sen in his capacity as EP. Contrary to the statement made at document 5/page 10 of the Audit Firm's response to the prima facie conclusions, WP No. 29702 (Manual) Closing Procedures Check list had not been initialed by CA Udayan Sen. CA Udayan Sen's initials were seen only in that part of the WP No. 29702 which is designated as the closing memorandum. This is in the form of a report sent by CA Shrenik Baid to CA Udayan Sen. This paper is a summary of the procedures adopted during the course of the audit. The very fact that CA Shrenik Baid had to send such a memorandum to CA Udayan Sen was itself proof that CA Udayan Sen had not participated in any of the audit processes listed therein. This is for the reason that if CA Udayan Sen had indeed participated in the listed procedures etc., his presence there would have been automatically recorded and the need for such a closing procedures memorandum would not have arisen. No further evidence had been provided by the Audit Firm to counter the conclusions of the NFRA that CA Udayan Sen was not involved with almost all the important work of the audit engagement.

xxxx xxxx xxxx 2.4.2 The response of the Audit Firm was as follows:

2.6.5 It is seen that the option Agreement was executed sometime in December 2015. If the argument of the Audit Firm that the option had a value of around Rs.180 crores was to be accepted, there was no reason why this was not reflected in the Balance Sheets as of 31st March, 2016, or 2017. The fact that this option contract was brought into the books as of 31st March, 2018, only served to confirm the prima facie conclusion of the NFRA that this action was only a method used by the management to inflate the profit, and that the Audit Firm did not display the required professional skepticism and challenge the evidence produced by the management.

2.6.6 After considering all the above matters, NFRA concluded as follows in the DAQRR:

2.11.11 NFRA has considered the above contentions of the Audit Firm and its conclusion are as follows:

2.3.18 The Audit Firm in their reply submits that IFIN classified its investment in RNEL as a long term investment, which, under AS 13, was measured at cost less any other than temporary diminution in value. The highest traded price of the shares of RNEL during FY 2017-18 was Rs.70.65, and there were many days during FY 17-18 where the closing traded price of shares of RNEL were more than the carrying value of the shares in the books of account of IFIN. Given such share prices and the general volatile nature of the RNEL share price, there certainly was no decline in value other than temporary as on 31st March, 2018. The Engagement Team documented important facts set forth in management's representation regarding the RNEL investment in WP 23150.01.05 including carrying cost and price movement, in the documentation of its testing reflected in WP 23150.01.01 "Investment In Equity and Preference Shares"- Refer Tab 'V1luation of listed shares'.

xxxx xxxx xxxx 2.2.3 On consideration of all the above evidence, the NFRA had concluded in the DSAQRR that:

2.10.3 Thus NFRA reiterates its conclusions in the DSAQRR and concludes that: -

connection (as contemplated by explanation (ii) to Sec 144) with EYG entities are clearly intended only to mislead and deceive. All entities in the EY network clearly hold themselves out as EY constituents. In summary, it is crystal clear that any entity providing any non-audit services under the EY brand name is to be regarded as providing the said non-audit services indirectly, as contemplated by the explanation to Section 144 of the Act. The separate legal structure of the entities providing the non-audit services does not exclude them from being considered as services provided "indirectly" for the purposes of explanation (ii) to Sec 144.

xxxx xxxx xxxx 2.19. Therefore, NFRA concludes that SRBC, EYLLP and EYMBS are covered under directly or indirectly related entities as per explanation (ii) to Sec 144 of the Act. Read with conclusions in section above, the non-audit services provided by these entities fall within the purview of the prohibited services, including management services, covered under section 144 of the Companies Act, 2013.

xxxx xxxx xxxx W.P.(C) 1065/2021 & other connected matters Page 450 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 2.46. In view of the above observations, NFRA concludes that the EP and the EQCR Partner have been grossly negligent in complying with the requirements of Para 11 and Para 21 of SA 220. Para 11 of SA 220 stipulates that the EP shall obtain relevant information from the firm and, where applicable, network firms to identify and evaluate circumstances and relationships that create threats to independence. Para 21 of SA 220 requires that for audits of financial statements of the listed entities, the EQCR Partner shall consider the ET's evaluation of firm's independence in relation to the audit engagement 2.47. Thus, subject to the above observations, NFRA reiterated its findings in the preliminary stage and concluded in the DAQRR that:

iv. The Audit Firm had been in serious breach of the Code of Ethics. v. The violations had undoubtedly fatally compromised the independence in mind and independence in appearance required of the Audit Firm. Independence in appearance stood destroyed since no unbiased person could conclude, on an objective assessment of the circumstances, that there had been no abridgement of the auditor's independence.

