Scrutiny by MCA officials- MCA Seeks Further Clarifications on Inventory Valuations and costing Under Section 148(7) of the Companies Act, 2013.
The companies are required to comply with various requirements under companies Act and Income Tax Act. One of the requirement is to comply with section 148 of the Companies Act 2013 relating to Cost Audit. The companies as mandated under section 148 of the Companies Act 2013 read with Companies Cost Records and Audit Rules are required to file Cost Audit Reports along with Annexures through XBRL form CRA-4 with MCA.
It was a common notion that file the cost audit report and forget it as no body is going to scrutinise the cost audit reports, however this myth is getting faded away with the new notices being issued by MCA. Moreover, with the introduction of the section 142(2A)(ii) of the Income Tax Act, the special audit of Inventory came under focus. Now the MCA authorities are also scrutinising the Cost Audit Data filed by the companies.
We have tried to bring to the kind attention of the corporates to file the Cost Audit Reoorts after thorough vetting by the concerned or may have to face the notices as are being issued by MCA. Few of the points given in various notices are given below for reference.
The Ministry of Corporate Affairs (MCA), through its Cost Audit Branch, has issued a formal direction seeking submission of further information and clarifications under Section 148(7) of the Companies Act, 2013. It needs mention that Notices are being issued presently for the year 2020-21 and content of the notices give an indication about the seriousness with which the cost audit reports are being vetted for Inventory Valuations or for other areas like related party transactions and capacities
Following a detailed examination of e-Forms CRA-4 and related supporting documents, the MCA identified several inconsistencies and disclosure gaps, which have been detailed in below. The companies are being directed to furnish explanations, clarifications, and documentary evidence within the prescribed timelines.
Statutory Authority Under Section 148(7)
Section 148(7) of the Companies Act, 2013 empowers the Central Government to call for such information and explanations as it may consider necessary to verify the correctness of cost records and cost audit reports. Directions issued under this provision are legally binding, and companies are required to comply fully and within the stipulated period.
The notices also specifically warn that non-compliance with these directions will attract penal action under Section 147 of the Companies Act, 2013.
Key Observations and Inconsistencies Identified by MCA
The annexure to the notice highlights multiple deficiencies, which captures detailed cost and operational information.
1. Stock Valuation Differences in Profit Reconciliation
The MCA has pointed out differences between stock valuation as per cost accounts and financial accounts that have been reported for the current year and in (negative) for the previous year.
The MCA has directed the company to:
- Explain the nature and reasons for these differences,
- Clarify the cost accounting policies followed for inventory valuation,
- Explain how these differ from the policies adopted in financial accounts, and
- Provide supporting documentary evidence.
The clarification as required by the MCA has brought to the light the importance of finalising cost records simultaneously with financial accounts so that the inventory valuation per costing data as adjusted for Net Realisable Value impact is considered while finalising the financials. It will result in minimal variance in inventory valuation as per cost records and as per financial records.
2. Inadequate Related Party Transaction Disclosures
The MCA has also pointed out shortcomings in related party transaction reporting, including:
- Generic disclosure of products or services as “sale including taxes” or “purchase including taxes,” without specifying the exact nature of goods or services or the applicable Customs Tariff Act (CTA) codes;
- Disclosure of aggregate quantities as zero for all related party transactions; and
There is Vague disclosure of the basis for determining normal prices as “any other method,” without a clear explanation of the methodology adopted.
3. Turnover Reporting and GST Reconciliation
Turnover as per GST records for the previous financial year has been reported as zero. The MCA has directed the company to provide documentary evidence to substantiate this disclosure.
Further, the mandatory explanation reconciling turnover as per financial statements with turnover as per GST records for both the current and previous financial years has not been furnished.
4. Non-Disclosure of Available Capacity
The notices state that company has not disclosed quantitative details relating to available capacity for manufactured products, including:
- Installed capacity
- Capacity enhanced during the year
- Capacity available through leasing or loan licensing arrangements
This omission affects the assessment of capacity utilisation, a key component of cost audit analysis.
While the MCA is seeking capacity details to assess capacities at the HSN code level, arriving at such details is very challenging.
Not only the above, MCA is seeking Additional Documents
The notices further require submission of:
- Relevant cost records addressing the identified inconsistencies,
- A copy of the cost audit report as issued/signed by the cost auditor, and
- The statutory audit report, including duly signed financial statements.
Time Limit for Compliance
The company is being granted 21 days from the date of the notice to submit the required explanations, clarifications, and documents.
Some of the Penal Provisions for Non-Compliance – Section 147 of the Companies Act, 2013
Failure to comply with the provisions of Section 148, including directions issued under Section 148(7), attracts penal consequences under Section 147 of the Companies Act, 2013. These penalties extend to the company, its officers, and the cost auditor.
The key penal provisions are as follows:
- Penalty on the Company
- The company shall be punishable with a fine not less than ₹25,000 and which may extend to ₹5,00,000.
- Penalty on Officers in Default
- Every officer of the company who is in default shall be punishable with:
- fine not less than ₹10,000 and which may extend to ₹1,00,000, or
- Penalty on the Cost Auditor
- If the cost auditor contravenes the provisions of Section 148 or the rules made thereunder, the cost auditor shall be punishable with a fine not less than ₹25,000 and which may extend to ₹5,00,000.
Further, where the contravention is willful with the intent to deceive the company, shareholders, or authorities, the cost auditor may also be liable under Section 447 of the Companies Act, 2013 relating to fraud, in addition to disciplinary action under the applicable professional regulations.
Key Takeaways for Companies and Professionals
This notice highlights the MCA’s increasing focus on:
- Proper Inventory Valuation,
- Accuracy and completeness of CRA filings,
- Reconciliation between cost records, financial statements, and GST data, and
- Detailed and meaningful disclosures in related party transactions.
Companies subject to cost audit must ensure that cost accounting policies are clearly documented, consistently applied, and adequately reflected in statutory filings. Cost auditors and compliance professionals must exercise heightened diligence, as lapses can result in significant monetary penalties and personal exposure.
Conclusion
The directions issued to various companies serve as a strong reminder of the regulatory seriousness attached to cost audit compliance. With clearly defined penalties under Section 147, non-compliance with notices issued under Section 148(7) can have serious financial and legal consequences. Companies and professionals must therefore ensure timely, accurate, and well-documented responses to avoid penal action and reputational risk.
*****
In case any further information or guidance is required, please feel free to contact us at navneetic@yahoo.com or at 9810175020
Author Bio
