VENKATARAMA AYYAR, J. -
(1.) THIS is a reference under Section 21 of the Chartered Accountants Act (Act XXXVIII of 1949). The respondent is a partner in a firm of chartered accountants. Messrs. A. Mohamed and Co., are a firm of merchants carrying on business in hardware in the city of Madras and they entrusted the work of auditing their accounts and preparing income-tax returns to the respondent's firm. The complaint against the respondent is that he performed this work negligently It appears from the assessment order dated 31st October, 1944, that Messrs.
(2.) A. Mohamed & Company had considerable business in black market and maintained two sets of accounts-regular day books and ledgers for the pen market transactions and a separate book for the black market transactions. While the former accounts contained entries, showing daily transactions the latter contained only consolidated entries made at the end of each week, of all the transactions of that week. At the end of the financial year all the weekly entries in the separate accountant were totalled up and these totals were entered in the regular accounts. For the year in question, 1943-44, the entries thus carried into regular accounts books show purchases of the value of Rs. 97, 403-7-6 and sales of the value of Rs. 1, 69, 766-7-6.
The respondent examined only the regular account books of the assessees and prepared the statements and income-tax return on the basis of these accounts. All the statements were signed by him and there was also an endorsement at the foot of the balance-sheet that it was "verified and found to be correct." The profit and loss statement as drawn up by the respondent contained under the heading 'stocks" the following entry :- "Recorded in separate book Rs. 97, 407-3-6" and under the heading 'sales" the following entry : "Recorded in separate book Rs. 1, 69, 766-7-6". The income-tax return was signed by the assessees and the respondent forwarded the same and the statements prepared by him to the Income-tax Officer, with a converting letter dated 11th July, 1944. Therein he stated as follows :-"To The Income Tax Officer Special (Central) Circle Madras Sir Re :- G.I. No. 510 Income Tax and E.P.T. Assessment 1944-45, Messrs. A. Mohamed & Co We have examined the books of accountants of Messrs. A. Mohamed & Co. Hardware Merchants, Madras, for Samvat Year 1999 ended 29th October, 1943, and beg to report as under :- Books examined :- 1.Rokad-cash and day book 2. Khatavahi-ledger 3. Jimna Nondth-purchase journal 4. Udhar nondth-sales journal and account books pertaining to property income, purchases and sales vouchers, invoices, bank pass books." and again "The books of accounts are kept in the Gujarathi style in the usual course of business and the statement and schedule prepared therefore represent in out opinion correct income of the firm." * On receipt of the return and the statements mentioned above, the Income-tax Officer called upon the assessees to produce their accounts and on examining them he found several discrepancies the most important of which was the difference between the sales as entered in the regular accounts and the sales as shown in the statements. On 23rd August, 1944, he wrote to the respondent for an explanation of this difference. On 2nd October, 1944, the respondent replied that the difference was to be accounted for by the sales entered in the separate book and it was added that there were "unfortunately no details" for these sales in the account book. The Income-tax Officer held that the separate accounts were inaccurate and unreliable. He accordingly proceeded to assess the profits made by the assessees in the black market transactions on estimate and computed the same at Rs. 3, 50, 000 and determined the tax payable on the basis of that figure. This assessment was finally confirmed on 30th July, 1947On these facts the Income-tax Department took up the matter against the respondent, and filed a complaint against him on 6th January, 1951, changing him with gross negligence in the discharge of his duties. Their contention is that the statements of the respondent in his letter dated 11th July, 1944, that the account books of the assessees were maintained in the usual course of business and that the income received by the firm as shown in the statement was correct were erroneous and could easily have been discovered to be erroneous by a proper investigation. They also contended that the explanation given by the respondent in his letter 2nd October, 1944, is equally erroneous and could have been avoided if he had acted with due diligence Notice of this complaint was given to the respondent. He filed a statement in which he pleaded that he prepared the return and the statements only on the basis of the accounts produced before him by the assessees, that he acted throughout only a their representative, that he had no personal responsibility in the matter and that he was not guilty of any negligence. The matter was enquired into by the disciplinary Committee who held that the charge of negligence was made out and that the respondent was guilty under clause (q) of the Schedule of the Act. The matter comes before us on reference under Section 21 of the Act The point for decision is whether on the facts mentioned above the respondent can be held to be guilty of gross negligence. There can be no negligence unless there is a duty cast upon the person to do a particular act and he fails to do it It is, therefore, necessary to ascertain what the duties of the respondent are as the auditor of Messrs. A. Mohamed & Co. It is contended by the respondent that when an assessee engages him for auditing his accounts and preparing the income-tax returns for him, his duty is only to prepare the statements on the basis of the accounts produced by the assessee and the he is under no obligation to go further and enquire whether the account books maintained by the assessee are reliable. The view taken by the Disciplinary Committee is that the respondent had not discharged his duty by merely preparing the abstracts from the accountants of the assessees, that it was further his duty "to prove into the matter" and investigate whether the accounts were correct. That such would have been his duty if he was auditing the accounts of a joint stock company, we do not doubt. In that case the audit is expected to examine the accounts maintained by the directors with a view to inform the shareholders of the true financial position of the company. The directors are in the position of the trustees in relation to the shareholders and in auditing the accounts maintained by the directors the auditor acts in the interest of he shareholders who are in the position of beneficiaries. The auditor is, in such a case, under a clear duty to "probe into the transactions" and report on their true character. It was so held by LORD ALVERSTONE, C.J., in London Oil Storage Company Ltd. v. Seear Hasluck & Co. wherein he observed :- "That