Supreme Court Upholds Rule 9(3)(b) of Chartered Accountants Rules: Naresh Chandra Agrawal vs. Institute of Chartered Accountants of India (2024)

Date of the Judgment: 08 February 2024

Citation: 2024 INSC 94

Judges: Pamidighantam Sri Narasimha, J., Aravind Kumar, J.

Can a regulatory body, disagreeing with its disciplinary director’s opinion, directly initiate disciplinary proceedings or must it always direct further investigation? The Supreme Court of India recently addressed this question in a case concerning the Chartered Accountants Act, 1949. The core issue revolved around the interpretation of the powers of the Board of Discipline when disagreeing with the Director (Discipline)’s opinion on a case of professional misconduct. The two-judge bench, consisting of Justice Pamidighantam Sri Narasimha and Justice Aravind Kumar, delivered the judgment, with Justice Aravind Kumar authoring the opinion.

Case Background

The Bank of Rajasthan Limited (Complainant-bank) engaged M/s Ramesh C. Agrawal & Co. (the firm/service provider) for audit work at the Sahara India, Aliganj, Lucknow Branch, for three years starting January 1, 2007. The firm was to submit monthly audit reports by the 7th of the following month and report any suspicious activity to the bank’s Chief Executive Officer.

On September 27, 2009, unusual transactions occurred in the branch accounts. However, the audit report did not flag these transactions. The Complainant-bank argued that the firm failed to report these suspicious transactions, thus breaching its professional obligations. The bank sent letters on March 5, 2009, and September 5, 2009, seeking an explanation, but received no satisfactory response. Consequently, the bank filed a complaint against the audit firm with the Director (Discipline) on December 21, 2009.

The Director (Discipline) requested the firm to identify the member responsible for the audit. The firm responded on February 15, 2010, stating that the Appellant, Naresh Chandra Agrawal, was responsible. The Appellant submitted his written statement on April 2, 2010, and the bank submitted its rejoinder on June 2, 2010. The Director (Discipline) sought additional documents from the bank on December 10, 2010.

Timeline

Course of Proceedings

The Director (Discipline) initially concluded that the Appellant was not guilty of professional misconduct. However, the Board of Discipline disagreed with this opinion and referred the matter to the Disciplinary Committee for further action under the Chartered Accountants’ (Procedure of Investigation of Professional and Other Misconduct and Conduct of Cases) Rules, 2007. The Appellant challenged the Board’s decision in the High Court of Delhi, arguing that Rule 9(3)(b) of the Rules, 2007, was invalid because it was ultra vires Section 21A(4) of the Chartered Accountants Act, 1949. The High Court rejected this challenge, leading to the current appeal before the Supreme Court.

Legal Framework

The case revolves around the interpretation of the Chartered Accountants Act, 1949, specifically Section 21, Section 21A, Section 21B and Section 29A, and the Chartered Accountants’ (Procedure of Investigation of Professional and Other Misconduct and Conduct of Cases) Rules, 2007, specifically Rule 9.

Section 21 of the Chartered Accountants Act, 1949, establishes a Disciplinary Directorate headed by a Director (Discipline) to investigate complaints of misconduct. The Director (Discipline) must form a prima facie opinion on the alleged misconduct. If the Director believes a member is guilty of misconduct under the First Schedule, the matter is placed before the Board of Discipline; if under the Second Schedule, it goes to the Disciplinary Committee.

Section 21A of the Chartered Accountants Act, 1949, constitutes the Board of Discipline, with the Director (Discipline) acting as its Secretary. The Board follows a summary procedure and can take action against members found guilty of misconduct under the First Schedule. Section 21A(4) states that the Director (Discipline) submits all cases where there is no prima facie case to the Board. The Board can either close the matter if it agrees with the Director or advise further investigation if it disagrees.

Section 21B of the Chartered Accountants Act, 1949, deals with the Disciplinary Committee, which handles cases of misconduct under the Second Schedule.

Section 29A of the Chartered Accountants Act, 1949, empowers the Central Government to make rules to carry out the provisions of the Act. Section 29A(2)(c) specifically allows rules regarding the procedure of investigation under Section 21(4).

