CA's Misconduct : Supreme Court Upholds Chartered Accountants' Rule That Allows Board To Refer Matter To Disciplinary Committee

In a significant development, the Supreme Court on Thursday (February 8) dispelled a challenge to a rule under Chartered Accountants' (Procedure of Investigation of Professional and Other Misconduct and Conduct of Cases) Rules, 2007, which allows the Board of Discipline to refer a complaint for misconduct to the Disciplinary Committee despite opinion of the Director (Discipline) that the person/firm accused of misconduct is not guilty, as well as to advise the Director to investigate further.

"...we have not the slightest hesitation to conclude that the impugned rule is completely in sync with the object and purpose of framing the Chapter on 'Misconduct' under the Act", said the Bench of Justices PS Narasimha and Aravind Kumar.

The Court was hearing an appeal against a Delhi High Court order that dismissed the appellant's challenge to Rule 9(3)(b) of the 2007 Rules as ultra vires of Section 21A (4) of the Chartered Accountants' (Amendment) Act, 2006 ["Act"].

The facts of the case can be summarized thus: the appellant was member of a firm which was given audit work wrt the complainant-Bank. Some suspicious transactions involving large sums of money took place in the Bank's branch, but they were not flagged by the audit firm.

As such, the complainant registered a complaint with Director (Discipline), who called for the audit firm to disclose the name of the person charged with auditing and preparing report wrt the subject transaction. Eventually, the Director came to a prima facie conclusion that the appellant was not guilty of any professional or other misconduct within the meaning of clause (7), (8) and (9) of Part 1 of the Second Schedule to the Act.

On the Director's opinion being placed before it, the Board of Discipline disagreed and decided to refer the matter to the Disciplinary Committee for further action. Aggrieved by the action of the Board, the appellant approached the High Court. When the High Court dismissed his petition, he moved the top Court.

The appellant's case was that the Board ought not to have assumed the role of the Director and referred the matter to the Disciplinary Committee. It was contended that there was no substantive basis in the Act for the Board's action and the impugned Rule [ie Rule 9(3)(b) of 2007 Rules], being a delegated legislation, could not provide for an action not contemplated under the Act.

After perusing the material on record, the court agreed with the contention of the respondents that accepting the appellant's argument would result in Director having greater powers than the Board (even though it acts as the Board's Secretary), as the Board would not be able to override the prima facie opinion of the Director.

"The 'prima facie' opinion of the Director will become nothing but a final opinion if the Board will have no option except to direct the Director (Discipline) to further investigate the matter. The Section is silent as to what would happen in a situation where the Director (Discipline) on further investigation concludes in accordance with his preliminary assessment".

It further opined that the Act prohibits professional misconduct, with an aim to uphold honesty, integrity, and professionalism in the practice of chartered accountancy. As such, the impugned Rule fell within the scope of Section 29A(1) of the Act, under which the Central government is empowered to make Rules for carrying out purposes of the Act.

"...even if we accept, for the sake of argument, that Rule 9(3) cannot be saved under Section 29A(2)(c), as it directly relates to furthering the purposes of the Act in ensuring that a genuine complaint of professional misconduct against the member is not wrongly thrown out at the very threshold, it can be easily concluded that the impugned Rule falls within the scope of the general delegation of power under Section 29A(1)."

Case Title: NARESH CHANDRA AGRAWAL v. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA AND OTHERS, CIVIL APPEAL No.4672 OF 2012

Citation : 2024 LiveLaw (SC) 101

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