Judgment : The brief facts of the case are as follows:- 1. The petitioner stated that he is one of the partners of the petitioner's firm, the DSQ Software Limited, is a listed company and he is doing business in development of Software. The petitioner's firm was appointed as Statutory Auditors of the Company under the Company's Act by the shareholders of the Company in the Annual General Meeting of the said Company held on 29.12.1999 to hold office until the next Annual General Meeting of the Company in relation to the Company's financial years 19992000. The said Company was managed by a Board of Directors which included independent directors of nominees of Financial Institutions. The Act was undergoing amendments from time to time and one such amendment to it was made by the Companies Amendment Act, 2000, which came into force on 30.12.2000. Section 227 of the Act sets out the powers and duties of Auditors. By the Amending Act to Section 227(3) sub-clause (e) was inserted. The petitioner has set out Section 227 which is as follows:- The Auditors Report shall also state: a) Whether he has obtained all the information and explanation which to the best of his knowledge and belief were necessary for the purposes of his audit. b) Whether, in his opinion, proper books of accounts as required by law have been kept by the Company so far as appears from his examinations of those books, and proper returns adequate for the purpose of his audit have been received from branches not visited by him. bb) whether the report on the accounts of any branch office audited under Section 228 by a person other than the Company's Auditor has been forwarded to him as required by Clause (c) of sub-section (3) of that section and how he has dealt with the same in preparing the Auditor's Report. bb) whether the report on the accounts of any branch office audited under Section 228 by a person other than the Company's Auditor has been forwarded to him as required by Clause (c) of sub-section (3) of that section and how he has dealt with the same in preparing the Auditor's Report. c) whether the Company's balance sheet and profit and loss account dealt with by the Report are in agreement with the books of account and returns:- d) whether, in his opinion, the profit and loss account and balance sheet comply with the accounting standards referred to in sub-section(3C) of section 211; e) in thick type or in italics the observations or comments of the auditors, which have any adverse effect on the functioning of the company; f) whether any director is disqualified from being appointed as director under clause (g) of sub section (1) of section 274.” 2. Section 233 of the Amendment Act provides that if any Auditor's Report is made which is not in conformity with the provisions of Section 227 & 229, the said default, if wilful, would be punishable which may extend to a fine of Rs.10,000/-. I respectfully crave leave of this Hon'ble Court to refer to the entire Provisions of Section 227 of the Act and treat them as part of this affidavit for fuller particulars. 3. Whilst conducting the audit for the period ended 31 December, 2000 the petitioner had borne in mind the provisions of the Companies Act, 1956 and the pronouncements of the Institute of Chartered Accountants of India made from time to time and there were 4 comments in the Auditor's Report and 6 comments in the annexure to the Auditor's Report which had been printed in italics. The comments relating to the two matters under question (viz. The comments relating to the two matters under question (viz. internal audit, PF dues) were not printed in italics based on my assessment and judgment that these matters would not have any adverse effect on the functioning of the Company for reasons explained below:- (i) Para (xii) in the annexure to the Auditor's Report : “In our opinion, the internal audit coverage requires to be reviewed and enlarged to make it commensurate with the size and nature of business; In respect to the above remark, the petitioner had considered the fact that the Company had appointed a firm of Chartered Accountants to function as Internal Auditors and periodical reports were submitted to the Board of Directors based on work carried out by that firm. Accordingly, the remark that the internal audit coverage requires to be reviewed and enlarged was more in the nature of recommendation for improving the functioning of the Company in future and in the petitioner's opinion not meant to convey adverse effect on the functioning of the Company. (ii) Para (xiv) in the annexure to the Auditor's Report: “There was delay in depositing the provident fund dues and employees state insurance dues with appropriate authorities. The arrears in respect of P.F. of Rs.323 thousands and ESI of Rs.11 thousands has been paid subsequently.” In respect of the above remark the petitioner had considered the fact that the company had subsequently paid all the arrears before completion of the audit and the same had been accepted by concerned authorities and accordingly in the petitioner's opinion, there was no adverse effect on the functioning of the Company. It may be noted that, the fact of delays in remittances had been clearly brought out. (iii) Accordingly, in the petitioner's well considered opinion the matters referred to in para(xii) and (xiv) in the annexure to the Auditor's Report did not constitute material which could have any adverse effect on the functioning of the Company and in the petitioner's subjective satisfaction the matters referred to in (xii) and (xiv) in the annexure to the Auditor's Report did not warrant, necessitate or justify the contents of the abovesaid two clauses being set out in italics, and (iv) The petitioner would like to respectfully point out that these two matters were also mentioned in the annexure to the Auditor's Report issued for the period ended 30th June 1999 to the shareholders of the Company. The petitioner is given to understand that inspection was ordered under Section 209 of the Act for the accounts relating to the financial year 31 December, 2000. 