Govinda Menon, J.
1. These groups of applications arise out of three calendar cases nos. 91, 92 and 93 of 1946 on the file of the Sub-Divisional Magistrate, Kumbakonam. In o. O No. 91 of 1946 there are nine accused, of whom eight were the directors of a banking company known by the name of the Sankara Ramanuja Sidhantha Paripalana Nidhi Ltd. Kumbakonam and they are being prosecuted for an offence under 8. 282, Companies Act for having wilfully made certain statements false in material particulars knowing the same to be false in the balance sheet of the company for the year ended 81st December 1938. The remaining accused was an auditor of the eaid company. In C. o. No. 92 of 1946 there are seven accused of whom Six were directors and one the auditor and they are prosecuted for a similar offence under 8. 282 Companies Act in connection with the balance sheet foe the year ended 31st December 1939. In o. 0. No. 93 of 1946, again there are nine accused persons of whom eight were the directors and one the auditor and the offence enquired into against them is one under Section 282, Companies Act, relating to the balance aheet for the year which ended with 31st December 1940. Or. M. p. Nos. 1416,1418 and 1420 of 1948 have been filed by the auditor-accused in the three calendar cases to quash the charge framed against him in each of them. Or. M. P. Noa. 1602, 1504 and 1606 of 1948 are by accused 2 in all the three calendar cases for quashing the charge framed against: him under the same Section 282, Companies Act.
[2-3] Crl. M. P, NOS, 1666, 1666 and 1667 of 1948 are the three petitions filed by accused 3 in all the three calendar cases for quashing the charge framed against him under Section 282, Companies Act, for a similar offence, Crl. M. P. NO. 1657 of 1948 is by accused 4 and 7 respectively in 0. 0. No. 91 of 1946 for quashing the charge framed against them for the offence under the provisions of B. 282, Companies Act, Crl. M. P. No. 1659 of 1948 is by accused 4 in 0. o. No. 93 of 1946 for quashing a similar charge and crl. M. p. Noe. 1660 and 1661 of 1948 are by the came individual who was accused 6 and 6 respectively in 0. G. Nos. 92 and 93 of 1946 for quashing similar charge framed against him.
4. As all these petitions are connected and intertwined with each other and they arise out of similar transactions it will be more profitable and convenient to deal with all of them by the same order. In fact the learned Counsel appearing in these various cages have agreed on the main outlines of their arguments and the leading argument was by Mr. V. Rajagopalachari on behalf of the auditor accused in the miscellaneous petitions. Toe other learned Counsel while adopting in all essential aspects the arguments of Mr. V. Bajagopalachari have placed before the Court certain further arguments relating to each of the director petitioners separately. It . will be, therefore, useful to give a brief resume of the genesis of the transaction which culminated in the proceedings against the Nidhi concerned of which the various accused were the .directors and the auditor.
5. The Sankara Ramanuja Sidhanta Pari-palana Nidhi Ltd., Kumbakonam was a limited ; liability company doing banking business and .incorporated under the Indian Companies Act. During the relevant dates, the various accused .persons were respectively the directors of the company. In April 1941 the business of the company was suspended and on 9th January 1942 as a result of the order passed by this Court ino. p. No. 202 of 1941 it was ordered to be compulsorily wound up. In the meanwhile on 5th October 1941 an interim auditor had been appointed to scru- tinise the accounts of the company and he has submitted his report, Ex. p-18 on 5th November 1941. After the winding up of the company and the Official Beceiver taking charge of its business, a misfeasance summons under Section 235, Companies Act, by Application No. 2337 of 1944 had been taken out and p. W. 2 in the lower Court was appointed auditor to scrutinise the accounts, the balance Sheets and the various other documents relating ' to the working of the company and submit a report regarding the way in which the affairs of the company had been going on. Exhisit P. IS is the report dated 14-3-1945 submitted by P.w. 1 and thereafter the matter was referred to the Registrar of Joint Stock Companies for taking action under the appropriate provisions of the Companies Act. The Begiatrar of the Joint Stock Companies after taking the necessary legal opinion filed the three complaints ouk of which the three calendar cases arose, under Act. 237 for offences under Section 282, Companies Act. After examining the witnesses tendered for the prosecution in all the three oases which were tried together the learned Sub-Divisional Magistrate has framed the charges which are now sought to be quashed on the ground that the evidence let in does not disclose that any offence has been committed at all.
