Writ Petition No. 2175 of 1999

11th October, 1999

Petitioner Counsel: MR. K.V. MANDLIK
Respondent Counsel: MR. B.P. APTE with MR. P.N. JOSHI ,MR. C.J. SAWANT, Advocate General with MR. U.G. KERKAR, AGP,DR. D.Y. CHANDRACHUD, Addl. Solicitor General, i/b M/s. Udwadia, Udeshi

Cases Cited:
The Appollo Textile Mills Employees Co-operative Credit Society Ltd. Vs. State of Maharashtra & Anr, W.P.No. 5038 of 1998 dt. 15/10/1998 [Para 3]

JUDGMENT

Y.K. SABHARWAL, C.J. :- Rule, Returnable forthwith, Counsel for Respondent Nos. 1 to 6 waive service. Learned Counsel for the Petitioner gives up Respondent No.7 - Chief Vigilance Commissioner.

2. The Nashik Merchants Co-operative Bank Ltd. (for short Bank ) is Respondent No.1 in the Petition. The State of Maharashtra, the Commissioner and Registrar Co-operative societies, Maharashtra State, the Divisional Joint Registrar, Co-operative Societies at Nashik and the Special Auditor, Class-I, Co-operative Societies are Respondent Nos. 2 to 5 respectively. The 6th Respondent is Chief General Manager, Reserve Bank of India.

3. The Petitioner seeks issue of appropriate writ, order or direction directing Respondent No.5 to continue and complete the audit of the Bank for the year 1997-98 and submit audit report and Respondent No.6 (RBI) be directed to investigate into the allegations made by the Petitioner. The grievance, as set out in the Petition, in brief, is that the Bank has not permitted Special Auditor appointed under the Maharashtra Co-operative Societies Act, 1860 (for short 'Act') to complete the audit which is illegal. In respect of the year in question (1997-98) special audit under the provisions of section 81 was entrusted to Special Government Auditor. According to the Petitioner, the said Auditor completed most of the audit work but the Bank did not supply to the auditor requisite information and, instead, appointed their own auditor. In the Annual General Meeting for the year 1997-98 held on 14/8/1998, it is alleged that the audit report submitted by the internal auditors of the Bank was placed before the meeting and not one prepared by the Special Auditor. According to the Petitioner, the Bank cannot change the Special Auditor on the ground of his failure to submit report before 14/8/1998 and, instead, appoint its own auditor. The Petitioner says that the Bank has misapplied the Division Bench decision of this court in Writ Petition No. 5038 of 1998 in the Appollo Textile Mills Employees Co-operative Credit Society Ltd. Vs. State of Maharashtra & Anr. decided on 15/10/1998. This Petition was disposed of as per the Minutes of the Order.

4. The Bank in its affidavit has given its own version. However, we need not go into the factual matrix. The Bank also states that in view of the aforesaid decision in Appollo Textiles case, there was no illegality in getting the audit conducted by an auditor appointed by it from the Panel of auditors maintained by the Registrar or by Chartered Accountant holding the Certificate in Co-operative Audit issued by the Institute of Chartered Accountants of India as there was failure on the part of the Special Auditor to submit the audit report.

5. In the Minutes of the Order in the Appollo Textiles Case, Rule in terms of prayer (c) was made absolute, which reads as under :-

"This Honourable Court may be pleased to issue a writ of mandamus or any other writ, directing the respondents, their agents and subordinates not to interfere in any manner in the audit of cooperative societies covered under section 81 (1)(a) of the Maharashtra Cooperative Societies Act 1960 being done by the Cooperatives through the auditors of their choice by an Auditor form the panel of certified auditors of the Registrar or by a Chartered Accountant holding a certificate in cooperative audit issued by the Institute of Chartered Accountants of India, in case the Registrar fails to do the audit at least once in a cooperative year and fails to present the audit report of the previous year on or before 15th of August, the last date for calling the annual general body meeting of that year, of every society covered under section 81(1)(a) of the Maharashtra Cooperative Societies Act 1960".

