CHAPTER 1
Comments of the Comptroller and Auditor General of India ON PSUs ACCOUNTS

Under Section 619 of the Companies Act, 1956 the Statutory Auditor of a Government Company, appointed by the Central Government on the advice of the Comptroller and Auditor General of India (CAG), conducts the audit of accounts of the Government Companies which also include companies deemed to be Government Companies under Section 619-B of the Act. On the basis of supplementary audit, CAG issues comments upon or supplements the report of the Statutory Auditors. Statutes governing some Corporations also require their accounts to be audited by CAG and a report to be given by him to the Government.

The details of Government Companies/Deemed Government Companies and Corporations of the Union Government whose accounts for 2000-2001 were received and audited by CAG were as under:

Note    Individual PSUs have been listed and marked in Appendix I, II & III by alphabet (R) for accounts received and alphabet (S) for accounts selected for test check.

As a result of supplementary audit of accounts, 18 Government Companies and 1 deemed Government Companies revised their accounts for 2000-2001. Comments were issued on the accounts of 77 Government Companies and 8 Deemed Government Companies for 2000-2001. Audit Report on the accounts of one Statutory Corporation (Central Warehousing Corporation) was also sent to the Government/Corporation.

As a result of supplementary audit and consequent corrections made in the accounts for the year ended 31 March 2001, the profit in respect of the following Companies increased (+) or decreased (-) as indicated below:

Increase (+) or Decrease (-) of Profit

In the following Companies, loss for the year increased (-) or decreased (+) as given below:

Increase (-) or Decrease (+) of Loss

(a) The comments issued by the Comptroller and Auditor General of India on the financial statements of various companies excluding the ‘Navratna Companies’ in respect of which the position has been brought out separately in para 1.1 (B) (b), indicated that in 15 PSUs assets as on 31 March 2001 were overstated by Rs.95.98 crore and in 5 PSUs these were understated by Rs. 19.37 crore. Similarly liabilities were overstated by Rs.18.44 crore in 5 PSUs and understated by Rs.1075.48 crore in 25 PSUs. In 21 PSUs net profit for 2000-2001 was overstated by Rs.814.22 crore and in 7 PSUs it was understated by Rs.26.96 crore. Similarly, in 15 PSUs net loss for 2000-2001 was understated by Rs.336.49 crore and overstated by Rs.7.75 crore in one PSU. The following tables give a company-wise break up of the financial implication of comments of the Comptroller and Auditor General of India:

*    The accounts for 1998-1999 had not been finalised till 31 October 2001
**    Includes Rs. 22.43 crore relating to the accounts for the year 1997-1998.

(ii)    Liabilities understated (+)/overstated (-) :

*    includes Rs. 243.74 crore relating to the accounts for the year 1999-2000

*    Total profit over-stated includes Rs. 170.12crore and total loss under-stated includes Rs. 75.29 crore relating to the accounts for the year 1999-2000. Hindustan Steelworks Construction Limited had shown net profit because of wavier on intrest on Government loan for earlier years written back- Rs. 957.81 crore.

(b)    Navratna Companies:

(b) (i)    Impact of comments issued by the Comptroller & Auditor General of India on the financial statements on 'Navratna' Public Sector Undertakings for the year 2000-2001 indicated that Assets were over-stated by Rs.395.99 crore in 3 PSUs and understated by Rs. 4.78 crore in one PSU. Similarly liabilities were understated by Rs. 1954.22 crore in 5.PSUs and overstated by Rs.2.34 crore in one PSU. The following tables give a company-wise break-up of the financial implication of comments of the Comptroller & Auditor General of India.

Assets over-stated (-)/under-stated (+)

Liability under-stated (-)/over-stated (+)

*    The Company revised the accounts on the basis of CAG comments and the impact of comments covered by the revised accounts had been shown.

(ii)    In addition to the above, the impact of CAG comments on the profit and loss of the 'Navratna' Public Sector Undertakings for the year 2000-2001 is given as under:

(Rs. in crore)

*    The company revised the accounts on the basis of CAG comments and the impact covered by the revised accounts had been shown.

1.2    Salient Comments on Balance Sheet/Profit & Loss Statement

Current liabilities & provisions were overstated by Rs 58.75 lakh due to incorrect inclusion of on account payment of insurance claim, which should have been treated as income as per its accounting policy. This resulted in under-statement of profit for the year to the same extent.

Company stated that the amount was on account payment against an insurance claim which would be accounted for on full and final settlement of the claim.

The reply is not tenable as the accounting policy of the Company stipulated accounting of the amount as income.

Profit before tax was overstated by Rs. 34.18 lakh due to crediting of income earned on sale of ore mined during the period of development of a mine to Profit & Loss account instead of setting off of the same against the development expenditure of the mine capitalized during the year.

Management stated that the job was neither a project nor an expansion of a project. Hence development work was not considered as construction project.

Management contention is not tenable as the Company had treated the expenditure on mines development as capital expenditure. Therefore, the income from this work should also be treated as of capital nature and should have been deducted from the total expenditure so capitalised as per general accounting principles.

MINISTRY OF CHEMICALS & FERTILIZERS

1.2.3    Indian Petro-chemicals Corporation Limited

Current liabilities did not include Rs. 8.36 crore being the interest payable to Oil Natural Gas Corporation Limited (ONGC) on payment of arrears in instalments relating to revision in price of ethane/propane supplies, as per the agreement. This resulted in under-statement of current liabilities and over-statement of profit for the year by Rs. 8.36 crore.

Management stated that Company paid arrears to ONGC by June 2000 before signing of the agreement on 11 July 2000. As such their claim of interest was not tenable.

Reply of the management is not tenable, as ONGC had agreed in December 1999 to receive the price revision arrears in instalments subject to the payment of interest. In April 2000, ONGC raised a debit note on the Company towards interest payable up to 31 March 2000.

1.    Non-charging of expenditure amounting to Rs.6.07 crore representing licence and know-how fee relating to manufacturing process in the year in which it was incurred had resulted in over-statement of gross block. As the Company had charged depreciation of Rs.0.96 crore on this, the loss was understated by Rs.5.11 crore.

Management stated that payments relating to the manufacturing process needed to be charged to revenue only if, such payments relate to an asset already in existence. All the know-how payments including payments relating to manufacturing process were to be capitalised as long as it related to a major fixed asset being brought into existence.

Management’s reply is not tenable, as Accounting Standard (AS)-10 does not distinguish between new asset and an existing asset.

2.    Current liabilities and provisions were understated by Rs.2.38 crore due to write back of provisions made towards interest on surcharge payable to Kerala State Electricity Board (KSEB) although KSEB had not withdrawn the claim.

The contention of the Company that no demand was raised is not acceptable as the claim was not subject to the law of limitation and hence, the write back was not in order.

Net Loss for the year was understated by Rs.6.72 crore in view of the following:

1.    Under-charge of depreciation by Rs.4.13 crore on machinery spares (non-regular use) due to capitalisation only during 2000-01 instead of with effect from 1 April 1999, as required under revised AS-2 and para 8.2 of AS-10.

Management stated that the Corporation had adopted the policy with regard to capitalisation of machinery spares which could be used only with an item of fixed assets and whose use was expected to be irregular in accordance with AS-2 from the year 2000-2001 only. Hence, depreciation was charged as per policy of depreciation of the Corporation.

The reply is not tenable since AS-2 was effective from 1 April 1999 and according to para-17 of AS-5, the non-implementation of AS-2 retrospectively in this case on account of error occurred as a result of mistake in applying accounting policy together with misinterpretation of revised AS-2. Necessary adjustment of depreciation and fixed assets after 1 April 1999 in compliance with AS-5 should have been carried out.

2.    Over-valuation of closing stock of urea by Rs.2.26 crore due to non-consideration of estimated marketing expenses which was higher than the marketing expenses allowed by Fertilizers Industries Co-ordination Committee (FICC).

Management stated that the net realisable value of urea stocks was made as per the accounting policy no. 3.5. The primary freight, secondary freight etc. was not part of retention price fixed by FICC. Hence, the same was not taken into account for arriving at net realisable value of urea.

The reply is not tenable as godown rent, handling charge etc. were also part and parcel of selling and distribution cost. As per AS-2, net realisable value was to be arrived at after deduction of estimated selling and distribution expenses. For conservative point of view, in arriving at net realisable value the expenditure of primary freight incurred by the unit towards despatch of urea to the selling point had been excluded in view of freight subsidy receivable from FICC.

3.    Capitalisation of Rs. 0.33 crore being the expenditure incurred on repair and renovation work of existing cooling tower relating to power house of Sindri modernization plant.

Management stated that the jobs were for renovation of cooling tower cells and not for dismantling/replacement and rectification only. Hence, accounting treatment given was in order.

The reply is not tenable as it could not be termed as addition to fixed assets vide para 23 of AS-10.

Net loss for the year was understated by Rs. 1.90 crore in view of the following:

(i)    Non-provision of anticipated future loss of Rs. 1.17 crore to be incurred on disposal of project leftover inventory.

Management stated that items of surplus stores was intended to put on sale through auction-cum-tender to the actual users of such items through Metal Scrap Trading Corporation Limited (MSTC). The reasonable price as was expected from the scrap dealer could not be fetched. As such, making provision for any loss on the basis of quotation for scrap dealer would grossly understate the value of such items.

The management contention is not tenable as the spares were lying since 1982 and in this case, loss could be assessed on the basis of information available from auction undertaken by a Government organisation - MSTC on 4 December 2000.

(ii)    Non-provision of Rs. 0.73 crore on account of claim, the recovery of which was doubtful.

Management stated that since the matter was pending before arbitration, the uncertainty of recovery at this stage was not ascertainable. This had also been disclosed in the Note to Accounts. The reply is not tenable as the matter was under litigation and it should have been provided for.

Inventories were overstated by Rs.4.14 crore due to incorrect valuation of closing stock of urea in violation of AS-2 which resulted in the over-statement of the profit by the same amount.

Management stated that the inventories had been valued at lower of cost and net realisable value which was as per AS-2.

The reply of the management is not acceptable as the valuation of closing stock of urea had been done at realisable value which also included the estimated expenditure on customary rebates and discounts allowed to the dealers before making the sale.

1.    Capital reserves were overstated to the extent of Rs.90.04 crore, being the grants received for meeting the part cost on the creation of fixed assets of the Authority, which should either have been shown as deduction from the cost of the assets or as deferred income to be treated as income in the Profit and Loss account over the useful life of the asset.

2.    Current liabilities were understated by:

1. Rs.73.59 crore due to non-inclusion of amount payable to State Governments for police guards deployed for anti-hijacking for the period prior to January 1997; and
2. Rs.4.16 crore due to incorrect calculation of interest on working capital loan.

3.    Provision for income tax was understated by:

1. Rs.78.88 crore on account of income-tax Rs.22.01 crore and interest thereon Rs. 56.87 crore due to difference in the amount of depreciation (including extra shift depreciation) as claimed in the income tax returns vis-a-vis the amount of depreciation admissible under the Income Tax Act, 1961; and
2. Rs.9.66 crore, being the income-tax (Rs.7.67 crore) and interest thereon (Rs.1.99 crore) due to non-deduction of TDS on canteen subsidy paid to employees in violation of the Income Tax Act, 1961.

4.    Physical verification of Fixed Assets had not been done in some of the offices and wherever it was done the relevant reports were not produced to audit.

5.(i)    The area of land under actual possession at southern and western region in respect of National Airports Division (NAD) and Calcutta International Airport could not be ascertained in the absence of detailed land records with the Authority.

6.    Cost of permanent buildings was overstated by Rs.1.30 crore due to wrong classification of revenue expenditure as a capital expenditure. This resulted in over-statement of depreciation by Rs.10 lakh and under-statement of profit by Rs.1.20 crore. This was also understated by Rs.2.48 crore due to non-capitalisation of expenditure of capital nature.

7.    Plant and equipment were understated by Rs.136.87 crore due to non-inclusion of (i) losses of Rs.86.86 crore on account of exchange fluctuations on loans borrowed to finance a project, (ii) interest of Rs.44.53 crore paid on loans borrowed to finance a project, and (iii) TDS of Rs.5.48 crore paid as an obligation of the Authority on behalf of financing agencies that financed a project.

8.    Capital work-in-progress was overstated by Rs.2.54 crore being the amount advanced to CPWD against which no details were furnished by them. The same was further overstated by Rs.9.99 crore, being the cost of equipment already installed.

9.    Sundry debtors were overstated by Rs.88.10 crore due to inclusion of:

1. licence fee of Rs 39 lakh shown recoverable from oil companies but disputed by the latter; and
2. dues of Rs.87.71 crore from various Government departments in contravention of accounting policy no.8.

10.    Deposits, loans and advances considered good and in respect of which the Authority was fully secured included an amount of Rs.257.24 crore in respect of which the Authority did not hold any security. The deposits, loans and advances were also overstated by Rs.2.21 crore, being the cost of CISF inducted at various airports to be met by the Authority itself .

11.    The profit was overstated by:

1. Rs.77 lakh due to non-inclusion of interest leviable on the delayed payment of tax on dividend, under Section 115(o) of the Income Tax Act;
2. Rs.6.39 crore due to short provisioning of interest on the loan portion of commencing capital resulting from adjustment of repayment in violation of decision no. 1(iv) under Rule 155 of General Financial Rules, and
3. Rs.1.75 crore (current year Rs.58.62 lakh) due to non-billing of Route Navigational Facilities Charges (over-flying) on various airlines.

12.    Non-traffic revenue was understated by Rs.6.54 crore due to wrong billing and non-raising of bills on the parties.

13.    Miscellaneous income was understated by Rs.69.53 crore (current year: Rs.16.26 crore) due to Authority 's failure in raising bills on Air India Limited and Indian Airlines Limited which were likely to be privatised in near future.

14.    Notes forming part of the accounts did not indicate that the arbitration proceedings were going on between National Buildings Construction Corporation Limited (NBCC) and the Authority and that NBCC had preferred counter claims of Rs.151.08 crore against the claims of Rs.119.02 crore preferred by the Authority.

15.    Accounting policy no. 7 of the Authority was not correct since it allowed charging of the full value of purchases of stores and spares made during the year irrespective of actual consumption thereof.

Reply to the audit report on the accounts for the year 1999-2000 was not made available by the Authority to audit as the report had not been placed before the Board.

1.    Inventories as on 31 March 2000 were overstated by Rs.3.49 crore due to non-writing off of the surplus inventory in respect of A-320 aircraft fleet. This resulted in over-statement of obsolescence reserve by Rs.1.82 crore, under-statement of expenditure on provision for obsolescence by Rs.1.82 crore and over-statement of profit by Rs.1.67 crore.

Management stated that A-320 aircraft being active fleet of the Company, any decision to consider a part of the inventory as surplus, required Board’s approval, which would be taken in due course.

The reply is not tenable as A-300 and B-737 aircrafts were also active part of the fleet of the Company in respect of inventories which were not moved for more than 5 years and should have been written off as surplus as per the accounting practice and without specific approval of Board.

2.    Sundry creditors as on 31 March 2000 were understated by Rs.1.32 crore due to non-provision of liability for goods despatched and invoiced by the sellers by 31 March 2000. This resulted in under-statement of goods-in-transit by same amount.

Management stated that accounting practice of not providing liability for materials on high seas was consistently followed and was adequately disclosed. The reply is not tenable as the accounting practice followed by the Company and disclosed in the accounts was in contravention of requirement of section 209 of the Companies Act, 1956 regarding maintenance of accounts on accrual basis.

3.    Provision for income tax was understated by Rs.1.87 crore, being the amount of income tax (Rs.1.52 crore) and interest thereon (Rs.35.47 lakh) due to less deduction of TDS on flying allowance paid to employees.