Rule 9 of the Chartered Accountants’ (Procedure of Investigation of Professional and Other Misconduct and Conduct of Cases) Rules, 2007, outlines the examination of complaints. Rule 9(3) states that if the Director (Discipline) finds no prima facie misconduct, the Board of Discipline can either close the matter if it agrees or, if it disagrees, proceed under Chapter IV (for First Schedule misconduct) or refer the matter to the Disciplinary Committee (for Second Schedule misconduct) or advise the Director to further investigate.

The Supreme Court noted that the power to make rules under Section 29A(2) is ‘without prejudice to the generality of the foregoing power’ under Section 29A(1), which means that the specific powers listed in Section 29A(2) do not limit the general power to make rules to carry out the provisions of the Act.

Arguments

Appellant’s Submissions:

• The Appellant argued that when the Director (Discipline) concludes that there is no prima facie misconduct, the Board of Discipline has only two options under Section 21A(4) of the Chartered Accountants Act, 1949: either close the matter or direct further investigation by the Director (Discipline).
• The Appellant contended that the Board cannot act as an investigating agency by referring the matter to the Disciplinary Committee.
• The Appellant submitted that Rule 9(3)(b) of the Rules, 2007, is a delegated legislation and cannot provide for actions not contemplated under the parent Act.
• The Appellant asserted that the impugned rule is ultra vires the parent Act as it exceeds the enabling power set out in the parent Act.

Respondent’s Submissions:

• The Respondent argued that if the Appellant’s argument is accepted, the Director (Discipline), who is merely a Secretary to the Board, would have more power than the Board itself.
• The Respondent submitted that the Board should be able to overrule the prima facie view of the Director (Discipline), and not be limited to just directing further investigation.
• The Respondent contended that there is nothing in the Act to suggest that the Board cannot refer the matter to the Disciplinary Committee for further action.
• The Respondent justified the correctness of the impugned order, stating that the legislature would not have intended the Director (Discipline) to have greater power than the Board.

The innovativeness of the argument by the Appellant lies in challenging the delegated legislation by stating that it is ultra vires the parent act, which is a common ground for challenging subordinate legislation.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. “Whether Rule 9(3)(b) of the Rules, 2007 is inconsistent with and beyond the rule-making power of the Central Government?”

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Cases:

• State of Tamil Nadu and Anr. v. P. Krishnamurthy and Ors. (2006) 4 SCC 517 – The Court referred to this case for the principles regarding the validity of subordinate legislation.
• BSNL v. TRAI, (2014) 3 SCC 222 – This case was cited to discuss the ‘generality versus enumeration’ principle in statutory interpretation.
• King Emperor v. Sibnath Banerji: AIR 1945 PC 156 – This case was cited to discuss the ‘generality versus enumeration’ principle in statutory interpretation.
• Afzal Ullah v. State of U.P, AIR 1964 SC 264 – This case was cited to discuss the ‘generality versus enumeration’ principle in statutory interpretation.
• Rohtak and Hissar Districts Electric Supply Co. Ltd. v. State of U.P., AIR 1966 SC 1471 – This case was cited to discuss the ‘generality versus enumeration’ principle in statutory interpretation.
• K. Ramanathan v. State of T.N. (1985) 2 SCC 116 – This case was cited to discuss the ‘generality versus enumeration’ principle in statutory interpretation.
• D.K. Trivedi and Sons v. State of Gujarat, 1986 Supp SCC 20 – This case was cited to discuss the ‘generality versus enumeration’ principle in statutory interpretation.
• State of Jammu and Kashmir v Lakhwinder Kumar and Ors., (2013) 6 SCC 333 – The Court cited this case to reinforce the principle that a specific power does not limit a general power.
• Academy of Nutrition Improvement v. Union of India (2011) 8 SCC 274 – The Court referred to this case for the interpretation of the expression “in particular and without the generality of the foregoing power”.
• State of Kerala v. Shri M. Appukutty (1963) 14 STC 242 – This case was cited to discuss the ‘generality versus enumeration’ principle, and to support the view that specific powers are illustrative and do not restrict the general power.
• PTC India Ltd. v. Central Electricity Regulatory Commission, (2010) 4 SCC 603 – This case was cited to discuss the ‘generality versus enumeration’ principle, and to support the view that specific powers are illustrative and do not restrict the general power.
• Hindustan Zinc Ltd. vs Andhra Pradesh State Electricity Board (1991) 3 SCC 299 – This case was cited to discuss the ‘generality versus enumeration’ principle, and to support the view that specific powers are illustrative and do not restrict the general power.
• Shri Sitaram Sugar Co. Ltd. vs Union of India (1990) 3 SCC 223 – This case was cited to discuss the ‘generality versus enumeration’ principle, and to support the view that specific powers are illustrative and do not restrict the general power.
• Afzal Ullah vs. The State of Uttar Pradesh 1963 SCC Online SC 76 – This case was cited to discuss the ‘generality versus enumeration’ principle, and to support the view that specific powers are illustrative and do not restrict the general power.