vi. EP and the EQCR Partner were guilty of professional misconduct arising out of gross violations of the applicable Auditing Standards.

xxxx xxxx xxxx 2.67. In view of the above, NFRA reiterates its observations in the DAQRR and concludes that:

But one thing is clear that while reading a show-cause notice the person who is subject to it must get an impression that he will get an effective opportunity to rebut the allegations contained in the show- cause notice and prove his innocence. If on a reasonable reading of a show-cause notice a person of ordinary prudence gets the feeling that his reply to the show-cause notice will be an empty ceremony and he will merely knock his head against the impenetrable wall of prejudged opinion, such a show-cause notice does not commence a fair procedure especially when it is issued in a quasi-judicial proceeding under a statutory regulation which promises to give the person proceeded against a reasonable opportunity of defence.

32. Therefore, while issuing a show-cause notice, the authorities must take care to manifestly keep an open mind as they are to act fairly in adjudging the guilt or otherwise of the person proceeded against and specially when he has the power to take a punitive step against the person after giving him a show-cause notice.

33. The principle that justice must not only be done but it must eminently appear to be done as well is equally applicable to quasi- judicial proceeding if such a proceeding has to inspire confidence in the mind of those who are subject to it.

xxxx xxxx xxxx

35. Going by the aforesaid test any man of ordinary prudence would come to a conclusion that in the instant case the alleged guilt of the appellant has been prejudged at the stage of show-cause notice itself."

333. We are thus of the firm opinion that the Executive Body could not have discharged the dual role of rendering findings of guilt and violation of the SAs' while authoring the SQARR/AQRR and thereafter don the mantle of the division which is contemplated under Rule 11. The assessment of whether circumstances warranted a disciplinary enquiry being initiated was statutorily liable to be undertaken by a unit of the NFRA separated from the one which drew up those reports. This W.P.(C) 1065/2021 & other connected matters Page 455 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 since, the Act and the Rules clearly contemplate a separation of functions between different constituents of the NFRA. Notwithstanding what may be observed in those reports, the law would contemplate and require a decision to initiate disciplinary action being arrived at impartially and independently. The procedure which NFRA chose to follow in these cases clearly lacked attributes of neutrality and a dispassionate appraisal.

334. The doctrine of necessity has also been found to be inapplicable since it was open for the NFRA to have constituted separate units which could have discharged the functions statutorily envisaged. Since the body of persons which penned the reports and took a decision to initiate proceedings under Rule 11 was one and the same, the procedure is found to be in clear violation of the reasonable likelihood of bias test. An informed observer would be justified in alleging predisposition, predetermination and an inclination to affirm against that body. We have also borne in consideration the damning and conclusive findings of guilt and infraction which came to form part of the AQRR and essentially shut the doors on an independent and impartial evaluation of the infractions which were alleged to have been committed. We are thus convinced that these facets have ineffaceably tainted the proceedings impugned before us.

PERIPHERAL ISSUES

335. That only leaves us to examine the argument of invidious discrimination amongst members of a homogenous class and those falling within the ambit of Rule 3 being placed at a serious disadvantage in the sense of being deprived of the safeguards W.P.(C) 1065/2021 & other connected matters Page 456 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 incorporated in the CA Act and the Misconduct Rules, 2007. We find ourselves unable to accede to that submission bearing in mind the underlying policy objectives which imbue Section 132(4) and the classification of auditors on the basis of entities whose audit they may have conducted. As we view the class of entities which are placed within the scope of Rule 3, it becomes apparent that they are body corporates in which members of the general public would have a vital interest and financial exposure. The potential fallout of financial statements of such entities not being compliant with the statutory obligations which apply may have huge ramifications. It is these facets which appear to have constituted the basis of classification. It would therefore be wholly incorrect to assert that the classification is not based on a rational criteria or nexus aimed at subserving a larger public interest. We have, in any case, found that there is no fundamental difference between the procedure contemplated under the CA Act and the NFRA Rules if matter being tried be based not on a complaint but on an investigation initiated either by the authority itself or on a reference made.

