Delhi High Court: A batch of petitions were filed by individual Chartered Accountants as well as auditing firms assailing the validity of Section 132(4) of Companies Act, 2013 and challenging Rules 3, 8, 10 and 11 of the National Financial Reporting Authority Rules, 2018 (NFRA). A division bench of Yashwant Varma and Dharmesh Sharma, upheld the validity being devoid of merit in the challenge based on the arguments of vicarious liability, retroactive operation and a violation of Article 20(1).
The petitioners argued that these provisions are unconstitutional, arbitrary, and ultra vires. The challenge stems from the retrospective application of Section 132, which allows NFRA to initiate disciplinary proceedings against Chartered Accountants and auditing firms for audits conducted even before the provision was introduced. The petitioners claim that this retroactive enforcement violates principles of fairness and due process, as it imposes penalties and disciplinary actions under a framework that did not exist at the time of the audits.
Additionally, the petitioners contended that NFRA’s disciplinary procedures lack procedural safeguards and fairness compared to those under the Chartered Accountants Act, 1949, and its associated regulations. They argued that NFRA’s structure, where the same body overseeing audits also initiates disciplinary proceedings, results in a conflict of interest, effectively making NFRA both prosecutor and judge. This, they claimed, violates Article 14 by denying fair and impartial proceedings.
The Court noted that the relationship between a firm and its members while delivering auditing services is one of complete integration, where roles and responsibilities overlap to ensure the highest levels of professional service. The nature of such services does not permit a firm to distance itself from the actions of its partners, especially when those actions are performed in furtherance of the firm’s obligations. Thus, the Court found no merit in the contention that Section 132 of the Companies Act is liable to be held as unconstitutional basis the audit firm or its individual partners and members becoming vicariously liable.
The Court stated that Section 132 is neither an overreach nor can it be said to be arbitrary; it is a necessary mechanism to enforce professional accountability. The firm’s designation as an auditor inherently includes the collective responsibilities of its members, making the imposition of a vicarious liability a logical and justified extension of its statutory obligations. The Court remarked that
“there cannot possibly be a cavil of doubt with respect to the well-established precept that statutes are generally presumed to be prospective in their operation. Equally well-settled is the principle of that presumption being dispelled only if a court were to find from the language of an enactment or a provision that the law maker intended otherwise.”
The Court also remarked that
“the issue of retrospectivity thus becomes liable to be examined in the backdrop of how the enactment operates and affects the rights which inhere or may have come to be perfected prior to its promulgation. What we seek to emphasize is that the argument of retrospectivity cannot be evaluated in an abstract dimension.”
The Court observed that the Explanation to Section 132(4) in unambiguous and explicit terms provides that the expression “professional or other misconduct” would have the same meaning as assigned to that phrase by Section 22 of the Chartered Accountants Act. Section 132 therefore, does not create a new species of misconduct nor does it create a liability which was otherwise not contemplated under a pre-existing legislation. The term “professional or other misconduct” already stood defined by Section 22 of the Chartered Accountants Act and thus all actions of CAs and auditors was liable to be tested on the basis thereof. It would thus be wholly incorrect to contend that Section 132 creates a new liability with respect to a misconduct or misdemeanor committed prior to October 2018.
The Court stated that no auditor can possibly claim or assert a vested right coming to be created in respect of professional misconduct that may have been committed prior to Section 132 coming into force. Thus, the Court is unable to comprehend any right leave alone a vested right that could have been claimed to have come into existence in respect of professional conduct which would have fallen within the scope of Section 22 of the CA Act prior to the introduction of Section 132.
The Court further remarked that a consideration of the legislative history preceding the introduction of Section 132 clearly suggests that a pre-existing regulatory deficiency or gap was sought to be addressed through the introduction of Section 132 aligning with the broader objective of strengthening oversight mechanisms and enhancing the quality of professional services rendered by audit firms. This measure was implemented not to create new liabilities but to bridge an existing gap in enforcement, ensuring that standards of professional conduct and accountability evolve in tandem with global best practices.
“The enactment of Section 132 thus represents a progressive regulatory shift, aimed at reinforcing compliance, raising the bar for audit quality, and ensuring that no aspect of professional misconduct or deficiency in service remains unchecked or unsupervised. By instituting a more structured and stringent framework, Section 132 ensures that audit firms and professionals adhere to internationally recognized standards, thereby fostering greater transparency, accountability, and confidence in financial reporting.”
The Court observed that the scope of Article 20(1) has thus been consistently explained to be confined to crimes and punishments as generally understood. An act of professional misconduct was liable to be penalised and punishment meted out as per a law which existed decades prior to the insertion of Section 132 in the Companies Act. Section 132 merely adopts the meaning assigned to misconduct by the Chartered Accountants Act for the purposes of proceedings that may be initiated thereunder. The argument based on Article 20(1) is thus liable to be rejected on this score alone.