The Minutes of the Order also records that -

"In such circumstances, in order to enable the committees of societies to fulfill their statutory obligation to submit the audit reports in time and to protect the interests of societies and its members, the audit of cooperative societies covered under section 81 (1)(a) may be done by an auditor from the panel of auditors maintained by the Registrar or by a chartered accountant holding a certificate in cooperative audit issued by the Institute of Chartered Accountants of India appointed by the choice of the cooperative societies, in case there is a failure on the part of the Registrar to submit the audit report in time."

6. The learned counsel for Reserve Bank of India and the learned Advocate General appearing for the State and the Co-operative Department vehemently contend that the aforesaid decision was applicable to only that particular case which was being disposed of in terms of the Minutes of the Order and, in any case, the observations that the audit of Co-operative societies covered under section 81(1)(a) may be done by the auditor appointed by the Co-operative Societies would be per incuriam since various statutory provisions were not brought to the notice of the Bench in the said case. Before we deal with this aspect, it may be noted the Review Petition filed by the State Government against the order dated 15/10/1998 was dismissed. However, a Special Leave Petition filed by the State against the dismissal of the Review Petition and the Order dated 15/10/1998 have been granted by the Supreme Court in terms of Order dated 27/9/1999.

7. The Minutes of the Order dated 15/10/1998 records that "it is clarified that the present order will apply so far as the present Petitioners are concerned." It is thus evident that the applicability of the said Minutes is confined to that particular case only. Ordinarily, if the Court was disposing of a matter laying down the law having wide repercussions, the decision would have been in terms of the Judgment and not Minutes of the Order. In fact, it is not disputed by learned counsel for Respondent No.1, that the said Minutes are applicable to that particular case only but it is contended that since the Maharashtra Certified Auditors Association was one of the Petitioners in Appollo Textiles Case, all members of the said Association can take the benefit of the Minutes of the Order dated 15/10/1998. We do not agree. It is apparent that the Co-operative Societies being Petitioner Nos. 1 and 2 in the said petition were seeking direction against the Government not to interfere in any manner in the audit of Co-operative Societies covered under section 81(1)(a) being done by the said Petitioners through the auditors of their choice. The Minutes cannot be stretched to mean that every member of the aforesaid Maharashtra Certified Auditors Association was held to be entitled to undertake such audit in the teeth of the aforesaid clarification that the order will apply to the Petitioners of the said case. The only reasonable interpretation can be that the reference to present Petitioners in that order is to the Petitioners Nos. 1 and 2 i.e. Societies.

8. In view of the submissions made before us as to whether the decision in Appollo Textiles Mills Case is per incurism or not, we may examine this decision in the light of the mandatory statutory provisions of the Act.

9. Chapter VIII of the Act deals with Audit, Inquiry, Inspection and Supervision of the Co-operative Societies by the Registrar of the Co-operative Societies. It would be useful to reproduce section 81 of the Act which reads as under :

"81. Audit

[(1) (a) The Registrar shall audit, or cause to be audited at least once in each co-operative year, by a person authorised by him by general or special order in writing in this behalf the account of every society which has been given financial assistance including guarantee by the State Government, for Government undertakings, from time to time, and the accounts of the apex societies, State and District Level Federal Societies, District Central Co-operative Banks, Co-operative sugar Factories, Urban Co-operative banks, Co-operative Spinning Mills, District and Taluka Co-operative Sale and Purchase Organizations, and any such Society or class of Societies which the State government may, form time to time, by notification in the Official Gazette, specify.]

(b) The societies other than the societies referred to in clause (a) shall arrange to get their account audited, at least once in each co-operative year by an auditor from the panel of auditors maintained by the Registrar, or by a chartered accountant holding a certificate in co-operative audit issued by the Institute of Chartered Accountants of India :

Provided that, every third year the accounts of such societies shall be audited by the Registrar or by a person authorised by him in this behalf :

Provided further that, the Registrar may, for reasons to be recorded in writing, audit or cause to be audited accounts of any such societies for any year and at any time.]

