M.S. Ranganath Vs. Institute of Chartered Accountants of India and ors. - Court Judgment

Jagannatha Shetty, J.

1. In this petition under article 226, the petitioner, who is a chartered accountant, has challenged the validity of an order made by the Institute of Chartered Accountants of India (hereinafter referred to as 'the Institute'). The Institute is a body created under the Chartered Accountants Act, 1949 (hereinafter referred to as 'the Act').

2. The facts leading to the petition are these :

The petitioner and respondents Nos. 3 to 7 wanted to promote a company known as 'Datacons Private Ltd.' The object of the said company as envisaged by its memorandum and articles of association is to carry on the business of consultancy services in all aspects relating to the management, economics, marketing, agriculture, engineering, project design and execution, development of prototypes and software techniques, to conduct work studies, research, system-analysis, surveys, investigation, planning, designing and execution, in all matters relating thereto and to provide their clientele with the necessary advice, guidance, reports, expertise, technique or know-how in relation to any or all the matters; to establish and run a data processing centre with the aid of calculating machines, electronic computers and other gadgets and to establish or assist companies, business, firms, projects or enterprises to undertake works, projects and schemes of all descriptions and to provide them with necessary advice and expertise in all engineering, technical, marketing, financial and other allied matters. The promoters of the company, before it was registered, forwarded the memorandum of association to the Institute for the opinion and approval of the Council, so that they may not, afterwards, be found fault with for their association with the company. It would be useful now to refer to the correspondence exchanged between the promoters of the company and the Institute. On 12th April, 1971, the Secretary of the Institute wrote a letter to respondent No. 3, suggesting certain changes in the memorandum of association of the Datacons Private Ltd. His letter reads as follows :

'12th April, 1971.

My dear Mr. Ramadhyani,

I am in receipt of your telegram and letter forwarding the memorandum and articles of association of the proposed company. As I have explained in my earlier letter, section 25 of the Chartered Accountants Act prohibits companies from practising as chartered accountants. Your attention is also invited to section 2(2) of the said Act and Regulation 167 of the Chartered Accountants Regulations as to what constitute practices as a chartered accountant. In view of these provisions, a member of the Institute associating himself with any limited company set up for the purpose of performing all or any of the functions which are considered to be within the ambit of practice of a chartered accountant would be rendering himself liable for disciplinary action.

From a first reading of the memorandum and articles of association sent by you and having regard to what I have explained above, before you or any of your partners could associate as directors of the proposed company, it would appear that the same would have to be amended appropriately omitting all reference to services which fall within the definition of 'practice'. All the same, I am referring the matter to our standing counsel and I shall revert to this subject on receipt of his reply during the course of the next few days.

As for the case of another member mentioned by you, as far as I have been able to see from the correspondence, no definite reply has yet been given to him granting the permission.

Yours sincerely,

(Sd.)

C. Balakrishnan.'

3. On 15th April, 1971, respondent No. 3, after effecting the necessary amendments to the 'object clause' in the memorandum of association, replied as follows :

'My dear Sri Balakrishnan,

DATOCONS PRIVATE LTD. (under formation)

May I refer you to para. 2 of your letter dated 12th April, 1971.

In accordance with the suggestions contained therein, it is proposed to amend the main objects clause 1 of the memorandum of association, omitting all reference to service within the definition of 'practice' so as to read as under :

'1. To carry on the business of consultancy services in all aspects relating to management, economics, marketing, agriculture, engineering, project design and execution, development of prototypes and software techniques, to conduct work-studies, research, systems-analysis, surveys, investigation, planning, designing and execution, in all matters relating thereto and to provide their clientele with the necessary advice, guidance, reports, expertise, technique or know-how in relation to any or all of the matters hereinbefore mentioned.'

In the light of the above change in the objects clause of the memorandum, I shall be much obliged if you will please let me know per return of post whether the proposed amendment of the objects clause of the memorandum is acceptable to your esteemed Institute and permission can accordingly be granted to me to be the managing director of the proposed company.

With kind regards.

Yours sincerely,

(Sd.)

B.K. Ramadhyani.