Management stated that they had a consistent policy of accounting for the flying allowance at foreign stations at a pre-determined rate and absorbing the differential as expenditure.

The reply is not tenable as the Company had not accounted for flying allowance correctly and portion of this allowance was considered as exchange loss instead of salary of the crew. This resulted in less deduction of TDS.

MINISTRY OF COAL AND MINES

Department of Coal

Loss for the year was understated by Rs.9.08 crore due to non-charging to the revenue, the value of float engines used for replacement resulting in over-statement of fixed assets by the same amount.

Management noted the observation.

Loss for the year was understated by Rs.2.95 crore due to non-provision for doubtful debts outstanding since 1992-93.

Management admitted that the realisation against the old dues was slow and it would be realised on completion of reconciliation with all the subsidiaries. The contention of the Management is not acceptable as the Company failed to realise the dues remaining outstanding since 1992-93.

Profit for the year was understated by Rs.3.42 crore in view of the following :

1.    The stock of stores and spares was overvalued by Rs.1.62 crore due to accounting of old returned items of stores and spares on closure of a mine, at the current weighted average cost.

Management stated that the necessary adjustment, if required, would be made next year.

2.    A reference is invited to item No. 9 of the Notes on Accounts regarding provision of gratuity liability on actuarial valuation basis plus payments made during the year. Provision for the gratuity aggregating Rs.5.04 crore paid to the employees who retired/died during the year already existed in the accounts and as such the same should have been adjusted against the ‘Provision towards gratuity’ instead of charging the same again to Profit & Loss account.

Management replied that the accounting had been made on the same line as was done in the earlier years. Payment due to the employees leaving during the year (2000-01) was added to the incremental liability certified by the Actuary.

The contention of the management is not acceptable as the payments made towards gratuity during the year should have been set-off against provision already created.

An amount of Rs. 1.12 crore paid as interest on account of shortfall in deposit of advance tax for the financial year 1998-99 should have been charged to Profit & Loss account as the Company had not disputed the payment. This resulted in over-statement of loans and advances as well as profit after tax by Rs.1.12 crore.

Management stated that as per the practice consistently followed by the Company, such interest was not charged till the assessment for the relevant year was completed in all respects including the adjudication by the Appellate Authorities against the appeals preferred by the Company.

The reply is not tenable as this was a clear demand and should have been debited to Profit and Loss account.

1.    Fixed assets included Rs.51.29 lakh being the value of the shaft sinking and main works in respect of abandoned blocks and mines. As the mining activities in these mines and blocks had been abandoned, the value of shaft sinking and main works required to be charged off in terms of accounting policy. This resulted in under-statement of loss and over-statement of fixed assets by Rs.51.29 lakh.

Management stated that they were depreciating these assets at a rate prescribed under Schedule XIV of the Companies Act 1956, as in the past consistently. These shafts were operated and had also produced some gold during the year 2000-01.

The reply is not tenable as the shaft sinking and main works in the mines were abandoned due to stoppage of mining and de-watering operations.

2.    Loans and advances included security deposit of Rs.34.90 lakh paid on a contract, which was short closed by the Company during the year. As per the terms of contract the security deposit was liable for forfeiture in the event of non-execution of the work. Non-provision for the forfeiture of security deposit resulted in over-statement of loans and advances and under-statement of loss by Rs.34.90 lakh.

Management stated that the short closure was made as per mutual understanding considering company’s present status. There was neither any claim from the party nor intimation to forfeit the security deposit

The reply is not tenable as no consent of the customer was obtained to short close the work without levy of penalty or forfeiture of the security deposit.

1.    Environment and pollution control expenses, charged to profit and loss account, included Rs.4.12 crore (cumulative expenditure Rs.5.27 crore) towards construction of Jarosite pond. As the expenditure was of capital nature, the same should have been accounted for as capital work-in-progress. This resulted in the under-statement of capital work-in-progress by Rs.5.27 crore and profit for the year by Rs.4.12 crore as well as prior-period profit by Rs.1.15 crore.

Management stated that the expenditure was incurred to meet the statutory obligation for environmental protection and no fixed assets having realisable value was created. Hence, it could not be treated as capital expenditure.

The reply is not tenable as Jerosite pond was a fixed asset and benefits from the pond would be derived in future years. Accordingly, this should have been shown as capital work-in-progress.

2.    The Company had not conducted physical verification of coke fines during the last two years ended 31 March 2001 despite the fact that it had found shortage of coke fines amounting to Rs. 2.14 crore during the physical verification conducted in 1998-99.

Management stated that physical verification of residual material, such as coke fines, was not conducted every year.

However, the fact remains that the Company should have conducted physical verification every year, since it had noticed shortage of coke fines during 1998-99.

MINISTRY OF COMMERCE & INDUSTRY

Provision for bonus/incentives of Rs.3.92 crore (including Rs.83.47 lakh made for the year 2000-01) represented provision for incentives to all employees in regular scale. As this scheme had neither been approved by the Administrative Ministry nor by the Board of Directors for the year 2000-01, no provision on this account was required to be made by the Company. This resulted in under-statement of excess of income over expenditure to the extent of Rs.3.92 crore.

Management stated that the incentive scheme was approved by the Board in its meeting held in September 1996 which was within the guidelines of the Department of Public Enterprises on perks and allowances applicable to PSUs officials. Reply is not tenable as the Ministry had not acceded to the request of the Company for ratification of payment.

1.    Cash and bank balance and the advances from creditors were overstated by Rs.5.44 crore due to accounting of cheques received during April 2001. The Company noted the comment and assured to avoid its recurrence in future.

2.    Motor cycle/car advances amounting to Rs.62.64 lakh paid to employees which were duly secured by hypothecation deeds were incorrectly classified as unsecured. The Company noted the comment for rectification in the next year.

MINISTRY OF COMMUNICATIONS

1.    Capital work-in-progress included Rs.1.21 crore being the value of Mobile Radio Trunked Service (MRTS) equipment lying idle since 1997-98. As the utilisation of these equipment was doubtful it should have been provided for. This resulted in over-statement of capital work-in-progress and profit by Rs.1.21 crore.

Management stated that MRTS equipment was working at Chennai, Madurai, Surat, Baroda, Ahmedabad, Hyderabad etc. and the demand for MRTS equipment continued. Further, the Company was entering into collaboration with other companies to use the capital items including the equipment at Mumbai.

The reply is not tenable since with the introduction of cellular wireless communication, the MRTS technology was already getting phased out, and the Company was not able to put to use the equipment for over two years.

2.    Rs.6.15 crore was accounted for as income on account of escalation without raising of bills. Though there was no progress in approval/realisation of proceeds from the customer, no provision had been made although commented on last year’s account. This resulted in over-statement of sundry debtors by Rs.6.15 crore, profit by Rs.5.01 crore and other liabilities by Rs.1.14 crore.

Management stated that the itemised rates for certain configurations of equipment supplied during 1997-98 and 1998-99 were not approved by the customer and, therefore, sales were set up based on similar items for which approved rates were available. Further, it was stated that the review committee had examined the rates and justifications given by the Company and as soon as the rates were finalised, bills would be raised on the client for payments.

Reply is not tenable as the review committee was yet to finalise the rates and the Company was yet to raise the claim. Therefore, a provision should have been made.

1.    Gross block of fixed assets was understated by Rs. 2.93 crore due to non-capitalisation/short capitalisation of apparatus & plants and civil construction works, which were completed and commissioned/put to use during 2000-2001 or earlier. This resulted in over-statement of capital work-in-progress by Rs. 2.93 crore and consequently, the depreciation was understated by Rs. 4.11 crore with a corresponding over-statement of profit.

Management stated that necessary adjustment would be made in the accounts of 2001-02

2.    Correctness of the gross block of fixed assets amounting to Rs. 10651.50 crore was not verifiable because 94 per cent of the fixed assets were not chosen for physical verification since incorporation of the Company in 1986. The verification of remaining six percent fixed assets pertaining to land and buildings, which were stated to be physically verified was also not completed either.

Management stated that necessary verification would be done during 2001-2002.

3.    Due to mistake in computation there was a short provision of Rs.3.17 crore towards leave encashment resulting in over-statement of profit for the year by an equal amount.

Management noted the comment for compliance.

4.    It was stated in the Notes to Accounts and Auditors’ Report that provision for license fee payable to DOT was made at Rs. 900 per working Direct Exchange Line instead of at 12 per cent of Annual Gross Revenue (AGR) claimed by DOT which was being contested by the Company. It was seen that the effective date for payment of the license fee at 12 per cent of AGR was 1 August 1999. On the basis of the rate of license fee fixed by DOT, the total fee payable for period from 1 August 1999 to 31 March 2001 worked out to Rs. 1166.11 crore as against which the provision made in accounts for the same period was Rs 690.39 crore indicating a short provision of Rs 475.72 crore.

Management stated that the matter was under consideration with DOT.

1.    The Company had been valuing the GDR proceeds received through Euro issue of US$408.85 million (net) made in 1997 and parked outside India at Rs.35.91/US $ treating it as a non-monetary item. Even the capital expenditure met out of these proceeds during 1997-2000 was valued at the same rate instead of the prevailing conversion rate on the date of transaction/payment. In the current year, Company had changed the accounting method for valuation of GDR proceeds, treating it as a monetary item and thus valued the balance proceeds parked outside India at the closing exchange rate as on 31 March 2001.

Due to non-adoption of the changed method in respect of assets and capital work-in-progress acquired during the years 1997-98 to 1999-2000, the gross block of fixed assets and capital work-in-progress were understated by Rs. 72 crore and Rs.3.58 crore respectively. This also resulted in under-statement of depreciation by Rs.4.67 crore including Rs.0.87 crore for earlier period and over-statement of profit by Rs.4.67 crore.

Management stated that the assets acquired during the years 1997-98 to 1999-2000 were recorded as per the accounting treatment adopted and consistently followed during those years. The change in the treatment in the current year was the direct result of RBI directives in the case of repatriation of GDR funds during 2000-01 and, therefore, did not warrant the reversal of the valid treatment adopted in previous years. Hence, the fixed assets acquired in earlier years and accounted by adopting a valid accounting treatment could not be recasted in the later year by reason of change in accounting treatment necessitated by an event taking place in that year.

The reply of management is not tenable because: (i) para 22 of AS-11 prescribed that fixed assets should be translated using the exchange rate at the date of transaction, (ii) since the Company itself changed the method of this year’s accounting for capital expenditure at the current conversion rate and the foreign exchange gain to capital reserve and (iii) the Company had given retrospective effect for interest, pending adjustment to the fixed assets/capital work-in-progress since beginning of the transaction.

2.    Plant and Machinery was overstated due to non-adjustment of Rs.4.28 crore reimbursed by Bezeq Israel in February 1996 towards 50 percent cost of 1 x 2 MB capacity circuit between Mumbai and Cyprus commissioned in June 1994. This resulted in over-statement of depreciation by Rs.1.55 crore including Rs.1.32 crore for previous years and under-statement of profit by Rs.1.55 crore.

Management stated necessary action would be taken during the financial year 2001-2002.

3.    Current liabilities were overstated by Rs.2.34 crore due to (a) retention of provision for Euro issue expenses of Rs.1.59 crore pertaining to 1994 for which the management stated that liabilities had already been discharged and (b) Non-transfer of very old unclassified amount of Rs.0.75 crore to income. This also resulted in under-statement of profit and reserve by Rs.2.34 crore.

Management stated that necessary action would be taken in the financial year 2001-02.

4.    Income was overstated by Rs.3.65 crore being excess billing on account of non-consideration of the reduction in total accounting rate from Special Drawing Rights (SDR) from 1.96 per minute to 0.80 per minute with Libya during the year. This also resulted in over-statement of sundry debtors by Rs.3.65 crore and profit by same amount.

Management opined that Libya’s acceptance for the Total Accounting Rate (TAR) reduction was received only after closure of the accounts and the Company had not accepted the said accounting rate so far.

The above reply of the management is not acceptable as the proposal for reduction in TAR was initiated by Company itself. Hence it was prudent to recognise the income at the reduced rate proposed by the Company, in compliance with AS-9.

MINISTRY OF CONSUMER AFFAIRS, FOOD AND PUBLIC DISTRIBUTION

Accounts of Food Corporation of India for the year 1997-98 were audited by C&AG, as sole auditor under Section 34 of the Food Corporations Act, 1964 as amended in June, 2000. The Audit Report thereon was issued to the Government of India on 28 September 2001.

A.    Some of the important observations made in the Report are reproduced as under:

1.    Interest payable (Rs.8.01 crore) did not include Rs.2.42 crore being the interest charges payable to bank on cash credit account. The reply of the management that the accounting policy to account for the interest receivable or payable to the bank had been framed keeping in view the provisions under section 43B(e) of the Income Tax, 1961 is not tenable since accounting on cash basis was in violation of accepted/corporate practice.

2.    Sundry creditors for other finance (Rs.283.08 crore) was overstated by Rs.3.60 crore due to non-writing back of liabilities no longer required to be paid to Ministry of Human Resources Development under Centrally Sponsored Programme (CSP) - State Funded Programme (SFP) scheme under Ministry of Education. Management agreed to carry out necessary adjustments during next year’s accounts.

3. (i)    Claims Receivable (Rs.244.57 crore) were overstated by Rs.40.16 crore due to inclusion of:

1. Old claims ranging in antiquity from 15 to 29 years, lodged on various shipping agents and aggregating to Rs. 21.57 crore;
2. Railway claims on account of excess payment of freight prior to 1989-90 aggregating to Rs.15.18 crore;
3. Railway claims of Pune district pending since 1971-72 aggregating to Rs.2.34 crore; and
4. Other old claims on railway aggregating to Rs.1.07 crore.

Management agreed to review the claims and to carry out necessary adjustments during next year.

(ii)    Claim Receivable were understated by Rs.17.73 crore due to non-inclusion of claims for storage losses recoverable from Central Warehousing Corporation (CWC) and Punjab State Warehousing Corporation (PSWC). The reply of the management that shortages were to be investigated and placed before the committee is not tenable since no action had been taken.

4.    Book debts (unsecured) (Rs.4599.04 crore) were overstated to the extent of Rs.44.29 crore recoverable from Ministry of Agriculture, Department of Fertilisers, which stands rejected by the concerned Ministry in January 1993, on account of non-regularisation of shortages by management before 8 March 1992 as per the arbitration award. Management reply that the Ministry had agreed to reimburse if regularised, is not tenable since the amount was yet to be regularised by the Corporation.

5.    Consumer subsidy of Rs.7712.43 crore on food grains reimbursable by Government of India was overstated by Rs.43.33 crore due to inclusion of loss in value of food grains due to deterioration in the quality in the absence of any norms prescribed by the Corporation in this regard. This resulted in claiming of excess subsidy from the Government to that extent. Management agreed to take up the matter with Government of India for review of subsidy principles.

6.    Sales (Rs.12089.99 crore) were overstated by Rs.131.77 crore due to accounting of sale of wheat and rice under Mid Day Meal scheme and to Defence Services at estimated economic cost. Management stated that sales realisation booked in the accounts was based on the estimated economic cost. The reply of the management is not tenable since adjustment on account of final cost should have been provided for in the accounts.

B.    Weakness in System of Internal Control and Book Keeping:

1.    Internal audit system was not adequate and commensurate with the size and nature of the business of the Corporation. Weakness in the internal audit was observed by the Branch Auditors in most of the regions of the Corporation. As a result of these weaknesses, there was no assurance to external auditors regarding the adequacy and effectiveness of internal controls and reliability of its annual financial statements. Management agreed to strengthen the internal audit at regional level by providing additional qualified personnel.