[(2) The audit under sub-section (1) shall include examination or verification of the following items, namely :-

(i) overdues of debts, if any;

(ii) cash balance and securities and a valuation of the assets and liabilities of the society;

(iii) whether loan and advances and debts made by the society on the basis of security have been properly secured and the terms on which such loans of the society and its members;

(iv) whether transactions of the society which are represented merely by book entries are not prejudicial to the interest of the society;

(v) whether loans and advances made by the society have been shown as deposits;

(vi) whether personal expenses have been charged to revenue account

(vii) whether the society has incurred any expenditure in furtherance of its objects;

(viii) whether the society has properly utilized the financial assistance granted by Government or Government undertakings or financial institutions, for the purpose of which such assistance was granted;

(ix) whether the society is properly carrying-out its objects and obligations towards members.]

(2A) Where, in the opinion of the State Government, it is necessary in the public interest to do so in relation to any society or class of societies for ensuring management thereof in accordance with sound business principles or prudent commercial practices, the State Government may, by order, direct [that such society or class of societies shall prepare and maintain its accounts in the form determined by the State Government, from time to time and] that cost audit or performance audit or both, of such society or class of societies, as may be specified in the order, shall be conducted.

(2B) Where any order is issued under sub-section (2A), the Registrar shall cause such audit of such society or class of societies to be conducted by a cost accountant who is a member of the Institute of Cost and Works Accountants of India constituted under section 3 of the Cost and Works Accountants Act, 1959,]

(3)[a] The Registrar or the person authorised shall, for the purpose of audit, at all times have access to all the books, accounts, documents, papers, securities, cash and other properties belonging to, or in the custody of, the society, and may summon any person in possession or responsible for the custody of any such books, accounts, documents, papers, securities, cash or other properties, to produce the same at any place at the headquarters of the society or any branch thereof.

[(b) The Registrar shall be competent to depute flying Squad to society or societies for examination of books, records, accounts, and such other papers and for verification of cash balance. The report of the Flying Squad shall be deemed to be an audit report for the purpose of taking further action, if necessary.

(c) The Registrar or the person authorised by him in this behalf may carry out or cause to be carried out the test audit of the accounts of any society. The test audit shall include the examination of such items as may be prescribed.]

(4) Every person who is, or has at any time been, an officer, or employee of the society, and every member and past member of the society, shall furnish such information in regard to the transaction and working of the society as the Registrar, or the person authorised by him, may require.

(5) The auditor appointed under sub-section (1) shall have the right to receive all notices and every communication relating to the annual general meeting of the society and to attend such meeting and to be heard thereat, in respect of any part of the business with which he is concerned as auditor.

[(5A) If, during the course of audit of any society, the auditor is satisfied that some books of accounts or other documents contain any incriminatory evidence against past or present officer or employee of the society the auditor shall immediately report the matter to the Registrar and, with previous permission of the Registrar, may impound the books or documents and give a receipt thereof at the society.

(5B) The auditor shall submit an audit memorandum duly signed by him to the society and to the Registrar in such form as may be specified by the Registrar, on the accounts examined by him and on the balance sheet and profit and loss account as on the date and for the period up to which the accounts have been audited, and shall state whether in his opinion and to the best of his information and according to the explanation given to him by the society the said accounts give all information required by or under this Act and present the true and fair view of the financial transaction of the society.]

(6) If it appears to the Registrar, on an application by a society or otherwise, that it is necessary or expedient to reaudit any accounts of the society, the Registrar may by order provide for such re-audit and the provisions of this Act, applicable to audit of accounts of the society shall apply to such re-audit.

NOTES

Section 81 provides that the Registrar shall audit or cause to be audited the accounts of every society at least once in each co-operative year."