Shri C. Balakrishnan,

Secretary,

The Institute of Chartered

Accountants of India,

New Delhi.'

4. In the above letter, respondent No. 3 has specifically sought permission from the institute for his becoming the managing director of the company, if the institute has no objection for the registration of the company. Similar requests were made by the petitioner and respondents Nos. 4 to 7 for becoming the directors of the said company. On 24th April, 1971, on behalf of the Institute a letter was addressed to respondent No. 3, stating that the Institute has obtained legal opinion on the matter and the standing counsel of the Institute has opined that the activities of the company would not offend the provisions of section 25 of the Act. It was further stated that respondent No. 3 could become the managing director, while others would be entitled to function as directors of the Datacons Private Ltd. Accordingly, on 3rd May, 1971, the said company was registered and it started catering to the needs of its clientele, with respondent No. 3 as the managing director and the petitioner and others as directors of the company. The company undertook huge outlay of expenditure. It made arrangements to get various sophisticated machines from the IBM. It installed many other machines at its new premises at Lalbagh Road, Bangalore. It borrowed loans from the banks and third parties directly under the authorisation and responsibility of the managing director of the company.

5. When the company was thus functioning for a little over one year, the petitioner received a letter dated 31st July, 1972, from the Institute, stating that the Council at its recent meeting, reviewed the whole position, and came to the conclusion that the permission granted to enable him to act as a director of the company would offend the provisions of section 25 of the Act. By the said letter, the petitioner was given six months' time for dissociating himself from the company. Similar directions were also issued to the other directors. Respondent No. 3, taken by surprise, addressed a detailed letter to the Institute, inter alia, contending as follows :

That the managing director or other directors do not engage themselves in offering consultancy services through the company. They function in the same way as a chartered accountant would do if he were the director of the IBM or IVL. They do not give or offer their professional services directly to the company's clients. The company has its won technical staff, to perform its day-to-day functions. The directors have acted on the strength of the permission accorded to them by the Institute. They have provided the company with substantial working funds and have incurred heavy financial commitments and their withdrawal at this stage would result in a total financial loss to them.

6. In the said letter, respondent No. 3 further reiterated that the provisions of section 25 of the Act are not attracted since the company does not indulge directly in performing any professional work, such as, audit, certification of accounts, income-tax work, etc., which form part of the normal functions of a practising accountant. It was further stated that the company has several long-term contractual obligations with its clients, and, if the directors are asked to withdraw from the company, leaving its clients in doldrums, it would affect the reputation of the directors and expose them to legal action including one for damages. With these and other stated circumstances, respondent No. 3 requested the Council to permit him and other directors to continue to functions as directors of the company.

7. The Council of the Institute did not, however, change its opinion. It reiterated its views by its letter dated 4th January, 1973, stating that the petitioner and other directors should dissociate themselves from the company to avoid penal consequences and to be free from professional misconduct.

8. The petitioner, finding himself with no other alternative, has preferred this petition challenging the action of the Council of the Institute.

9. On behalf of the institute, a counter-affidavit has been filed by its secretary in which he has not denied the statement of facts alleged by the petitioner. He has also not denied that the Council permitted the petitioner and others to become directors of the company, after considering that they would not be rendering themselves liable for disciplinary action. He has, however, stated as follows :

'The rendering of consultancy services and other work which comes within the ambit of chartered accountant's work in all aspects relating in management is, in the opinion of the Council, a part of the practice of a chartered accountant under section 2(2)(iv) of the Act. Section 25(1) of the Act forbids the rendering of any such services by a company. It is immaterial whether the managing director or other directors of Datacons Private Ltd. are personally rendering any of the services which can be rendered by a chartered accountant. So long as the company whose affairs they are controlling, is rendering such services, they come under the mischief of section 25(2) of the Act. In other words, the fact that the petitioner is a director of the company is actionable in itself under section 25(2) of the Act. Even if the directors are not actually controlling the day-to-day affairs of the company, if the company is rendering such services as a chartered accountant would, then, it would come within the ambit of section 25.'

