Harish Kumar Agarwal And Ors. vs. Bank Of Baroda And Ors.
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The petitioners, Harish Kumar Agarwal & Ors., filed a writ petition challenging an order dated March 2, 2024, which declared their accounts as fraud. The petitioners had availed loans and credit facilities from Bank of Baroda (respondent no.1) and Axis Bank. Due to the COVID-19 pandemic and adverse market conditions, their business was affected, leading to a default in servicing loans and classification of their account as NPA. Proceedings were initiated before the Debts Recovery Tribunal and the National Company Law Tribunal, leading to the commencement of CIRP and appointment of an interim resolution professional. The respondent bank appointed M/s Raj Gupta and Company as a forensic auditor, who was later replaced by M/s SKVM and Company on July 27, 2023. M/s SKVM and Company submitted its report on December 5, 2023, followed by a show cause notice to the petitioners on December 7, 2023. The petitioners submitted a reply on December 22, 2023. The petitioners alleged that they did not receive the forensic report or its addendum dated January 4, 2024, and thus could not adequately reply. The bank contended that the addendum was not relied upon for the impugned order.
Held
The Court held that the petitioners' claim of not being served the forensic audit report was contradicted by their own admission in the writ petition and their reply to the show cause notice. They had received the forensic audit report from Axis Bank and had submitted a detailed reply to the show cause notice after perusing it. The Court found that the petitioners had not requested the forensic audit report in their reply and had not stated that the non-supply prejudiced their ability to respond. Regarding the addendum, the respondent bank specifically contended that it was an internal document and was not relied upon for the impugned order. The Court noted that the petitioners themselves disclosed the addendum in their writ petition. Therefore, the Court found no violation of natural justice or the Master Directions on Fraud issued by the Reserve Bank of India in the issuance of the show cause notice and the impugned order, as the petitioners had access to the forensic report and the bank did not rely on the addendum for its decision. Consequently, the writ petition was dismissed.
Key Issues
1. Whether the petitioners were denied an effective opportunity of hearing and rebuttal of allegations, as required by the principles of natural justice and the judgment in *Hemant Kanoria Vs. Bank of India*, by not being served with the forensic audit report and its addendum prior to the impugned order? 2. Whether the Authority's reliance on the forensic audit report without supplying it to the petitioners before arriving at a decision violates the principle laid down in *Sweta Agarwal Vs. State Bank of India*? Petitioner's arguments: The petitioners argued that the forensic audit report and its addendum were not served upon them before the show cause notice and the impugned order. They contended that this lack of service, particularly of the addendum, prevented them from providing an effective reply and violated their right to natural justice. They relied on *Hemant Kanoria* for the necessity of an effective hearing and *Sweta Agarwal* for the requirement to supply reports relied upon by the authority. Respondent's arguments: The respondent bank argued that the petitioners had admitted to possessing the forensic report through Axis Bank and had submitted a detailed reply to the show cause notice after perusing it. They further contended that the addendum to the forensic report was an internal document, not relied upon for the impugned order dated March 2, 2024, which was passed based on the show cause notice and the petitioners' reply. The bank also argued that the petitioners had not approached the court with clean hands, citing *Heera Lal Saini and Another Vs. State of Rajasthan*.
Sections Cited
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Cause title — parties, addresses and appearances
order.
Mr. Suddhasatva Banerjee, Learned Advocate representing the petitioners submits that before pandemic Covid-19, there was no default on the part of the petitioner company in serving the loans and credit facilities which were availed from the respondent no.1 as well as another bank, namely, Axis Bank. Due to pandemic Covid-19 and adverse market situation, the business of the petitioner company was severely affected. There was a default in servicing the loan and credit facilities which had caused the account of the petitioner company to be classified as NPA initially in the month of October, 2022 and subsequently it was changed to July, 2022. 3. The respondent no. 1 bank has initiated proceedings before the Learned Debts Recovery Tribunal as well as in the National Company Law Tribunal. In one of the proceedings initiated by an Operational Creditor against the petitioners before the Learned NCLT has resulted in 3
commencement of the CIRP and an interim resolution professional has been appointed over the petitioner company.
