Gujarat High Court
Pipara And Co Llp vs Gujarat State Police Housing ... on 17 June, 2021
Bench: J.B.Pardiwala, Vaibhavi D. Nanavati
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 7342 of 2021
With
R/SPECIAL CIVIL APPLICATION NO. 7340 of 2021
With
R/SPECIAL CIVIL APPLICATION NO. 7270 of 2021
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE J.B.PARDIWALA
and
HONOURABLE MS. JUSTICE VAIBHAVI D. NANAVATI
==========================================================
1 Whether Reporters of Local Papers may be allowed to YES
see the judgment ?
2 To be referred to the Reporter or not ? YES
3 Whether their Lordships wish to see the fair copy of NO
the judgment ?
4 Whether this case involves a substantial question of NO
law as to the interpretation of the Constitution of India
or any order made thereunder ?
==========================================================
PIPARA AND CO LLP
Versus
GUJARAT STATE POLICE HOUSING CORPORATION LIMITED
==========================================================
Appearance:
IN SPECIAL CIVIL APPLICATION NO.7342 OF 2021:
MR MANISH BHATT, SENIOR ADVOCATE FOR M R BHATT & CO.(5953) for the
Petitioner(s) No. 1,2
MR MUNJAAL M BHATT(8283) for the Petitioner(s) No. 1,2
MR CHINTAN DAVE AGP for the Respondent(s) No. 2
MR G H VIRK(7392) for the Respondent(s) No. 3
MR VARUN K.PATEL(3802) for the Respondent(s) No. 1
MR VISHAL DAVE ADVOCATE for the Respondent No.4
NOTICE SERVED BY DS(5) for the Respondent(s) No. 4
IN SPECIAL CIVIL APPLICATION NO.7340 OF 2021:
MR MANISH BHATT, SENIOR ADVOCATE FOR M R BHATT & CO.(5953) for the
Petitioner(s) No. 1,2
MUNJAAL M BHATT(8283) for the Petitioner(s) No. 1,2
MR CHINTAN DAVE AGP for the Respondent(s) No. 2
MR G H VIRK(7392) for the Respondent(s) No. 3
for the Respondent(s) No. 1
Page 1 of 41
Downloaded on : Sun Sep 05 19:23:05 IST 2021
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
IN SPECIAL CIVIL APPLICATION NO.7270 OF 2021:
MR MANISH BHATT, SENIOR ADVOCATE FOR M R BHATT & CO.(5953) for the
Petitioner(s) No. 1,2
MR MUNJAAL M BHATT(8283) for the Petitioner(s) No. 1,2
MR CHINTAN DAVE AGP for the Respondent(s) No. 2
MR G H VIRK(7392) for the Respondent(s) No. 3
MR KEYUR GANDHI ADVOCATE FOR NANAVATI ASSOCIATES (1375) for the
Respondent(s) No. 1
==========================================================
CORAM:HONOURABLE MR. JUSTICE J.B.PARDIWALA
and
HONOURABLE MS. JUSTICE VAIBHAVI D. NANAVATI
Date : 17/06/2021
COMMON ORAL JUDGMENT
(PER : HONOURABLE MR. JUSTICE J.B.PARDIWALA)
1 As the issues raised in all the captioned writ applications are the
same, those were taken up for hearing analogously and are being
disposed of by this common judgement and order.
2 In administrative law rule of natural justice are foundational and
fundamental concepts. Law is now well settled that the principles of
natural justice are part of legal and judicial proceedings.
[Rattan Lal Sharma vs. Managing Committee, Dr. Hari Ram Higher
Secondary School AIR [1993] SC 2155 para 9]
3 We are tempted to preface our judgement with the aforenoted
observations of the Supreme Court as in the case on hand the writ
applicant has been very badly condemned and that too unheard.
4 The Special Civil Application No.7342 of 2021 is treated as the
lead matter.
5 By this writ application under Article 226 of the Constitution of
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
India, the writ applicants have prayed for the following reliefs:
"(a) This Hon'ble Court may be pleased to issue a writ of mandamus or
any other writ, order or direction of petitioner No.1 as statutory Auditor
effected for F.Y. 2020-21 and be pleased to grant consequential relief of
reinstatement.
(b) This Hon'ble Court may be pleased to issue a writ of mandamus or
any other writ, order or direction directing respondents to produce on
record the letter dated 05.12.2020, in the event respondent No.1 or
respondent No.3 has relied on the said letter before taking the illegal
action of terminating the assignment given to petitioner No.1 and
subsequently provide an opportunity to the petitioners to respond to the
same.
(bb) This Hon'ble Court may be pleased to issue a writ of mandamus or
any other writ, order or direction quashing and setting aside the letter
dated 05.12.2020 issued by respondent No.2 to various PSUs including
the present respondents;
(bbb) Pending admission, final hearing and disposal of the petitioner,
this Hon'ble Court may be pleased to stay the effect, implementation
and execution of the letter dated 05.12.2020 issued by respondent No.2
to various PSUs including the present respondents.
(c) Pending admission, final hearing and disposal of the petition, this
Hon'ble Court may be pleased to stay the effect, implementation and
execution of the termination of petitioner No.1 as statutory Auditors for
F.Y. 2020-21 and permit the petitioners to complete the work as agreed
for F.Y. 2020-21.
(d) In any view of the matter, this Hon'ble Court may be pleased to pass
any such order(s) directing respondent No.1 or respondent No.3 not to
consider the letter dated 05.12.2020 (if placed reliance upon) as a
ground for blacklisting the petitioners for future agreements;
(e) This Hon'ble Court may be pleased to grant ad-interim ex-parte
relief in terms of paragraph 22(c) and (d) hereinabove.
(f) Pass any such order(s) that this Hon'ble Court deems fit in the facts
and circumstances of the case."
6 The facts giving rise to this writ application may be summarized as
under:
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
7 The writ applicant No.1 is a Chartered Accountant LLP claiming to
be working across the verticals of Assurance, Taxation, Accounting, ERP
Implementations, Management Consultancy, Cross Boarder Advisory,
Investigations, Forensic Audits, Corporate Litigation, Compliance, GRC,
M&A's and allied activities.
8 The writ applicant No.2 is a partner of the Pipara and Company,
LLP.
9 The respondent No.1 is an undertaking of the Gujarat Government
and is established to undertake construction of residential, non-
residential and all other types of building required for the Gujarat Police,
Jails, Home Guards amongst other activities.
10 The respondent No.3 herein is the Comptroller and Auditor
General of India (hereinafter referred to as "C&AG") who performs such
duties and exercises such powers in relation to the accounts of the Union
and the State.
11 The appointments to carry out either the statutory audit or
internal audit of a Public Sector Undertaking (PSUs), such as the
respondent No.1 is done through the respondent No.3 - C&AG. In
accordance with the procedure prescribed, a Chartered Accountant firm
like the writ applicant No.1 herein would apply to the C&AG for
empanelment. After due verification and checks and balances, the said
firm would get empanelled with the C&AG, who, thereafter, would
recommend appointment of the said firm to the various PSUs, depending
on the scale of work vis-a-vis the size of the firm.
12 In the case on hand, the writ applicant got empanelled with the
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
C&AG for the financial year 2020-21. The writ applicant firm was also
empanelled with the C&AG for the previous years and was already
appointed as the statutory authority for the respondent NO.1 for the F.Y.
2019-20.
13 Post empanelment, under the email dated 24 th August 2020, the
C&AG informed the respondent No.1 that the writ applicant No.1 has
been appointed as the statutory auditor for the respondent No.1 for the
F.Y. 2020-21. The same email was forwarded by the respondent No.1 to
the writ applicant No.1, who confirmed the appointment on 24 th August
2020 itself.
14 Immediately thereafter on the very next day i.e. on 25 th August
2020, the C&AG portal reflected the name of the writ applicant No.1 as
the statutory Auditor for the respondent No.1 for the F.Y. 2020-21.
Between September 2020 and December 2020, the respondent no.1 had
contacted the writ applicant No.1 for various works pertaining to the
statutory audit for the F.Y. 2020-21 as well as queries regarding F.Y.
