P D SHAMDASANI Vs. SMPOCHKHANAVALA

JUDGEMENT

(1.) This is an application by Mr. P.D. Shamdasani for revision of an order passed by the Chief Presidency Magistrate, dismissing a complaint that he had filed against the directors, the secretary, the chief accountant and the accountant of the Central Bank of India, Ltd. This complaint charges them with having in 1925 and 1926 wilfully made, or caused to be made, false statements in the balance- sheets and Profit and Loss accounts of the bank, and so having committed offences under Section 282 of the Indian Companies Act of 1913. The learned Magistrate before issuing process had a notice of the complaint given to the respondents, and after taking some evidence and hearing the arguments of the parties has come to the conclusion that the applicant failed to make out a prima facie case. Accordingly he discharged the notice and dismissed the complaint. The alleged false statements were :- (1) In the balance-sheet as at June 30, 1925, under the heading "Particulars required by Act VII of 1913," item (5) "Debts considered doubtful or bad" are shown as nil. (2) In the balance-sheet as at December 31, 1925, under the heading "Particulars required by Act VII of 1913," item (5) only shows "Debts considered doubtful" as Rs. 5,00,000 and by implication "Debts considered bad" as nil.

(2.) There were further allegations as to certain figures in the Profit and Loss Account, but it is unnecessary to go into that part of the charge. The only question that has been raised before us is whether the statements in question as to bad debts are false, and contrary to the provisions of the Indian Companies Act 1913, as to balance-sheets. It was eventually admitted by the bank in the proceedings before the Magistrate that there were certain bad debts that might have been shown in the two balance-sheets, but it is denied that the statements in question are false and in contravention of the provisions of the Indian Companies Act. The grounds on which this contention is set up and was accepted by the lower Court are shown in the following extract from the Magistrate's judgment:- The evidence of Mr. Stevens shows that in accordance with the usual practice he and Mr. Cooke went through each loan or advance made by the bank and considered the securities for the same and the value thereof and also any collateral security handed over to the bank by the debtors. Whenever necessary, explanations were called for from the bank and duly considered, According to his evidence the auditors take into consideration in respect of loans or advances whether any allowance should be made or not after paying due regard to the securities, their values and personal standing, and if in their opinion the allowance suggested is insufficient, then the Auditors require the management to make proper allowances, and in case when such allowance is made they do not show in the balance-sheets the extent of the debt being bad or doubtful, in case of bank accounts in drawing up of balance sheets of banks. Mr. Stevens gives an illustration; says he supposing the debt amounts to five lacs in a particular case and the auditors value the securities at a lac of rupees, then they require the bank to provide for four lacs in some other account on both sides. In other words the four lacs do not appear on either side of the account. If the four lacs is provided out of the reserve, it does not appear in the balance-sheets or anywhere, i.e., to the extent to which the auditor finds the debts to be bad or doubtful, they reduce the assets and liabilities to that extent on both sides. According to the evidence of Stevens, which I have no reason to distrust and which I accept, all the accounts challenged in this case were duly considered and where necessary, further allowance was called for and made out of the secret reserve fund, which is not shown in the balance-sheet but which undoubtedly existed and was available to fully provide for the so-called bad or doubtful debts. The respondents case is that in the amount of five crores eighty-one lacs odd under item No. (1) under the heading Particulars required by Act VII of 1913, and of three crores sixty-one lacs odd under item (2) and (c), the so called bad or doubtful debts are not included as contended for by the applicant. The extent to which the debts were doubtful or bad is not shown in these figures. The respondents say that the total debts under these headings shown at nine crores forty-three lacs 94,000 odd are good assets. What the bank has done is they have in effect wiped off the bad debts of twenty lacs referred to by the applicant. The bank has provided for those bad debts or made allowance in respect thereof out of the secret reserve fund, which undoubtedly the bank had at material periods, and neither shown the bad debts on the assets side nor the secret reserve on the liability side. They have disclosed only good assets and the figure of total debts nine crores forty-throe lacs odd constitute good assets, and does not include the so-called twenty lacs bad or doubtful debts, and if these lacs had been disclosed then the figure of nine mores forty-three lacs odd would have become nine crores sixty- three lacs, and in that case they would have had to show on the liabilities side the twenty lacs of secret reserve, which the bank had built up out of the appreciated value of some of the assets. If the bank had followed this method of accounting, the assets no doubt would be inflated to the extent of twenty lacs, but wrongly, so that the statement that there were no bad or doubtful debts as it stands, in view of the manner in which the total debts have been treated is undoubtedly correct. The contentions of the respondents are in my opinion fully established by the evidence before me and in particular by the evidence of Mr. Stevens. As against that there is no evidence on behalf of the prosecution except vague generalities and mere speculation. On the evidence before me I am satisfied that, although the total of the loans and advances etc, was larger, what the balance sheets show is the total of the net good debts fully secured, and that, to the extent that the debts were bad or doubtful, or to the extent that the security in respect of some of these debts was considered insufficient by the auditors, at the time of the auditing of the accounts due and adequate allowances were made by debiting the amount of the estimated deficiency to secret reserve.

(3.) Sir Thomas Strangman for the respondents has very lucidly argued in support of that view. His arguments can be, we think, fairly summarised as follows :-