1. ' SYED HAIDER ALI PIRZADA, J.---The petitioner in the above petition has prayed for the following reliefs:- "(1) To declare the report of the Government auditors dated 24th May, 1989 forwarded to the petitioner on 21-6-1989 as without lawful authority and of no legal effect and the same be set aside.
(2) That the respondent No, 2 be restrained to invoke the said report and to make any claim of financial nature on the basis thereof more particularly eight months' additional bonus.
(3) That the Government be directed to instruct its auditor to examine the accounts if necessary only of factory and in accordance with the provisions of section 23-B of IRO, 1969 afresh.
(4) Cost of the petition may be awarded.
(5) Any other relief which this Hon'ble Court may deem fit and proper in the circumstances of the case."
2. ' The facts leading to the filing of the above petition are that the petitioner is a company having been taken over under Economic Reforms Ordinance, 1972 being Presidential Order No, 1 of 1972; it is being managed by State Engineering Corporation and controlled by the Ministry of Production, Government of Pakistan. The petitioner company is engaged in the manufacturing of black and galvanised steel pipes, steel tubular poles and scaffolding tubes. The petitioner-company is maintaining several establishments being a factory, head office, marketing and sales division, accounts department and a Zonal Office at Lahore. The company has employed about four hundred workers in the factory and other staff in its establishments. The accounts of the entire company including the factory are audited every year by the Chartered Accountants of the company. The accounts for the financial year 1986-87 were audited by Feroze Sharif and Company, Chartered Accountants and the Annual Report in respect of the affairs of and the financial position of the petitioner company was published and a copy thereof is filed herewith and marked 'A'. In the financial year 1986-87 net loss of Rs,7,83,592 was disclosed as per report of the Chartered Accountants being Annual Report of 1986-87.
3. ' It seems that the second respondent felt itself dissatisfied on the accounting position of the company and applied to the first respondent for the nomination of an Auditor to audit the accounts of the company in pursuance of section 23-B(10) of the Industrial Relations Ordinance, 1969 (hereinafter referred to as 'IRO'). The Collective Bargaining Agent, second respondent, had also proposed a panel of three persons who being Chartered Accountants could be nominated for the purpose of audit under section 23-B(10) of IRO. The first respondent accordingly nominated the third respondent to audit the accounts of the petitioner company for the financial year 1986-87. On or about 21-6-1989 the third respondent forwarded a copy of its audit report for the year 1986-87 ending 30-6-1987. The petitioner objected to this report on several grounds mainly that the third respondent exceeded their jurisdiction and authority in their report inasmuch as the said report is based not only on the accounts of the factory but it has overseen and have extended the scope of their audit to the financial transactions and commercial matters of the petitioner company and does not confine to the matters of management of the factory or the accounts of the factory; one of such letters dated 18-7-1989 containing the objections of the petitioner company is annexed to the petition as Annexure 'B' to the petition.
4. ' It is the case of the petitioner-company that this report of the third respondent has shown a profit of Rs,37,099,57 as against the report of the official auditors of the company a loss of Rs,7,83,592.
5. ' The second respondent has relied solely on the report of third respondent and has raised a demand that respondent union is entitled to a bonus for the year 1986-87 equal to eight months gross wages. A copy of letter dated 1-6-1989 from second respondent is annexed to the petition as Annexure `D'. On the aforesaid letter, the petitioner-company objected and pointed out that in spite of loss in the relevant year, the petitioner had already advanced one month's basic wages plus all statutory (legal) allowances to all workmen as per agreement dated 25-8-1987. It was also pointed out that on 16-1-1988 the petitioner company had also paid one month's basic wages plus all the statutory (legal) allowances to the workmen in appreciation of their work during the year of loss.
6. The petitioner being aggrieved by the third respondent's report, has filed the above petition.
7. ' The second respondent filed counter-affidavit wherein they pleaded that there was no excess of authority, on the part of the auditor nor was his report in excess of jurisdiction. The allegation that the auditor took into consideration any matter not within the scope of audit within the meaning of section 23-B of IRO, is denied. The second respondent prayed for dismissal of the petition as the petitioner is not entitled to any relief.
