2021 Supreme(Online)(Guj) 4054

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 7342 of 2021 With R/SPECIAL CIVIL APPLICATION NO. 7340 of 2021 With R/SPECIAL CIVIL APPLICATION NO. 7270 of 2021 FOR APPROVAL AND SIGNATURE:

HONOURABLE MR. JUSTICE J.B.PARDIWALA and HONOURABLE MS. JUSTICE VAIBHAVI D. NANAVATI ==========================================================

1 Whether Reporters of Local Papers may be allowed to YES

1	Whether Reporters of Local Papers may be allowed to see the judgment ?	YES
2	To be referred to the Reporter or not ?	YES
3	Whether their Lordships wish to see the fair copy of the judgment ?	NO
4	Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ?	NO

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PIPARA AND CO LLP Versus GUJARAT STATE POLICE HOUSING CORPORATION LIMITED ==========================================================

Appearance:

IN SPECIAL CIVIL APPLICATION NO.7342 OF 2021:

MR MANISH BHATT, SENIOR ADVOCATE FOR M R BHATT & CO.(5953) for the Petitioner(s) No. 1,2 MR MUNJAAL M BHATT(8283) for the Petitioner(s) No. 1,2 MR CHINTAN DAVE AGP for the Respondent(s) No. 2 MR G H VIRK(7392) for the Respondent(s) No. 3 MR VARUN K.PATEL(3802) for the Respondent(s) No. 1 MR VISHAL DAVE ADVOCATE for the Respondent No.4 NOTICE SERVED BY DS(5) for the Respondent(s) No. 4 IN SPECIAL CIVIL APPLICATION NO.7340 OF 2021:

MR MANISH BHATT, SENIOR ADVOCATE FOR M R BHATT & CO.(5953) for the Petitioner(s) No. 1,2 MUNJAAL M BHATT(8283) for the Petitioner(s) No. 1,2 MR CHINTAN DAVE AGP for the Respondent(s) No. 2 MR G H VIRK(7392) for the Respondent(s) No. 3 for the Respondent(s) No. 1 IN SPECIAL CIVIL APPLICATION NO.7270 OF 2021:

MR MANISH BHATT, SENIOR ADVOCATE FOR M R BHATT & CO.(5953) for the Petitioner(s) No. 1,2 MR MUNJAAL M BHATT(8283) for the Petitioner(s) No. 1,2 MR CHINTAN DAVE AGP for the Respondent(s) No. 2 MR G H VIRK(7392) for the Respondent(s) No. 3 MR KEYUR GANDHI ADVOCATE FOR NANAVATI ASSOCIATES (1375) for the Respondent(s) No. 1 ==========================================================

CORAM: HONOURABLE MR. JUSTICE J.B.PARDIWALA and HONOURABLE MS. JUSTICE VAIBHAVI D. NANAVATI Date : 17/06/2021 COMMON ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE J.B.PARDIWALA)

1 As the issues raised in all the captioned writ applications are the same, those were taken up for hearing analogously and are being disposed of by this common judgement and order.

2 In administrative law rule of natural justice are foundational and fundamental concepts. Law is now well settled that the principles of natural justice are part of legal and judicial proceedings.

[Rattan Lal Sharma vs. Managing Committee, Dr. Hari Ram Higher Secondary School AIR [1993] SC 2155 para 9]

3 We are tempted to preface our judgement with the aforenoted observations of the Supreme Court as in the case on hand the writ applicant has been very badly condemned and that too unheard.

4 The Special Civil Application No.7342 of 2021 is treated as the lead matter.

5 By this writ application under Article 226 of the Constitution of India, the writ applicants have prayed for the following reliefs:

“(a) This Hon’ble Court may be pleased to issue a writ of mandamus or any other writ, order or direction of petitioner No.1 as statutory Auditor effected for F.Y. 2020-21 and be pleased to grant consequential relief of reinstatement.

(b) This Hon’ble Court may be pleased to issue a writ of mandamus or any other writ, order or direction directing respondents to produce on record the letter dated 05.12.2020, in the event respondent No.1 or respondent No.3 has relied on the said letter before taking the illegal action of terminating the assignment given to petitioner No.1 and subsequently provide an opportunity to the petitioners to respond to the same.

(bb) This Hon’ble Court may be pleased to issue a writ of mandamus or any other writ, order or direction quashing and setting aside the letter dated 05.12.2020 issued by respondent No.2 to various PSUs including the present respondents;

(bbb) Pending admission, final hearing and disposal of the petitioner, this Hon’ble Court may be pleased to stay the effect, implementation and execution of the letter dated 05.12.2020 issued by respondent No.2 to various PSUs including the present respondents.

