TMI Blog1982 (8) TMI 166X X X X Extracts X X X X X X X X Extracts X X X X ..... more than one unit of a company, the report in respect of each unit will be treated as one cost audit for the purpose of reckoning the above limit. The above limit will be made applicable from the calendar year 1-1-1981 and will apply to those units whose year ending falls within the period". The said decision of the CLB was published in the publication of the Council of the Institute of Costs and Works Accountants of India, namely, the "Management Accountant" on 3rd March, 1981, for the notice of its members, including the petitioner. By its representation dated 23rd June, 1981, to the CLB, the petitioner pointed out as to how such a restriction was illegal, arbitrary and unjust and requested the Board to rescind the said decision. On 19th September, 1981, the CLB informed M/s. Chemical, Industrial and Pharmaceutical Laboratories, Bombay, a regular client of the petitioner-firm, that the company should propose the name of a qualified cost accountant other than the petitioner-firm as the name of the said firm had already been approved by the Board for the audit of 30 units. A similar letter was sent by the Board to Anil Starch Products Ltd., another regular client of the petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost accountants. We may now note the relevant provisions of the Companies Act in this regard; "209. (1)( d ) In the case of a company pertaining to any class of companies engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material or labour or to other items of cost as may be prescribed, if such class of companies is required by the Central Government to include such particulars in the books of account". "224. (1) Every company shall, at each annual general meeting, appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting and shall, within seven days of the appointment, give intimation thereof to every auditor so appointed. (1A)Every auditor appointed under sub-section (1) shall, within thirty days of the receipt from the company of the intimation of his appointment, inform the Registrar in writing that he has accepted, or refused to accept, the appointment. (1B)On and from the financial year next following the commencement of the Companies (Amendment) Act, 1974, no company or its Board of Directors shall appoint or reappoint an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Government. (3) An audit conducted by an auditor under this section shall be in addition to an audit conducted by an auditor appointed under section 224. (4) An auditor shall have the same powers and duties in relation to an audit conducted by him under this section as an auditor of a company has under sub-section (1) of section 227 and such auditor shall make his report to the Central Government in such form and within such time as may be prescribed and shall also at the same time forward a copy of the report to the company. (5) ( a ) A person referred to in sub-section (3) or sub-section (4) of section 226 shall not be appointed or re-appointed for conducting the audit of the cost accounts of a company. ( b ) A person appointed, under section 224, as an auditor of a company, shall not be appointed or re-appointed for conducting the audit of the cost accounts of that company. ( c ) If a person, appointed for conducting the audit of cost accounts of a company, becomes subject, after his appointment, to any of the disqualifications specified in clause ( a ) or clause ( b ) of this sub-section, he shall, on and from the date on which he becomes so subject, cease to conduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the contrary contained in such or any other provision of this Act, the (Central Government or Company Law Board) may accord, give or grant such approval, sanction, consent, confirmation, recognition, direction or exemption subject to such conditions, limitations or restrictions as it may think fit to impose and may, in the case of contravention of any such condition, limitation or restriction, rescind or withdraw such approval, sanction, consent, confirmation, recognition, direction of exemption." "637AA. Notwithstanding anything contained in section 198, section 309 or section 637A, the Central Government may, while according its approval under section 269, to any appointment or to any remuneration under section 309, section 310, section 311 or section 187, fix the remuneration of the person so appointed or the remuneration, as the case may be, within the limits specified in this Act, at such amount or percentage of profits of the company, as it may deem fit and while fixing the remuneration, the Central Government shall have regard to ( a )the financial position of the company; ( b )the remuneration or commission drawn by the individual concerned in any other capacity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posed as to why in 1974 Parliament found it necessary to expressly amend section 224 so as to permit the Central Govt. to impose restrictions on the number of audits. Section 233B relating to the cost audits was also amended in 1974. Why was it that Parliament did not find it necessary to amend the said provision permitting the Central Govt. to impose restrictions on the number of cost audits ? It is clear that Parliament thought that