Mr. Banerjee submits that the respondent no.1 had appointed M/s Raj Gupta and Company as a Forensic Auditor for audit of the manufacturing division of the petitioner company. As per requirements of the Forensic Auditor, the petitioners have furnished all details and rendered all cooperation. After the period of nine months, the respondents have replaced Forensic Auditor M/s. Raj Gupta and Company and appointed another Forensic Auditor, namely, M/s. SKVM and Company on 27th July, 2023. M/s. SKVM and Company submitted its forensic report to the respondent no.1 bank on 5th December, 2023 and on 7th December, 2023, the respondent no.2 served show cause notice to the petitioners. On receipt of show cause notice, the petitioners have submitted reply to the said show cause notice on 22nd December, 2023. 5. Mr. Banerjee submits that the respondents have not served the copy of forensic report to the petitioners but the petitioners managed to get the same through other bank. He submits that the petitioners further came to know that there was an Addendum dated 4th January, 2024 to the forensic report submitted by M/s. SKVM and Company to the report to the petitioners’ bank conducted a personal hearing on 28th February, 2024 and issued the impugned order on 2nd March, 2024. 9. Mr. Anirban Pramanick, Learned Advocate representing the respondent no. 1 bank submits that the accounts of the petitioners’ were declared NPA in the month of July, 2022. The show cause notice was served upon the petitioners on 7th December, 2023 and the petitioners have submitted their reply to the show cause notice on 22nd December, 2023. He submits that there is an Addendum to the forensic audit report but the bank has not relied upon the Addendum and has passed
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an order declaring the accounts of the petitioners’ fraud on 2nd March, 2024, on the basis of the show cause notice and reply submitted by the have stated that "no copy of the forensic audit report was served upon the petitioners by the respondent nos. 1 to 4 till date but the petitioners were provided a copy of the forensic audit report from another consortium lender being Axis Bank sometime in May 2024 while carrying out its own forensic audit”.
In the reply to the show cause notice, the petitioners have not requested the respondents for providing Forensic Audit Report. It is also not the case of the petitioners in the reply to the show cause notice that due to non-supply of Forensic Audit Report, the petitioners could not give reply properly. On the other hand, the petitioners have stated that “In the meantime, on 9th December, 2023, we have also received a separate show cause notice from Axis Bank vide their letter No. AXISB/SAG/EAST/2023-24/153 dated 8th December 2023 and they have enclosed the forensic audit report received from M/s SVKM and Company. We have gone through copy of the forensic audit report and were surprised to notice some misleading facts/false allegations highlighted by the M/s SVKM & Company in relation to Non-Co-operation and diversion of funds, which we deny and dispute as the allegations were being made without any proper evidence”. From the said statement of the petitioners, it reveals that the petitioners have admitted that they possess forensic audit repot not from the 7
respondent bank but from the Axis Bank and were aware of the contents of the Forensic Audit Report.
Supply of the forensic audit report or any document is required to be served if the authorities have relied upon the same. In the present case, the bank has issued show cause notice to the petitioners on the basis of the forensic audit report. Though the forensic audit report is not served by the respondent bank but the petitioners have admitted that they received the said forensic report from the Axis Bank. In the show cause reply, the petitioners have not requested for supply of forensic audit report on the other hand, have submitted detailed reply to the show cause notice. This Court is of the view that while furnishing reply to the show cause notice, the petitioners had the forensic report and have not prejudiced for non-supply of forensic report by the respondents herein.
As regard to the addendum to the forensic audit report is concern, it is the contention of the petitioners that after receipt of reply to the show cause notice dated 22nd December, 2023 wherein the petitioners have clarified the contentions of paragraph 3 (iii) of the show cause notice and given the details of the figures which was not correct in the show cause notice and after receipt of the said reply, the respondents’ Chartered Accountant has issued Addendum on 4th January, 2024 to the forensic audit report dated 5th December, 2023. 17. Paragraph 3(iii) of the show cause notice reads as follows:
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“3. On basis of the information submitted the outcome from the investigation states the below issues due to which the account is getting classified as fraud.
