Koliyacode Consumer Co-operative Society Ltd. v. State of Kerala and The Director of Co-operative Audit

## **`IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT`** ## **`THE HONOURABLE MR. JUSTICE GOPINATH P. FRIDAY, THE 9[TH] DAY OF FEBRUARY 2024 / 20TH MAGHA, 1945 WP(C) NO. 26639 OF 2019`** ## **`PETITIONER/S:`** ``` KOLIYACODE CONSUMER CO-OPERATIVE SOCIETY LTD. KOLIYAKODE.P.O., VENJARAMOODU, THIRUVANANTHAPURAM-695607, REPRESENTED BY ITS SECRETARY. BY ADVS. K.J.SAJI ISAAC DR.ELIZABETH VARKEY SRI.AJEESH EMMANUEL SRI.JITHIN SAJI ISAAC ``` ## **`RESPONDENT/S:`** - `1 STATE OF KERALA, REPRESENTED BY SECRETARY TO GOVERNMENT, DEPARTMENT OF CO-OPERATIONS, SECRETARIAT, THIRUVANANTHAPURAM-695001.` - `2 THE DIRECTOR OF CO-OPERATIVE AUDIT, OFFICE OF THE DIRECTOR OF CO-OPERATIVE AUDIT, THIRUVANANTHAPURAM-695033. BY ADV ADVOCATE GENERAL OFFICE KERALA` ``` SRI. VENUGOPAL V (GP) ``` ``` THIS WRIT PETITION (CIVIL) HAVING COME UP FOR ADMISSION ON 09.02.2024, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ``` `WP(C) NO. 26639 OF 2019` 2 ## **`JUDGMENT`** The Koliyacode Consumer Co-operative Society Ltd. has approached this Court, challenging Exts.P3, P7 and P9 and seeking a writ of mandamus, directing the respondents to reaudit the accounts of the petitioner Society for the period from 2016-17 onwards. Ext.P3 is the audit certificate dated 06.07.2018 together with the audit memorandum for the year 2016-17 issued by the auditor, appointed in terms of the provisions contained in the Kerala Co-Operative Societies Act, 1969 (hereinafter referred to as ‘the 1969 Act’) and the Rules framed thereunder. Ext.P7 is an order issued by the Government of Kerala on a revision petition filed by the petitioner in terms of the directions issued by this Court in Ext.P5 judgment, which holds that the revision petition is not maintainable against an audit report. Ext.P9 is also an order issued by the Government of Kerala holding that a revision petition cannot be maintained against the audit report prepared by the auditor appointed in terms of the provisions contained in the 1969 Act and the Rules framed thereunder. Ext.P9 order came to be issued after the issuance of Ext.P7 order, as the petitioner caused to be issued Ext.P8 notice `WP(C) NO. 26639 OF 2019` 3 pointing out that Ext.P7 order is actually in contempt of the directions issued by this Court in Ext.P5 judgment. 2. Learned counsel appearing for the petitioner would submit that though the petitioner is classified as a primary cooperative society, it is a society that has substantial business and turnover. It is submitted that, in respect to the year 201617, the turnover of the Society was Rs.7,31,15,836/- (Rupees Seven Crores thirty-one lakhs fifteen thousand eight hundred and thirty-six only). It is submitted that the petitioner-Society was functioning very profitably, and owing to certain fundamental errors committed by the auditor appointed in terms of the provisions contained in the 1969 Act and the Rules framed thereunder, the petitioner was required to provide for certain reserves beyond the requirements of the law leading to a situation where the Society had slipped into a loss. It is submitted that, in such circumstances, the petitioner has sought for re-audit of its accounts, preferably through a Chartered Accountant, who may be appointed or nominated by the Director of Co-operative Audit. 3. Learned Government Pleader opposes the grant of any relief to the petitioner. It is submitted that the prayer of the petitioner to appoint a Chartered Accountant for the `WP(C) NO. 26639 OF 2019` 4 purposes of auditing the accounts of the petitioner-Society, cannot be accepted. Reference is made in this regard to the provisions of Article 243-ZM of the Constitution of India and the provisions of Sections 63 and 64 of the 1969 Act and Rules 63 and 64 of the Kerala Co-operative Societies Rules (the Rules) as also the Audit Manual to contend that the audit of the primary co-operative societies can only be in the manner contemplated by the provisions of the 1969 Act and not in any other manner. To a specific question from the Court as to what will be the remedy of the petitioner against Ext.P3, taking into consideration the fact that the Government has, in Exts.P7 and P9 orders, clearly held that a revision petition is not maintainable against an audit report, the learned Government Pleader submits that the petitioner may have to approach the Director of Co-operative Audit, who may, after taking note of the contentions taken by the petitioner, decide whether a further audit of the accounts of the petitioner-Society is required in terms of the provisions contained in the 1969 Act and the Rules framed thereunder and having regard to the provisions of the audit manual. 