1.  We have audited the attached Balance Sheet of M/s. PASUPATI
 SPINNING & WEAVING MILLS LIMITED as at 31st March, 2012 and also the
 Profit and Loss Account and the cash flow statement for the year ended
 on that date annexed thereto. These financial statements are the
 responsibility of the Company''s management. Our responsibility is to
 express an opinion on these financial statements based on our audit.
 
 2.  We conducted our audit in accordance with auditing standards
 generally accepted in India. Those Standards require that we plan and
 perform the audit to obtain reasonable assurance about whether the
 financial statements are free of material misstatement. An audit
 includes examining, on a test basis, evidence supporting the amounts
 and disclosures in the financial statements.  An audit also includes
 assessing the accounting principles used and significant estimates made
 by management, as well as evaluating the overall financial statement
 presentation. We believe that our audit provides a reasonable basis for
 our opinion.
 
 3.  As required by the Companies (Auditors'' Report) Order, 2003 as
 amended by the Companies (Auditors'' Report) (Amendment) order, 2004,
 issued by the Central Government of India in terms of sub-section (4A)
 of Section 227 of the Companies Act, 1956 we enclose in the Annexure a
 statement on the matters specified in paragraphs 4 and 5 of the said
 order.
 
 4.  Further to our comments in the annexure referred to above, we
 report that :
 
 i. We have obtained all the information and explanations which to the
 best of our knowledge and belief were necessary for the purpose of our
 audit.
 
 ii. In our opinion, proper books of account, as required by law have
 been kept by the Company, so far as appears from our examination of the
 said books.
 
 iii. The Balance Sheet, Profit and Loss Account and cash flow statement
 dealt with by this report are in agreement with the books of account.
 
 iv. In our opinion the Balance Sheet, Profit & Loss Account and cash
 flow statement dealt with by this report comply with the Accounting
 Standards referred to in sub-section (3C) of Section 211 of the
 Companies Act, 1956, subject to our observations in paragraph (vi)
 below.
 
 v. As per information and explanations given to us, we report that as
 on 31.3.2012 none of the directors of the company are disqualified from
 being appointed as a director of the company under Section 274((1)(g)
 of the Companies Act, 1956. As the company had not redeemed its
 debentures on due dates and as the default continued for more than a
 year, directors of the company were not qualified for being appointed
 as directors of any other public company in terms of provision of
 Section 274(1)(g) of the Companies Act, 1956 as amended by the
 Companies Amendment Act, 2000. Board for Industrial and Financial
 Reconstruction has sanctioned rehabilitation scheme for the company
 vide its order dated 17.2.2012. The said scheme has approved payments
 of the settled amount to debenture holders in instalments. The payment
 as approved by BIFR is being made and there is no default in such
 payment. Besides, one of the directors has been appointed after the
 scheme has been sanctioned. He has certified that he is not
 disqualified from being appointed as a director in any other company.
 
 vi.  Reference is drawn to :
 
 (a) Note No. 32 of accompanying notes to the financial statements
 relating to accounts of the company for the year-ended 31.03.2012
 having been prepared on the basis that the company is a going concern.
 
 (b) Note No 4(v)(b) of accompanying notes to the financial statements
 relating to non- provision of interest amounting to Rs. 59109302
 (including Rs. 26614936 for earlier years) on loan of Rs.10 Crores of
 JMFARC which is proposed to be converted into Equity / Optionally
 Cumulative Convertible Debentures as per the rehabilitation scheme
 sanctioned by BIFR resulting in the profit for the year to be higher
 and other current liabilities to be lower by the said amount.
 
 (c) Note No. 4(v)(c) of accompanying notes to the financial statements
 relating to waiver of loan of Rs. 6.45 Crores of JMFARC not being
 written back pending full implementation of rehabilitation scheme
 sanctioned by BIFR, resulting in the profit for the year to be lower
 and long term borrowings to be higher by the said amount.
 
 (d) Note No. 4(vii)(g) of accompanying notes to the financial
 statements relating to non- provision of interest on 14% and 15%
 redeemable partly convertible debentures amounting to Rs.
 23939987(including Rs. 21944988 for earlier years) resulting in the
 profit for the year to be higher and other current liabilities to be
 lower by the said amount.
 