336. The argument of deprivation of the right of legal representation pales into insignificance in light of the statement made on behalf of NFRA and when it was stated that it had undertaken a course correction and taken a principled decision to permit legal assistance to a charged auditor or auditing firm.

STATEMENT OF CONCLUSIONS

337. For sake of convenience and ease of reference we deem it appropriate to summarise our principal conclusions which form part of W.P.(C) 1065/2021 & other connected matters Page 457 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 this judgment as under:-

B. The Companies Act clearly contemplates a firm suffering a liability as a consequence of the action of its Engagement Partners and constituents who may be involved in the conduct of the audit. Thus, both the audit firm as well as its individual partners would be exposed to a statutory liability if Sections 139 to 146 were found to have been violated. Therefore, the liability which is suffered by an audit firm by virtue of the actions of its partners engaged in an audit can neither be said to be abhorrent to the constitutional scheme nor violative of Article 14. It would be wholly impermissible for an audit firm to disavow or seek to distance itself from the actions of its members.

C. This we hold bearing in mind the indubitable fact that members come to be engaged in the conduct of the audit solely on account of the firm being appointed as an auditor of a company. The appointment of those members is not an independent engagement for it is the firm, be it a partnership or an LLP, which comes to be designated as the auditor. The individual members of those firms discharge functions and carry out duties in accordance with the directives issued by the audit firm.

D. This reasoning aligns closely with the principles of the organic theory which views the firm and its members as a single, inseparable unit for the purposes of legal and professional obligations. This indivisibility reflects the theory's premise that the firm and its members are one and their roles are interdependent and unified. Thus, the appointment of the firm as an auditor naturally encompasses the actions of its members. The engagement of members in the conduct of an audit is not an independent or isolated act but is inherently derivative of the firm's appointment as the auditor. The firm acts as the central organ, and its members function as its limbs, carrying out its obligations and responsibilities. The firm's designation as the auditor inherently extends to its members, who act on its behalf.

E. To propose an arrangement where distinct spheres of liability operate independently for acts performed by a firm and for those same acts attracting liability on its partners is inherently flawed. Such a proposition assumes the existence of a framework in which the firm functions autonomously, separate from its W.P.(C) 1065/2021 & other connected matters Page 459 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 members or constituents, while delivering auditing services. However, this assumption disregards the very essence and the nature of auditing work, where such disengagement is not only impractical but also fundamentally incompatible with the professional obligations involved.

F. Auditing, by its very nature, requires an unbroken chain of diligence, monitoring, and oversight. The service itself is deeply collaborative, demanding seamless integration of expertise and accountability between the firm and its partners. It necessitates meticulous scrutiny of financial data, adherence to regulatory frameworks and the exercise of professional judgment at every stage. These elements inherently bind the firm and its members inextricably together. To suggest otherwise would ignore the operational realities of such engagements, where the quality and integrity of the work are not divisible between the firm and the individuals performing the task.

G. In essence, the relationship between a firm and its members while delivering auditing services is one of complete integration, where roles and responsibilities overlap to ensure the highest levels of professional service. The nature of such services does not permit a firm to distance itself from the actions of its partners, especially when those actions are performed in furtherance of the firm's obligations. We thus find no merit in the contention that Section 132 of the Companies Act is liable to be held as unconstitutional basis the audit firm or its individual partners and members becoming vicariously liable.

H. We also hold that Section 132 is neither an overreach nor can it be said to be arbitrary; it is a necessary mechanism to enforce professional accountability. The firm's designation as an auditor inherently includes the collective responsibilities of its members, making the imposition of a vicarious liability a logical and justified extension of its statutory obligations. Therefore, the contention that the provision is unconstitutional lacks merit and proceeds in ignorance of the operational and legal realities of an audit firm's engagement.

I. There cannot possibly be a cavil of doubt with respect to the well-established precept that statutes are generally presumed to be prospective in their operation. That presumption, undoubtedly, constitutes the starting point from which a court would embark upon its analysis. Equally well-settled is the principle of that presumption being dispelled only if a court were to find from the language of an enactment or a provision that the law maker intended otherwise.

J. The word "vested" is explained by precedents as pertaining to rights which could be said to have become fixed, absolute and complete. Those rights would fall in the category of assertions and protections which could be claimed and not being contingent or subject to be defeated by a condition precedent. However, mere expectancy of future benefits and interests which may be contingent, or an anticipated continuance of existing laws would not constitute vested rights.