We are concerned with the audit of Societies covered under section 81(1)(a). As would be seen from the said provision, that it concerns the accounts of a Society which has been given financial assistance by the State Government Undertaking. It postulates audit atleast once in each co-operative year. We are not concerned in the present Petition with the Societies other than those referred to in clause (a). The co-operative year, according to Rule 2(c) means the year ending on 31st March as per Maharashtra Act No.13 of 1994. Prior to the said amendment, the co-operative year meant the year ending on 30th June. There is no dispute that in respect of the Respondent - Bank the year ending for the purposes of the Act would be as on 31st March. Sub-sections (2), (3) and (4), inter alia, provided as to what all is required to be examined or verified when audit is undertaken by the auditor appointed by the Registrar for the purposes of conducting the audit. Under section 81(1)(a) a duty is enjoined upon the auditor to examine the matters provided in the provision and also on the part of all Officers to produce all the books, accounts, etc. before the Special Auditor and furnish to him such information in regard to transactions and working of the society as may be required. Under sub-section (5A) the auditor is required to immediately report the matter to the Registrar if the books of accounts or documents contain any incriminatory evidence against the past or present officer or employee of the Society. The auditor has also been given power to impound the books or documents. Under sub-section (5B), the auditor shall submit an audit memorandum to the society and to the Registrar in the prescribed form on the accounts examined by him as also other documents for the period up to the accounts have been audited. The importance and significance of the audit memorandum can be seen from Rule 69 of the Maharashtra Co-operative Societies Rules, 1961. The said Rules provide for procedure for appointment of auditors and for conducting audit. Under sub-rule (3) of Rule 69 the auditor is required to submit an audit memorandum on the accounts examined by him. It would also be useful to reproduce Rule 69 in its entirety. Rule 69 reads as under :-

"69. Procedure for appointment of auditors and for conducting audit.-

(1) The audit of accounts of societies shall be conducted by Departmental Auditors or by certified auditors appointed by the Registrar from time to time on such terms and conditions as he deems fit :

Provided that any society or class of societies notified by the Registrar may get their accounts audited by an auditor selected from the panel of certified auditors maintained by the Registrar and published by him in the Official Gazette.

Explanation 1.-

For the purposes of this Chapter, audit shall include annual or periodical audit, continuous or concurrent audit and test or super audit and reaudit.

Explanation 2.-

For purposes of this rule, "a certified auditor" includes -

(a) a Chartered Accountant within the meaning of the Chartered Accountants Act, 1949;

(b) a person who holds a Government Diploma in co-operative accounts or a Government Diploma in co-operation and accountancy; or

(c) a person who has served as an auditor in the Co-operative Department of the State Government, and whose name has been included by the Registrar in the panel of certified auditors maintained and published by him in the Official Gazette at least once every three years

(2) The audit under Section 84 shall in all cases extend back to the last date of the previous audit and shall be carried out upto the last date of the co-operative year immediately preceding the audit or where the Registrar so directs in the case of any particular society or class of societies, such other date as may be specified by the Registrar.

(3) The auditor shall submit an audit memorandum to the society and to the Registrar in the form specified by the Registrar, on the accounts examined by him and on the balance sheet and profit and loss account as on the date and for the period up to which the accounts have been audited, and shall state whether in his opinion and to the best of his information and according to the explanation given to him, the said accounts give all the information required by the Act in the manner so required and give true and fair view:-

(i) in the case of the balance sheet, of the state of society's affairs as at the end of the financial year or any other subsequent date up to which the accounts are made up and examined by him, and

(ii) in the case of the profit and loss account, of the profit or loss for the financial year or the period covered by the audit, as the case may be.

(4) The audit memorandum shall state:-

(i) Whether the auditor had obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit;

(ii) Whether in his opinion proper books of accounts, as required by the Act, these rules and by-laws of the society have been kept by the society so far as it appears from the examination of these books and

(iii) Whether the balance sheet and profit and loss account examined by him are in agreement with the books of accounts and returns of the society.