(c) Pending admission, final hearing and disposal of the petition, this Hon’ble Court may be pleased to stay the effect, implementation and execution of the termination of petitioner No.1 as statutory Auditors for F.Y. 2020-21 and permit the petitioners to complete the work as agreed for F.Y. 2020-21.

(d) In any view of the matter, this Hon’ble Court may be pleased to pass any such order(s) directing respondent No.1 or respondent No.3 not to consider the letter dated 05.12.2020 (if placed reliance upon) as a ground for blacklisting the petitioners for future agreements;

(e) This Hon’ble Court may be pleased to grant ad-interim ex-parte relief in terms of paragraph 22(c) and (d) hereinabove.

(f) Pass any such order(s) that this Hon’ble Court deems fit in the facts and circumstances of the case.”

6 The facts giving rise to this writ application may be summarized as under:

7 The writ applicant No.1 is a Chartered Accountant LLP claiming to be working across the verticals of Assurance, Taxation, Accounting, ERP Implementations, Management Consultancy, Cross Boarder Advisory, Investigations, Forensic Audits, Corporate Litigation, Compliance, GRC, M&A’s and allied activities.

8 The writ applicant No.2 is a partner of the Pipara and Company, LLP.

9 The respondent No.1 is an undertaking of the Gujarat Government and is established to undertake construction of residential, non- residential and all other types of building required for the Gujarat Police, Jails, Home Guards amongst other activities.

10 The respondent No.3 herein is the Comptroller and Auditor General of India (hereinafter referred to as “C&AG”) who performs such duties and exercises such powers in relation to the accounts of the Union and the State.

11 The appointments to carry out either the statutory audit or internal audit of a Public Sector Undertaking (PSUs), such as the respondent No.1 is done through the respondent No.3 – C&AG. In accordance with the procedure prescribed, a Chartered Accountant firm like the writ applicant No.1 herein would apply to the C&AG for empanelment. After due verification and checks and balances, the said firm would get empanelled with the C&AG, who, thereafter, would recommend appointment of the said firm to the various PSUs, depending on the scale of work vis-a-vis the size of the firm.

12 In the case on hand, the writ applicant got empanelled with the C&AG for the financial year 2020-21. The writ applicant firm was also empanelled with the C&AG for the previous years and was already appointed as the statutory authority for the respondent NO.1 for the F.Y.

2019-20.

13 Post empanelment, under the email dated 24th August 2020, the C&AG informed the respondent No.1 that the writ applicant No.1 has been appointed as the statutory auditor for the respondent No.1 for the F.Y. 2020-21. The same email was forwarded by the respondent No.1 to the writ applicant No.1, who confirmed the appointment on 24th August

2020 itself.

14 Immediately thereafter on the very next day i.e. on 25th August 2020, the C&AG portal reflected the name of the writ applicant No.1 as the statutory Auditor for the respondent No.1 for the F.Y. 2020-21. Between September 2020 and December 2020, the respondent no.1 had contacted the writ applicant No.1 for various works pertaining to the statutory audit for the F.Y. 2020-21 as well as queries regarding F.Y.

2919-20, which were duly attended to by the writ applicant No.1.

15 From January 2021 onwards, the respondent No.1 suddenly stopped responding to the calls of the writ applicant No.1 in respect of the queries raised. At first the writ applicant No.1 suspected that with the on-set of Covid-19 pandemic and surge of cases in India, the response was not forthcoming. Sometime thereafter, the officials of the respondent No.1 interacted with the officials of the writ applicant No.1 over phone, but the former consciously refrained from sending any email or answering any query raised on record.

16 On 22nd December 2021, the writ applicant No.1 checked the C&AG portal to ascertain the status of its appointment. The writ applicant was shocked to see the portal display “nil” appointment in the name of the writ applicant. The same conveyed that the respondent No.1 had technically terminated the appointment of the writ applicant without prior notice.

17 Upon inquiry, the writ applicant learnt that some time in January 2021, the respondent no.1 had already appointed one another Chartered Accountant firm to undertake the work of the statutory audit for the F.Y. 2020-21 and had uploaded the relevant ADT – 1 Form on 4th February

2021.

18 In such circumstances referred to above, the writ applicants came before this Court with the present writ application.

19 This writ application was take up for hearing by one of us (Vaibhavi D. Nanavati, J) sitting as a Single Judge during the summer vacation on 12th May 2021. The following order came to be passed:

“Draft amendment supplied by the learned advocate for the petitioner is ordered to be taken on record. The same shall be carried out within a period of one week.

Heard learned Senior Counsel Mr.Manish Bhatt for the petitioners and learned AGP Mr.Dhawan Jayswal for the respondent no.2-State.

