Amended and updated notes on section 148 of Companies Act 2013. Detail discussion on provisions and rules related to Central Government to specify audit of items of cost in respect of certain companies.
Chapter X (Sections 139–148) of the Companies Act, 2013 (CA 2013) deals with the provisions related to audit and auditors. Section 148 of CA 2013 provides for Central Government to specify audit of items of cost in respect of certain companies.
Recently, we have discussed in detail section 147 (Punishment for contravention) of CA 2013. Today, we learn the provisions of section 148 of Companies Act 2013.
The provisions of section 148 are effective from 1-April-2014. You may refer Notification No. S.O. 902(E) issued dated 27.03.2014. In this article, you will learn detail of the provisions of section 148 of the Companies Act 2013 read with the Companies (Audit and Auditors) Rules, 2014 and the Companies CRA (Cost Records and Audit) Rules, 2014.
| Name of Act | The Companies Act 2013 |
|---|---|
| Enacted by | Parliament of India |
| Administered by | Ministry of Corporate Affairs (MCA) |
| Number of Chapters | 29 |
| Number of Sections | 484 (470-43+57) |
| Number of Schedules | 7 |
| You are reading: | |
| Chapter No. | X |
| Chapter Name | Audit and Auditors |
| Section No. | 148 |
| Section Name | Central Government to specify audit of items of cost in respect of certain companies |
| Monthly Updated Edition | Company Law PDF |
Section 148 (Central Government to specify audit of items of cost in respect of certain companies) of Companies Act 2013
Section 148(1) of Companies Act 2013
Cost Records [Section 148(1)]: CG by order may direct to include cost records in the books of account of specified class of companies. Note that such order shall be issued by the CG notwithstanding anything contained in Chapter-X (Sections 139-148) of the CA 2013.
However, the CG shall consult regulatory body of special Act companies before issuing such order in respect of such class of companies. Special Act includes:
- The Rubber Act, 1947
- The Electricity Act, 2003
- The Major Port Trusts (MPT) Act, 1963
- The Telecom Regulatory Authority of India (TRAI) Act, 1997
- The Petroleum and Natural Gas Regulatory Board (PNGRB) Act, 2006
- The Airports Economic Regulatory Authority of India (AERAI) Act, 2008
That means CG make rules in the areas of maintenance of cost records by the companies engaged in specified industries, manufacturing of goods or providing services. Such cost records audited under section 148 of Companies Act, 2013.
Application of Cost Records [Rule 3 of CRA Rules 2014]:
The class of companies including foreign companies are required to include cost records in their books of account as prescribed in Rule 3 of the Companies (Cost Records and Audit) Rules, 2014. Such class of companies are classified into two sectors viz. regulated and non-regulated sectors.
Thus, the following class of companies engaged in the production of the goods or providing services, specified in the Table below, having at least ₹35 crore turnover in preceding financial year shall include cost records in their books of account:
TABLE
(A) Regulated Sectors:
- Telecommunication services regulated by TRAI under the Telecom Regulatory Authority of India Act, 1997 including activities authorized or licensed under Indian Telegraph Act, 1885.
- Generation, transmission, distribution and supply of electricity regulated under the Electricity Act, 2003.
- Petroleum products including activities regulated under the Petroleum and Natural Gas Regulatory Board Act, 2006.
- Drugs and pharmaceuticals
- Fertilisers;
- Sugar and industrial alcohol.
