Finance Code Chapter 1 - Financial Organization Historical Background  

 

Evolution of Financial Organisation: 1903 Year - Before Railway Board (1905)

 

·  41000 Route KMs - 33 separate Railway companies (4 - Government, 5 - erstwhile Indian States and 24 - Private)  

 

·  Regulator - Railway Branch of PWD - Public Works Department of Government of India  - Headed by ICS Officer (Indian Civil Service) who is also a Member of Viceroy and Governor General’s Executive Council.  

 

·                     Assisted by One Secretary (Like CRB), Three Deputy Secretaries & Four Assistant Secretaries

 

· 3 Deputy Secretaries (like Railway Board Members) representing Traffic, Accounts & Construction.  

 

· Entire Railway System divided into 7 Circles (like Zonal Railways at present)   

 

· Each Circle headed by Consulting Engineer (like GM) and Government Examiner of Accounts (like PFA) 

 

·  The Accounting and Auditing functions of the Railway Branch - combined with the Accountant General, Public Works Department.  

 

Thomas Robertson Report 

· 1901 - Thomas Robertson, CVO was appointed as Special Commissioner for Indian Railways   - to prepare a Report on the administration & working of Indian Railways.  

 

·                     In his report, he recommended setting up of a Railway Board consisting of a President / Chief Commissioner and 2 Commissioners, who are having a practical knowledge of Railway matters and should be “Men of high Railway standing” 

 

·                     The Board should be assisted by a Secretary, a Chief Inspector of Railways and other Inspectors & Government Auditors. 

 

Railway Board

 

·  Established in 1905, 18.02.1905

 

·  On the recommendations of the report of Sir Thomas Robertsons committee in the place of abolished Railway Branch of PWD

 

·  Initially Chairman and Two Members 

·  Responsible for the Government of India in the Department of Commerce & Industry.  

 

· The Railway Department was established in the year 1908 based on the recommendations of the Railway Finance Committee.  

 

· Accountant General of Railways was created (due to amalgamation of the Accounts and Civil Audit establishments of PWD)  

 

·  Landmark Development :  Appointment of FC - Financial Commissioner for Railways in April, 1923  ( on the recommendations of Acworth Committee (1921)  

 

·  Objects of appointment of FC are

·  i) The economy in the expenditure of public moneys

·  ii) Co-ordination of Railway Policy with General Financial policy of Government of India.  

 

Separation Convention:

 

· Acworth Committee recommended Separation of Railway finances from the General finances of Government of India 

 

·  Excerpts of the Acworth Committee are:   

 

"We recommend that the Finance Department should cease to control the internal finances of the railway, that the railways should have a separate budget of their own, be responsible for earning and expending their own incomes and for providing such net revenue as is required to meet the interest on the debt incurred or to be incurred by the Government for railway purpose; and that the railway budget should be presented to the Legislative Assembly, not by the Finance Member of the Council but by the Member in charge of Railways", 

 

Salient features of Acworth committee recommendations are: 

 

1.            No role of Finance Department in regards with Railway Finances 

2.            Separation of Railway Budget from General Budget  

3.            Railways were responsible for earnings and expending their own incomes 

4.            Obligation of paying of Interest on the Debt (i.e., Dividends) to General Finances (Ministry of Finance)  

5.            Presenting of Railway Budget by the Member, in charge of Railways/Minister of Railways (not by Finance Member / Finance Minister)  

 

· However such recommendation is inconsistent with the provisions of Government of India Act, 1919

 

·   So an alternate choice was a Convention to be laid before the Legislative Assembly in the form of Resolution.  The Legislative Assembly voted on the Convention resolution of 1924 on 20.09.1924.  

 

· Separation of Railway Budget from General Budget - 1924 year 

  

Merger of Railway Budget with the General Budget

 

·    With effect from 2017-18 FY 

·   Estimates of Ministry of Railways have been included in the estimates of Union Budget  

·  Presented by Ministry of Finance  

·  Single Appropriation Bill under Article 114 (1) of the Constitution of India.   