(5) Where any of the matters referred to in sub-rule (4) are answered in the negative or with a qualification, the audit memorandum shall specify the reasons for the answer.

(6) The audit memorandum shall also contain schedules with full particulars of:-

(i) all transactions which appear to be contrary to the provisions of the Act, the rules, or the by-laws of the society;

(ii) all sums which ought to have been but have not been brought into account by the society;

(iii) any material impropriety or irregularity in the expenditure or in the realisation of moneys due to the society;

(iv) any money or property belonging to the society which appear to the auditor to be bad or doubtful debt; and

(v) any other matters specified by the Registrar in this behalf.

(7) The summary of audit memorandum as prepared by auditor shall be read out in a general meeting. The audit memorandum together with its accompaniment shall be open to inspection by any member of the society. The Registrar may however direct that any portion of the audit memorandum which appears to him to be of objectionable nature or not justified by facts shall be expunged and the portion so expunged shall not form part of the audit memorandum.

(8) The Registrar may from time to time specify the form or forms in which the statements of accounts and information shall be prepared for audit by the society.

(9) On the completion of his statutory audit, the auditor shall award an audit classification letter to the society whose accounts he has audited in accordance with the instructions issued by the Registrar from time to time. The list of societies to be published under sub-section (3) of section 12 shall also specify the audit class of the society."

The Rules including the aforesaid Rule have been framed in exercise of power under section 165 in general and sub-clauses 46 and 47 of section 165(2) in particular.

10. The Registrar can direct rectification of the defects in accounts as provided in section 82 of the Act. The registrar also has power to assess damages against the delinquent promoters etc. under section 88 of the Act which, inter alia, provides that where in the course of or as a result of an audit under section 81 any person misapplied or retained, or become liable or accountable for, any money or property of the society, or has been guilty of misfeasance or breach of trust in relation to the society, the Registrar may frame charges against such person and after giving reasonable opportunity to him make or require him to repay or restore the money or property or any part thereof with interest or to contribute such sum to the assets of the society by way of compensation in regard to the misapplication, retention, misfeasance or breach of trust, as he may determine.

11. The aforesaid provisions throw ample light on the importance of audit to be conducted by the Registrar or his nominee auditor in respect of societies and Co-operative Banks etc. who have been given financial assistance by the Government or some instrumentality of the Government. The question before us is, can such statutory audit be by-passed and Society and/or Bank or others covered by section 81 allowed to get the accounts audited from the auditor of their choice?

12. We may notice section 75 which concerns the holding of Annual General Meeting to consider the accounts presented before the members. Under section 75(1), every society is required to call a general meeting of its members within a period of three months next after the date fixed for making up its accounts for the year under rules. Under the first proviso, the Registrar is empowered to extend the period for a further period not exceeding three months by general or special order. Admittedly, the time fixed for making up accounts is forty-five days as provided in Rule 61. The co-operative year being at the end of 31st March, the time for making up the accounts would be up to 15th May. Rule 61 inter alia, provides that within forty-five days of every co-operative year, or within such extended period as may be specified by the Registrar, the committee of every society shall prepare annual statements of accounts showing receipts and disbursements during the previous co-operative year, the profit and loss account for the year, and the balance sheet as at the close of the year. A copy thereof is required to be submitted within fifteen days from the date of preparation to the auditor appointed by the Registrar for the audit of the society and the statement of account is also open to inspection by any member of the society. Sub-section (2) of section 75 requires the accounts to be placed at every annual general meeting of the society. Sub-section (4) of section 75 requires that in the said annual general meeting the balance sheet, the profit and loss account, the audit memorandum submitted by the auditor appointed under section 81 and the committee's report shall be placed for adoption.

13. The scheme discernible from the aforesaid provisions is, briefly, as follows:-

(i) The account to be closed on 31st March.

