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CRA/Miscellaneous No. 20(23) of 1982, decided on 10th October, 1985.
---S.21--Order for enquiry--Appointment and terms of reference of Enquiry Officer--Where order of appointment and terms of reference to enquiry were signed by competent official of Government, copies whereof, were sent to Authority and Managing Director of Establishment as per postal order acknowledgement available on record, copy of said order, held, was deemed to have been duly served on such establishment.
---S.21--Reference to Enquiry Officer--Terms of reference--Validity of--Where terms of reference were neither vague nor ambiguous nor unspecified, nor slipshod nor arbitrary, it would, held, not be necessary to specify allegations in order for inquiry as those were meant for fact-finding.
---S.21--Terms of reference--Validity of--Where notice to Establishment related to contraventions of provisions of Securities and Exchange Ordinance and not to any breach of Companies Act, 1913, such notice, held, would be valid and operative.
Syed Raunaq Ali v. Chief Settlement Commissioner P L D 1973 SC 257 ref.
---S.21--Appointment of Enquiry Officer against Establishment without hearing--Effect--Where enquiry was for fact finding not affecting rights of any one, notice for hearing before appointing Enquiry Officer, held, was not necessary.
Commissioner of Income-tax v. Fazlur Rahman P L D 1964 S C 410 distinguished.
Raja Narayanlal v. Phiroz Mistry A I R 1961 S C 29; Datta on Company Law, 1982 Editions p.476 and Commentaries on Companies Act, 1982 Edn., p.631 ref.
--S.21--Securities and Exchange Rules, 1971, R.12 [as amended by S.R.O. 669 (9)/ 82]--Rules, applicability of--Law and Rules applicable at point of time when default was committed, held, would be applied.- [Fact and procedure].
---S.21--Corporate Law Authority--Power to make enquiry in respect of earlier year--Corporate Law Authority, held, would be competent to deal with case of a company in respect of any year.
Puranlal Lakhanpal v. Union of the India A I R 1958 S C 163 ref.
---S.22--Show-cause notice for contravention of Rules--Effect--Where Establishment was. served with a show-case notice as to why maximum penalty should not be imposed, and the matter was to be decided after hearing of case, such notice; held, would not 'amount to prejudging case against such Establishment.
---S.21--Penalty--Words "contravention" and "Contraventions," connotation of--Where in law word "contravention" and not "contraventions" was used, such use of singular, held, would clearly show that same referred to one contravention and as such separate penalty could be levied for each contravention.--[Words and phrases].
---S.21---Accounts in Annual Report for previous year classified as "current assets"--Effect--Where in Annual Report for previous year, accounts thereof, were classified as current assets though same were of long term nature, such disclosure, held, would be incorrect and contrary to requirement of Part 1 of Second Schedule which was in force at such time.
---S.21--Statement of accounts of Establishment showing meeting out capital requirements of and advances of temporary nature to subsidiaries which were running in loss--Such advances being not of permanent nature but fluctuating from year to year, held, were correctly shown as "current assets".
---S.21--Nature of debts, determination of--Establishment, held, would be competent to decide whether particular debt was doubtful-or not.
---S.21--Investments by Establishment, classification of Where Establishment regarded their investments as sound and recoverable, neither such advances nor interest receivable thereon, held, could be classified as doubtful--Treatment of such investment as sound and recoverable, would not amount to contravention of Ordinance or Rules thereunder.
---S.18--Accounting policies in Company's Annual Account showing "depreciation charged to income at normal tax rates"--Effect- "Depreciation charge", being contrary to such declared policy of the company resulting in overstating/understating income/loss and giving wrong impression to share-holders/creditors etc.--Such misstatement being prohibited under S.18, held, would be liable to penalty.
---Sched. II, para. 7, Part 1--Expenditures shown as, "Deferred Revenue Expenditures" in the Balance-sheet--Effect--Wherein "statement of accounts" by Establishment expenditures in balance sheet of specified years were shown as "deferred Revenue Expenditures" although same should have been disclosed distinctly, provision of schedule having been contravened penalty, held, could be imposed.
---S.18--Statement of accounts-Establishment, plea, that statements of accounts of subsidiaries were annexed--Statement of Accounts of such subsidiaries found not to be annexed--Such misstatement by Establishment, being prohibited under S.18 of Ordinance 1969, held, would render Establishment liable to penalty.