K. Vested rights are those which would remain unimpacted by any future change in the legal position. Regard must be had to the fact that if the right hinges on an unsecured or contingent foundation, susceptible to modification by a change in the legislative scheme, then such a right was never truly vested, as it lacked the essential characteristics of being absolute, fixed, or immune to future alteration.

L. A challenge to a statute on the ground of it being retrospective, however, is invariably and indelibly linked to how it impacts or infringes the rights of an individual or entity. The issue of retrospectivity thus becomes liable to be examined in the backdrop of how the enactment operates and affects the rights which inhere or may have come to be perfected prior to its promulgation. What we seek to emphasize is that the argument of retrospectivity cannot be evaluated in an abstract dimension. That submission has to be necessarily tested on what we find at the crossroads and intersection where the statute meets with the expanse of the bundle of rights which are asserted to exist.

M. Tested on the aforesaid principles, we find ourselves unable to sustain the argument that Section 132 is liable to be struck down on the ground that it operates retrospectively and impacts rights which may have been perfected or completed. It becomes relevant to note that the Explanation to Section 132(4) in unambiguous and explicit terms provides that the expression "professional or other misconduct" would have the same meaning as assigned to that phrase by Section 22 of the CA Act.

Section 132 therefore, does not create a new species of misconduct nor does it create a liability which was otherwise not contemplated under a pre-existing legislation.

N. "Professional or other misconduct" already stood defined by Section 22 of the CA Act and thus all actions of CAs and auditors was liable to be tested on the basis thereof. It would thus be wholly incorrect to contend that Section 132 creates a new liability with respect to a misconduct or misdemeanor committed prior to October 2018.

O. No auditor can possibly claim or assert a vested right coming to be created in respect of professional misconduct that may have been committed prior to Section 132 coming into force. We find ourselves unable to comprehend any right leave alone a vested right that could have been claimed to have come into existence in respect of professional conduct which would have fallen within the scope of Section 22 of the CA Act prior to the introduction of Section 132.

P. As was pertinently observed by the Supreme Court, a statute is not liable to be viewed as having retroactive operation merely because it draws upon an event or act which preceded its promulgation. Acts of misconduct committed prior to October 2018 were neither accorded nor conferred a shield of immunity. Section 132 does not create a new disqualification or create a novel set or category of misdemeanors to constitute professional or other misconduct. The conduct of an audit, an individual or a firm remains liable to be enquired into based on the obligations W.P.(C) 1065/2021 & other connected matters Page 463 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 and duties which held the field even prior to the introduction of Section 132. The conduct of an audit would continue to be examined and evaluated based on those legal obligations and set of rules which existed earlier.

Q. A consideration of the legislative history preceding the introduction of Section 132 clearly suggests that a pre-existing regulatory deficiency or gap was sought to be addressed through the introduction of Section 132 aligning with the broader objective of strengthening oversight mechanisms and enhancing the quality of professional services rendered by audit firms. This measure was implemented not to create new liabilities but to bridge an existing gap in enforcement, ensuring that standards of professional conduct and accountability evolve in tandem with global best practices.

R. The enactment of Section 132 thus represents a progressive regulatory shift, aimed at reinforcing compliance, raising the bar for audit quality, and ensuring that no aspect of professional misconduct or deficiency in service remains unchecked or unsupervised. By instituting a more structured and stringent framework, Section 132 ensures that audit firms and professionals adhere to internationally recognized standards, thereby fostering greater transparency, accountability, and confidence in financial reporting.

S. This regulatory evolution does not operate retrospectively in a punitive sense but rather brings India's auditing and financial oversight framework in line with global standards, ensuring that W.P.(C) 1065/2021 & other connected matters Page 464 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 all professional conduct meets the highest levels of scrutiny and quality assurance. The underlying objective is to create a more robust and reliable regulatory ecosystem, where professional standards are continuously refined to prevent any compromise in audit quality or integrity.

T. The precedents rendered in the context of Article 20(1) clearly appear to exclude civil liabilities or penalties that may come to be imposed from the ambit of that constitutional prohibition. The scope of Article 20(1) has thus been consistently explained to be confined to crimes and punishments as generally understood. An act of professional misconduct was liable to be penalised and punishment meted out as per a law which existed decades prior to the insertion of Section 132 in the Companies Act . Section 132, as noticed hereinabove, merely adopts the meaning assigned to misconduct by the CA Act for the purposes of proceedings that may be initiated thereunder. The argument based on Article 20(1) is thus liable to be rejected on this score alone.