 

Evolvement of Financial Organisation  - 5 Stages:   

 

First Stage: Prior to the appointment of FC

 

·                     Prior to the appointment of FC - Financial Commissioner for Railways. In this stage, Accounting work was done by the AG - Accountant General, Railways, under the administrative control of the Auditor General (like Present C&AG - Comptroller & Auditor General of India)  

 

Second Stage: Appointment of FC. Separate cadre of IRAS

 

·                     Appointment of FC - Financial Commissioner of Railways in 1923 (April)  

 

Third Stage:  Separation of Accounting & Auditing functions

 

·                     Separation of the Accounting & Auditing functions on the Railways in the year 1929 

 

·                     on the recommendations of Report of Sir Arthur Lowes Dicknson, 1927 (August)  

 

·                     The Accountant General, Railways (then under the administrative control of the Auditor General) was replaced by  

 

·                     Controller of Railway Accounts (present PFA) responsible to the FC 

 

·                     The Director of Railway Audit (present PDA - Principal Director of Audit) was under the Auditor General (present C&AG) 

 

·                     At Unit level  - Accounts Officers answerable to PFA and Audit Officer answerable to PDA 

 

·                     Beginning of IRAS - Indian Railway Accounts Service as a cadre distinct from the IA&AS - Indian Audit & Accounts Service. 

 

Fourth Stage:  Railway Accounts under the control of GM

 

·                     Placing the Railway Accounts Department under the administrative control of GM instead of FC. 

 

·                     on the recommendations of Indian Railway Enquiry Committee, 1937 (commonly known as Wedgwood Committee) on the pattern of British Railway practice. 

 

·                     To ensure full contact an adequate co-ordination between the GM and PFA 

 

·                     Subject to the condition, that PFA would have access to the FC / Member Finance in all important matters on which he might be in disagreement with the GM not only as regards accounting regularity but also on questions of financial prudence. 

 

·                     Experiment in two State Railways i.e., NWR - North Western Railway and GIPR - Great Indian Peninsular Railway in 1938.  Later it was made permanent in all Government Railways in 1941. 

 

Fifth Stage: Setting up of distinct Finance Branch under PFA

 

·                     Setting up of a distinct Finance Branch under PFA for placing at the disposal of the GM

·                     An improved machinery for financial advice and control. 

·                     Experimental measure in B.B & C.I Railway in 1947 and later adopted permanently on all Indian Railways. 

 

Summary: 

 

·                     The Railway Ministry has been fully delegated with powers relating to all Railway matters. 

·                     The Railway Ministry is managed entirely by Railway Men 

·                     The Railways have their own independent and integrated financial set up i.e., having full powers of financial sanction to expenditure and Accounts are maintained by the Railway’s own Accounting cadres and not by the C&AG - Comptroller & Auditor General. 

 

Member Finance

 

·                     Professional Head of the Railway Financial Organisation. 

 

·                     Represents the Government of India, Finance Department on the Railway Board as ex-officio Secretary to the Government of India in the Ministry of Railways in Financial matters. 

 

·                     Vested with full powers of the Government of India to sanction Railway Expenditure subject to the General control of the Finance Minister. 

 

·                     In the event of a difference of opinion between the Member Finance and other Members of Railway Board, the former, has the right to refer the matter to the Finance Minister. This stipulation is equally applicable to the difference between PFA and other PHODs or GM. 

 

·                     May issue instructions to the PFAs, on all accounting and administrative matters.  These instructions will be communicated to the GM and it is the duty of PFA, to give effect to them. The PFA should, however, keep the GMs in touch with such correspondence as may be exchanged by him directly with Member Finance 

 

Finance Branch: 

 

·     Under control of PFA 

 

·    To assist the Railway Administration in considering all proposals involving financial implications as Canons of Financial Propriety.  

 

·     In any other business, there is hardly any activity or service which does not involve considerations of finance in some form or the other.  Railways is not an exclusion.  

 

·    An important limb of the Administration 

 

·  Its functions are broadly analogous to those of Management Accountant like: 

 

1.            Assist Management 

2.            Making rational plans and decisions.  

3.            Controlling the operations of the Railway Administration as a whole. 

 

·                     Role has been changed from a mere “friendly critic to one of the Complete “Management Participation” 

 

·                      This role is in no way abated by the fact that in case of disagreement, when he has been overruled by the GM, the PFA may request the GM to make a reference to the Railway Board for orders, and the GM would be under an obligation to make such a reference incorporating therein fairly and fully the comments and views of the PFA.

 

·                      The success of the Finance Branch would depend on the spirit and the manner in which its services are utilized by the Executive Departments. 

·                     The relations between the latter and the Finance Branch should, like all interdepartmental relations, be based on mutual confidence and free and full consultation.  