2919-20, which were duly attended to by the writ applicant No.1.
15 From January 2021 onwards, the respondent No.1 suddenly
stopped responding to the calls of the writ applicant No.1 in respect of
the queries raised. At first the writ applicant No.1 suspected that with
the on-set of Covid-19 pandemic and surge of cases in India, the
response was not forthcoming. Sometime thereafter, the officials of the
respondent No.1 interacted with the officials of the writ applicant No.1
over phone, but the former consciously refrained from sending any email
or answering any query raised on record.
16 On 22nd December 2021, the writ applicant No.1 checked the
C&AG portal to ascertain the status of its appointment. The writ
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
applicant was shocked to see the portal display "nil" appointment in the
name of the writ applicant. The same conveyed that the respondent No.1
had technically terminated the appointment of the writ applicant
without prior notice.
17 Upon inquiry, the writ applicant learnt that some time in January
2021, the respondent no.1 had already appointed one another Chartered
Accountant firm to undertake the work of the statutory audit for the F.Y.
2020-21 and had uploaded the relevant ADT - 1 Form on 4th February
2021.
18 In such circumstances referred to above, the writ applicants came
before this Court with the present writ application.
19 This writ application was take up for hearing by one of us
(Vaibhavi D. Nanavati, J) sitting as a Single Judge during the summer
vacation on 12th May 2021. The following order came to be passed:
"Draft amendment supplied by the learned advocate for the
petitioner is ordered to be taken on record. The same shall be carried
out within a period of one week.
Heard learned Senior Counsel Mr.Manish Bhatt for the
petitioners and learned AGP Mr.Dhawan Jayswal for the respondent
no.2-State.
It is stated by the learned Senior Counsel Mr.Manish Bhatt for
the petitioners that petitioner no.1 is a Chartered Accountant LLP
empaneled with Indian Banking Association for forensic audit of Major
Frauds and is also one of the 10 firms empaneled with SEBI as Forensic
Auditors. It is stated that the petitioner no.2 is a partner of Pipara &
Co., LLP and operates out of New Delhi. It is stated that the petitioner
no.1 got empaneled with C&AG for the Financial Year 2020-21. It is
stated that post empanelment, by email dated 24.08.2020, C&AG
informed respondent no.1 that the petitioner no.1 is being appointed as
Statutory Auditor for respondent no.1 for Financial Year 2020-21. It is
stated that the respondent no.1 suddenly stopped imparting work to the
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
petitioner from January-2021. It is stated that the petitioner no.1
checked the C&AG portal on 22.04.2021 to check the status of their
appointments and it came to notice that the portal displayed 'Nil'
appointments in the name of petitioner, which meant that respondent
no.1 had technically terminated petitioner no.1's appointment without
informing them. The screen shot is annexed at Annexure-C to this
petition. It is stated that newly appointed appointee will be joined as
party respondent.
Let Notice be issued making it returnable on 17.05.2021.
Learned AGP Mr.Dhawan Jayswal waives service of notice for
the respondent no.2-State.
Direct service permitted through Fax message, email and/or any
other suitable electronic mode."
20 The aforesaid facts may be summarized in the form of dates and
events as under:
Date Particulars
07.02.2020 Letter addressed by Anti-Corruption Bureau to State of
Gujarat
21.08.2020 Letter addressed by the General Administration
Department to the Finance Department relying on letter
dated 07.02.2020
24.08.2020 C&AG informed the respondent No.1 that the writ
applicant No.1 has been appointed as the statutory Auditor
of the company for F.Y. 2020-21.
25.08.2020 C&AG portal reflected the name of the writ applicant No.1
as the statutory Auditor of the company for F.Y. 2020-21.
September to Work carried out by the writ applicant No.1 in terms of its
December 2020
appointment.
05.12.2020 Letter addressed by the Finance Department to 8 PSUs
including the respondent No.1 relying on letters dated
07.02.2020 and 21.08.2020 making certain "suggestions".
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
18.12.2020 Letter addressed by the respondent No.1 to the C&AG
informing them about letter dated 05.12.2020 and
requesting for appointment of another suitable CA firm,
thereby misconstruing letter dated 05.12.2020.
05.01.2021 Letter addressed by the C&AG to the respondent No.1
appointing the respondent No.4 as the new Auditor.
16.01.2021 Letter addressed by the respondent No.4 to the C&AG
accepting their appointment.
04.02.2021 Form ADT-1 required to be uploaded by the respondent
No.1 certifying appointment of a new Auditor uploaded
online.
22.04.2021 C&AG portal showed 'NIL' appointments qua the writ
applicant No.1 meaning thereby the work allotted by the
C&AG terminated.
27.04.2021 Petition filed.
SUBMISSIONS ON BEHALF OF THE WRIT APPLICANTS:
21 Mr. Manish Bhatt, the learned Senior Counsel assisted by Mr.
Munjal M. Bhatt, the learned advocate appearing for the writ applicants
vehemently submitted that the action on the part of the respondents
would be termed as absolutely arbitrary and in gross violation of the
principles of natural justice. Mr. Bhatt would submit that it was not
expected by an authority like the Comptroller and Auditor General of
India to act in such a highhanded manner.
22 Mr. Bhatt would submit that in response to the notice issued by
this Court, the respondent No.1 has filed an affidavit in which there is a
reference of a letter dated 5 th December 2020 addressed by the
respondent No.2 (State of Gujarat, Finance Department) to few PSUs
including the respondent No.1 herein informing that the writ applicants
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
- firm shall not be engaged to act as the Auditor in public. Mr. Bhatt
would submit that the respondent No.1 blindfoldedly followed the letter
addressed by the respondent No.2 and proceeded to appoint a new
statutory Auditor i.e. the newly impleaded respondent No.4 - B. P. Bang
and Company.
23 Mr. Bhatt, thereafter, invited the attention of this Court to the
letter dated 5th January 2021 addressed by the office of the C&AG to the
respondent No.1 herein informing that a new Chartered Accountant firm
has been appointed as the new Auditor in the wake of the appointment
of the writ applicant being terminated. This, according to Mr. Bhatt, was
in gross violation of the principles of natural justice, as, at no point of
time, the respondent No.3 - C&AG gave any opportunity of hearing to
the writ applicant.
24 Mr. Bhatt, thereafter, invited the attention of this Court to a letter
dated 21st August 2020 addressed by the General Administrative
Department, State of Gujarat to the Additional Chief Secretary,
Department of Finance to take up the proceedings in accordance with
the observations made by the Anti-Corruption Bureau of Ahmedabad. In
this regard also, according to Mr. Bhatt, the writ applicant was not put
to any notice.
25 Mr. Bhatt invited the attention of this Court to Section 139 of the
Companies Act, 2013. Section 139 falls in Chapter X titled as the "Audit
and Auditors". Section 139 talks about the appointment of Auditors.
Thereafter, Mr. Bhatt invited the attention of this Court to Section 140 of
the Act, 2013. This is with respect to the removal, resignation of auditor
and giving of special notice. It is argued by Mr. Bhatt that any Auditor
appointed under Section 139 can be removed from his office before the
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
expiry of its term only by a special resolution of the company after
obtaining the prior approval of the Central Government in that behalf in
the prescribed manner. However, the emphasis is laid by Mr. Bhatt on
the proviso to sub-section (1) to Section 140 which provides that before
taking any action under sub-section (1), the Auditor concerned shall be
given a reasonable opportunity of being heard. It is submitted that the
removal of the writ applicant as the Auditor could be said to be in gross
violation of the provisions of Section 140 of the Act. Mr. Bhatt also
invited the attention of this Court to the rules called as "the Companies
(Audit and Auditors) Rules, 2014", more particularly, Rule 7 which
prescribes the procedure for removal of the Auditor before expiry of his
term.
26 In such circumstances referred to above, Mr. Bhatt would submit
that the removal of his client as an Auditor could be termed as a very
highhanded and arbitrary action and in gross violation of the principles
of natural justice. He would submit that the reliefs prayed for in the writ
application be granted in the interest of justice keeping in mind the
concept of the "Rule of Law".