4. The petitioner's Firm had received a letter dated 8th April, 2002 on 10th April, 2002 from the respondent. The said letter contains 3 paragraphs. Paragraph 1 of the said letter states that our Firm has not stated the observations in the Auditor's Report dated 07.02.2001 on the Balance Sheet as at 31.12.2000 of the Company in relation to the Para (xii) and (xiv) in thick type or italics. Paragraphs 2 and 3 of the said letter enquire about the other matters relating to the company and our Firm was requested by the respondent to offer its comments on the said letter. The Firm by its letter dated 15th April, 2002 had submitted an elaborate comment consisting of 6 paragraphs. In respect to the instant matter namely matters relating to Section 227(3)(e) of the Act the Firm had pointed out that there should be existence of adverse effect on the functioning of the Company as an essential feature for the applicability of the sub-Section. The Firm had also quoted the statement of Audit Practice (SAP-7) issued by the Institute of Chartered Accountants in this connection. It is also necessary to set out the relevant paragraphs from the Guidance Note on Section 227(3)(e) and (f) of the Companies Act, 1956 issued by the Institute of Chartered Accountants of India in April 2001 for better appreciation of the contentions raised hereunder, which runs as follows: Para (6) in Guidance Note.... “The Act does not specify the meaning of the phrase 'adverse effect on the functioning of the Company.' The expression may be interpreted to mean that any event affecting the functioning of the Company observed by the Auditor should be reported upon even though it does not affect the financial statements, e.g. revocation of a license to manufacture one out of the many products during the year, etc. However, such an interpretation would not only be beyond the scope of the Audit of accounts of the company but would also not be in accordance with the objective and concept of an independent audit stipulated under the Act. However, such an interpretation would not only be beyond the scope of the Audit of accounts of the company but would also not be in accordance with the objective and concept of an independent audit stipulated under the Act. A more logical and harmonious interpretation is that the amendment does not intend to change the basic objective and the concept of an independent audit of accounts of a Company, which is to examine the financial statements with a view to express an opinion thereon.” Para (7) in Guidance Note.........”The scope of the audit and Auditor's role remains as contemplated under the Statements on Standard Auditing Practices and other relevant pronouncements issued by the Institute of Chartered Accountants of India as well as laid down in the Act, i.e., to lend credibility of the financial statements by reporting whether they reflect a true and fair view. SAP-2 on “Objective and Scope of the audit of Financial Statements” specifies that the auditor's opinion helps determination of the true and fair view of the financial position and operating results of an enterprise. The user, however, should not assume that the Auditor's opinion is an assurance as to be future viability of the enterprise or the efficiency or effectiveness with which management has conducted the affairs of the enterprise.” It also states that “the Auditor's work involves exercise of judgment, for example, in deciding the extent of Audit procedure and in assessing the reasonableness of the judgments and estimates made by management in preparing the financial statements. 5. The petitioner crave leave of this Court to produce a copy of the Guidance Note on section 227(3)(e) and (f) of the Act issued by the Institute of Charitable Accountants of India, New Delhi and refer and rely upon the same as part of this Affidavit. The Firm had also effectively and elaborately dealt with the other aspects raised in the letter of the respondent dated 08.04.2002 in its reply dated 15.04.2002. While so, the petitioner was pained and shocked to receive a show-cause notice dated 2nd December, 2002 from the respondent asking me to state as to why prosecution should not be launched against the petitioner under Section 233 of the Act for the alleged default. The alleged default is stated to be the violation of the provisions of Section 227(3) (e) of the Act. The alleged default is stated to be the violation of the provisions of Section 227(3) (e) of the Act. In the said letter no reference has been made to the extensive reply given to the questions raised by the respondent by its letter dated 8th April, 2002. It can therefore, reasonably be assumed that notwithstanding the several explanations given by the Firm in his letter dated 15th April, 2002 the matter has been already concluded by the respondent and the show cause notice was issued only as a formality with an object to launch prosecution against the petitioner. 