 

Budget:  

 

·                     Initial preparation of the Budget is the responsibility of the Departmental Officers (Executives) 

 

·                     Whereas the scrutiny and compilation of the Budget as a whole - the responsibility of PFA. Also the setting up of a satisfactory system of Budgetary Control.  

 

·                     The Budget Branch is under the control of the GM, though it is manned by personnel of Accounts personnel & Other Departments.   

 

·                     It is obligatory on the Railway Administration i.e., GM to furnish to the Railway Board a verbatim copy of the opinion expressed by PFA with every such proposal, unless it has his unqualified concurrence in which case the fact that he has concurred in the proposal should be indicated in the letter addressed to the Railway Board.  

 

·                     The PFA’s appreciation of the proposal accompanying the Administration's letter should be sufficiently comprehensive and should not only contain his comments, if any, on the facts adduced in justification of the proposal but should also mention its financial and budgetary implications and his views as to its financial prudence.  

 

·                     There can be no hard and fast rules on how precisely the financial scrutiny of proposals received from the Executive departments should be carried out. 

 

·                     Objective: To secure maximum efficiency in Railway operations at the minimum cost, without unduly sacrificing one for the other. 

 

·                     The functions of Railway Finance Officers have now developed beyond the traditional bounds of those of the financial Accountants.

 

·                     These are no longer restricted to tendering advice to the Administration whenever required or necessary in all matters involving railway finances.  

 

·                     The Finance Officer's job as a Management Accountant is: 

 

1.            To furnish and interpret financial statements

2.            Compile cost data and prepare cost reports

3.            Explore avenues of controlling staff and material costs, institute and operate budgetary control procedures, and participate in all Capital expenditure and rating/pricing decisions duly employing tools of analyzing financial decisions such as IRR, Sensitivity Analysis etc. 

 

·                     This involves an irrevocable commitment to Management, and calls for a high degree of professional training and competence. 

 

·                     At the same time the Finance Officer should see that the standards of financial propriety, expected of all Public Servants in the operation of public funds, are strictly observed. 

 

Standards / canons of financial propriety

 

Para No. 116 of Finance Code  - 

 

Rule No. 21 of GFR ( General Financial Rules) of Dept. of Expenditure, Ministry of Finance, Govt. of India.Ø

 

 All sanctioning authorities must pay due regard these rules/principles while exercising their financial powers.  There is a misnomer, that these are the norms to be followed by financial authorities (Finance officers).  But it is not correct.  All Executives/Officers as sanctioning authorities are conscious of these standards.Ø

 

  Every Officer should also enforce financial order and strict economy at every step and see that all relevant financial rules and regulations are observed, by his own office and by subordinate disbursing officers.Ø

 

KEYWORD – P V A C A

 

1.         The expenditure should not prima facie be more than the occasion demands. 

 

           (prima facie means 'at first appearance' or 'before investigation'. A proposal for purchase of a chair for officers at a cost of Rs.one lakh need not require much investigation to sanction the same.  That means on the face itself i.e., cost of the chair Rs. one lakh is not justified to incur expenditure.)

 

2.         That every Government servant should exercise' the same vigilance in respect of expenditure incurred from public moneys as a person of ordinary prudence would exercise in respect of the expenditure of his own money.

 

           (As an ordinary person, how much exercise we would be taken for purchase of Computer or Plasma Color Television, the same exercise supposed to be applied also for expenditure involved of public money)

 

3.         No authority should exercise its powers of sanctioning expenditure to pass an order which will be directly or indirectly to its own advantage.

 

          (Sanctioning of expenditure would not be advantageous to the sanctioning authorities directly or indirectly.  That means Officer should not decide the specifications of the items to be purchased to suit the particular firm for which he or his relatives have a stake) 

4.         Public moneys should not be utilized for the benefit of a particular person or section of the community unless- 

 

a. the amount of expenditure involved is insignificant ; or

b. a claim for the amount could be enforced in a court of law ; or

c. the expenditure is in pursuance of a recognized policy or custom. 

 

5.         The amount of allowances, such as traveling allowances, granted to meet expenditure of a particular type, should be so regulated that the allowances are not on the whole sources of profit to the recipients.

 

            (People should not think of the allowances such as Travelling allowance, Over time allowance, etc as profit.  It should not be correct )

 

Audit officers shall also be responsible for watching that the above principles are strictly observed or not. 

