1962 Supreme(Cal) 241

HIGH COURT OF CALCUTTA
P. B. MUKHARJI, C. N. LAIK
KISHORILAL DUTTA - Appellant
Versus
P. K. MUKHERJEE - Respondent
Matter 78  Of  1959
Decided On : DECEMBER 5, 1962

Failure to disclose material facts known to him which were not disclosed in the financial statement but disclosure of which was necessary to make the financial statement not misleading.

Headnote:

CHARTERED ACCOUNTANTS ACT - Section 21 - Reference under - Complaint against Chartered Accountant - Failure to disclose material facts known to him which were not disclosed in the financial statement but disclosure of which was necessary to make the financial statement not misleading - Failure particularised - Held, that the auditor was not guilty of any non-disclosure to the company which appointed him; he was not guilty of non-disclosure to the Trustees of the Provident Fund who signed and who knew of these irregularities; he was not guilty of any non-disclosure to the individual subscribers of the Provident Fund because he owed no duty to disclose to them and the accountant was well within his rights to have disclosed the irregularities to the Trustees themselves and to the company.

Fact of the Case:

The complaint was that the auditor failed to disclose material facts known to him which were not disclosed in the financial statement but disclosure of which was necessary to make the financial statement not misleading. The failure particularised by the complaint was (1) that the fund was vested in a Board of Trustees and was irrevocable save with the consent of all the beneficiaries under Rule 7 of the Provident Fund Rules, but was in fact revoked without such consent of all the beneficiaries. It is alleged that the auditor did not bring to the notice of the beneficiaries, nor was there any mention of it in the financial statement. This is the first non-disclosure which the auditor is alleged in the complaint to be guilty of; (2) that the Government securities to the extent of Rs. 2,06,937-8-0 were encashed without any resolution of the Board of Trustees and in contravention of Rule 11 of the Fund. It is also alleged that this fact was also not disclosed in the financial statement of the year which the auditor signed; (3) that the Joan granted to Ananda Bazar Patrika Private Ltd. was in contravention of Rule 12 of the Provident Fund Rules and that the auditor failed to disclose that fact in that financial statement; and (4) that the auditor had failed to invite attention to the material fact that huge amount was shown as cash in hand in the financial statement for the years 1953 and 1954 in contravention of Rule 11 of the Fund. This in short is the complaint made about two years after the auditor had signed the statement.

Finding of the Court:

The Disciplinary Committee found -- (1) that it was admitted that the loans were granted by the Provident Fund to the Company in contravention of the Provident Fund Rules and the auditor should have brought out this fact in his report and (2) that the auditor was guilty of not disclosing the fact that a large amount of loan was given out of the fund of the Provident Fund to the company and that the cheques received in payment of these loans and shown as cash in hand "cheques and Cash" in the statement of accounts as at the 31st December 1954 were not encashed at least upto the day on which he wrote the letter to the Directors i. e. 25th May 1955 and the nondisclosure of this material information was an act of misconduct on the auditor's part. The Disciplinary Committee also held that the loans were given in contravention of the Rules of the Fund and failure to report on the default in clearing the cheques received in repayment of the loans amounted to a failure to report on a material miss atement known to the Chartered Accountant. On these findings the Disciplinary Committee held that the auditor was guilty of misconduct under he provision, of the Chartered Accountants Act.

Issues: Whether the auditor was guilty of misconduct under items (o), (p) and (q) of the schedule to the Chartered Accountants Act.

Ratio Decidendi: The auditor was not guilty of any non-disclosure to the company which appointed him; he was not guilty of non-disclosure to the Trustees of the Provident Fund who signed and who knew of these irregularities; he was not guilty of any non-disclosure to the individual subscribers of the Provident Fund because he owed no duty to disclose to them and the accountant was well within his rights to have disclosed the irregularities to the Trustees themselves and to the company.

Final Decision: The findings of the Council and the Disciplinary Committee are set aside and it is held that the Accountant has not been guilty of misconduct under items (o), (p) and (q) of the schedule to the Chartered Accountants Act on the facts of the present complaint and the present reference.