Cost Audit and Cost Records Applicability 2024-25 & Non Compliance attracting Show Cause Notices

The government of India has given many privileges to India and one of the privileges is to decide at their own about the applicability of various provisions in the Companies Act. The companies have a free hand to decide whether section 148 of the Companies have been complied with or not, the directors and financials auditors have been entrusted with the responsibilities of ensure that wherever applicable cost records have been made and maintained. But it has come to the notice that due to oversight or other reasons, the wrong declarations were given resulting into issue of notices by Cost Audit Branch of MCA.

One question always comes to the mind of the compliance officials of the organisations at the beginning of the year that whether they are required to appoint cost auditor or have to maintain cost records and in which form they have to maintain the cost records, if section 148 of the Companies Act is applicable.

Simple way of checking the applicability of Section 148 with regard to applicability of maintenance of Cost records or cost audit for 2024-25 is

1. To review the financials of 2023-24 &Check the Total turnover of the Company
2. Check the HSN code wise turnover of the company (Manufacturing Turnover only except in case of items mentioned in Srl No 33 of Table B below)
3. Find out the category of HSN codewise sales as per Table A or Table B (Please note that the HSN codes wise sales is for products category, for services one need to refer to the relevant notification-Link given in the article)

The concept of reporting with regard to the maintenance of cost records by directors and financial auditors separately was brought in specifically to ensure that there are no misreportings with regard to applicability. Recently many show cause notices were also issued to companies who had not prepared the cost records or had not filed the cost audit report though apparently as per the data gathered by MCA through various sources Cost Audit seemed to be applicable on those companies.

The companies especially which consider themselves to be out of the ambit of section 148 of the Companies Act 2013 must at the beginning of every year get the same clarified by any professional preferably practicing CMA. It will help them to report the same comfortably in the Director's report and Auditor's report may also refer to the clarification obtained from practicing cost accountant.

Extract of one Show Cause Notice is give below which makes it clear that MCA has information with it with regard to the applicability of section 148, so the companies must act on its own rather than waiting for regulators to come calling.

Sub.: Show-Cause Notice for Non-Compliance of provisions of Section- 148 of the Companies Act, 2013.

WHEREAS, it has been found from our records that the company falls under the ambit of Cost Audit for the financial year ending 31st March 2023 but has not filed the Cost Audit Report in prescribed Form to the Central Government within the statutory time limit prescribed by Section 148 (6) of the Act and Rule 6 of Companies (Cost Records and Audit) Rules, 2014 (Rules) read with Section 403 of the Act. Thus, sub-section (6) of Section 148 of the Act has been contravened.

2. AND WHEREAS, as per sub-section (8) of Section 148 of the Act, "If any default is made in complying with the provisions of this section, -

a. The company and every officer of the company who is in default shall be punishable in the manner as provided in sub-section (1) of section 147.

b. the cost auditor of the company who is in default shall be punishable in the manner as provided in sub-sections (2) to (4) of section 147."

3. WHEREAS your attention is also drawn towards Section 441 of the Act under which the aforesaid contravention may be compounded.

4. Now, therefore the addressees (being the company/ its officers in default as the case may be is called upon to show cause within 30 days from the date of issue of the show cause notice, as to why no penal action as contemplated under Section 148 (8)(a) read with Section 147(1) of the Act be initiated for contravention of Section 148(6) of the Act read with Rule 6 of CCRA Rules, 2014 and Section 403 of the Act.

5. It may be noted that in case you failed to reply (along with supporting documents) within the period as stipulated above, it will be presumed that you have nothing to say in the matter and prosecution will be launched against the company and all its officers who are in default, without any further reference in the matter.

6. In terms of the provision of Section 20 of the Act, the notice is hereby being served to the company and officers of the company who are in default by electronic mode on the email id, as provided by the company on MCA Portal.

7. The company is requested to bring the notice to the knowledge of all the officers who are in default, immediately upon its receipt.

The reason for getting the clarification at the beginning of the year is that the company has to file the form CRA-2 for appointment of cost auditor within 180 days of the beginning of the year The new financial year has begun and all accounting and secretarial professionals are busy in finalization of accounts and other documents for the year 2023-24 on the one hand and on the other hand there are many documents which are required to be filed with Ministry of Corporate Affairs for the year 2024-25 like CRA-2 for appointment of cost auditors.

One can view the updated notification on Companies Cost Audit and Report Rules 2014 at https://icmai.in/upload/pd/Companies_CRAR_2019.pdf

All of us have started experiencing the heat towards the compliance mechanisms being put up by the statutory/regulatory authorities. As the Cost Records and GST records both use the HSN codes for reporting purposes, leniency in the maintenance of cost records or missing out on getting the cost audit conducted can cost a lot hardships to the organisations in case of detection.

The cost audit applicability especially for companies (not under cost audit earlier) is based on the turnover of the previous year. So to check the applicability of cost records maintenance of cost audit one needs to review the HSN codewise turnover primarily. Please review the HSN code figures as have been submitted to GST authorities and reconciled with financials The detailed parameters are given below.

Through this article, we have tried to answer most of queries which a company can have with regard to cost records applicability or cost audit.