The Court also stated that Rule 11 of the NFRA Rules makes it apparent that the statute clearly commands that authority to ensure that the disciplinary proceedings are undertaken in accordance with the principles of natural justice including where deemed necessary and appropriate providing an opportunity of hearing to the charged entity in person. The reason for not prescribing for oral testimony as a matter of rule or practice is evident from the fact that the proceedings themselves would have been commenced based either on a suo motu decision taken by the NFRA or on receipt of a reference made to it either by the Union Government or any other competent authority. The NFRA thus commences proceedings not on the basis of a written complaint or at the behest of a complainant and which was a possibility envisaged under the Chartered Accountants Act and the Misconduct Rules, 2007. The proceedings are thus clearly not adversarial and which was a possible scenario under the Misconduct Rules 2007.T
The Court noted that the NFRA itself initiates and undertakes the inquiry on the basis of the audit file and record which may have been gathered in the course of an audit quality review. Those proceedings are thus not triggered or based upon the oral testimony of a complainant or person. Thus, the commencement of an inquiry by the NFRA is premised entirely on either a reference that may be made to it by the Union Government or where the said body were to initiate an investigation suo motu or in light of facts that may be gathered in the course of its supervisory role envisaged in Rules 7, 8 and 9. In the absence of those proceedings being based on the version of an individual complaint or testimony, the Court failed to appreciate the submission that the denial of a right of cross-examination is liable to be viewed as a factor which renders the procedure prescribed under the NFRA Rules to be arbitrary.
Thus, the Court upheld the validity of Section 132 and the NFRA Rules, however, it said that the NFRA clearly acted contrary to the command of the legislation which obliged it to bear in mind the division of functions and which clearly mandates a separation of roles that the authority is called upon to discharge under the Companies Act and the NFRA Rules.
[Deloitte Haskins v UOI, W.P.(C) 1065 of 2021, decided on 07-02-2025]
Advocates who appeared in this case :
W.P.(C) 1065/2021 & CM APPL. 9896/2021
Mr. Kapil Sibal, Sr. Adv. with Ms. Prachi Dhanani, Mr. Rohini Jaiswal, Mr. Pratham Vir Agarwal, Mr. Rahul Dwarkadas & Ms. Niyati Kohli, Advs.
Ms. Shiva Lakshmi, CGSC Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal, Mr. Pranjal Tripathi, Mr. Suradish Vats, Mr. Kunal Kochhar & Ms. Radhika Puri, Advs. for NFRA. Mr. Kirtiman Singh, CGSC along with Mr. Waize Ali Noor, Mr. Varun Rajawat, Mr. Ranjeev Khatana and Mr. Varun P. Singh, Advs.
W.P.(C) 12096/2019 & CM APPL. 49556/2019
Ms. Manasi Bhushan, Ms. Sanjana Patel, Ms. Khyati Chhabra, Mr. Vikrant Sharma and Ms. Sakshi Sharma, Advs.
Ms. Shiva Lakshmi, CGSC. Mr. Kirtiman Singh, CGSC along with Mr. Waize Ali Noor, Mr. Varun Rajawat, Mr. Ranjeev Khatana and Mr. Varun P. Singh, Advs. Ms. Pooja Mehra Saigal, Adv. for Mr. Jatin Dua and Mr. Kaveri Rawal, Advs. for R-3.
W.P.(C) 1522/2020 & CM APPL. Nos.17186/2020, 30096/2023
Mr. Arun Kathpalia, Sr. Adv. with Ms. Aayushi S. Khazanchi, Mr. Aditya Dhupar, Ms. Bani Brar, Ms. Pooja Deepak and Mr. Vinayak Chawla, Advs.
Ms. Shiva Lakshmi, CGSC. Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal & Ms. Radhika Puri, Advs. for NFRA. Mr. Kirtiman Singh, CGSC along with Mr. Waize Ali Noor, Mr. Varun Rajawat, Mr. Ranjeev Khatana and Mr. Varun P. Singh, Advs.
W.P.(C) 1524/2020 & CM APPL. Nos. 7533/2020, 10777/2020 17184/2020, 30095/2023
Mr. Arun Kathpalia, Sr. Adv. with Ms. Aayushi S. Khazanchi, Mr. Aditya Dhupar, Ms. Bani Brar, Ms. Pooja Deepak and Mr. Vinayak Chawla, Advs.