6. The learned counsel for the petitioner submits that the respondent in issuing the impugned notice has abused the power conferred on it. The show-cause notice was issued on a non-existent default and also without jurisdiction. The respondent has omitted to note that under the provision of 227(3)(e) of the Act, an auditor is liable to report in thick type or italics only those observations or comments of the Auditors on matters which have an adverse effect on the functioning of the Company. The complaint of the said requirement under Section 227(3)(e) of the Act does not rise if the opinion of the auditors, is that these observations or comments in their report do not have an adverse effect on the functioning of the Company. The Company Report does not have adverse effect on the functions of the Company and that these are of instrumentality in nature of statement of fact respectively. The respondent totally failed to see that the comments regarding the size and nature of business. There was delay in depositing the provident fund dues and the Employees State Insurance dues with appropriate authorities. The arrears in respect of provident fund of Rs.3,23,000/- and Employees State Insurance of Rs.11,000/- has been paid subsequently. 7. The learned counsel further submits that the above remark of the petitioner has considered the fact that the Company had subsequently paid all the arrears before the completion of the audit and the same had been accepted by the concerned authorities and accordingly in the petitioner's Company opinion, that there was no adverse effect on the functioning of the Company. The fact of the delays in remittances had been clearly brought out. The fact of the delays in remittances had been clearly brought out. Further the Auditor's Report does not constitute material which could have had any adverse effect on the functioning of the Company and in the petitioner subject to satisfaction the matter is referred to in clause Nos.12 and 14 in the annexure to the Auditor's Report did not warrant, necessitate or justify the contents of the above-said clauses being set out in italics. The respondent has also failed to note that it is not a case of Auditor's Report having been prepared by him without application of mind. The Company's Report is fully in compliance with requirements of Section 227 (3)(e) of the Act. As such, the show-cause notice is not maintainable. Hence, the learned counsel instructs the Court to quash the respondent's impugned notice. 8. The learned counsel for the respondent argued that the books of accounts and other records of the Company was ordered for inspection under Section 209A of the Act, the inspecting officer has reported that the Statutory Auditors of the Company in paragraphs 12 and 14 of the annexure to the Auditor's Report dated 17.02.2001 on the Company's balance sheet as dated 31.12.2000 has made the adverse remarks. Paragraph 12 the internal audit coverage requires to be reviewed and enlarged to make it commensurate with the size and nature of business. Paragraph 14 of the balance sheet, there was a delay in depositing the provident fund dues and Employees State Insurance dues with the appropriate authorities. The arrears in respect of provident fund Rs.3,23,000/-and Employees State Insurance of Rs.11,000/-has been paid subsequently, as such, the Company is functioning adversely, as such, the provisions of the Companies Act, Section 227(3)(e) had been violated. Therefore, the respondent issued a show-cause notice to the petitioner's company and sought explanation. The respondent is the competent authority to seek explanation regarding the irregularities of the Company. 9. On verifying the facts and circumstances of the case and arguments advanced by the learned counsels on either side, this Court does not find enough force to allow the writ petition. This Court's further view that the impugned notice is nothing but a show-cause notice i.e., preliminary notice for seeking explanation regarding the adverse remarks of the Company. 9. On verifying the facts and circumstances of the case and arguments advanced by the learned counsels on either side, this Court does not find enough force to allow the writ petition. This Court's further view that the impugned notice is nothing but a show-cause notice i.e., preliminary notice for seeking explanation regarding the adverse remarks of the Company. The further view of this Court is that the impugned notice is not a order and this Court does not find any infirmities in the said show cause notice. The petitioner's firm is a registered one under the Companies Act, as such, the petitioner's firm is bound to give an answer/explanation to the show-cause notice of the respondent. 10. In the result, the above Writ Petition is dismissed. Consequently, the show-cause notice No.28331/CIV/209 A/227/2002 on the file of the respondent, dated 02.12.2002, is confirmed and it is fit to be operated upon. Accordingly ordered.