It is stated by the learned Senior Counsel Mr.Manish Bhatt for the petitioners that petitioner no.1 is a Chartered Accountant LLP empaneled with Indian Banking Association for forensic audit of Major Frauds and is also one of the 10 firms empaneled with SEBI as Forensic Auditors. It is stated that the petitioner no.2 is a partner of Pipara & Co., LLP and operates out of New Delhi. It is stated that the petitioner no.1 got empaneled with C&AG for the Financial Year 2020-21. It is stated that post empanelment, by email dated 24.08.2020, C&AG informed respondent no.1 that the petitioner no.1 is being appointed as Statutory Auditor for respondent no.1 for Financial Year 2020-21. It is stated that the respondent no.1 suddenly stopped imparting work to the petitioner from January-2021. It is stated that the petitioner no.1 checked the C&AG portal on 22.04.2021 to check the status of their appointments and it came to notice that the portal displayed 'Nil' appointments in the name of petitioner, which meant that respondent no.1 had technically terminated petitioner no.1's appointment without informing them. The screen shot is annexed at Annexure-C to this petition. It is stated that newly appointed appointee will be joined as party respondent.

Let Notice be issued making it returnable on 17.05.2021.

Learned AGP Mr.Dhawan Jayswal waives service of notice for the respondent no.2-State.

Direct service permitted through Fax message, email and/or any other suitable electronic mode.”

20 The aforesaid facts may be summarized in the form of dates and events as under:

Date	Particulars
07.02.2020	Letter addressed by Anti-Corruption Bureau to State of Gujarat
21.08.2020	Letter addressed by the General Administration Department to the Finance Department relying on letter dated 07.02.2020
24.08.2020	C&AG informed the respondent No.1 that the writ applicant No.1 has been appointed as the statutory Auditor of the company for F.Y. 2020-21.
25.08.2020	C&AG portal reflected the name of the writ applicant No.1 as the statutory Auditor of the company for F.Y. 2020-21.
September to December 2020	Work carried out by the writ applicant No.1 in terms of its appointment.
05.12.2020	Letter addressed by the Finance Department to 8 PSUs i ncluding the respondent No.1 relying on letters dated 07.02.2020 and 21.08.2020 making certain “suggestions”.

18.12.2020	Letter addressed by the respondent No.1 to the C&AG i nforming them about letter dated 05.12.2020 and r e questing for appointment of another suitable CA firm, t hereby misconstruing letter dated 05.12.2020.
05.01.2021	Letter addressed by the C&AG to the respondent No.1 appointing the respondent No.4 as the new Auditor.
16.01.2021	Letter addressed by the respondent No.4 to the C&AG accepting their appointment.
04.02.2021	Form ADT-1 required to be uploaded by the respondent No.1 certifying appointment of a new Auditor uploaded online.
22.04.2021	C&AG portal showed ‘NIL’ appointments qua the writ applicant No.1 meaning thereby the work allotted by the C&AG terminated.
27.04.2021	Petition filed.

 SUBMISSIONS ON BEHALF OF THE WRIT APPLICANTS:

21 Mr. Manish Bhatt, the learned Senior Counsel assisted by Mr. Munjal M. Bhatt, the learned advocate appearing for the writ applicants vehemently submitted that the action on the part of the respondents would be termed as absolutely arbitrary and in gross violation of the principles of natural justice. Mr. Bhatt would submit that it was not expected by an authority like the Comptroller and Auditor General of India to act in such a highhanded manner.

22 Mr. Bhatt would submit that in response to the notice issued by this Court, the respondent No.1 has filed an affidavit in which there is a reference of a letter dated 5th December 2020 addressed by the respondent No.2 (State of Gujarat, Finance Department) to few PSUs including the respondent No.1 herein informing that the writ applicants – firm shall not be engaged to act as the Auditor in public. Mr. Bhatt would submit that the respondent No.1 blindfoldedly followed the letter addressed by the respondent No.2 and proceeded to appoint a new statutory Auditor i.e. the newly impleaded respondent No.4 – B. P. Bang and Company.

23 Mr. Bhatt, thereafter, invited the attention of this Court to the letter dated 5th January 2021 addressed by the office of the C&AG to the respondent No.1 herein informing that a new Chartered Accountant firm has been appointed as the new Auditor in the wake of the appointment of the writ applicant being terminated. This, according to Mr. Bhatt, was in gross violation of the principles of natural justice, as, at no point of time, the respondent No.3 – C&AG gave any opportunity of hearing to the writ applicant.

