1.2 Query Creation of a statutory reserve fund in Accounts. 1.The querists are a State Government Corporation manufacturing sugar. The query relates to the creation of a Fund under section 10A of the Sheera Niyantran Adhiniyam, 1964. This section, which was inserted in 1974, is reproduced below:
“Funds for Regulation of Adequate Storage Facilities
Every occupier of a sugar factory shall from the price prescribed in the schedule referred to in sub-sec. (I) of sec. 10 for different grades of molasses, place in separate fund the amount mentioned below or such other amount as the State Government may notify in that behalf for being utilised for provision and maintenance of adequate storage facilities in accordance with general or special orders issued from time to time by the Controller:
2. Pursuant to the above provisions, the querists have created the Fund in the following manner:
(i) The sale proceeds from molasses have been shown in the Profit and Loss Account in full i.e. without deducting the amount for the purpose of creating the Fund.
(ii) The profit and loss account has not been debited but amount equal to the statutory requirement has been placed in various deposit accounts under the head “Cash and Bank Balances” in the Balance Sheet as below: --“on Fixed Deposit Account—Molasses Fund”
--“on Savings Bank Account—
Post Office………………………Molasses Fund”
--“on Term Deposit Account of—
Post Office………………………..Molasses Fund” 3.The State Government issued a notification on December 31, 1975, increasing the rates for the purpose of creating this fund by approximately six times. The said enhancement wasquashed by the High Court in 1980. The querists did not make any adjustment in their 4.The Comptroller and Auditor General of India pursuant to his powers u/s 619 (4) of the Companies Act made the following observations:
“Cash & Bank Balance—Rs. 6,14,54,780 (Sch. “K”)
(a) As per the Sheera Niyantran Adhiniyam, 1964, introduced by amendment Act (XV) of 1974, every occupier of a sugar factory would, from the price prescribed in the schedule for sale of molasses, place an amount at the rate mentioned therein in separate fund for being utilised for provision and maintenance of adequate storage facilities. The company has not created any fund in accordance with the above Act; instead it had earmarked out of cash and bank balance Rs. 28,93,213 (Savings Bank Account Rs. 1,88,671, Fixed Deposit Account Rs. 26,96,660 and Post Office Savings Bank Account Rs. 7,882 as Molasses Fund).
(b) The rate of contribution to be set apart as mentioned in the Act was enhanced from 1975; the enhanced rate was struck down by the High Court in June, 1980. The approximate amount to be credited to the fund works out to Rs. 5,92,000. Due to non-creation of Reserve Fund, the accumulated loss Rs. 26,37,98,542 stands understated to that extent.
(c) In the absence of the said fund, the maintenance expenditure on the storage facilities is being charged to the Profit and Loss A/c.”
5. The views of the querist on the above observations of the C & AG are as follows:
(a) Neither the Companies Act, 1956, nor the Sheera Niyantran Adhiniyam, 1964, and amendment of 1974, require that the reserve fund should be created by debiting the Profit and Loss Account.
(b) Funds which were not earlier available for use due to enhanced rates under “Adhiniyam” were now available for use and this does not change the profitability. It, of course, improves the availability of working capital i.e. liquidity position, but nothing else. It does not reduce the losses of the Corporation.
(c) Funds utilised for maintenance of molasses storage facilities etc. would not always be adjusted (debited) against the “reserve” so created. Depending upon the necessity, the moneys would be utilised for “capital” or “revenue” expenditure. Action in this regard is possible only after obtaining the permission of the Controller of Molasses but under no circumstances the same would be effected through an adjustment against any “reserve” as stated by C & AG.
(d) The querist are also of the opinion that the disclosure of such a fund as a “liability” is not proper because this money is not owed to an outsider viz. the State Government.
6.In brief, the querists sought the opinion of the Expert Advisory Committee on the following:
(1) Whether the Fund should have been created by debiting the Profit and Loss Account, and whether the loss has been understated because it was not done so.
(2) Whether the surplus arising over the past years from the quashing of the notification enhancing rates affects the profitability of business.
(3) Whether maintenance expenditure on the storage facilities of molasses should have been charged to the Fund created under the Act or to the Profit and Loss Account.
Opinion January 19, 1982 1.The Committee considered the above facts and was of the view that it was a statutory obligation to create the fund. Despite the fact that the control and management of such fund vests with the querists, in accounting practice, the only way to discharge such an obligation is by creating a Special Reserve Fund under “Reserve and Surplus,” with a corresponding debit to the Profit and Loss Account (even if the business is incurring losses). 2.The fact that querists have deposited money in the bank and post office against such reserve, simply means that the fund so created is represented by these specific assets. Since the creation of this fund is in the nature of a provision, failure to debit the Profit and Loss Account during the past years has resulted in the accumulated loss being understated to that extent. 3.The contention that the benefit accruing to the querists from the quashing of the enhancement notification only improves liquidity and not profitability is also not correct. As the creation of the reserve fund should have been a charge to the Profit and Loss Account, the reduction of such a charge with retrospective effect should have been credited to the Profit and Loss Account or to the Reserve Fund if it had been created. Thus, the quashing does affect the profitability of the business. Since the querists did not create the Reserve Fund this can now be created by debiting the Profit and Loss Account of the current year with the total amount. 4. It is also clear that all annual expenses on the maintenance of the storage facilities should be debited to the Fund, provided, it is in accordance with the orders issued by the Controller of Molasses. Therefore, the objection by the C& AG that in the absence of the Fund the maintenance expenditure on storage facilities is being charged to the Profit and Loss Account, is valid. From the language of the section, it may be interpreted that any expenditure which is not in accordance with the orders as specified above, may be charged directly to the Profit and Loss Account and not through the Reserve Fund Account. Otherwise, the debit should be made to the Reserve Fund Account. 5. In view of the above, the Committee’s opinion is as below: --
(1) The reserve Fund should have been created by debiting the Profit and Loss Account and as it has not been done, the loss has been understated. To rectify the error, the Profit and Loss Account of the current year should be debited and the Molasses Storage Maintenance Fund Account should be credited at the old rates for the past years.
(2) Maintenance expenditure on the storage facilities as per the general or special orders issued from time to time by the Controller, should have been charged through the Fund Account.
(3) Since the company did not follow the accounting treatment given in (1) & (2) above, the maintenance charges of earlier years have been debited to the respective profit and loss accounts. To rectify this the current year’s Profit and Loss Account should be credited with the total maintenance charges so debited in the years with corresponding debit to the Molasses Storage Maintenance Fund which is to be created as suggested in (1) above.
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