Disciplinary proceedings initiated against CA on basis of newspaper report: HC in matter of Joint Statutory Auditors of PNB vs ICAI

These writ petitions raise the important question of whether the Institute of Chartered Accountants of India1 could be recognised to have a suo moto power to initiate disciplinary proceedings against its members. The question revolves around the meaning to be ascribed to the word “information” as occurring in Section 21 of the Chartered Accountants Act, 1949.

The writ petitions themselves emanate from disciplinary proceedings initiated by the Institute against the petitioners who are its members and were employed with firms which were appointed as Joint Statutory Auditors of the Punjab National Bank3. The writ petitioners assail the validity of the show cause notices which were issued as well as the Prima Facie Opinion which has been drawn by the Disciplinary Directorate and forwarded for the consideration of the Disciplinary Committee. The writ petitions also seek quashing of the disciplinary proceedings itself as initiated against the individual petitioners.

Relevant Extract:

121. In view of the aforesaid discussion, the Court proceeds to record the following conclusions: –

A. The Court finds that a ―complaint as well as ―information is treated distinctively under the rules. A complaint in terms of Rule 3 must necessarily comply with Form-I. The Rules further prescribed the complaint to be submitted along with the fee fixed by the Institute under its regulations. The Rules further and more particularly in Rule 5(5) stipulate that a complainant may be placed on notice to remove defects which are noticed on scrutiny. In terms thereof, the Directorate is empowered to return the complaint for rectification and resubmission. Rule 5(6) then prescribes that if a complainant fails to rectify all defects within the time allowed under sub-rule 5, the Director shall form the opinion that there is no prima facie case and present the complaint before the Board for its closure.

B. ―Information, as per Rule 7, on the other hand, is any material that may be received by the Institute against a member or a firm in a written form. Rule 7, in fact, proceeds on the premise that the information which has been received in the shape of written content is not in Form-I. Rule 7(2) further obliges the Directorate to apprise the sender whether it would like to file a complaint in Form-I.

C. As would be evident from the above, the expression information has been defined and understood to mean any instruction or knowledge derived from an external source concerning facts or particulars. It has been further explained to include knowledge acquired from investigation, study or instruction. The word ―inform has been understood to mean to impart knowledge, knowledge concerning a matter and the power of an authority to act on any information that may be received. The word ―information as used in Section 17(1)(d) of the Wealth Tax Act, 1957 was interpreted to be of the widest amplitude and to include knowledge of any fact that may be derived from either an external source or from material already on record.

D. A complaint, on the other hand, would mean and include the providing of information with respect to a grievance of injustice suffered or injury borne by an individual. It is essentially understood to mean an accusation made in respect of the conduct of a particular person and relates to matters that personally affect the complainant. ―Information is commonly understood and defined to mean the deriving of knowledge of a particular fact or event. It includes any knowledge or information that may be derived in respect of a fact or occurrence from an external source.

E. Even under the scheme of the Act and the Rules with which we are concerned, the word complaint clearly appears to have been used in the sense of a written request for redressal of grievances which is submitted by a person specific and seeks the redressal of grievances that may have been personally suffered. This would also be evident from a perusal of the nature of disclosures which are to be made in terms of Form-I.

F. Distinguished from the above, information, is in terms of the Rules presumed to be material that may be received by the Institute in writing although not in accordance with the format prescribed in terms of Rule 3. The aforesaid is confined to what is prescribed by Rule 7 and which salvages written complaints which may not conform to the norms of Rule 3.

G. However, if the word ―information be correctly understood, and appreciated [and as the dictionaries have defined it to be], as the mere communication of knowledge or news of some factual occurrence, it would clearly stand on a pedestal distinct and different from a complaint. Information need not necessarily be or relate to the grievance or injury suffered by a particular individual. It could in that sense include the communication of any particular fact, subject or event to the Institute. It could also and consequently include any information or intelligence which the Institute may itself derive from an external source.

H. The Court further takes into consideration the significance of the prefix ―any to the word information as occurring in Section 21 of the 1949 Act. The use of the word ―any before information in Section 21 clearly appears to be a conscious attempt by the authors of the statute to confer an expansive meaning upon the word and not confine or whittle it down to the rigours and formality that may be attached to a written complaint that may be received by the Institute.

I. The expression “any information” as used in Section 21 thus appears to have been consciously employed so as to enable the Institute to make an investigation with respect to professional conduct of its members untrammelled by rigours of form.

