ZAFFAR HUSSAIN MIRZA, J.-The petitioners, a Company registered under the Companies Act, 1913 is carrying on business of manufacturing Electric Bulbs, fluorescent tubes and other glass articles.
The manufacture of electric bulbs and fluorescent tubes by the petitioners carries the trade names belonging to four renowned companies, namely, the Phillips of Holland, General Electric Company of England, British Thompson and Houston of England and Crompton (Pakistan) Limited of England, which will be referred to in this judgment for the sake of convenience as "the distributors".
2. According to the Company it manufactures bulbs and fluorescent tubes to the orders of the distributors of their respective brands. The products were sold to the distributors under an arrangement between the parties. According to this arrangement the petitioners sell these two products to the distributors on a discount of about 161: The distributors in turn allow a discount of 7 -- % out of the 16 % discount received by them to the retailers in order to cover the latter's expenses, loss by breakage and retailers' profit. The remaining 8 -- % is retained by the distributors to cover, inter alia, the following expenses which are to be exclusively borne by them Advertisement, selling and distribution expenses, freight, breakages, collection and recoveries expenses, bad debts if any and distributors' margin of profit.
3. According to the petitioners, the Controller-General of Prices and Supplies, Government of Pakistan minutely examines the petitioners' cost structure including the discount allowed to the distributors and fixes the retail prices. The petitioners' accounts for the Calender year 1975 were duly audited by their Auditor and the not profit of the petitioner-Company for the aforesaid year was determined at Rs. 12,05,101 in accordance with the Auditor's report.
4. Accordingly the petitioners on the basis of the audited accounts paid 5 % of their profits during the year as determined in the aforesaid manner into the Workers' Participation Fund as required by section 3 of the Companies Profits (Workers' Participation) Act XII of 1968. It seems that the Collective Bargaining Agent of the petitioners' establishment, respondent No. 4 moved the Provincial Government under section 23-B, subsections (10) and (11) of the Industrial Relations Ordinance, 1969 for appointment of an auditor to audit the accounts of the petitioners, as a result of which the Provincial Government appointed respondent No. 3 as Auditor for the purpose. It may be stated that the profits for the year in question were determined by the petitioners on the basis of the report of their Auditors Messrs Gangat & Company, Chartered Accountants. Pursuant to an audit carried out by respondent No. 3 a report dated 22-11-76 was forwarded by him to the General Secretary of respondent No. 4 Union which has been placed on the record as Annexure 'A-1'.
5. Thereupon by notice dated 11-1-77 respondent No. 2, referring to the subsequent audit report of respondent No. 3, directed the petitioners to pay to the Board of Trustees of the Workers'
Participation Fund the additional sum of Rs. 70,252 in terms of the report failing which action under section 5 of the Companies Profits (Workers' Participation) Act, 1968 (hereinafter referred to as the Act of 1968) was threatened. Additionally, the petitioners were called upon to show cause why action should not be taken against them for wrong declaration of "Net Profits" for the year in question. The petitioners resisted the threatened action by a representation to respondent No. 2 requesting him to withdraw the notice but the latter expressed his inability to do anything in the matter. The petitioners, therefore, filed a review petition under section 5 (4) of the Act of 1968 to the Central Government but by letter dated 1-3-77 respondent No. 2 informed the petitioners that the findings of the second audit were final as there was no provision in the Act of 1968 and the Industrial Relations Ordinance (hereinafter referred to as the Ordinance of 1969) whereby such a report could be challenged. Accordingly, respondent No. 2 reiterated his demand pointing out to the petitioners the penalties imposable on them under the law in case of non-compliance. The petitioners now challenge, by this Constitutional Petition the two orders passed by respondent No. 2 dated 11-1-77 and 1-3-77 demanding the payment of the additional sum of Rs.70,252 as being without lawful authority and of no legal effect. Additionally, the petitioners seek 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 (b) of the Act of 1968 and hence the profits of the petitioners could not be assessed on the basis of the said report. The respondents have resisted this petition and have supported the impugned orders. According to them it was within the powers of respondent No. 3 to determine, in the course of his audit, the actual profits earned by the petitioner-Company in the year under enquiry.