The government of India has mandated the maintenance of Cost Records and Cost Audits under section 148 of the Companies Act 2013. The relevant Acts/Rules/provisions with regard to cost records maintenance or cost audit or production of these documents before statutory authorities are given below

1. Companies Act 2013
2. Companies Cost Records and Audit Rules 2014 as amended till date
3. Companies (Audit and Auditors) Rules, 2014
4. Companies (Accounts) Rules, 2014
5. Director's Responsibility Statement
6. CGST/SGST Acts

Summarised general steps to check the cost records maintenance or audit applicability. However, in case of inter unit transfers one needs to get the same checked thoroughly in line with various FAQs issued by Institute of Cost Accountants of India. One simple principle one should follow is to get the applicability checked in case turnover in above 35 crores and it is not a finance/banking/insurance/pure trading company (excepting dealing in implants etc.)

1. Compile the HSN codewise turnover of the company (Consolidation of all GSTINs segregated into Distinct person and outside sales) or activity wise turnover as per the activity mentioned in Table A or table B
2. Check for the HSN codes/activity in the Table A or table B of the notification issued by Ministry of Corporate Affairs.
3. Apply the rules for determination of applicability as per the table given below in 1) & 3) i.e turnover of 35 crores/50 crores/100 crores

Few queries which normally comes to the minds of the Directors/ CFOs/Compliance heads of organisations are given below with summarized replies

Primarily, turnover means gross turnover made by the company from the sale or supply of all products or services during the financial year. It includes any turnover from job work or loan license operations, any other operational income but exclude duties and taxes. Export benefit received should be treated as a part of sales

Simplified tables for the activities to be undertaken for compliance with section 148 of the Companies Act 2013 with regard to audit of Items of Cost in Respect of Certain Companies

Applicability of Cost Records Maintenance and reporting in various statutory documents

Note 1: whether maintenance of cost records has been specified by the Central Government under subsection (1) of section 148 of the Companies Act and whether such accounts and records have been so made and maintained; (Reference: Companies (Auditor's Report) Order, 2020.

Note 2:a disclosure, as to whether maintenance of cost records as specified by the Central Government under sub-section (1) of section 148 of the Companies Act, 2013, is required by the Company and accordingly such accounts and records are made and maintained (Reference: The Companies (Accounts) Rules, 2014)

Applicability of Cost Audit

The companies on which cost records maintenance is applicable may have to undergo cost audit in case further condition of aggregate turnover and tablewise turnover is achieved

Summarised chart showing applicability of Cost audit is given below

Turnovers for the previous years are to be considered for the applicability of section 148 of the Companies Act 2013. Once the cost audit is applicable, it has to be continued even if turnover falls below the minimum criterion in any of the succeeding years.

Please refer to the FAQ as released by Institute of Cost Accountants of India with regard to maintenance of Cost Records as given below:

FAQ 14

Is maintenance of cost accounting records mandatory for a multi-product company where annual turnover from all the products & services is rupees thirty five crore or more during the immediately preceding financial year even if the turnover of the individual product/s that are covered under the Rules is less than rupees thirty five crores?

Reply:

The Rules provide threshold limits for the company as a whole. The Rules do not provide any minimum product specific threshold limits for maintenance of costaccounting records and consequently the company would be required to maintain cost accounting records for the products covered under Table-A or Table-B or both even if the turnover of such products is below rupees thirty five crores but its overall turnover is rupees thirty five crore or more during the immediately preceding financial year.

Micro enterprise or a small enterprise including as per the turnover criteria under sub-section (9) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006) will not be covered.

It is important to note that the cost statements, including other statements to be annexed to the cost audit report, shall be approved by the Board of Directors before they are signed on behalf of the Board by any of the director authorised by the Board, for submission to the cost auditor to report thereon

Through this article an attempt has been made to answer to many queries with regard to the applicability of cost records maintenance and cost audit under section 148 of the Companies Act 2013.

Annexure 1

Companies manufacturing products or providing services as have been mentioned in Table A (Regulated Sectors) or Table B Non Regulated sectors will be covered under Section 148 after fulfilling the turnover criterion

Table (A) Regulated Sectors

Penal provisions for non-compliances

If any default is made in complying with the provisions of section 148,-

(a) the company and every officer of the company who is in default shall be punishable in the manner as provided in sub-section (1) of section 147;

Section 147(1) states that for any contravention of the sections 139 to 146 (Both Inclusive)of Companies Act the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees.

(b) the cost auditor of the company who is in default shall be punishable in the manner as provided in sub-sections (2) to (4) of section 147.

Summarised provision: (If cost auditor of a company contravenes any of the provisions of section 148, the cost auditor shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees or four times the remuneration of the auditor, whichever is less. Provided that if an auditor has contravened such provisions knowingly or wilfully 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 one year and with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees or eight times the remuneration of the auditor, whichever is less)

An attempt has been made to explain the provisions in simplified manner. The readers are requested to go through the provisions in details from the gazette notifications. The author has explained the provisions as per his understanding,

The author can also be reached at navneetic@yahoo.com