---S.18--"Interest accrued" treated - by Establishment as "interest received"--Such default by Establishment being minor, held, could be condoned by Corporate Law Authority.
Muhammad Faridul Haq for the Company.
Dates of hearing: 16th, 17th July, 5th and 6th August, 1985.
An enquiry was conducted into the affairs of Hyesons Sugar Mills Limited in pursuance of the order of the Central Government under section 21 of the Securities and Exchange Ordinance, 1969 (hereinafter referred to as the Ordinance). A show-cause notice was issued to the company under section 22 of the Ordinance on 25-7-1984. The reply received from the company and the arguments advanced by the representatives of the company have been considered and are deal with in the following paragraphs.
2. At the hearings, Mr. Muhammad Faridul Haq, counsel of the company has made a written submission raising certain legal objection, which are first considered and disposed of.
3. The first objection is that the Corporate Law Authority has no deliberately supplied to the company the complete documents regarding the appointment and the terms of reference of the Enquiry Officer under section 21 of the Ordinance so as to enable it to verify that the appointment was made by the competent authority of the Central or Federal Government. It has been stated that the company vehemently criticise the act of the Corporate Law Authority from withholding that required information and presume that the reference to the Enquiry Officer was not made by a competent authority.
4. This objection has been examined by reference to the record. The order for inquiry was issued by the Federal Government on 12-1-198 and reads as under:
"In exercise of the powers conferred under section 21 of the Securities and Exchange Ordinance, 1969 (XVII of Federal Government is pleased to appoint Mr. Patel, partner, Ford Rhodes Robson Marrow, Accountants, Karachi to conduct an enquiry into Messrs Hyesons Sugar Mills Limited."
The order was signed by a Deputy Secretary to Government of Pakistan and copies were sent to Chairman, Corporate Law Authority, Mr Ahmed Dawood Patel, partner, Ford Rhodes Robson Marrow and to the Managing Director/Chief Executive, Hyesons Sugar Mills Limited. As per postal acknowledgement available on record, copy of the order was duly served on Managing Director/Chief Executive of Hyesons Sugar Mills Limited on 13-1-1982. The objection therefore fails.
5. The second objection raised is that the 'Terms of Reference' assigned to the Enquiry Officer under section 21 of the Ordinance by the Central or Federal Government are vague, ambiguous, unspecified, inconsistent, slipshod and arbitrary without specifying any instance or allegation and the same are in the nature of fishing and digging in a haphazard way with a pre-determined mined to punish the company. It has further been stated that the order of the Central or Federal Government in appointing an Enquiry Officer without specifying the allegation in a lucid and clear terms is fanciful, illegal, arbitrary and capricious which has frustrated the purpose of the statute in its spirit and substance.
6. The terms of reference have been seen. They are neither vague nor ambiguous nor unspecified nor slipshod nor arbitrary. It is also not necessary to specify the allegations in an order for inquiry as they are meant for fact finding. In fact in another objection raised by the representative of the company discussed in paras. 14 to 18 below, case-law has been quoted by the representative himself that an enquiry of this type is for fact finding. The objections on this round, therefore, must also fail.
7 The next objection is, that in para. III of the 'Terms of Reference' the Enquiry Officer was asked to investigate breach of the provisions of sections91-A and 91-B of the Companies Act, 1913 while the company law is a self-contained and exhaustive enough to punish any company who contravenes the provisions of the company law. It has been stated that in section 138 of the Companies Act, 1913 there is a specific provision for the appointment of an Inspector to investigate the affairs of any company. Further, that under section 21 of the Securities and Exchange Ordinance, 1969, the Federal or Central Government is not competent to appoint an Enquiry Officer to investigate alleged irregularities committed by a company under the Companies Act, 1913. it has been urged that the Federal Government has acted illegally and without any Authority or jurisdiction by including this item in the 'Terms of Reference'.
8. It has been stated that in Syed Raunaq Ali v. Chief Settlement Commissioner reported as P L D 1973 S C 257 Mr. Hamoodur Rehman, C.J. observed:
"This is no doubt correct, but it is also now well-established that where an inferior tribunal or Court has acted wholly without jurisdiction or, as Rubinstein Puts it in his book on 'Jurisdiction and illegality' taken any action 'beyond the sphere allotted to the tribunal by law, and, therefore, outside the area within which the law recognizes a privilege to err', then such action amounts to a 'usurpation of power unwarranted by law' and such an act is a nullity: that is to say, 'the result of a purported exercise of authority which has no legal effect whatsoever.