24 Mr. Bhatt, thereafter, invited the attention of this Court to a letter dated 21st August 2020 addressed by the General Administrative Department, State of Gujarat to the Additional Chief Secretary, Department of Finance to take up the proceedings in accordance with the observations made by the Anti-Corruption Bureau of Ahmedabad. In this regard also, according to Mr. Bhatt, the writ applicant was not put to any notice.

25 Mr. Bhatt invited the attention of this Court to Section 139 of the Companies Act, 2013. Section 139 falls in Chapter X titled as the “Audit and Auditors”. Section 139 talks about the appointment of Auditors. Thereafter, Mr. Bhatt invited the attention of this Court to Section 140 of the Act, 2013. This is with respect to the removal, resignation of auditor and giving of special notice. It is argued by Mr. Bhatt that any Auditor appointed under Section 139 can be removed from his office before the expiry of its term only by a special resolution of the company after obtaining the prior approval of the Central Government in that behalf in the prescribed manner. However, the emphasis is laid by Mr. Bhatt on the proviso to sub-section (1) to Section 140 which provides that before taking any action under sub-section (1), the Auditor concerned shall be given a reasonable opportunity of being heard. It is submitted that the removal of the writ applicant as the Auditor could be said to be in gross violation of the provisions of Section 140 of the Act. Mr. Bhatt also invited the attention of this Court to the rules called as “the Companies (Audit and Auditors) Rules, 2014”, more particularly, Rule 7 which prescribes the procedure for removal of the Auditor before expiry of his term.

26 In such circumstances referred to above, Mr. Bhatt would submit that the removal of his client as an Auditor could be termed as a very highhanded and arbitrary action and in gross violation of the principles of natural justice. He would submit that the reliefs prayed for in the writ application be granted in the interest of justice keeping in mind the concept of the “Rule of Law”.

 SUBMISSIONS ON BEHALF OF THE RESPONDENT NO.1:

27 Mr. Varun Patel, the learned counsel appearing for the respondent No.1 would submit that his client was left with no other option, but to comply with the directions issued by the respondent No.2 – State of Gujarat (Finance Department). Mr. Patel would submit that his client is in no way concerned with the cause or reason for the termination of the writ applicants as the statutory Auditor. The respondent No.1 is only concerned with the work of audit. He would submit that the C&AG, by letter dated 5th January 2021, has appointed the respondent No.4 as the statutory Auditor of the respondent No.1 – Corporation for F.Y. 2020-21.

Mr. Patel would submit that although the writ applicant was appointed as the Auditor to undertake the audit work of the respondent No.1 – Corporation, yet nothing substantial was done by the writ applicant or in other words, the writ applicant had yet to commence with the work of statutory audit and by that time, the respondent No.4 came to be appointed as the Auditor. Mr. Patel would submit that the respondent No.4 has commenced the work of audit.

28 Mr. Patel would submit that Section 140 of the companies Act, which is sought to be relied upon, has no application in the present case as Section 140 talks about removal of Auditor from his office by the company and that too, after obtaining the prior approval of the Central Government. Section 140 does not talk about removal of an Auditor appointed under Section 139 by the C&AG. According to Mr. Patel, if sub-section (1) of Section 140 is not applicable, then the proviso to the same, which provides for a reasonable opportunity of being heard, would also not apply.

29 In such circumstances referred to above, Mr. Patel prays that the present writ application may not be entertained the same be rejected.  SUBMISSIONS ON BEHALF OF THE RESPONDENT NO.3 – C&AG:

30 Mr. Gursharan Virk, the learned counsel appearing for the respondent No.3 – C&AG, with his usual fairness, submitted that an opportunity of hearing ought to have been definitely granted to the writ applicant and before removing the writ applicant as the statutory Auditor. Mr. Virk would submit that although it is the stance of all other learned counsel appearing for the respondents that Section 140 of the Act, 2013 would not apply, yet, according to him, Section 140 would apply and before taking any decision to remove the writ applicant as the Auditor, an opportunity of hearing should have been granted. Mr. Virk submitted that the entire confusion came to be created by the State Government. The State Government smacked of some foul play at the end of few employees of one of the statutory Corporations (other than the respondent No.1) in which the writ applicant was appointed as the Auditor of the said Corporation. According to Mr. Virk, some of the office bearers of the said Corporation were found to be in possession of the assets disproportionate to the known sources of their income and in this regard, the Anti-Corruption Bureau, State of Gujarat took up this issue. According to Mr. Virk, it is the case of the State Government that as the writ applicant was appointed as the statutory Auditor of the said Corporation, during the work of audit, it would have definitely come to its notice of the disproportionate assets of the office bearers, and in such circumstances, the writ applicant owed a duty to inform about the same to the State Government. It is the failure on the part of the writ applicant to inform the State Government as regards the disproportionate assets, that annoyed the authorities concerned, which led to the letters, which have been referred to above. However, Mr. Virk submits that the writ applicant ought not to have been condemned so badly without giving any opportunity of hearing. He would submit that his client i.e. the respondent No.3 would abide by whatever order this Court may deem fit to pass in the larger interest of justice.