J. On an overall consideration of the aforesaid, this Court is of the considered view that the word ―information as appearing in Section 21 cannot be narrowly construed to mean only those facts which may be specifically provided to the Institute. The Act and the Rules have consciously attempted to treat the two separately and distinctively. The phrase ―any information would thus cover within its ambit not only written complaints that may be received, albeit not compliant with Form-I, but also any material or fact that may come to the notice of the Institute pertaining to the professional conduct of a member and which on due examination and evaluation may merit an enquiry being initiated.

K. The Court thus comes to the firm conclusion that the words―information and ―complaint appear to have been consciously used and placed in Section 21 in order to enable the Institute to proceed against a particular member unfettered by the absence a written complaint being provided to the Institute.

L. If Section 21 were to be interpreted as conferring jurisdiction on the Institute to proceed against a member only upon receipt of a written complaint, it would clearly fetter and impede the larger public function that it is obliged to perform and the statutory duties that stand placed upon it.

M. The Court further takes into consideration the significance of the prefix ―any to the word information as occurring in Section 21 of the 1949 Act. The use of the word ―any before information in Section 21 clearly appears to be a conscious attempt by the authors of the statute to confer an expansive meaning upon the word and not confine or whittle it down to the rigours and formality that may be attached to a written complaint that may be received by the Institute.

N. The expression “any information” as used in Section 21 thus appears to have been consciously employed so as to enable the Institute to make an investigation with respect to professional conduct of its members untrammelled by rigours of form.

O. On an overall consideration of the aforesaid, this Court is of the considered view that the word ―information as appearing in Section 21 cannot be narrowly construed to mean only those facts which may be specifically provided to the Institute. The Act and the Rules have consciously attempted to treat the two separately and distinctively. The phrase ―any information would thus cover within its ambit not only written complaints that may be received, albeit not compliant with Form-I, but also any material or fact that may come to the notice of the Institute pertaining to the professional conduct of a member and which on due examination and evaluation may merit an enquiry being initiated.

P. A written complaint or allegation in writing cannot, in any manner, be understood to be a pre-requisite or a sine qua non for the initiation of action under Section 21. This since the authority conferred on the Institute relates to both a complaint as well as information. Information, as has been found by this Court, would extend to any material or fact that may come to the notice of the Institute and from which it may derive knowledge. That material need not necessarily be in the written form or be interpreted as being confined to something which an individual may choose to bring to the notice of the Institute.

Q. The Court while arriving at the aforesaid conclusion also bears in mind the significant and pivotal role which the Institute is obliged to discharge while acting as the self- regulating body with respect to the conduct of members and firms. Bearing in mind its primordial obligation to ensure that its members adhere to the strict code of discipline and the high standards of professional conduct which they are liable to maintain, the Court would be doing grave injustice to the plain language of the statute and the evident intent underlying the use of the phrase ―any information in Section 21.

R. In fact, if Section 21 were narrowly construed as suggested by the petitioners, it would clearly undermine the duty and obligation of the Institute to examine cases of professional misconduct and restrict it to being able to initiate action against a member dependent upon whether it had received written information or complaints. It would clearly result in seriously handicapping the Institute in the discharge of its disciplinary functions.

S. The power of an authority to proceed of its own motion or initiative would principally have to be evaluated bearing in mind the language of the statute and the nature of the power that may stand conferred upon such a body. From the decisions which have been noticed hereinabove on this question, it is evident that the ultimate conclusion of the respective entities not being empowered to exercise powers suo moto ultimately rested on the language of the statutory provisions which governed the exercise of jurisdiction and the fact that those bodies could have initiated proceedings only upon the filing of an application or complaint relating to grievances and allegations.

T. Viewed in the aforesaid backdrop, this Court is of the considered opinion that Section 21 does empower the Institute to proceed suo moto and unhindered by the absence of a written complaint or allegation that may be submitted. A written complaint or allegation in writing cannot, in any manner, be understood to be a pre-requisite or a sine qua non for the initiation of action under Section 21. This since the authority conferred on the Institute relates to both a complaint as well as information. Information, as has been found by this Court, would extend to any material or fact that may come to the notice of the Institute and from which it may derive knowledge. That material need not necessarily be in the written form or be interpreted as being confined to something which an individual may choose to bring to the notice of the Institute. Acceptance of a submission to the contrary would amount to restricting the width and amplitude of the power conferred by Section 21 which enables the Institute to proceed on the basis of ―any information.