(B) Non-Regulated Sectors:
- Machinery and mechanical appliances used in defence, space and atomic energy sectors excluding any ancillary item or items;
- Turbo jets and turbo propellers;
- Arms, ammunitions and Explosives;
- Propellant powders; prepared explosives (other than propellant powders); safety fuses; detonating fuses; percussion or detonating caps; igniters; electric detonators;
- Radar apparatus, radio navigational aid apparatus and radio remote control apparatus;
- Tanks and other armoured fighting vehicles, motorised and parts of such vehicles, that are funded (investment made in the company) to the extent of 90% or more by the Government or Government agencies;
- Port services of stevedoring, pilotage, hauling, mooring, re-mooring, hooking, measuring, loading and unloading services rendered for a Port in relation to a vessel or goods regulated by the Tariff Authority for Major Ports under the Major Port Trusts Act, 1963;
- Aeronautical services of air traffic management, aircraft operations, ground safety services, ground handling, cargo facilities and supplying fuel rendered at the airports and regulated under the Airports Economic Regulatory Authority of India Act, 2008;
- Iron and Steel;
- Roads and other infrastructure projects corresponding to para No. (1) (a) as specified in Schedule VI of the Companies Act, 2013;
- Rubber and allied products including products regulated by the Rubber Board constituted under the Rubber Act, 1947;
- Coffee and tea;
- Railway or tramway locomotives, rolling stock, railway or tramway fixtures and fittings, mechanical (including electro mechanical) traffic signaling equipment’s of all kind;
- Cement;
- Ores and Mineral products;
- Mineral fuels (other than Petroleum), mineral oils etc.;
- Base metals;
- Inorganic chemicals, organic or inorganic compounds of precious metals, rare-earth metals of radioactive elements or isotopes, and organic chemicals;
- Jute and Jute Products;
- Edible Oil;
- Construction Industry as per para No. (5) (a) as specified in Schedule VI of the Companies Act, 2013;
- Health services, namely functioning as or running hospitals, diagnostic centres, clinical centres or test laboratories;
- Education services, other than such similar services falling under philanthropy or as part of social spend which do not form part of any business;
- Milk powder;
- Insecticides;
- Plastics and polymers;
- Tyres and tubes;
- Pulp and Paper;
- Textiles;
- Glass;
- Other machinery and Mechanical Appliances;
- Electricals or electronic machinery;
- Production, import and supply or trading of following medical devices, namely: –
- Cardiac stents;
- Drug eluting stents;
- Catheters;
- Intra ocular lenses;
- Bone cements;
- Heart valves;
- Orthopaedic implants;
- Internal prosthetic replacements;
- Scalp vein set;
- Deep brain stimulator;
- Ventricular peripheral shud;
- Spinal implants;
- Automatic impalpable cardiac defibrillators;
- Pacemaker (temporary and permanent);
- Patent ductus arteriosus, atrial septal defect and ventricular septal defect closure device;
- Cardiac re-synchronise therapy;
- Urethra spinicture devices;
- Sling male or female;
- Prostate occlusion device; and
- Urethral stents:
Rule 3 shall not apply to a company which is classified as a micro enterprise or a small enterprise including as per the turnover criteria u/s 7(9) of the Micro, Small and Medium Enterprises Development Act, 2006.
Thus, Section 8 Companies and One Person Company (OPC) newly introduced in the Companies Act, 2013 may also be required to maintain cost records if falls under the above criteria.
Note that nothing contained in serial number 33 shall apply to foreign companies having only liaison offices. Foreign companies have been defined in clause (42) of Section 2 of the CA 2013 as any company or body corporate incorporated outside India which:
- (a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
- (b) conducts any business activity in India in any other manner.
Maintenance of Cost Accounting Records [Rule 5 of CRA Rules 2014]:
As per Rule 5 of the Companies (cost records and audit) Rules, 2014, the cost records shall be maintained in Form No. CRA-1 for each of financial year.
The cost records shall be maintained on regular basis in such manner so as to:
1) Facilitate calculation of per unit cost of production or cost of operations, cost of sales and margin for each of its products and activities for every financial year on monthly or quarterly or half-yearly or annual basis.
2) Enable the company to exercise, as far as possible, control over the various operations and costs to achieve optimum economies in utilisation of resources.
3) Provide necessary data which is required to be furnished under these rules.
Note that once the maintenance of cost records becomes applicable, it would be maintained on a continuous basis in the subsequent years also.
Section 148(2) of Companies Act 2013
Audit of Cost Records [Section 148(2)]: The Central Government may order to direct that the audit of cost records of class of companies covered u/s 148(1) shall be conducted in specified manner if having prescribed net worth or prescribed turnover.
Applicability for Cost Audit [Rule 4 of CRA Rules 2014]
Such net worth or turnover had been prescribed in the Rule 4 of the Companies (Cost Records and Audit) Rules, 2014.
