Disciplinary action against CA giving forged service tax challan to client by diverting cheques with bank staff connivance-Proceedings remanded back by HC

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Disciplinary action against CA giving forged service tax challan to client by diverting cheques received from client for deposit of service tax with the hep and connivance of bank staff. Proceedings remanded back to ICAI by the High Court.

Disciplinary action against CA giving forged service tax challan

ABCAUS Case Law Citation:
998 2016 (08) HC
Date/Month of Judgment: August 2016

Brief Facts of the Case:
The complainant was running a Travel company and had alleged that a practicing Chartered Accountant (the respondent) had misappropriated

As per the complaint lodged in 2005, the Respondent CA used to file returns of the complainant’s company and he had entrusted the respondent with the job of depositing Service Tax and for this job he used to pay him the professional fees.  At the end of every month, the respondent used to collect the amount of Service Tax in Cash/Pay Orders on behalf of the Complainant’s Company for depositing it in the Service Tax account at Bank.

It was alleged that the respondent always used to handover to the complainant the photocopies of the Challans deposited in the Bank. Despite the demand from the complainant, the respondent CA did not give the original challans. When becoming suspicious, the complainant insisted upon payment of entire Service Tax amounts through DD/Pay orders. The respondent advised the complainant to give the Service Tax amount in form of DD/Pay Order favouring PNB, Lawrence Road for which he used to give the service tax challans’ copies of the same amount as deposited in PNB, Lawrence, Road. However, thereafter, on repeated demand for the originals, the respondent handed over the original challans. The complainant got suspicious, particularly noticing overwritings and amendments in the original challans so handed over to him.

When, the complainant verified from the bank, it was found that the actual amount of service tax paid by the respondent CA was not the same as the amount as collected from the complainant. On further enquiry from the bank, the complainant found that with the assistance from the bank employees, the payments made through demand draft were credited in the Current Account of a firm whose proprietor was none other than the brother of the respondent CA. Thus the respondent with the help the employees of the bank carried out this fraudulent activity amounting to Rs. 47,34,278/-. When the complainant detected the fraud, the Respondent admitted his fault and promised to pay the entire amount to the Government with interest and penalty.

The complainant alleged that the respondent used to maintain two files in respect of Service Tax for the companies- one for filing the Service Tax to the Govt., with less amount as actual paid (Forged figure) and other one to show to the Complainant that he has paid all the money as Service Tax confirming the money collected from the Complainant’s Company. The whole fraud was carried out in connivance with bank staff.

The Respondent in his Written Statement (WS) submitted to the Council of ICAI, that the dispute had been sorted out and an M.O.U. has already been signed and the matter is pending before the High Court, for quashing of the F.I.R. lodged by the complainant.

However, the complainant in his rejoinder stated that no compromise had been reached with the respondent in except that a Memorandum of Understanding had been signed. The Complainant also enclosed a letter issued from the office of the Assistant Commissioner of Service Tax, which clearly stated that the respondent had committed similar fraudulent activities with other parties in particular, the respondent had cheated two other companies by not depositing the proper Service Tax.

The Respondent failed to submit anything in reply to the rejoinder of the complainant. Subsequently, in compliance with provisions of Regulation 12(11) of the Chartered Accountants Regulations, 1988, the Council of the Institute of Chartered Accountants (ICAI) found the respondent guilty of professional and/or other misconduct, and cause an enquiry by the Disciplinary Committee (DC).

The DC found that in MOU there was a clear admission by the respondent about the act of cheating the complainant by forging the service tax challans and the respondent had agreed to refund the money embezzled and in return, the complainant helped in quashing the first information report. However, the committee also noted that the High Court had dismissed the petition filed by the respondent for quashing of FIR stating that some of the offences were non-compoundable in nature as a result of which the FIR could not be quashed.

The DC held that the conduct of the Respondent was highly unbecoming of the Chartered accountant and had brought disrepute to the profession and the respondent was guilty of ‘Other Misconduct’ under section 22 read with section 21 of the Chartered Accountant Act 1949 and a reference was made to the High Court under Section 21 of the un-amended Chartered Accountants Act, 1949, seeking imposition of penalty against the respondent.