SUBMISSIONS ON BEHALF OF THE RESPONDENT NO.1:
27 Mr. Varun Patel, the learned counsel appearing for the respondent
No.1 would submit that his client was left with no other option, but to
comply with the directions issued by the respondent No.2 - State of
Gujarat (Finance Department). Mr. Patel would submit that his client is
in no way concerned with the cause or reason for the termination of the
writ applicants as the statutory Auditor. The respondent No.1 is only
concerned with the work of audit. He would submit that the C&AG, by
letter dated 5th January 2021, has appointed the respondent No.4 as the
statutory Auditor of the respondent No.1 - Corporation for F.Y. 2020-21.
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
Mr. Patel would submit that although the writ applicant was appointed
as the Auditor to undertake the audit work of the respondent No.1 -
Corporation, yet nothing substantial was done by the writ applicant or in
other words, the writ applicant had yet to commence with the work of
statutory audit and by that time, the respondent No.4 came to be
appointed as the Auditor. Mr. Patel would submit that the respondent
No.4 has commenced the work of audit.
28 Mr. Patel would submit that Section 140 of the companies Act,
which is sought to be relied upon, has no application in the present case
as Section 140 talks about removal of Auditor from his office by the
company and that too, after obtaining the prior approval of the Central
Government. Section 140 does not talk about removal of an Auditor
appointed under Section 139 by the C&AG. According to Mr. Patel, if
sub-section (1) of Section 140 is not applicable, then the proviso to the
same, which provides for a reasonable opportunity of being heard,
would also not apply.
29 In such circumstances referred to above, Mr. Patel prays that the
present writ application may not be entertained the same be rejected.
SUBMISSIONS ON BEHALF OF THE RESPONDENT NO.3 - C&AG:
30 Mr. Gursharan Virk, the learned counsel appearing for the
respondent No.3 - C&AG, with his usual fairness, submitted that an
opportunity of hearing ought to have been definitely granted to the writ
applicant and before removing the writ applicant as the statutory
Auditor. Mr. Virk would submit that although it is the stance of all other
learned counsel appearing for the respondents that Section 140 of the
Act, 2013 would not apply, yet, according to him, Section 140 would
apply and before taking any decision to remove the writ applicant as the
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
Auditor, an opportunity of hearing should have been granted. Mr. Virk
submitted that the entire confusion came to be created by the State
Government. The State Government smacked of some foul play at the
end of few employees of one of the statutory Corporations (other than
the respondent No.1) in which the writ applicant was appointed as the
Auditor of the said Corporation. According to Mr. Virk, some of the
office bearers of the said Corporation were found to be in possession of
the assets disproportionate to the known sources of their income and in
this regard, the Anti-Corruption Bureau, State of Gujarat took up this
issue. According to Mr. Virk, it is the case of the State Government that
as the writ applicant was appointed as the statutory Auditor of the said
Corporation, during the work of audit, it would have definitely come to
its notice of the disproportionate assets of the office bearers, and in such
circumstances, the writ applicant owed a duty to inform about the same
to the State Government. It is the failure on the part of the writ applicant
to inform the State Government as regards the disproportionate assets,
that annoyed the authorities concerned, which led to the letters, which
have been referred to above. However, Mr. Virk submits that the writ
applicant ought not to have been condemned so badly without giving
any opportunity of hearing. He would submit that his client i.e. the
respondent No.3 would abide by whatever order this Court may deem fit
to pass in the larger interest of justice.
SUBMISSIONS ON BEHALF OF THE RESPONDENT NO.2 - STATE
OF GUJARAT:
31 Mr. Chintan Dave, the learned A.G.P. appearing for the State
would submit that this Court may not entertain this writ application and
reject the same. He would submit that the decision to remove the writ
applicant as the Auditor has been taken in the larger public interest.
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
SUBMISSIONS ON BEHALF OF THE RESPONDENT NO.4:
32 Mr. Vishal Dave, the learned counsel appearing for the respondent
No.4 - newly appointed Auditor submitted that his client has already
undertaken the work of statutory audit and would be filing his report in
the near future. Even otherwise, the last date is 31 st August 2021 and
therefore, before 31st August 2021, the respondent No.4 will have to file
the audit report. The learned counsel would submit that having
undertaken the substantial work, the respondent No.4 may be permitted
to complete the audit and file its report.
33 In such circumstances referred to above, Mr. Dave submitted that
there being no merit in this writ application, the same be rejected.
34 We also heard Mr. Keyur Gandhi, the learned counsel appearing
for the respondent No.1 in the Special Civil Application No.7270 of
2021.
ANALYSIS:
35 Having heard the learned counsel appearing for the parties and
having gone through the materials on record, the following three
questions fall for our consideration:
[1] Whether Section 140(1) of the Companies Act, 2013 applies
to the C&AG?
[2] If the C&AG has appointed a Chartered Accountant firm as
the statutory Auditor of a Public Sector Undertaking owned by the
State Government and if the C&AG wants to remove such Auditor
midway on the ground of fraud, etc., then what is the procedure
as prescribed in law?
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
[3] Whether the writ applicant could have been removed as a
statutory Auditor appointed under Section 139 of the Act, 2013
without giving any opportunity of hearing or without any show
cause notice?
36 Procedure under the old Act - Companies Act, 1956.
Sections 224-233 of the Companies Act, 1956.
(a) Deals with the Auditor's appointment, removal and remuneration
generally.
(b) Heading of the Sections:
[224. Appointment and remuneration of auditors]
224-A. Auditor not to be appointed except with the approval of
the company by special resolution in certain cases]
[225. Provisions as to resolutions for appointing or removing
Auditors]
[226. Qualifications and disqualifications of auditors]
[227. Powers and duties of auditors]
[228. Audit of accounts of branch office of company]
[229. Signature of audit report, etc]
[230. Reading and inspection of auditor's report]
[232. Penalty for non-compliance with Sections 225 to 231]
[233. Penalty for non- compliance by auditor with Sections 227
and 229]
[233-A. Power of Central Government to direct special audit in
certain cases]
[233-B. Audit of cost accounts in certain cases]
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
Section 619. Application of Sections 224 to 233 to Government
companies .-
(1) In the case of a Government company, the following provisions
shall apply, notwithstanding anything contained in Sections 224 to 233.
(2) The auditor of a Government company shall be appointed or re-
appointed by the Comptroller and Auditor-General of India:
Provided that the limits specified in sub-sections (1-B) and (1-C)
of section 224 shall apply in relation to the appointment or re-
appointment of an auditor under this sub-section.
(3) The Comptroller and Auditor-General of India shall have power-
(a) to direct the manner in which the company's accounts shall be
audited by the auditor appointed in pursuance of sub-section (2) and to
give such auditor instructions in regard to any matter relating to the
performance of his functions as such;
(b) to conduct a supplementary or test audit of the company's accounts
by such person or persons as he may authorise in this behalf; and for
the purposes of such audit, to require information or additional
information to be furnished to any person or persons, so authorised, on
such matters, by such person or persons, and in such form, as the
Comptroller and Auditor-General may, by general or special order,
direct.
(4) The auditor aforesaid shall submit a copy of his audit report to the
Comptroller and Auditor-General of India who shall have the right to
comment upon, or supplement, the audit report in such manner as he
may think fit.
(5) Any such comments upon, or supplement to, the audit report shall
be placed before the annual general meeting of the company at the
same time and in the same manner as the audit report.
37 The Supreme Court in Gurugobinda Basu vs. Sankari Prasad
Ghosal and others reported in 1964 SC 254 had held in the context of a
Government company that the statutory Auditor is removable by the
Central Government and the Comptroller and Auditor-General of India
would exercise full control over him. We quote the relevant
observations:
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
"8. It is clear from the aforesaid provisions that notwithstanding s. 224
of the Act which empowers every company to appoint an auditor or
auditors at each annual general meetings, the appointment of an
auditor of a Government company rests solely with the Central
Government and in making such appointment the Central Government
takes the advice of the Comptroller and Auditor-General of India. Under
section 224(7) of the Act an auditor appointed under s. 224 may be
removed from office before the expiry of his term only by the company
in general meeting, after obtaining the previous approval of the Central
Government in that behalf. The remuneration of the auditors of a
company is to be fixed in accordance with the provisions of sub-s. (8) of
s. 224. It is clear however that sub-s (7) of s. 224 does not apply to a
Government company because the auditor of a Government company is
not appointed under s. 224 of the Act, but is appointed under sub-s. (2)
of section 619 of the Act. It is clear therefore that the appointment of an
auditor in a Government company rests solely with the Central
Government and so also his removal from office. Under sub-s. (3) of s.