6. The entire controversy in this case has arisen on account of the conclusions arrived at .By respondent No. 3 in his report whereby he opined that the retailers' discount and selling expenses etc. Passed on to the respective distributors amounting to Rs. 59 lacs were not justified. He, therefore, proposed a reduction of 2 % in Retailers' Discount and 3 % in Selling Expenses to the distributors. On this basis respondent No. 3 received the profits of the Company and worked out the share payable to the Workers' Participation Fund at Rs. 1,30,560. Deducting Rs. 60,308 already provided by the petitioner-Company, the respondent No. 3 found an additional amount payable to the Fund as Rs. 70,252.
7. The only contention advanced in support of this petition by Mr. A.I Athar, learned counsel appearing for them, was that audit report submitted by respondent No. 3 cannot be treated as a valid audit report in terms of the proviso to section 3 (l) (b) of the Act of 1968 so as to be the basis for assessm ent of profits. It was argued that it was no part of the functions of the Auditor to cut down disbursement actually made by the petitioners in allowing discount at a particular rate or to sit in judgment on the commercial arrangement entered into by the Company in the best interest of its business or trade.
8. The sole question for determination in this case is, therefore, as to what is the scope of the powers and functions of an Auditor appointed under section 23-B of the Ordinance of 1969. It would be advantageous to set out subsections (10) and (11) of the Ordinance of 1969 which read as under "(10) 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 the 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.
(11) An application under subsection (10) shall be accompanied by a panel of three persons who.
Are Chartered Accountants within the meaning of the Chartered Accountants' Ordinance, 1961 (X of 1961), and on receipt of such an application, the Provincial Government shall appoint one of such persons to be an Auditor for the purposes of that subsection." it would also be advantageous to reproduce here section 3 of the Act of 1968 as amended and as it stood at the relevant time, which is in the following terms; "3. Establishment of Fund.-(1) Every Company to which the scheme applies shall---
(a) establish a Workers' Participation Fund in accordance with the scheme as soon as the accounts for the year in which the scheme becomes applicable to it are finalized, but not later than 9 months after the close of that year ; and
(b) subject to adjustments, if any, pay every year to the Fund not later than 9 months after the close of that year 5 % of its profits during such year---- Provided that, where the accounts have been audited by an Auditor appointed under section 23-B of the Industrial Relations Ordi--nance 1969 (XXIII of 1969), the profits shall be assessed on the basis of such audit.
(2) Not relevant for present purposes." , 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 shah be a Chartered Accountant within the meaning of the Chartered Accountants'
Ordinance, 1961. Section 145 of the Companies Act, 1913 lays down in greater detail the powers and duties of the Auditors. It would be advantageous to set out below the relevant parts of section 145; "Section 145. Powers and duties of Auditors.-(1) Every auditor of a Company shall have a right of access at all times to the books and accounts and vouchers of the Company, and shall be entitled to require from the Directors and Officers of the Company such informa--petition and explanation as may be necessary for the performance of the duties of the auditors.
(2) The auditors shall make a report to the members of the Company on the accounts examined by them, and on every balance-sheet (and profit & loss account) laid before the Company in general meeting during their tenure of office and the report shall state-
(a) whether or not they have obtained all the information and explanations they have required ; and
(b) whether or not in their opinion the balance-sheet and the profit & loss account referred to in the report are drawn up in conformity with the law ; and
(c) whether or not such balance-sheet exhibits a true and correct view of the Company's affairs according to the best of their information and the explanations given to them, and as shown by the books of the Company ; and
(d) whether in their opinion, books of account have been kept by the Company as required by section 130.
(2-A) Where any of the matters referred to in clauses (a), (b), (c) and (d) of subsection (2) is answered in the negative or with a qualification, the report shall state the reason for such answer."
9. Maxwell on Interpretation of Statutes (1953 Edition) at page 54 has observed that "in dealing with matters relating to the general public, statutes are presumed to use words in their popular sense.
But when dealing with particular businesses or transactions, words are presumed to be used with particular meaning in which they are used and understood in the particular business in question, that meaning being rejected, however, as soon as the judicial mind is satisfied that another is more agreeable to the object and the intention". The learned Author has further approved the construction put upon Acts of similar scope on similar subjects to be a legitimate source of extrinsic assistance in interpreting one such Act. 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 o similar scope.
