Gujarat High Court
Rayan S/O Nambi Puruam Salivati vs State Of Gujarat on 2 May, 2025
NEUTRAL CITATION
R/SCR.A/7016/2018 JUDGMENT DATED: 02/05/2025
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CRIMINAL APPLICATION (QUASHING) NO. 7016 of 2018
With
R/SPECIAL CRIMINAL APPLICATION NO. 7020 of 2018
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE J. C. DOSHI
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Approved for Reporting Yes No
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RAYAN S/O NAMBI PURUAM SALIVATI
Versus
STATE OF GUJARAT & ANR.
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Appearance:
MR MIHIR JOSHI, SR. ADVOCATE WITH MS. NISHA OJHA AND MS.
VINISHA JAIN FOR M/S WADIAGHANDY AND CO(5679) for the Applicant(s)
No. 1
MR PRADIP D BHATE(1523) for the Respondent(s) No. 2
MR SOHAM JOSHI, APP for the Respondent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE J. C. DOSHI
Date : 02/05/2025
ORAL JUDGMENT
1. Except seminal difference, that Special Criminal Application No.7016 of 2018 is in regard to consolidated financial statement, whereas, Special Criminal Application No.7020 of 2018 is in regard to standalone financial statement, there is no other substantive change in both the petitions challenging questioned Criminal Complaint dated 14.02.2018 bearing Criminal Enquiry No.137 of 2018 and Criminal Complaint dated 14.02.2018 bearing Criminal Enquiry No.43 of 2018. Hence, with consent of learned advocates for both the Page 1 of 12 Uploaded by SATISH C. VEMULLA(HC00206) on Mon May 05 2025 Downloaded on : Tue May 06 01:22:07 IST 2025 NEUTRAL CITATION R/SCR.A/7016/2018 JUDGMENT DATED: 02/05/2025 undefined sides, both the petitions are decided analogously.
2. Facts of the case are as under :-
2.1. The Respondent No. 2 herein has filed the aforementioned Complaint under Section 143 of the Companies Act, 2013 ("Companies Act") on the allegation that Petitioner, as auditors, have failed to make certain disclosures pertaining to related party transactions in the consolidated financial statements and are therefore in contravention of Section 143 of the Companies Act and thus liable to be prosecuted under Section 147(2) of the Companies Act. It is further submitted that allegations made against Petitioner, if proven, amount to imposition of a civil penalty at best and therefore the entire proceeding is sans jurisdiction. Hence, present petitions.
3. Learned Senior Advocate Mr.Mihir Joshi assisted by learned advocate Ms.Nisha Ojha and learned advocate Ms.Vinisha Jain for the petitioners would submit that Registrar of Companies found that the petitioner who is Chartered Accountant of M/s. Deloitte Haskins and Sells - partnership firm though has mentioned list of related parties / Key Management Personnel (KMP), has not stated who are related parties or KMP of the Company in their audit report and hence, they have committed breach of provisions of Companies Act and therefore, violation of section 143 of the Companies Act having punishment under section 147 of the Companies Act. Learned Senior Advocate Mr.Joshi would submit that auditors would follow Accounting Standard (AS 18), wherein, in clause 10.1 related Page 2 of 12 Uploaded by SATISH C. VEMULLA(HC00206) on Mon May 05 2025 Downloaded on : Tue May 06 01:22:07 IST 2025 NEUTRAL CITATION R/SCR.A/7016/2018 JUDGMENT DATED: 02/05/2025 undefined party is defined and in clause 10.8 Key Management Personnel (KMP) is defined. Learned Senior Advocate Mr.Joshi reading definition of related party and Key Management Personnel submits that it does not require to mention name of specific individual with his posting to say that it is Key Management Personnel. Learned Senior Advocate Mr.Joshi submits that auditors have to follow Accounting Standard 18. It is further submitted that while filing audit report, the petitioner has followed Accounting Standard 18 and therefore, prosecution against the petitioner is bad on its face.