unless an express power is conferred by statute, the Central Govt. has no such power. In its own wisdom Parliament also thought that no such restriction was necessary for cost accounting and for that reason no power need be conferred on the Central Govt. to impose restrictions on the number of cost audits. Further, there is intrinsic evidence of the intention of Parliament not to impose any such restriction on the number of cost audits. The proviso to section 233B, simultaneously introduced in 1974, makes this position clear. What Parliament found was that the problem of the profession of cost accountants was not of surplus but was one of shortage, unlike the profession of chartered accountants. Because of this special problem concerning the professio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to do. The proviso to section 233B, introduced in 1974 by the same amendment by which the restriction on number of audits was introduced in section 224, unambiguously expresses the intention of the Legislature contrary to the idea of any restriction or limitation. Section 637A will have, therefore, no application and cannot be utilised by the Central Govt. or by the CLB to take the power which is not conferred upon them by the Companies Act. The impugned decision is wholly ultra vires the provisions of the Companies Act. Since the restriction of audits to 30 audits is not lawful, the basis and mode of calculation of 30 audits, namely, "each product" of the company and each unit of the company, where the product is manufactured in more than one unit, is also illegal. The respondents, however, submit that the decision of the Supreme Court in CLB v. Upper. Doab Sugar Mills Ltd . [1977] 47 Comp. Cas. 173 ; AIR 1977 SC 831, supports the restrictions of thirty audits imposed by the impugned order. In that case, the respondent-company had sought approval of the CLB under section 269(1) of the Act for the appointment of two managing directors after the coming into force of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, therefore, calls for a separate consideration. The decision of the Supreme Court, to my mind, would not salvage the respondent in the imposition of restriction on the number of cost audits. The petitioner has also challenged the impugned order as being violative of the right to carry on a profession, guaranteed by article 19(1)( g ) of the Constitution. It is admitted by the counsel of the Institute of Costs and Works Accountants of India that at present most of the work of cost accountants pertains to the cost audits ordered by the Central Govt. under section 233B of the Act. The utility of scientific costs auditing for optimum efficiency and future development is not much appreciated by the private enterprises in India or by public sector undertaking':. In the industrially advanced countries cost auditing has become a regular feature of industrial planning. The restriction imposed, therefore, materially and substantially affects the right to carry on the profession of cost audit. Cost audit, it is submitted, not being an annual feature like the financial audit, depends largely on the chance of the Central Govt. directing such audit and the profession is required to be carrie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In other words, if a law passed by Parliament imposes restrictions relating to professional and technical qualifications for practising a profession that will be a reasonable restriction permitted by the Constitution. Most of the enactments regulating professions passed after the adoption of the Constitution, prescribed the professional and technical qualification for practising these professions, Parliament has kept in mind the ambit of the power of the State mentioned in article 19(6) to impose restrictions in the nature of professional and technical qualifications. The restriction imposed on a profession can be reasonable and hence constitutional if two conditions are satisfied (1) the restriction must be imposed by law, and (2) the restriction should be only in the nature of professional or technical qualifications. If the restrictions imposed are not imposed by law or if they are of the nature different from the professional or technical qualifications, the restrictions would be unreasonable and unconstitutional. The preamble and the statement of objects and reasons expressly state that this enactment is made for "regulating" the profession. In fact, the petitioner had start ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle 14 of the Constitution. The justification of the respondents in taking the present decision is that the work of cost accountants is monopolised in the hands of a few persons and the dispersal of the work is in the interest of the profession. The approval by the statutory council is also relied upon to show that there is no arbitrariness in the decision. The respondents claim that the said restriction is necessary in order to get the cost audits done within the time prescribed by the Act and for securing effciency of performance. It is submitted by the respondent that there are about 500 auditors and the Government orders about 1,200 to 1,600 audits every year. By a simple arithmetical calculation a cost auditor does not get more than three audits every year. Annexure R-5 filed by the