 (e) Note No. 3 of accompanying notes to the financial statements
 relating to non provision of Debenture Redemption Reserve amounting to
 Rs. 18761301 which has no effect on the profit for the year.
 
 (f) Note No. 30(b) of accompanying notes to financial statements
 relating to payment of remuneration of Rs.1187496(including Rs. 579606
 for previous year) to a director for which approval of Central
 Government is to be obtained resulting in the profit for the year and
 cash & cash equivalents to be understated by the said amount.
 
 (g) Note No. 11 of the accompanying notes to the financial statements
 relating to non provision of additional compensation on acquisition of
 part of factory land amounting to Rs. 24276787, demanded by the
 company, resulting in the profit for the year and other current assets
 to be lower by the said amount.
 
 (h) We further report that had the observations made by us in paragraph
 vi(b), vi(c), vi(d), vi(f) and vi(g) above been considered, the profit
 for the year would have been Rs.  18987624 (as against the reported
 figure of Rs. 12072180), long term borrowings would have been Rs.
 47910478 (as against the reported figure of Rs. 112410478), cash & cash
 equivalents would have been Rs.30687858 (as against the reported figure
 of Rs. 29499912), other current liabilities would have been Rs.
 429178322 (against the reported figure of Rs. 346129033) and other
 current assets would have been Rs. 34731633 (against the reported
 figure of Rs. 10454846).
 
 Subject to the above, in our opinion and to the best of our information
 and according to the explanations given to us, the said accounts read
 together with the accompanying notes give the information required by
 the Companies Act, 1956, in the manner so required and give a true and
 fair view in conformity with the accounting principles generally
 accepted in India :
 
 i) in the case of the Balance Sheet, of the state of affairs of the
 Company as at 31st March, 2012 and
 
 ii) in the case of the Profit and Loss Account, of the profit for the
 year ended on that date and
 
 iii) in the case of cash flow statement, of the cash flow for the year
 ended on that date.
 
 ANNEXURE REFERRED TO IN PARAGRAPH 3 OF OUR REPORT OF EVEN DATE
 
 (i) (a) The company has maintained proper records showing full
 particulars including quantitative details and situation of fixed
 assets.
 
 (b) As explained to us, all the fixed assets have been physically
 verified by the management according to a regular program which in our
 opinion is reasonable having regard to the size of the company and the
 nature of its assets. No material discrepancies with respect to book
 records were noticed on such verification.
 
 (c) In our opinion and according to explanations given to us, fixed
 assets disposed off during the year were not substantial and as such
 the disposal has not affected the going concern concept of the company.
 
 (ii) (a) As explained to us, physical verification of inventory (except
 material in transit and lying with third parties) has been conducted by
 the management at reasonable intervals. In our opinion, the frequency
 of verification is reasonable.
 
 (b) In our opinion, the procedures of physical verification of
 inventories followed by the management are reasonable and adequate in
 relation to the size of the company and nature of its business.
 
 (c) On the basis of our examination of the records of inventory, we are
 of the opinion that the company is maintaining proper records of
 inventory. Discrepancies noticed on verification of inventory as
 compared to book records were not material and these have been properly
 dealt with in the books of accounts.
 
 (iii) The company has neither granted nor taken any loans, secured or
 unsecured, to / from companies, firms or other parties covered in the
 register maintained under Section 301 of the Companies Act, 1956 and
 hence paragraph (iii)(a) to (iii)(g) of the aforesaid order are not
 applicable to the company.
 
 (iv) In our opinion and according to the information and explanations
 given to us, there are adequate internal control procedures
 commensurate with the size of the company and the nature of its
 business with regard to purchase of inventory and fixed assets and for
 the sale of goods and services. No major weakness in the internal
 control system was observed during the course of audit.
 
 (v) According to the information and explanations given to us, during
 the year there were no transactions that need to be entered into the
 register maintained under Section 301 of the Companies Act, 1956.
 Accordingly, paragraphs v (a) and (b) of the aforesaid order are not
 applicable.
 
 (vi) In our opinion and according to the information and explanations
 given to us, the company has not accepted any deposits from public as
 per provisions of Sections 58A, 58AA or any other relevant provisions
 of the Companies Act, 1956 and the Companies (Acceptance of Deposit)
 Rules, 1975. No order has been passed by the Company Law Board or
 National Company law Tribunal or Reserve Bank of India or any court or
 any other Tribunal.
 