619 the Comptroller and Auditor-General of India exercises control over
the auditor of a Government company in respect of various matters
including the manner in which the company's accounts shall be audited.
The Auditor-General has also the right to give such auditor instructions
in regard to any matter relating to the performance of his functions as
such. The Auditor-General may conduct a supplementary or test audit
of the company's accounts by such person or persons as he may
authorise in this behalf. In other words, the Comptroller and Auditor-
General of India exercises full control over the auditors of Government
company. The powers and duties of auditors in respect of companies
other than Government companies are laid down in s. 227 of the Act
but by virtue of sub-s. (1) of section 619 of the Act, the provisions in s.
227 of the Act do not apply to a Government company because a
Government company is subject to the provisions of s. 619 of the Act.
Under s. 619-A of the Act, where the Central Government is a member
of a Government company, an annual report of the working and affairs
of the company has to be prepared and laid before both Houses of
Parliament with a copy of the audit reports and the comments made by
the Comptroller and Auditor-general. Under s. 620 of the Act the
Central Government may by notification direct that any of the
provisions of the Act, other than Sections 618, 619 and 639, shall not
apply to any Government company.
9. The net result of the aforesaid provisions is that so far as the
Durgapur Projects Ltd. and the Hindustan Steel Ltd. are concerned, the
appellant was appointed an auditor by the Central Government; he is
removable by the Central Government and the Comptroller and
Auditor-General of India exercise full control over him. His
remuneration is fixed by the Central Government under sub s. (8) of s.
224 of the Act though it is paid by the company."
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
38 Comptroller and Auditor-General's (Duties, Powers and Conditions
of Service) Act, 1971.
Section 19. Audit of Government companies and corporations.
(1) The duties and powers of the Comptroller and Auditor General in
relation to the audit of the accounts of Government companies shall be
performed and exercised by him in accordance with the provisions of the
Companies Act, 1956 (1 of 1956).
(2) The duties and powers of the Comptroller and Auditor-General in
relation to the audit of the accounts of corporations (not being
companies) established by or under law made by Parliament shall be
performed and exercised by him in accordance with the provisions of
the respective legislations.
39 Interpretation of Section 19 of the Comptroller and Auditor-
General's (Duties, Powers and Conditions of Service) Act, 1971.
i. For Companies, CAG has to follow the procedure under
Companies Act, 2013.
ii. For Corporations established by law (Parliament or State
Legislature), CAG's duties and powers shall be performed and
exercised by him in accordance with the provisions of the
respective legislations.
40 Procedure under the New Companies Act, 2013:
Section 2(20) of the Companies Act, 2013
(20) "company" means a company incorporated under this Act or under
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any previous company law;
Section 2(45) of the Companies Act, 2013
(45) "Government company" means any company in which not less than
fifty one per cent. of the paid-up share capital is held 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,
and includes a company which is a subsidiary company of such a
Government company;
41 Section 139 of the Companies Act, 2013:
"... ...
(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 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
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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."
42 Section 140 of the Companies Act, 2013:
"140. Removal, resignation of auditor and giving of special notice.
(1) The auditor appointed under section 139 may be removed from his
office before the expiry of his term only by a special resolution of the
company, after obtaining the previous approval of the Central
Government in that behalf in the prescribed manner:
Provided that before taking any action under this sub-section, the
auditor concerned shall be given a reasonable opportunity of being
heard.
.... ...
(5) Without prejudice to any action under the provisions of this Act or
any other law for the time being in force, the Tribunal either suo motu
or on an application made to it by the Central Government or by any
person concerned, if it is satisfied that the auditor of a company has,
whether directly or indirectly, acted in a fraudulent manner or abetted
or colluded in any fraud by, or in relation to, the company or its
directors or officers, it may, by order, direct the company to change its
auditors:
Provided that if the application is made by the Central Government and
the Tribunal is satisfied that any change of the auditor is required, it
shall within fifteen days of receipt of such application, make an order
that he shall not function as an auditor and the Central Government
may appoint another auditor in his place:
Provided further that an auditor, whether individual or firm, against
whom final order has been passed by the Tribunal under this section
shall not be eligible to be appointed as an auditor of any company for a
period of five years from the date of passing of the order and the
auditor shall also be liable for action under Section 447.
Explanation I. - It is hereby clarified that the case of a firm, the liability
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shall be of the firm and that of every partner or partners who acted in a
fraudulent manner or abetted or colluded in any fraud by, or in relation
to, the company or its director or officers.
Explanation II. - For the purposes of this Chapter the word "auditor"
includes a firm of auditors."
43 Section 143 of the Companies Act, 2013
"... ...
(5) In the case of a Government company, the Comptroller and Auditor-
General of India shall appoint the auditor under sub-section (5) or sub-
section (7) of section 139 and direct such auditor the manner in which
the accounts of the Government company are required to be audited
and thereupon the auditor so appointed shall submit a copy of the audit
report to the Comptroller and Auditor-General of India which, among
other things, include the directions, if any, issued by the Comptroller
and Auditor-General of India, the action taken thereon and its impact
on the accounts and financial statement of the company.
(6) The Comptroller and Auditor-General of India shall within sixty
days from the date of receipt of the audit report under sub-section (5)
have a right to,-
(a) conduct a supplementary audit of the financial statement of the
company by such person or persons as he may authorise in this behalf;
and for the purposes of such audit, require information or additional
information to be furnished to any person or persons, so authorised, on
such matters, by such person or persons, and in such form, as the
Comptroller and Auditor-General of India may direct;
and
(b) comment upon or supplement such audit report:
Provided that any comments given by the Comptroller and Auditor-
General of India upon, or supplement to, the audit report shall be sent
by the company to every person entitled to copies of audited financial
statements under sub section (1) of section 136 and also be placed
before the annual general meeting of the company at the same time
and in the same manner as the audit report.
(7) Without prejudice to the provisions of this Chapter, the Comptroller
and Auditor-General of India may, in case of any company covered
under sub-section (5) or sub-section (7) of section 139, if he considers
necessary, by an order, cause test audit to be conducted of the accounts
of such company and the provisions of Section 19A of the Comptroller
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and Auditor-General's (Duties, Powers and Conditions of Service) Act,
1971 (56 of 1971), shall apply to the report of such test audit."
44 Interpretation of the provisions:
As the Companies Act, 2013 makes a departure from the erstwhile
Companies Act,1956, the Constitution Bench judgement in
Gurugobinda Basu (supra) would now not be applicable.
[A] Ramaiya's Guide to Company Act (18th Edition Volume 2) page
2764:
"Appointment of auditors [Proviso to Sub-section (2):
The appointment and removal of the auditor or auditors rested with the
Central Government and the Auditor-General of India exercised full
control over the auditor. Guru Gobinda Basu v. Sankari Prasad Ghosal,
(1963) 33 Com Cases 1132, 1136 (SC)
(This case law is not now relevant because under the 2013 Act, the
auditor's appointment and removal does not rest with the Central
Government.)"
[B] Under the Old Companies Act, 1956 the provision of the Section 619
was separate and was notwithstanding the general scheme of auditors
under Sections 224-233. In such circumstances, the Supreme Court held
that the CG and CAG retained the power to appoint and remove the
auditor for the Government Companies.
[C] It appears that under Section 140(5) of Companies Act, 2013, the
power is now with the NCLT.
45 The scope and ambit of Section 139 (5)- 139(7) under the
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Companies Act, 2013 is wider than the Companies Act, 1956.
[A] Earlier phrase under Section 619 was "Government Companies".
