Gulshan Rai vs Institute Of Chart. Accountants
2011 Latest Caselaw 3875 Del

*                 THE HIGH COURT OF DELHI AT NEW DELHI

+                         RFA No.714/1999



                                Date of Decision: 10.08.2011

GULSHAN RAI                                   ...... APPELLANT

                          Through:   Mr. Siddharth Yadav with Mr.
                                     Wasim Ashraf, Advocates for
                                     the appellant.

                              Versus

INSTITUTE OF CHART. ACCOUNTANTS
OF INDIA & ANR.              ...... RESPONDENTS

                          Through:   Mr.    Rakesh     Agarwal,
                                     Advocate      for     the
                                     respondent.


CORAM:
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE M.L. MEHTA

1.     Whether Reporters of local papers may be
       allowed to see the judgment?
2.     To be referred to the Reporter or not ?
3.     Whether the judgment should be reported
       in the Digest ?

M.L. MEHTA, J. (Oral)

1. The appellant is a Chartered Accountant (CA) and a

fellow member of the Institute of Chartered Accountant ("the

Institute" for short). The Institute received a complaint

against him from respondent no.2 on 02-06-1989. The

complaint was based on the allegations that (i) the appellant

had entered into a partnership with respondent no.2 in

promoting a company M/s Sai Beverage Private Limited in

violation of provision of Clause (4) of Part-I, First Schedule of

Chartered Accountants Act, 1949 ("the Act" for short). (ii) The

appellant violated the provisions of Regulation 190A of

Chartered Accountants Regulations 1988 (the Regulations) by

engaging in the business activities; (iii) the appellant violated

the provisions of Clause 1 of Part-II of Second Schedule of the

Act by having more than 20% shares in the aforesaid

company in his name and in the name of his wife and son;

(iv) the appellant committed various acts of perjury such as

he gave contradictory information to the court regarding the

registered office of the company. (v) He also contradicted

and gave false information to different Local Commissioners

about the statutory records of the company and (vi) he gave

false information to the Court about the number of directors

in the company.

2. In addition to above, the appellant was alleged to have

misconducted himself as a CA by having violated the

restraint order of the court, by having illegally allotted the

shares worth `10 lac to his own friend/ nominees, by illegally

removing respondent no.2 from the Directorship of the

company and by illegally appointing his directors in place of

others and by engaging in the activities of other companies

namely M/s Sai Impex Private Limited through his own son as

its Benami Director.

3. The institute decided to conduct an enquiry into the

complaint and consequently entrusted the matter to

Disciplinary Committee, which after hearing the appellant

submitted its report dated 29th December 1994 which inter

alia found the appellant to be innocent of all the charges

except professional misconduct within the meaning of Clause

11 of Part-I of First Schedule of the Act. The appellant

submitted his representation against the said report dated

29-12-1994 to the Council of Institute of Chartered

Accountants of India (for short „the Council‟) which after

consideration of the report and the written as well as oral

submissions of the appellant accepted the report of

Disciplinary Committee and found the appellant guilty under

the provision of Clause 11 of Part-I, First Schedule of

Chartered Accountant Act and consequently passed the order

against him under Section 21 (4) of the Act. A show-cause

notice was issued to the appellant in this regard. The Council

vide its decision dated 04-07-1998 decided to remove the

name of the appellant from the List of Members for a period

of six months.

4. The appellant has challenged the same by filing the

present appeal alleging findings of the Disciplinary

Committee to be based on conjectures and surmises. It has

been averred that the Disciplinary Committee erred in not

appreciating the fact that there was no need for the appellant

to act as a "Functional Director" inasmuch as the company

had a full-time Executive Director i.e. respondent no.2,

General Manager, Consultant and Commercial Manager to

deal with the affairs of the company. He averred that his role

was limited to attending periodical meetings to review

project implementation and to oversee the statutory

compliances. He averred that the respondent no.2 had filed

this complaint in order to blackmail and pressurize him to

extract more value of his shares in the company. He

admitted that he was one of the signatories in the operation

of the bank account and was involved in the banking

activities such as operation of bank accounts, but stated that

the Account Department was maintained by the Commercial

Manager. He, however, stated that it was the complainant

who alone was in-charge of the project and construction

activities. He admitted that he had been signing cheques on

behalf of the company and also stated that it was in the

absence of the Executive Director who was other signatory

for the operation of the bank accounts. He averred that his

mere signing of cheques would not make him a "Working

Director". He also averred that in his application dated 01-06-

1987 whereby he sought permission of the Institute, he had

stated that his relatives will have substantial interest to the

tune of 20% in the said company. He averred that he had

sought the permission and dispatched the same vide letter

dated 20-06-1987. He averred that he also sent another

letter dated 14-03-1994 to the Institute. He further averred

that he bonafidely believe that he was not engaged as "full-

time"/ working Director of the company, but as an abundant

caution disclosed the fact about his being a Director of the

said company in the „entry record‟ dated 1-5-1987 submitted

by him along with his remittance to the Institute for renewal

of his membership within 4 days of his becoming Director of

the company and also disclosed that he was devoting one

hour per day and 7 hours a week in the activities of the

company. He pleaded that in response to above, he received

a communication from the Institute advising him to submit

the request for permission in the prescribed format under

Regulation 166 of the Regulations and that he complied with

the same vide application dated 20.06.1987. He averred that

no further communication was received from the Institute in

this regard, that the Ex-Office Assistant Secretary of the

Institute vide his letter dated 05-04-1990 certified the fact

about his engagement in other business/ occupation and that

if there was no application of permission on record of the

institute and no permission had been granted to him, how the

Assistant Secretary could issue certificate in this regard, that

the question whether a person is whole-time engaged in a

business (other than professionally), is to be considered qua

the incident of his involvement therein and not merely on the

presumption that he was signing the cheques or overseeing

the functional activities of the company, that his engagement

in the company was for a few hours a week and that he was

not engaged in any sale, purchase or commercial activities.