2.    Physical verification of fixed assets as on 31 March 1998 was not conducted in District Office, Srinagar; Regional Office, Jammu; Delhi Region, Zonal office (North); FCI Headquarters; District units of Port Depot; Non-Port Depot, Durgapur and District Office, Siliguri. Management had conducted the physical verification in 1999-2000.

3.    Fixed Asset registers were not properly maintained to exhibit complete details of gross and net value including quantitative details, situation/location, item-wise cost and depreciation in respect of fixed assets in most of the regions. Management stated that administrative instructions had again been reiterated for the remedy of shortcomings.

4.    The recovery of Government of India loan from sugar mills and refunded to Government of India had not been entered in Receipt & Payment Account. Management stated that the recovery of the Government of India loan from sugar mills and refund thereof to the Government of India did not form part of Sugar Price Equalisation Fund (SPEF). The reply is not tenable. Being a vital transaction undertaken by FCI on behalf of Government of India, it should have been disclosed by way of note to SPEF account.

5.    In order to exercise control over purchase/receipt of food grains according to prescribed specifications, a system of surprise checking of food grains in the depots by Head Office, Zonal Office and Regional Office Squad was in place. It was seen in audit in Haryana region that the system was not functioning properly. The working of this system was not seen in other regions of FCI.

6.    In West Bengal region, annual physical verification could not be done and stock holding certificates could not be obtained from State Warehousing Corporation (SWC), Storing agents, Rice millers etc. in respect of stocks lying with them as on 31 March 1998 valuing Rs.2.73 crore. Management agreed to carry out necessary adjustments during 1998-99.

MINISTRY OF DEFENCE

Department of Defence Production and Supplies

1.    As per AS-13 the current investment (short term investment) is to be valued at lower of cost or fair value. The investment of Rs. 4.96 crore in US 64 scheme of the Unit Trust of India (UTI) held by the Company had been valued at fair value as on the Balance Sheet date. However, the value of investment had been eroded considerably and sale and redemption was suspended by the UTI during the period between Balance Sheet date and the date on which Board of Directors approved the financial statements. This had not been disclosed as required in para 15 of AS-4.

Management stated that since the scheme was under suspension by UTI. The losses, if any, could not be quantified.

Reply is not acceptable as even if the losses could not be quantified, disclosure of the event that represent material change affecting the financial position of the Company, should have been made as required in AS-4.

2.    Inventories included Rs.1.11 crore being the cost booked for a work order pending for the last 9 years for want of customer’s order. Non-provision resulted in over-statement of work-in-progress and profit by Rs.1.11 crore.

Management stated that the materials drawn against this work order were physically available and not considered as obsolete and hence not considered for necessary provision. The material would be consumed when customer order materialises.

Reply is not tenable as the Company had not manufactured the equipment after 1991-92 and there was no production plan to manufacture the equipment in 2001-02 also.

3.    Raw material and components included Rs.2.94 crore being the value of inventories pertaining to equipment not moved for the last five years. Non-provision for obsolescence had resulted in over-statement of inventories and profit by Rs.2.94 crore.

Management stated that due to market conditions, the market off-take had been slow. The material inputs were in good condition and hence not considered obsolete.

Reply is not tenable as the Company was carrying the inventory for the last five years, hence suitable provision for obsolescence for non-moving material was required to be made.

4.    Income was overstated by Rs. 5.41 crore being the sales set-up on FOR destination basis. As the contractual obligation regarding FOR destination was not fulfilled as of 31 March 2001, accounting of such sales resulted in over-statement of sales and Sundry debtors by Rs.5.41 crore with over-statement of profit by Rs.2.24 crore and under-statement of inventories by Rs.3.17 crore.

Management stated that that the sales had been set-up within the ambit of Accounting Standards by fully complying with the requirements there under and consistent with accounting policy being followed.

The reply of the management is not tenable as the contractual obligations regarding FOR destination sales were not fulfilled as on March 2001.

1.    Inventories included Rs. 1.29 crore representing stores and spares (Rs. 27.72 lakh), Raw materials and components (Rs. 42.50 lakh), Finished Goods (Rs. 1.63 lakh) and work-in-process (Rs. 57.12 lakh) pertaining to TV Guns. Since the production of TV Guns had been discontinued due to product obsolescence, suitable provision should have been made for diminution in the value of inventory. Non-provision on this account resulted in over-statement of inventory and profit by Rs. 1.29 crore.

Management stated that during the last three years, sale of Rs.1.48 crore had been effected from TV Guns assembly which was still operational. Since the items were saleable, no provision was considered necessary

The reply of the management is not acceptable as the demand for black and white TVs for which these guns were being used had drastically fallen and hence production of guns was discontinued. TV gun production had been discontinued and it was no longer in operation as claimed by the Company. Utilisation of these inventory items was, therefore, doubtful and hence should have been provided for in the accounts.

2.    Raw materials and components included an amount of Rs. 1.33 crore representing the inventory not moved for more than 5 years. As these items could not be utilised, suitable provision should have been made. Non-provision on this account had resulted in over-statement of inventory and profit by Rs. 1.33 crore.

Management stated that the inventory of Rs.1.21 crore was identified as useful in various on-going projects and for after sales service. Inventory identified as unusable, was fully written off. In view of the above, no provision was considered necessary.

The reply of the management is not acceptable as the entire non-moving inventory was more than 5 years old. Equipment for which these items related were already under regular production.

3.    A reference is invited to comment no. 1 (i) of the Comptroller and Auditor General of India on the accounts of the Company for the year ended 31 March, 2000 wherein non-existence of provision for the obsolescence in respect of surplus raw materials and components due to design change/engineering modifications was commented. Though the surplus materials valued at Rs. 56.22 lakh remained unutilised as on 31 March, 2001, no provision for obsolescence was made resulting in under-statement of provision for obsolescence and over-statement of profit by Rs. 56.22 lakh.

Management stated that these items were reviewed for their usage in the existing/future projects. Items valued at Rs.16.77 lakh were utilised during the last two years i.e., 1999-2000 and 2000-01. Further, as these materials were usable and not obsolete, no provision was considered necessary.

The reply of the management is not acceptable as these items were declared as surplus during 1997-98 and 1998-99. During the last two years items costing Rs.16.77 lakh only could be utilised and hence as a prudent accounting practice, provision should have been made in the accounts for the balance surplus items.

4.    A reference is invited to comment no. 2 (a) (ii) of the Comptroller and Auditor General of India on the accounts of the Company for the year ended 31 March 2000, regarding non-provision of doubtful debts amounting to Rs. 1.94 crore due from a customer since 1990-91. Though the customer already stood referred to BIFR and there was no progress in the recovery of dues, no provision had been made in the accounts. Non-provision on this account had resulted in over-statement of sundry debtors and profit by Rs. 1.94 crore.

Management stated that the customer was a PSU and had substantial assets. The Company was pursuing for appropriate approvals to continue civil proceedings. As the Company expected to recover the amount, no provision was considered necessary.

The reply is not acceptable, as BIFR had not even permitted the Company to pursue the legal case. Though this was a PSU customer, the recovery of dues was doubtful, as no progress had been made in the recovery for several years.

5.    A reference is invited to comment no. 2 (a) (iv) of the Comptroller and Auditor General of India on the accounts of the Company for the year ended 31 March 2000, regarding non-provision of doubtful debts amounting to Rs. 3.73 crore due from a customer. There was no progress in realisation of the amount and the Company reversed sales during the year for the items short supplied to the extent of Rs. 36.40 lakh and sundry debtors had been reduced to Rs. 3.37 crore. However, no provision had been made for this amount in the accounts. This resulted in over-statement of sundry debtors and profit by Rs.3.37 crore.

Management stated that it was a debt due from a Government customer. The amount was withheld as one of the critical components purchased from USA had failed. The supplier had confirmed that the item had been repaired awaiting lifting of US sanctions for despatch. Hence no provision was considered necessary

Reply of the management is not tenable as the repair work had been suspended after May 1998. Even after supply of the repaired item, it was not sure whether the customer would accept the part and whether that item would be fit for use.

6.    A reference is invited to comment no. 2 (b) of the Comptroller and Auditor General of India on the accounts of the Company for the year ended 31 March 2000, regarding incorrect setting up of sales to the extent of Rs.23.42 crore in 1998-99. Even as on 31 March 2001, the Company had not completed the despatch of full equipment nor had the product reached 100 per cent completion. This should have been accounted for under work-in-progress.

Management stated that product was complete in all respects and had been accepted by the customer after inspection. Further, Rs.23.42 crore being the value of deliverables, which were unconditionally accepted by the indenting authority, were accounted as sales as per AS-7 and AS-9. Customer’s instructions for the despatch of the equipment were awaited. This was to be despatched in October/November 2001.

The reply of the Company is not tenable as testing and inspection had not yet been completed to the extent of 100 per cent (completed to the extent of 98 per cent as on 31 March 2001) and the unconditional acceptance of deliverables was not stipulated in the contract. The customer had not cleared the despatch of the equipment so far. As per the terms of the MOU, the Company should suitably pack and transport the system duly insured under escort to Naval dockyard by road. This had not been done even during 2000-2001.

7.    A reference is invited to comment no. 2(v) of the Comptroller and Auditor General of India on the accounts of the Company for the year ended 31 March 2000 about non-provision for doubtful doubts amounting to Rs. 78.67 lakh, towards liquidated damages for delayed supply of equipment, leviable by a customer as per contractual terms. In addition, sundry debtors included an amount of Rs. 99.47 lakh being the liquidated damages for delayed supply of equipment, leviable by other customers. Non-provision on this account resulted in over-statement of sundry debtors and profit by Rs. 1.78 crore.

Management stated that the Government customer had not recovered any liquidated damages. The customer had released an amount of Rs.11.63 lakh in March/ June 2001 without deducting any Liquidated Damage (LD). Amounts of Rs.99.47 lakh were due from Government customers. The orders had been executed during the period of US sanctions and the Company was confident that LD would not be levied. Since the debts were realisable, no provision was considered necessary.

Reply of the management is not tenable as LD was payable as per the contract. No order for waiver of LD had been received.

8.    Sundry debtors also included Rs. 1.53 crore being outstanding dues against supplies made in March 1997. As the dues were doubtful of recovery, suitable provision should have been made. Non-provision on this account resulted in over-statement of sundry debtors and profit by Rs. 1.53 crore.

Management stated that supplies were effected as required by the customer. Amendment to the order was under process by Government and was expected shortly and the balance payment would be realised. Hence, provision was not considered necessary.

Reply of the management is not tenable as supplies made were not as per the contract and no amendment has been received for the change in supplies.

9.    Sales included Rs. 56.10 crore being the sale value of 6 numbers of equipment. As per the terms of the supply orders, the sale was to be set up on FOB basis. The equipment were despatched through Railways in June/July 2001. Thus, setting up of sales during the year 2000-2001 resulted in over-statement of sales by Rs. 56.10 crore, under-statement of finished goods by Rs. 40.72 crore and over-statement of profit by Rs. 15.38 crore.

Management stated that since the goods were produced, inspected and accepted by customer before 31 March 2001 and were awaiting instructions from the customer regarding destination and escort, the sale was complete as per AS-9.

The reply is not tenable as the sales were on FOB basis and goods were actually despatched in 2001-02 and as such setting up of sales in 2000-01 was incorrect.

10.    Sales included Rs. 30.90 crore being the sale value of equipment and spares. As per the terms of the supply orders the delivery was to be made in Russia on FOR basis. The consignments were handed over to the air cargo carriers after customs clearance during April to July 2001. But the sale was set up as on 31 March 2001. This resulted in over-statement of sales by Rs. 30.90 crore, under-statement of finished goods by Rs. 25.49 crore and over-statement of profit by Rs. 5.41 crore.

Management stated that the equipment was manufactured, inspected, accepted by customer and handed over to carrier by 31 March 2001. The sale was on FOR/ FCA Bangalore basis. Hence the accounting of sale was as per Section 23 (2) of Sale of Goods Act and AS-9 and was in order

Reply of the management is not tenable as the airway bill issued by Air cargo carriers after customs formalities was a legal document of transfer of significant risks to the buyer. This was done only during April 2001 to July 2001. The transit insurance of the consignment was also done on or after date of airway bill (i.e. after 31 March 2001). As the significant risk was not passed on to the buyer on or before 31 March 2001 the recognition of sale in these cases was not correct as per Sale of Goods Act and AS-9 .

MINISTRY OF FINANCE

Loans and advances included Rs.56.37 crore being the interest up to March 2001 accounted for as recoverable from the Government of India for purchase of plant and equipment for Nasik and Dewas press. In the absence of any agreement with the Government of India regarding rate of interest and other terms of payment, accounting of interest as receivable resulted in over-statement of loans and advances and reserves & surplus by Rs.56.37 crore.

Management stated that in the absence of any formal agreement the amount actually paid to RBI as interest on the expenditure incurred for procurement of plant and machinery for Nasik and Dewas press had only been accounted for as interest receivable.

Reply of the management is not tenable as there was no agreement with the Government of India as on 31 March 2001 regarding interest and other terms of payment.

In violation of non-banking finance company prudential norms (Reserve Bank) directions 1998, the Company made reversal of provisions made in the earlier years (Rs.2.39 crore) and ignored to make further provision during the year (Rs.0.93 crore) on a non-performing asset. The profit before tax was over-stated by Rs.3.32 crore.

Management stated that no provision was required as they had valid recourse in respect of this non-performing asset. The reply of the management is not tenable as the lessee in respect of this non-performing asset had not made repayments and was referred to BIFR.

Net profit of Rs. 46.27 crore for the year was overstated by Rs. 9.73 crore due to the following:

1.    Loan of Rs. 14.32 crore advanced to four companies was not backed by any tangible security. The Company had made a provision of Rs. 6.50 crore for doubtful recovery of these loans. As net worth of these companies had been fully eroded, full provision should have been made for doubtful recovery of these loans. The shortfall in provision resulted in over-statement of profit by Rs. 7.82 crore.

Management stated that considering the available asset coverage for lending in these companies, provisions had been made as per RBI guidelines.

Management’s contention is not acceptable because commercial prudence demanded full provision against the loans as the same were not backed by any tangible security and the net worth of the borrowers was negative.

2.    Loan of Rs. 13 crore advanced to another company was secured by assets to the extent of 79 per cent. The Company had made a provision of 30 per cent for doubtful recovery of the loan. As the borrowing company had been referred to BIFR, full provision should have made for unsecured portion of the loan. The shortfall in provision resulted in over-statement of profit by Rs. 1.91 crore.

Management stated that considering the available security based on valuation of fixed assets of the borrowers, provision had been made as per RBI guidelines.

Management’s contention is not acceptable as 21 per cent of the loan was not secured by assets and hence full provision should have been made for unsecured portion of the loan.

1.    Estimated capital commitments remaining to be executed did not include Rs.2.14 crore being the estimated liability towards stamp duty and registration charges of land and house properties for which title deeds in favour of the Company were yet to be registered.

Management noted the audit comment.

2.    An amount of Rs.106.54 crore representing various items of accounts relating to advances or deposits such as advances given for purchase of house property, pre-paid expenses, gratuity fund, electricity deposit, telephone deposit, etc., which were incorrectly classified as Sundry debtors as they did not represent any amount receivable by the Company towards goods supplied or services rendered by the Company.

Management noted the audit comment.

3.    Excess recovery of engineering claim from reinsurers against a claim paid during the year resulted in under-statement of commission on reinsurances ceded by Rs.0.19 crore and overall loss transferred to Balance Sheet by Rs.2.93 crore .

