Facts of the Case

The proceedings arose from a Show Cause Notice dated 17.05.2024 issued to CA Lavitha Shetty, proprietor of M/s Lavitha & Associates and Engagement Partner for the statutory audit of Mysore Amalgamated Coffee Estates Limited (MACEL) for FY 2018-19 and FY 2019-20.

Earlier orders had already been passed against the auditor under Section 132(4) of the Companies Act, 2013 concerning the statutory audit of MACEL. During those proceedings, CA Lavitha Shetty had furnished information regarding audit and non-audit revenue earned by her firm and related parties from the auditee company and its related parties.

The information submitted disclosed revenue from only one related party, namely Coffee Day Hotel & Resorts Pvt. Ltd. Subsequently, NFRA found that M/s Lavitha & Associates was the statutory auditor of four additional entities considered related parties of MACEL. Details relating to revenue earned from those entities had not been disclosed.

NFRA sought clarification regarding the omission. The explanation furnished by CA Lavitha Shetty was that those entities did not fall within the definition of “related party” under Section 2(76) of the Companies Act, 2013.

Upon examination, NFRA formed a prima facie view that the omitted entities were related parties within the meaning of Section 2(76), resulting in the issuance of the Show Cause Notice alleging submission of incomplete information and failure to exercise due diligence in professional duties.

 

Issues Involved

  1. Whether the four entities omitted by CA Lavitha Shetty qualified as “related parties” under Section 2(76) of the Companies Act, 2013.
  2. Whether failure to disclose revenue earned from those entities amounted to submission of incomplete information before NFRA.
  3. Whether the omission constituted professional misconduct and lack of due diligence in the conduct of professional duties.
  4. Whether the proceedings were barred by the principle of double jeopardy because previous orders had already been passed concerning the audit of MACEL.

 

Petitioner’s Arguments

The auditor contended that:

1. Double Jeopardy

NFRA had already taken action against her under Section 132(4) of the Companies Act, 2013 in relation to the audit of MACEL for FY 2018-19 and FY 2019-20. Therefore, initiation of fresh proceedings for the same audit engagement amounted to double jeopardy and was legally unsustainable.

2. Subsidiary Companies Not Related Parties

It was argued that the common directors of MACEL and Coffee Day Hotel & Resorts Pvt. Ltd. were neither shareholders nor directors of Wilderness Resorts Pvt. Ltd. (WRPL) and Karnataka Wildlife Resorts Pvt. Ltd. (KWRPL). Consequently, they could not influence the Boards of Directors of those companies merely because of their directorship in CDHRPL.

3. CEPL and KEPL Not Covered Under Section 2(76)(iv)

The auditor submitted that Chandrapore Estates Private Limited (CEPL) and Kurkenmutty Estates Private Limited (KEPL) did not satisfy the technical requirements of Section 2(76)(iv). According to her, the relevant relationship under the provision concerns directors, managers, or their relatives and not shareholders. Since V.G. Siddharth was not holding any official position in MACEL, CEPL and KEPL could not be treated as related parties.

4. Omission Not Part of Professional Duties

It was further contended that the alleged omission in disclosure was outside the ambit of “conduct of professional duties” and therefore could not amount to professional misconduct.

 

Respondent’s Arguments (NFRA)

NFRA maintained that:

1. Proceedings Were Distinct

The present proceedings did not concern deficiencies in audit performance. Instead, they related to the submission of incomplete and inaccurate information during NFRA proceedings. Therefore, the issue was entirely separate from the earlier audit-related orders and the plea of double jeopardy was inapplicable.

2. WRPL and KWRPL Were Related Parties

NFRA found that MACEL and CDHRPL had common directors and that CDHRPL held more than 99% shareholding in WRPL and KWRPL. Because of these controlling relationships and common directorships, the Boards of WRPL and KWRPL were accustomed to act in accordance with the directions or instructions of MACEL and CDHRPL, thereby bringing them within Section 2(76)(vi).

3. CEPL and KEPL Were Also Related Parties

NFRA observed that V.G. Siddharth exercised effective control over CEPL, KEPL, and MACEL. Applying the substance-over-form principle and considering actual control rather than merely technical designation, NFRA concluded that CEPL and KEPL qualified as related parties of MACEL.

4. Duty to Provide Complete Information

NFRA emphasized that providing complete and accurate information to the regulator is an integral part of an auditor’s professional responsibilities. Any omission or misrepresentation affects the regulator’s ability to assess independence and compliance.

 

Court Findings / NFRA Findings

NFRA rejected all defenses raised by CA Lavitha Shetty and recorded the following findings:

Double Jeopardy Argument Rejected

The authority held that the earlier proceedings related to deficiencies in audit performance, whereas the present proceedings concerned incomplete disclosure of information provided during regulatory proceedings. Since the subject matter was different, the principle of double jeopardy was not attracted.

Four Omitted Companies Were Related Parties

NFRA concluded that:

  • Wilderness Resorts Pvt. Ltd. (WRPL)
  • Karnataka Wildlife Resorts Pvt. Ltd. (KWRPL)
  • Chandrapore Estates Private Ltd. (CEPL)
  • Kurkenmutty Estates Private Ltd. (KEPL)

were related parties of MACEL under Section 2(76) of the Companies Act, 2013.

Failure to Exercise Due Diligence

The authority held that CA Lavitha Shetty failed to exercise due diligence by not disclosing revenue earned from the related parties of MACEL while responding to NFRA.

Professional Misconduct Established

NFRA found that the omission constituted professional misconduct under Paragraph 7 of Part I of the Second Schedule to the Chartered Accountants Act, 1949, which deals with failure to exercise due diligence in the conduct of professional duties.

Misrepresentation Before Regulator

NFRA observed that the incomplete disclosure amounted to misrepresentation of facts before the regulator and interfered with NFRA’s statutory functions, particularly in assessing auditor independence.

 

Final Order

NFRA held CA Lavitha Shetty guilty of professional misconduct for failing to provide complete information regarding revenue earned from related parties of MACEL.

Exercising powers under Section 132(4)(c) of the Companies Act, 2013, NFRA imposed a monetary penalty of:

₹1,00,000 (Rupees One Lakh Only)

The order was directed to become effective after thirty days from the date of issuance.

 

Important Clarifications

1. Auditor’s Duty Extends Beyond Audit Work

The decision clarifies that an auditor’s professional obligations include providing complete and truthful information during regulatory proceedings.

2. Substance Over Form Principle

NFRA emphasized actual control and influence while determining related-party status rather than relying solely on formal titles or technical corporate structures.

3. Separate Proceedings May Arise from Same Audit

Even where prior action has been taken regarding audit deficiencies, separate proceedings may be initiated for misrepresentation or incomplete disclosures made before the regulator.

4. Independence Assessment Is Critical

Revenue earned from related parties is a material factor in assessing auditor independence. Incomplete disclosure of such information can amount to professional misconduct.

 

Sections Involved

Companies Act, 2013

  • Section 132(4)
  • Section 132(4)(c)
  • Section 2(76)
  • Section 2(76)(iv)
  • Section 2(76)(vi)

Chartered Accountants Act, 1949

  • Paragraph 7 of Part I of the Second Schedule

NFRA Rules, 2018

Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2024/09/20240909677548557.pdf

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