NFRA Prima Facie Has No Jurisdiction To Initiate Proceedings For Audits Conducted Prior To Its Constitution In 2018: Telangana High Court

The Telangana High Court has directed the National Financial Reporting Authority (NFRA) not to proceed in furtherance of a letter issued by it seeking audit files of a firm with regard to financial years predating its constitution and prior to enforcement of Statues and Rules giving it authority.

"...respondent was constituted by the Central Government on 01-10-2018 under Section 132(1) of the Companies Act, 2013 and Section 132 (4) was enforced with effect from 24.10.2018 and the NFRA Rules, 2018 were brought into force on 14.11.2018, this Court prima facie is of the opinion that the respondent does not have any jurisdiction or statutory authority to issue any directions or commence any proceedings against the petitioner pertaining to audits conducted prior to its constitution," Justice Surepalli Nanda said.

The stay was granted in a writ filed by M/s P. Murali & Co. challenging the letters issued by NEFRA in seeking audit reports conducted for Brightcom Group Limited from the financial year 2014- 2015 to 2016-2017 as without jurisdiction and arbitrary.

The NFRA is a body formulated in October 2018, by the Central Government to recommend, formulate, monitor and enforce auditing standards. Simultaneously, section 132(4) was added to the Companies Act, 2013 and the National Financial Reporting Authority Rules, 2018 were codified to give power to NFRA.

Senior Counsel Vikram Pooserla appearing on behalf of the petitioner stated that a plain reading of section 132 along with the NFRA rules would make it evident that the intent of the legislature was prospective in nature. He further stated that unless specifically provided for, no statues shall be assumed to have a retrospective effect.

The Senior Counsel also brought to the notice of the Court that audits completed prior to the formation of NFRA can only be reviewed under the Chartered Accountants Act, 1949 by the ICAI.

The Bench referred to the general principles concerning "retrospectively" laid down by the Apex Court in CIT vs. Vishala Township (p) Ltd.

"Taking into consideration the above referred facts and circumstances of the case and the law laid down by the Apex Court in the judgment reported in 2015(1) SCC 1 dated 15-09-2014 in Civil Appeals No. 8750 of 2014 and batch (referred to and extracted above), there shall be stay of all further proceedings with regard to letter dated 15-06-2023 and letter bearing Ref. No. NCAS/COM00048V3/1, dated 20-07-2023 issued by the respondent to the petitioner to the extent concerning Financial years 2014- 15 and 2016-17," it ordered.

Case Title: M/s P. Murali & Co. Chartered Accountants Vs. NFRA

Date: 18.08.23

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