10. With these peadings, it is necessary now to deal with the submissions on the merits of the case. The claim of the petitioner is firstly founded upon equity or estoppel which is said to arise in his favour as a result of the representation made or permission accorded by or on behalf of the Council of the Institute. The estoppel is a complex legal notion. It is a rule of equity. The principle upon which this rule rests is that it would be must inequitable and unjust that if one person, by a representation made, or by conduct amounting to representation, has induced another to act as he would not otherwise have done, the person who made the representation should not be allowed to deny or repudiate the effect of his former statement, to the loss and injury of the person who acted on it. This rule has gained new dimensions in recent years. It has been extended to the representation made by the State and the public bodies. In Union of India v. Anglo-Afghan Agencies the Supreme Court held that the following observations made by Denning J., in Robertson v. Minister of Pensions, applied in India :

'The Crown cannot escape by saying that estoppels do not bind the Crown, for that doctrine has long been exploded. Nor can the Crown escape by praying in aid the doctrine of executive necessity, that it the doctrine that the Crown cannot bind itself so as to better its future executive action.'

11. In Century Spinning and . v. Ulhasnagar Municipal Council, the Supreme Court extended the rule of estoppel against public bodies. It was observed :

'If our nascent democracy is to thrive different standards of conduct for the people and the public bodies cannot ordinarily be permitted. A public body is in our judgment, not exempt from liability to carry out it obligation arising out of representations made by it relying upon which a citizen has altered his position to his prejudice.'

12. It was also observed in that case that public bodies are as much bound as private individuals to carry out the representations of facts and promises made by them, relying on which other persons have altered their position to their prejudice.

13. The principles of estoppel are now well established and any difficulty that arises is due only to the application of well-settled principles in an individual case. The question before me is whether these principles apply a fortiori to fettering the effective discharge of statutory duties by the Council of the Institute. The answer to the question, to my mind, depends upon the scheme of the Act and the purpose for which the Institute is constituted. The Act is a self contained code of conduct of the chartered accountants. The Institute of the Chartered Accountants of India is a body corporate. All the chartered accountants in India are its members. For the management of the affairs of the Institute, section 9 provides for the constitution of a Council of the Institute. Under section 15, the duty of carrying out the provisions of the Act shall be vested in the Council. It has got, among others, the power to take disciplinary action against the chartered accountants. It is the Council which is primarily responsible to guide its members in the discharge of their professional duties and to maintain a high standard. In Kishorilal Datta v. P. K. Mukherjee the Calcutta High Court observed that the aim of the Act was mainly to protect the public from 'unscrupulous, negligent or dishonest' chartered accountants who are entrusted with the safety of the interest of the public. The Chartered Accountants Regulations, 1964, provide in detail the method and manner in which the chartered accountants have to conduct themselves while they are in practice. They shall not do any act which the Act forbids or their profession disapproves. On a perusal of these provisions of the Act and the said Regulations, I have no doubt that the Act was intended for the benefit of the public and the Council of the Institute is charged with the duty of carrying out the provisions of the Act. Such a public body, in my judgment, shall not be disabled or estopped from properly guiding the chartered accountants. A public authority cannot abdicate its statutory duty in the public interest. My view finds support from the following passage from Judicial Review of Administrative Action (second edition) by S. A. de Smith at page 459 :

'A public authority is created for the purpose of discharging responsibilities for the public benefit, and it is vested with specific powers and duties in that behalf. If it impedes the discharge of its responsibilities by permitting others to do things that it has no power to permit, the public interest requires that it shall not be disabled from reasserting those responsibilities notwithstanding its previous conduct.'

14. In Southend-on Sea Corporation v. Hodgson (Wickford) Ltd. an officer of a planning authority told a firm that if they bought certain property they would not need planning permission to sue it as a builder's yard since it had already been used for this purpose so that the purchaser would have the benefit of the 'existing use of right'. In fact this was proved to be wrong information, and planning permission was subsequently refused. It was observed by Lord parker C.J., at page 422, as follows :

'It is perfectly clear that that proposition is sound, at any rate to this extent, that estoppel cannot operate to prevent or hinder the performance of a positive statutory duty. That, indeed, is admitted by Mr. Forbes on behalf of the respondents, but he maintains that it is limited to that and that it does not extend to an estoppel which might prevent or hinder the exercise of a statutory discretion. I can see no logical distinction between the two.'