For Companies specified in Regulated Sectors i.e. Table (A):
Accordingly, all companies specified in Table (A) of Rule 3 are required to get its cost records audited if:
1) ₹50 crore Turnover of Company: The overall annual turnover of the company from all its products and services during the immediately preceding financial year is ₹50 crore or more; and
2) ₹25 crore Turnover of Products or Services: The aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained is ₹25 crore or more.
For Companies specified in Non-Regulated Sectors i.e. Table (B):
Similarly, all companies specified in Table (B) of Rule 3 are required to get its cost records audited if:
1) ₹100 crore Turnover of Companies: The overall annual turnover of the company from all its products and services during the immediately preceding financial year is ₹100 crore or more; and
2) ₹35 crore Turnover of Products or Services: The aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained is ₹35 crore or more.
The following table will explain in simple the criteria for applicability of cost record audit under the Companies Act 2013:
| Class of Companies | Companies Specified in item (A) of Table of Rule 3 | Companies Specified in item (B) of Table of Rule 3 |
|---|---|---|
| Annual turnover of the company | ₹50 Crore or more | ₹100 Crore or more |
| Aggregate turnover of the individual product(s) or service(s) | ₹25 Crore or more | ₹35 Crore or more |
However, the requirement for cost audit shall not apply to a company which is covered in rule 3 the Companies (Cost Records and Audit) Rules, 2014; and
(i) Foreign Exchange: whose revenue from exports, in foreign exchange, exceeds 75% of its total revenue; or
(ii) SEZ: which is operating from a Special Economic Zone.
(iii) Electricity: which is engaged in generation of electricity for captive consumption through Captive Generating Plant. For this purpose, the term “Captive Generating Plant” shall have the same meaning as assigned in rule 3 of the Electricity Rules, 2005.
Section 148(3) of Companies Act 2013
Cost Audit by CMA [Section 148(3)]: The BOD appoints a Cost Accountant to conduct cost audit. Auditor appointed under section 139 shall not be appointed for conducting the audit of cost records. Cost auditor shall comply with the cost auditing standards as are issued by the Institute of Cost Accountants of India (ICAI) with the approval of the Central Government.
Appointment of Cost Auditor [Rule 6 of CRA Rules 2014]
- Appoint Cost Auditor within 180 days: As per Rule 6 of CRA Rules 2014, the Cost Auditor must be appointed within 180 days of the commencement of every financial year. Every company shall inform the cost auditor concerned of his or its appointment as such. Thus, there is no need to get an approval of the Central Government under the CA 2013 for appointment of Cost auditor of company.
- Inform CG in E-Form CRA-2: Thereafter, the company shall file a notice in E-Form CRA-2 with CG:
- within 30 days of the Board meeting; or
- within 180 days of the commencement of the financial year,
whichever is earlier.
Such notice shall be filed through electronic mode along with fee as specified in Companies (Registration Offices and Fees) Rules, 2014.
- Tenure of Cost Auditor: Cost auditor shall continue his office till expiry of 180 days from closure of financial year or till he submits the cost audit report.
- Casual Vacancy: Any casual vacancy of a cost auditor, whether due to resignation, death or removal, shall be filled by BOD within 30 days and shall inform CG in Form CRA-2 within 30 days of such appointment of cost auditor.
- Cost Auditor file Form CRA-3: Cost auditor shall submit the cost audit report along with his or its reservations or qualifications or observations or suggestions, if any, in Form CRA-3.
- Cost Audit Report to BOD: Cost auditor shall forward cost audit report to the Board of Directors within 180 days from the closure of the financial year. The Board of Directors shall consider and examine such report particularly any reservation or qualification contained therein.
- Company file Form CRA-4: Every company within 30 days furnish CG with cost audit report along with full information and explanation on every reservation or qualification contained therein, in Form CRA-4.
Form CRA-4 shall be submitted along with fees specified in the Companies (Registration Offices and Fees) Rules, 2014. The Companies which have got extension of time of holding AGM u/s 96 (1) of the Companies Act, 2013, may file form CRA-4 within resultant extended period of filing financial statements under section 137 of the Companies Act, 2013.