Legal Provisions:

• Section 21 of the Chartered Accountants Act, 1949 – Deals with the establishment of the Disciplinary Directorate and the functions of the Director (Discipline).
• Section 21A of the Chartered Accountants Act, 1949 – Deals with the constitution and functions of the Board of Discipline.
• Section 21A(4) of the Chartered Accountants Act, 1949 – Specifies the powers of the Board of Discipline when disagreeing with the Director’s opinion.
• Section 21B of the Chartered Accountants Act, 1949 – Deals with the constitution and functions of the Disciplinary Committee.
• Section 29A of the Chartered Accountants Act, 1949 – Grants the Central Government the power to make rules to carry out the provisions of the Act.
• Section 29A(1) of the Chartered Accountants Act, 1949 – Grants the general power to make rules.
• Section 29A(2)(c) of the Chartered Accountants Act, 1949 – Specifies the power to make rules regarding the procedure of investigation under Section 21(4).
• Rule 9 of the Chartered Accountants’ (Procedure of Investigation of Professional and Other Misconduct and Conduct of Cases) Rules, 2007 – Deals with the examination of complaints.
• Rule 9(3) of the Chartered Accountants’ (Procedure of Investigation of Professional and Other Misconduct and Conduct of Cases) Rules, 2007 – Specifies the procedure when the Director finds no prima facie misconduct.
• Rule 9(3)(b) of the Chartered Accountants’ (Procedure of Investigation of Professional and Other Misconduct and Conduct of Cases) Rules, 2007 – Specifies the procedure when the Board disagrees with the Director’s opinion.

Judgment

The Supreme Court held that Rule 9(3)(b) of the Rules, 2007, is not inconsistent with Section 21A(4) of the Chartered Accountants Act, 1949. The court reasoned that the power to make rules under Section 29A(1) is a general power, and the specific powers listed in Section 29A(2) are illustrative and do not limit the general power. Therefore, Rule 9(3)(b), which allows the Board of Discipline to refer a case to the Disciplinary Committee even when the Director (Discipline) has found no prima facie misconduct, is valid. The Court emphasized that the Director (Discipline), being a Secretary to the Board, should not have more power than the Board itself.

The Court noted that the power to make rules under Section 29A(2) is ‘without prejudice to the generality of the foregoing power’ under Section 29A(1), which means that the specific powers listed in Section 29A(2) do not limit the general power to make rules to carry out the provisions of the Act.

The Court held that the Board of Discipline, as the body entrusted with the duty to ensure that members of the profession act with utmost integrity and professionalism, should not be restricted to merely directing further investigation. It should also have the power to refer the matter to the Disciplinary Committee if it disagrees with the Director’s opinion.

Ratio Decidendi

The ratio decidendi of the judgment is that:

• Rule 9(3)(b) of the Chartered Accountants’ (Procedure of Investigation of Professional and Other Misconduct and Conduct of Cases) Rules, 2007, is valid and is not ultra vires Section 21A(4) of the Chartered Accountants Act, 1949.
• The general power to make rules under Section 29A(1) of the Act is not limited by the specific powers listed in Section 29A(2).
• The Board of Discipline can refer a case to the Disciplinary Committee even if the Director (Discipline) has found no prima facie misconduct.

Flowchart of Complaint Handling Process

Key Ratios

Conclusion

The Supreme Court’s judgment in Naresh Chandra Agrawal vs. The Institute of Chartered Accountants of India and Others upholds the validity of Rule 9(3)(b) of the Chartered Accountants Rules, 2007, ensuring that the Board of Discipline maintains its authority in disciplinary matters. The judgment clarifies that the Board is not limited to merely directing further investigation when it disagrees with the Director (Discipline)’s opinion but can also refer the matter to the Disciplinary Committee. This ruling reinforces the regulatory framework for Chartered Accountants in India and ensures that professional misconduct is thoroughly addressed.