6. It is unnecessary to set out in any detail what ought to be the contents of a balance sheet for that matter is statutorily found in B. 132, Companies Act, The duties of an auditor with respect to the scrutiny of the accounts etc. of the company are also defined in Section 145, Companies Act. According to the prosecution, the auditor in these cases in signing the various balance sheets wilfully made false statements in material particulars knowing the same to be false and the same is the gravamen of the com. plaint against the directors also. It becomes, therefore, necesaasy to consider whether there were false statements, or material particulars wilfully made by the accused knowing them to be false. If all or any of three ingredients do not exist the accused cannot be held guilty of an offence under 8. 282, Companies Act. The arguments of the learned Counsel ranged over a wide field regarding the duties and powers of an auditor and the responsibilities of an ordinary director in a banking company for demonstrating that there is no title of evidence regarding any of the ingredients neoeasary for an offence under Section 283, Companies Act. The counsel for the petitioners invited my attention to the evidence especially of p. vs. 1 and 2. The other witnesses examined, namely, P. Ws. 3 to 5 are merely formal proving the various documents filed in the lower Court, The charges framed deal with three different matters each of which according to the prosecution makes the accused persons guilty of the offence under Section 282.
7. The grab of them is that there are defects and omissions in the classification of loans and securities and their verification. This is explained by elaborating that in the balance sheets of the three years, loans which according to the auditor were unsecured had not been specifically mentioned as such. Secondly, in these balance sheets the debts have not been separately demarcated as good, bad or unrealisable. Thirdly, the balance sheets did not disclose what were Hie amounts borrowed by the directors from the company or advanced to the directors during Ihe course of the respective years and lastly, it is stated that the accrued but unrealised interest on the various loans has not been disclosed a3 an asset. The contention of the Public Prosecutor is that these matters have to be specifically and clearly shown in the balance sheet and the failure to do so would make the petitioners guilty of the offence complained against.
8. I shall deal with each of these heads sepa-arately and in seriatim. Exhisit P-2 is the report of the auditor, p. w. 2 and the evidence of the witness is based entirely upon thi3 document. In schedule 33 at p. 154 of Ex. P-2 it is stated on T-4-1941 a sum of es. 28,737 out of the loans advanced in the year 1938 on the security of the produce of grain was outstanding without being guaranteed by any existing security. Similarly on the same date a sum of Bs. 11454 is seen as outstanding out of the loans on the produce advanced in the year 1939. Likewise a Bum of Bfl, 86,959 was seen outstanding on 7-4-1041 out of the produce loans granted in the year 1940, P. W. 2 states that so far as produce loans were concerned he verified all the loans which were in the town and to which he was taken and he treated them as existing assets. He treated as ansecured loans such of them about which there is no evidence that the Nidhi had any control over the produce which formed the primary lecurity. Ha came to this conclusion as he did not have any evidence that there was any such security and on asking for the records they were not forthcoming, Since there was nothing lo show that the original stock was ever repla-oed, he came to the conclusion that these outstanding loans were unsecured ones on 7-4-1941, Again he states, that with regard to the produce loans, he examined the promissory notes, pledge 4hita and appraising forms and found them satisfactory so far as the documents were con. erned. He inspected the physical stocks in the bank, but he did not contact any person who Aad taken loans on security of stocks outside 4he town and did not verity those stocks as he iras told by the clerk Krishnamachari that there was no necessity to do so bub he did not take a statement from the clerk. p. w, a also stated that be cannot say that the stock or produce was not in existence on the dates of the balance sheets in question and the reports of the auditors on those balance sheets are not correct. In view of this state o evidence, it is impos-Biblo to say that the produce loans out. standing are unsecured. P. w. 2 admits that he did not inspect the various places where produce was stored or stocked to satisfy himself about their existence or not. Unless it is shown by the prosecution that the produce as such did not exist and that the loans were falsely entered as