Sanjay Sreesha vs Serious Fraud Investigation ...
2022 Latest Caselaw 7278 Kant

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      IN THE HIGH COURT OF KARNATAKA AT BENGALURU      R
          DATED THIS THE 19TH DAY OF MAY, 2022

                         BEFORE

          THE HON'BLE MR. JUSTICE K.NATARAJAN

           CRIMINAL PETITION NO.2136 OF 2016

BETWEEN

SANJAY SREESHA
S/O.K.S.ACHARYA,
AGED 43 YEARS,
N.D.S. & COMPANY,
CHARTERED ACCOUNTANTS,
1/4, 3RD FLOOR, SUJATHA COMPLEX,
1ST MAIN, GANDHI NAGAR,
BENGALURU - 560 009.                        ... PETITIONER

(BY SRI KIRAN S. JAVALI, SENIOR ADVOCATE
 FOR SRI CHANDRASHEKARA K., ADVOCATE)

AND

SERIOUS FRAUD INVESTIGATION OFFICE
MINISTRY OF CORPORATE AFFAIRS,
GOVERNMENT OF INDIA,
II FLOOR, PARYAVARAN BHAVAN,
CGO COMPLEX, LODHI ROAD,
NEW DELHI - 110 003.
REPRESENTED BY ASSISTANT DIRECTOR.         ... RESPONDENT

(BY SRI. B. SATISH ALONG WITH
 SRI. MADHUKAR DESHPANDE, SPECIAL COUNSELS)

     THIS CRIMINAL PETITION IS FILED UNDER 482 OF THE
CODE OF CRIMINAL PROCEDURE, PRAYING TO SET ASIDE THE
ORDER DATED 23.02.2012 IN C.C.NO.34/2012 ON THE FILE OF
THE SPECIAL COURT (ECONOMIC OFFENCES), BENGALURU AND
QUASH THE COMPLAINT AS NOT MAINTAINABLE VIDE
ANNEXURE-A.
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     THIS CRIMINAL PETITION HAVING BEEN HEARD AND
RESERVED FOR ORDERS ON 22.04.2022 THIS DAY, THROUGH
VIDEO CONFERENCING THE COURT PRONOUNCED THE
FOLLOWING:

                       ORDER

This petition is filed by the petitioner/accused

accused under Section 482 of Cr.P.C for quashing

criminal proceedings in CC No.34/2012 pending on

the file of Special Court for economic offences

Bangalore to set aside the order of the trial court

dated 23.02.2012 for the offence punishable under

section 209A and 240(3) of the Companies Act,

1956.

2. The case of the petitioner is that the

respondent is Serious Fraud Investigation (officer

herein referred as SFIO) filed complaint under

section 200 of Cr.P.C against the petitioner for

violation of Section 240 (3) of Companies Act,

alleging that they issued summons to the petitioner

on 16.06.2011 and he has not replied to the notice.

Again one more summons issued on 20.06.2011 to

be appeared on 28.06.2011 and it is also alleged the

final summons was issued on 01.07.2011 to appear

before them on 07.07.2011 and he has not appeared

and he has sent a reply that he was not employed

as Auditor of the Company. Therefore private

complaint came to be filed and the trial court took

the cognizance of the offence against the petitioner,

which is under challenge.

3. Learned senior counsel appearing for the

petitioner has mainly argued on the ground, the

petitioner was not employed by the Company as per

Section 240 of Companies Act. The petitioner was the

partner in the firm in which the petition was appointed

as Auditor. Such being the case, without making the

firm as an accused the petitioner cannot be

prosecuted and he cannot be vicariously be held liable

for the penal provisions. Therefore, prayed for

quashing the proceedings.

4. Per Contra learned counsel for the

respondent has objected the petition and contended

that the petitioner is the Auditor. The eligibility

criteria for appointing the Auditor is that he must be a

Chartered Accountant as per Section 226 of the

Companies Act and the partner who is practicing in

India and if the firm is appointed as Auditor then he

has to sign as an Auditor of the Company. Therefore,

the petitioner being a Accountant was appointed as an

Auditor and he is running the firm, therefore even

without making firm as party he is liable for the

responsibility of answering the questions, as he was

appointed by the resolution of the Company. Further

contended that the petitioner himself signed the Audit

Report as per Section 229 of Companies Act and as

per 240 of Companies Act, it is the duty of all the

Officers, employees and Agents of the Company and

where the affairs of any other body corporate are

investigated by the virtue of Section 239 of

Companies Act, they have to furnish the details

requested by the investigating agency, in view of the

powers of this Section 239 of Companies Act.

Therefore, the petitioner has been appointed as

Auditor with eligibility criteria of Chartered

Accountant, he is responsible person to submit the

information to the investigating agency, failure to

furnish the information, he has to be prosecuted.