3.1. Learned Senior Advocate Mr.Joshi submits that perhaps Registrar of Companies expected that auditors have to follow section 2(51) of the Companies Act and to specify who is Key Managerial Personnel but section 2(51) of the Companies Act would not apply in the present case. It is further submitted that eve otherwise, Hon'ble Supreme Court in the case of Dayle De'souza v/s. Government of India [(2021) 20 SCC 135] in para 34, held that prosecuting agency has to be thoughtful in cases of technical, venial breaches and genuine and be firmly unforgiving in case of deceitful and mendacious conduct. In the present case, at the most it can be said to be technical and venial breach and nothing more, therefore, the petitioner who is Chartered Accountant should not be send for facing trial of technical breach.
3.2. Making above submissions, it is submitted to allow the petitions and quash the criminal complaint.
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4. Learned advocate Mr.Kshitij Amin for respondent no.2 would submit that let trial be completed. It is submitted that contention which is raised by the petitioner can be tested during trial. At this stage at threshold, it cannot be said that offence is not made out against the petitioner. The petitioner has not mentioned that who are Key Management Personnel of Mafalal Industries. Merely stating name would not satisfy requirement of Key Management Personnel. Thus, he submits that the petitions may not be entertained and criminal complaint may not be quashed at threshold.
5. Noticeably, fact that issue and dispute is between Registrar of Companies and auditors, learned APP submitted to pass necessary order.
6. Aptly to note that the petitioner is auditor of Mafatlal Industries and he has filed consolidated financial statement as well as standalone financial statement in the Registrar of Companies. In column of KMP, auditors have mentioned names of Mr.H.A.Mafatlal (upto 28.05.2013), Mr.Rajiv Dayal and Mr.V.P.Mafatlal. Ministry of Corporate Affairs and Office of Registrar of Companies on 25.07.2017 issued show cause notice for violation for violation of Section 143 of the Companies Act, 2013 to petitioner observing following as contravene :-
"During the inspection of books of accounts and consolidated financial statements of the company, it was observed form the Note No.31.5 of notes on Consolidated financial statements for the year ended 31.03.2015 and 31.03.2016 that the list of related parties / KMPs were Page 4 of 12 Uploaded by SATISH C. VEMULLA(HC00206) on Mon May 05 2025 Downloaded on : Tue May 06 01:22:07 IST 2025 NEUTRAL CITATION R/SCR.A/7016/2018 JUDGMENT DATED: 02/05/2025 undefined given, however, in the list name of Company Secretary and CFO was not given, hence violated the provisions section 129, 133 of the Companies Act, 2013 read with AS-18. You being the auditors have not reported the same in your report the said violation for respective financial year. Therefore, there is violation of section 143 of the Companies Act, 2013 and liable for penal action under section 147 of the Act."
7. Show cause notice was replied, where following answers are given :-
"Paragraph 6 of General Instructions in Schedule III states "for the purpose of this schedule, the terms used herein shall be as per the applicable Accounting Standard.
The said position was also prevalent under the erstwhile Revised Schedule VI of the Companies Act, 1956. Consequently, the guidance note on Revised Schedule VI issued by the Institute of Chartered Accountants of India (ICAI) under para 6.15 also states that "The instructions are clarify that the terms used in the Revised Schedule VI shall be as per the applicable Accounting Standards. For example, the term "related parties" used at several places in the Revised Schedule VI should be interpreted based on the definition given in AS-18 Related Party Disclosures.
Accordingly, with respect to related party disclosures, disclosure requirements as prescribed under Accounting Standard 18 : Related Party Disclosures (AS 18) (prescribed under section 133 of the Act) is required to be adhered to.
Whilst section 2(51) defines a key managerial personnel to include the company secretary and chief financial officer, disclosures in the financial statements is determined / mandated in terms of the notified according standards.
Paragraph 10.8 of AS defines a key management personnel to mean 'those persons who have the authority and responsibility for planning, directing and controlling the Page 5 of 12 Uploaded by SATISH C. VEMULLA(HC00206) on Mon May 05 2025 Downloaded on : Tue May 06 01:22:07 IST 2025 NEUTRAL CITATION R/SCR.A/7016/2018 JUDGMENT DATED: 02/05/2025 undefined activities of the reporting enterprise".
8. In Inspection Report done under section 206(5) of the Companies Act (Annexure -B), Ministry of corporate Affairs in para 17 found following violation :-
"17. Violation of section 129 read with section 133 of the Companies Act, 2013 read with AS -18.
