Gujarat High Court
Rayan S/O Nambi Puruam Salivati vs State Of Gujarat on 2 May, 2025
NEUTRAL CITATION
R/SCR.A/7016/2018 JUDGMENT DATED: 02/05/2025
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CRIMINAL APPLICATION (QUASHING) NO. 7016 of 2018
With
R/SPECIAL CRIMINAL APPLICATION NO. 7020 of 2018
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE J. C. DOSHI
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Approved for Reporting Yes No
✓
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RAYAN S/O NAMBI PURUAM SALIVATI
Versus
STATE OF GUJARAT & ANR.
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Appearance:
MR MIHIR JOSHI, SR. ADVOCATE WITH MS. NISHA OJHA AND MS.
VINISHA JAIN FOR M/S WADIAGHANDY AND CO(5679) for the Applicant(s)
No. 1
MR PRADIP D BHATE(1523) for the Respondent(s) No. 2
MR SOHAM JOSHI, APP for the Respondent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE J. C. DOSHI
Date : 02/05/2025
ORAL JUDGMENT
1. Except seminal difference, that Special Criminal
Application No.7016 of 2018 is in regard to consolidated
financial statement, whereas, Special Criminal Application
No.7020 of 2018 is in regard to standalone financial statement,
there is no other substantive change in both the petitions
challenging questioned Criminal Complaint dated 14.02.2018
bearing Criminal Enquiry No.137 of 2018 and Criminal
Complaint dated 14.02.2018 bearing Criminal Enquiry No.43 of
2018. Hence, with consent of learned advocates for both the
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sides, both the petitions are decided analogously.
2. Facts of the case are as under :-
2.1. The Respondent No. 2 herein has filed the aforementioned
Complaint under Section 143 of the Companies Act, 2013
(“Companies Act“) on the allegation that Petitioner, as auditors,
have failed to make certain disclosures pertaining to related
party transactions in the consolidated financial statements and
are therefore in contravention of Section 143 of the Companies
Act and thus liable to be prosecuted under Section 147(2) of the
Companies Act. It is further submitted that allegations made
against Petitioner, if proven, amount to imposition of a civil
penalty at best and therefore the entire proceeding is sans
jurisdiction. Hence, present petitions.
3. Learned Senior Advocate Mr.Mihir Joshi assisted by
learned advocate Ms.Nisha Ojha and learned advocate
Ms.Vinisha Jain for the petitioners would submit that Registrar
of Companies found that the petitioner who is Chartered
Accountant of M/s. Deloitte Haskins and Sells – partnership firm
though has mentioned list of related parties / Key Management
Personnel (KMP), has not stated who are related parties or KMP
of the Company in their audit report and hence, they have
committed breach of provisions of Companies Act and therefore,
violation of section 143 of the Companies Act having punishment
under section 147 of the Companies Act. Learned Senior
Advocate Mr.Joshi would submit that auditors would follow
Accounting Standard (AS 18), wherein, in clause 10.1 relatedPage 2 of 12
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party is defined and in clause 10.8 Key Management Personnel
(KMP) is defined. Learned Senior Advocate Mr.Joshi reading
definition of related party and Key Management Personnel
submits that it does not require to mention name of specific
individual with his posting to say that it is Key Management
Personnel. Learned Senior Advocate Mr.Joshi submits that
auditors have to follow Accounting Standard 18. It is further
submitted that while filing audit report, the petitioner has
followed Accounting Standard 18 and therefore, prosecution
against the petitioner is bad on its face.
3.1. Learned Senior Advocate Mr.Joshi submits that perhaps
Registrar of Companies expected that auditors have to follow
section 2(51) of the Companies Act and to specify who is Key
Managerial Personnel but section 2(51) of the Companies Act
would not apply in the present case. It is further submitted that
eve otherwise, Hon’ble Supreme Court in the case of Dayle
De’souza v/s. Government of India [(2021) 20 SCC 135] in para
34, held that prosecuting agency has to be thoughtful in cases of
technical, venial breaches and genuine and be firmly unforgiving
in case of deceitful and mendacious conduct. In the present
case, at the most it can be said to be technical and venial breach
and nothing more, therefore, the petitioner who is Chartered
Accountant should not be send for facing trial of technical
breach.