8. ' Mr. Obaidur Rehman, learned counsel appearing for the petitioner raised the following contentions:-
(1) Commercial and financial transactions of the petitioner-company cannot be looked into by the auditor appointed under the provisions of section 23-B(10) of the IRO.
(2) The jurisdiction of auditor is limited to factory as specified under subsection (10) of section 23-B of IRO.
(3) In any case, for any adverse comments, the petitioner-company was entitled to notice from authorities before finalisation of the report.
9. ' On the other hand, Mr. Ali Amjad submitted that the auditor has not exceeded his authority. The commercial transactions were part of the operation of the factory of the petitioner in connection with and for the purpose of sale of goods produced by the factory. The petitioner was afforded opportunity. Mr. Sulaiman Qasim appearing for the third respondent adopted the submission of Mr. Ali Amjad. Mr. Abdul Ghafoor Mangi, learned Additional Advocate-General, Sindh submitted that the first respondent appointed auditor and the Government of Sindh has nothing further to say.
10. ' We have heard the learned counsel appearing for the parties at length and have gone through the material available on the record. Subsection (1) of section 23-B provided that in every factory employing fifty persons or more, there shall be elected or nominated workers' representatives to participate to the extent of fifty per cent in the management of the factory. Provided that there shall be elected or nominated at least one workers' representative to participate in the management of such a factory. Subsection (2) of section 23-B provided that the workers' representatives shall be workmen employed in the same factory and shall (a) where there is a collective bargaining agent in the factory, be nominated by it, or (b) where there is no collective bargaining agent in the factory, be elected by simple majority at a secret ballot by all workmen employed in the factory. Subsection (4) provided that the workers' representatives shall hold office for a period of two years from the date of their election or nomination, as the case may be.
11. ' Subsection (5) of section 23-B provided that the workers' representatives shall participate in all the meetings of the management committee constituted in the prescribed manner and all matters relating to the management of the factory, except commercial and financial transactions, may be discussed in such meetings.
12. ' Subsection (10) of section 23-B provides that the collective bargaining agent for an establishment which is a factory the number of workers employed in which in any shift at any time during a year is fifty or more may apply to the Provincial Government to nominate an auditor to audit the accounts of the factory once after the closing of every accounting year and for that purpose to inspect the accounts, records, premises and stores of the factory once every year.
13. ' The word 'factory' is defined in section 2(j) of the Factories Act (XXV) of 1934. It means any premises including the precincts thereof whereon ten or more workers are working, or were working on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on or is ordinarily carried on whether with or without the aid of power, but does not include a mine subject to the operation of the Mines Act, 1923.
14. ' The word "profits" is defined in section 2(d) of the Companies Profits (Workers' Participation) Act, 1968. The words 'profits in relation to a company' mean such of the net profits as defined in section 87-C of the Companies Act, 1913 (VII of 1913), as are in its business, trade, undertakings or other operations in Pakistan.
15. ' Subsection (3) of section 87-C of the Companies Act, 1913 provided that for the purposes of this section, 'net profits' means the profits of the company calculated after allowing for all the usual working charges, interest on loans and advances, repairs and outgoings, depreciation, bounties or subsidies received from any Government or from a public body, profits by way of premium on shares sold, profits on sale proceeds of forfeited shares, or profits from the sale of the whole or part of the undertaking of the company but without any deduction in respect of income-tax or super- tax, or any other tax or duty on income or revenue or for expenditure by way of interest on debentures or otherwise on capital account or on account of any sum which may be set aside in each year out of the profits for reserve or any other special fund.
16. ' A bare reading of the provisions of section 23-B of IRO would show that the auditor is nominated by the Provincial Government to audit the accounts of the factory once after the closing of every accounting year and for that purpose to inspect the accounts, records, premises and stores of the factory once every year.