Whereas an auditor appointed under section 145 owes an obligation to the shareholders of the Company to report to them a correct4 view of Company's affairs, an auditor nominated under the latter provisio does the same duty for the benefit of the workers in order to asses 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.
10. The word "auditing" does not seem to have been defined statutorily.
But R. Glynne Williams in his book on "Principles and Practice of Auditing" (13th Edition) has attempted a definition of auditing as under :--- "Auditing may be defined as the independent examination and investiga--petition of the books, accounts and vouchers of a business with a view to enabling the auditor to report whether the Balance-Sheet and Profit and Loss Account are properly drawn up so as to show a true and fair view of the state of the affairs and the profit (or 'toss) of the business according to the best of the information and explanations obtained by the auditor."
The legal rights and liabilities of an auditor are defined partly by statute and partly by the decisions of the Courts of Law. There is, however, a great deal of conflict of opinion as to the exact legal position of an auditor. But it is not necessary in this case to enquire into the larger questions of the extent of an auditor's enquiry or the nature of the report he is under an obligation to submit. It would suffice to determine only the question whether the auditor in this case was entitled to propose cuts in the quantum of discount allowed by the Company on its sales to the distributors. A some--what similar question came up for consideration In re : London and General Bank Limited ((1895) 2 Oh. D 673) in which Lindley, L. J. Observed as follows :---- "The object of this enactment (section 7 of the English Companies Act, 1879) is obvious. It evidently is to secure to the shareholders independent and reliable information respecting the true financial position of the Company at the time of the audit . . . . . . . . . . It is no part of an auditor's duty to give advice, either to directors or shareholders, as to what they are to do. 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 the audit, and his duty is confined to that."
11. It seems, therefore, that under the Companies Act, the auditor is confined to the examination of the accounts of the Company primarily, to se 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 overstepts 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 right argued by Mr. A.I Athar 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.
12. Mr. Munawwar Abbas, learned counsel appearing for respondent No. 3 referred us to subsection
(13) of section 23-B of the Ordinance of 1969 and argued that the application of the Companies Act has been expressly excluded and as such the auditor appointed under the aforesaid section was not bound to act within the limits prescribed under section 145 of the Companies Act, 1913. As already pointed out there is nothing in law which gives any power to the auditor except to audit the accounts. He further contended that the petitioners were clearly adopting a device for diversion of part of the profits to their own subsidiary Company. Whatever be the remedies available to the workers against such a situation if true, in its present form, subsection (10) of section 23-B does not grant any powers of adjudication to the auditor to determine any dispute that the profits were being diverted. It will be a different matter if upon examination of the accounts accrued profit or any part thereof is suppressed and does not appear in the account books. But in the present case the report of respondent No. 3 does not indicate a case of falsification of accounts. There is, therefore, no force in this contention.
13. Mr. S. Nasiruddin, learned counsel appearing for respondent No. 4 challenged the maintainability of the petition on the ground that there was no defect of jurisdiction involved in passing the impugned orders. He placed reliance on Muhammad Hussain v. Sikandar (PLD1974SC139) where it was laid down that the High Court, in exercise of its writ jurisdiction, is concerned only with the question whether a Court or Tribunal of inferior jurisdiction has acted within jurisdiction and is not competent to interfere with an order merely because in the opinion of the Court, the decision was wrong. The facts of the reported case are quite clearly distinguished and the principles laid down by their Lordships do not appear to be attracted in the present case. The petitioners have shown that the assessm ent of the profits was bas ed upon the report of respondent No. 3 which in the relevant respect was clearly in E excess of authority under the law. The impugned orders being based on such illegal report were, therefore, without lawful authority. There is, therefore, no substance in the objection as to the maintainability of this petition.
14. In the result, this petition is allowed and it is hereby declared that the impugned orders were passed without lawful authority and are of no legal effect. Consequently, respondents Nos. 1 and 2 shall be restrained from giving effect to or acting upon the impugned orders. In the circumstances of this case, there will be no order as to costs.
I. MAHMUD, J.-I agree.