In such a case, it is well-established that a Superior Court is not bound to give effect to it particularly where the appeal .16 to the latter's, discretionay jurisdiction. The Courts would refuse to perpetuate, in such circumstances, something which would be patiently unjust or unlawful."
9. It has further been stated that in view of the law laid down by the Supreme Court of Pakistan the Terms of Reference assigned by the Central or Federal Government to the Enquiry Officer are ultra vires of the Companies Act, 1913 and are without jurisdiction. This illegal act of the Central or Federal Government has made the whole Terms of Reference illegal, inoperative and ultra vires.
10. This plea has been considered. A perusal of the Terms of Reference shows that para. III did ask the Enquiry Officer to investigate any breach of provisions of sections 91-A and 91-B of Companies Act, 1913 but the present notice to the company does not require it to give any explanation about any default under the Companies Act. The notice' under 6onsideration relates to contraventions of provisions of Securities and Exchange Ordinance, 1969. As no action under Companies Act is contemplated nor is proposed to. be taken this objection also fails.
11. The next objection is that the Federal Government has erred in law in not giving any opportunity of being heard to the company before appointing an Enquiry Officer which is in violation of the principle of Natural Justice contained in the legal dictum "Audi alteram partem'. It has been stated that the principles contained in this dictum have been adopted by the Supreme Court of Pakistan and all other Superior Courts of the country. Further, that in the case of Commissioner of Income-tax v. Fazlur Rahman reported as P L D 1964 S C 410 the Full Bench of the Supreme Court of Pakistan while explaining the principles of Natural Justice observed:
"On behalf of the appellant it is argued that even if the order passed under section 33-A (Income-tax Act, 1922) be a judicial order it does not successfully imply that notice to the respondent of the hearing of the application under section 33-A was essential. Reliance is placed in this connection on section 31 of the Income-tax Act, which provides for notice of the hearing of the appeal to the appellant. It is urged that the existence of provision for notice in section 31 and its absence in section 33 should lead to the inference that notice of the hearing of the application under section 33-A to the applicant was not needed. The logical result of the acceptance of this argument should be that notice of hearing should never be necessary unless it is specially provided for because if this argument be valid by comparison of two sections of the statute it should also be valid by comparison of provisions in different statutes on the ground that the Legislature when it intends notice makes an express provision. We do not think, the mere absence of a provision as to notice can override the principle of justice that an order affecting the rights of a party cannot be passed without an opportunity of hearing to that party."
12. It has further been stated that in view of the authoritative pronouncement of the Supreme Court of Pakistan and other superior Courts of the Islamic Republic of Pakistan the Federal Government has disregarded and violated the law laid down by the superior Courts, hence the appointment of the Enquiry Officer has no sanction and force of law. Further, that the Federal Government was bound to give a hearing to the company before referring the matter to an Enquiry Officer. It has been urged that rule of Natural Justice has been violated in disregard to the law laid down by the Supreme Court of Pakistan.
13. This objection has been considered. The observations made in the decision of the Supreme Court lay down that a hearing must be given where the rights of a party are affected. An Enquiry is for fact finding and does not affect the rights of any one. As such a notice for hearing before appointing an Enquiry Officer was not necessary and the case-law quoted by the learned counsel has no relevance to this case. This objection also fails.
14. The next objection is that the learned Enquiry Officer has committed legal misconduct by not investigating all the points contained in the Terms of Reference and it was his duty to decide each and every question submitted to him. It has been stated that it is a matter of trite law that where several matters were referred the report must decide each of them. Further, that it was mandatory for him to give his findings on all the matters submitted to him. It has also been stated that the Enquiry Officer has not acted in accordance with the Terms of Reference and has based his report on irrelevant material, misconception of law and by giving his personal opinion on legal issues which were not the subject-matter of the reference and thus he has exceeded the Terms of Reference. Further that in view of the established principle of law the learned Enquiry Officer has committed legal misconduct and the report is illegal and inoperative having no force of law. It has been urged that the Enquiry Report is not valid and no reliance should be placed on it as the same is based on erroneous application of law and irrelevant material. It has been stated that scope and functions of an Enquiry Officer under section 21 of the Ordinance are those of fact finding and he has no power to interpret, or decide any issue of law by way of giving any verdict. It has been stated that the parallel provisions in other laws are contained in the section 263 of the Companies Ordinance, 1984 and section 237 of the Indian Companies Act, 1956.