[B] While in the 2013 Act, Section 139(5)-(7) uses the phrase "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".
Section 140(1) is clear in it's language
46 Interpretation of "auditor appointed under Section 139":
[A] CAG appoints auditors under Section 139(5)
[B] Section 140(1) refers to the auditor appointed under the
Section 139.
[C] Section 139 includes Section 139(5)
47 Interpretation of "Government Company" and Authorised
established by law by the Supreme Court:
[A] "Government Company" would be subsumed by the "Company". The
Supreme Court in the Hindustan Construction Company Limited vs.
Union of India (2019 SCC OnLine SC 1520) held as under:
"....63. As correctly argued by the learned Solicitor General, Shri Tushar
Mehta, the first part of 'corporate person', as defined in Section 3(7) of
the Insolvency Code, means a company as defined in Clause 20 of
Section 2 of the Companies Act 2013. Sections 2(20) and 2(45) of the
Companies Act, 2013, which define 'company' and 'Government
company' respectively, are set out hereinbelow:
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"2(20). "company" means a company incorporated under this Act or
under any previous company law;"
"2(45). "Government company" means any company in which not less
than fifty-one per cent of the paid-up share capital is held 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, and includes a company which is a subsidiary company
of such a Government company."
64. From a reading of the aforesaid definition, Shri Tushar Mehta is
clearly right in stating that the three entities who owe monies under
arbitral awards to the Petitioner No. 1, being Government companies,
would be subsumed within the first part of the definition. However, so
far as NHAI is concerned, Dr. Singhvi's argument of either deleting
certain words in Section 3(7) of the Insolvency Code, or adding certain
words in Section 3(23)(g) of the Insolvency Code into Section 3(7)
cannot be accepted."
[B] The "PSU" established by any Act of Parliament or State Legislature
also would be "Government Company" if incorporated under the
Companies Act and if the CAG has appointed an auditor under Section
139.
48 Thus, it appears that from the scheme of the Act, 2013 that if a
company wants to remove the Auditor appointed under Section 139 of
the Act from its office before the expiry of his term, then the company is
empowered to do so only by way of passing a special resolution and that
too after obtaining the previous approval of the Central Government in
that behalf in the prescribed manner. At this stage, we may clarify that
the company may want to remove an Auditor for many reasons. To
illustrate take a case wherein the company is not satisfied with the
working of the Auditor or the Auditor is working in a negligent manner
or there is dereliction of duty on the part of the Auditor, then, in such
circumstances, the company can remove the Auditor appointed under
Section 139 after passing a special resolution in that regard with the
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prior approval of the State Government.
49 In the aforesaid context, we shall now look into sub-section (5) of
Section 140 referred to above. Sub-section (5) starts with a non obstante
clause "without prejudice to any action under the provisions of this Act
or any other law for the time being in force". Sub-section (5) of Section
140 would come into play if the Auditor appointed under Section 139 of
the Act is found to have directly or indirectly, acted in a fraudulent
manner or has abetted or colluded in any fraud by, or in relation to, the
company or its Directors or officers. In such circumstances, the Tribunal
either "suo motu" or on an application made to it by the "Central
Government" or by "any person" concerned can direct the company to
change its Auditor. Here, again, there is a grey area which needs to be
looked into. A close reading of Sub-section (5) would indicate that the
fraudulent act or any collusion of the Auditor concerned should be with
respect to the company whose audit work the Auditor has undertaken.
Therefore, Sub-section (5) takes care of altogether a different
contingency i.e. other than sub-section (1) of Section 140. For the
purpose of sub-section (1), the power of removal is with the company,
after following the procedure prescribed therein and for the purpose of
sub-section (5), the power is with the Tribunal.
50 Section 140(5) of Companies Act, 2013 was considered by the
Bombay High Court in N Sampath Ganesh vs Union of India (2020 SCC
OnLine Bom 782).
Key Findings of the Bombay High Court
Para 204. In the light of the above, we find it appropriate to mention the
relevant findings which crystalize out of our deliberations in the matter:
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.....
VII.S.140(5) is part of the provision (S.140) which deals with the
removal of CA or his resignation. Need of special resolution to remove
CA or grant of opportunity to him in that connection are part of this
scheme. The concerned CA though removed by special resolution or
due to his resignation, is not visited thereby with any action for
professional misconduct or prosecution for crime or any disability
because of that removal or resignation.
....
IX. When NCLT comes across cases in which the company does not
exercise its power under S. 140(1) or the CA does not resign and there
is unholy collusion between them, it can order the company to change
him.
....
XI. After NCLT issues the direction to company to change its CA,
procedure under S. 140(1) need not be followed. Exercise of passing of
special resolution which is contingent upon the desire of the majority is
ruled out. CA against whom the company proposes to pass a special
resolution is not prohibited from resigning after following the
prescribed procedure. That option is not denied to & also available to
CA when NCLT initiates the exercise towards directing the company to
change him.
....
XVII. Debarment or disqualification under 2nd proviso to S. 140(5)
follows automatically due to statutory mandate and NCLT has no
option or discretion in that respect.
....
XXII. If despite such CA ceasing to be the CA of concerned Company,
need for passing of a final order to change him is read into scheme of S.
140(5), it would overlook the absence of need to pass final order and
violate its language. NCLT has been given the discretion whether to
pass that final order or not, even after reaching the "satisfaction" and
legislative wisdom behind it will be lost. It will introduce a discordant
note in the scheme of S. 140 itself.
XXIII. Second proviso speaks of a "final order" and question is whether
it needs to be construed in contradistinction with first proviso which
contemplates passing of an urgent order within 15 days on application
of Central Government prohibiting the "suspect auditor" to continue
with audit work thereby enabling the Central Government to substitute
him. This order under first proviso, according to the respondent Union
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of India is an interim order. According to UOI, the words "final order"
in second proviso are to be understood with reference to this "interim"
order.
XXIV. We find that S.140(5) in its substantive part, does not envisage
any such interim order. It only speaks of an order and direction to
company to change its CA. Thus final order to be issued under
substantive part is to a Company only. The CA to be changed who
opposes that change, may also be required to be heard under this
substantive part as he may point out the want of material to sustain the
subjective satisfaction. reached by NCLT......
XXVII. But as object of S. 140(5) is to change the suspect auditor, the
final order will always displace an existing auditor. Therefore order
asking the Company to change the auditor, alone needs to be treated as
final order which will attract the above disqualification or debarment.
Element of subjective satisfaction rules out the need of a full fledged
inquiry or an exercise to prove it in each & every case.
......
XXXI. Threat of disqualification is only to expedite the change of CA as
the "satisfaction" which triggers said jurisdiction is of a superior
authority like NCLT. Intention is not to punish, but to prohibit a CA
with prima facie dubious record to continue and to see that concerned
Company appoints another CA of its choice as per law....
XXXV. Under first proviso to S. 140(5), in specified contingencies, due
to urgency, NCLT has to pass order to change a CA within 15 days.
There again the same procedure will be followed, but the Central
Government can change or substitute the CA itself. There is no
provision in 2013 Act & S. 139 also does not authorize the Central
Government to appoint the CA for any company. Therefore this power
given to Central Government does not take away the power of the
concerned Company to appoint CA of its choice. Hence, even after the
central government appoints the CA, said Company can exercise its
right, Not only this, but said Company or its CA can oppose the move,
thereby necessitating the passing of final order. Power given to the
Central Government is therefore by way of exception & hence, in
emergent situations to avoid further perpetration of apprehended fraud.
The NCLT after reaching the subjective satisfaction as warranted by
substantive part of S.140(5), may pass an order restraining the suspect
CA from further functioning in appropriate cases. Thereafter, the
Central Government can be clothed with & gets the power to appoint
CA in his place.......
XLIII.S.140(5) is enacted to infuse confidence in the public in corporate
sector & to prevent abuse of the position by company to the detriment
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of its share holders. Direction issued by NCLT thereunder does not
result in any injury to Company. Still, it gives opportunity to company
or CA to meet the subjective satisfaction but it comes at the risk of
disqualification for CA as stipulated in second proviso.