secured, a criminal Court will not be justified in framing a charge on this evidence. In fact after the admission by p. w. 2 that he could not say that the stock or produce was not in existence on the dates ot the balance sheets in question or that the report of the auditor on those balance sheets was not correct the lower Court had no jurisdiction to frame a charge that the produce loans were unsecured. It is not shown that on the date of the balance sheets, the produce did not exist as I have stated already. It was the duty of P. W. 2 before he submitted his report containing the allegation that the produce loans were unsecured, to have examined at least one or two of such borrowers and ascertain whether on the date of his investigation the security of the produce did or 'did not exist. The learned Public Prosecutor invites my attention to para. 20 of the report, Ex. p-2, wherein it is stated by P. W. 2 that in the case of produce loans there is no positive evidence that there was a pledge in the real sense of the word, the Nidhi having full possession of the produce. It is also stated that there is no evidence that there was any inspection as to the continued existence of the produce in good condition and the auditor simply came to the conclusion that because paddy stocked in one and the same place without any movement or other interference for more than a year and a half would not be in good condition, it is neceseary to infer that there was do pledge in most of the cases and that the Nidhi probably bad a floating charge on the produce, if such produce existed at the time of the advance of the loan. Even if it were a floating charge it was obligatory upon the auditor to have ascertained whether in the godown at the time of his report there existed sufficient quantity of produce to cover the amounts lent by the company to any particular individual. Not having made any attempt to ascertain the existence or otherwise of such produce it is not open to the auditor to say that there was no pledge in the real sense of the term and as I have already remarked, in view of the definite admission made by p. w. a, that he cannot say whether the stock or produce was in existence or not, he is not justified in Baying so. This item of charge ought not to have been framed by the lower Court. The auditor was dealing with a set of circum-Btancea in April 1941 and according to him he makes a report about what should have been done in 1938,1939 and 1940. In the absence of any verification by the auditor, the charge as regards the unsecured nature of loans being false in the various balance Bheets cannot be sustained. It has not been shown that the statements in the balance sheets are in any respect false, and much leas false to the knowledge of the auditor and the directors.
9. Before discussing the legality and validity of the other charges framed againet the petitioners it is necessary to advert without much elaboration to the powers and duties of an auditor of a company as well as the directors of such an institution Section 145, Companies Act, as referred to already, is a statutory enactment defining the powers of an auditor. This provision is to a large extent based upon the observations and dicta contained in the well-known decisions of the English Courts. In re London and General Bank (no. 2), (1895) 2 ch. 673, Lindley L, J. observes as follows:
It is no part of an auditor's duty to give advioa, either to dirtotors or shareholders, as to what they ought to do. Ad auditor has nothing to do with the prudence or imprudence of making loans with or without security. It n nothing to him whether the business of a company is being conducted prudently or imprudently, profitably or unprofitable. It is nothing to him whether dividends are properly or improperly declared, provided he discharges his own duty to the shareholders. His business is to ascertain and state the true financial position of the cnmpany at the time of the audit, and, his duty is confined to that. But then comes the question, 'How is he to ascertain that position ?' The answer is 'By examining the books of the company.' But he does not discharge his-duty by doing this without inquiry and without taking any trouble to see that the books themselves show the company's true position. Be must take reasonable care to ascertain that they do so Unless he does this his audit would be worse than an idle farce, Assuming rhe books to be be kept as to show the true position of a company, the auditor has to frame a balance sheet showing that position aooord-, ing to the books and to certify that the balance sheet presenter is correct in that sense. But his first duty is to examine the books not merely for the purpose of ascertaining what they do shew, but also for the purpose of satisfying himself that they shew the true financial position of the company.
