Think of Section 140 as the exit protocol for auditors — it covers what happens when an auditor leaves, whether by force (removal) or by choice (resignation), and what protections exist for everyone involved.
Removal (sub-section 1) is deliberately made hard. A company cannot simply fire its auditor mid-term — it needs a special resolution (75%+ votes at a general meeting) plus prior approval of the Central Government. Why so strict? Because auditors must be independent, and management shouldn't be able to remove a tough auditor just because they are raising uncomfortable findings. Crucially, before removal, the auditor must be given a reasonable opportunity of being heard — basic natural justice.
Resignation (sub-section 2 & 3) is the auditor's own choice to leave, but it comes with a mandatory disclosure obligation. Within 30 days of resignation, the auditor must file a statement — in the prescribed form — with both the company and the Registrar of Companies. For government companies (under Section 139(5)), the Comptroller and Auditor-General of India (C&AG) must also receive a copy. The statement must explain why the auditor resigned. This prevents auditors from quietly slipping away when they spot fraud. If they fail to file? Penalty of ₹50,000 or remuneration, whichever is less, plus ₹500 per day for continuing default, capped at ₹2 lakh.
Special Notice (sub-section 4) is required at an AGM when members want to appoint a new auditor in place of the retiring one, or explicitly block re-appointment of the retiring auditor — except when the retiring auditor has already completed the mandatory tenure (5 years for individuals, 10 years for firms under Section 139(2)). Once the company receives such a notice, it must immediately inform the retiring auditor, who can submit a written representation. The company must circulate that representation to all members. The Tribunal can override this right if it finds the auditor is abusing the process.
Fraud (sub-section 5) — the most serious part. If the Tribunal finds an auditor acted fraudulently or colluded with management, it can order the company to change its auditor. A final order bars the auditor (individual or firm) from any audit appointment for 5 years and triggers liability under Section 447 (fraud provisions). This is asked frequently as a 4-mark theory question in CA Inter exams.
📊 Worked example
Example 1 — Resignation Penalty Calculation
Question: M/s. Kapoor & Associates resigned as auditors of Bharat Textiles Pvt. Ltd. on 1st April 2025. They filed the required statement with the company and ROC only on 20th May 2025. Their annual remuneration was ₹40,000. Calculate the penalty.
Working:
- Deadline to file: 30 days from 1st April 2025 = 30th April 2025
- Actual filing date: 20th May 2025
- Days of default: 1st May to 20th May = 20 days
- Base penalty = lower of ₹50,000 or remuneration (₹40,000) = ₹40,000
- Continuing default penalty = 20 days × ₹500 = ₹10,000
- Total penalty = ₹40,000 + ₹10,000 = ₹50,000
Note: Had the default continued further, total continuing penalty is capped at ₹2,00,000.
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Example 2 — Special Notice Requirement
Question: M/s. Rajan & Co. has been auditor of Sunrise Pharma Ltd. for 3 consecutive years. At the upcoming AGM, a shareholder wants to replace them with M/s. Mehta & Associates. Is a special notice required?
Working:
- Mandatory rotation threshold for firms: 10 consecutive years (Section 139(2))
- M/s. Rajan & Co. has served only 3 years — tenure is NOT exhausted
- Since the retiring auditor is being replaced before completing mandatory tenure, special notice IS required
- The company must send a copy to M/s. Rajan & Co. immediately upon receipt
Answer: Yes, special notice is required under Section 140(4).
⚠️ Common exam mistakes
- Students confuse ordinary resolution with special resolution for removal. Removal of an auditor mid-term always requires a special resolution (75%+ majority) — not a simple majority. An ordinary resolution is not enough, no matter how large the company.
- Forgetting the Central Government approval step for removal. Many students write only 'special resolution' in their answer and miss that prior CG approval is mandatory before the resolution is even passed. Both steps together = valid removal.
- Missing the C&AG filing requirement for government companies on resignation. For companies under Section 139(5) (government companies), the resigning auditor must file with three parties: the company, the ROC, and the C&AG. Leaving out C&AG costs you marks.
- Calculating the 30-day deadline from the wrong date. The 30-day clock starts from the date of resignation, not from the date the board accepts it or the date of the next board meeting. Use the actual resignation date.
- Ignoring the 5-year debarment for fraud. In sub-section (5) questions, students mention the Tribunal order but forget to state that a final fraud order bars the auditor from being appointed in any company for 5 years and attracts Section 447 liability. Both consequences must be stated for full marks.
📖 Bare Act text — Section 140, Companies Act 2013
(click to expand)
(1) The auditor appointed under section 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central Government in that behalf in the prescribed manner: Provided that before taking any action under this sub-section, the auditor concerned shall be given a reasonable opportunity of being heard. (2) The auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement in the prescribed form with the company and the Registrar, and in case of companies referred to in sub-section (5) of section 139, the auditor shall also file such statement with the Comptroller and Auditor-General of India, indicating the reasons and other facts as may be relevant with regard to his resignation. (3) If the auditor does not comply with the provisions of sub-section (2), he or it shall be liable to a penalty of fifty thousand rupees or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with a further penalty of five hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees. (4) (i) Special notice shall be required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be re-appointed, except where the retiring auditor has completed a consecutive tenure of five years or, as the case may be, ten years, as provided under sub-section (2) of section 139. (ii) On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor. (iii) Where notice is given of such a resolution and the retiring auditor makes with respect thereto representation in writing to the company (not exceeding a reasonable length) and requests its notification to members of the company, the company shall, unless the representation is received by it too late for it to do so,— (a) in any notice of the resolution given to members of the company, state the fact of the representation having been made; and (b) send a copy of the representation to every member of the company to whom notice of the meeting is sent, whether before or after the receipt of the representation by the company, and if a copy of the representation is not sent as aforesaid because it was received too late or because of the company's default, the auditor may (without prejudice to his right to be heard orally) require that the representation shall be read out at the meeting: Provided that if a copy of representation is not sent as aforesaid, a copy thereof shall be filed with the Registrar: Provided further that if the Tribunal is satisfied on an application either of the company or of any other aggrieved person that the rights conferred by this sub-section are being abused by the auditor, then, the copy of the representation may not be sent and the representation need not be read out at the meeting. (5) Without prejudice to any action under the provisions of this Act or any other law for the time being in force, the Tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors: Provided that if the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is required, it shall within fifteen days of receipt of such application, make an order that he shall not function as an auditor and the Central Government may appoint another auditor in his place: Provided further that an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and the auditor shall also be liable for action under section 447. Explanation I.— It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its director or officers. Explanation II.— For the purposes of this Chapter the word "auditor" includes a firm of auditors.
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