1. This is a reference under Section 21 Chartered Accountants Act (Act XXXVIII of 1949). The respondent is a partner in 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.
2. It appears from the assessment order dated 31-10-1944 that Messrs. A. Mohamed and Co. had considerable business in black-market and maintained two sets of accounts -- regular day books and ledgers for the open 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 account 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 account books show purchases of the value of Rs. 97403-7-6 and sales of the value of Rs. 1,69,766-7-6.
3. The respondent examined only the regular account books of the assesses and prepared the statements and income tax return on the basis of those 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. 97,403-7-6" 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 Incometax Officer, with a covering letter dated 11-7-1944. Therein he stated as follows:
The Income-tax Officer,
Special (Central) Circle, Madras.
Re: G. I. No. 510 Income-tax and E. P. T.
Assessment 1944-45--Messrs. A. Mohamed
We have examined the boobs of accounts of Messrs. A. Mohamed and Co. Hardware merchants, Madras, for Samvat year 1999 ended 29-10-1943 and beg to report as under:
Books examined: 1. Rokad -- cash and day book
2. Khatavahi -- ledger
3. Jinna Nondh -- purchase journal
4. Udhar Nondh -- 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 schedules prepared therefrom represent in our opinion correct income of the firm."
4. 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 23-8-1944 he wrote to the respondent for an explanation of this difference. On 2-10-1944 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 those 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 assessee 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 30-7-1947.
5. On these facts the Income-tax Department took up the matter against the respondent, and filed a complaint against him on 6-1-1951 charging him with gross negligence in the discharge of his duties. Their contention is that the statements of the respondent in his letter dated 11-7-1944 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 the proper investigation. They also contend that the explanation given by the respondent in his letter dated 2-10-1944 is equally erroneous and could have been avoided if he had acted with due diligence.
6. 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 as 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 up before us on reference under Section 21 of the Act.
7. The point for decision is whether on the facts above mentioned 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.
8. It is, therefore, necessary to ascertain what the duties of the respondent are as the auditor of Messrs. A. Mohamed and 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 that 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 accounts of the assessees, that it was further, his duty "to probe 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 intended for the protection of the share-holders and the auditor is expected to examine the accounts maintained by the directors with a view to inform the share-holders of the true financial position of the company. The directors are in the position of trustees in relation to the shareholders and in auditing the accounts maintained by the directors the auditor acts in the interests of the share-holders 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 --'In re: London Oil Storage Co. Ltd. v. Seear Haslaek and Co.', Dicksee on Auditing, p. 781, 10th Edn. 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 suspicion of honesty and if he does that he fulfils his duty; if his suspicion 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--'In re: London General Bank (No. 3)', (1895) 2-Ch. 673; -- 'In re: Kingston Cotton Mill Co. (No. 2)', (1896) 2-Ch 279 and -- 'In re: City Equitable Fire Insurance Co. Ltd.', (1925) Ch. 407.
9. But the question is whether there is the same duty when the auditing relates to the accounts of individuals. In those cases the auditor acts only for those individuals and it is his duty to act on their instructions, 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. 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 presentation of the 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 facts 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 "probe into". In like manner the accountant is under a duty to prepare and present correct statements of the accounts of the assessees; and he 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 Tribunals. 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 aforesaid.
10. The points that have been urged against him are the following: 1. In his letter dated 11-7-1944 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 or 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 11-7-1944 the respondent stated that,
"the statements and schedules 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 the 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 book in the profit and loss statement is misleading as it suggests that the book was also examined. But if the duty of the respondent was only to prepare a correct statement from the accounts of the assessees and not to investigate 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 profits 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 mentions that 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 2-10-1944 the respondent gave an explanation that the differences between sales mentioned in the regular account books and those shown in the statements were to be accounted or by the sales entered in the separate book and that this explanation was found to be false, and that the respondent was negligent in passing on the statement of his client without satisfying himself whether it was correct or not. But if 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 in his letter dated 2-10-1944.
11. There is no charge against the respondent that he connived at the assessees' putting forward a false statement or that he had in any manner associated himself with the attempt of the assessee to mislead the department. The charge is that he owed a duty to the department, to himself investigate 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 such duty to the department and, therefore, no question of negligence arises.
12. Before concluding we think it is necessary to comment on the inordinate delay in the institution of these proceedings. The statements complained of were made on 11-7-1944 and 2-10-1944; they were found to be unacceptable by the department by its order dated 31-10-1944; the assessment proceedings were themselves finally closed on 30-7-1947 and this complaint is filed on 6-1-1951. It is essential that charges of this kind should be made with promptitude.
13. 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 reference.