FAILURE TO FILE COST AUDIT REPORT TO CENTRAL GOVERNMENT

[Mr. M. GOVINDARAJAN]

Cost Records

Section 148 of the Companies Act, 2023 provides that the Central Government may, by order, in respect of such class of companies engaged in the production of such goods or providing such services as may be prescribed, direct that particulars relating to the utilization of material or labour or to other items of cost as may be prescribed shall also be included in the books of account kept by that class of companies.   Rule 3 of Companies (Cost Records and Audit) Rules, 2014 (‘Rule’ for short) provides that the class of companies, including foreign companies defined in clause (42) of section 2 of the Act, engaged in the production of the goods or providing services, specified in the given table, having an overall turnover from all its products and services of Rs.35 crore or more during the immediately preceding financial year, shall include cost records for such products or services in their books of account.  The Central Government shall, before issuing such order in respect of any class of companies regulated under a special Act, consult the regulatory body constituted or established under such special Act.

Cost Audit

If the Central Government is of the opinion, that it is necessary to do so, it may, by order, direct that the audit of cost records of class of companies, which are covered under Section 148.  The Cost Audit is applicable to the following companies-

• Every company specified below shall get its cost records audited if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is Rs.50 crore  or more and the aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained under rule 3 is Rs.20 crore or more-

• Telecommunication services;
• Generation, transmission, distribution and supply of electricity;
• Petroleum products;
• Drugs and pharmaceuticals;
• Fertilizers;
• Sugar and industrial alcohol;

• Every company coming under non regulated sectors as specified in item (B) of rule 3 shall get its cost records audited in accordance with these rules if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is rupees one hundred Rs.100 crore or more and the aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained under rule 3 is Rs.35 crore or more.

Cost Auditor

The cost audit shall be conducted by a practicing cost accountant who shall be appointed by the Board on such remuneration as may be determined by the members in such manner as may be prescribed. Before such appointment is made, the written consent of the cost auditor to such appointment, and a certificate from him.  The auditor conducting the cost audit shall comply with the cost auditing standards.

The report on the audit of cost records shall be submitted by the cost auditor to the Board of Directors of the company.   A company shall within 30 days from the date of receipt of a copy of the cost audit report furnish the Central Government with such report along with full information and explanation on every reservation or qualification contained therein.

If, after considering the cost audit report  the Central Government is of the opinion that any further information or explanation is necessary, it may call for such further information and explanation and the company shall furnish the same within such time as may be specified by that Government.

Punishment for default

The company and every officer of the company who is in default shall be punishable with fine which shall not be less than Rs.25000/- but which may extend to Rs. 5 lakh.  Every officer of the company who is in default shall be punishable with fine which shall not be less than Rs.10000/- but which may extend to Rs.1 lakh.

The cost auditor of the company who is in default shall be punishable with fine which shall not be less than Rs.25000/- but which may extend to Rs. 5 lakh or 4 times the remuneration of the auditor, whichever is less.   If the cost  auditor has contravened such provisions knowingly or willfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to 1 year and with fine which shall not be less Rs.5000/- but which may extend to Rs.25 lakhs or 8 times the remuneration of the auditor, whichever is less.]

Where an auditor has been convicted, he shall be liable to-

1. refund the remuneration received by him to the company; and
2. pay for damages to the company, statutory bodies or authorities or to members or creditors of the company for loss arising out of incorrect or misleading statements of particulars made in his audit report.

In case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force, for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally.  In case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable.

Criminal prosecution - case law

In M/S. NUSUN GENETIC RESEARCH LTD & OTHER, M/S. VIBHA AGRO TECH LTD & OTHER AND M/S. SEED INNOVATIONS PRIVATE LTD & 2 OTHERS VERSUS REGISTRAR OF COMPANIES, (FOR ANDHRA PRADESH AND TELANGANA) - 2023 (10) TMI 1002 - TELANGANA HIGH COURT, criminal complaints have been filed against the petitioners by the Registrar of Companies on the file of Special Judge for Economic Offences at Hyderabad for violation of Section 148(8) of Companies Act, 2013 punishable under Section 147 of the Act of 2013. According to the allegation, the petitioners failed to get its cost accounting records to be audited by a Cost Auditor and failed to file Cost Audit Report to the Central Government within 30 days from the date of receipt of a copy of the cost audit report furnished by the Cost Auditor, as such, liable. The non-filing of the cost audit report was for the financial year ending 31.03.2014.

The petitioners filed the present writ petitions questioning the continuance of the criminal proceedings against them.  The petitioners contended that the criminal proceedings have been barred by limitation.  The default date is 01.11.2014.   The notice dated 14.06.2016 was issued under Section 233B (11) of the Companies Act, 1956 read with Section 148 (8) of the Companies Act,  2013.  The Companies Act, 1956 was repealed and the notices issued against the petitioners were invalid.  The period of limitation for filing of complaint cannot be calculated from the date of granting of sanction which is 03.10.2016.   The companies are admittedly seed manufacturing units and since there was no provision with the Registrar of Companies regarding seed manufacturing companies, the company has mentioned that the cost audit order relates to ‘Edible Oil Seeds and Oils (including vanaspati)’.

The Registrar of Companies contended that according to Section 469 of Criminal Procedure Code, the commencement of period of limitation would be from the date of knowledge to the Registrar of Companies. The said date can be taken as 14.06.2016 on which date the show-cause notice was sent to the accused company.  Since complaint was filed on 30.05.2017, complaint is well within time.   It is admitted the seed manufacturing companies do not fall within Rule 3 of the Companies (Cost Records and Audit) Rules 2014. However, since the company is mentioned in the column for the name of industry as ‘Edible Oil Seeds and Oils (including vanaspati)’, the prosecution was launched.

The High Court held that since the company itself had mentioned that the industry is ‘Edible Oil Seeds and Oils (including vanaspati) industry’, the same cannot be determined in the proceedings for quashing the complaint. If the ROC has no provision of seed manufacturing companies and for which reason, the company had entered the name as ‘Oil Seeds and Oils (including vanaspati)’, to enable themselves to upload the relevant documents into the Registrar of Companies, the said ground can be agitated only before the trial Court.  Thus the High Court closed the cases.