3.2. Making above submissions, it is submitted to allow the
petitions and quash the criminal complaint.
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4. Learned advocate Mr.Kshitij Amin for respondent no.2
would submit that let trial be completed. It is submitted that
contention which is raised by the petitioner can be tested during
trial. At this stage at threshold, it cannot be said that offence is
not made out against the petitioner. The petitioner has not
mentioned that who are Key Management Personnel of Mafalal
Industries. Merely stating name would not satisfy requirement
of Key Management Personnel. Thus, he submits that the
petitions may not be entertained and criminal complaint may not
be quashed at threshold.
5. Noticeably, fact that issue and dispute is between Registrar
of Companies and auditors, learned APP submitted to pass
necessary order.
6. Aptly to note that the petitioner is auditor of Mafatlal
Industries and he has filed consolidated financial statement as
well as standalone financial statement in the Registrar of
Companies. In column of KMP, auditors have mentioned names
of Mr.H.A.Mafatlal (upto 28.05.2013), Mr.Rajiv Dayal and
Mr.V.P.Mafatlal. Ministry of Corporate Affairs and Office of
Registrar of Companies on 25.07.2017 issued show cause notice
for violation for violation of Section 143 of the Companies Act,
2013 to petitioner observing following as contravene :-
“During the inspection of books of accounts and
consolidated financial statements of the company, it was
observed form the Note No.31.5 of notes on Consolidated
financial statements for the year ended 31.03.2015 and
31.03.2016 that the list of related parties / KMPs werePage 4 of 12
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given, however, in the list name of Company Secretary and
CFO was not given, hence violated the provisions section
129, 133 of the Companies Act, 2013 read with AS-18. You
being the auditors have not reported the same in your
report the said violation for respective financial year.
Therefore, there is violation of section 143 of the
Companies Act, 2013 and liable for penal action under
section 147 of the Act.”
7. Show cause notice was replied, where following answers
are given :-
“Paragraph 6 of General Instructions in Schedule III states
“for the purpose of this schedule, the terms used herein
shall be as per the applicable Accounting Standard.
The said position was also prevalent under the erstwhile
Revised Schedule VI of the Companies Act, 1956.
Consequently, the guidance note on Revised Schedule VI
issued by the Institute of Chartered Accountants of India
(ICAI) under para 6.15 also states that “The instructions
are clarify that the terms used in the Revised Schedule VI
shall be as per the applicable Accounting Standards. For
example, the term “related parties” used at several places
in the Revised Schedule VI should be interpreted based on
the definition given in AS-18 Related Party Disclosures.
Accordingly, with respect to related party disclosures,
disclosure requirements as prescribed under Accounting
Standard 18 : Related Party Disclosures (AS 18)
(prescribed under section 133 of the Act) is required to be
adhered to.
Whilst section 2(51) defines a key managerial personnel to
include the company secretary and chief financial officer,
disclosures in the financial statements is determined /
mandated in terms of the notified according standards.
Paragraph 10.8 of AS defines a key management personnel
to mean ‘those persons who have the authority and
responsibility for planning, directing and controlling the
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activities of the reporting enterprise”.
8. In Inspection Report done under section 206(5) of the
Companies Act (Annexure -B), Ministry of corporate Affairs in
para 17 found following violation :-
“17. Violation of section 129 read with section 133 of the
Companies Act, 2013 read with AS -18.
During the inspection of books of accounts and
consolidated financial statements of the company, it was
observed form the Note No.31.5 of notes on Consolidated
financial statements for the year ended 31.03.2015 and
31.03.2016 that the list of related parties / KMPs were
given, however, in the list name of Company Secretary and
CFO was not given, hence violated the provisions section
129, 133 of the Companies Act, 2013 read with AS-18.”