15. In order to explain the functions of an Enquiry Officer the following legal dictums have been cited. In Raja Narayanlal v. Phiroz Mistry reported as A I R 1961 S C 29 Mr. B.R. Sinha, C.J. observed:
"Thus, the scope of the enquiry contemplated by the Company Law is clear; wherever the Registrar has reason to believe that the affairs of the company are not properly carried on he is empowered to make an enquiry into the said affairs. Similarly inspectors are appointed to investigate the affairs of any company and report thereon. The investigation carried on by the Inspectors is no more than the work of a fact-finding commission."
16. It has further been stated that in the well-known book on the subject known as "Datta on Company Law" at page 476 of 1982 edition the learned author writes about the 'Nature of Investigation' as under:
"Under this section inspectors are appointed to investigate the affairs of a company and report thereon. The investigation carried on by the inspectors is no more than the work of a tact-finding commission. It is investigatory and not judicial."
17. It has also been stated that Mr.Jagadish Swarup in his book 'Commentaries on Companies Act, 1956, at page 631 of 1982 edition writes about the Nature of Investigation on by Inspector as under:
"The provisions of the Act are modelled on the corresponding provisions of the English Companies Act. Describing the character of the enquiry, Lord Macmillan observed that 'the object of the enquiry manifestly is that the Commission may either by himself directly or through the medium of a delegate obtain the information necessary to enable him to decide what action, if any, he should take. In the same case Lord Thankerton said: "The object of the examination is merely to recover information as to the Company's, affairs and it is in no sense a judicial proceeding for the purpose of trial of an officer. There are no parties before the Inspector: he alone conducts the enquiry and the power to examine on oath is confined to the officers, members, agents and servants of the company."
18. This objection has been considered. The enquiry conducted b the Enquiry Officer was for fact-finding and- this has been done by him. The Enquiry Office has also given his comments on each term of reference. He has also made some suggestions for amendment to the law, but this does not in any way effect the facts stated about the company under consideration. This objection is misconceived and also falls.
19. The next objection is that Securities and Exchange Rules, 1971 were amended vide S.R.O. 669 (9) / 82 making several amendments. According to the Circular of the Corporate Law Authority the amended rules were to be applicable to the accounts of the listed companies for the year/period ending on September 30, 1982 and thereafter. Also that the amendments entirely replaced the Second Schedule. It has further been stated that there is established cannon of law that the rules cannot have retrospective effects. It has been stated that there is no mention of International Accounting Standards in the Schedule applicable at the relevant time; but the Enquiry Office has pointed out defects, with reference to I.A.Ss. and they are included in the show-cause notice.
20. This point has been considered. There cannot be any two opinion that the law and rules applicable at the point of time when a default was committed have to be applied. This point is conceded.
21. The next objection is that the Corporate Law Authority has not applied its mind in examining the report of the Enquiry Officer before issuing the notice under section 22 of the Ordinance and has thus accepted the erroneous, illegal and void report of the learned Enquiry Officer as a readymade advice. It has been urged that the issuance of the show-cause notice under section 22 of the Ordinance was bias and against the established rules of Natural Justice. It has been stated that in Puranlal Lakhanpal v. Union of the India reported as 1958 AIR 163 the Supreme Court of India observed:
"Where an authority is vested with a power to take action but is also required to consult an advisory body prior to taking action, the responsibility, for the decision or the final order is that of the authority who is entrusted with such power.
The final authority cannot act simply on the advice given by the advisory body. This principle was adhered to in cases even of preventive detention and it was held that though the authority empowered to issue the order acts on the report of the police or on the advice of the Advisory Board constituted under the relevant act, the responsibility for the final order rests with the authority who issued it. It was further observed that the object of associating an Advisory Body with the Statutory authority is only to provide a safeguard against an abuse of unguided power but not to substitute the discretion of the statutory authority by the comments of the Advisory Body; and if the competent authority fails to apply his mind, the order will be vitiated by mala fides.
Mala fides is another name for legal malice in which it is not necessary to prove malicious intention or factual malice. Legal malice is complete if the aggrieved party establishes that the authority making the impugned order did not apply its mind at all to the matter in question."
