Companies Act Case Law Comptroller And Auditor General Vs Kamlesh Vadilal Mehta

Appeal (civil) 11458 of 1995



DATE OF JUDGMENT: 21/01/2003



2003(1) SCR 471

The Judgment of the Court was delivered by

KHARE, CJ. The respondent herein, is a sole proprietor of a Chartered
Accountant firm in Ahmedabad, Gujarat. One of the statutory functions
assigned to the appellant herein is to get the accounts of public sector
undertakings and governments concerns audited by the Chartered Accountants.
The audit work of the government and public sector undertakings is assigned
to only those Chartered Accountant firms which are enrolled on the panel
maintained by the appellant. In May, 1981, the appellant through an
advertisement invited applications from the firms of the Chartered
Accountants for the purpose of empanelment for audit of government
companies. The aforesaid advertisement stipulated that excepting the States
of Orissa, Jammu & Kashmir, Assam, Manipur, Meghalya, Nagaland and Tripura,
only the partnership firm of the Chartered Accountants were eligible for
enrollment on the panel and the proprietary firms of the Chartered
Accountants were made ineligible either to apply or to be empanelled for
being assigned audit work of the government companies. However, in several
States the proprietary firm based on those States was made eligible for
being brought on the panel for audit work of government companies and
concerns. It would be appropriate at this stage to extract the relevant
clause 3 and sub-clause (d) of clause 4 to the advertisement, which runs as

“3. Particular reference is invited to Instructions 1 to 4 for filling up
the form and the Footnote to Co.l. Proprietary Firms based in the States
listed therein only need apply”.

(4)d. The proforma should be signed by a partner on behalf of the
firm……proprietary firms of F.C. As with registered offices in the
following only are being considered for audits in those States: Orissa,
Jammu & Kashmir, Assam, Manipur, Meghalaya, Nagaland, Tripura” (emphasis

The respondent herein submitted an application for enrolment on the panel,
but the same was rejected on account of the fact that his firm was not a
partnership firm, but a proprietary concern. Aggrieved, the respondent
filed a writ petition under Article 226 of the Constitution challenging the
exclusion of the proprietary concerns from their empanelment as being
discriminatory, arbitrary and violative of Article 14 of the Constitution.
One of the reliefs prayed for runs as under:

“10. that the petitioner, therefore, prays that the Honorable Court may be
pleased to issue in appropriate writ, order or direction declaring and
setting aside the policy of the respondent which excludes the proprietary
firm of F.C.As with registered office in the States other than the States
Orissa, Jammu & Kashmir, Assam, Manipur, Meghalaya, Nagaland and Tripura as
mentioned in the advertisement at Annexure-B as unconstitutional, illegal,
null and void and restraining the respondent permanently from adopting the
said policy and not considering the firm of the petitioner for the purpose
of empanelment as per Annexure-B”

The said writ petition came up for hearing before a Learned Single Judge of
the High Court of Gujarat, who, by a judgment and order on 26.4.82 allowed
the writ petition. The Learned Single Judge was of the view that the policy
followed by the appellant was unreasonable and that such sub-classification
had no real nexus with the objects sought to be achieved. The learned
Single Judge while holding that the exclusion of proprietary concern from
being enrolled on the panel is discriminatory issued following direction:

“…….Hence, it would be just and proper to direct the respondent to
include the name of the petitioner in the pannel as stated above. It is
also made clear that even in future as and when the respondent issues
public notices inviting applications for empanelment in connection with
entrustment of audit work of government companies, the respondent is
enjoined to see that it does not insist in continuing the artificial sub-
classification of chartered accountants who are carrying on profession as
Chartered Accountants in partnership…….with costs.”

The appellant filed Letters Patent Appeal before the Division Bench of the
High Court, but the same was dismissed. It is against the said judgment and
order of the High Court, the appellant is before us.

It was first contended by learned counsel for the appellant that the
appellant’s decision to invite the applications exclusively from
partnership firms was a matter of policy and, therefore, beyond the pale of
review by this Court. This argument has no substance. It must be borne in
mind that there is difference between framing of a policy which is an
administrative function and an exercise of statutory functions. The
function of the Comptroller and Auditor General in respect of appointment
of auditors for government corporations and public sector undertakings is
statutorily assigned under the Companies Act and it cannot then be urged
that the Comptroller and Auditor General is free to act untrammeled and
unreasonably. Whenever the CAG appoints an auditor for audit of government
corporations and public sector undertakings under the Companies Act, he
exercises statutory powers under the Companies Act and such an exercise of
power manifestly is a statutory function and not a matter of policy.

It was then contended by the learned counsel for the appellant that the
policy of empanelment of partnership firm of Chartered Accountants by the
appellant was on account of the fact that the partnership firm of Chartered
Accountants have been found more efficient and in better position to carry
out the statutory audit in view of the continuity, accumulation of
experience and facilitating adherence to time schedule for completion of
audit work than a sole proprietary firm of the Chartered Accountants and,
as such, the partnership firm of the Chartered Accountants was a class in
itself and a valid classification for the purposes of Article 14 of the
Constitution. It was also urged in this context that the said
classification would be seen to pass the test of reasonableness on account
of the intelligible differentia between partnership firms on the one hand,
and proprietary concerns on the other in terms of factors such as size,
flexibility and continuity. It was also submitted that the said differentia
bore a reasonable nexus to the object which was sought to be achieved by
the impugned advertisement, namely the efficiency and effective auditing of
government companies.