Management noted the audit comment.

MINISTRY OF HEAVY INDUSTRY & PUBLIC ENTERPRISES

Profit of Rs.1.74 crore for the year was overstated by 89.37 lakh due to non-provision of liability on account of interest on Government of India loan.

Management noted the comment.

Loss of Rs. 45.22 crore for the year was understated by Rs.95.84 lakh due to non-provision for doubtful recovery of old claims for Rs.56.62 lakh pertaining to 1989-90 to 1993-94 and non-accounting of credit notes issued against previous claims on Railway (Rs.39.22 lakh).

Management noted the comment for compliance.

Net loss of Rs. 189.26 crore during the year has been understated by Rs. 141.10 crore due to the following:

1. (i)    Inventory of finished and semi-finished goods had been overstated by Rs. 8.53 crore due to valuation of non-marketable goods at sales price instead of scrap rate/re-usable value i.e. 50 per cent of sales price.

Management stated that the items included standard product, spares for shovels and steel plant equipment coal tar etc. which were saleable and regularly needed by our customers. These items, therefore, could not be treated as scrap or unusable.

Management’s reply is not tenable in view of the fact that the Company manufactured tailor-made engineering products for its customers. Since the finished goods/equipment had been lying in the stock for a period of more than four to five years due to non-lifting by the customers, these goods could not be sold as a general purpose equipment. Thus, at least 50 per cent provision should have been made against these stocks.

(ii)    Consumption of raw materials and components understated by Rs.6.91 crore due to excess accounting than their actual physical balance and also the Company’s unrecoverable inventory lying with the private parties for more than 3 years.

Management stated that the materials like scrap, sand blooms were directly unloaded on the shop floor, although not appearing in bin card, but were available in different shops/locations near the shop. Reconciliation of the balances of bin card and Store Price Ledger (SPL) would be made in the next financial year and discrepancy, if any, would be accounted for on yearly basis. Regarding material lying with private parties, the matter had been taken up with them for settlement and, if required, necessary adjustments would be made from their bills.

Management’s reply is not correct as the shops were having sub-stores and maintaining bin cards for the items in question. As regards materials lying with private parties, the Company had neither asked the parties to return the materials nor initiated any action to recover the cost of materials from the parties.

2.    Sales tax liabilities for Rs.2.09 crore not charged from the customers had not been provided.

Management stated that the amount was realisable from the customers on billing after confirmation /reconciliation.

Management’s reply is not acceptable in view of the fact that contract had been closed long back and no final bills were raised against the customers for recovery of sales tax.

3.    Liability on account of electricity charges of Rs.66.99 crore payable to Electricity Board had not been provided for.

Management stated that State Government had agreed in consultation with Bihar State Electricity Board (BSEB) to charge consumption of power in township at domestic rate, although the billing was being done at industrial rate. The matter was under dispute. Pending reconciliation, amount had been shown as contingent liability.

Management’s reply is not tenable as the delayed payment surcharge on the arrears of amount of electricity was payable as per clause 16.2 of the power tariff of BSEB. Hence, provision should have been made.

4.    Provision for debtors of Rs. 37 crore against non-accrued erection/commission charges and disputed escalation /excise duty had not been made.

Management stated that revenue had been recognised as there was no uncertainty of realisation of the balance amount receivable on commissioning. This was in accordance with accounting policy. Further, erection was not within the scope of the contract and hence there was separate price for erection work. Regarding escalation/excise duty, the matter was being pursued regularly and realisation was expected shortly.

Management’s reply is not acceptable in view of the fact that claims towards escalation/excise duty had been disputed and were pending for more than 5 to 10 years. As such realisation was uncertain and doubtful. Further, accounting of 10 to 20 percent of total sales was not justified as erection/commissioning charges had actually not been crystallized till 31 March 2001.

5.    Provision for Rs.15.84 crore was not made for towards against penal interest on defaulted Employees’ Provident Fund (EPF).

Management stated that provision had been made at normal rate of 12 per cent as per assessment order issued by Provident Fund Authorities. This was in accordance with EPF Act for BIFR referred companies.

Management’s reply is not acceptable since the Company had defaulted in payment of Provident Fund, the penal interest was payable as per Section 14(B) of EPF Act. Further, in view of recent direction issued by Law Ministry, the BIFR referred company would have to make the payment of PF as per provisions of EPF Act, failing which they would be liable to pay penal interest.

6.    Prior-period adjustment (net debit balance) was understated by Rs. 3.74 crore due to non-inclusion of arrear dues against water charges payable to State Government.

Management stated that provision for increase of water charges had been made from the date of receipt of the order. However, increase for retrospective period had been protested and shown under contingent liabilities.

Management’s reply is not tenable as the State Government had not considered the Company’s protest and demanded payment of arrears of water charges.

Loss of Rs.71.41 crore for the year was understated by Rs.3.92 crore due to treatment of a portion of leave encashment and gratuity, paid to employees on voluntary retirement, as deferred revenue expenditure instead of charging the same to Profit & Loss account.

Management stated that only the portion of leave salary which was in excess of annual actuarial valuation and the portion of gratuity which was not available under Group Gratuity Scheme had been considered as Deferred Revenue Expenditure as these were unusual expenditure which had arisen due to premature separation of large number of employees.

Reply is not acceptable because gratuity and leave encashment paid on VRS accrued in normal course and, therefore, should have been charged to Profit & Loss account.

Other expenses were understated by Rs.40.00 lakh representing stamp duty payable to State Government on the increased Authorised Share Capital from Rs.25.00 crore to Rs.80.00 crore. This resulted in under-statement of loss for the year by Rs.40.00 lakh and current liabilities to the same extent.

Management stated that the matter regarding waiver of stamp duty on increase in authorised share capital had been taken up with appropriate authorities and in view of this, no provision was made.

Reply of the management is not tenable as the stamp duty had not been waived. Therefore, provision should have been made for the same.

Net loss was understated by Rs.1.79 crore due to non-provision of liabilities on account of (i) railway tollage charges-Rs.48.53 lakh, (ii) electricity duty on township consumption-Rs.25.55 lakh and (iii) pay & allowances and other charges of CISF-Rs.1.04 crore.

Management stated that contingent liabilities were provided for in respect of point (i) and (ii) and point (iii) had been noted for action.

The contention of the management in respect of (i) and (ii) is not acceptable as the management approached the Certificate Officer for non-enforcement of the payment and, therefore, there was confirmed liability on these accounts.

Non-accounting of expenditure of Rs.1.89 crore towards sub-contracting/labour charges etc. on a project resulted in under-statement of loss for the year as well as current liabilities & provisions by the same amount.

Company while accepting the mistake stated that job under question was still under progress and the actual expenditure would be booked in current year.

1.    Contract work-in-progress (WIP) included three projects undertaken between 1981 and 1989 valued at Rs.42.27 lakh. The Company had not been able to transfer the expenditure to sales due to (i) non-completion of final testing/commissioning, and (ii) non-extension of contract period by the customer. As there was no response from the customer since 1995, the chances of releasing the expenditure to the sales were very bleak and required to be charged off in the accounts. This resulted in over-statement of contract WIP and profit by Rs.42.27 lakh.

Management stated that it was confident of converting WIP into sales.

The reply is not tenable as the WIP related to a period which was more than 20 years old and there was no possibility of completion of the balance work.

2.    This included Rs.90.24 lakh due from a customer in respect of a project kept in abeyance. As the customer was BIFR referred, the realisability of the amount was doubtful and hence a provision of Rs.82.94 lakh (after adjusting advance of Rs.7.30 lakh) was required to be made. Non-provision of the same resulted in over-statement of sundry debtors and profit by Rs.82.94 lakh.

Management stated that necessary adjustments would be made in the books of accounts on final settlement by BIFR.

MINISTRY OF PETROLEUM AND NATURAL GAS

1.    Sundry debtors included a net debit balance of Rs. 121.16 crore made up of 2.16 lakh debit items amounting to Rs. 4134.40 crore and 1.33 lakh credit items amounting to Rs. 4013.24 crore remaining unlinked, of which 1.07 lakh items remained unreconciled for more than two years. In view of non-reconciliation of these items sundry debtors balance could not be considered to be correct.

Management stated that the unreconciled items were mainly due to non-adjustment of advance payments made by the customers. Further, its clearance was a continuous process and had no material impact on debit balance.

Management’s reply is untenable as the large number of unreconciled and unlinked debits and credits indicated a system deficiency.

2.    Loans and advances included an excess claim on Oil Co-ordination Committee (OCC) to the extent of Rs. 1.00 crore due to erroneous calculation of amount reimbursable from Pool Account towards long term settlement in respect of non- management staff. Consequently, loans and advances were over-stated and net recovery from/payment to Industry Pool Account under-stated with consequential over-statement of profit.

Management admitted the mistake and committed that necessary corrections would be made in the next year’s account.

3.    Stores consumption included stores valued Rs. 1.28 crore lying in stock at LPG Bottling Plants and other 14 locations as at the end of the year resulting in over-statement of consumption of stores, spares and materials and under-statement of inventory of stores and spares with consequential under-statement of profit. The value of such stocks lying at other locations could not be determined in the absence of information.

Management stated that in view of large number of low value inventory maintaining separate stores accounting for each of these locations was not considered necessary. However, this aspect had been addressed with the implementation of SAP where such stores item could be conveniently inventorised at the up country locations.

Management’s reply is untenable, as the unutilised material lying at locations could not be treated as consumption and might give scope for defalcation/fraud in stores accounts.

4.    Depreciation provided during the current year was over-stated by Rs. 349.92 crore due to provision of depreciation on LPG cylinders procured during the year at 100 per cent instead of 16.21 per cent applicable according to Note to Accounts and the proviso thereunder in Schedule XIV of the Companies Act, 1956.

Management stated that they had been following a consistent policy of providing depreciation on LPG cylinders at 100 per cent which was higher than the rate prescribed in Schedule XIV to the Companies Act, 1956 and was also in line with the A S-6 issued by the Institute of Chartered Accountants of India.

Management’s reply is untenable. While providing 100 per cent depreciation, the Company had not ensured compliance to the condition that aggregate value of such items should not exceed 100 percent of total cost of plant & machinery. Other oil PSUs had shifted to charging normal depreciation rates in respect of LPG cylinders.

The provision for taxation was understated by Rs.2.47 crore being the income tax including surcharge (Rs.0.06 crore) and interest (Rs.0.69 crore) on non-deduction of TDS on canteen subsidy paid to employees up to the year 1999-2000 in violation of Income Tax Act, 1961.

Management stated that such expenses reimbursed to the employees were within the prescribed monetary limit under Income Tax Act, and therefore, non-taxable in the hands of employees as taxable perquisites.

The contention of the management is not tenable since the amount was paid directly to the employees and not through the canteen contractor, as required under Income Tax Act, 1961. Hence the payment was perquisite in the hands of employees.

1.    Advances for capital expenditure included an amount of Rs.1.36 crore as recoverable under a bank guarantee on which an injunction was granted in September 1998. No provision has been made against this amount.

Management stated that as the matter was sub-judice, it was not felt necessary to make any provision on this account.

The reply is not tenable as the amount of advance backed by bank guarantee, which was not alive, should have been provided as doubtful of recovery considering the nature and period of dispute.

2.    Profit for the year was overstated by total Rs.67.58 crore on account of short provision of depreciation by Rs.8.78 crore on tele-supervisory system, accounting of Rs.7.97 crore being interest accrued, Rs.2.39 crore towards export incentive on the basis of entry in Duty Entitlement Pass Book scheme and Rs.48.44 crore on account of claims on Oil Co-ordination Committee in contravention to the accounting policy which provided for accounting of such claims on realisation basis. The Company had also written back a claim of Rs.21.82 crore accounted for in 1999-2000 on accrual basis and shown the amount as prior-period expenses in the current year.

Management assured to amend the accounting policy relating to the claims in the next financial year.

3.    The fact that lease deed for 183880 square meters of land at Jaipur costing Rs.1.20 crore was yet to be executed in favour of Company had not been disclosed. The Management accepted the comment.

1.    Microbial Desulphurisation Process Plant (MDPP) was capitalised in March 1998 for Rs.13.26 crore, on which depreciation of Rs.4.46 crore had been charged. The plant was capitalised without successful trial runs and was lying idle and in-operative since then due to design/manufacturing defect. This should have been shown at the lower of net book value or net realisable value.Management stated that matter was under review for alternative course of action.

2.    Plant and Machinery was over-stated by Rs.63.20 crore on account of non-adjustment of Rs.63.20 crore recovered from LPG cylinder manufacturers towards rate difference recovery. The treatment given by the Company was different from other public sector undertakings in the oil sector who had capitalised only when the amount paid was to the cylinder manufacturers. Consequently, depreciation and loans & advances - claim on oil pool account were also over-stated by Rs.13.96 crore.
Management stated that the matter was under dispute and adjustment could be carried out only after the dispute was settled. The reply of the management is not tenable as other oil PSUs viz. HPCL, BPCL & IBP had adjusted/de-capitalised the above amount, but the Company had deviated from the practice followed by other oil PSUs.

3.    After change of accounting policy in the current year to provide depreciation as per Schedule XIV of the Companies Act, 1956, the Company had not written back the excess depreciation of Rs.1022.45 crore provided in earlier years due to non-adoption of Schedule XIV without a bonafide technological evaluation on LPG cylinders and pressure regulators purchased upto 1999-2000. This resulted in over-statement of accumulated depreciation and loans & advances - amount recoverable from industry pool account by Rs.1022.45 crore.

Management stated that the Oil Co-ordination Committee (OCC) had revised the compensation of depreciation at the rate of 16.21 per cent with effect from 1 April 1998 during 2000-2001.

The reply of the management is not tenable as depreciation charged in excess of Schedule XIV of the Companies Act, 1956 was not permitted without the bonafide technological evaluation. Therefore, over-charged depreciation should have been written back accordingly.

4.    Other income included Rs.295.69 crore being the amount of non-refundable deposit collected under the Tatkal LPG connection scheme during the years 1995-96 to 1999-2000. This should have been shown as prior-period income instead of current year’s income. This resulted in over-statement of profit and income for the current year and under-statement of prior-period income by Rs.295.69 crore. Management stated that OCC had conveyed the decision to account for the deposit in 2000-2001 and accounting treatment was in line of AS-5.

The reply of the management is not tenable because as per the opinion of the Expert Advisory Committee of ICAI, the amount should have been accounted for as income in the year of receipt. This was also in contravention of AS-5.

5.    According to accounting policy, claims on OCC/Government arising on account of Administered Price Mechanism (APM) are accounted for as income on acceptance in principle. But in the following cases income was recognised without acceptance in principle by OCC/Government. (i) An amount of Rs.367.73 crore on account of sales tax recoverable from Foreign Airlines had been refused for payment. The claim in respect of this had also not been accepted by the OCC/Government. This resulted in over-statement of sundry debtors and profit by Rs.367.73 crore. Management stated that above amount was recoverable from foreign airlines. The view of the management is not tenable as the sale tax was not covered under bilateral agreement between Indian Government and the Governments of foreign airlines. (ii) An amount of Rs.17.38 crore being the amount claimed from OCC in respect of customs duty based on vessel ullage for the period from 1994-95 to 1997-98 was rejected by OCC in March 2001. This resulted in over-statement of profit and claims recoverable from industry pool account by Rs.17.38 crore.Management stated that as per APM, the full cost towards customs duty was reimbursable and OCC had withheld the amount in view of divergent views of different Judicial authorities. The fact remains that OCC had rejected the claim.

