2022 (6) TMI 390 - HC - Companies Law

Appointment of Cost auditors - whether the first petitioner- Company has not appointed Cost Auditor within the prescribed limits as contemplated under the proviso to Section 148 of the Companies Act? - liability for punishment under Section 148 of the Companies Act - HELD THAT - Sub-section (2) of Section 148 of the Companies Act, 2013, makes it clear that the Central Government may direct that the audit of cost records of class of companies which are covered under sub-section (1) and which have a net worth of such amount as may be prescribed or a turnover of such amount as may be prescribed, shall be conducted in the manner specified in the order. The amendment of Rule 4(2) of the amended Companies (Cost Records and Audit) Rules, 2014 shows that the aggregate turnover in respect of individual product or products or service or services for which the cost records are required, be maintained under Rule 3, is Rs.35 crore or more, in respect of item (B) of Rule 3. Therefore, the said Rule makes it clear that as far as the production is concerned, if the turnover is below Rs.35 crore, the cost audit is not required - In the present case, the statements filed for the financial year 2014-2018 attached in the typed set of papers, which have not been disputed by the respondent, clearly show that the turnover is below Rs.35 crore. This Court is of the view that the very initiation of the prosecution itself is against the amended Rules - Petition allowed.

Summary

Issues:
Quashing of criminal proceedings under Section 148 of the Companies Act, 2013 based on alleged non-appointment of Cost Auditor within prescribed limits.

Analysis:
The petitioners sought to quash the proceedings in C.C.No.163 of 2018 under Section 148 of the Companies Act, alleging non-appointment of a Cost Auditor as per the proviso to Section 148. The petitioners argued that the company did not fall under the turnover threshold specified in the Companies (Cost Records and Audit) Amendment Rules, 2014, as per the Notification issued by the Ministry of Corporate Affairs. They contended that the manufacturing cost for the financial years 2014 to 2018 was below Rs.35 Crores, the threshold set in the amended Rule 4. The prosecution was launched without verifying this fact, prompting the petitioners to seek quashing of the proceedings.

The Central Government Standing Counsel did not dispute the amendment of the relevant Rule presented by the petitioners. The Court examined the materials on record, including Section 148 of the Companies Act, 2013, which empowers the Central Government to specify the audit of cost records for certain companies based on prescribed criteria. Sub-section (2) of Section 148 allows for the audit of cost records for companies meeting specific financial thresholds. The amended Companies (Cost Records and Audit) Rules, 2014, mandate cost audit for companies engaged in specified activities and meeting designated turnover criteria.

The amended Rule 4 specifies different turnover thresholds for cost audit applicability based on the category of companies. For companies falling under item (B) of Rule 3, the aggregate turnover for the individual products or services requiring cost records maintenance must be Rs.35 crore or more for cost audit obligation. The financial statements for the years 2014-2018, undisputed by the respondent, indicated turnover below Rs.35 crore. Consequently, the Court concluded that the initiation of prosecution was contrary to the amended Rules.

In light of the above analysis, the Court held that the criminal proceedings against the petitioners were not in accordance with the amended Rules and therefore ordered the quashing of the proceedings. The Court allowed the Criminal Original Petition and closed the connected Criminal Miscellaneous Petition.