15. It is in the public interest that this court shall not extend the rule of estoppel in respect of a representation made or act performed or advice tendered by the Council of the Institute in relation to the professional conduct of the members of the Institute. The Council is under a duty to guide correctly the members of the Institute. It is a professional body of people who are the best judges to decide and lay down what the standard of their conduct should be. It is perhaps with that end in view the Council reviewed its earlier opinion and asked the petitioner to dissociate himself from the company. The Council is now of the opinion that the consultancy service offered by the directors of the company individually or through the company, in all respects relating to management, is part of the practice of a chartered accountant as described under section 2(2)(iv) of the Act, and it would offend the provisions of section 25. In my view, the Council is entitled to hold this opinion provided that it is not ultra vires of the Act and the regulations made thereunder. It is not the case of the petitioner that that decision of the Council is contrary to the Act and Regulations. Therefore, the Council cannot be estopped from reviewing its own decision when that decision particularly relates to the professional conduct and activities of the members of the institute.

16. The next question is whether an opportunity should have been afforded to the petitioner, before he was called upon to dissociate himself from the company. The need to observe the rules of natural justice depends upon the effect of the decision of the Council on the rights of the petitioner. The petitioner is a director of the company; so also respondents Nos. 3 to 7. They became directors only after the Council expressly permitted them. they have undertaken huge outlay of expenditure and have committed themselves on various contracts. They have been functioning as such for more than one year when the Council made the impugned direction. They have stated that the consequences of their withdrawing from the company, would not only affect their reputation, but they will be exposed to legal action including one for damages. These facts and allegations have not been denied in the counter-affidavit filed by the secretary of the Institute. I have, therefore, to proceed on the ground that the impugned direction of the Council has prejudicially affected the petitioner and respondents Nos. 3 to 7.

17. In State of Orissa v. Dr. (Miss) Bina Pani Dei the Supreme Court observed that the rule that a party to whose prejudice, an order is intended to be passed is entitled to a hearing applies alike to judicial tribunals and bodies of persons invested with authority to adjudicate upon matters involving civil consequences. This principle has been reiterated by the Supreme Court in D. F. O., South Kheri v. Ram Sanehi Singh.

18. In A. K. Kraipak v. Union of India it was observed :

'........... The aim of the rules of natural justice is to secure justice or to put it negatively to prevent miscarriage of justice. These rules can operate only in areas not covered by any law validly made. In other words, they do not supplant the law of the land but supplement it .... If the purpose of the rules of natural justice is to prevent miscarriage of justice one fails to see why those rules should be made inapplicable to administrative enquires ......'

19. Apart from the applicability of these principles to the case on hand, there is one other strong reason as to why the petitioner should have been given an opportunity of being heard. The direction given to the petitioner and other directors of the company was to dissociate themselves from the company on the ground that the consultancy service offered by them or through their company is a part of the practice of a chartered accountant and, therefore, forbidden by the provisions of section 25. Disobedience of this direction of the Council would entail penal consequences to the petitioner and other directors and they would be liable to be dealt with for professional misconduct. This was made clear by the secretary in his letter dated 4th January, 1973, addressed to the petitioner. When such is the position, the Council ought to have afforded an opportunity of being heard to the petitioner and respondents Nos. 3 to 7 before taking the decision and issuing the impugned direction. After all, the decision of the Council rested solely on the 'main objects clause' in the memorandum of association of the company. It is said that the Council has had no opportunity or benefit of looking into the actual works performed by the directors of the company. The impugned direction must, therefore, be set aside on the simple ground that it was made contrary to the basic rule of natural justice.

20. In the result, this petition is allowed with a direction to respondent No. 1 to forbear from enforcing the letter dated July 31, 1972, against the petitioner and respondents Nos. 3 to 7, with liberty reserved to respondent No. 1 to take appropriate decision after affording them a reasonable opportunity of being heard.

21. In the circumstances, I make no order as to costs.