respondents (with the counter-affidavit) gives a summary of the audits conducted in 1981. It is as under : A Unit Range No. of Cost Auditors Below 5 123 6 10 12 11 20 6 20 and above 2 Total: 143 B Remuneration Range No. of Cost Auditors Below 25,000 120 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernment would show that out of about 500 auditors only about 143 auditors are to some extent actively practising. Even out of 143, majority of auditors are in service drawing salaries and some of them are retired employees who do auditing merely as an additional income. It is the Government which is responsible for restricting the growth of the profession of cost accountants. Annexure D is a letter written by the Chemical, Industrial and Pharmaceutical Laboratories Ltd. to the CLB. This was a company to which the Board had informed that they should engage another cost auditor as the petitioner had done more than 30 audits. In reply the company had informed that the work was entrusted to the petitioner as the profession involves an element of confidentiality, trade secrecy, integrity and professional ethics and familiarity with the intricacies of bulk drug manufacturing. They had also informed that the petitioner had performed his duties within the statutory time and with efficiency. Similar is a letter (annex. E) from the Anil Starch Products Ltd. The said company had also emphasised that a change of auditor from year to year would seriously jeopardise the industry. The petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a routine necessity. Our public sector undertakings and the private industries have yet not appreciated the importance of cost audits, which is in their own interest. This is similar to the total neglect of research by our industries. In this state of affairs there is a limited scope for large scale increase of the cost audit work and that too within the cost audits ordered by the Government under section 233B. In the present state of this profession the endeavour of the Government should be to foster further the growth and awareness of its utility in optimum industrial development of this country. The uncontroverted figures for the year 1981 would show that the activity of the Government in this area is in the reverse direction. The economists would call this harmful to the industrial growth of this nation. Even by the Government calculations an auditor will get about two or three audits in a year. This would not even be sufficient for making his living. The restriction of audits to 30 audits would in no way contribute to a dispersal of the cost audit work. Even if 1,600 audits are ordered on the basis of 30 audits per auditor the work would be concentrated in the hands of 55 audi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t after the decision of this court in Upper Doab Sugar Mills Ltd . v. CLB [1971] 41 Comp. Cas. 643, wherein this court held that section 637A does not permit the imposition of a ceiling on remuneration and commission of a managing director so as to ensure minimisation of economic inequalities, a new section, namely, section 637AA, was introduced in the Companies Act by the Amending Act of 1974. The said section provides for the guidelines to the Government in giving approvals under section 269 of the Companies Act. Guideline "e" reads: "the Central Government shall have regard to public policy relating to the removal of disparities in income". This is a clear indication of the intention of Parliament that such policy considerations should be supported by its legislation and should not be left to Government policy to be expressed in the form of an executive order or decision. For the reasons stated above the impugned decision is arbitrary and violative of article 14 of the Constitution. In Ajay Hasia v. Khalid Mujib Sehravardi, AIR 1981 SC 487, the Constitution Bench of the Supreme Court after reviewing some of the earlier decisions has held (p. 499): "It must, therefore, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f auditors, as an entity, has a right to practise. This is a statutory right. Apart from the fact that the right cannot be taken away by an executive decision no rational justification is shown by the respondents to justify the limitation of a firm. A partnership firm is a compendious name of the partners working together. Other professions such as solicitors architects, etc ., have such firms. The Act expressly prohibits an incorporated company from practising as a chartered accountant. That is to some extent understandable because the profession depends on the personal efficiency, competence and integrity, which may not be possible in the case of a company. So also the question of professional misconduct or violation of staiutoiy requirements cannot be appropriately dealt with against a large number of persons involved in a company. But that is not so in the case of a partnership firm. The respondents have explained as to why the petitioner's application for reconstitution of the firm has been delayed for such an inordinate time. Rejecting an approval on the grounds stated in regln. 113 is understandable but merely to sit on a file for seven months is wholly capricious. The me ..... X X X X Extracts X X X X X X X X Extracts X X X X
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