This case has been considered in In re Kingston Cotton Mill Go. (No. 2), (1896) S Ch. 279 : 65 L. J. ch. 673 and Lindley L. J. in the Court of Appeal affirms and reiterates what was laid down in the earlier case and observes as follows;
I now come to the real question in this controversy, and that is, whether the appellants have been guilty of any breach of duty to the company. To decide this ques- tion it is necessary to consider (1) what their duty was: : (2) how they performed it, and in what respects (if any)' they failed to perform it. The duty of an auditor generally Was very carefully considered by this Court in In re London and General Bank (No 2j, 1895 2 Ch. 673 and 1 cannot usefully add anything to what will be found there, It was there pointed out that an auditor's duty is to examine the books, aecertain that they are right, and to prepare a balance sheet shewing the true financial positi`on of the company at the time to which the balance sheet refers. Bat it was also pointed out that an auditor is not an insurer, and that in the discharge of his duly he is only be und to exercise treasonable amount of care and skill. It was further point' ed out that in any particular case a reasonable amount of care and skill depends on the circumstances of that case, that If there is nothing which ought to excite suspicion, less care may properly be considered reasonable than could be so considered if suspicion was or 'ought to have been aroused. These are the general principles which have to be applied to cases of this description. I protest, however, against the notion that an auditor is be und to be Suspicious as distinguished from reasonably careful, To substitute the one expression' for the other may easily lead to serious error.
The company's articles of association contain special regulations relating to auditors, tee Articles 12 ., 140, but they do not impose upon the auditors any more onerous, duties than thuse I have already mentioned.
The learned Lord Justices in the Court of ftp. peal accepted the arguments of Mr. Haldane, as he then was, that a mere error of judgment on the part of an auditor is not enough. Lopes L.J also considers this question in the same strain as Lindley L. J. and observes at page 288 in In re Kingston Cotton Mills Co. No. 2, (1896) a Cr 279 : 65 It. J. Ob. 678:
They are very fully described in In re London and General Bank Lid., (1896) 2 Ch. 279 : 65 L J. Ch. 673 to which judgmant I was a party. Shortly they may be stated thus. It is the duty of an auditor to bring to bear on the work he has to perform that skill, oars and caution which a reasonably competent, careful, and cautious auditor would use. What is reasonable skill, care and caution must depend on the particular circumstances of each case. An auditor is not be und to be a detective, or as was said to approach his work. with suspicion or with a foregone conclusion that there is something wrong. He is a watchdog but not a bloodhound. He is justified in believing tried servants of the oompany in whom confidence is placed by the company. He is entitled to assume that they are honest, and to rely upon their representations provided he takes reasonable care, If there is anything calculated to excite suspicion he should probe it to the bottom, but in the absence of anything of that kind he is only be und to be reasonably cautious and careful.
Both these cases were again considered in very great detail in In re City Equitable Fire Insurance Co. (1925) 1 ch. 407 : 94 L. J. Ch. 445 , be mer J. as he then was, refers in detail to the observations of Lindley L. J. that an auditor has nothing to do with the prudence or imprudence of making loans with or without security. He must, of course, take care that he does not bring into his balance eheet at face value a debt that is not a good one. At p. 609 Pollock M. B. in confirming the judgment of be mer J. in the Court of Appeal refers to and accepts the dictum contained in In re Kingston Cotton Mill Co., (1896) 3 ch 279 : 6 L. J. ch. 678 and further observes that in the words of Sargeant L.J the duty of an auditor is verifioa-tion and not detection. The learned Master of the be lls discussed the matter in great detail and came to the conclusion as was done by the Court of appeal 80 years prior to that date. These principles are so well established in Eng-lish Courts and have been consistently followed in oar Courts that there can be co dispute re-garding them, Applying these principles to the facts of the present case, on the evidence of P. W. 2, I am not able to find that the auditor accused in this case has in any way failed to Act. according to the strict confines of the duty imposed upon him. On the other hand, even aocording to the evidence of P. W. 2, the auditor has done what is expected of him.
10. The next question is whether the balance sheets in question have disclosed the nature of the bad and doubtful debts of the company. According to the articles and memorandum of association as well as the evidence before the lower Court the Sankara Ramanuja Sidhantha Partpalana Nidhai is a banking company in accordance with the provisions of a. 277 (f), Companies Act. P. W. l in his cross examination admits that the Nidhi is doing banking business. Form P which shows the necessary and essential requisites of the balance sheet of a banking company has been amended by Act xxx  of 1943 as a result of the observations in some of the decisions of the Bombay High Court.