During the inspection of books of accounts and consolidated financial statements of the company, it was observed form the Note No.31.5 of notes on Consolidated financial statements for the year ended 31.03.2015 and 31.03.2016 that the list of related parties / KMPs were given, however, in the list name of Company Secretary and CFO was not given, hence violated the provisions section 129, 133 of the Companies Act, 2013 read with AS-18."
9. Subsequent to aforesaid aspect, Criminal Case was registered under section 143 of the Companies Act against the petitioner stating following breach as consolidated case for launching prosecution :-
"During the inspection of books of accounts and consolidated financial statements of the company, it was observed from the Note No.31.5 of notes on Consolidated financial statements for the year ended 31.03.2015 and 31.03.2016 list of related parties / KMP were given, however in the list of name of Company Secretary and CFO was not given, hence there is violation of provisions section 129, 133 of the Companies Act, 2013 read with AS-18. You being the auditors have not reported the same in your report the said violation for respective financial year. Therefore, there is violation of section 143 of the Companies Act, 2013 and liable for penal action under Page 6 of 12 Uploaded by SATISH C. VEMULLA(HC00206) on Mon May 05 2025 Downloaded on : Tue May 06 01:22:07 IST 2025 NEUTRAL CITATION R/SCR.A/7016/2018 JUDGMENT DATED: 02/05/2025 undefined section 147 of the Act."
10. What could be found as breach is name of Company Secretary and CFO was not given in the consolidated financial statement or standalone financial statement, which according to prosecution violates section 129 and 133 of the Companies Act, 2013 read with Accounting Standard 18. It is true that in consolidated financial statement or standalone financial statement, names of Company Secretary and CFO are not annexed but names of persons who are having authority and responsibility for planning, directing and controlling the activities of reporting enterprise has been stated. It manifestly clear that Accounting Standard 18 is governing provision in regard to related party. Related party is defined in clause 10.1 of Accounting Standard, it reads as under :-
"10.1 Related party - parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and /or operating decisions."
10.1. Clause 10.8 of Accounting Standard defines Key Management personnel. It reads as under :-
"10.8 Key Management Personnel - those persons who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise."
11. Reading aforesaid provision, it does not demand specific name of Company Secretary or CFO. It just demands name of Page 7 of 12 Uploaded by SATISH C. VEMULLA(HC00206) on Mon May 05 2025 Downloaded on : Tue May 06 01:22:07 IST 2025 NEUTRAL CITATION R/SCR.A/7016/2018 JUDGMENT DATED: 02/05/2025 undefined person who has authority and responsibility for planning, directing and controlling the activities of reporting enterprise. It is not case of the Registrar of Companies that names of persons who have authority and responsibility for planning, directing and controlling the activities of reporting enterprise is not mentioned in consolidated financial statement or standalone financial statement. Section 2(51) of the Companies Act defines Key managerial personnel in relation to company. It reads as under :-
(51) Key managerial personnel, in relation to a company means :-
(i) the Chief Executive Officer or the managing director or the manger.
(ii) the company secretary
(iii) the whole time director;
(iv) the Chief Financial Officer;
(v) such other officer, not more than one level below the directors who is in whole time employment, designated as key managerial personnel by the board and
(vi) such other officer as may be prescribed.
12. Therefore, as per Companies Act, Key Managerial personnel means aforesaid persons but according to Accounting Standard 18, Key Management Personnel are those persons who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise. Therefore, according to this Court, prosecution launched by Registrar of Companies without noticing Accounting Standard 18 found be hyper technical one.
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13. In the case of Dayle De'Souza (supra), the Hon'ble Apex Court in para 34 has held as under :-
"34. Almost every statute confer operational power to enforce and penalise, which power is to be exercised consistently from case to case, but adapted to facts of an individual case. The passage from Hindustan Steel Ltd. highlights the rule that the discretion that vests with the prosecuting agencies is paired with the duty to be thoughtful in cases of technical, venial breaches and genuine and honest belief, and be firmly unforgiving in cases of deceitful and mendacious conduct. Sometimes legal provisions are worded in great detail to give an expansive reach given the variables and complexities involved, and also to avoid omission and check subterfuges. However, legal meaning of the provision is not determined in abstract, but only when applied to the relevant facts of the case. Therefore, it is necessary that the discretion conferred on the authorities is applied fairly and judiciously avoiding specious, unanticipated or unreasonable results. The intent, objective and purpose of the enactment should guide the exercise of discretion, as the presumption is that the makers did not anticipate anomalous or unworkable consequences. The intention should not be to target and penalise an unintentional defaulter who is in essence law-abiding."