51 We are of the view that the phrase "any person concerned" for the
purpose of sub-section (5) of Section 140 would include the C&AG. We
are persuaded to take the view that the C&AG can approach the NCLT
for the removal of the Auditor if the C&AG is of the view that the
Auditor has acted fraudulently. However, as discussed above, the only
grey area is whether such fraudulent act should be with respect to that
particular company only or any other company whose audit work the
Auditor might have undertaken in the past.
52 The Supreme Court in the case of Bar Council of Maharashtra vs.
M. V. Dabholkar reported in 1975(2) SCC 702 had the occasion to
interpret the phrase "person aggrieved". We quote the relevant
observations:
"28. ...... The meaning of the words "a person aggrieved" may vary
according to the context of the statute. One of the meanings is that a
person will be held to be aggrieved by a decision if that decision is
materially adverse to him. Normally, one is required to establish that
one has been denied or deprived of something to which one is legally
entitled in order to make one "a person aggrieved". Again a person is
aggrieved if a legal burden is imposed on him. The meaning of the
words "a person aggrieved" is sometimes given a restricted meaning in
certain statutes which provide remedies for the protection of private
legal rights. The restricted meaning requires denial or deprivation of
legal rights. A more liberal approach is required in the background of
statutes which do not deal with property rights but deal with
professional conduct and morality. The role of the Bar Council under
the Advocates Act is comparable to the role of a guardian in
professional ethics. The words "persons aggrieved" in Sections 37 and
38 of the Act are of wide import and should not be subjected to a
restricted interpretation of possession or denial of legal rights or
burdens or financial interests. The test is whether the words "person
aggrieved" include "a person who has a genuine grievance because an
order has been made which prejudicially affects his interests". It has,
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therefore, to be found out whether the Bar Council has a grievance in
respect of an order or decision affecting the professional conduct and
etiquette."
53 The Supreme Court, while interpreting "any person aggrieved" in
relation to Section 17 of the NPA Act, 2002, has held in Jagdish Singh v.
Heeralal, (2014) 1 SCC 479 : (2014) 1 SCC (Civ) 444 : 2013 SCC
OnLine SC 978 at page 488:
"18. Any person aggrieved by any order made by the DRT under
Section 17 may also prefer an appeal to the Appellate Tribunal under
Section 18 of the Act.
19. The expression "any person" used in Section 17 is of wide import
and takes within its fold not only the borrower but also the guarantor
or any other person who may be affected by action taken under Section
13(4) of the Securitisation Act. Reference may be made to the judgment
of this Court in Satyawati Tondon case [United Bank of India v.
Satyawati Tondon, (2010) 8 SCC 110 : (2010) 3 SCC (Civ) 260] .
20. Therefore, the expression "any person" referred to in Section 17
would take in the plaintiffs in the suit as well. Therefore, irrespective of
the question whether the civil suit is maintainable or not, under the
Securitisation Act itself, a remedy is provided to such persons so that
they can invoke the provisions of Section 17 of the Securitisation Act, in
case the Bank (secured creditor) adopt any measure including the sale
of the secured assets, on which the plaintiffs claim interest.
54 The Supreme Court in AIR 1966 SC 955 (Sachidananda Banerjee,
Assistant Collector of Customs, Calcutta vs. Sitaram Agarwal) has held
the word "concerned" to be of wide import.
55 The NCLT is required to decide within 15 days. (See the 1 st
unnumbered proviso sub-section (5) of Section 140 of the Companies
Act, 2013)
56 If the Tribunal is approached either by the Central Government or
by any person concerned which includes the C&AG, then the NCLT has
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to decide such an application within 15 days as prescribed under the first
proviso to sub-section (5) of Section 140 of the Act, 2013.
57 The Supreme Court in the case of Leelabai Gajanan Pansare vs.
Oriental Insurance Co. Ltd (2008) 9 SCC 720, speaking through
Kapadia, J. (as His Lordship then was) held that the "Public Sector
Undertakings" are in the form of statutory corporations, public sector
companies, government companies and companies in which the public
are substantially interested. The litigation before the Supreme Court was
one in context of the Income Tax Act, 1961 vis-a-vis the provisions of the
Maharashtra Rent Control Act, 1999. We quote the relevant
observations:
"62. The word "PSU" is not a term of art. It is not defined in the said
Rent Act. It is not defined in the Companies Act. However, the said
term finds place in the Report of the Study Team on Public Sector
Undertakings. One such report of the Study Team is dated 10-6-1967.
The Study Team was appointed on 20-5-1966. It submitted its report to
the Chairman, Administrative Reforms Commission, Government of
India. Under Chapter XIV, the committee has discussed the forms of
organisation, namely, departmental undertaking, government company
and PSU. It observed that departmental undertakings are unsuitable for
industrial and commercial enterprises. It is further observed that, in
India, the Government has adopted the method of running companies
by directly holding shares in them. According to the committee, this is
the pattern of public sector in India. This, according to the committee,
is apart from statutory corporations which are set up or established
under Central/State Acts. According to the committee, a public
corporation as a form covers statutory corporation, government
company and public sector company. According to the Committee, PSU
and government company are to be equated in the sense that these two
entities are the same when it comes to autonomy and flexibility as
compared to departmental undertakings.
63. One point may be noted at this stage. The concept of PSU and the
concept of government company became relevant after introduction of
economic reforms in 1991. With the said reforms, market orientation
was given to our economy. It is around this time that the role of PSU
became important. Both, the PSU as well as the government company,
were given autonomy and flexibility in commercial sectors. Annexure I
to the Report of the Study Team on PSUs dated 10-6-1967 indicates
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clearly that government companies stood covered under the concept of
PSUs. In the present matter, the High Court has taken a view that
government companies stand excluded from PSUs under Section 3(1)
(b) as government companies are separate and distinct entities from
PSUs, and since government company is not in the enumerated items in
Section 3(1)(b) one cannot include the said entity within the meaning
of the word "PSU". This view of the High Court is erroneous for the
simple reason that the word "PSU" is not defined under any Act. The
word "PSU" is indicated in various Parliamentary Committees on
administrative reforms so that in financial, employment and in policy
matters, the Central/State Government could evolve norms/standards.
.....
73. Moreover, if we are to hold that PSUs do not include government
companies, as held by the High Court, we would be disturbing the
package offered by the legislature of allowing increase of rent annually
at 5%, allowing the landlords to accept premium and exclusion of
certain entities from the protection of the Rent Act under Section 3(1)
(b). On the other hand, acceptance of the arguments advanced on
behalf of the respondents on the interpretation of Section 3(1)(b)
would make the Act vulnerable to challenge as violative of Article 14 of
the Constitution. Therefore, we are of the view that on a plain meaning
of the word "PSUs" as understood by the legislature, it is clear that,
India's PSUs are in the form of statutory corporations, public sector
companies, government companies and companies in which the public
are substantially interested (see the Income Tax Act, 1961). When the
word PSU is mentioned in Section 3(1)(b), the State Legislature is
presumed to know the recommendations of the various Parliamentary
Committees on PSUs. These entities are basically cash-rich entities.
They have positive net asset value. They have positive net worths. They
can afford to pay rents at the market rate.
....
81. Before concluding, we may note that we have interpreted the word
"PSUs" in Section 3(1)(b) purely in the context of the provisions of the
Maharashtra Rent Control Act, 1999. Our judgment is, therefore,
confined strictly to the said provisions of the Rent Act.
82. For the aforestated reasons, we hold that OIC, UIC and BPCL and
such other government companies as defined under Section 617 of the
Companies Act are not entitled to protection of the Maharashtra Rent
Control Act, 1999 in view of the provisions of Section 3(1)(b)."
58 The CAG has a limited control over the auditor of the
Government Company appointed Section 139(5) of the Companies Act,
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2013.
[a] Section 143(5) - [A] direct such auditor the manner in which
the accounts of the Government company are required to be
audited and
[b] thereupon the auditor so appointed shall submit a copy of the
audit report to the Comptroller and Auditor-General of India.