17. ' The words 'premises' and 'precincts' have not been defined in the Factories Act but 'premises' ordinarily includes lands also and 'precincts' ordinarily means "the unit, bound, or exterior line encompassing a place". The scope of the enquiry is confined to the inspection of the accounts, records, premises and stores of the factory alone.
18. We are of the humble view that the auditor cannot take into consideration the matters which do not fall within the scope of audit under section 23-B. Commercial and financial transactions of the company could not be formed basis of arriving at the said conclusion as section 23-B is extended only to the factory and not to an establishment which is anything other than factory. A perusal of report of the third respondent has shown a profit of Rs,37,09,957 as against the report of the official auditors of the company a loss of Rs,7,83,592.
19. ' The scope and object of section 23-B(10) of IRO and section 145 of the Companies Act (VII of 1913) were considered by a Division Bench of this Court in Messrs Electric Lamp Manufacturers of Pakistan Ltd., Karachi v. Government of Pakistan through Secretary, Ministry of Labour, Islamabad and 3 others (PLD 1978 Kar. 972). This case, the petitioner challenged two orders passed by the respondent No, 2 dated 11-1-1977 and 1-3-1977 demanding the payment of additional sum of Rs,70,252 as being without lawful authority and of no legal effect. Additionally, the petitioners sought a declaration to the effect that the report of respondent No, 3 is not a report of audit as contemplated by the Proviso to section 31(6) of the Act of 1968 and hence the profits of the petitioners could not be assessed on the basis of the report. The learned Judges held at page 976 as follows:- "A plain reading of subsection (10) of section 23-B of the Ordinance of 1969 makes it clear that the purpose for which an Auditor is nominated under that provision is "to audit the accounts of the factory". For this purpose the subsection further specifies that such an Auditor can inspect the accounts, records, premises and stores of the factory once every year. Subsection (11) of that section further explicitly provides that an Auditor appointed for this purpose has to be a Chartered Accountant within the meaning of the Chartered Accountants' Ordinance, 1961. Except for this there is no other indication in the aforesaid provisions prescribing for the scope of powers and functions of an Auditor nominated under the aforesaid subsection. Under subsection (3) of section 144 of the Companies Act, 1913 every company is required at the annual general meeting to appoint an Auditor and the qualifications of such Auditors are prescribed by subsection (1) which require that the Auditor shall be a Chartered Accountant within the meaning of the Chartered Accountants'
20. Ordinance, 1961. Section 145 of the Companies Act, 1913 lays down in ,greater detail the powers and duties of the Auditors."
21. ' On page 977 the learned Judges further held as under:- "On an overall examination and comparison of the objects and intendment of section 145 of the Companies Act, 1913 and subsections (10) and (11) of section 23-B of the Ordinance of 1969, it appears to me that the two provisions are of similar scope. Whereas an auditor appointed under section 145 owes an obligation to the shareholders of the Company to report to them a correct view of company's affairs, an auditor nominated under the latter provision does the same duty for the benefit of the workers in order to assess correctly the profits earned by the Company in the year under survey. It would, therefore, be legitimate, in view of the recognised principles of interpretation, to determine the question raised in this case in the light of the provisions of the Companies Act, 1913." Again on page 978 the learned Judge held as under:- "It seems, therefore, that under the Companies Act, the auditor is confined to the examination of the accounts of the Company primarily, to see that the Balance-Sheet and Profits & Loss Account are drawn up in conformity with the law and whether or not the Balance-Sheet exhibits a true and correct view of Company's affairs. If the auditor oversteps these limits and enters into the examination of the manner in which the business of the Company was conducted, he would be clearly acting in excess of his authority, for, in doing so, to borrow the words of Judge Lindley, he would be concerning himself with the question "whether the business of the Company is being conducted prudently or imprudently, profitably or unprofitably". There is nothing in subsections (10) and (11) of section 23-B of the Ordinance of 1969 which in any way confers greater powers upon an auditor than are normally enjoyed by an auditor under the Companies Act, 1913. As already pointed out subsection (1) authorises the auditor appointed thereunder "to audit the accounts" of the factory. As explained above auditing does not involve any function of overseeing the conduct of the business and the subsections in question, by no stretch can be construed to confer such a power upon the auditor appointed by the Government. It was rightly argued by Mr. Ali Athar that there is no allegation of fraud against the petitioners or that the discount allowed to the distributors was in any way fictitious. Respondent No,3, therefore, could not consider that which was not in the hands of the Company as profit only on a notional basis that the discount was improperly excessive. Clearly, therefore, respondent No,3 exceeded his authority in assessing the profits in the manner complained of."