22. Some other similar case-law has also been quoted and it has been stated that the Corporate Law Authority did not apply its mind in examining the report of the Enquiry Officer and has acted blindly on the readymade advice contained in the Enquiry Report in which findings are based on irrelevant material and misreading of the law and is thus inoperative, null and void. It has been urged that the issue of a show-case notice based on the Enquiry Report was mala fide and against principles of Natural Justice.
23. This objection is also misconceived. The case-law quoted by the counsel of the company is about malice where action has been taken. No action has been taken by any authority so far and as such there is no question of any malice. This objection, therefore, also fails.
24. The next objection is that S.R.O. No.1024/ 181 was published in the official Gazette of Pakistan on September 21, 1981 by which the Federal Government delegated the powers and functions of the Federal Government under section 28 of the Ordinance other than those of under sections 26, 2.7, 28 and 33 to be exercised or performed by the Member, Corporate Law Authority (Corporate Law Wing). It has been stated that this notification had no retrospective effect and that if, at all any breach of the Second Schedule was committed for the accounting year ending on 30-9-1980 it was committed before the period " of this notification, hence the Member of the Corporate Law Authority is not competent to hear the case and it is only the Federal Government which is competent to hear the matter of the company.
25. This objection is without any basis. The Member, Corporate Law; Authority is fully competent to deal with the case of the company in respect of any year as section 21 of the Ordinance or the notification does not specify any estoppel for not making any enquiry in respect of any earlier year. The objection on this point, therefore, must also fail.
26. The next point raised is that the Corporate Law Authority has violated the principles of Natural Justice in pre-judging and pre determining the case of the company by indicating its intention of imposing 'the maximum penalty' on the company. It has been stated pre-judging closes the mind of a judicial Authority which is against the law.
27. This objection of the learned counsel is misconceived. The company has been served with a show-cause notice to state why maximum penalty for each contravention may not be imposed. The matter is to be decide after hearing the case and there is no question of pre-judging it. This objection also fails.
28. The next objection is that in the last paragraph of the notice issued by the Corporate Law Authority it is mentioned that the authority would impose penalty for 'Each Contravention' of the Ordinance and the Securities and Exchange Rules, 1971. It has been stated that the relevant portion of the provisions of the section 22 of the Ordinance reads as under:
"The Central Government may, if it is satisfied after giving the person an opportunity of being heard that the refusal, failure or contravention was wilful, by order direct that such person shall pay to the Central Government by way of penalty such sum not exceeding thirty thousand rupees as may be specified in the order and, in the case of a continuing default, a further sum calculated at the rate of one thousand rupees for every day after the issue of such order during which the refusal, failure or contravention continues."
29. It has been pleaded that from the perusal of the provisions of section 22 of the Ordinance, it is clear that the words for 'Each Contravention' does not exist and it is trite law that in order to determine the intention of legislature it must be found in the words used in a statute. It has further been stated that the words of the section 22 of the Ordinance are clear plain, and unambiguous and no other meaning can be ascribed to it. It has been urged that the Corporate Law Authority has acted illegally by adding the words 'Each Contravention' in the provisions of the section 22 of the Ordinance without any lawful authority.
30. The arguments of the learned counsel have been considered. The law uses the word 'contravention' and not 'contraventions'. The use of a singular clearly shows that it refers to one contravention an as such a separate penalty can be levied for each contravention. If the plea of learned counsel was to be accepted a company making a hundred contraventions would be dealt with on the same footing as a company making only one contravention. This would be against all cannons of natural justice. The objection on this point also fails.
31. After disposing of the legal issues raised by the learned counsel the contraventions mentioned in the show-cause notice are taken up. The first contravention mentioned in the notice states that the company invested Rs.18,750,000 in its following two subsidiary companies:
| Name of Company | Investment | Percentage of capital held. |
| (a)Consolidated Sugar Mills Limited. | Rs.15,000,000 | 99% |
| (b) Consolidated Spinning and Textile Mills. Limited | Rs.3,750,001 | 95% |
Both the companies have been making losses since commencement of commercial production in 1977 and the accumulated losses as on 30-e-1980 were as under:-
| (a)Consolidated Sugar Mills Limited. | Rs.82,783,249 |
| (b) Consolidated Spinning and Textile Mills. Limited | Rs.40,177,880 |
These investments were shown in the Annual Reports for 1978, 1979 and 1980 at cost without providing for the diminution in value of investment, although the losses shown by the subsidiaries were more than 6j times the value of investment. It was pointed- out that in accordance with the generally accepted accounting principles (as given under IAS-3), if the value of an investment is below the carrying amount for other than a temporary period, the investor's assets are overstated. unless there is appropriate recognition of the decline in value. Further that generally accepted auditing practice also require that provision be made if there is a material and permanent diminution in the value of an investment. As such no provision having been made, the Balance-sheets and profit and Loss Accounts of the company for the years 1978, 1979 and 1980 did not exhibit true and correct state of your company's affairs and the annual published accounts for the above-mentioned years were materially incorrect and this was a contravention of section 18 of the Ordinance.