4. Having heard the learned counsel appearing for the petitioner and the learned Government Pleader, I am of the `WP(C) NO. 26639 OF 2019` 5 view that the learned Government Pleader is right in contending that the audit of a primary co-operative Society like the petitioner can only be in terms of the provisions contained in Sections 63 and 64 of the 1969 Act and the Rules framed thereunder and the provisions of the Co-operative Audit Manual. Article 243-ZM of the Constitution of India deals with the audit of accounts of Co-operative societies. It reads as follows; ## **“243-ZM. Audit of accounts of co-operative** **societies** .-(1) The Legislature of a State may, by law, make provisions with respect to the maintenance of accounts by the co-operative societies and the auditing of such accounts at least once in each financial year. (2) The Legislature of a State shall, by law, lay down the minimum qualifications and experience of auditors and auditing firms that shall be eligible for auditing accounts of the co-operative societies. (3) Every co-operative society shall cause to be audited by an auditor or auditor firms referred to in clause (2) appointed by the general body of the cooperative society: Provided that such auditors or auditing firms shall be appointed from a panel approved by a State Government or an authority authorised by the State Government in this behalf. (4) The accounts of every co-operative society shall be audited within six months of the close of the financial year to which such accounts relate. `WP(C) NO. 26639 OF 2019` 6 (5) The audit report of the accounts of an apex co-operative society, as may be defined by the State Act, shall be laid before the State Legislature in the manner, as may be provided by the State Legislature, by law.” A reading of the provisions of Article 243-ZM will indicate that it is the State Legislature's duty to make provisions regarding the maintenance of the accounts by the co-operative societies and the auditing of such accounts at least once in each financial year. The said provision also makes it clear that the Legislature of the State shall also lay down the minimum qualifications and experience of auditors and auditing firms that shall be eligible for auditing accounts of the co-operative societies. 5. Section 2(ab) of the 1969 Act defines “auditing of accounts of Co-operative Societies”. It states that auditing of accounts of Co-operative Societies means a close examination of financial transactions, overdue debts, if any, maintenance of books of accounts, documents and other records of a business, preparation of audit report and includes an inquiry into the affairs of the society and subsidiary institutions in order to ascertain the correctness of accounts and **the extent to which its activities were useful in promoting the economic welfare of the members in accordance with the** `WP(C) NO. 26639 OF 2019` 7 **Co-operative principles** . It is clear from the definition of the term ‘auditing of accounts of Co-operative Societies’ that the audit of accounts of co-operative societies must also be with regard to the Co-operative principles, and the auditor must also ascertain the extent to which the activities of the society were useful in promoting the economic welfare of the members in accordance with the Co-operative principles. 6. Reading of Section 63 of the 1969 Act will indicate that there shall be a Director of Co-operative Audit, who shall be the Principal Officer in charge of the audit of co-operative societies. Sub Section (5) of Section 63 of the 1969 Act indicates that the procedure to be adopted in the auditing of accounts of different types of co-operative societies shall be specified in the audit manual approved by the Director of Cooperative Audit or guidelines, directions that may be issued, from time to time, by the Registrar of the Co-operative societies, the National Bank for Agricultural and Rural Development or the Reserve Bank of India, as the case may be, from time to time. It is also clear from the provisions of Section 63 of the 1969 Act that the functions of the Director of Co-operative Audit can be delegated to any subordinate officers by the Government through a general or special order. `WP(C) NO. 26639 OF 2019` 8 The said provision also provides for the prescription of minimum qualification and experience of auditors. Also, it provides that every Co-operative Society shall cause its accounts to be audited by