3.2 Query
Employer’s contribution to Public Provident Fund of the Managing Director of the company.
1.The statutory auditors of a public limited company have observed that the company is depositing the employer’s share of provident fund contribution to the Public Provident Fund (PPF) of the Managing Director. The approval of Central Government in this regard reads as under: -
“Company’s contribution towards Provident Fund subject to ceiling of 8% of the salary”.
2. The statutory auditors are of the view that
(a) the above contribution means that contribution should be to the Contributory Provident Fund maintained by the company for the benefit of their employees;
(b) the company cannot subscribe to the Public Provident Fund of the Managing Director as under PPF Act, 1968, only an individual can be the subscriber;
(c) the PPF is not recognised as per the provision of Section 2(38) of the Income-tax Act, 1961, for the purposes of Section 36(1)(IV) of the said Act so the amount will not be allowed as an expenditure in the hands of the company;
(d) in view of the above, it would mean that the company has paid unauthorized remuneration to the Managing Director and the company should recover the same from him.
3.The management of the company, however, differs with the statutory auditors. The management is of the view that the provident fund can be deposited in any provident fund including the Public Provident Fund.
4.The querist has sought the opinion of the Expert Advisory Committee on the following issues arising from the above:
(i) Whether the opinion of the statutory auditors is correct. (The querist has requested the Committee to give the reasons for its opinion in this regard.)
(ii) If so, what course of action the auditors should take
(a) in case the company debits the whole contribution to the employee and adjusts it with his salary payable for the relevant period?
(b) in case the company does not rectify accordingly?
Opinion July 27, 1989
1.The opinion of the Committee on various issues raised by the querist in para 4 of the query is as below:
(i) Since a contributory provident fund is already maintained by the company, contribution to that provident fund should be made by the company in respect of the company in respect of the provident fund of the managing director as per the approval of the Central Government. In view of this, the stand taken by the statutory auditors, that subscription to public provident fund in these circumstances amounts to payment of unauthorised remuneration to managing director is correct.
(ii)(a) The Committee notes that para 3.17 of the Statement on qualifications in Auditor’s Report, states as below:
“In some cases the auditor’s objection may be of such a nature that it is his duty to bring it to the attention of shareholders, e.g., where there is a breach of law. It would not be sufficient in that case to merely state the facts leaving it to be inferred therefrom that a contravention of legal requirements has arisen. It is the auditor’s duty not only to state the facts which give rise to the legal contravention, but also to point out that in his opinion, a contravention of the law has occurred. For example, if a company has not separately invested the provident fund moneys of its employees, it would not be sufficient for the auditor in his report merely to state this fact. He should go further and point out that the facts as stated constitute, in his opinion, a contravention of the requirements of Section 418 of the Companies Act.”
The Committee is accordingly of the opinion that even if the company debits the whole contribution to the managing director and adjusts the same with his salary payable for the relevant period, the auditors should qualify their report since a mere rectification does not absolve the company of breach of law. However, the auditors may also mention about the rectification made by the company.
(b) Same as (a) above, excepting that obviously no mention has to be made about rectification. ___________________________ |