11. Before the amendment there was a notification dated 16th January 1937 by the Govern-ment of India in the same terms as is now contained in Act XXX  of 1943, directing alteration in the Form F Seh. ni. That being the case and since it is admitted that this is a banking company in the balance-sheet of which it is not necessary to show such debts I do not think that there was any wilful omission in the balance sheet so far as this item is concerned.
12. The next point for consideration is whether it is obligatory to show in the balance sheet what exactly would ba the accrued interest in a particular year. Schedule 14 of ex. p. 9 at p. 81 contains according to p. W. a, the amount of accrued interest for the years 1933 to 1940. It is found therefrom that the balance sheets of the concerned years, namely, 1938 to 1940 do not show that any interest accrued was taken credit of for determining the dividends payable to the thare holders In this connection it is necessary to consider the admissions made by p. W. 2 in his cross-examination. He says:
accused interest on be ok debts need not be shown separately and practice variei. Till the end of 193S the Nidhi took credit for all Interest neerued on debts. Then they made a charge of policy and wanted to adopt the go .1 of cash basis for interest receipts. This basis is sound for the distribution of profit.
Later on, he further admits that the share-holders were informed that the accrued interest on certain loans were not to be taken credit for unless actually credited, and this statement is reiterated in every balance sheet till 31st December 1939. Again this admission goes on to state that it is well known to the share-holders and the public that all accrued interest was not taken to the balance sheet though F. w, 2 states that in his opinion it is not a sound policy. He has necessarily to admit that he could not attack the bona fides of this policy. Further, two of the balance sheets in question have a note appended, that accrued interest has not been taken into consideration. In this state of circumstances, it is very difficult to see how any Court can say that either the directors or the auditor have in any way wilfully concealed any material fact about accrued interest from the balance sheet. In Newton v, Birmingham Small Arms Co, Ltd, (1906) 3 ch. 578 : 75 L, J. ch. 627, Buckley J. while disoussing a similar matter observed as follows:
If the balance sheet be be worded as to shew that there is an undisclosed asset, whose existence makes the financial position better than that shewn, each a balance sheet will not in my judgment, be necessarily inconsistent with the Act. of Parliament. Assets are often by reason of prudence estimated, and stated to be estimated, at lees than their probable real value. The purpose of the balance sheet is primarily to shew that the financial position of the oompany js at least as good as there stated, not to shew that it is not or may not be b9tter, The provision as to not disclosing the internal reserve fund in the balance sheet is not, I think, neoeasarily fatal to these special resolutions.
Later on the learned Judge observes that if the auditor reports to the shareholders that in the balance sheet there was such a reserve fund, that would be sufficient. In this case, the note appended showing that the accrued interest has not been taken into consideration in fixing the dividend, is sufficient to bring home to the share holders the existence of such an asset. I am decidedly of opinion that this item of charge has necessarily no basis whatever.
13. It has then to be considered whether the fact that the loans taken by the directors in any particular year, if the same had been paid off during the course of the same year, should be specifically and separately mentioned in the balance sheet. It is not disputed that there is a statement in the balance sheet regarding loans taken by the directors in a given year outstand. ing at the end of each year; and it is admitted, that whatever was outstanding at the end of the year by way of loans to the directors has been mentioned in each year's balance sheet. P. w. 2 again, admits in cross-examination:
I do not think the balance-sheet is falsified by the non-mention in the balance sheet of the volume of loans issued to the directors at any time daring the year. I do not think the omission is dua to mala fides .bat it was due to ignorance.
In addition he agrees
that the balance sheet is not a history of individual transactions closed daring the year, except those of the directors whose history muft be mentioned in the balance sheet even if the transaction is closed. Loans to directors ought not to be entered in the left hand column and it is not brought into the total and its non-mention will not affect the oorreotneas of the balance sheet.