U. As we view Rule 11 of the NFRA Rules, it becomes apparent that the statute clearly commands that authority to ensure that the disciplinary proceedings are undertaken in accordance with the principles of natural justice including where deemed necessary and appropriate providing an opportunity of hearing to the charged entity in person. The reason for not prescribing for oral testimony as a matter of rule or practice is evident from the fact that the proceedings themselves would have been commenced based either on a suo motu decision taken by the NFRA or on W.P.(C) 1065/2021 & other connected matters Page 465 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 receipt of a reference made to it either by the Union Government or any other competent authority.

V. The NFRA thus commences proceedings not on the basis of a written complaint or at the behest of a complainant and which was a possibility envisaged under the CA Act and the Misconduct Rules, 2007. Even though the Union Government itself is enabled to make a reference to the NFRA to undertake an investigation, the said entity stands merely in the shoes of an informant or a body which provides material for the NFRA to investigate. The proceedings are thus clearly not adversarial and which was a possible scenario under the Misconduct Rules 2007.

W. The NFRA itself initiates and undertakes the inquiry on the basis of the audit file and record which may have been gathered in the course of an audit quality review. Those proceedings are thus not triggered or based upon the oral testimony of a complainant or person. Thus, the commencement of an inquiry by the NFRA is premised entirely on either a reference that may be made to it by the Union Government or where the said body were to initiate an investigation suo motu or in light of facts that may be gathered in the course of its supervisory role envisaged in Rules 7, 8 and 9.

X. In the absence of those proceedings being based on the version of an individual complaint or testimony, we fail to appreciate the submission that the denial of a right of cross-examination is liable to be viewed as a factor which renders the procedure prescribed under the NFRA Rules to be arbitrary.

Y. The mere usage of the word 'summary' cannot lead one to presume that the procedure that the NFRA may ultimately adhere to, would be violative of the principles of natural justice. When Rule 11(5) uses the expression 'summary procedure' all that the rule-making authority perhaps intended to convey was that disciplinary proceedings would not be liable to be conducted in accordance with a procedure or rules of evidence which a court of law may be obliged to follow while trying a lis. In fact, that rule itself enjoins the authority to ensure adherence to the principles of natural justice. It also places it under the duty to provide an opportunity of hearing to a person in cases where circumstances may so warrant. The statute thus provides enough guidance for the authority to ensure that the disciplinary proceedings are conducted in a manner which is fair, transparent and in consonance with the broad, basic and fundamental principles of natural justice.

Z. The NFRA Rules oblige the authority to make available to the charged CA or firm a detail of the allegations that are laid together with the evidence in support thereof as well as an appropriate disclosure with respect to the provisions of the Act, Rules or the SAs which are found to have been allegedly violated. It enjoins the SCN to broadly indicate the action that NFRA proposes to take or the directions that it may be constrained to frame if the allegations were to be ultimately established. The authority is also statutorily obliged to enclose all copies of documents relied upon as well as to make available the W.P.(C) 1065/2021 & other connected matters Page 467 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 extracts of reports of investigation or other records which are proposed to used for proving the allegation levelled. The SCN must be served upon the auditor as well as the firm dependent upon the action which the authority proposes to initiate. The statute thus adopts and incorporates appropriate measures and safeguards to ensure that the procedure that it adopts is in accord with the principles of fair play and natural justice.

AA. We are also of the firm opinion that the proceedings which the NFRA would undertake are not liable to conform to the requirement of guilt being proved beyond reasonable doubt and which is a test which primarily applies to criminal trials. The proceedings under Section 132(4) are essentially disciplinary proceedings and which are governed and guided by the well- accepted principle of the charge being liable to be proved on the basis of preponderance of probabilities.

BB. The argument of the restriction of proceedings to the audit file being arbitrary is misconceived. The provisions contained in the SAs' have repeatedly laid emphasis on the audit file and record being comprehensive and incorporating all material which may have formed the basis for the conclusions appearing in the audit report. Suffice it to state that the charge of professional misconduct which may come to be laid against a CA or a firm would have to be necessarily proved and established on the basis of that audit record alone. The restriction of the proceedings to the audit record thus binds not only the person charged with misconduct but the NFRA itself.