(iii) Based on available information, data available at the MCA portal and logical analysis of the same, key highlights of our audit findings are as under:
On comparison of the information submitted by you for getting the drawing power and the figures in the audited financials are different and the same has been mis-representation from your end to get the higher drawing power.
In Lakhs) Particulars 31.03.2020 31.03.2021 31.03.2022 Manuf. Division Manuf. Division Project Division Project Division As per the SS of BOB
3,800.98 4,053.67 - - As per the SS of Indian Bank - - 380.59 2,476.74 Total as per SS 3,800.98 4,053.67 380.59 2,476.74 Total as per the AFS 4,261.57 3,357.18 (950.00)
66 Excess/(Short) in SS (460.59) 696.49 1,330.59 1,746.08
SS = Stock statement; BOB = Bank of Baroda; AFS = Audited financial Statement
Further it is also observed that you have used the manufacturing departments funds towards the other division:
Table showing disclosure of inter division advances as per AFS is as follows: (In Lakhs)
Particulars 2019-20 2021-22 2022-23 Manuf. Manuf. Manuf. Contribution in EPC 1,324.64 1,326.41 -
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Contribution in Auto 895.48 881.47 - Advance to EPC 1,334.49 Advance to Auto 559.82
Your company had taken Packing Credit facility based on Export orders of Rs. 26.83 crores during the period August 2021 to July 2022. However, after multiple reminders also, you have not submitted any information with regards to export sales to us. The documents which we have been seeking are documents related to exports, e.g. Copy of Invoices, Bill of Landing, Transport bill copies etc. since, the documents related to exports are not submitted we are not able to understand whether Export has been made or not. As from the order copy submitted to us to avail the facility mentioned the terms of payments as LC or 120 days from receipt. The same not been updated to us raises the concern if the export has happened or not. However, from your previous records it is observed that you had executed some export sales which can be identified form the GST refunds which is received by you in the year FY 2019-20 & FY 2020-
Towards which you have given reason as “We are unable to provide the same due to accounting software limitations and labour unrest.”
To give a better/honest information to bank, an effort to seek the information from E-mail/shipper/other resource if tried then would have been of help, but your reply towards the same is raising question on the transaction.
Inventories of the company worth Rs. 235 Crs (from audited financials as on 31.03.2022) seems to nonexistent for all the divisions:
- As per the AFS of FY 2021-22, you have reported the inventory with you of Rs. 235 crores. As per latest stock statement submitted of 31.10.2022 for manufacturing division you have shown the inventory of Rs.15,668.29 Lakhs out of which from your stock statement you have shown paid stock with you of Rs.12383.76 Lakhs. The same is not verified either to us, nor to external agency i.e. stock auditor, statutory auditor of bank forensic auditor etc. The stock being hypothecated to bank and the asset of bank the same not being available to verification or liquidation raises doubt on its actual existence.
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In reply to paragraph 3(iii) of the show cause notice, the petitioners have stated as follows: “3(iii) We have found that the Audited Stock figure given in the your letter are not matching with the audited balance sheet. Total Stock figure as per audited Balance sheet as on 31.03.20, 31.03.21 and 31.03.22 was as follows, break up which was as follows.
Rs. (in Lakhs) 31.03.20 Rs. (in Lakhs) 31.03.21 Rs. (in Lakhs) 31.03.22 MFG - 13355.29 14491.64 15543.67 EPC - 2475.45 2953.50 6152.07 Auto - 1054.88 ………………….. 1275.06 ………………….. 1730.22 ………………… Total 16885.62 …………………. 18720.20 …………………. 23425.96 ………………….
Further it seems that there is a typographical error in mentioning the FYs. The figure for F.Y. 2021-22 and 2022-23 actually relates to the F.Y. 2020-21 and 2021-22 respectively. We have not yet got audited the Balance sheet for the F.Y. 2022-23. Beside this the advance figures shown for the F.Y. 2021-22 are also not matching with the audited financial statements. Correct figures are as follows :-
Particulars (In Lakhs) 2019-20 Manuf. (In Lakhs) 2020-21 Manuf. (In Lakhs) 2021-22 Manuf. Contribution in EPC 1324.64 1326.41
3(iii)(A) Forensic Auditor has highlighted differences in Trade Payables reported in the Stock Statements vis-à-vis Audited Financial Statements.”