(ii) The annual statement of accounts to be prepared by 15th May or within the extended period.

(iii) Copy of the aforesaid to be supplied to the auditor by the Registrar and to be kept open for inspection to members. The auditor appointed by the Registrar has to inspect accounts etc. and has power to issue necessary directions in terms of section 81 and Rule 69.

(iv) Annual general meeting to be called by 15th August or within the extended period not exceeding three months.

14. We may notice that if default is made in calling for general meeting within the stipulated period or extended period in complying with sub-sections (2), (3) and (4) of section 75, the Registrar can pass necessary orders against the defaulter who, without reasonable excuse, failed to comply with any of the sub-sections mentioned therein. Almost none of the mandatory provisions of the Act, it seems, were brought to the notice of the Bench which decided the Appollo Textiles Case by Minutes of Order as aforenoticed. This is besides the fact that the decision was confined to the two societies before the Court. The effect of Minutes of Order as sought to be interpreted by the Bank and the other societies and bodies covered by section 81(1)(a) would be that despite the mandate of section 81(1)(a) and other provisions noticed above, after 15th August of the accounting year if the special auditor is unable to complete the audit for any reason including non-cooperation of the societies etc. they would be free to get the audit under section 81(1)(a) conducted from auditor of their choice. We have no doubt that it was never intended in the Minutes of Order of Apollo Textiles Case. Such an interpretation would also amount to amending section 81(1)(a) and placing societies and other covered by clause (a) in clause (b). The argument that they will subject themselves to offence under section 146 of the Act has also no relevance for the present purposes. It may be mentioned here that under clause (f) of section 146 there will be offence under the Act if the committee of society, or an officer or member thereof, fails to comply with the provisions of sub-sections (2), (3) and (4) of section 75. This is to be read with sub-section (1) and sub-section (5) of section 75; one providing for extension for holding annual general meeting and the other for giving opportunity to defaulter to plead reasonable excuse. We have no doubt that appointment of its own auditor by those covered by clause (a) is alien to section 81(1)(a) of the Act.

15. For the aforesaid reasons, we hold that the Minutes of Order dated 15/10/1998 are applicable only to the two co-operative societies which were before the Court and also that the observations that the co-operative societies under section 81(1)(a) may get the audit done from the auditor of their own choice is clearly per incuriam and, therefore, not binding. We have no doubt that audit under section 81(1)(a) has to be undertaken by the Registrar or any person authorised by him. In case of difficulty, those covered by section 81(1)(a) can always approach the Registrar for issue of necessary directions to the person authorised by him to conduct the audit or change the person which request would, of course, be considered and decided by the Registrar in accordance with law.

16. Reverting now to the present case, in terms of order dated 21/6/1999, Reserve Bank of India was asked to look into the matter and assist the Court whether special audit for the period 1/4/1997 to 31/3/1998 was required or not. The order further states that the parties have agreed that, in case, the R.B.I. so opines, then, either R.B.I. can itself appoint independent Chartered Accountant or the Special Auditor appointed by the Registrar, Co-operative Societies, can complete the audit. The Reserve Bank of India has submitted its report to the Registrar. We are further told that special audit under section 81(1)(a) in respect of the next year i.e. 1998-99 has also been completed. Further, the Registrar has issued certain directions for rectification in respect of the year 1997-98 which Mr. Apte states have been complied with . Under these circumstances, as a special case, without it being treated as a precedent, we leave the matter to be decided by the Registrar whether, at this stage, it is necessary to get the special audit under section 81(1)(a) completed. As a special case, it would be open to the Registrar, if facts so warrant, to dispense with holding of special audit. This would, however, be not treated as precedent since, in our view, no such power vests even with the Registrar.

17. Rule is made absolute in the above terms. Writ Petition is disposed of accordingly. In view of disposal of the Writ Petition, all civil applications taken out therein are also disposed of.

Order accordingly.