 SUBMISSIONS ON BEHALF OF THE RESPONDENT NO.2 – STATE OF GUJARAT:

31 Mr. Chintan Dave, the learned A.G.P. appearing for the State would submit that this Court may not entertain this writ application and reject the same. He would submit that the decision to remove the writ applicant as the Auditor has been taken in the larger public interest.

 SUBMISSIONS ON BEHALF OF THE RESPONDENT NO.4:

32 Mr. Vishal Dave, the learned counsel appearing for the respondent No.4 – newly appointed Auditor submitted that his client has already undertaken the work of statutory audit and would be filing his report in the near future. Even otherwise, the last date is 31st August 2021 and therefore, before 31st August 2021, the respondent No.4 will have to file the audit report. The learned counsel would submit that having undertaken the substantial work, the respondent No.4 may be permitted to complete the audit and file its report.

33 In such circumstances referred to above, Mr. Dave submitted that there being no merit in this writ application, the same be rejected.

34 We also heard Mr. Keyur Gandhi, the learned counsel appearing for the respondent No.1 in the Special Civil Application No.7270 of

2021.

 ANALYSIS:

35 Having heard the learned counsel appearing for the parties and having gone through the materials on record, the following three questions fall for our consideration:

[1] Whether Section 140(1) of the Companies Act, 2013 applies to the C&AG?

[2] If the C&AG has appointed a Chartered Accountant firm as the statutory Auditor of a Public Sector Undertaking owned by the State Government and if the C&AG wants to remove such Auditor midway on the ground of fraud, etc., then what is the procedure as prescribed in law?

[3] Whether the writ applicant could have been removed as a statutory Auditor appointed under Section 139 of the Act, 2013 without giving any opportunity of hearing or without any show cause notice?

36 Procedure under the old Act – Companies Act, 1956.

 Sections 224-233 of the Companies Act, 1956.

(a) Deals with the Auditor’s appointment, removal and remuneration generally.

(b) Heading of the Sections:

 [224. Appointment and remuneration of auditors]

 224-A. Auditor not to be appointed except with the approval of the company by special resolution in certain cases]

 [225. Provisions as to resolutions for appointing or removing Auditors]

 [226. Qualifications and disqualifications of auditors]

 [227. Powers and duties of auditors]

 [228. Audit of accounts of branch office of company]

 [229. Signature of audit report, etc]

 [230. Reading and inspection of auditor’s report]

 [232. Penalty for non-compliance with Sections 225 to 231]

 [233. Penalty for non- compliance by auditor with Sections 227 and 229]

 [233-A. Power of Central Government to direct special audit in certain cases]

 [233-B. Audit of cost accounts in certain cases]

 Section 619. Application of Sections 224 to 233 to Government companies .-

(1) In the case of a Government company, the following provisions shall apply, notwithstanding anything contained in Sections 224 to 233. (2) The auditor of a Government company shall be appointed or re-

appointed by the Comptroller and Auditor-General of India:

Provided that the limits specified in sub-sections (1-B) and (1-C)

of section 224 shall apply in relation to the appointment or re-

appointment of an auditor under this sub-section.

(3) The Comptroller and Auditor-General of India shall have power-

(a) to direct the manner in which the company's accounts shall be audited by the auditor appointed in pursuance of sub-section (2) and to give such auditor instructions in regard to any matter relating to the performance of his functions as such;

(b) to conduct a supplementary or test audit of the company's accounts by such person or persons as he may authorise in this behalf; and for the purposes of such audit, to require information or additional information to be furnished to any person or persons, so authorised, on such matters, by such person or persons, and in such form, as the Comptroller and Auditor-General may, by general or special order, direct.

(4) The auditor aforesaid shall submit a copy of his audit report to the Comptroller and Auditor-General of India who shall have the right to comment upon, or supplement, the audit report in such manner as he may think fit.

(5) Any such comments upon, or supplement to, the audit report shall be placed before the annual general meeting of the company at the same time and in the same manner as the audit report.