he must exercise such reasonable care as would satisfy a man that the accounts are genuine assuming that there is nothing to arouse his suspicious of honesty and if he does that he fulfils his duty, if his suspicious is aroused, his duty is to 'probe the thing to the bottom' and tell the directors of it and get what information he can." * Vide also the observations in Re London and General Bank (No. 2), in Re Kingston Cotton Mills Company and in Re City Equitable Fire Insurance Company Ltd But the question is whether there is the same duty when the auditing relates to the accounts of individuals. In those cases the auditors acts only for those individuals and it is his duty to act on their instruction, and to audit the accounts produced by them and prepare statements from them. He is under an obligation to them to perform the auditing with due skill and diligence and if he does that it is difficult to see what further obligation he has in the matter and in favour of whom. Mr. R. Ramamurthi Iyer the learned advocate for the Council contended that the respondent was a representative of the assessee in the income-tax proceedings, that his position was analogous to that of an advocate appearing for a party in court and that he owed a duty to the Income-tax Department to act fairly in the present action of he case of the assessees. We agree that the position of chartered accountants representing the income-tax assessees is similar to that of advocates representing parties in court and that their obligations are similar to those of advocates. But what are the obligations of the advocates " They are bound to act strictly within the instructions of their clients they are under a duty not to misrepresent fact or to mislead the court and they should be no parties in any manner to setting up false defences but they are under no obligation to suspect their clients or to investigate whether their case is true or false. It is a matter for the court to decide and not for the advocates to 'prove into'. In like manner the accountant is under a duty to prepare and present correct statements of the accounts of the assessees and the should of course, neither suggest nor assist in the preparation of false accounts. But he is under no duty to investigate whether the accounts produced by the assessees are correct or not. That is a matter for the decision of the Income-tax Tribunal. Judged by this standard the question is whether the respondent has said or done anything which can be held to be a breach of his duties as aforesaidThe points that have been urged against him are the following :- 1.In his letter dated 11th July, 1944, the respondent stated that "books of accounts are kept in the Gujarathi style in the usual course of business." It is argued that this statement is incorrect because it has been found that the account books are imperfect and unreliable. But the statement of the respondent only means that the entries in the account books were made at about the time when the transactions took place of shortly thereafter and that is what they purported to be. It has not been found by the Disciplinary Committee that the entries in the regular account books were not made in the usual course and indeed the Income-tax Officer accepted them as correct so far as they went. The opinion of the committee that the accounts were not kept in the usual course of business is based on its finding that those account books were not complete. But they do not for that reason cease to be accounts maintained in the usual course of business 2. In the letter dated 11th July, 1944, the respondent stated that "the statement and schedule prepared therefrom (from the accounts) represent, in our opinion, correct income of the firm", and he also endorsed on the balance sheet that it was "verified and found correct." It is argued that it would be impossible to make a correct determination of the profits made by the assessees without a proper examination of he separate book, that the Income-tax Department has in fact found that the statements prepared by the respondent were incorrect and that, therefore, he must be held to have acted negligently in passing on the figures from the accounts without making an independent investigation. It is also added that the reference to separate books in the profit and loss statement from the accounts of the assessees and not to investigation whether those accounts are correct or not this charge must fall to the ground. The respondent did not state that the figures mentioned in the statement represented the real profits made by the assessees. He only stated that the balance-sheet represented the correct position according to the accounts of the assessees. Nor is there any foundation for the suggestion that the reference to the separate books in the profit and loss statement was misleading. It represents only the entries in the separate book carried forward into regular account books which had been examined by the respondent. In fact the letter clearly mentioned what all accounts had been examined by the respondent and this is not one of them 3. Finally, it was stated that in his letter dated 2nd October, 1944, the respondent gave an explanation that the differences between sales mentioned in the regular account books and those shown in the statement was to be accounted for by the sales entered in the separate book and that this explanation was found to be false, and that the respondent was negligence in passing on the statement of his client without satisfying himself whether it was correct or not. But it he was only acting as the representative of the assessee, he was under a duty to place their representation before the Income-tax authorities and that is all that was done by the respondent is his letter dated 2nd October, 1944.
(3.) THERE is no charge against the respondent that he connived at the assessee's putting forward a false statement or that he had in any manner associated himself with the attempt of the assessees to mislead the department. The charge is that he owed a duty to the department to himself investigation the truth and correctness of the accounts of the assessees and not merely to act as their post office in transmitting them. We do not agree that the respondent is under any such duty to the department and, therefore, no question of negligence arises. We think it is necessary to comment on the inordinate delay, before concluding, in the institution of these proceedings. The statements complained of were made on 11th July, 1944, and 2nd October, 1944 they were found to be unacceptable by the department were themselves finally closed on 30th July, 1947, and this complaint is filed on 6th January, 1951.It is essential that charges of this king should be made with promptitude In the result we hold that the respondent is not guilty of any conduct which renders him unfit to be a member of the Institute. THERE will be no order for costs in this referenceOrdered accordingly.;