 

Key Takeaways for MCQ 

 

1.            Before 1905, Railways under the control of PWD - Public Works Department

 

2.            Railway Board formed in the year 1905 under Ministry of Commerce & Industries 

 

3.            Railway Board formed on the recommendations of Sir Robert Thomson Committee

 

4.            Railway Department established in the Year 1908.  (Before that, Railways under the Ministry of Commerce & Industries) 

 

5.            FC - Financial Commissioner (now Member Finance) appointment in the year 1923 - on the recommendations of Sir Acworth Committee. 

 

6.            Separation of the Railway Budget from the General Budget - in the year 1924 - based on the recommendations of Sir Acworth Committee

 

7.            The merger of the Railway Budget with the General Budget in the Financial year 2017-18  

 

8.            The financial organisation brought under the GM - Based on the recommendations of the Indian Railway Enquiry Committee, 1937 (commonly known as the Wedgwood Committee)

 

9.            The designation of CAO-Chief Accounts Officer was redesigned as the FA&CAO - Financial Advisor & Chief Accounts Officer.

 

10.         Separating the Accounting and Auditing Functions  - 1929 - on the recommendations of Report of Sir Arthur Lowes Dicknson

 

11.         Placing the Railway Accounts Department under the administrative control of GM instead of FC - on the recommendations of Indian Railway Enquiry Committee, 1937 (commonly known as Wedgwood Committee). 

 

12.        Prior to 1937 year   - CAO - Chief Accounts Officer  - under the  administrative control of FC.

 

13.         1937 year onwards - CAO - Chief Accounts Officer - under the administrative control of GM. 

 

14.         1947 - Setting up of a distinct Finance Branch under PFA for placing at the disposal of the GM

 

15.         Canons of Financial Proprity  - Para No. 116 of Finance Code Volume One 

 

16.         Canons of Financial Proprity - Rule 21 of GFR 

 

17.         Canons of Financial Proprity -  KEYWORD – P V A C A   ( P Stands for Prima facie,  V stands for Vigilance, A stands for Advantageous  C stands for Community & A stands for Allowance. 

 

18.         Audit officers shall also be responsible for watching that the canons of financial priority are strictly observed or not. 

  

Previous	Now
Railway Branch	Railway Board
Public Works Dept	Railway Dept
Secretary, Railway Branch	Chairman & CEO, Railway Board
Dy.Secretary – Accounts	Member (Finance)  - MF
Dy. Secretary – Traffic	Member (O&BD - Operations & Business Development)  - M/O&BD
Dy. Secretary – Construction	Surrendered now.  (Previously it was Member - Engineering)
Circle	Zonal Railway
Consulting Engineer	General Manager
Govt Examiner of Accounts	PFA – Principal Financial Advisor

 

 

 

Event	Year	Committee (recommended by)
Railway Board established	1905	Sir Thomson Robertson Committee
Railway Department established	1908	Railway Finance Committee
FC - Financial Commissioner appointment	1923	Sir Acworth Committee
Separation of Railway finances from General Finances or Railway Budget from General Budget	1924	Sir Acworth Committee
Separation of Accounts & Audit Functions in IR	1929	Sir Arthur Lowes Dicknson
Brought Railway Accounts under the control of GM (instead of FC)	1941	Indian Railway Enquiry Committee (commonly known as  Wedgewood Committee)
Merger of Railway Budget with General Budget	2017-18	NITI Aayog recommendations

 

 

 

MCQ on First chapter of Finance Code  - Financial Organization - Historical Background 

 