32. In the reply to the notice it was stated that the investments in subsidiaries, despite the fact that the subsidiares suffered losses, cannot be construed as a permanent diminution in the value of investments. It was further stated that the subsidiaries are running concerns and fully operational, their performance is improving by every passing year and the management is sure that in course of time subsidiaries especially Consolidated Sugar Mills Limited would make tangible contribution towards the profitability of the holding company by making good profits. It was also stated that the losses suffered by the subsidiaries were due to the intervention of extraneous factors over which the management had no control. It was further stated that the subsidiaries are industrial companies and the value of investment in them is determined at the replacement value of the units and that the present net replacement value of, the assets of the subsidiaries exceeds several times their original cost:
33. At the time of hearing it has been stated that the International Accounting Standards have not been adopted by the Rules or Schedule applicable at the relevant time. This being so this point is dropped.
34. The next point mentioned in the show-cause notice was that the accounts of the company 'for the year ending 30-9-1980 showed the following amounts as due from subsidiaries:
| (a)Consolidated Sugar Mills Limited. | Rs.8,046,330 |
| (b) Consolidated Spinning and Textile Mills. Limited | Rs.24,828,553 |
The enquiry had revealed that, in the Annual Report for 1980, these were classified as 'current assets' though they were of long term nature. Thus, correct disclosure was not made, contrary to the requirement of part.I of the Second Schedule than in force.
35. In reply to the show-cause notice it was stated that due to factors beyond the control of the management, the subsidiaries were running in losses and the holding company had to help these out in meeting their working capital requirements and advances of temporary nature were given. It was also stated that the advances were not of permanent nature but fluctuated from year to year.
36. At the time of hearing the position stated in reply to snow-cause notice was reiterated. The company was asked to supply a statement showing monthly balances of the two subsidiary companies for the period under consideration. This statement has since been received. Its perusal shows that there were very considerable variations from month to month and as such they were correctly shown as 'current assets'. This objection is, therefore, dropped.
37. The next point raised in the show-cause notice was that the loans and advances to subsidiaries referred to above were identified as doubtful in the Annual Accounts of 1980 but no provision was made for doubtful debts in the accounts. Hence the accounts did not exhibit a true and correct view of the state of the company's affairs.
38. In reply to show-cause notice it was stated that the auditors had treated the advances to subsidiary companies as doubtful which was contrary to the realities and the judgment of the management of the company who had never regarded the advances as doubtful. It was further stated that the management was sure that, in course of time, the subsidiaries would become viable and profitable and generate sufficient cash to repay the amount and as such no provision for doubtful debts was made.
39. At the time of hearing it has been stated that it is for company to decide whether a debt was doubtful or not and no provision of the Ordinance or Rules lays down any yardstick for treating a particular debt as doubtful. This point has been considered. As no infringement of Ordinance or Rules has been made the point is dropped.
40. The next point raised in - the show-cause notice was that on loans and advances to. associated companies, which were doubtful of recovery, interest was charged during the years 1978-79 and 1979-80 and these interest amounts were disclosed as income during the said years. As a result of company's policy of adding interest on doubtful loans and advances, the profits for the years were overstated to that extent. Hence the Balance-Sheet and profit and Loss Accounts for the years 1975-76 to 1979-80 did not exhibit a true and correct view of the state of the company's affairs.
41. In reply to show-cause notice it was stated that the advances to subsidiaries were, never at any stage, considered by the management as doubtful and the interest on these amounts was, therefore, treated as income to disclose the correct operating results for the year. It was further stated that as the management regards their investments a sound and recoverable, neither the advances nor the interest receivable could be classified as doubtful.
42. The same view, has been reiterated at the time of hearing it has also been pleaded that there was no contravention of the Ordinance or Rules. This being so this point is dropped.