The appellant consequently prayed for setting aside the

decision dated 04-07-1998 of the institute.

5. Before us, none appeared for the appellant despite long

passovers. We, thus, proceeded to hear the learned counsel

for the respondent no.1. We have perused the record

including the report dated 29th December 1994 of the

Disciplinary Committee. The matter was finally heard by the

Disciplinary Committee on 12th March, 1994 which was

attended by the appellant along with his counsel. The Council

perused the statement of the respondent made before the

Committee. The appellant stated that in April, 1987 he had

discussions with respondent no.2 for starting business of a

bottling plant and it was agreed that the capital required was

to be contributed by them equally and the company was to

be established under the name and style of M/s Sai Beverage

Private Limited. The said company was incorporated on 16-

04-1987 with the appellant and respondent no.2 as the only

Directors holding equal shares. The appellant stated that he

was not engaged as whole-time Director or Managing

Director and has never managed the substantial work of the

company, which was being looked after by the General

Manager and respondent no.2 as its Executive Director. The

appellant in the grounds of appeal has admitted that as

Director of the company his role was to handle the bank

operations of the company including obtaining loans from the

banks and to look after the accounting records of the

company. It was also an admitted case that the appellant and

respondent no.2 were authorized signatories to operate the

bank accounts of the company in different banks. The

Disciplinary Committee also found from the record that both

the appellant as well as respondent no.2 were authorized to

raise loans and overdraft from the banks and to acknowledge

all types of debts from the company. The Council examined

the plea of the appellant that he had sought permission of

the Institute for engaging in other occupation vide his letter

dated 20-06-1987. Since the said letter was not available on

record of the Institute, the Disciplinary Committee questioned

the appellant to the manner of his sending the said letter to

the Institute. In reply thereto, the appellant stated having

sent the same by ordinary post. The Disciplinary Committee

has recorded that after the hearing was concluded, the

appellant vide his letter dated 14 th March, 1994 informed

about having dispatched the said letter on 23-06-1987. The

Disciplinary Committee further records that although the

appellant in the said letter dated 14-03-1994 had stated

about his enclosing photocopy of the dispatch register along

with it, no such enclosure was received. In an answer to a

question the appellant had also admitted before the

Disciplinary Committee that he used to arrange loans for the

company from the banks. In an answer to another question,

he admitted that substantial paper work of the company was

being signed by him since he had the competence in the

field. The appellant had submitted record showing his holding

and that of his wife and son in the said company to the

extent of `10,60,000/- apart from shareholding of the M/s Sai

Impex Pvt. Ltd which company was stated to be pertaining to

his son. In addition, it was also seen by the Disciplinary

Committee from the record that Shasi and Indu Aggarwal

who had the same address as that of the appellant were also

shareholders and thereby the shareholding of the appellant

and his family group was as much as 69.2%. The appellant‟s

son Vikas Rai was also examined. He stated to be working in

the company as an apprentice.

6. Considering the submissions and evidence on record,

the Disciplinary Committee arrived at the conclusion that the

appellant never made any application for obtaining

permission of the Disciplinary Committee to act as a full-time

Director of the company. The Disciplinary Committee

recorded that as per rule before engaging himself in any

commercial activities he should have verified that in fact the

permission had been granted. In fact this was the

requirement of Clause 11 of Part-I of the First Schedule of the

Act read with Regulation 190(A) of the Regulations and

Appendix (10) thereto which speaks about obtaining specific

and prior approval of the Disciplinary Committee. The type of

activities being carried out by the appellant as Director

thereto would demonstrate that he was substantially involved

in the managing of affairs of the company though not

designated as Managing Director or whole-time Director. The

Disciplinary Committee report records that the appellant was

guilty of professional misconduct for violating the provisions

of Clause 11 of Part-II of First Schedule read with Section 190

(A) of the Regulations. We do not find any infirmity or

illegality in the said decision of the Disciplinary Committee.

7. The Council considered the report of the Disciplinary

Committee and also representation made by the appellant

and vide its decision dated 4th July, 1998 accepted the report

of the Disciplinary Committee and found the appellant guilty

of professional misconduct within the meaning of Clause 11

Part-I of First Schedule. The Council also gave a show-cause

notice to the appellant to which he submitted his reply.

Consequently, the Council vide its decision dated 04-07-1998

decided to remove the name of the appellant from the list of

members for a period of six months. We do not find any

infirmity or illegality in the impugned decision of the Council

dated 04-07-1998. We are of the view that since the

allegation of professional misconduct against the appellant

pertained to the year 1987 and 23 years have since passed,

the interest of justice would be met in reducing the period of

removal from the list of members from the period of six

months to three months. Consequently, the decision of the

Council dated 04-07-1998 is modified to the extent as

indicated above.

8. The appeal stands disposed of.

(M.L. MEHTA) JUDGE

(A.K. SIKRI) JUDGE August 10, 2011 rd