22. ' In Messrs Rashid Industries Ltd. v. Government of Pakistan and 2 others (1984 PLC 700) a Division Bench of this Court interpreted word `profits' as defnned in section 2(d) read with section 7(1) of Companies Profits (Workers' Participation) Act, 1968. The learned Judges held at page 703 as under:- "It is clear from above definition of profits, that the same arc to be calculated in accordance with section 87-C of the Companies Act, 1913, irrespective of the fact whether such company to which provision of Companies Profits (Workers' Participation) Act, 1968 applies, is private limited or public limited company."
23. ' In United Woollen Mills Workers' Union v. Presiding Officer, Labour Court No, III and another (1988 PLC 564) the United Woollen Mills Workers' Union filed a petition on the ground that the Labour Court erred in relying upon respondent No, 2's auditor report in presence of the Government Auditor's report. It was held that under section 145 of the late Companies Act, 1913 (Corresponding provision section 255 in the Companies Ordinance, 1984), the powers and duties of the Auditors were defined, the purpose of which was to have the correct picture of the financial position and of the working of a company. It was also held at page 569 as under:- "It is the statutory requirement of a company to get its annual accounts audited by a qualified auditor. Whereas section 23-B of the I.R.O. Contemplates workers' participation in the management in every factory employing 50 persons or more, subsection (10) of above section 23-B entitles a collective bargaining agent for an establishment which is a factory and in which the number or workers employed in any shift at any time during a year is fifty or more, to apply to the Provincial Government to nominate an Auditor to audit the accounts of the factory once after the closing of every accounting year and for the purpose to inspect the accounts, records, premises and stores of the factory once every year. It may also be observed that subsection (13) of the above section provides that this section shall have effect notwithstanding anything contained in the Companies Act (VII of 1913), or any other law for the time being in force or in any agreement or contract or memorandum or articles of association. The object of above section 145 of the Companies Act seems to be to protect the interest of the shareholders of a company by ensuring that the accounts of the company should reflect the correct financial position, whereas the purpose of above section 23-B of the I.R.O. Appears to be to protect the interest of the workers who are entitled to have share in the profit to some extent by ensuring that the accounts of the company should correctly reflect the profit."
24. ' On the same page it was further held as follows:- "It is true that under subsection (13) of above section 23-B of the I.R.O., it has been provided that the above section will prevail notwithstanding anything contained in the Companies Act, 1913 or any other law for the time being in force but in my view it does not lead to an inference that the provisions of the Companies Act or the audit carried out by the company's auditors are rendered redundant or infructuous. The only effect of subsection (13) of section 23-B of the I.R.O. Seems to be that for determining the right of the workers as to their share to the profit, the Government Auditor's report shall, prevail over the Company's Auditor's report."
25. ' It is advantageous at this stage to reproduce section 234(1) of the Companies Ordinance, 1984 which reads as under:- "234. Contents of balance-sheet.--(1) Every balance-sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of its fnnancial year, and every profit and loss account or income and expenditure account of a company shall give a true and fair view of the profit and loss of the company for the financial year so, however, that every item of expenditure fairly chargeable against the year's income shall be brought into account and, in case where any item of expenditure which may in fairness be distributed over several years has been incurred in any one financial year, the whole amount of such item shall be stated, with the addition of the reasons why only a portion of such expenditure is charged against the income of the fnnancial year."