Contentions of the Respondent:
It was argued on behalf of the respondent that the Council, erred in holding that in absence of any provision in the Chartered Accountant Act, 1949 the complaint could not be withdrawn. It was stated that the Council, failed to consider that the basis of the complaint proceedings became non-existent in view of the complaint withdrawal letter in 2012 as well as the Memorandum of Understanding dated 12.05.2005 and 16.04.2012 between the two . It was argued that once a compromise to end the dispute was arrived at between a complainant and a chartered accountant, disciplinary proceedings did not survive.

It was urged that the proceedings against the respondent were illegal and violative of principles of natural justice because the Council failed to consider the written statement/submissions dated 16-10-2012. Also on 21.03.201,3 it was specifically admitted by the complainant to the Council that he was under mistaken belief as to the conduct of the Respondent and that all the FIRs lodged were cancelled or quashed by the respective courts. There was specific terms of the two compromise/MOUs dated dated 12.05.2005 and 16.04.2012 stating that the respondent was absolved of all allegations of wrongdoing and that the complainant withdrew such allegations.

It was also argued that the charges alleged against the respondent were not proved beyond reasonable doubt. Being quasi criminal proceedings the result of which can severely affect the professional reputation of a chartered accountant, the higher burden of proof was required in the instant case.

Contentions of the Council of ICAI:
It is argued that in none of the MoUs dated 12.05.2005 or 16.04.2012 was there any reference to the complaint made by the complainant against the respondent and that the complainant or the parties could not avoid the disciplinary proceedings by entering into a private settlement particularly when there were serious allegations of fraud leveled by the complainant.

It was further submitted that the petitioner being a regulatory body was simply enquiring into the conduct of one of its members, the Respondent.

It was further submitted that the petitioner was under obligation to maintain status and standard of professional qualifications of its members.

It was also urged that there is no provision in the Act for withdrawal of the complaint.

It was submitted that in case a complaint containing serious allegations of fraud is allowed to be withdrawn simply because monetary disputes between the accountant member and the complainant are settled, it would render the disciplinary mechanism of the Act meaningless.

Observations made by the High Court:

Regarding the contentions of the respondent objection as to maintainability of the complaint, on the ground that the disputes were settled between him and the complainant, the High Court instanced a when Punjab and Haryana High Court, in case where the complainant had not appeared before the Council of ICAI, held that there was no evidence when council did not reported that instead of the complainant some other witnesses were examined in proof of the allegations and/or record of the case was proved during the course of the proceedings. The High Court also pointed out that Punjab and Haryana High Court again in a case held that a complaint not on behalf of the client, but its old auditor, was not maintainable as the auditor had no locus standi to make a complaint and that disputes related to the issue had been settled and so recorded by the Company Law Board.

The High Court observed that in the subsequent MOU dated 16.04.2012 , the complainant did absolve the respondent of all misconduct and withdraw the allegations. These facts, i.e. the parties appearing to have entered into another MOU on 16.04.2012 were material and had to be investigated but the order of the Council did not take the subsequent MOU into consideration at all.

According to the High Court, the Council should have gone into it and called the complainant to depose before it, in the light of the later development and opined that it was a serious infirmity with the impugned order.

The High Court noted that the relative or corresponding demands from the Service Tax authorities or the assessment orders, or service tax returns which could substantiated complainant’s allegation were not placed on the record. Also there was no material to suggest that the amounts were deposited in some other concern’s account.

According to the Court, when a professional, such as a chartered accountant is arrayed for misconduct which has quasi criminal overtones, the Council has to be circumspect; some objective evidences- both documentary and oral and in the instant case, not only the statement of the complainant, the relative bank records and relevant statement of bank officers were necessary.

Thus However, that ipso facto does not transform into proof of such criminal misconduct; the prosecution or the complainant would have to establish his guilt.

The Court pointed out that after the MOU. the complainant did appear before the Council and state that he did not withdraw the allegations However the later MOU significantly changed the entire picture.

The High Court summed up that the Council acted with haste and great dispatch to complete proceedings but it was obligatory on the part of the Council not only to investigate the truth of the later MOU, but also satisfy itself that the basis of the complaint, i.e., that amounts were appropriated and lower amounts were paid into the accounts of Service tax authorities, were established objectively through documentary material. The findings of the Council cast a shadow on the professional integrity of the respondent, without proof of essential foundational facts.

Accordingly, the High Court referred the case back to the Council for further inquiry and report  and to dispose off the case within 6 months.

Disciplinary action against CA giving forged service tax challan

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