9. Subsequent to aforesaid aspect, Criminal Case was
registered under section 143 of the Companies Act against the
petitioner stating following breach as consolidated case for
launching prosecution :-
“During the inspection of books of accounts and
consolidated financial statements of the company, it was
observed from the Note No.31.5 of notes on Consolidated
financial statements for the year ended 31.03.2015 and
31.03.2016 list of related parties / KMP were given,
however in the list of name of Company Secretary and CFO
was not given, hence there is violation of provisions section
129, 133 of the Companies Act, 2013 read with AS-18. You
being the auditors have not reported the same in your
report the said violation for respective financial year.
Therefore, there is violation of section 143 of the
Companies Act, 2013 and liable for penal action underPage 6 of 12
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section 147 of the Act.”
10. What could be found as breach is name of Company
Secretary and CFO was not given in the consolidated financial
statement or standalone financial statement, which according to
prosecution violates section 129 and 133 of the Companies Act,
2013 read with Accounting Standard 18. It is true that in
consolidated financial statement or standalone financial
statement, names of Company Secretary and CFO are not
annexed but names of persons who are having authority and
responsibility for planning, directing and controlling the
activities of reporting enterprise has been stated. It manifestly
clear that Accounting Standard 18 is governing provision in
regard to related party. Related party is defined in clause 10.1 of
Accounting Standard, it reads as under :-
“10.1 Related party – parties are considered to be related if
at any time during the reporting period one party has the
ability to control the other party or exercise significant
influence over the other party in making financial and /or
operating decisions.”
10.1. Clause 10.8 of Accounting Standard defines Key
Management personnel. It reads as under :-
“10.8 Key Management Personnel – those persons who have
the authority and responsibility for planning, directing and
controlling the activities of the reporting enterprise.”
11. Reading aforesaid provision, it does not demand specific
name of Company Secretary or CFO. It just demands name of
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person who has authority and responsibility for planning,
directing and controlling the activities of reporting enterprise. It
is not case of the Registrar of Companies that names of persons
who have authority and responsibility for planning, directing and
controlling the activities of reporting enterprise is not mentioned
in consolidated financial statement or standalone financial
statement. Section 2(51) of the Companies Act defines Key
managerial personnel in relation to company. It reads as
under :-
(51) Key managerial personnel, in relation to a company
means :-
(i) the Chief Executive Officer or the managing director
or the manger.
(ii) the company secretary
(iii) the whole time director;
(iv) the Chief Financial Officer;
(v) such other officer, not more than one level below the
directors who is in whole time employment, designated as
key managerial personnel by the board and
(vi) such other officer as may be prescribed.
12. Therefore, as per Companies Act, Key Managerial
personnel means aforesaid persons but according to Accounting
Standard 18, Key Management Personnel are those persons who
have the authority and responsibility for planning, directing and
controlling the activities of the reporting enterprise. Therefore,
according to this Court, prosecution launched by Registrar of
Companies without noticing Accounting Standard 18 found be
hyper technical one.
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13. In the case of Dayle De’Souza (supra), the Hon’ble Apex
Court in para 34 has held as under :-
“34. Almost every statute confer operational power to
enforce and penalise, which power is to be exercised
consistently from case to case, but adapted to facts of an
individual case. The passage from Hindustan Steel Ltd.
highlights the rule that the discretion that vests with the
prosecuting agencies is paired with the duty to be
thoughtful in cases of technical, venial breaches and
genuine and honest belief, and be firmly unforgiving in
cases of deceitful and mendacious conduct. Sometimes
legal provisions are worded in great detail to give an
expansive reach given the variables and complexities
involved, and also to avoid omission and check
subterfuges. However, legal meaning of the provision is not
determined in abstract, but only when applied to the
relevant facts of the case. Therefore, it is necessary that
the discretion conferred on the authorities is applied fairly
and judiciously avoiding specious, unanticipated or
unreasonable results. The intent, objective and purpose of
the enactment should guide the exercise of discretion, as
the presumption is that the makers did not anticipate
anomalous or unworkable consequences. The intention
should not be to target and penalise an unintentional
defaulter who is in essence law-abiding.”