26. ' Fifth Schedule to the Companies Ordinance, 1984 provides requirement as to balance-sheet and profit and loss account of non-listed companies. Part 1 deals with general, part II, deals with requirement as to balance-sheet, part III, deals with requirement as to profit and loss account.
27. Instruction No,1 provides that the profit and loss account shall be made out to disclose clearly the operating results of the company during the financial year concenred by the account and shall show arranged under the most convenient heads, the gross income and the gross expenditure of the company during financial year disclosing every material feature and in particular the following:-- ' Head (E) the relevant for the purposes of the present case. (E) is divided into sub-heads (i) to (x).
28. For the purpose of the present case (iv) and (viii) are relevant. E(iv) provides that debts written off as irrecoverable distinguishing between trade and other debts. E(viii) provides loss or expenses arising from prior period items and provisions therefor.
29. ' Section 234 provides that balance-sheet must be in the form given in Part I of Schedule to the Ordinance or as near thereto as circumstances admit. It may be in such form as the Federal Government may approve. In preparing the balance-shcet as far as possible the instructions given in the Ordinance should be followed. Every balance-sheet shall give a true and fair view of the state of affairs of the company at the end of financial year.
30. ' Form of profit and loss account shall give a true and fair view of the profit and loss of the company for the financial year. As far as applicable, it should be drawn up according to the requirements of the Part III of Schedule.
31. A resume of the above makes it clear that under the Companies Ordinance, the auditor is confined to the examination of the accounts of the company primarily to see that the balance-sheet and profits and loss accounts are drawn up in conformity with the law. The balance-sheet and profits and loss accounts shall give a true and fair view of the profits and loss of the company for the financial year. If the auditor oversteps these steps and enters in examination of the manner in which the business of the company was conducted, he would be clearly acting in excess of his authority. Lindley, L.J. Observed in re: London and General Bank Ltd., ((1895) 2Ch. D. 673) that "an auditor has nothing to do with the prudence or imprudence of making loans with or without security. It is nothing to him whether the business of a company is being conducted prudently or imprudently, profitably or unprofitably. It is nothing to him whether dividends are properly or improperly declared, provided he discharges his own duty to the shareholders. His business is to ascertain and state the true financial position of the company at the time of audit and his duty is confined to that". The auditor nominated by the Sindh Government under section 23-B(10) and (1) of the IRO, has all the powers and authority that the auditor of the company has under section 255 of the Ordinance, 1984. As already pointed out, subsection (10) authorises the auditor appointed thereunder "to audit the accounts of the factory.
32. ' Mr. Obaidur Rehman lastly contended that for any adverse comments, the petitioner was entitled to notice from auditor before finalization of the report. On the other hand, Mr. Ali Amjad submitted that it was not necessary to issue any notice before finalization of the report.
33. ' In the instant case, the grievance of the petitioner is that the auditor has extended his scope of audit to the entire company having several establishments including the factory, the other grievance is that the prior years adjustments are deductible from current year's profits but the auditor has not allowed this adjustment. Late delivery charges are deductible but the auditor has in allowed this deduction. It is contended on behalf of the petitioner that opportunity should have been given to the petitioner before preparing the report. It was an important question, therefore, to decide whether adjustments are deductible or not, whether debts were written off or not. For that it was absolutely essential that an opportunity should have been afforded to the petitioner in accordance with the principle of natural justice. As observed earlier, if an opportunity had been given to the petitioner, it would have satisfied the auditor that the adjustments were properly deductible and debts were properly written off in accordance with the international standard.
34. For the foregoing discussion, the petition must succeed and it is accordingly allowed and it is hereby declared that the report of the Government auditor dated 24-5-1989 is without lawful authority and is of no legal effect. Consequenity, respondent No,2 shall be restrained from giving effect to or acting upon the impugned report. We further issue direction to instruct its auditors to examine, if necessary, only for the factory in accordance with the provisions of section 23-B of IRO afresh.