37 The Supreme Court in Gurugobinda Basu vs. Sankari Prasad Ghosal and others reported in 1964 SC 254 had held in the context of a Government company that the statutory Auditor is removable by the Central Government and the Comptroller and Auditor-General of India would exercise full control over him. We quote the relevant observations:

“8. It is clear from the aforesaid provisions that notwithstanding s. 224 of the Act which empowers every company to appoint an auditor or auditors at each annual general meetings, the appointment of an auditor of a Government company rests solely with the Central Government and in making such appointment the Central Government takes the advice of the Comptroller and Auditor-General of India. Under section 224(7) of the Act an auditor appointed under s. 224 may be removed from office before the expiry of his term only by the company in general meeting, after obtaining the previous approval of the Central Government in that behalf. The remuneration of the auditors of a company is to be fixed in accordance with the provisions of sub-s. (8) of s. 224. It is clear however that sub-s (7) of s. 224 does not apply to a Government company because the auditor of a Government company is not appointed under s. 224 of the Act, but is appointed under sub-s. (2) of section 619 of the Act. It is clear therefore that the appointment of an auditor in a Government company rests solely with the Central Government and so also his removal from office. Under sub-s. (3) of s. 619 the Comptroller and Auditor-General of India exercises control over the auditor of a Government company in respect of various matters including the manner in which the company's accounts shall be audited. The Auditor-General has also the right to give such auditor instructions in regard to any matter relating to the performance of his functions as such. The Auditor-General may conduct a supplementary or test audit of the company's accounts by such person or persons as he may authorise in this behalf. In other words, the Comptroller and Auditor- General of India exercises full control over the auditors of Government company. The powers and duties of auditors in respect of companies other than Government companies are laid down in s. 227 of the Act but by virtue of sub-s. (1) of section 619 of the Act, the provisions in s. 227 of the Act do not apply to a Government company because a Government company is subject to the provisions of s. 619 of the Act. Under s. 619-A of the Act, where the Central Government is a member of a Government company, an annual report of the working and affairs of the company has to be prepared and laid before both Houses of Parliament with a copy of the audit reports and the comments made by the Comptroller and Auditor-general. Under s. 620 of the Act the Central Government may by notification direct that any of the provisions of the Act, other than Sections 618, 619 and 639, shall not apply to any Government company.

9. The net result of the aforesaid provisions is that so far as the Durgapur Projects Ltd. and the Hindustan Steel Ltd. are concerned, the appellant was appointed an auditor by the Central Government; he is removable by the Central Government and the Comptroller and Auditor-General of India exercise full control over him. His remuneration is fixed by the Central Government under sub s. (8) of s.

224 of the Act though it is paid by the company.”

38 Comptroller and Auditor-General's (Duties, Powers and Conditions of Service) Act, 1971.

 Section 19. Audit of Government companies and corporations.

(1) The duties and powers of the Comptroller and Auditor General in relation to the audit of the accounts of Government companies shall be performed and exercised by him in accordance with the provisions of the Companies Act, 1956 (1 of 1956).

(2) The duties and powers of the Comptroller and Auditor-General in relation to the audit of the accounts of corporations (not being companies) established by or under law made by Parliament shall be performed and exercised by him in accordance with the provisions of the respective legislations.

39 Interpretation of Section 19 of the Comptroller and Auditor-

General's (Duties, Powers and Conditions of Service) Act, 1971.

i. For Companies, CAG has to follow the procedure under Companies Act, 2013.

ii. For Corporations established by law (Parliament or State Legislature), CAG's duties and powers shall be performed and exercised by him in accordance with the provisions of the respective legislations.

40 Procedure under the New Companies Act, 2013:

 Section 2(20) of the Companies Act, 2013 (20) "company" means a company incorporated under this Act or under any previous company law;

 Section 2(45) of the Companies Act, 2013 (45) "Government company" means any company in which not less than fifty one per cent. of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company;

41 Section 139 of the Companies Act, 2013:

“… ...

(5) Notwithstanding anything contained in sub-section (1), in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, the Comptroller and Auditor- General of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within a period of one hundred and eighty days from the commencement of the financial year, who shall hold office till the conclusion of the annual general meeting.

(6) Notwithstanding anything contained in sub-section (1), the first auditor of a company, other than a Government company, shall be appointed by the Board of Directors within thirty days from the date of registration of the company and in the case of failure of the Board to appoint such auditor, it shall inform the members of the company, who shall within ninety days at an extraordinary general meeting appoint such auditor and such auditor shall hold office till the conclusion of the first annual general meeting.

(7) Notwithstanding anything contained in sub-section (1) or sub- section (5), in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government, or Governments, or partly by the Central Government and partly by one or more State Governments, the first auditor shall be appointed by the Comptroller and Auditor- General of India within sixty days from the date of registration of the company and in case the Comptroller and Auditor-General of India does not appoint such auditor within the said period, the Board of Directors of the company shall appoint such auditor within the next thirty days; and in the case of failure of the Board to appoint such auditor within the next thirty days, it shall inform the members of the company who shall appoint such auditor within the sixty days at an extraordinary general meeting, who shall hold office till the conclusion of the first annual general meeting.”