SN	Question	Answer
1	Railway Board was formed in the year ______ on the recommendations of _______ A.                 1903, Railway Finance Committee  B.                 1903, Sir Thomson Robertson Committee   C.                 1905, Railway Finance Committee  D.                 1905, Sir Thomson Robertson Committee
2	FC - Financial Commissioner (Present Member Finance)- First appointed in the year _____ on the recommendations of _____________ A.                 1923, Sir Acworth Committee  B.                 1923, Sir Thomas Robertson Committee C.                 1924, Sir Acworth Committee  D.                1924, Sir Thomas Robertson Committee
3	Separating the Audit and Accounts functions in Indian Railways in the year ______ on the recommendations of _____________ A.                 1924, Sir Acworth Committee  B.                 1929, Sir Arthur Lowes Dicknson’s Report  C.                 1923, Sir Acworth Committee  D.                 1924, Sir Arthur Lowes Dicknson’s Report
4	Canons of Financial Propriety - Para _____ of ________  A.                 116 of Accounts Code  B.                 116 of Finance Code  C.                 126 of Accounts Code  D.                 126 of Finance Code
5	Indian Railways were under the control of _________Departments from 1903 to till now (as per chronological order) A.                 PWD, Transport and Railways  B.                 Commerce & Industries, PWD and Railways  C.                 PWD, Commerce & Industries and Railways  D.                 Commerce & Industries and Railways
6	Placing of Railway Accounts Department under the administrative control of GM instead of FC - on the recommendations of _________ A.                 Indian Railways Enquiry Committee (Wedgewood Committee) B.                 Railway Finance Committee  C.                 Sir Thomas Robertson Committee  D.                 Sir Arthur Lowes Dicknson
7	Merger of Railway Budget with the General Budget takes place in the year _____  A.                 2018-19  B.                 2017-18 C.                 2020-21  D.                 2016-17
8	The designations of Accounts Officer in IR are _________ (chronological order)  A.                 Financial Advisor, Chief Accounts Officer, FA&CAO and PFA  B.                 Chief Accounts Officer, Financial Advisor, FA&CA and PFA  C.                 Chief Accounts Officer, FA&CAO and PFA  D.                 FA&CAO and PFA
9	Setting up of a distinct Finance Branch under FA&CAO (present PFA) for placing at the disposal of GM in the year _____ A.                 1924  B.                 1929 C.                 1941 D.                 1947
10	Before 1905, entire Indian Railways was divided into 7 _____ A.                 Zones   B.                 Sections  C.                 Sectors D.                 Circles

 

 

 

 

 

 

Answers for MCQ on

First chapter of Finance Code  - Financial Organization - Historical Background 

 

 

SN	Question	Answer
1	Railway Board was formed in the year ______ on the recommendations of _______ A.     1903, Railway Finance Committee  B.     1903, Sir Thomson Robertson Committee   C.     1905, Railway Finance Committee  D.     1905, Sir Thomson Robertson Committee	D
2	FC - Financial Commissioner (Present Member Finance)- First appointed in the year _____ on the recommendations of _____________ A.     1923, Sir Acworth Committee  B.     1923, Sir Thomas Robertson Committee C.     1924, Sir Acworth Committee  D.     1924, Sir Thomas Robertson Committee	A
3	Separating the Audit and Accounts functions in Indian Railways in the year ______ on the recommendations of _____________ A.     1924, Sir Acworth Committee  B.     1929, Sir Arthur Lowes Dicknson’s Report  C.     1923, Sir Acworth Committee  D.     1924, Sir Arthur Lowes Dicknson’s Report	B
4	Canons of Financial Propriety - Para _____ of ________  A.     116 of Accounts Code  B.     116 of Finance Code  C.     126 of Accounts Code  D.     126 of Finance Code	B
5	Indian Railways were under the control of _________Departments from 1903 to till now (as per chronological order) A.     PWD, Transport and Railways  B.     Commerce & Industries, PWD and Railways  C.     PWD, Commerce & Industries and Railways  D.    Commerce & Industries and Railways	C
6	Placing of Railway Accounts Department under the administrative control of GM instead of FC - on the recommendations of _________ A.     Indian Railways Enquiry Committee (Wedgewood Committee) B.     Railway Finance Committee  C.     Sir Thomas Robertson Committee  D.     Sir Arthur Lowes Dicknson	A
7	Merger of Railway Budget with the General Budget takes place in the year _____  A.     2018-19  B.     2017-18 C.     2020-21  D.     2016-17	B
8	The designations of Accounts Officer in IR are _________ (chronological order)  A.     Financial Advisor, Chief Accounts Officer, FA&CAO and PFA  B.     Chief Accounts Officer, Financial Advisor, FA&CA and PFA  C.     Chief Accounts Officer, FA&CAO and PFA  D.     FA&CAO and PFA	C
9	Setting up of a distinct Finance Branch under FA&CAO (present PFA) for placing at the disposal of GM in the year _____ A.     1924  B.     1929 C.     1941 D.     1947	D
10	Before 1905, entire Indian Railways was divided into 7 _____ A.     Zones  B.     Sections  C.     Sectors D.     Circles	D

  

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