Remuneration of the Cost Auditor [Rule 14 of Audit and Auditors Rules 2014]:
As per sub-section (3) of section 148 read with rule 14 of the Companies (Audit and Auditors) Rules, 2014, —
- In case of Audit Committee: In the case of companies which are required to constitute an audit committee:
- the Board shall appoint cost auditor on the recommendations of the Audit committee, which shall also recommend remuneration for such cost auditor;
- the remuneration recommended by the Audit Committee shall be considered and approved by the Board of Directors and ratified subsequently by the shareholders;
- In other Case: In the case of other companies which are not required to constitute an audit committee, the Board shall appoint cost auditor and the remuneration of such cost auditor shall be ratified by shareholders subsequently.
Section 148(4) of Companies Act 2013
Statutory Audit u/s 143 [Section 148(4)]: An audit conducted u/s 148 shall be in addition to the statutory audit conducted under section 143 of the CA 2013.
Section 148(5) of Companies Act 2013
Qualification of Cost Auditor [Section 148(5)]: The qualifications, disqualifications, rights, duties and obligations applicable to auditors under Chapter-X (Sections 139-148) shall apply to a cost auditor. The report on the audit of cost records shall be submitted by the cost accountant to the Board of Directors of the company.
Section 148(6) of Companies Act 2013
Cost Audit Report to CG [Section 148(6)]: A company shall within 30 days from the date of receipt of a copy of the cost audit report furnish the CG with such report along with full information and explanation on every reservation or qualification contained therein.
Section 148(7) of Companies Act 2013
Additional Information to CG [Section 148(7)]: After considering the cost audit report and the information and explanation furnished u/s 148(6) by the company, the Central Government may call for further information and explanation.
Section 148(8) of Companies Act 2013
Penalty for Contravention [Section 148(8)]: If any default is made in complying with the provisions of section 148, the company, officer and auditor shall be punishable in accordance with section 147. That means-
- The company shall be punishable with fine of ₹25,000 to ₹5,00,000; and
- Every officer shall be punishable with-
- Imprisonment for a term of 1 year; or
- Fine of ₹10,000 to ₹1,00,000; or
- Both.
- The cost auditor shall be
punishable with-
- Fine of ₹25,000 to ₹5,00,000 or 4 times the remuneration, whichever is less.
- If contravened such provisions knowingly or wilfully then imprisonment for 1 year and with fine of ₹50,000 to ₹25,00,000 or 8 times the remuneration, whichever is less.
- Refund the remuneration and pay for damages (If any).
There are no specific provisions for punishment for contravention of provisions of section 148 of CA 2013. Hence, you should go through the provisions of section 147 of the Companies Act, 2013 to know the penalty provisions related to contravention of section 148 of the CA 2013.
Section 148 of Companies Act 2013: Central Government to specify audit of items of cost in respect of certain companies
Section 148 shall come into force on 1st April, 2014 vide Notification No. S.O. 902(E) issued dated 27.03.2014.
(1) Notwithstanding anything contained in this Chapter, 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 utilisation 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:
Author Note: Class of companies which shall be required to include cost records in their books of account has now been prescribed in Rule 3 of the Companies (cost records and audit) Rules, 2014.
Provided that 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.
(2) 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 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.
(3) The audit under sub-section (2) shall be conducted by a 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:
Provided that no person appointed under section 139 as an auditor of the company shall be appointed for conducting the audit of cost records:
Provided further that the auditor conducting the cost audit shall comply with the cost auditing standards.
Explanation: For the purposes of this sub-section, the expression “cost auditing standards” mean such standards as are issued by the Institute of Cost Accountants of India, constituted under the Cost and Works Accountants Act, 1959, with the approval of the Central Government.
(4) An audit conducted under this section shall be in addition to the audit conducted under section 143.
(5) The qualifications, disqualifications, rights, duties and obligations applicable to auditors under this Chapter shall, so far as may be applicable, apply to a cost auditor appointed under this section and it shall be the duty of the company to give all assistance and facilities to the cost auditor appointed under this section for auditing the cost records of the company:
Provided that the report on the audit of cost records shall be submitted by the cost accountant to the Board of Directors of the company.
(6) A company shall within thirty days from the date of receipt of a copy of the cost audit report prepared in pursuance of a direction under sub-section (2) furnish the Central Government with such report along with full information and explanation on every reservation or qualification contained therein.
(7) If, after considering the cost audit report referred to under this section and the information and explanation furnished by the company under sub-section (6), 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.
(8) 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.