43. The next point in the show-cause notice was that in note 25(ii) to the Annual accounts for the year ended 30-9-1980 it was stated that there was a dispute with Habib Bank Limited regarding the amount of interest accrued, but not received, on fixed deposit, and no provision was made against it. The amount involved is Rs.4,67,462 and was due since 1972. As a matter of accounting policy, a provision against it should have been made.
44. In reply to the show-cause notice it was stated that there was a firm commitment by the bank regarding the rate of interest to be allowed on fixed deposits and the company was expecting a sum of Rs.4,67,462 from the banks and hence in all fairness it had shown the amount as accrued amount. Further, that when its recovery was not in doubt, making a provision would have weakened the claim of the company.
45. At the time of hearing it has been pleaded that no contravention of Ordinance or Rules is involved and this being so the point is dropped.
46. The next point mentioned in the show-cause notice was that in the accounting year ended 30-9-1980, depreciation on plant and machinery of sugar unit was charged for only 164 days. Further that accounts gave no reason for charging depreciation on the basis of the number of actual working days. Moreover, this practice was contrary to paragraph 18 of International Accounting Standard-4, which requires charging of depreciation on the useful life of an asset. Further, that the method adopted by the company for charging depreciation reduced the charge to the profit and Loss account, thus over/understating profit/loss. Also that this practice was not in accordance with the generally prevalent practice in the sugar industry; nor it was in accordance with the policy followed within the company's own group. Hence the Profit and Loss Account for the year did not exhibit a true and correct view of the company's state of affairs.
47. In reply to show-cause notice it was stated that charging depreciation on the basis of actual working days, specially in seasonal industries, where the period of season may vary considerably from year to year, is a refined method of determining the quantum of depreciation charged for a year for computing cost of production. It was further, stated how can a practice which brings the quantum of depreciation in proportion to use of asset be contrary to paragraph 18 of JAS-4. Further that charging full year's depreciation in a variable seasonal industry would, understate profits and overstate loss. It was also stated that many sugar mills, to the best of knowledge, had adopted such practice. It was further stated that Consolidated Sugar Mills Limited is the only seasonal company in their group and it followed a policy of charging full depreciation and there were special circumstances for adopting this policy namely that the Federal Government's basis of fixing price of sugar for new units, at that time, was based on the total cost of manufacture which included a depreciation charge for full year.
48. At the time of hearing the same pleas were reiterated. A perusal of company's Annual Accounts shows that while stating the accounting policies it has been stated in note 1(b) that "depreciation is charge to income at normal tax rates". The depreciation charge is, however, contrary to this declared policy and has resulted in overstating/ understating income/loss. It also had the effect of giving a wrong impression to the shareholders, creditors etc. that depreciation was being charged in a particular manner while it was not so. This is case of misstatement which is prohibited under section 18 of the Ordinance. This default is, therefore, liable to penalty and a penalty of Rs. 5,000 (rupees five thousand) is imposed.
49. The next point mentioned in the show-cause notice is that the company incurred an expenditure of Rs.1,785,038 during the period 1973 to 1979 on revenue stamps, underwriting commission, commitment. charges etc., for securing debenture. loans. These expenses should have been, in accordance with standard accounting practice, written off immediately after they were incurred; or amortized over the term of the debentures. As a result of non-amortization of the expenditure, the Balance Sheet and Profit and Loss account of the company did not, over the years, exhibit a true and correct state of the company's affairs.
50. In reply to the show-cause notice it was stated-that the reason for not writing off or amortizing the sum was that the debentures were primarily raised to finance the setting up of the company's subsidiaries viz. C . S . M . and C . S . T . M . Further that the management was desirous of capitalising the amount when the subsidiaries went into production and the amount, therefore, was carried forward. Ultimately, bowing to expert advice, the company decided to write off the amount.
51. At the time of hearing it has pleaded that while it would have been appropriate to amortize the amount but by not doing so no provision of Ordinance and Rules had been contravened. This being so the point is dropped.
52. The next point raised in the show-cause notice was that the expenditure of Its.1,185,038 mentioned in the earlier sub-para. was shown as "Deferred Revenue Expenditure" in the Balance Sheets of 1973 to 1979, although as per requirement of paragraph 7 of part I of the Schedule, the same should have been disclosed distinctly and thus the provisions of the Schedule were contravened.
53. In reply to the show-cause notice it was stated that as the expenses represented expenses on issuing debentures, they should have been disclosed as such in compliance with paragraph 7 of Part I of the Schedule and the company was sorry for not having described them as such.