14. The intent, objective and purpose of the enactment should guide the exercise of discretion, as the presumption is that the makers did not anticipate anomalous or unworkable consequences and unintentional defaulter should not be targeted. In the present case, as stated herein above, Registrar of Companies without referring to intention of provision and even without noticing definition in Accounting Standard 18, has taken hyper technical view, which is unworkable consequence.
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15. The petitioner who is reputed auditor who has audited reputed company following Accounting Standard 18, cannot be send for rigmarole of the trial.
16. This Court may gainfully refer to the following observations of this Court in the case of State of Haryana v. Bhajan Lal [1992 Suppl (1) SCC 335], and the law laid down therein has been consistently followed. In para 102, the Hon'ble Apex Court held as under :-
"102. In the backdrop of the interpretation of the various relevant provisions of the Code under Chapter XIV and of the principles of law enunciated by this Court in a series of decisions relating to the exercise of the extraordinary power under Article 226 or the inherent powers under Section 482 of the Code which we have extracted and reproduced above, we give the following categories of cases by way of illustration wherein such power could be exercised either to prevent abuse of the process of any court or otherwise to secure the ends of justice, though it may not be possible to lay down any precise, clearly defined and sufficiently channelised and inflexible guidelines or rigid formulae and to give an exhaustive list of myriad kinds of cases wherein such power should be exercised.
(1) Where the allegations made in the first information report or the complaint, even if they are taken at their face value and accepted in their entirety do not prima facie constitute any offence or make out a case against the accused.
(2) Where the allegations in the first information report and other materials, if any, accompanying the FIR do not disclose a cognizable offence, justifying an investigation by Page 10 of 12 Uploaded by SATISH C. VEMULLA(HC00206) on Mon May 05 2025 Downloaded on : Tue May 06 01:22:07 IST 2025 NEUTRAL CITATION R/SCR.A/7016/2018 JUDGMENT DATED: 02/05/2025 undefined police officers under Section 156(1) of the Code except under an order of a Magistrate within the purview of Section 155(2) of the Code.
(3) Where the uncontroverted allegations made in the FIR or complaint and the evidence collected in support of the same do not disclose the commission of any offence and make out a case against the accused.
(4) Where, the allegations in the FIR do not constitute a cognizable offence but constitute only a noncognizable offence, no investigation is permitted by a police officer without an order of a Magistrate as contemplated under Section 155(2) of the Code.
(5) Where the allegations made in the FIR or complaint are so absurd and inherently improbable on the basis of which no prudent person can ever reach a just conclusion that there is sufficient ground for proceeding against the accused.
(6) Where there is an express legal bar engrafted in any of the provisions of the Code or the concerned Act (under which a criminal proceeding is instituted) to the institution and continuance of the proceedings and/or where there is a specific provision in the Code or the concerned Act, providing efficacious redress for the grievance of the aggrieved party.
(7) Where a criminal proceeding is manifestly attended with mala fide and/or where the proceeding is maliciously instituted with an ulterior motive for wreaking vengeance on the accused and with a view to spite him due to private and personal grudge."
17. In view of above, allowing of trial against the petitioner would be absolutely absurd. Sub-para 1 and 1 of para 102 of Bhajan Lal (supra) is attracted.
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18. In view of above, the petitions are allowed. The Criminal Complaint dated 14.02.2018 bearing Criminal Enquiry No.137 of 2018 in Criminal Case No.25083 of 2018 and Criminal Complaint dated 14.02.2018 bearing Criminal Enquiry No.43 of 2018 in Criminal Case No.25094 of 2018 pending before the learned Additional Chief Metropolitan Magistrate, Ahmedabad as well as all consequential proceedings initiated in pursuance thereof are hereby quashed and set aside qua the applicant. Direct service is permitted.
(J. C. DOSHI,J) SATISH Page 12 of 12 Uploaded by SATISH C. VEMULLA(HC00206) on Mon May 05 2025 Downloaded on : Tue May 06 01:22:07 IST 2025