CC. Of course that is not to state, that an auditor or a firm is precluded from referring to material or standards that may be sought to be referred to in order to lend credence or support to the conclusions contained in the audit report. However, since the charge is to be proved solely on the basis of the audit record, the reports of investigation and other records, we find no merit in the challenge to the procedure prescribed under the NFRA Rules when they restrict the inquiry to the audit file.

DD. As we view Section 132 of the Companies Act, there appears to be no doubt in our mind that the provision did and always contemplated the NFRA performing and discharging its functions through such divisions as may be constituted. While it is true that Rule 2(g), while defining the word 'division' includes one headed by a Chairperson or a full time Member, the Executive Body cannot possibly be construed to be a division in itself. A conjoint reading of sub-sections (3)(a) and (3)(b) appearing in Section 132 alongside the NFRA Rules, leads us to the irresistible conclusion that the statute clearly contemplated the discharge of functions enumerated in Rules 7 and 8 being undertaken by independent units or divisions of the NFRA.

EE. A body must not only be fair and impartial, but it should also not be burdened by a predisposition or a predetermined state of mind. This aspect assumes significance insofar as we are concerned in light of a common complement of persons having rendered findings of alleged professional misconduct and thereafter sitting W.P.(C) 1065/2021 & other connected matters Page 469 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 upon that very opinion to consider commencement of disciplinary action.

FF. A person charged by such an authority could be reasonably said to apprehend a reasonable likelihood of the opinion so formed being tainted by the proscription of a reasonable likelihood of bias. It is these principles which weighed upon the Supreme Court in L.K. Ratna to hold that a person who may have been a party to the preparation of the result of the enquiry would be disqualified from participating in the deliberations of the Council.

GG. We are in such situations primarily concerned with the view that could be formed by a fair minded and informed observer and whether a real possibility of bias could have been legitimately inferred. As has been pertinently observed, a decision-making process which fails to satisfy the test of real possibility of bias is not saved merely because it is likely that a different decision maker may have reached the same conclusion.

HH. We also doubt the soundness of the proposition that a subsequent fair hearing or appeal would cure proceedings which otherwise failed to meet the test of likelihood of bias or that the said statement could be accepted as an inviolable rule. We are reminded of what our Supreme Court observed in Ratan Lal Sharma when they held that when the error or irregularity is "so patent and loudly obtrusive" it leaves "an indelible stamp of infirmity or vice which cannot be obliterated or cured on appeal or revision".

II. We are thus of the firm opinion that the bifurcation or division of functions which the statute envisaged could have neither been ignored nor disregarded. The underlying purpose of that separation of functions and roles was clearly intended to confer a real and discernible degree of impartiality and neutrality. The statute clearly envisaged separate and distinct branches of the NFRA discharging its functions of monitoring, oversight and adoption of disciplinary measures. But for the separation of those powers, one would be inevitably faced with the possibility of one branch discharging dual and overlapping roles.

JJ. The principle of no man being a judge in its own cause was explained by the Supreme Court as mandating the deciding authority being one which was impartial and without bias. It also alluded to aspects such as a predisposition to decide for or against one party or where that authority may be inclined to disregard the true merits of the dispute by virtue of bias.

KK. This clearly exposes the authority to the charge of a predilection to affirm, the tendency to shut out a challenge to an opinion already formed and disregard the weight of argument aimed at convincing one to review and reappreciate. It would thus be akin to what we in law term as the useless formality theory- an appeal from Caesar to Caesar's wife. This in addition to such a procedure clearly becoming susceptible to the possibility of a person reasonably and justifiably viewing the same as being unfair and violating the golden principle of justice not only being done but being visibly and perceivably served.

LL. Our jurisprudence on the subject lays great emphasis on proceedings not being tainted by preconceived opinions, predisposition or predetermination and underscores the imperatives of the absence of an unbiased mind. What thus emerges from the aforesaid discussion is that a body must not only be fair and impartial, but it should also not be burdened by a predisposition or a predetermined state of mind.

MM. This aspect assumes significance insofar as we are concerned in light of a common complement of persons having rendered findings of alleged professional misconduct and thereafter sitting upon that very opinion to consider commencement of disciplinary action. A person charged by such an authority could be reasonably said to apprehend a reasonable likelihood of the opinion so formed being tainted by the proscription of a reasonable likelihood of bias.

NN. As we have found on a review of the statutory scheme, the Legislature as well as the rule making authority appears to have consciously made appropriate provisions for the monitoring of compliance of SAs, enforcement of compliance, oversight, investigation and disciplinary proceedings being undertaken by different arms of the NFRA. The division of functions which the principles of due process and fairness would demand clearly appear to inform the statutory provisions when they speak of divisions performing different functions and obligations that stand placed.