[c] Section 143(6) - [A] CAG has within 60 days the right to
conduct supplementary audit.
[d] comment on the audit report
[e] Section 143(7) - [A] CAG can cause test audit under Section
19A of Comptroller and Auditor- General's (Duties, Powers and
Conditions of Service) Act, 1971.
59 It appears that when the CAG appoints a statutory auditor, it does
so in accordance with the policy/guideline/conditions of appointment
which is titled the "Appointment of auditors of Government
Company/Government controlled other company under Section 139 (5)
& (7) of the Companies Act, 2013".
II. CONDITIONS FOR THE AUDITOR:
1. The Firm/LLP may please intimate their acceptance as auditors
of the Company within 3 weeks of receipt of this appointment letter (i)
to the Company (ii) to this Office (iii) to the concerned
DG/PAG/AG/MAB entrusted with the Supplementary Audit of the
Company. If, for any reason the Auditors are not in a position to accept
the appointment, they may intimate all the above-mentioned offices
immediately along with the reasons for their decision.
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2. The appointment / re-appointment of Firm/LLP is subject to its
performance in the previous years' audit being adjudged as satisfactory
by the DG/PAG/AG /MAB concerned.
3. The appointment/re-appointment of the auditors is subject to the
Auditors making the following declarations/undertakings:
(i) That the firm/LLP is not disqualified under section 141 of the
Companies Act, 2013
(ii) That no unreasonable TA/DA, out of pocket expenses will be
claimed from the company. In case where audits are allotted to
the Branch office of the Firm no TA/DA should be claimed by the
firm from the company for the audit of the Company/Units
located at the same station of the branch.
(iii) That during the year of audit, and for one year (to be
counted from the date of conclusion of the relevant Annual
General Meeting of the Company) after the Firm/LLP ceases to
be Auditor, the Firm/LLP or its partner, cannot accept
Directorship or any assignment for consultancy or other services
including those specified in section 144 of the Companies Act,
2013 and non-audit assignments that involve performing
management functions or making management decisions,
directly or indirectly (as per explanation given under section 144
of the Companies Act, 2013), of the company or its holding
company / subsidiaries (irrespective of the shareholding) / joint
ventures of the Company whether under production sharing
contract or otherwise. The above restriction would also be
applicable to audit of annual accounts of subsidiary companies /
Joint Ventures/Associates except where auditors of such
subsidiary companies /Joint Ventures/Associates are appointed
by CAG. This condition would not apply to assignments for the
tax audit under Income Tax Act, VAT audit required under
various State Legislations, review of Quarterly/half yearly
accounts as per SEBI guidelines and other statutory certificates
related to the audit assignment
(iv) That no partner/chartered accountant employee of the
firm /LLPs has been held guilty of professional misconduct by
the Institute of Chartered Accountants of India during last year
(in case any partner of the firm/LLP has been held guilty of
professional misconduct by the Institute of Chartered Accountant
of India, please furnish details thereof).
(v) The audit should not be conducted by a person (i) who is not
a CA partner /CA employee/ CA article of the firm/LLP to which
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the audit has been allotted; (ii) who was earlier associated with
the audit of the said PSU as a partner/employee of the retiring
auditor. (vi) No partner of the firm/LLP would hold post of
Director (except in the case of financial companies) or undertake
audit or any other job/assignment of any Private organization/
Company which is in the same line of business or having any
business relation with that of the PSU.
4 The auditor may start the audit of the Company immediately on
receipt of the accounts of the Company. However, they should certify
the accounts for the year only after the audited accounts for the
previous year has been laid before the AGM for their consideration. In
case audited accounts of the previous years has been considered but
finally not adopted by the shareholders, the auditor can certify the
accounts of the succeeding year indicating the fact of the non-adoption
of the previous years accounts in their report.
5 The time schedule for conducting the audit may be drawn up
with scheduling of audit i.e indicating the period of audit of different
departments/ units of the PSU and also the name of personnel & their
qualification who will be deployed for audit of each unit. A copy of the
time schedule so fixed may be sent to the concerned DG/PAG/AG/MAB
so that they may also draw their time schedule for supplementary audit.
6 The Firm/LLP must complete the audit of the units/branches
allotted to them within the time schedule stipulated by the
management so that the statutory time schedule for placing the
accounts in the AGM could be adhered to.
7 Record of audit work done in the form of working papers should
be retained with sufficient information so as to support the auditors'
significant conclusions and judgments.
8 The Auditors shall have to comply with the directions issued by
this office under 143(5) of the Companies Act, 2013. The remuneration
is inclusive of the fee on account of the additional work involved in this
regard. Directions under section 143(5) is available at this office's
official website i.e. www. saiindia.gov.in (CA Empanelment)
9. Statutory auditors of the companies who have adopted SAP
should deploy at least one partner/employee having ISA/CISA
qualification to conduct the audit. Auditors appointed for Listed PSU
should have a valid peer review certificate issued by Peer Review Board
of ICAI.
10. The Company/Auditors will have to comply with all the
provisions of the Companies Act, 2013. as also all other applicable
statutes including directions/guidelines issued by various Regulatory
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
Bodies/ Authorities viz Securities & Exchange Board of India, Reserve
Bank of India, Insurance Regulatory Development Authority etc.
11. In case of violation of any of the above conditions by the
appointed auditor, this office reserves the right to withdraw the
audit(s) allotted to the auditor at any point of time after following the
due administrative process."
60 Thus, it is evident from the aforesaid that in case of violation of
any of the aforesaid conditions by the appointed Auditor, the C&AG has
the right to remove the Auditor at any point of time after following the
due administrative process. What is this administrative process is not
clear. Even while following the due administrative process, the
opportunity of hearing has to be given to the concerned Auditor before
his removal. The principles of natural justice are implicit in clause 11
referred to and highlighted. However, in the case on hand, it is not the
stance of the C&AG that action against the writ applicant has been taken
in terms of clause 11 referred to above.
61 Prima facie, we are of the opinion that the aforesaid is not in
conformity with the scheme of the 2013 Act. However, we do not
propose to delve much into this aspect.
62 We may now answer the third question posed by us. We propose
to answer the third question independent of all the aforesaid discussion.
In other words, even if we had not to take into consideration the
relevant provisions of the Companies Act and other relevant provisions,
as discussed above, we are of the view that the action on the part of the
C&AG is not sustainable in law.
63 We should first look into the letter dated 21 st August 2020 of the
General Administrative Department, State of Gujarat addressed to the
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Additional Chief Secretary, Department of Finance. The same reads thus:
"No.PRCH-1-2020-240-TA
General Administrative
Department, Sachivalaya
Gandhinagar
Date : 21/08/2020
To,
Additional Chief Secretary,
Department of Finance,
Sachivalaya, Gandhinagar.
Subject:To take up the proceedings as per the recommendations made
by the Anti Corruption Bureau of Ahmedabad.
Dear Mr.,
With reference to the subject noted above, I am to inform you
that a copy of the letter dated 7/2/2020 of the Director, Anti
Corruption Bureau, Ahmedabad is annexed herewith for your
information.
By his aforesaid letter, the Director, Anti Corruption Bureau,
ACB Police Station, Ahmedabad has recommended to take legal action
against the Auditor Pipara & Company in connection with the case
registered with Gandhinagar ACB Police Station vide its CR No.6/2018
for the offences punishable u/s.8, 10 and 13(2) of the Prohibition of
Corruption Act came to be lodged against the accused persons, (1)
K.C.Parmar, Joint Director and (2) K.S. Detroja, Managing Director,
Gujarat State Land Development Corporation Limited, Gandhinagar as
the cash of Rs.56,50,500/was seized during the course of search
operation against them.
Looking to the details of the letter of ACB, some
recommendations have been made by the ACB for prevention of
misappropriation of government money. Moreover, ACB has also
requested to launch Ideal guidelines for all Audit Agencies to bring
purity and transparency in the financial administration in the
Corporations and Public Sector offices of the Government.
That, Bureau of Public Enterprises working under your. control,
issues directions to all the Boards' and Corporations for smooth'
running of administration. After taking into consideration the
recommendations of ACB, I am forwarding a copy of the letter of ACB
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
with a request to take necessary action in the matter.