1.    Other current assets included Rs.15.89 crore being the amount of interest accrued up to March 1999 on loans (Rs.15.00 crore) given to two PSUs in the year 1989. Recovery of these loans and interest had not been secured by any guarantee. Provision on this account was not made.

Management stated that amounts were overdue from PSUs and Company was pursuing with concerned PSUs for recovery of principal as well as interest thereon.

The reply of the management is not tenable as the loan given in 1989 to two PSUs was not secured and as such recovery of loan amount and interest was doubtful.

2.    Expenditure was under-stated by Rs.122.10 crore on account of following:

(i)    Rs.41.54 crore on account of allocation of expenditure during the year on consumption of spare parts and workshop services/repairs to different services and consequently to Exploratory Wells-in-Progress and Producing Properties, which should have been expensed as cost of repairs.

Management stated that as per the consistent practice followed by the Corporation, the expenditure was first accounted for under the various support services and then allocated to the various activities.

Management’s reply is not tenable as the expenditure on repairs and replacement (including expenditure on spares) of equipment was a normal maintenance cost and had to be expensed instead of capitalising to different activities.

(ii)    Rs.2.54 crore on account of expenditure on inland freight incorrectly booked under Advances.

Management agreed to carry out necessary adjustment in the year 2001-02.

(iii)    Rs.10.92 crore due to non-consideration of depreciation on a Gas Sales Pipeline in a joint venture as per the accounting policy.

Management stated that necessary accounting adjustment would be carried out in the year 2001-02.

(iv)    Rs.8.26 crore on account of non-expensing of cost of idle rig days (waiting for ready site/staff/material etc.) during the year.

Management stated that these cases were normal in cycle idle days and not covered under the accounting policy. Hence these were not been charged in Profit & Loss account.

Management’s reply is not tenable. As per Company’s instruction contained in circular dated 31 January 2000, expenditure on abnormal idle rig days was to be charged to Profit & Loss account.

(v)    Rs.4.56 crore on account of expenditure on repairs and replacement of drilling rig equipment, incorrectly capitalised.

Management stated that systems, which were adopted in place of the earlier one, resulted in upgradation and enhanced the performance of the system. It was an addition to fixed asset and hence the same was capitalised.

Management’s reply is not tenable as the expenditure was incurred on replacement of the worn out parts of the entire system. It had neither increased the operational efficiency of the rig nor had prolonged the total estimated life of the rig. As such, this expenditure should have been charged to the Profit & Loss account.

(vi)    Rs.8.20 crore on account of interest on additional land compensation payable as per High Court order of December 2000 for land acquired but capitalised. Similar expenditure in Ahmedabad, Ankleshwar and Mehsana projects had been expensed.

Management stated that such payments made at Hazira project were relating to acquisition of land and were apparently attributable to land cost.

Management’s reply is not tenable as in other projects of ONGC, the payment of interest on land compensation was treated as revenue expenditure and was charged to Profit & Loss account.

(vii)    Rs.17.57 crore on account of undercharge of depletion in respect of Mumbai High Field, which had been calculated by adopting a figure of recoverable reserves higher than Company’s total estimated production of hydro-carbons from the field up to the year 2030, based on the available facilities.

Management replied that as per the accounting policy, the reserves as approved by Reserve Estimates Committee (REC) were being considered conservately for working out the depletion since 1985-86.

Management’s reply is not tenable. As per REC chart, the reserves in respect of Bombay High Field as on 1 April 2000 were 148.78 Million Metric Tonne (MMT). However, as per re-development plan (June 2001), the Company had estimated 139.337 MMT reserves for next 30 years counting from April 2000. Company should have conservatively adopted lower figure 139.337 MMT for working out depletion.

(viii)    Rs.2.86 crore on account of non-provision towards terminal benefits payable to field workers (working since 1977-1999) for their continuous past service, as per Memorandum of Settlement of January 2001.

Management replied that payment of one time lump-sum terminal benefit was subject to the condition that pending court cases would be withdrawn by the two Unions. As no court case had been withdrawn, no liability was provided for.

Management’s reply was untenable as Company had accepted the liability for payment of terminal benefits when the agreement was signed with the Unions. Therefore, this liability should have been been recognised in the accounts.

(ix)    Rs.6.35 crore on account of undercharge of depletion due to non-consideration of Profit Petroleum given to the Government, as per provisions of the Production Sharing Contract, as part of production.

Management replied that necessary accounting adjustment would be carried out during 2001-02.

(x)    Rs.74 lakh on account of value of stores and spares issued for consumption during the year to the wells, which were subsequently abandoned as dry wells.

Management replied that necessary accounting adjustment would be carried out during 2001-02.

(xi)    Rs.12.95 crore on account of under-provision against the value of stores and spares found discrepant during physical verification.

Management replied that reconciliation of inventory was in process and the final discrepancy report was expected in 2001-2002. Thereafter, adjustment if any, would be carried out in the books of accounts.

(xii)    Rs.4.10 crore on account of carried over expenditure on four exploratory locations where activities ceased between August 1996 and July 1997, which should have been expensed in line with Company’s policy of expensing such costs.

Management stated that these exploratory locations fall under the blocks for which Government of India had invited the bids. Hence, these locations had been retained as exploratory wells-in-progress.

Management’s reply is not tenable as the expenditure on these locations, incurred more than three years back, was required to be expensed keeping in line with the accounting policy of the Company.

(xiii)    Rs.1.51 crore on account of claims pertaining to the period till 1988-99 on account of services provided to a joint venture, which had been disputed and rejected.

Management stated that necessary accounting adjustment would be carried out in the year 2001-02.

Profit of the Company was overstated by Rs.6.14 crore due to non-provision towards impairment of a well which was included in the producing properties (net) at Rs.6.30 crore being the cost of successful well in Gulabwalla which was not being exploited for reasons of commercial viability. As net realisable value of gas from this well was estimated at Rs.15.86 lakh only, the Company should have provided for difference of Rs.6.14 crore. Similar comment was taken on last year’s accounts.
Management stated that the wells in Gullabwalla field in Rajasthan were hydro-carbon bearing and would be exploited after settling the pricing issue.

MINISTRY OF POWER

1.2.42    Nathpa Jhakri Power Corporation Limited

Loans and advances included Rs 13.42 crore deposited with the High Court, Shimla on account of claims of landowners for enhancement of compensation, which should have been shown under the head Advance for capital works instead of Loans and advances.

Management noted the comment.

1.    Insurance claim of Rs.1.57 crore lodged in August 1994 had not yet been decided. This should have been provided for in the accounts. This resulted in over-statement of current assets as well as profit by Rs.1.57 crore.

Management stated that the claim was under consideration at the headquarters of the insurance company and no provision was required to be made in this regard.

Reply of the management is not tenable as the Company could not get the insurance claim cleared from the insurance company even after a lapse of more than six years.

2.    The Company had not provided liability amounting to Rs.4.54 crore for completion of supply of the equipment in respect of Dulhasti Project, which resulted in under-statement of current liabilities as well as capital work-in-progress by Rs.4.54 crore.

Management noted the comment.

The Company was liable to pay to Government of India guarantee fee at the rate of 0.25 per cent per annum on the internal borrowings. Further, the Company was also liable to pay guarantee fee at double the rate for the period of default where the guarantee fee was not paid on due date. As the Company had not paid the guarantee fee on due dates amounting to Rs.9.87 crore payable in respect of counter guarantee given by the Government, it had become liable to pay guarantee fee at double the rate which worked out to Rs.19.74 crore.

The reply of the management that guarantee fee as stipulated by the Government from time to time had been paid by the Corporation is not acceptable as the Ministry of Finance in September 1992 had clearly stated that guarantee fee would be levied in respect of guarantees already issued but still partially outstanding.

MINISTRY OF RAILWAYS

1.    Leasehold land did not include Rs.25.34 crore in respect of 109.33 hectares of land in possession of the Company for which payment had already been made. This resulted in under-statement of leasehold land and over-statement of capital work-in-progress by Rs.25.34 crore.

Management noted the comment.

2.    The Company had not provided liability amounting to Rs.90.06 lakh towards demand raised by Customs Department in respect of pilfered goods resulting in under-statement of current liabilities and over-statement of profit by Rs. 90.06 lakh.

Management noted the comment.

Rolling stock procured at cost of Rs.77.11 crore was capitalised in October/November 2000 instead of from the date of putting the same to use in February 2001. This resulted in over-statement of depreciation and under-statement of profit by Rs. 2.46 crore.

Management stated that the capitalisation of rolling stock in October/November 2000 was based on the payment made on shipment of coaches from Germany. In terms of the lease agreement with the Ministry of Railways, assets were leased from the date of payment of consideration and being a leasing company, date of leasing was the date of putting the assets to use. Hence, there was no over-statement of depreciation.

The reply is not tenable, as the Company deviated from its accounting policy, according to which depreciation was to be provided from the date of putting the assets to use.

1.    Fixed Assets included Rs.4.55 crore being the value of buildings/flats, which were yet to be transferred in the name of the Company. This had not been disclosed in the Accounts.

Management noted the comment.

2.    The Company had not accounted for an escalation bill amounting to Rs.57.40 lakh in respect of work executed up to 31 March 2001, which resulted in under-statement of work-in-progress as well as profit by Rs.57.40 lakh.

Management noted the comment.

Net loss of Rs.381.62 crore during the year had been understated by Rs.9.12 crore on account of the following:

1.    Non-provision of Rs.3.68 crore lying with M/s Punwire Limited since 1998. Realisability of this amount was uncertain and the case was being litigated in the Punjab High Court.

Management stated that the Corporation had proceeded criminal initiated against M/s. Punwire Limited and was certain of getting decree in its favour.

The reply is not tenable as realisability of amount was uncertain as M/s. Punwire Limited had since been disinvested. Provisions should have been made.

2.    Non-provision of Rs.5.44 crore lying with private parties for more than 3 years.

Management stated the amount pertained to Government department/companies and as such was not doubtful of recovery.

The reply is not tenable as this amount pertained to private parties and was more than three years old. Provision should have been made.

MINISTRY OF ROAD TRANSPORT AND HIGHWAYS

1.    The Authority had spent Rs.97.07 crore more than the maintenance grant received by it from the Government of India. This deficit was incorrectly adjusted from the capital resulting in under-statement of capital by Rs.97.07 crore.

Authority stated that as they receive fund from Government of India for maintenance of highways, excess of expenditure over specific funds received from Government of India had been adjusted against the capital provided by Government of India.

The contention of the Authority is not tenable as funds receivable for maintenance of highways from Government of India should not be adjusted against capital.

2.    The capital reserve represents:

1. Damages amounting to Rs.5.17 crore recovered from an ex-contractor on termination of his contract, which should have been credited to capital work-in-progress.Authority noted the audit comment.
2. Liquidated damages amounting to Rs.4.42 crore due from a contractor, the imposition of which had been deferred by the Authority. The Authority had, however, credited the capital reserve by Rs.4.42 crore with a corresponding debit to claims recoverable. This incorrect accounting resulted in over-statement of each of capital reserve and claims recoverable by the same amount.Authority stated that the liquidated damages were due on 31 March 2000 but the actual recovery of same was deferred.

The reply is not tenable, since the recovery of liquidated damages was deferred, the treatment given by the Authority in accounts was incorrect.

3.    The Authority had not included Rs.5.27 crore towards interest on unutilised capital grants. This resulted in under-statement of capital grants and over-statement of profit by the same amount.

Authority noted the audit comment.

4.    Capital work-in-progress was over-stated by Rs.8.89 crore due to the inclusion of:

(i)    Rs. 1.79 crore under advances for shifting of utilities and acquisition of land which should have been shown as Advances-Others.

Authority stated that they were finalising the significant accounting policies and issue would be dealt with accordingly.

(ii)    Revenue expenditure of Rs. 98 lakh incurred on study undertaken on study undertaken against a grant receivable form the Government which should have been shown as amount recoverable under Current assents, Loans & advances.

(iii)    Advances of Rs. 4.63crore paid for two contractors against material brought at the work at Vijaywada which should have been shown as Advances to contractors

Authority noted the audit comment.

(iv)    Rs. 1.49 crore being the cost of completed site office and residential building at Durgapur.

Authority noted the audit comment.

5.    The income from agency charges was overstated by Rs.5.34 crore due to accounting of:

(i)    Agency charges amounting to Rs.1.39 crore at the rate of 9 per cent as income in respect of projects owned, funded and executed by the Authority without involvement of any outside agency. As no such charges were receivable by the Authority on execution of such projects, the position disclosed in Note to the Accounts was defective to this extent.

Authority stated that they implemented the capital work projects on behalf of the Government of India, accordingly agency charges on the value of work executed were treated as income.

The reply is not tenable as Authority can not book income on the execution of work from its own funds.

(ii)    Agency charges of Rs.13.89 lakh at the rate of 3 per cent on the amount of advances paid to two contractors at Vijaywada for procurement of material. The recognition of the income was in contravention of position disclosed in Note to the Accounts as the advances paid were for procurement of material and not for escalation of work which did not represent execution of the works.

Authority noted the comment.

(iii)    Agency charges of Rs.3.81 crore at the rate of 9 per cent on the amount advanced (Rs.56.46 crore) to various State Public Works Department towards maintenance of highways in respect of which the utilisation certificates had not been received from them till the finalisation of the accounts. The recognition of this income was not in order as the advances paid did not represent the execution of the works.

Authority noted the comment.

6.    The interest on loan from Government of India was understated by Rs.25.20 crore due to non-provision of interest on loan received from Government of India.

Authority stated that matter was taken up with the Government of India for treating the loan in perpetuity with zero interest and accordingly, no provision was made.

In the absence of any Government of India decision in this regard, the provision for interest should have been made as per terms and conditions of the sanction of the loan.

MINISTRY OF SMALL SCALE INDUSTRIES, AGRO AND RURAL INDUSTRIES

1.    Other liabilities and losses were understated by Rs.1.23 crore on account of non-provision of penalty for non-payment of guarantee fee to the Government in respect of the fund borrowed by the Company.

Management stated that since huge amount was receivable from the Government of India towards deficit of various grants, the guarantee fee was not paid and hence, penalty for delayed payment had not been provided.

The contention of the management is not tenable as the provision was required to be made as per Government directives.

2.    Provisions included Rs.8.98 crore being the exchange rate variation and represented 80 per cent of 11.75 per cent interest payable on KFW-XII line of credit. This interest was to be retained by the Company in pursuance of the loan agreement for meeting the losses in exchange rate variation. However, the losses and gains due to exchange rate variation were treated in pursuance of AS-11 and the provision amounting to Rs.9.32 crore created in the last five years from 1996-97 was utilised only once during 1998-99 when the exchange variation loss of Rs.0.34 crore was debited to the provision account. Thus, the provision of Rs.8.98 crore became unnecessary and resulted in over-statement of provision and loss by Rs.8.98 crore (previous Rs.7.30 crore).

Management stated that they had been making provisions upto March 1998 as per the terms of agreement without giving effect to the provisions of AS-11. However, no provision for the year 1998-99 was made and the same was adversely commented by the auditors. During the year 1999-2000, Rs.1.86 crore was provided and also written back as the liability on account of this credit line was translated at the exchange rate prevailing as on 31 March 2000 in accordance with AS 11, which was again commented upon by the auditors. Keeping in view the audit observations, the entire back log i.e. Rs.2.19 crore for 1998-99, Rs.1.86 crore for 1999-2000 and Rs.1.68 crore for 2000-01 had been provided during the year 2000-01. Thus, as on 31 March 2001, total sum of Rs.8.98 crore was lying under provisions for exchange variation under KFW-XII line of credit. The provision had, thus, been made in terms of loan agreement.