My attention has not been drawn by the learned Public Prosecutor to any provision of law or any observation in a decision to the effect, that the loans taken by a director in a particular year, which were repaid by him before the end of the year, should be mentioned as a separate item in the balance-sheet even though the buai-ness had been closed. It is no doubt necessary in order that the balance sheet may be a true and correct one, that all the necessary information regarding the financial status of the company and ita working has to be given to the shareholders and that the balance-sheet should contain how much money was outstanding as being loans to the directors at the end of a particular year; but in my opinion it is unnecessary to show the volume of business transacted with a director or directors, if the loans have been duly repaid within the course of the year. It is just possible, that a director or directors may be doing individually and separately busL ness on very large scale, and during the course of such business, large amounts may have to be be rrowed from a bank, of which he or they happen to be a direotor; but if the loans are properly paid off during the course of the year and they are not outstanding when the year ends, it is unnecessary to encumber the balanoe-sheet by thowiog details of all closed-up transactions that had taken plaae during the intervening period, finch being the case it is not possible to say that Any criminal offence has been committed by the directors or the auditor in not mentioning the details of the loans given to the directors.
14. In discussing the general liability of the directors for the so-called false statements refer-red to in the charge, it is necessary to consider what exactly the legal position of the directors is, via-A-via the company with regard to the criminal liability for theic actions. In a recent ease reported in Pulin Chandra Daw v. Emperor : AIR1948Cal190 , Qhakravarti J., referred to the decision of the Privy Council reported in Srinivas Mall v. Emperor, Cl C. w, N. soo : A.I.R. 1947 P. 0. 135, where their Lordships quoted with approval the proposition laid down in an earlier case that:
Unless the statute, either clearly or by necessary implication, rules out mens rea as a constituent part of a crime, a person should not be found guilt; of an offence against the criminal law unless he has got a guilty mind.
The learned Judge after quoting this passage observes as follows:
Be that as It may, it appears to us that the language used by 8. 282 itself does import an element of men) rea when it speaks of the relevant statement being known to be false.
The decision in In re City Equitable Fire Insurance Co. Ltd., (1925) l ch. 407 : 94 L. 3. Ch. Mb, discusses the meaning of the term 'wilful' in relation to the actions of the directors of a company. In Doss v, Connell, I. L. R. (1938) Mad. 592 : A. I..E. 1938 Mad. 12l in considering whether, in the circumstances of a particular case the directors were guilty of wilful negligence Leach 0. J. and Varadachariar J. have followed the diotum of Romer J., in In re City Equitable Fire Insurance Co. Lid,, (1926) l Ob. 407 : 91 L. J. ch. 415, regarding the duties of directors and as to what amounts to wilful negligence, In adverting to the question whether a director is justified in trusting the officials of the company, this Court referred to the observations oMiindley M. B, in In re National Bank of Wales Ltd., (1899) 2 ch. 629 : 68 L.J ch. 634, in the following terms:
Business cannot be carried on upon principles of distrust. Men in responsible positions must be trusted by those above them, as well as those below them, until there is reason to distrust them. We agree the care and prudence do not involve distrust: but for a director acting honestly himself to be held legally liable for negligence, in trusting the officers under him not to conceal from him what they ought to report to him appears to us to be laying too heavy a burden on honest businessmen.
They have also relied upon the observations of Lord Davey in Dovey v. John Cory, 1901 A. C. 477 : 70 L. J. Ch, 753:
I think the respondent wag be und to give his attention to and exercise his judgment as a man of business on the matters which were brought before the beard at the meetings of which he attended and it is not proved that he did not do so.
It seems to me that these dicta are applicable to the actions of the petitioners herein. The accused in this case are men of position and responsibility and some of them are, I am given to understand, members of the bar enjoying fairly good practice. One cannot attribute any wilful negligence or dishonesty to men in such positions if they depend upon and trust the permanent officials and the managing director of the company so far as the working of the company is concerned. The prosecution baa not been able to show any mala fides or want of good faith on the part of any of these accused. All that might be laid at their door is per ha pa the blame-if that could be oalled a blame at all-that they placed trust upon the permanent servants of the company. It seems to me that they are not guilty of any false statement of any material particular wil-fully made and knowing the same to be false. Even accepting as fully correct and true the oral and documentary evidence placed before the lower Court, I do not think there are any materials, whatever, on which the charges can be framed under Section 282. Companies Act. This is a case of entire absence of evidence and the learned Sub-Divisional Magistrate was not justified in framing charges on the materials placed before him.
15. I would, therefore, quash all the charges and discharge the accused in the various petitions.