42 Section 140 of the Companies Act, 2013:

“140. Removal, resignation of auditor and giving of special notice.

(1) The auditor appointed under section 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central Government in that behalf in the prescribed manner:

Provided that before taking any action under this sub-section, the auditor concerned shall be given a reasonable opportunity of being heard.

.… ...

(5) Without prejudice to any action under the provisions of this Act or any other law for the time being in force, the Tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors:

Provided that if the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is required, it shall within fifteen days of receipt of such application, make an order that he shall not function as an auditor and the Central Government may appoint another auditor in his place:

Provided further that an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and the auditor shall also be liable for action under Section 447.

Explanation I. - It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its director or officers.

Explanation II. - For the purposes of this Chapter the word "auditor"

includes a firm of auditors.”

43 Section 143 of the Companies Act, 2013 “… …

(5) In the case of a Government company, the Comptroller and Auditor- General of India shall appoint the auditor under sub-section (5) or sub- section (7) of section 139 and direct such auditor the manner in which the accounts of the Government company are required to be audited and thereupon the auditor so appointed shall submit a copy of the audit report to the Comptroller and Auditor-General of India which, among other things, include the directions, if any, issued by the Comptroller and Auditor-General of India, the action taken thereon and its impact on the accounts and financial statement of the company.

(6) The Comptroller and Auditor-General of India shall within sixty days from the date of receipt of the audit report under sub-section (5)

have a right to,-

(a) conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorise in this behalf; and for the purposes of such audit, require information or additional information to be furnished to any person or persons, so authorised, on such matters, by such person or persons, and in such form, as the Comptroller and Auditor-General of India may direct;

and (b) comment upon or supplement such audit report:

Provided that any comments given by the Comptroller and Auditor- General of India upon, or supplement to, the audit report shall be sent by the company to every person entitled to copies of audited financial statements under sub section (1) of section 136 and also be placed before the annual general meeting of the company at the same time and in the same manner as the audit report.

(7) Without prejudice to the provisions of this Chapter, the Comptroller and Auditor-General of India may, in case of any company covered under sub-section (5) or sub-section (7) of section 139, if he considers necessary, by an order, cause test audit to be conducted of the accounts of such company and the provisions of Section 19A of the Comptroller and Auditor-General's (Duties, Powers and Conditions of Service) Act, 1971 (56 of 1971), shall apply to the report of such test audit.”

44 Interpretation of the provisions:

 As the Companies Act, 2013 makes a departure from the erstwhile Companies Act,1956, the Constitution Bench judgement in Gurugobinda Basu (supra) would now not be applicable.

[A] Ramaiya’s Guide to Company Act (18th Edition Volume 2) page

2764:

“Appointment of auditors [Proviso to Sub-section (2):

The appointment and removal of the auditor or auditors rested with the Central Government and the Auditor-General of India exercised full control over the auditor. Guru Gobinda Basu v. Sankari Prasad Ghosal, (1963) 33 Com Cases 1132, 1136 (SC)

(This case law is not now relevant because under the 2013 Act, the auditor’s appointment and removal does not rest with the Central Government.)”

[B] Under the Old Companies Act, 1956 the provision of the Section 619 was separate and was notwithstanding the general scheme of auditors under Sections 224-233. In such circumstances, the Supreme Court held that the CG and CAG retained the power to appoint and remove the auditor for the Government Companies.

[C] It appears that under Section 140(5) of Companies Act, 2013, the power is now with the NCLT.

45 The scope and ambit of Section 139 (5)- 139(7) under the Companies Act, 2013 is wider than the Companies Act, 1956.

[A] Earlier phrase under Section 619 was “Government Companies”.

[B] While in the 2013 Act, Section 139(5)-(7) uses the phrase “in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments”.

 Section 140(1) is clear in it's language

46 Interpretation of "auditor appointed under Section 139":

[A] CAG appoints auditors under Section 139(5)

[B] Section 140(1) refers to the auditor appointed under the Section 139.

[C] Section 139 includes Section 139(5)

47 Interpretation of "Government Company" and Authorised established by law by the Supreme Court:

[A] "Government Company" would be subsumed by the "Company". The Supreme Court in the Hindustan Construction Company Limited vs.

Union of India (2019 SCC OnLine SC 1520) held as under:

“....63. As correctly argued by the learned Solicitor General, Shri Tushar Mehta, the first part of ‘corporate person’, as defined in Section 3(7) of the Insolvency Code, means a company as defined in Clause 20 of Section 2 of the Companies Act 2013. Sections 2(20) and 2(45) of the Companies Act, 2013, which define ‘company’ and ‘Government company’ respectively, are set out hereinbelow:

“2(20). “company” means a company incorporated under this Act or under any previous company law;”

“2(45). “Government company” means any company in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company.”