an auditor or auditors or team of auditors appointed by the general body or special general body from among the panel of auditors approved by the Director of Co-operative Audit. It further provides that if no auditors are available from the above panel, the general body of a society may appoint auditing firms from the panel approved by the Director of co-operative Audit. Sub Section (10) of Section 63 of the 1969 Act reads as follows: ‘’(10) The financial accounts of all apex societies shall be audited by auditing firms from among the panel approved by the Director of Co-operative Audit and the administrative matters and related accounts of assisted apex societies shall be audited by the departmental auditors from among the panel approved by the Director of Co-operative Audit as may be prescribed and submit the audit reports to the Director of Co-operative Audit.’’ From the general scheme of Section 63 of the 1969 Act, it appears that, while in the case of apex societies, it is mandatory that accounts shall be audited by the auditing firms from among the panel approved by the Director of Cooperative Audit, in the case of other societies, it is not `WP(C) NO. 26639 OF 2019` 9 mandatory that the auditing shall be by an auditing firm as defined in Rule 64 A of the 1969 Rules. 7. Section 64 of the 1969 Act deals with the scope of audit, powers of the Director of Co-operative Audit and procedure for audit. Sub Section (4B) of Section 64 of the 1969 Act provides that within three months from the date of receipt of the audit report, the Director of Co-operative Audit shall issue an audit certificate to the concerned society with a copy of the audit memorandum as may be prescribed. Ext.P3 is an audit certificate along with the memorandum issued in terms of Sub Section (4B) of Section 64 of the 1969 Act. A reading of Sub-sections (9), (10) and (11) of Section 64 indicates that if the audit conducted in terms of Section 63 discloses any defects in the working of a society, the Director of Cooperative Audit may bring such defects to the notice of the society and if the society is affiliated to another society, also to the notice of that other society. Further, if the result of the audit discloses any serious defect in the working of the society, the Director of Co-operative Audit or the person authorized by him shall communicate the same forthwith to the Registrar for immediate further action. Sub Section (11) of Section 64 of the 1969 Act indicates that the Director of Co-operative Audit `WP(C) NO. 26639 OF 2019` 10 may, by order in writing, direct the society or its officers to take such action as may be specified in the order within the time mentioned therein to rectify the defects disclosed in the audit, under intimation to the Registrar. 8. Rule 64 of the 1969 Rules provides, among other things, that the Director of Co-operative Audit shall be the authority competent to prepare and maintain a list or panel of auditors and auditing firms who satisfy the qualification and experience as specified in rule 64A for undertaking the audit of accounts of co-operative societies in the State. Sub Rule (3) of Rule 64 of the 1969 Rules also provides that the Director of Co-operative Audit shall publish a panel of auditors on a designation basis as per the class and type of societies within sixty days from the close of every year. The said sub-Rule also provides that in the case of apex co-operative societies, the Director of Co-operative Audit shall communicate the panel of auditing firms and departmental auditors to the apex societies. The general body of the vapex societies/federation shall appoint the auditing firms and departmental auditors to audit the accounts of apex federations for the year in which the general meeting is held. `WP(C) NO. 26639 OF 2019` 11 9. Rule 64 A of the 1969 Rules deals with the qualifications of an Auditor. Though it is the contention of the learned counsel for the petitioner with reference to Rule 64 A(2)(i) of the 1969 Rules that audit by the qualified Chartered Accountant as defined in the Chartered Accountants Act, 1949 is also contemplated, I am of the opinion that the said contention cannot be accepted in the general scheme of Sections 63 and 64 of the 1969 Act and the Rules framed thereunder as also the provisions of Article 243-ZM of the Constitution of India. Rule 64 A(2)(i) of the 1969 Rules defines a Chartered Accountant only for the purposes of defining the term “Auditing firm”, which is used in Sections 63 and 64 of the 1969 Act and Rule 64 of the 1969 Rules. Therefore, nothing turns on the said fact. 10. Therefore, I find it difficult to hold that the petitioner, which is a primary co-operative society, can insist that it must be permitted to appoint a Chartered Accountant to audit its accounts in the manner contemplated by the provisions of the 1969 Act, the Rules framed thereunder. 