OO. As we have found in the body of this judgment, it was the Executive Body which in the first instance came to record findings of guilt and violation of the SAs'. Those reports had come to conclude in no uncertain terms that the petitioners had violated the ethics standards required to be maintained and having acted in violation of the SAs' which applied. That very body proceeded to take a decision to commence disciplinary action based not an independent review of the facts that obtained but solely on the strength of what had been found in the AQRR. The composition of the body which penned the AQRR and that which issued the SCN remained unaltered. The proceedings have thus come to be stigmatized beyond repair and cannot in law be salvaged or saved.

PP. As is manifest from the language in which the AQRR and the SCNs' proceed, they are replete with findings which clearly appear to transgress the boundaries of a prima facie opinion or one which could be termed as being precursive. They ex facie verge if not cross the border of the conclusive. They are clearly imbued by notes of finality. It is these findings and conclusions rendered by the Executive Body which constituted the foundational material for the formation of opinion by it as to whether circumstances warranted disciplinary action being taken against the writ petitioners. The Executive Body thus not only acted as the propounder of a prima facie finding of violation of SAs and the laws, it took its own opinion into consideration for W.P.(C) 1065/2021 & other connected matters Page 473 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 the purposes of formation of the belief that sufficient cause existed to take action as contemplated under Section 132(4).

QQ. We are thus of the firm opinion that the Executive Body could not have discharged the dual role of rendering findings of guilt and violation of the SAs' while authoring the SQARR/AQRR and thereafter don the mantle of the division which is contemplated under Rule 11. The assessment of whether circumstances warranted a disciplinary enquiry being initiated was statutorily liable to be undertaken by a unit of the NFRA separated from the one which drew up those reports. This since, the Act and the Rules clearly contemplate a separation of functions between different constituents of the NFRA.

RR. Notwithstanding what may be observed in those reports, the law would contemplate and require a decision to initiate disciplinary action being arrived at impartially and independently. The procedure which NFRA chose to follow in these cases clearly lacked attributes of neutrality and a dispassionate appraisal.

DISPOSITION

338. On an overall conspectus of the above, we uphold the validity of Section 132 and the NFRA Rules. We find no merit in the challenge based on the arguments of vicarious liability, retroactive operation and a violation of Article 20(1) of the Constitution.

339. We also find ourselves unable to sustain the challenge to those provisions which were asserted to suffer from the vice of manifest arbitrariness and deprivation of a fair procedure. The prescription of a W.P.(C) 1065/2021 & other connected matters Page 474 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26 summary procedure for trial of disciplinary matters neither obviates nor relieves the NFRA from adhering to a procedure which is in consonance with the principles of fairness and natural justice.

340. However, the NFRA clearly acted contrary to the command of the legislation which obliged it to bear in mind the division of functions and which clearly mandates a separation of roles that the authority is called upon to discharge under the Companies Act and the NFRA Rules. The assessment of whether circumstances warranted a disciplinary enquiry being initiated was statutorily liable to be undertaken by a unit of the NFRA separated from the one which drew up those reports. The procedure which NFRA chose to follow in these cases clearly lacked attributes of neutrality and a dispassionate appraisal.

341. We would thus allow the instant writ petitions and quash the impugned SCNs' and final orders assailed in this batch as per the details which appear below:-

342. However, we leave it open to the NFRA to draw proceedings afresh if so chosen and advised from the stage of issuance of fresh notices based on the findings that have come to be recorded in the AQRRs'. The findings and conclusions appearing in the AQRRs' would be liable to viewed as merely being the expression of a prima facie opinion as opposed to definitive conclusions. Those findings and conclusions may be evaluated afresh for the purposes of formation of opinion whether disciplinary action is liable to be initiated.

343. The decision of whether disciplinary action is liable to be commenced shall be taken independently by a complement of the NFRA comprising of members who were disconnected and disassociated from the process of audit review and the drawl of the AQRRs'.

YASHWANT VARMA, J.

DHARMESH SHARMA, J.

FEBRUARY 07, 2025/Neha/DR/RW/KK W.P.(C) 1065/2021 & other connected matters Page 476 of 476 Signature Not Verified Digitally Signed By:KAMLESH KUMAR Signing Date:07.02.2025 18:46:26