U. The Court also bears in mind the significant observations which were made by the Division Bench of this Court in P. Ramakrishna where while recognizing the intrinsic distinction between a complaint and information, the Court had aptly observed that information would include material that may be made available by a third person or even that which may come to the knowledge of the Institute. The Division Bench clearly held that in case of information, action may be initiated either suo moto or even on the basis of material that may be provided by a third party who may for a variety of reasons be not desirous of filing a formal complaint.

V. Rule 7 cannot control or constrict the ambit of Section 21 of the Act. Firstly, and on a fundamental plane, it will be wholly incorrect to either interpret or construe a provision placed in the principal enactment on the basis of what may be contained in a subordinate piece of legislation, as in this case the Rules. A rule cannot possibly be understood or held to be determinative of the scope or content of a provision placed in the parent enactment. Rules, as is well settled, cannot be interpreted in a manner which may curtail the powers that may be vested or be available to be exercised by virtue of the parent enactment. They essentially supplement and are ancillary to the principal provisions contained in the Act.

W. Rules cannot possibly be interpreted in a manner which would either scuttle the parent provision or extract or delete something therefrom. If the Court were to accord a judicial imprimatur to such a submission, it would amount to virtually recognizing a right existing in the delegatee to control or even amend the parent provision. The acceptance of such a submission would lead to preposterous results and virtually permit the delegatee to rewrite or even override the legislative wisdom.

X. More fundamentally, this Court is of the considered opinion that Rule 7 merely engrafts a statutory or a legal fiction in respect of written allegations that may be received by the Institute against a member or a firm. It becomes pertinent to note that ordinarily the Institute may receive information in the shape of a written complaint against a member or a firm. That written complaint would have to necessarily be compliant with the requirements of Rule 3 and thus the in the format prescribed by Form-I. However, Rule 7 takes care of contingencies where even though information may be received by the Institute in writing, it may not be in accord with Form-I as prescribed. It is only to take care of such an eventuality that Rule 7 prescribes that even such written information shall be treated as such and fall within the ambit of Section 21.

Y. The usage of the phrase “shall be treated” is clear evidence of the introduction of a statutory fiction. However, that cannot possibly be understood as denuding the Institute of the authority to commence an investigation on the basis of information that may be derived from an external source or be restricted only to information that may be submitted before it in writing.

Z. In the facts of the present case, the Court comes to conclude that the impugned action was not based on mere newspaper reports. In fact, those reports could not have possibly and on their own constituted material at all since they did not carry any allegation against the petitioners here. What appears to have transpired is of the news reports merely acting as a catalyst for the Institute to delve deeper into the massive fraud which had occurred and to examine whether any member had failed to abide by the SAs‘ which applied. It was the material recorded and encompassed in the letter of 13 March 2018 which would constitute the foundation for testing the argument of the petitioner whether there was ―information which merited further enquiry.

AA. Viewed in that light the Court is of the firm opinion that the Institute did have the requisite information as contemplated by Section 21 and which justified the initiation of the enquiry against the petitioners in the facts of the present case.

BB. While the Court is not called upon at this stage to return any definitive or final conclusions with respect to the alleged violation of the various SAs‘ as well as SRE 2410, the material placed on the record would clearly belie the contention of the petitioners that the entire initiation of proceedings was based merely on news reports.

CC. The record in fact and to the contrary would appear to indicate that the news reports only triggered a deeper examination by the Institute with respect to the role that had been discharged by the Joint Statutory Auditors and evaluating whether the standards of performance and enquiry as embodied in the various SAs‘ had been complied with.

DD. A mere news report cannot constitute material which may justify the initiation of an enquiry. A newspaper report, as is well settled, cannot and does not constitute evidence per se. A report that may appear in the print media or on a visual news platform, can at best be understood as being an external source from which the Institute may gather or derive knowledge of a particular fact or incident. However, since the initiation of disciplinary action clearly has serious repercussions, the decision to initiate disciplinary action would necessarily have to rest on more cogent and dependable material, data and facts.

EE. The initiation of an enquiry would necessarily have to be preceded by due application of mind, evaluation of the veracity of the reports and consideration of whether circumstances warrant the initiation of an enquiry. In the facts of the present case, the Court has come to conclude, for reasons aforenoted, that the said tests stood satisfied.

122. Accordingly, and for all the aforesaid reasons, the challenge to the proceedings initiated by the Institute fails. The writ petitions shall stand dismissed. The Institute shall consequently be entitled to proceed further in accordance with law. It shall therefore be open to the Institute to give effect to the final orders which have been kept in a sealed cover. The rights of the petitioners to question any final decision that may have been taken is kept open.

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