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On 4th January, 2024, the Chartered Accountant has made the following Addendum in the forensic audit report dated 5th December, 2023:
“4. As per the AFS of Supreme for FY 2021-22, there is an inventory of Rs.15,543.67 lakhs as on 31.03.2022. However, there is a typographical error at point 2.1.7 on page 41 (Observation on movement of Inventories) in our original report submitted to the consortium vide dated 05.12.2023, wherein the same is considered as Rs. 15,563.47 lakhs, due to which there is a difference of Rs. 20 lakhs in the value of Inventories as on 31.03.2022. Therefore, the same is now to be considered as follows:
Table showing Inventories as per the AFS for FY 2019-20 till FY 2021-22 is as follows: (In Lakhs)
Division 2019-20 2020-21 2021-22 RM FG, SFG, SIT
Total
RM FG, SFG, SIT
Total
RM FG, SFG, SIT
Total
Manuf 940 .09 12,415.21 13,355. 30 1,84 7.68 12,643. 96 14,491 .64 1,875. 31 13,688.3 6 15,543 .67 EPC
- 2,475.45 2,475.4 5 - 2,953.5 0 2,953. 50 - 6,152.07 6,152. 07 Auto - 1,054.89 1,054.8 8 - 1.275.0 7 1.275. 07 - 1,730.22 1,730. 22
Total 16,885. 63
Total 18,720 .21
Total 23,425 .96
From the above table, it is observed that there is an inventory amounting to Rs. 16,885.63 lakhs as on 31.03.2020, which has been increased to Rs. 23,425.96 lakhs as on 31.03.2022. In continuation to the above, our observation at point 2.1.7 in our original report stands as it is.
Considering the additional information submitted, the conclusion of our Report submitted on 05.12.2023 is restated as follows:
Our
conclusion is on the basis of information made available/explanation/documents and logical analysis of the same, by giving reference to “Master Circular on Fraud” issued by the Reserve Bank of India dated 3rd July 2017, there are few transactions which are suspicious in nature and the reasons for the same has remained unexplained, even after giving multiple
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opportunities to the borrower. Further, the same would have to be re- visited if the required information/explanation/documents are shared by the borrower in the near future.”
On receipt of reply to the show cause notice, the respondents have given personal hearing to the petitioners and have issued the impugned order dated 2nd March, 2024 by declaring the Company, its Directors and ex-Directors as Fraud. Learned Counsel for the respondent bank submits that the addendum is the internal documents between the bank and the Chartered Accountant and the same has not been served upon the petitioners but strangely, the petitioners have disclosed the same in the writ petition. It is the specific contention of the respondents that the addendum is after the issuance of show cause notice and the respondents have not relied upon the said addendum in the impugned order dated 2nd March, 2024 wherein the petitioners have been declared as fraud.
The petitioners have admitted that they had the forensic audit report and have submitted reply to the show cause notice after perusing the forensic audit report and it is the specific case of the respondents that they have not relied upon the addendum to the forensic audit report submitted by the Chartered Accountant on 4th January, 2024, thus this Court did not find any violation of natural justice or Master Directions on Fraud issued by the Reserve Bank of India while issuing the show cause notice and the impugned order.
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In view of the above, WPA No. 16473 of 2024 is dismissed. Interim order is vacated. CAN No. 1 of 2026 is disposed of. Parties shall be entitled to act on the basis of a server copy of the Judgment placed on the official website of the Court.
Urgent Xerox certified photocopies of this judgment, if applied for, be given to the parties upon compliance of the requisite formalities.
(Krishna Rao, J.)
Reproduced from the public record of the Calcutta High Court. Verify against the court's own copy before relying on it. Income tax judgments are on bharattax.net.