The reply is not tenable as reserves had been utilised only once and as such there was no need for the same.

MINISTRY OF STEEL

1.    The Company did not provide for doubtful escalation claim of Rs.1.08 crore refuted by Indian Iron & Steel Company Limited (IISCO), the realisability of which was uncertain.

Management stated that the claim being the difference between provisional rates and final rates was raised for the services rendered during the period August 1995 to November 1997. IISCO agreed to pay the current service charges bills from July 2001 and to pay additional Rs.5.00 lakh in every month to liquidate their old outstanding.

The reply of the management is not tenable, as IISCO had not agreed to pay the claim for the period relating to August 1995 to November 1997. As the debt was more then 3 years old and its realisability was uncertain, provision should have been made.

2.    Liability towards leave encashment had been provided on arithmetical basis as per accounting policy instead of actuarial valuation in accordance with AS-15.

Management stated that as per AS-15, accounting for retirement benefits would depend on the type of arrangement which the employer had chosen to make with suitable disclosure of method followed. Management further stated that AS also provided for calculating the accrued liability by reference to any other rational method for those enterprises which employed only a few persons. Accordingly, the Company had made provision for leave encashment on arithmetical basis.

Management’s contention that AS-15 accepts the different practices for accounting the retirement benefits and does not stipulate for making provision based on actuarial valuation is factually not correct. AS-15 specifically provides that accounting liability should be calculated according to actuarial valuation. Further, AS envisages calculation of the accrued liability by reference to any other rational method for those enterprises which employ only a few persons. Since the Company was having more than 1300 employees it did not come under the category of enterprises which employed only a few persons. Hence, provision should have been made on the basis of actuarial valuation and not on arithmetical basis.

Net Profit of Rs.851.73 crore for the year 1999-2000 had been overstated by Rs.159.54 crore on account of:

1.    Incorrect write back of provision for doubtful debts -Rs.2.44 crore.

Management stated that the provision for the doubtful recoveries created in the earlier years, now found no longer required, has been written back after the proper justification and the approval of competent authority.

Management’s reply is not tenable. In the absence of confirmation/or the realisation of debts from the parties, the write back of the provision for doubtful debt was not correct.

2.    Under-statement of provisions for doubtful recoveries in respect of old disputed and doubtful debtors lying outstanding for a long time (3 to 18 years) without any confirmation from the clients - Rs.127.59 crore.

Management stated that most of the clients were Government departments/ public sector undertakings. There were several instances where Company had received old dues which were more than 8 to 10 years old.

Management’s contention is not acceptable as absence of confirmation/acceptance of the long outstanding claims/debts by the parties, non-realisation/settlement of debts/claims for a long time ranging between 3 and 18 years, disputes and rejection of the claims were indicative of the fact that debts had become doubtful of recovery.

3.    Under-provision towards supply of electricity to residential/labour colony, fabrication yard, main building and also rent, electricity etc. for quarters allotted by Bokaro Steel Plant for use of Company’s employees-Rs.3.81 crore.

Management stated that for want of proper debit note, liability could not be provided. However, the same had been considered as contingent liability in 1998-99 and also in 1999-2000.

Management’s contention is not convincing as the estate dues payable were definite and firm liabilities. Provision should have been created as against contingent liability.

4.    Non-provision of penal interest on defaulted Provident Fund (PF) contribution-Rs.25.70 crore.

Management stated that as required in trust deed, the shortfall in the revenue accounts had been made good. An amount of Rs.3.50 crore had been provided against the anticipated shortfall for the year 1999-2000. Trust deed did not provide for any penal interest on defaulted remittance.

Management’s reply is not acceptable in view of fact that the provision of penalty/damages/interest was applicable in case where a Company made default in depositing its contribution in PF account. Since the Company defaulted in making payment of contribution during past 3 years, the default attracted the provision of penalty as per Section 14 of PF Act.

Loss of Rs.187.31 crore for the year 2000-2001 had been understated by Rs.73.02 crore on account of following:

1.    Non-provision of liability for cess on cost payable to Government of West Bengal for the period 2000-2001-Rs. 16.98 crore

Management stated that based on the Hon’ble Supreme Court’s judgement on the subject the Hon’ble High Court, Kolkata had passed a judgement that levy of cess was beyond the legislative competence of West Bengal State. The State Government had filed special leave petition. Accordingly, there was no definite liability. However, the amount had been shown as contingent liability treating the same as disputed.

Management’s reply is not acceptable in view of the fact that based on of Hon’ble Supreme Court’s judgement given in 1991-92, the Company had been making provision continuously since 1991-92 to 1999-2000. As no new development had taken place during 2000-2001, there was no cause for changing the policy. Other companies Bharat Coking Coalfield Limited (BCCL) and Eastern Coalfields Limited (ECL) had been paying cess to State Government. Since the cess was payable, the liability should have been provided on the line of other coal companies.

2.    Non-provision of liability towards Leave Travel Concession (LTC)/ Long Leave Travel Concession (LLTC) for the block year 1998-2001- Rs. 1.03 crore.

Management stated liability towards LTC/ LLTC accrued only when journey approved/performed. Expenditure for the block years 1998-99 and 2000-01 had already been provided for on the basis of actual availing of LTC/LLTC. In other cases, no liability accrued for such unavailed LTC/LLTC. This accounting treatment had been consistently followed and hence there was no under provisioning of liability.

The contention of management is not acceptable as the facility of LTC/LLTC for the block years 1998-99 and 2000-2001 had not been withdrawn but only deferred upto March 2001. Provision should have been made in the accounts in view of the para 1.09 of the Guidance note of ICAI and AS-1.

3.    Non-provision of liability towards wage revision in respect of collieries employees due from 1 July 1996 to 31 March 2001 - Rs.45.75 crore

Management stated that the Company had been referred to BIFR. The pay revision was pending as no decision could be taken. Hence, no liability accrued.

Management’s contention is not correct as the recommendation of Joint Bipartite Committee was agreed to by IISCO management for implementing wage revision in respect of colliery employees for a period of 5 years with effect from 1 July 1996. Other BIFR referred coal companies viz. ECL, BCCL etc. had already revised the pay scales of the employees. Since the liability was certain this should have been provided either on estimated basis or on the basis of calculation as made by the Company in respect of their colliery employees.

4.    Overvaluation of stock of boiler ash lying at old dump area - Rs. 1.59 crore.

Management stated that out of the stock of 1.43 lakh tonnes of boiler ash valuing Rs. 1.59 crore, a quantity of 0.70 lakh tonnes was sold. As the stock had tangible value, the same had been appropriately valued.

Management’s reply is not tenable in view of the fact that stock of boiler ash lying at old dump area for several years could not be disposed of/sold in spite of taking initiative to sell the boiler ash through tender. Full provision was required to be made.

5.    Non-provision for doubtful claims lying with Joint Plant Committee (JPC) for more than 10 years - Rs. 5.77 crore.

Management stated that the receivable claim from JPC was adequately covered against outstanding payable to JPC. Therefore, provision was not required.

Management’s reply is not acceptable as the claim was lying against JPC for more than 10 years and without any persuasion of its realisation.

6.    Non-provision for partially constructed residential quarters/36 seated Guest House lying incomplete since March 1992 - Rs.1.90 crore.

Management stated that the construction of quarters was held up on account of resource constraints and pending Company’s revival plan. At appropriate time, efforts would be made for its completion and gainful utilization.

Management’s reply is not tenable in view of the fact that the construction of quarters was held up due to non-availability of fund both from external and internal sources. As construction had not been resumed till date for want of fund, and project was lying incomplete for the last nine years, provision should have been made.

The Accounts of the Company for the year 1999-2000 were revised as a result of the observations made by the Comptroller and Auditor General of India, as indicated in Note No.28 (Schedule 12 II)-Notes to the Accounts thereby increasing the loss by Rs.2.43 crore. The following further comments were made upon or supplement to the Auditor’s Report under Section 619(4) of the Companies Act, 1956 on the accounts of Company.

Net loss for the year 1999-2000 had been understated by Rs.75.29 crore on account of the following:

1.    Accounting of higher percentage of progress of work as against the actual work completed -Rs.4.18 crore.

Management stated that the percentage of progress achieved in the execution of lump sum fee consultancy contracts was arrived at on the technical estimate based on the milestones achieved.

Management’s reply is not acceptable in view of the fact that the actual percentage of progress had not been worked out correctly as it was found less by 5.37 per cent after linking up physical progress of different sites activities.

2.    Withdrawal of contingency provision of 10 per cent of the value of the order before completion of the work/supply of material -Rs.4.38 crore.

Management stated that on completion of respective scope of work as certified by Project Co-ordinator, the income had been recognised in line with the accounting policy.

Management’s reply is not tenable as the mechanical completion certificate was not submitted by the client as of 31 March 2001. Accounting of income was not justified as the project was not completed. Hence, accounting of income in such circumstances tantamounts to violation of the Company’s own approved and adopted accounting policy.

3.    Non-provision towards estimated future loss in respect of job-in-progress in violation of AS-7 - Rs.12.91 crore

Management stated that the cost to complete the consultancy jobs with lumpsum fee related to manpower expenses (salaries & wages) which were accounted for in full in the respective years. Provision towards future losses was not considered necessary on such jobs.

Management’s contention is not acceptable in view of the fact that without making any provision towards estimated future loss calculated on expenditure, the valuation made for the job-in-progress was against the requirement of para 19 of mandatory AS-7.

4.    Short-provision of liability in respect of revision in salaries and wages due from 1 January 1997-Rs.4.25 crore.

Management stated that pending finalisation of revision in wages for the employees, the extent of liability was not ascertainable.

Management’s contention is not justified as the Company itself worked out the monthly expenditure against wage revision as per decision taken in the Board meeting held in August 1999. Provision should have been made accordingly.

5.    Non-provision towards liquidated damages already recovered by the clients and not disputed by the Company/finally disallowed by the client-Rs.4.27 crore.

Management stated that the corresponding recoveries made from the respective vendors were in excess of the recoveries made by the clients. Pending final settlement with these vendors, no provision was considered necessary.

Management’s contention is not acceptable as the jobs had been closed long back and Company had no claim towards deducted liquidated damages.

6.    Non-provision for claims disallowed more than three years ago by a client due to delay in completion of a project by the Company, the realisability of which was bleak - Rs.10.13 crore.

Management stated that the debts were being pursued and were considered good and realisable.

Management’s reply is not acceptable in view of the fact that the debts as shown outstanding had been disallowed by the clients due to non-fulfillment of contractual obligation by the Company. As such, chance of their realisation was remote.

7.    Non-provision for disputed escalation claims not admitted by the client - Rs.25.91 crore.

Management stated that the escalation claim made by the Company was as per terms of the contract and its realisation was being pursued. No provision was considered necessary at this stage.

Management’s reply is not acceptable as the client (RSP) has rejected the company’s claim towards escalation. Recognition of income by changing their accounting policy was against the provision contained in the para 9 of AS-9 since the realisation of escalation was doubtful and uncertain.

8.    Non-provision for the amount deducted by client on account of work completed by them at the risk & cost of the Company - Rs.9.26 crore

Management stated that the arbitrary withholding of Rs.6.73 crore by one of the clients was contested and was considered good and realisable. As against Rs.2.53 crore withheld by another client, company had correspondingly withheld Rs.2.81 crore from the respective vendors. Pending settlement, the extent of liability, if any, was not ascertainable.

Management’s reply is not tenable as the clients deducted the amount from the invoice of Company on account of faulty design, defective supply, liquidated damages and risk cost. Since clients refused to pay the deducted amount, the realisation of debts was doubtful for which provision was required.

1 (a)    A reference is invited to comment no.1 of the Comptroller & Auditor General of India on accounts of the Company for the year ended 31 March 2000 wherein it was pointed out that the leasehold land was overstated by Rs.4.87 crore due to capitalising the entire amount of Rs.8.93 crore paid towards penal compensatory afforestation on the land to be broken instead of capitalising Rs.4.06 crore being the amount actually payable on the leasehold land already broken on the date of expiry of mining lease of Deposits 5/14. Despite the above audit comment, the Company did not adjust the amount that was capitalised in excess during the year 2000-2001. As a result the advances recoverable continue to be understated by Rs.4.87 crore with the result that there was an over-statement of cumulative depreciation by Rs.1.33 crore with corresponding under-statement of cumulative profit.

(b)    A reference is invited to the comment no.2 of the Comptroller & Auditor General of India on the accounts of the Company for the year ended 31 March 2000 wherein it was pointed out that the leasehold land was overstated by Rs.1.07 crore due to capitalisation of penal compensatory afforestation paid on the land to be broken instead of capitalising the amount payable on the area already worked/used in respect of Deposit-10. Despite the above audit comment, the Company did not adjust the amount that was capitalised in excess. As a result, there was an over-statement of net block by Rs.77.13 lakh and incidental expenditure during construction awaiting allocation by Rs.29.87 lakh. This resulted in under-statement of advances recoverable by Rs.1.07 crore.

Management while admitting the excess payment stated that refund of excess payment had been taken up with the Madhya Pradesh State Government and necessary adjustments would be carried out on the basis of final settlement.

2.    Leasehold land was overstated by Rs.16.73 crore due to capitalisation of the entire amount of Rs.19.33 crore paid towards safety zone charges instead of actual amount payable based on correct calculation of boundaries relating to Deposit 5, Deposit 10, Deposit 10 float ore, Deposit 11, Deposit 14 and Deposit-14 NMZ. This resulted in over-statement of depreciation by Rs.4.01 crore (current year Rs.83.67 lakh, prior period Rs.3.17 crore), under-statement of incidental expenditure during construction in respect of Deposit 10 and Deposit 10 float ore by Rs.55.14 lakh and under-statement of advances recoverable by Rs.16.73 crore.

Management stated that although the case of refund of excess payment made was rejected by the State Government without citing specific reasons, the same would be pursued further for an amicable settlement.

A reference is invited to the comment no.2 of C&AG of India on the accounts of Company for 1999-2000. Current liabilities and provisions were understated by Rs.1.73 crore due to utilisation of Government grants received under National Renewal Grant (NRG) towards VRS payments for meeting inadmissible item of expenditure viz. notice pay, gratuity, leave enchasment etc. during the years 1995-96 to 1999-2000. This resulted in under-statement of prior-period expenditure as well as cumulative loss by Rs.1.73 crore.

Management stated that company did not debit any NRF amount except ex-gratia amount from June 1999 onwards after receipt of revised Government guidelines.

The reply is not tenable since Ministry had categorically clarified (July 2000) that ever since the inception of NRF from 1992-93, assistance from NRF had been made available to PSUs only for making compensation payment under voluntary retirement scheme (VRS) i.e ex-gratia as per DPE guidelines.

Net loss of Rs.728.66 crore had been understated by Rs. 1275.94 crore on account of the following:

1. (i)    Employees’ remuneration and benefits had been understated by Rs. 326.04 crore due to non-provision for interim relief in respect of employees for 14 months from April 1998 to May 1999 (Rs. 122.78 crore): non-provision for estimated liability towards LTC/LLTC on accrual basis for the block years 1998-99 and 2000-01 (Rs. 60.70 crore): short provision against wage revision for non-executive employees for the period from 1 January 2001 to 31 March 2001 (Rs.70.83 crore) and premature adjustment of liability on Performance Linked Benefit Scheme (PLBS) - (Rs.71.73 crore).

Management stated that as regards liability towards arrears of wage revision including interim relief for 14 months, the same was to be discussed separately with the Union and as such no liability existed. The difference, if any, between the estimated liability and the actual would be provided for during 2001-2002 on finalisation of detailed agreement. Regarding LTC/LLTC liability, the same accrued only when journeys had been approved/performed. In this case, since the journeys had not been approved/performed, no liability accrued for such un-availed LTC/LLTC. Further, composite offer envisaged no past liability on account of PLBS and the same had been duly considered while making overall provision towards wage revision on estimated basis.