Therefore, the petitioner is liable to be prosecuted for

the offence punishable under Section 240 (3) of

Companies Act, 1956. Therefore the special counsel

prayed for dismissal.

5. The learned counsel for the petitioner, in

support of his arguments relied upon the following

judgments:

1. Central Bureau of Investigation, Hyderabad Vs K. Narayana Rao reported in (2012) 9 SCC 512.

2. Sunil Bharti Mittal Vs. Central Bureau of Investigation reported in (2015) 4 SCC

609.

3. Rafel Del Riyo Vs The State of Karnatak through Agricultural Officer and Seeds Inspector, Haveri reported in 2022(2) KCCR 1071.

4. Aneeta Hada Vs Godfather Travels and Tours Pvt. Ltd. reported in (2012) 3 SCC (Cri) 241.

6. Learned counsel for the respondent also

relied upon the judgment of the co-ordinate bench in

the case of K.Janardhan Reddy Vs State by

CBI/ACB in Crl.P.No.7847/2018 dated

03.06.2019.

7. Having heard the arguments and perused the

records. On perusal of the same, it reveals that the

respondent SFIO filed private complaint against the

petitioner for the offence punishable under section

240 (3) of Companies Act alleging that the petitioner

was appointed as an Auditor of the company and

notice was issued by the respondent for furnishing

some details of the Company and he has filed to

furnish. Therefore the offence was committed by the

petitioner, hence liable for punishment and penal

action.

8. Per contra learned senior counsel has

contended that without making the firm as an accused

this petitioner cannot be vicariously made liable to

face the penal provisions under Section 240 (3) of

Companies Act. Based upon the reliable contention

and on perusal of record, which reveals admittedly for

the purpose of appointing an Auditor as per Section

226 of Companies Act, where the Companies Act

regarding qualification and disqualification of auditors

which is read as under:

"226. Qualifications and disqualifications of auditors.

A person shall not be qualified for appointment as Auditor of the Company unless he is Chartered Accountant within the meaning of Chartered Accountant Act 1949 (38 of 1949)

provided that a firm, all of their partners practicing in India are qualified for appointment as aforesaid may be appointed by its firm name, to be auditor of the company in which case any partner so practicing may act in the name of the firm. "

9. Admittedly the petitioner is a Chartered

Accountant and he is running firm in the name of

N.D.S & Co., as Chartered Accountant. The resolution

of the Company where the petitioner was appointed as

an auditor in respect of Mega City (Bangalore),

Developers and Builders Ltd., and there is no dispute

that the petitioner firm was appointed as an auditor as

per Section 226 of Companies Act. The petitioner is

Chartered Accountant which is the required eligibility

qualification to be appointed as an Auditor. The

appointment of Auditor is statutory appointment under

the Companies Act, some rights and duties also

prescribed under the Companies Act and as per

section 239 of Companies Act, the investigating

authority requires some information and the auditor is

bound to submit the information as per Section 240 of

Companies Act. Admittedly the respondent issued

notice to the petitioner three times and he has not

answered and submitted any information sought by

the respondent and petitioner also failed to appear in

respect of the notice issued by the respondent. On the

other hand the petitioner has given reply on

06.07.2011 stating that since he is not employed in

Mega City (Bangalore), Developers and Builders Ltd.,

as auditor therefore the reply to the notice as per

Section 242 of Companies Act will not be attracted.

10. The learned senior counsel relied upon

judgment of Hon'ble Supreme Court Aneeta Hada's

case stated supra where the Hon'ble Supreme Court

while considering Section 141 of the Negotiable

Instruments Act, where he has held that without

making Company as accused the Director or the

Managing Directors or authorized signatories, the

penal provisions will not attract. The judgment of the

Hon'ble Supreme Court has been followed by the

various High Courts and Supreme Court in many cases

and it is well settled that without making Company as

accused the Directors or the Managing Directors are

not vicariously held liable for the offence committed

by the company.

11. In CBI Vs K.Narayana Rao case, the

Hon'ble Supreme Court has held, the advocate who

gave an advice as legal advice or opinion he cannot be

prosecuted. In this regard the respondent counsel

has contended the advocate who has given opinion

based upon the document cannot be considered as

employee of the Company as per Section 240 of

Companies Act. Therefore on that context Supreme

Court quashed the criminal proceedings. But here in

this case the petitioner was statutorily appointed

under the Companies Act, therefore it is contended

the said judgment is not applicable to the case on

hand.