To substantiate the point, reference was made to such instances as the
ability of one partner to substitute or supplement another in an exigency;
the continuity of the partnership firm normally assured upon the demise of
one of the partners, if not in law then in practice; the inability of a
proprietary concern to meet the audit deadlines stipulated by Section
210(2)(b) and 619A of the Companies Act; and the usual practice of private
companies relying on partnership, largely to the exclusion of proprietary

The aforesaid argument raises the question as to whether the sub-
classification of partnership firms stands the test of reasonableness on
the touchstone of Article 14.

It is not disputed that the Chartered Accountants having qualifications are
eligible for being considered for entrustment of audit work for public
sector undertaking or the government concerns. Once it is accepted that
these Chartered Accountants are qualified and eligible for the audit work
and also are eligible for being brought on the panel of audit work for
public sector undertakings and government concerns, there appears no valid
reason why the impugned advertisement has created a sub-classification from
the general class of eligible Chartered Accountants which relates to a
smaller group of Chartered Accountants who form partnership concerns only.

The appellant insists that it is only a smaller group of Chartered
Accountants firms that would be eligible for being brought on the panel for
audit of public sector undertakings or government concerns. The audit work
of public sector undertaking, no doubt, is to be done by the qualified and
efficient Chartered Accountants. Once a person is qualified, experienced
and efficient, it is difficult to understand how he could be discriminated
against only for the reason that he has chosen to act alone in the
professional career and has not been able to form a partnership firm. The
efficiency, as pointed out by the High Court, springs from the personal
experience, proficiency and personal capacities. It is, therefore, not
possible to link these characteristics and professional acumen to a person
or persons in a firm alone. A single individual as an auditor in a
proprietary concern can have such characteristics and professional acumen
by himself and also through the assistance of experienced auditor who could
be in his services as efficients as any partnership firm. It is often seen
in many cases that some of the partners of the partnership firm are
sleeping partners with no professional duties to discharge. A partnership
concern is not a legal entity like company; it is a group of individual
partners. In a partnership firm, it is the partner who will be assisted in
carrying out the work but quite remains the eligible Chartered Accountant.
It is the same situation as in a proprietary concern where a Chartered
Accountant would be carrying on audit work all-in-one. Merely because some
of the Chartered Accountants have formed a partnership firm, it cannot be
assumed that they become more efficient for carrying out audit work than
the individual Chartered Accountant who forms proprietary concern. It is,
therefore, evident that the appellant himself erroneously assumed that the
partnership firms are more efficient than the proprietary concern in the
matter of audit of accounts of the public sector undertakings or of the
government concerns.

A useful analogy may be drawn with the experiences of the legal profession.
It could not be justifiably argued that the quality of the legal services
rendered by a senior advocate is compromised by virtue of the fact that he
is the sole and ultimate repository of knowledge and responsibility in a
given matter. Nor could it reasonably be said that a client would be put to
unnecessary risk by being compelled to sink or swim with the solitary
lawyer. Personal experience and integrity are the essential attributes of
every successful professional, and they are the virtues that win the day
for the client, whether it is a corporation seeking an audit of its
accounts or an individual seeking a remedy in court. A clear line of
command is also known to prevent a diffusion of responsibility. As such,
Chartered Accountant cannot be discriminated against merely because he
elected to invest his professional expertise in a proprietary concern,
rather than to express it in the form of a partnership firm.

In any event it would not follow as a categorical imperative that a
partnership is better placed for auditing government concerns simply
because “two minds are better than one”. There could be several instances
when a partnership firm, which is ostensibly an association of contributing
individuals, is in actual fact found to consist of a solitary working
partner who may for the purpose of securing tax benefits or for other
reasons, choose to form an alliance with sundry uninterested person, or
“sleeping partners”. In such a scenario it would be fallacious to attribute
a greater capacity to partnership firms than to proprietary concerns simply
on account of the nomenclature or members involved.

For the aforesaid reasons the classification between proprietary and
partnership firms is arbitrary and unfair, and accordingly falls on the
anvil of Article 14 of the Constitution.

It was also urged that the proprietary firms of Chartered Accountants have
been allowed empanelment in certain States namely, in the States of Orissa,
Jammu & Kashmir, Assam, Manipur, Meghalaya, Nagaland and Tripura out of
necessity and exigency and it would be not in public interest to allot
audit work of government concerns to partnership firms from outside the
State and, therefore, there was no discrimination involved in empanelment
of proprietary concern in such States.

We find this submission inconsistent with the earlier submission that the
proprietary concern although qualified are not suitable for considerable
task of auditing public sector enterprises. Either proprietary concerns are
suitable and, therefore, eligible, or they are not. If the proprietary
concern of Chartered Accountants are really inefficient, there appears no
reason why they have been made eligible to audit the government and public
sector undertakings in the aforesaid states. Further, if there was a
paucity of partnership firm of Chartered Accountants in a given State, the
services of partnership firm who were said to be efficient based on in
other States could be taken. Under such circumstances, we are of the view
that the impugned notification does not stand the test of Article 14 of the

For the aforesaid reasons, we do not find any merit in the appeal. It fails
and is accordingly dismissed. There shall be no order as to costs.


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