Management’s reply is not acceptable in view of the fact that wage revision and interim relief of 14 months, the Company did not reject the demand rather it accepted and offered to pay interim relief after some time. Hence, liability existed as on the date of balance sheet. As a note of fact, the Board of Directors had since approved (September 2001) the proposal to make payment of arrears. Regarding LTC/LLTC, the reply is not tenable since in the present case, availment of LTC/LLTC for 1998-99 and 2000-01 was deferred till March 2001 and this facility could be availed after 31 March 2001. Since, the Company already received the benefits of service put by the employees during 1998-99 and 2000-01, a suitable provision for LTC/LLTC for these years should have been provided for. Further, though liability of PLBS had been withdrawn, the Company had not assessed and provided for liability for the new scheme in place of existing PLBS as per composite package. Since the liability for new scheme had not been provided for, the withdrawal of PLBS was not appropriate.

(ii)    Income of the Company had been overstated by Rs.24.20 crore due to accounting of material worth Rs. 132.17 crore as sales although despatch documents were held under the custody of the Company/material returned by the customers.

Management stated sales had been accounted for consistently based on the delivery of goods to the carriers wherein significant risks and rewards of ownership had been passed on to the customers. In the cases referred, the despatches had been made to the customers and accordingly included in the sales. However, the documents were held in the custody of the Company for securing the payments.

Management’s reply is not acceptable in view of the fact that the despatch documents were given to customers only after 31 March 2001. By retaining despatch documents as on 31 March 2001 the Company had retained the effective control of the goods transferred. Hence in view of AS-9, revenue should not have been recognised but postponed till the despatch of delivery documents.

(iii)    Expenses had been understated by Rs. 131.28 crore due to the following :

(a)    Non-provision for debts, loans and advances against IISCO Ujjain Pipe & Foundry Company Limited, a sick company under liquidation - Rs. 16.51 crore

Management stated that the value of land and building of IISCO Ujjain Pipe & Foundry Company Limited assessed by an independent agency adequately covered the debts loans and advances given by the Company.

Management’s reply is not acceptable in view of the fact that the assets of IISCO Ujjain had been vested with the Official Liquidator and valuation made by SAIL of the assets of IISCO Ujjain had no relevance. Further, inability of debtor to pay dues or the party closing down its business were indicative of the fact that loans and advances and debtors had become doubtful of recovery. Further, as the Company was in liquidation since 1997 and the amount could not be realised, provision was required.

(b)    Non-provision for entry tax on limestone at the rate prescribed by the Madhya Pradesh/Chattisgarh Government - Rs. 35.25 crore.

Management stated that as the matter of entry tax was sub-judice, the same had been disclosed as contingent liability.

Management’s contention is not tenable in view of the fact that as per para 10 of AS-4 contingent loss should be provided for when it was probable that future event would confirm that liability had been incurred as on date of Balance Sheet. The plea of the Company was rejected by the Entry tax Authorities and also by the Hon’ble Madhya Pradesh (MP) High Court who held that SAIL was liable to pay the entry tax at the rate prescribed in the notification of Madhya Pradesh Government.

(c)    Non-provision for income tax paid under protest and shown as advance - Rs. 52.65 crore.

Management stated that the Company had been advised by a Tax Expert that it was eligible for benefits of exemption in respect of the profits derived from the generation of power for the purpose of computing taxable income as per provision of Section 115 JA of Income Tax Act. The case was under appeal. As such, tax paid had been disclosed as contingent liability.

Management’s reply is not tenable in view of the fact that since SAIL is in the business of manufacturing and selling of steel products and not in the business of generation and distribution of power, power generated in the captive power plant was consumed internally and not sold, the benefit of exemption as stipulated in Section 115JA was not available to SAIL.

(d)    Non-provision against stores and spares declared surplus/non-moving for more than 10 years - Rs. 20.88 crore.

Management stated that there was a well defined procedure in the Company for declaration of obsolete/surplus stores & spares and creation of provision thereof. Usability of materials in other mills/sister units/subsidiary companies needed to be ascertained before declaring any item as surplus. As such, provision was required to be made only when the items were declared surplus.

Management’s reply is not acceptable as the Company had been holding stores and spares for more than ten years and their non-use within a normal production cycle indicated that these were surplus to the requirement and this should have been provided for.

(e)    Treatment of revenue expenditure relating to Blast Furnace (BF)-1 in Durgapur Steel Plant (DSP) as deferred revenue expenditure. - Rs. 5.99 crore

Management stated that the expenditure had been treated as deferred revenue expenditure (DRE) in earlier years and continued to be charged off this year also.

Management’s contention is not tenable in view of the fact that Guidance Note on audit of Miscellaneous expenditure issued by ICAI categorically states that unless some benefit from an expenditure can be reasonably expected to be received in future, there is no justification for carrying forward the expenditure to be written off in subsequent years. Since the Company had not been getting any benefit from the expenditure booked as DRE, the deferment thereof was contrary to accepted accounting principles. Incorrect treatment of an expenditure as DRE in the past was not a valid reason.

(iv) (a)    The Company had not provided for unrealised claims amounting to Rs. 44.76 crore pending for 17 years to 25 years with M/s. Tiazpromexport (TPE), Russia for short supply of equipment to Bhilai Steel Plant (BSP) during 1976 to 1984.

Management stated that the refund claim had been accepted by TPE in the protocol meetings between Government of India and Government of Russia and the recovery was being followed up through inter-governmental meetings/protocol.

Management’s reply is not acceptable as the claim was pending for the last 17-25 years. Neither Russian Government nor TPE had accepted it as debt. Since the realisability of claim was doubtful, provision should have been made in the accounts.

(b)    The Company had extended Financial assistance/advances to Hindustan Steelworks Construction Limited (HSCL) in excess of contractual obligations for modernisation of Durgapur Steel Plant (DSP) during 1990-95 amounting to Rs. 133.40 crore, the realisability of which is doubtful.

Management stated that in the interest of the early completion of the projects, financial assistance/advances were given to HSCL from time to time. All the issues regarding adjustment/recovery of advance to HSCL from time to time were envisaged to be settled on closure of contracts. In order to settle the issue alongwith the disputed claims of HSCL, the matter had been referred to a Conciliator. The Conciliation proceedings were under progress and appropriate adjustments would be made based on decision arising out of conciliation proceedings.

Management’s reply is not tenable in view of the fact that advance given was in excess of contractual provisions, all assets had been capitalised more than 5 years ago. The dispute had not yet been settled even after referring the matter to conciliator two years back.

Further, HSCL had disputed the above amount and lodged a counter claim of Rs. 135.80 crore on DSP/SAIL.

(v) (a)    Valuation of accumulated mixed coke lying embedded at Bokaro Steel Plant (BSL) which was neither utilised nor sold at Rs.66.90 crore and accumulated residual inferior grade iron ore fines at BSP which had no market value valued at Rs.92.20 crore, resulted in ove-statement of inventories.

Management stated that mixed coke lying at BSL was usable within the plant and had a good market outside. Mixed coke lying in the yard was being continuously drawn and used in the Sinter Plant. Further, accumulated iron ore fines stock at BSP were usable. Blending with high Fe grade fines would give the desired quality iron ore fines for Sinter Plant. Requirement of iron ore fines would also increase with the commissioning of Sinter Plant-3 at BSP during 2001-02. As the stock existed, there was no over-statement of inventories.

Management’s reply is not acceptable as the old stock of mixed coke lying at BSL was neither used for sintering mix in the plant nor sold in market. As regards accumulated residual inferior grade iron ore fines at BSP, the valuation thereof was not proper in view of the fact that the inferior iron ore stock was only residual quantity and remaining unconsumed over the years and were also neither usable in the process nor saleable in the market.

(b)    Non-capitalisation/delay in capitalisation of certain plant & equipment at BSL - resulted in undercharging of depreciation by Rs. 38.11 crore.

Management stated that as per normal principles of capitalisation, the plant was considered to have been commissioned from the date it was ready for commercial production after trial runs. The term ‘commercial production’ refers to production in commercially feasible quantities and in a commercially practicable manner on a sustained basis. Production in commercially feasible quantities in sustained manner could be achieved by the Continuous Casting Department (CCD) plant at BSL from February 1999 onwards and hence accordingly capitalised during 1999-2000.

Reply of the management is not tenable in view of the fact that CCD plant was ready for commercial production and unit B and unit A were commissioned on 5 August 1998 and 2 December 1998. Hence depreciation should have been charged from the commissioning dates of units and not from February 1999.

(vi)    Other revenues had been overstated due to recognition of entire amount of premium lease rent as current year’s income instead of spreading it over the entire lease period - Rs.4.53 crore.

Management stated that the amount was received during 1999-200 and 2000-01 on account of land premium towards cost of development of infrastructural facilities and had correctly been credited to other revenues.

Management’s reply is not acceptable in view of the fact that amount was received for the maintenance cost to be incurred over the lease period of 33 years and should be spread over accordingly in view of principle of matching cost to revenue.

(vii)    Company made investment of Rs. 374.94 crore in Indian Iron & Steel Company Limited (IISCO). Since IISCO was declared a sick industrial company by Board for Industrial and Financial Reconstruction (BIFR), the recoverability of amount was doubtful.

Management stated that since the current value of IISCO’s assets including mines, plant & machinery, land & building etc. was quite adequate to cover the Company’s investment in it, no provision was called for in the accounts.

Reply of the management is not acceptable. The market value, as per para 27 of the Guidance Note on Audit of Investment issued by ICAI, is determined by break-up value method, capitalisation of yield and yield to maturity method. The break-up value is determined by the assets value shown on the company’s balance sheet which, in case of IISCO, was negative. Further, the other method also gives negative results as IISCO’s accumulated loss was Rs.617.27 crore and it had been consistently recording losses. Since SAIL had considered the revalued value of IISCO’s assets which was not realised/realisable as on 31 March 2001 and accordingly had not made any provision against investment, it tantamounts to recognising contingent gain which was contrary to para 12 of AS-4 which prohibits recognising the contingent gain.

(viii)    The Company had given financial assistance/advances to HSCL for modernisation of BSL (Rs.34.38 crore) during 1995-2000 and against future jobs to be executed (Rs. 2.54 crore). Further, an amount of Rs. 2.66 crore was also recoverable from HSCL towards other advances/estate dues at Bhilai and Durgapur. The chance of realisation of these amounts was remote. However, no provision had been made.

Management stated that in the interest of the early completion of the projects, time to time adjustable/recoverable advances were given to HSCL. Adjustment/recovery of advances was being followed up.

Management’s reply is not tenable in view of the fact that all the advances paid to HSCL till December 1998 had been frozen by the Ministry and no adjustment could be possible till date. As the recoverability, collection or adjustment of advance was uncertain and doubtful, the provision should have been made.

2    Fixed assets included the following idle/surplus assets :

(i) (a)    Rotary Kiln-II, two Slag Pot Transporters, Electro Static Precipitator for BF gas mixing, assets of power distribution system and Fertiliser Plant of RSP lying unused for more than three years due to non-completion of schemes/obsolescence of technology for want of requirement - (Rs. 20.79 crore).

(b)    Soaking pits/cover cranes of Slabbing Mill, skids of Re-heating Furnace No.1, assets of 12 investment planning unit schemes, DG set and stamping machine of BSL lying unused for a period ranging from 3 to 7 years due to non-completion of schemes/obsolescence of technology for want of requirement - (Rs. 42.02 crore).

Management stated that some facilities/assets did remain idle for some time due to technical or commercial reasons. As per normal accounting practice, depreciation continued to be charged on such assets. Some items also remained under work-in-progress on account of disputes with the contractors, mid-term review of schemes and other market related considerations. Status of each scheme was being reviewed regularly. Further efforts would be made in the current year to identify alternative use or declare as surplus/obsolete for disposal etc.

Management’s contention is not acceptable in view of the fact that the assets/equipment were lying either idle due to obsolescence of technology or incomplete for a considerable period and their revival and alternative use was doubtful.

(ii)    Fixed Assets had been overstated by Rs. 143.62 crore due to capitalisation of avoidable escalation paid in excess of contractual provisions to a private firm M/s. Mukand Ltd., in respect of modernisation of Rourkela Steel Plant (RSP) - Rs.58.91 crore and to various contractors engaged in the modernisation of BSL beyond contractual provision and avoidable payment of R&D cess -Rs. 84.71 crore.

Management stated that escalation payments made to contractors under contractual provisions was a part of capital cost of assets and, therefore, had been correctly capitalised. Similarly R&D cess paid on items relating to modernisation schemes had been capitalised. Action was being taken for its refunds and appropriate adjustments would be made on getting such refunds.

Management’s reply is not acceptable in view of the fact that R&D cess paid by BSL was not covered by any foreign collaboration agreement and was also not payable in respect of foreign contracts not covered under foreign collaboration agreement in view of the judgement of the High Court, Kolkota. Further, such cess had not been paid by even other plants like Durgapur Steel Plant, etc.

MINISTRY OF SURFACE TRANSPORT

The Company charged an amount of Rs.10.76 crore incurred towards importing a Dredger from Holland (Rs.8.97 crore for customs duty and Rs.1.79 crore for transportation charges) to revenue instead of debiting to the cost of Dredger and also withdrew an amount of Rs.1.29 crore (transportation charges) from the same asset account which was capitalised last year and charged to revenue during 2000-2001. This resulted in under capitalisation of the asset by Rs.12.05 crore, under-statement of depreciation by Rs.17.80 lakh and consequential under-statement of profit by Rs.11.88 crore.

Management stated that the company had rightly charged the voyage expenses and the customs duty to revenue as per AS-10.

Management reply is not tenable as AS-10 was applicable in case of start up and commissioning charges etc. The comment is related to the treatment of expenditure (customs duty and transportation charges) incurred in connection with the acquisition of an asset viz. Dredger.

1.    Title deeds in respect of buildings valuing Rs.66.94 lakh, purchased in 1986-87 from Standing Conference of Public Enterprises, was yet to be executed in favour of the Company. This fact had not been disclosed in the accounts.

Management noted the comment for future compliance.

2.    In terms of Ministry of Finance office memorandum dated 4 June 1993 read with memorandum dated 24 April 1992, the Company was liable to pay guarantee fee at the rate of 1.2 per cent per annum on the outstanding amount of principal of external borrowings guaranteed by the Government of India. Further, the Company was liable to pay guarantee fee at double the normal rate if the guarantee fee was not paid on due dates. As the Company had not paid the guarantee fee on due dates, it become liable to pay guarantee fee at penal rate of 2.4 per cent for which no provision was made in the accounts. This resulted in under-statement of current liabilities and provisions as well as interest and finance charges by Rs.6.04 crore (including prior-period Rs.5.31 crore). Consequently, the profit of Rs.23.92 lakh for the year would turn into loss of Rs.5.80 crore.

Management stated that Government’s office memoranda were issued in 1992 and 1993. As the counter guarantee given by Government was not extended beyond December 1990, no such fee was payable on this account. Further, in absence of any formal claim/clarification to this account by the concerned authority and in view of the Government decision to wind up the Company, it was viewed to account for this liability, if any, on receipt of formal demand from the authority concerned.

The reply is not tenable as the guarantee already issued was still outstanding and as such, the Company was liable to pay the guarantee fee.