Yours faithfully,
sd/- A.H. Mansuri
Deputy Secretary
General Administrative
Department, Govt. of Gujarat"
64 The aforesaid led to the letter dated 5 th December 2020 of the
Finance Department to the Managing Director of all the Corporations
(PSUs) and it is this letter which created the controversy. The letter
reads thus:
"No.JNV-102020-361769-A
Finance Department,
Block No.4/9, Sachivalaya,
Gandhinagar.
date : 05/12/2020
To,
1. Managing Director, Gandinagar Urban Development Authority, Nr.
Swagat Rain Forest, 'Kh' Road, Sargasan, Gandhinagar, Gujarat -
382423.
2. Managing Director, Gujarat State Police Housing Corporation
Limited, B/h. Gujarat Lokayukt Office, 'Chh' Road, Sector-10B,
Gandhinagar.
3. Managing Director, Tourism Corporation of Gujarat Limited, Block
No.16/4, Udyog Bhavan, Sector -11, Gandhinagar - 382011.
4. State Project Director, Gujarat Council of Alimentary Education,
Gandhinagar Office of the State Project Director, Sector - 17,
Gandhinagar - 3820007.
5. Managing Director, National Highway Authority of India, 235-239,
2nd floor, super Mall 01, Above HDFC Finance, Info-city, Gandhinagar
382007.
6. Managing Director, Gujarat Council of Primary Education,
Gandhinagar, Office of State Project Director, Sector - 17, Gandhinagar
382016.
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7. Managing Director, Gujarat State Financial Investment Corporation
Limited, 6th floor, HK House, Ashram Road, Navrangpura, Ahmedabad
380009.
8. Managing Director, Sardar Sarovar Narmada Nigam Limited, Block
NO.12, 1st Floor, Sachivalaya, Gandhinagar.
Subject : To take up necessary procedure for the Audit Inspection and
other concerning matters in respect of your public Sector Offices /
Corporations carrying out by Pipara & Company LLP.
Reference : GAD Letter No.PRCH-102020-240-TA dated 21/08/2020.
Sir,
With reference to the subject noted above, I am to state that vide
letter dated 21/8/2020 of the General Administrative Department and
as mentioned in the letter dated 7/2/2020 of the office of ACB which is
enclosed in the above letter, it is recommended to take up necessary
procedure for the Audit Inspection and other concerning matters in
respect of various Public Sector Offices and Corporations.
As mentioned at the Point No.12 of the letter dated 7/2/2020 of
the ACB (Copy of the letter is enclosed herewith), Pipara & Company,
LLP is carrying out Audit work of more than 10 Public Sector Offices/
Corporations of the State Government. If the Pipara & Company would
have performed their Audit Work according to the terms and conditions
of the work-order and with total devotion, commitment and loyalty,
then they would have been able to bring such huge irregularities and
misappropriation to the notice of Government and the Government
could prevent misappropriation of government money but Pipara &
Company has shown quite negligence and carelessness in its audit
work. It clearly appears that there is breach of Chartered Accounts
Ethics.
You are further informed that the audit work of your office has
been carrying out or was carried out by Pipara & Company since last
some years.
In view of the above facts, the ACB Office has made following
recommendations as mentioned at the Point No.14 of their letter (Copy
is enclosed herewith).
(1) It is recommended to hold detailed inspection of the audit work of
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
the Corporations and other offices which earlier have been performed
by Pipara & Company so that irregularities and misappropriations of
government money can be prevented.
(2) It is also recommended to hold thorough verification of the terms
and conditions of the appointment of Pipara & Company including
detailed verification of bills etc. in respect of the Corporations and other
offices and if found necessary, it is recommended to put the company in
black-list as per the rules and regulations.
(3) It is suggested to hold inquiry against Pipara & Company through
Vigilance Commission.
(4) It is desirable in the public interest that audit work of any Govt.
public sector office and corporation should not be given to Pipara &
Company in future."
You are therefore, requested to consider the aforesaid facts and
to take necessary steps at the earliest.
Yours faithfully,
sd/- illegible
(Sapna V. Rana)
Deputy Secretary
(Public Sectors)
Finance Department"
65 Although the contents of the letter dated 5 th December 2020,
prima facie, appear to be far fetched, yet we do not intend to get into
any debate as regards the complaint of the State Government against the
writ applicant for not bringing to its notice the alleged irregularities and
misappropriation at the end of certain officials. We are only concerned
with the manner in which the writ applicant has been dealt with. We are
of the view that the respondent No.3 - C&AG ought not to have
blindfoldedly accepted the say of the State Government. It should have
first put the writ applicant to notice and should have given an
opportunity of hearing. It is the principle of law or rather one of the
C/SCA/7342/2021 JUDGMENT DATED: 17/06/2021
principles of natural justice that no person should be condemned
unheard.
66 In the case on hand, we are at one with Mr. Bhatt, the learned
counsel appearing for the writ applicant that the sudden removal has
caused a lot of blemish to his client. We appreciate the bold and fair
stance of Mr. Virk, the learned counsel appearing for the respondent
No.3 - C&AG.
67 Let us assume for the moment that Section 140 of the Act, 2013
has no application as Section 140 does not talk about removal of the
Auditor by the C&AG and talks about removal of the Auditor by the
company with the prior approval of the Central Government, even in
such circumstances, the natural justice principle is implicit. It need not
be expressly provided for in the statute. Where there is nothing in the
statute to actually prohibit the giving of an opportunity of being heard,
then having regard to the nature of the statutory duty imposed the
decision maker itself implies an obligation to hear before deciding.
Whenever an action of a public body results in civil consequences for the
person against whom the action is directed, the duty to act fairly can be
presumed and in such a case, the administrative authority must give an
appropriate opportunity of hearing to the affected person. [See Prakash
vs. State of Bihar, (2009) 4 SCC 690 paras 13 and 14].
68 If there is a power to decide and decide detrimentally to the
prejudice of a person, the duty to act judicially is implicit in exercise of
such a power and the rule of natural justice operates in areas not
covered by any law validly made. The criteria for an adequate notice is
that the Court's conscience must be satisfied that the concerned person
had a fair chance to know the details of the case against him and of the
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action proposed to be taken against him. [See CCE vs. Brindavan
Beverages (P) Ltd, (2007) 5 SCC 388].
69 It goes without saying that any order or any decision which has
civil consequences must be passed after giving an opportunity of
hearing. There could be just one overriding reason to exclude the
application of the principles of natural justice and that is in the case of
national security. Such is not the stance of any of the respondents in the
present case.
70 For all the foregoing reasons, we are of the view that the writ
applicants are entitled to get themselves once again uploaded on the
portal. The removal of the writ applicant No.1, as the statutory
authority, is hereby quashed and set aside. We also quash and set aside
the letter dated 5th December 2020 issued by the respondent No.2 to the
various PSUs including the respondents herein.
71 The aforesaid relief granted by us is definitely going to cause some
difficulties, not only for the respective companies, but also for the newly
appointed Auditors. However, it is the paramount duty of this Court to
set right the illegality and this is the fit case in which we should set the
clock back. However, we grant four weeks time to the C&AG to do the
needful in accordance with law, if at all it intends to do so. Till any fresh
orders are not passed in accordance with law, the newly appointed
Auditors shall not proceed with the work of audit and at the same time,
the writ applicant No.1 shall also not proceed with the work of the audit.
However, as stated above, the removal of the writ applicant No.1 is
quashed and set aside and his name shall once again be reflected on the
portal as the statutory Auditor for the respective companies.
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72 We are conscious of the fact that in view of some provisions of law
under the Companies Act, the Company has to complete the work of
audit by 31st August 2021 and submit the audit report before the
competent authority. However, none of the respondent - companies
shall be held responsible in any manner if they are not in a position to
submit the audit reports within the prescribed time period having regard
to the pendency of the present litigation.
73. All the writ applications stand disposed off accordingly.
(J. B. PARDIWALA, J)
(VAIBHAVI D. NANAVATI,J)
CHANDRESH
