Expert Advisory Committee

1.28 Query:

Provision for liability on account of market fees.

1. A government corporation, managed by the board of directors nominated by the State Government, is engaged in the distribution of the essential commodities. The Memorandum of Association of the corporation, vide clause no. III A (iii) and (XIV) of the object clause reproduced hereunder, gives it the status of an agent of the Government, for carrying out its objects:

“(iii) To act as an agent of the Government of ………. in the matter of procurement and distribution, both in wholesale and retail, of food-grains and food-stuffs.

(xiv) To carry out and implement the food policies or such other policies of Government, Central or State as may be directly linked with the objects of the corporation and also the act as an agent of the Government of ………….. and Central Government or Food Corporation of India or any other institution or body corporate or society in the matter of procurement and distribution, both in wholesale and retail, of food-grains, food-stuffs and other essential commodities as may be identified by the Government from time to time.”

2. The Articles of Association of the corporation provide, vide Article No. 93, as reproduced hereunder, for the supremacy of Government over the important decisions of the Board.

Article 93

“(1) Subject to the Provisions of the Act, the Chairman shall reserve for the approval of the State Government any proposals on decisions of the Board, in respect of the following matters, namely: -

(a) -----------------

(b) ------------------

(d) Any other matter which in the opinion of the Chairman is of such importance, as to be reserved for the approval of the State Government.

(2) No action shall be taken by the company in respect of the any proposal or decisions of the Board reserved for the approval of the State Government as aforesaid until approval of the same has been obtained.”

3. The sale price of edible oil and foodgrains was fixed by the Government, inclusive of ‘mandi fees’ during the financial years 1985-86, 1986-87 and 1987-88. Later, in October, 1991, and February, 1992, it came to the notice of the Government that the mandi fees was not payable by the corporation on the edible oil and foodgrains at the second point of sale (where purchase and sale are made in the same mandi area). Thus, the mandi fees wrongly collected from the customers has to be refunded. The Government then directed the corporation to deposit the excess collection of mandi fees, included in sale price earlier, in the Government treasury. (The querist has submitted copies of the relevant governmental directions for the perusal of the Committee). In this context it should be noted that the identity of the customers can not be ascertained easily as the number of customers is very large.

4. On the direction of the Government, the corporation has shown the amount of mandi fees collected as payable to the Government. The adjustment was made in the books of account during the year 1987-88 for this year as well as the previous years, since the accounts for the year 1987-88, were open and the statutory audit was not completed. The accounts for the subsequent years are still to be finalised.

5. The querist has stated that the corporation had collected mandi fees in trust and hence it was not the income/trading receipt for the corporation. It has been well settled in various cases, e.g., Chowringhee Sales Bureau Private Limited Vs CIT (1973) 87 ITR 542 and Commissioner of Income Tax M. P. Vs M. P. State Agro Industries Development Corporation, Bhopal, “That the moneys which were not income at the time of receipt, could never later be treated as income”. It is the true nature and the quality of receipt which would prove decisive. The corporation’s receipts of mandi fees represented the character of money in trust. Since no demand was made, it was neither paid to the mandi board nor refunded to the consumers since their identity was unascertainable. A similar Judgement was also given in Indore Bhed-Bakra Vikreta Sangh and others Vs the Municipal Corporation AIR 1992 M. P. 134.

6. The querist has further stated that the Indian Contract Act, 1872, also states that if money has been collected by mistake or under coercion, it must be returned/repaid. Thus, the corporation is legally bound to return the said mandi fees unauthorisedly collected. Hence, the corporation has shown the liability for refund of mandi fees in question in the accounting year 1987-88.

7. The querist has sought the opinion of the Expert Advisory Committee in respect of following issues:

(a) Whether the amount has been rightly shown as payable to the Government, in the accounting year 1987-88?

(b) If not, then in which year it should be shown as payable?

Opinion December 8, 1992

1. It may be mentioned that the Committee has addressed itself only to the issues raised by the querist in his query. The Committee has not considered other issues arising from the matter such as whether ‘mandi fees’ constitutes a trading receipt in the hands of the corporation or not.

2. The Committee further notes paras 3.1, 3.2 and 10 of Accounting Standard (AS) 5 on ‘Prior Period and Extraordinary Items and Changes in Accounting Policies’, issued by the Institute of Chartered Accountants of India, which read as follows:

“3.1 ‘Prior period items’ are material charges or credits which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.

3.2 ‘Extraordinary items’ are gains or losses which arise from events or transactions that are distinct from the ordinary activities of the business and which are both material and expected not to recur frequently or regularly. These would also include material adjustments necessitated by circumstances, which though related to previous periods are determined in the current period.

10. Extraordinary items of enterprise during the period should be disclosed in the statement of profit and loss as part of net income. The nature and amount of each such item should be separately disclosed in a manner that their relative significance and effect on the current operating results of the period can be perceived.”

3. The Committee notes that the company did not make any provision for the market fees collected at the time relevant sales were effected, even though it was aware that the said fees formed a part of the sale price. The Committee, therefore, feels that the company considered that the said fees was to be retained by it until the receipt of the Government orders in this regard. The Committee is thus of the view that this liability has arisen in view of the above-stated governmental orders, which though relate to previous periods, i.e., financial years 1985-86, 1986-87 and 1987-88 but have been passed in the financial year 1991-92 only. Therefore, the relevant liability is an extraordinary item for the financial year 1991-92.

4. The Committee is further of the view that it cannot be regarded as an event occurring after the balance sheet date which requires any adjustment in the accounts for the year 1987-88, since the liability to refund the amount collected on account of market fees as composite part of the sale price, has arisen consequent to the governmental orders dated October 8, 1991, and February 1, 1992, only. Therefore, it cannot be said that there existed any condition as at the date of balance sheet relevant to financial year 1987-88. In this context, the Committee notes para 8.2 of Accounting Standard (AS) 4 on ‘Contingencies and Events Occurring After the Balance Sheet Date’, issued by the Institute of Chartered Accountants of India, which states as follows:

“8.2 Adjustments to assets and liabilities are required for significant events occurring after the balance sheet date that provide additional information materially affecting the determination of the amounts relating to conditions existing at the balance sheet date. For example, an adjustment may be made for a loss on a trade receivable account which is confirmed by the insolvency of a customer which occurs after the balance sheet date.”

5. On the basis of the above, the Committee is of the following opinion in respect of the issues raised by the querist in paragraph 7 of the query:

(a) No. The company should have provided for the relevant liability only in the financial year 1991-92 as an extraordinary item. The company should also make appropriate disclosures as recommended in paragraph 10 of Accounting Standard (AS) 5, reproduced at paragraph 2 above.

(b) Please see (a) above.

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