Ms. Shiva Lakshmi, CGSC. Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal & Ms. Radhika Puri, Advs. for NFRA. Mr. Kirtiman Singh, CGSC along with Mr. Waize Ali Noor, Mr. Varun Rajawat, Mr. Ranjeev Khatana and Mr. Varun P. Singh, Advs
W.P.(C) 11737/2021
Mr. Jayant K. Mehta, Sr. Adv. with Ms. Nikita Sethi, Ms. Aayushi Kumar, Mr. Prateek Khanna, Mr. Ravneet Kaur Malik and Ms. Rumella Jain, Advs
Ms. Shiva Lakshmi, CGSC Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal & Ms. Radhika Puri, Advs. for NFRA. Mr. Kirtiman Singh, CGSC along with Mr. Waize Ali Noor, Mr. Varun Rajawat, Mr. Ranjeev Khatana and Mr. Varun P. Singh, Advs
W.P.(C) 11738/2021
Mr. Jayant K. Mehta, Sr. Adv. with Ms. Nikita Sethi, Ms. Aayushi Kumar, Mr. Prateek Khanna, Mr. Ravneet Kaur Malik and Ms. Rumella Jain, Advs.
Ms. Shiva Lakshmi, CGSC. Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal & Ms. Radhika Puri, Advs. for NFRA. Mr. Kirtiman Singh, CGSC along with Mr. Waize Ali Noor, Mr. Varun Rajawat, Mr. Ranjeev Khatana and Mr. Varun P. Singh, Advs.
W.P.(C) 11739/2021
Mr. Jayant K. Mehta, Sr. Adv. with Ms. Nikita Sethi, Ms. Aayushi Kumar, Mr. Prateek Khanna, Mr. Ravneet Kaur Malik and Ms. Rumella Jain, Advs.
Ms. Shiva Lakshmi, CGSC. Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik W.P.(C) 1065/2021 & other connected matters Page 5 of 476 Sabharwal & Ms. Radhika Puri, Advs. for NFRA. Mr. Kirtiman Singh, CGSC along with Mr. Waize Ali Noor, Mr. Varun Rajawat, Mr. Ranjeev Khatana and Mr. Varun P. Singh, Advs. Mr. Vikram Jetly, CGSC along with Mr. Abhigyan Siddhant, GP.
W.P.(C) 11987/2022 & CM APPL. 35778/2022
Mr. Jayant K. Mehta, Sr. Adv. with Ms. Nikita Sethi, Ms. Aayushi Kumar, Mr. Prateek Khanna, Mr. Ravneet Kaur Malik and Ms. Rumella Jain, Advs
Mr. Vikram Jetly, CGSC along with, Mr. Abhigyam Siddhant, GP & Mr. Shreya Jetly, Adv. for UOI. Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal & Ms. Radhika Puri, Advs. for NFRA.
W.P.(C) 1525/2020 & CM APPL. Nos. 10765/2020, 17182/2020 & 30097/2023
Mr. Arun Kathpalia, Sr. Adv. with Ms. Misha Rohatgi Mohta and Mr. Amulya Upadhyay, Advs
Ms. Shiva Lakshmi, CGSC. Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal & Ms. Radhika Puri, Advs. for NFRA.
W.P.(C) 1650/2023 & CM APPL. 6296/2023
Mr. Jayant K. Mehta, Sr. Adv. with Ms. Nikita Sethi, Ms. Aayushi Kumar, Mr. Prateek Khanna, Mr. Ravneet Kaur Malik and Ms. Rumella Jain, Advs.
Mr. Ravi Prakash, CGSC along with Ms. Astu Khandelwal, Mr. Taha Yasin, Mr. Ali Khan, Mr. Yasharth Shukla, Mr. Tarveen Singh Nanda, GP & Mr. Ayushman Kishore, Advs. Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal & Ms. Radhika Puri, Advs. for NFRA.
W.P.(C) 2194/2023 & CM APPL. 8353/2023, 39638/2023
Mr. Jayant K. Mehta, Sr. Adv. with Ms. Nikita Sethi, Ms. Aayushi Kumar, Mr. Prateek Khanna, Mr. Ravneet Kaur Malik and Ms. Rumella Jain, Advs.
Mr. Ravi Prakash, CGSC with Mr. Tarveen Singh Nanda, Adv. for Resp./ UOI Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal & Ms. Radhika Puri, Advs. for NFRA.
W.P.(C) 5842/2023 & CM APPL. 22884/2023 (Stay), 40762/2023 (30 Days Delay in C.A.), CM No.63005/2023
Mr. Shivam Shukla & Ms. Anjali Upadhyay, Advs.
Ms. Shiva Lakshmi, CGSC for R1. Mr. Zoheb Hossain, Mr. Vivek Gurnani, Ms. Abhipriya Rai, Mr. Vivek Gaurav, Mr. Kartik Sabharwal & Ms. Radhika Puri, Advs. for NFRA. Mr. Prashant Rawat, GP and Mr. Kabir Singh, Adv