12. In my considerate opinion there is

substance in the argument addressed by the

respondent counsel, that auditor appointed under the

Companies Act as per section 226 of Companies Act

and there are some duties cast upon the Auditor of

the company and they are responsible to be answered

or liable to give information to the authority under

section 239. As per Section 240 of Companies Act,

the employees and other persons also are required to

give the information. Therefore, the said judgment

relied upon by the petitioner counsel is not acceptable

to the case on hand. The judgment of the co-ordinate

bench Panduranga's case stated supra in respect of

the Company and by relying upon the judgment of the

Supreme Court in Sunil Bharti Mittal's case

quashed the criminal proceedings. The Hon'ble

Supreme Court already covered the said decision in

Aneeta Hada's case.

13. In Sunil Bharti Mittal's case stated supra

the Hon'ble Supreme Court has taken the similar view

that without making Company as accused the Court

cannot proceed to issue summons against the

Directors of the company. The judgment relied by the

counsel for the petitioner are all related to Companies

and it's Directors where no criminal prosecution can

be lodged against the Directors or Managing Directors

without making company as accused as the company

has vicarious liability. But here in this case, petitioner

who is Chartered Accountant is running a firm in the

name of N.D.S. & Co., but in literal meaning N.D.S. &

Co., is not a company registered under the

company's act, where the company is a legal entity

having its Managing Director, Director and others

shareholders but the petitioner- N.D.S. & Co., is a

firm. Admittedly the Mega City (Bangalore),

Developers by their resolution have appointed the firm

of the petitioner as it's Auditor and admittedly for

appointing an Auditor the eligibility criteria is

Chartered Accountant. The firm though appointed as

a Chartered Accountant the proviso of Section 226

reveals "the person who is in charge in India as a

partners have signed the audit reports".

Therefore, for all practical purpose, the petitioner is

the partner of the firm and admittedly he has signed

the audit reports as partner of the firm. It is well

settled that the literal meaning of the firm and the

partner is that, collectively it is a 'firm' and

individually called as a partner. Therefore a partner

and a firm cannot be bifurcated separately. It is not

like a legal entity under the Companies Act. It is like

a proprietorship business where the proprietor and

proprietorship are one and the same. Likewise the

petitioner is a Chartered Accountant who is eligible for

the appointment of Auditor and because of the fact

that he is running a firm, his firm was appointed as

Auditor and for all practical purposes, a partner of the

firm individually called the partner and collectively

called as 'firm'. Therefore, the firm and the partner

cannot be divided into two separate entities or the

partner cannot be considered as employee of the

company but he is appointed as Auditor under the

Company's Act and it is a statutory appointment under

the Companies Act. Therefore he is required to answer

the queries or information sought by the respondent.

Therefore he cannot state that he is appointed as

employees and he is not a firm. A firm and partners

are one and the same person and as per proviso to

the Section 226 of Companies Act.

13. In my considered opinion a partnership firm

is not a corporate entity, it does not have a separate

legal persona and this has several important legal

consequences in the relationship between the parties

all rights and duties only exist between the parties,

inter se the right and duties of the partnership are the

rights and duties of the partners for as per the

partnership deed. Therefore, a partner cannot be

bifurcated from a firm, for example for a firm

minimum two partners are required, if one partner is

retired either by resignation or by death, the firm

becomes a proprietorship. Therefore, merely the

petitioner running a firm in the name of N.D.S & CO.,

but it is not a legal entity and it cannot be placed on

par with the companies which is registered under the

Companies Act. A partnership firm is not a separate

legal entity distinct from its partner it is merely a

collective name given to the individuals composing it

and even as per the definition of the Indian

Partnership Act, as person who have entered into

partnership with one another called individually

"partners" and collectively "a firm" and the name

under which their business is. The definition of

Section 2 (a) of the Indian Partnership Act provides as

below,

"an "act of a firm" means any act or omission by all the partners, or by any partner or agent of the firm which gives rise to a right enforceable by or against the firm"

Sections 5, 18, 25 and 26 of The Indian Partnership

Act provides as below:

Section 5 - the "Partnership not created by status." The relationship of the partnership arises from the contract and not from the status.

Section 18 - the "partner is an agent of the firm for the purpose of business of the firm."

Section 25 - "Liability of a partner for acts of the firm.--Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner".

Section 26 - "Liability of the firm for wrongful acts of a partner.--Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm, or with the authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable therefore to the same extent as the partner."

Therefore if an offence committed by the firm, is

also an offence committed by the partners, it cannot

be bifurcated as partners and the firm.

Therefore, in my considered opinion, the

judgment relied by the counsel for the petitioner is not

applicable to the case on hand and therefore the

criminal proceeding cannot be quashed against him.

Therefore, the Trial Court, rightly took the

cognizance against the petitioner for the offence

punishable under section 240(3) of Companies Act.

Accordingly, the criminal petition filed by the

petitioner is hereby dismissed.

Sd/-

JUDGE

AKV