MINISTRY OF TEXTILES

Fixed assets included land measuring 26 acre (approx.) relating to Panipat Woolen Mills and Kharar Textile Mills (nationalised in April 1974) of the Company, which had been in possession of the erstwhile owners. The fact that the case pertaining to title of these lands had been pending in the High Courts of Punjab and Haryana, had not been disclosed in the Accounts.

Management noted the comment

MINISTRY OF URBAN DEVELOPMENT

1.    Buildings included Rs.4.33 crore being the value of lease hold buildings at Jaipur and Thiruvananthapuram, which should have been distinctly disclosed.

Management stated that the matter would be referred to the Institute of Chartered Accountants for their expert opinion.

2. (i)    Grant received from Ministry did not include Rs.29.84 crore being the interest earned on unspent amounts of grant received from the Ministry of Urban Development and Poverty Alleviation since 1989 even though as per directives of the Ministry such interest was to be used for the earmarked scheme only. This resulted in under-statement of current liabilities and over-statement of profit by Rs.29.84 crore.

Management stated that at the time of release of funds by the Ministry, there was no condition of interest payment. However, the Ministry enquired in June 1997 about interest earned and raised a demand during 2000-2001 for payment of interest on the unutilised funds from time to time. The issue of interest payment would be taken up in the current year with the Ministry and necessary action would be taken accordingly.

(ii)    Interest of Rs.91.76 lakh earned on the unspent balance of subsidy received from the Ministry of non-Conventional Energy Sources, had not been provided for as liability. This resulted in under-statement of current liabilities and over-statement of profit by Rs.91.76 lakh (previous - Rs.30.58 lakh).

Management stated that as per sanction order, interest earned on undisbursed funds was to be deducted by the Ministry from the future releases and as on date, no such recovery had been made. However, the issue of interest would be taken up in the current year in consultation with the Ministry and necessary action would be taken accordingly.

3. In accordance with its accounting policy, the Company had not provided a sum of Rs. 2.17 crore on account of employer’s contribution to Provident Fund (Rs.14.84 lakh) and gift to employees (Rs.2.02 crore), which was in contravention of Section 209 (3) (b) of Companies Act, 1956. As the amounts were paid before the finalisation of the accounts, the same should have been provided. This resulted in under-statement of current liabilities and provisions and over-statement of profit by Rs. 2.17 crore.

Management stated that the accounting policy would be reviewed in the current year and necessary action would be taken accordingly.

1.3    Review of Accounts:

1.4    Significant findings reported by Statutory Auditors:

As per Section 227 (3) (e) of the Companies Act, 1956 [as amended by Companies (amendment) Act, 2000], the auditor’s report shall also state in thick type or in italics the observations or comments of the auditors which have any adverse effect on the functioning of the Company. While certifying the accounts of the PSUs for the year 2000-2001, the Statutory Auditors made the following major qualifications highlighting the impact on Balance Sheet and Profit and Loss Account:

Loss for the year of Rs.16.20 lakh would have been converted into profit of Rs.1.08 crore had the provision of doubtful advances for Rs. 67 lakh and accounting of waiver of loan of Rs.1.91 crore been considered by the Company.

1. Non-provision for the loss on dis-investment - Rs.26.78 lakh;
2. Non-provision for penal interest on loan taken from IDBI & Canara Bank - Rs 2.62 crore;
3. Non-provision for overdue interest, penal interest & service charges on lease rent payable to Kirloskar Investment & Leasing Limited - Rs.37.71 lakh;
4. Non-provision for penal interest for Government plan loan, professional tax, tax deducted at source Rs.40.92 lakh; and
5. Non-provision towards stock allegedly misappropriated by C & F Agent - Rs.14.78 lakh.

Had the above observations been considered by the Company the loss for the year would have been Rs. 8.73 crore (as against the reported figure of Rs.4.91 crore), accumulated losses at year end would have been Rs. 177 crore ( as against the reported figure of Rs.161.48 crore).

MINISTRY OF COAL AND MINES

Income related to earlier years amounting to Rs.56.34 crore had not been provided for.

Had the above observation been considered, the profit would have been reduced by Rs.56.34 crore.

1. Mining activities in Chincholi and Wirur mines were suspended in 1997 and 1999 respectively due to heavy losses and adverse geo-mining condition. Pending finalisation of strategic plan for these mines, the amount of Rs.15.22 crore incurred thereon had not been provided for;
2. Bills amounting to Rs.9.61 crore were not raised, subject to adjustment with regard to sampling results;
3. Old unadjusted advances of Rs.1.43 crore had not been provided for;
4. Non-moving and obsolete items of stores worth Rs.3.03 crore had not been provided for

Had the above observations been made, the profit of Rs.28.23 crore as well as assets would have been reduced by Rs.10.07 crore.

MINISTRY OF COMMUNICATIONS

Provisions had not been made in respect of:

1. Rs.0.43 crore receivable from Electronics Corporation of India (including liquidated damages of Rs.0.03 crore) remaining unpaid for several years.
2. Capital advances aggregating Rs.0.70 crore towards acquisition of land at the Mumbai unit.
3. Liquidated damages aggregating Rs.9.77 crore refundable to ITI Limited, in terms of a directive from DOT, pending approval of the Board of Directors of the Nigam.
4. Rs.2.44 crore recoverable from Hindustan Cables Ltd., relating the period prior to 1998-99.

Had the provision been made in respect of the above items, the profit and reserves for the year would be lower by Rs.13.34 crore.

MINISTRY OF CONSUMER AFFAIRS, FOOD & PUBLIC DISTRIBUTION

1    Investments (at cost) included Rs.80 lakh invested with Punjab State Warehousing Corporation for setting up a Container Freight Station at Ludhiana as joint venture which was not contemplated under Warehousing Corporations Act, 1962. The net income, inclusive of profit/loss, from 1989-90 to 1996-97, aggregating to Rs.7.46 crore as minimum return at the rate of 12 per cent which had been accounted for, remained outstanding as on 31 March 2001. The income for 1997-98 to 2000-01 and the corporation’s share in the assets and liabilities as on 31 March 2001 had not been incorporated in the accounts since the same had not been furnished by the Punjab State Warehousing Corporation.

2.    Loan instalment of land and interest charges payable to Food Corporation of India (FCI) as on 31 March 2001 were shown as Rs. 1.71 crore as against Rs. 2.69 crore claimed by FCI but refuted by CWC. The outstanding balance of interest was subject to reconciliation with FCI.

3.    The Corporation had not taken into account the income of Rs. 128.00 crore (previous year Rs. 129.45 crore) from bonded stocks, excluding management bonded.

4.    Outstanding liabilities included Rs. 7.64 crore lying with the Corporation towards auction proceeds of time-barred bonds. Pending final settlement with the Custom Authorities, the amount had not been recognised as revenue.

5.    Leasehold land included value of land at Narela, Delhi of Rs. 1.32 crore which project had been abandoned/closed. Further expenditure of Rs. 28.12 lakh on the project has been included in work-in-progress.

6.    Penalties for delayed movement of export/import loaded containers were imposed on Handling & Transport contractors for an amount aggregating to Rs. 2.53 crore against which the Corporation had recovered an aggregate amount of Rs 1.85 crore. The cases were under arbitration/review/contested in Court of Law. Pending arbitration award/final decision by Court the amount had not been treated as revenue.

MINISTRY OF DEFENCE

1. Adjustment of cheques received by the Company up to 15 April 2001 (dated 31 March 2001) in the accounts, which was not in accordance with the generally accepted accounting practice resulted in under-statement of Sundry Debtors and Loans & Advances by Rs.33.86 crore and Rs.5.27 crore respectively and over-statement of cheques in hand by Rs.39.13 crore.
2. Non- accounting of interest granted on refund of Income- tax amounting to Rs. 71.82 lakh resulted in over-statement of loss by the same amount.

Had the above observations been adjusted in the accounts, the net debit balance of Profit & Loss account would have been Rs.8.46 crore (as against Rs.9.18 crore as per accounts); Cash & bank balances would have been Rs.1002.20 crore (as against Rs.1041.33 crore as per accounts); Sundry Debtors would have been Rs.213.76 crore (as against Rs. 179.91 crore as per accounts); and Loans & Advances would have been Rs.285.08 crore (as against Rs.279.81 crore as per accounts).

1. No provision had been made in the accounts for certain fixed assets found short on physical verification, book value of which were Rs.8.49 lakh.
2. No provision had been made in the accounts for subsidy/incentive receivables of Rs.9.71 crore from Government of India which were doubtful of recovery (for claims relating to 1993-94 to 1997-98).
3. Loans and advances included Rs.71.94 lakh recoverable from banks as claimed by the Company, for which no confirmation had been received from bank. In view of uncertainty in the admittance of the claim, this should have been accounted for after acceptance of the claim amount as per principle stated in AS-9 issued by the ICAI.

Had the above observations been taken into account, the loss for the year would have been Rs. 118.82 crore (as against reported figure of Rs. 108.30 crore) and net Current assets, Loans and advances would have been Rs.(-) 37.73 crore (as against reported figure of Rs. 27.21 crore).

MINISTRY OF HEAVY INDUSTRY AND PUBLIC ENTERPRISES

(i)    Profit for the year (Rs.19.47 crore) was overstated by Rs.7.90 crore due to:

1. Over-statement of Loans and Advances (Rs.82.73 crore) by Rs.5.44 crore on account of non-adjustment towards an arbitration award pronounced against the Company
2. Over-statement of Sundry Debtors (Rs.48.69 crore) by Rs.2.49 crore on account of inadequacy of provision made towards amount retained by the clients towards liquidated damages.
3. Crediting of exchange variation profit of Rs.0.03 crore to exchange variation reserve in the current year.

(ii)    Accumulated loss (Rs.856.24 crore) and exchange variation reserve (Rs.59.51 crore) had been overstated by Rs.59.51 crore due to non-recognition of accumulated profit on exchange variation

1.    Revenue had been recognised as sales against interest amounting to Rs.6.80 crore on disputed claim receivable from a customer which was not in accordance with AS-9

2.    Company had capitalised Rs.4.89 lakh, to the extent ascertained, which was in the nature of repairs and maintenance. This was not in accordance with AS-10.

3.    Company had withdrawn an admitted liability of Rs.1.53 crore and considered as prior period income without confirmation/settlement by the creditor.

4.    No provision had been made in respect of:

1. Capital work-in-progress of Rs.2.77 crore on erection/commissioning had been deferred for over three years.
2. Liquidated damages of Rs.10.90 crore deducted by a customer, which was not in accordance with the accounting policy.
3. Interest on overdue amount to small scale industrial undertakings Rs.7.61 lakh had not been provided.Had the above observations been considered, the loss for the year after prior-period adjustments and VR Scheme expenses would have been Rs.211.39 crore (as against the reported figure of Rs.189.26 crore), the figure of profit & loss account in the Balance Sheet would have been debit balance of Rs.1363.81 crore (as against the reported figure of Rs.1341.68 crore debit balance), Sundry Debtors would have been Rs.116.06 crore (as against the reported figure of Rs.133.76 crore), Capital work-in-progress would have been Rs.10.96 crore ( as against the reported figure of Rs. 13.78 crore ) and the Current liabilities would have been Rs.474.79 crore (as against the reported figure of Rs.473.18 crore).

No provision towards arrears of pay and allowances of Rs.6.99 crore had been made for the period 1 January 1992 to 31December 1998.

As a result, loss of Rs.135.82 crore for the year had been under-stated by Rs.6.99 crore.

MINISTRY OF PETROLEUM AND NATURAL GAS

1. No provision had been made in the accounts for long outstanding trade dues from sick/closed undertakings amounting to Rs.3.01 crore.
2. Company had not written off the expenditure of Rs.1.86 crore, included in capital work-in-progress spent in preparation of feasibility report received in October 1996 for enhancement of production capacity of DMT plant which was not being implemented due to receding of its products.
3. No provision had been made in the accounts for stores not moved for more than 5 years valuing Rs.3.91 crore.
4. Amortisation of insurance spares instead of providing for depreciation in accordance with AS-6 read with AS-10 resulted in under-statement of loss and over-statement of Fixed Assets by Rs.4.32 crore.

Had the above observations been considered, loss for the year would have been Rs.70.54 crore (as against reported loss of Rs.57.44 crore) and Fixed Assets would have been Rs.463.91 crore (as against reported figure of Rs.470.09 crore) and net current assets would have been Rs.157.03 crore (as against reported figure of Rs.163.94 crore).

MINISTRY OF POWER

Profit of Rs.447.10 crore was overstated by Rs.48.44 crore due to taking effect of exchange rate variation to the extent of Rs.42.75 crore in the carrying cost of fixed assets and due to non-provision of Rs.5.69 crore of old debtors.

1. Provision for tariff adjustment amounting to Rs. 267.00 crore had been made where tariff was likely to be lower than the existing one;
2. Calculation of tariff for Rs. 77.51 crore on the basis of estimated capital cost, pending finalisation of tariff by Central Electricity Regulatory Commission.

Had the above observations been considered, the profit for the year and reserve and surplus reported would be less by Rs. 344.51 crore.

1. Non-provision of Rs.0.85 crore against receivable from MEA Raj Biraj Project;
2. Writing back of amount of Rs.0.51 crore on account of lease equalisation in respect of seized assets.

Had the above observations been considered, the loss for the year would have been increased by Rs.1.36 crore.

MINISTRY OF SOCIAL JUSTICE & EMPOWERMENT

Profit for the year of Rs.51.03 lakh would have been converted in to loss of Rs.29.01 lakh and prior-period adjustment would have been higher by Rs.8.19 crore had the penal interest of Rs.8.99 crore been provided for.

MINISTRY OF TEXTILES

1. Non-payment of dues in respect of provident fund and ESIC including estimated damages and interest - Rs.39.86 crore
2. Non-provision towards payment made prior to 1995 - Rs.8.18 crore
3. Non-provision of towards wages/salaries and other dues of employees for the post takeover period - Rs.15.26 crore; and
4. Non-provision of gratuity liability for the employees transferred in 1994 - Rs.5.39 crore

Had the effect of the above observations been incorporated in the accounts, the loss for the year would have been Rs.276.36 crore (as against the reported loss figure of Rs.207.67 crore). The net loss carried forward to Balance Sheet would have been Rs.1498.75 crore (as against the reported figure of Rs. 1430.06 crore), Other Current Assets would have been Rs.6.47 crore (as against the reported figure of Rs.29.91 crore).

No provision had been made for the following liabilities in the account:

1. Penal interest leviable by banks and financial institution for the year - Rs.9.18 crore;
2. Liabilities on account of upward pay revision of employees governed by Industrial Dearness Allowance - Rs.5.19 crore;
3. Excise duty on controlled cloth, vicose, polyster and towels/bed sheets - Rs.2.18 crore;
4. Damages on delayed payment of outstanding dues of Provident Fund and ESIC - Rs.20.30 crore; and
5. Disputed delayed payment of power/water charges dues - Rs.6.90 crore.

Had the above observations been considered, the net loss would have been Rs.231.99 crore (as against Rs.188.24 crore reported), secured loans would have been Rs.167.85 crore (as against Rs.158.67 crore reported) and current liabilities would have been Rs.234.76 crore (as against Rs.200.19 crore reported).

MINISTRY OF URBAN AFFAIRS & EMPLOYMENT

On the basis of the impact of qualifications contained in the Report, the net profit for the year (Rs.2.49 crore) would be converted into a net loss of Rs.49.36 crore and the total net assets would be reduced from the reported figure of Rs.127.92 crore to Rs.76.07 crore and hence the said accounts do not reflect a true and fair view (i) in case of Balance Sheet of the state of affairs of the Company as at 31 March 2001 and (ii) in case of Profit and Loss account, of the profit disclosed for the year ended on that date.