54. At the time of hearing it has been pleaded that it was a case of misclassification and as such it may be condoned.
55. The plea has been considered. It cannot be treated as a case of misclassification as the position was well-known to the company. For this default a penalty of Rs 10,000 (rupees ten thousand) is imposed.
56. The next point raised in the show-cause notice was that the company had pledged shares of various companies for securing loans from banks, but the following were not disclosed over the years:
(a) Pledge of 160,000 shares (of Rs.10 each) of Consolidated Sugar Mills Limited.
(b) Pledge of shares of other companies valuing Rs.3,360,000.
(c) Creation of second charge on fixed assets.
(d) Bank guarantee to secure a loan.
This was contrary to the requirement of para.10(c) of Part I of the Schedule and the provisions of the Schedule were contravened.
57. In reply to the notice the company accepted that there had been omission in this respect, but this omission occurred because of lack of proper communication between the top management and the accounts department of the company.
58. At the time of hearing it has been pleaded that 'the omission may be condoned.
59. The plea has been considered. Inasmuch as the disclosure requirements have been contravened a penal Rs.10,000 (Rupees ten thousand) is imposed.
60. The next point is that the company took, during 1979-80, an unsecured loan of Rs.545,384 from the Allied Bank of Pakistan. The same was not shown separately, contrary to the requirement of para. 10(b) of Part I of the Schedule. It was wrongly disclosed as "secured" in note 5 to the annual accounts for the year 1979-80. Thus, the provisions of the Schedule were contravened.
61. In reply it was stated that a loan of Rs. 27, 00, 000 was obtained from Allied Bank of Pakistan against export of alcohol and -was secured on "stocks of alcohol held in Karachi" and later there was a short shipment, the stock having partly evaporated. Thus, after adjusting the export proceeds some amount remained in the loan account. It was stated that the loan was secured but the goods against which it was secured had exhausted and as such it could not be said with absolute certainty, whether, it was "secured" or "unsecured" at that date and the company treated it as "secured" as it was originally secured.
62. The same arguments have been reiterated at the time of hearing. Inasmuch as the loan was originally secured the point is dropped.
63. The next point in the show-cause notice was that in note 26(i) to the Annual Accounts for the year ending 30-9-1980 it was stated to the audited statements of account of Consolidated Sugar Mills Limited and Consolidated Spinning and .Textile Mills Limited for the years ended 30-9-1980, were annexed. The said 'accounts of the two subsidiary companies were, however, not annexed. Hence this statement was made, contravening section 18 of the Ordinance.
64. In reply the company had stated that they regret, due to oversight, the account of C.S.M. and C.S.T,M. were not annexed to the accounts of H.S.M. for the year 30th September, 1980, but on noticing the above omission the same has rectified. This plea has been reiterated at the time of hearing. It is however, a case of deliberate misstatement which is prohibited under section 18 of the Ordinance. As such the provisions of the Ordinance have been contravened and a penalty of Rs.10,000 (rupees ten thousand) is imposed.
65. The next point in the notice was that in note 20 to the annual accounts for the year ended 30-9-1980, the interest accrued was wrongly stated as "interest received". This contravened section 18 of the Ordinance. In reply it was stated that in the mercantile system of accounting followed by the company "interest accrued" is also "income receipt" and accordingly it was disclosed as "interest received" At the time of hearing the same argument has been reiterated. The default being minor is condoned.
66. The last point raised in the show-cause notice was that interest income shown as "interest received", referred to in the preceding sub-para, was wrongly adjusted towards "interest expenses and bank charges", in contravention of the requirement of para. I(A)(iii) of Part II of the Schedule which required separate disclosure of interest income on loans and advances and other interest.
67. In reply to show-cause notice it was stated that advances to subsidiaries were mainly made from funds the company borrowed 'from banks and it was imperative that the interest received on the funds be shown as deduction from the total interest paid on the borrowings, including borrowing for purpose of lending to subsidiary.
68. At the time of hearing it has been pleaded that while there may have been a technical default the overall results of the company were not affected.
69. The plea has been considered. The relevant para. of the Schedule requires that such income should be declared separately in the Profit and Loss Account. The requirements of the Schedule have, therefore, been contravened and a penalty of Rs.5,000 (rupees five thousand) is imposed.
70. The penalty levied should be paid by 30th November, 1985 and a compliance report should be sent to the Authority.
A. A. Order accordingly.
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