14. The intent, objective and purpose of the enactment should
guide the exercise of discretion, as the presumption is that the
makers did not anticipate anomalous or unworkable
consequences and unintentional defaulter should not be
targeted. In the present case, as stated herein above, Registrar of
Companies without referring to intention of provision and even
without noticing definition in Accounting Standard 18, has taken
hyper technical view, which is unworkable consequence.
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15. The petitioner who is reputed auditor who has audited
reputed company following Accounting Standard 18, cannot be
send for rigmarole of the trial.
16. This Court may gainfully refer to the following observations
of this Court in the case of State of Haryana v. Bhajan Lal [1992
Suppl (1) SCC 335], and the law laid down therein has been
consistently followed. In para 102, the Hon’ble Apex Court held
as under :-
“102. In the backdrop of the interpretation of the various
relevant provisions of the Code under Chapter XIV and of
the principles of law enunciated by this Court in a series of
decisions relating to the exercise of the extraordinary
power under Article 226 or the inherent powers under
Section 482 of the Code which we have extracted and
reproduced above, we give the following categories of cases
by way of illustration wherein such power could be
exercised either to prevent abuse of the process of any
court or otherwise to secure the ends of justice, though it
may not be possible to lay down any precise, clearly
defined and sufficiently channelised and inflexible
guidelines or rigid formulae and to give an exhaustive list
of myriad kinds of cases wherein such power should be
exercised.
(1) Where the allegations made in the first information
report or the complaint, even if they are taken at their face
value and accepted in their entirety do not prima facie
constitute any offence or make out a case against the
accused.
(2) Where the allegations in the first information report and
other materials, if any, accompanying the FIR do not
disclose a cognizable offence, justifying an investigation byPage 10 of 12
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police officers under Section 156(1) of the Code except
under an order of a Magistrate within the purview of
Section 155(2) of the Code.
(3) Where the uncontroverted allegations made in the FIR
or complaint and the evidence collected in support of the
same do not disclose the commission of any offence and
make out a case against the accused.
(4) Where, the allegations in the FIR do not constitute a
cognizable offence but constitute only a noncognizable
offence, no investigation is permitted by a police officer
without an order of a Magistrate as contemplated under
Section 155(2) of the Code.
(5) Where the allegations made in the FIR or complaint are
so absurd and inherently improbable on the basis of which
no prudent person can ever reach a just conclusion that
there is sufficient ground for proceeding against the
accused.
(6) Where there is an express legal bar engrafted in any of
the provisions of the Code or the concerned Act (under
which a criminal proceeding is instituted) to the institution
and continuance of the proceedings and/or where there is
a specific provision in the Code or the concerned Act,
providing efficacious redress for the grievance of the
aggrieved party.
(7) Where a criminal proceeding is manifestly attended with
mala fide and/or where the proceeding is maliciously
instituted with an ulterior motive for wreaking vengeance
on the accused and with a view to spite him due to private
and personal grudge.”
17. In view of above, allowing of trial against the petitioner
would be absolutely absurd. Sub-para 1 and 1 of para 102 of
Bhajan Lal (supra) is attracted.
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18. In view of above, the petitions are allowed. The Criminal
Complaint dated 14.02.2018 bearing Criminal Enquiry No.137 of
2018 in Criminal Case No.25083 of 2018 and Criminal
Complaint dated 14.02.2018 bearing Criminal Enquiry No.43 of
2018 in Criminal Case No.25094 of 2018 pending before the
learned Additional Chief Metropolitan Magistrate, Ahmedabad as
well as all consequential proceedings initiated in pursuance
thereof are hereby quashed and set aside qua the applicant.
Direct service is permitted.
(J. C. DOSHI,J)
SATISH
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