11. Coming to the contentions of the learned counsel for the petitioner that the revision petition filed by the petitioner has been rejected by Exts.P7 and P9 orders, leaving the `WP(C) NO. 26639 OF 2019` 12 petitioner with no remedy against Ext.P3 audit certificate and memorandum, and taking into consideration the provisions of Section 87 of the 1969 Act, the view taken by the Government that the revision is not maintainable against Ext.P3 audit certificate and memorandum appears to be incorrect. [See the law laid down by this Court in **Peroor Service Co-op. Society Ltd. v. State of Kerala and Others;** [2017 (5) KHC 531] as modified by the judgment of the Division Bench in W.A.No.288 of 2018]. 12. However, in the facts and circumstances of this case and in the light of the orders that I propose to pass, I do not deem it necessary to direct fresh consideration of the revision petition filed by the petitioner at the hands of the Government. In light of the above findings, it must be held that the provisions of Section 63(9) of the 1969 Act indicate that while there is no prohibition in the accounts of a primary cooperative society being audited by an auditing firm, the normal procedure is that only the accounts of apex societies shall be audited by auditing firms that from the panel approved by the Director of Co-operative Audit. Since the petitioner has a specific case that, on account of the requirement to create reserves owing to the wrong assessment of the situation by the `WP(C) NO. 26639 OF 2019` 13 auditor who prepared the Ext.P3 report, the petitioner society has slipped into a loss, I deem it appropriate to permit the petitioner society to file a detailed objection to Ext.P3 report before the Director of Co-operative Audit, who shall on a consideration of the objection and the contents of Ext.P3 report take a decision as to whether the accounts of the petitioner society for the year 2016-17 and any subsequent year must be conducted by another auditor to be nominated by him or by an auditing firm as defined in Rule 64 A of the 1969 Rules approved by the Director of Co-operative Audit. In order to enable the consideration of the matter by the Director of Cooperative Audit, as above, the petitioner shall file its objections to Ext.P3 report within a period of two weeks from the date of receipt of a certified copy of this judgment. The Director of Co-operative Audit shall, thereafter, take a decision in the matter as directed above within a further period of two months. It is open to the Director of Co-operative Audit to provide for the audit of the accounts of the petitioner society as directed above for the financial year 2016-17 as well as for all the financial years succeeding that financial year. If the Director of Co-operative Audit requires any further information from the petitioner society in order to take a decision as above, `WP(C) NO. 26639 OF 2019` 14 it will be open to the Director of Co-operative Audit to call for such informations from the society. The writ petition will stand disposed of with the aforesaid directions. **Sd/GOPINATH P., JUDGE** rkj/ajt `WP(C) NO. 26639 OF 2019` 15 ## **`APPENDIX OF WP(C) 26639/2019`** |`PETITIONER EXHIBITS`|| |---|---| |`EXHIBIT P1`|`TRUE COPY OF THE REPRESENTATION DATED`| ||`7.2.2018 SUBMITTED BY THE PETITIONER TO THE`| ||`2ND RESPONDENT.`| |`EXHIBIT P2`|`TRUE COPY OF THE LETTER DATED 14.2.2018 SENT`| ||`BY THE ASSISTANT DIRECTOR (NEDUMANGAD) TO`| ||`THE AUDITOR.`| |`EXHIBIT P3`|`TRUE COPY OF THE AUDIT CERTIFICATE ALONG`| ||`WITH AUDIT MEMORANDUM APPROVED ON 6.7.2018.`| |`EXHIBIT P4`|`TRUE COPY OF THE REPRESENTATION DATED`| ||`24.2.2019 SUBMITTED BY THE PETITIONER BEFORE`| ||`THE 2ND RESPONDENT.`| |`EXHIBIT P5`|`TRUE COPY OF THE JUDGMENT IN WP.C.NO.8518 OF`| ||`2019 BEFORE THE HONOURABLE HIGH COURT OF`| ||`KERALA.`| |`EXHIBIT P6`|`TRUE COPY OF THE REVISION PETITION DATED`| ||`30.4.2019 FILED BY THE PETITIONER BEFORE THE`| ||`1ST RESPONDENT.`| |`EXHIBIT P7`|`TRUE COPY OF THE ORDER NO.G.O.`| ||`(RT)NO.325/2019/CO-OP. DATED 20.5.2019 OF`| ||`THE 1ST RESPONDENT.`| |`EXHIBIT P8`|`TRUE COPY OF THE CONTEMPT NOTICE DATED`| ||`3.6.2019 FILED BY THE PETITIONER BEFORE THE`| ||`1ST RESPONDENT.`| |`EXHIBIT P9`|`TRUE COPY OF THE ORDER NO.G.O.NO.499 OF 2019`| ||`DATED 19.8.2019 ISSUED BY THE THE 1ST`| ||`RESPONDENT TO THE PETITIONER.`|