64. From a reading of the aforesaid definition, Shri Tushar Mehta is clearly right in stating that the three entities who owe monies under arbitral awards to the Petitioner No. 1, being Government companies, would be subsumed within the first part of the definition. However, so far as NHAI is concerned, Dr. Singhvi's argument of either deleting certain words in Section 3(7) of the Insolvency Code, or adding certain words in Section 3(23)(g) of the Insolvency Code into Section 3(7)

cannot be accepted.”

[B] The "PSU" established by any Act of Parliament or State Legislature also would be "Government Company" if incorporated under the Companies Act and if the CAG has appointed an auditor under Section

139.

48 Thus, it appears that from the scheme of the Act, 2013 that if a company wants to remove the Auditor appointed under Section 139 of the Act from its office before the expiry of his term, then the company is empowered to do so only by way of passing a special resolution and that too after obtaining the previous approval of the Central Government in that behalf in the prescribed manner. At this stage, we may clarify that the company may want to remove an Auditor for many reasons. To illustrate take a case wherein the company is not satisfied with the working of the Auditor or the Auditor is working in a negligent manner or there is dereliction of duty on the part of the Auditor, then, in such circumstances, the company can remove the Auditor appointed under Section 139 after passing a special resolution in that regard with the prior approval of the State Government.

49 In the aforesaid context, we shall now look into sub-section (5) of Section 140 referred to above. Sub-section (5) starts with a non obstante clause “without prejudice to any action under the provisions of this Act or any other law for the time being in force”. Sub-section (5) of Section 140 would come into play if the Auditor appointed under Section 139 of the Act is found to have directly or indirectly, acted in a fraudulent manner or has abetted or colluded in any fraud by, or in relation to, the company or its Directors or officers. In such circumstances, the Tribunal either “suo motu” or on an application made to it by the “Central Government” or by “any person” concerned can direct the company to change its Auditor. Here, again, there is a grey area which needs to be looked into. A close reading of Sub-section (5) would indicate that the fraudulent act or any collusion of the Auditor concerned should be with respect to the company whose audit work the Auditor has undertaken. Therefore, Sub-section (5) takes care of altogether a different contingency i.e. other than sub-section (1) of Section 140. For the purpose of sub-section (1), the power of removal is with the company, after following the procedure prescribed therein and for the purpose of sub-section (5), the power is with the Tribunal.

50 Section 140(5) of Companies Act, 2013 was considered by the Bombay High Court in N Sampath Ganesh vs Union of India (2020 SCC OnLine Bom 782).

Key Findings of the Bombay High Court Para 204. In the light of the above, we find it appropriate to mention the relevant findings which crystalize out of our deliberations in the matter:

.....

VII.S.140(5) is part of the provision (S.140) which deals with the removal of CA or his resignation. Need of special resolution to remove CA or grant of opportunity to him in that connection are part of this scheme. The concerned CA though removed by special resolution or due to his resignation, is not visited thereby with any action for professional misconduct or prosecution for crime or any disability because of that removal or resignation.

.…

IX. When NCLT comes across cases in which the company does not exercise its power under S. 140(1) or the CA does not resign and there is unholy collusion between them, it can order the company to change him.

.…

XI. After NCLT issues the direction to company to change its CA, procedure under S. 140(1) need not be followed. Exercise of passing of special resolution which is contingent upon the desire of the majority is ruled out. CA against whom the company proposes to pass a special resolution is not prohibited from resigning after following the prescribed procedure. That option is not denied to & also available to CA when NCLT initiates the exercise towards directing the company to change him.

.…

XVII. Debarment or disqualification under 2nd proviso to S. 140(5) follows automatically due to statutory mandate and NCLT has no option or discretion in that respect.

.…

XXII. If despite such CA ceasing to be the CA of concerned Company, need for passing of a final order to change him is read into scheme of S. 140(5), it would overlook the absence of need to pass final order and violate its language. NCLT has been given the discretion whether to pass that final order or not, even after reaching the “satisfaction” and legislative wisdom behind it will be lost. It will introduce a discordant note in the scheme of S. 140 itself.

XXIII. Second proviso speaks of a “final order” and question is whether it needs to be construed in contradistinction with first proviso which contemplates passing of an urgent order within 15 days on application of Central Government prohibiting the “suspect auditor” to continue with audit work thereby enabling the Central Government to substitute him. This order under first proviso, according to the respondent Union of India is an interim order. According to UOI, the words “final order” in second proviso are to be understood with reference to this “interim”