 (vii) In our opinion, the company has an internal audit system
 commensurate with the size and nature of its business.
 
 (viii) We have broadly reviewed the books of account maintained by the
 company pursuant to the order made by the Central Government for the
 maintenance of cost records under Section 209 (1) (d) of the Companies
 Act, 1956 and we are of the opinion that prima facie the prescribed
 accounts and records have been made and maintained. However, we have
 not made a detailed examination of such accounts and records.
 
 (ix) (a) According to the records of the company, the company is not
 regular in depositing with the appropriate authorities undisputed
 statutory dues including Provident Fund, Investor Education and
 Protection Fund, Employees State Insurance, Income Tax, Wealth Tax,
 Service Tax, Custom Duty, Excise Duty, Cess and other statutory dues
 applicable to it.  According to information and explanations given to
 us the undisputed amounts outstanding as at 31st March, 2012 for a
 period of more than six months from the date they became payable are as
 under :
 
 Name of the Statue    Nature of dues      Amount   Period to which
                                           Rs.      amount relates
 
 Sales Tax Haryana     Demand               339148  2006-07
 
 Central Excise Act    Excise Duty        27555087  April'' 84 to Oct.'' 93
 
 Service Tax Act       Service Tax          380586  2009-10
 
 (b) According to the records of the company, dues in respect of Sales
 Tax/Income Tax / Customs Duty/Wealth Tax/Service Tax/Excise Duty/Cess
 which have not been deposited on account of any dispute are as under :
 
 Name of              Nature of dues    Amount   Forum where pending
 the Statue                             Rs.
 
 Haryana Value        VAT              4407602   Joint Excise & Taxation
 Added Tax Act                                   Commissioner
 
 Uttar Pradesh        VAT               106000   Joint
 VAT Act, 2007                                   Commissioner (Appeals)
 
 Income Tax           Income Tax      16364611   Assessing Authority
 Act, 1961
 
 (x) A s at 31.03.2012 the accumulated losses of the company are more
 than fifty percent of its net worth. The company has not incurred cash
 losses during the financial year covered by our audit or in the
 immediately preceding financial year.
 
 (xi) The company has defaulted in payment of dues to financial
 institutions, banks and debenture holders. Details as per company''s
 books of accounts are as under :
 
 The limits with banks were overdrawn for most of the year and were
 within limits for the remaining part of the year. The overdrawn limits
 as on 31.03.2012 are as under :
 
 Nature of Limit       Name of the Bank           Limit      Balance as
                                                             per Banks
                                                 (Rs. in
                                                  Lacs)     (Rs. in Lacs)
 
 Demand Loan           Nainital Bank Limited        27.40         27.75
 
                       State Bank of Travancore     82.20         82.60
 
                       Canara Bank                  98.00         99.40
 
                       Bank of Baroda              136.00        137.88
 
 Packing Credit        State Bank of Patiala       315.50        317.83
 
                       ING Vysya Bank Ltd.         114.50        115.61
 
                       Bank of Baroda              350.00        368.25
 
 Cash Credit           State Bank of Patiala       105.50        105.94
 
                       Canara Bank                 225.00        230.05
 
                       State Bank of Travancore    375.80        378.28
 
 Nature of Limit               Excess            Remarks
                              (Rs. in Lacs)
 
 Demand Loan                       0.35          Borrowings
                                   0.40          in excess
                                   1.40          of limit 
                                   1.88
 
 Packing Credit                    2.33
 
                                   1.11
 
                                  18.25
 
 Cash Credit                       0.44 
 
                                   5.05 
 
                                   2.48
 
 Nature of Limit   Name of the Bank   Amount     Due       Remarks
                                      Overdue    Date
                                      (Rs.)
 
 Bill Discounted/  Bank of Baroda     290377   11.03.2012  Payment 
                                                           pending on
                                                           due date
 Purchased                            421413   11.03.2012
 
 Does not include amount for which one time settlement (OTS) has been
 negotiated with the lenders and repayment of dues has been rescheduled
 or the dues have been settled / rescheduled by BIFR vide its order
 dated 17.02.2012 and payments are being made accordingly.
 
 (xii) Based on our examination of documents and records maintained by
 the company, we are of the opinion that since the company has not
 granted any loan and advance on the basis of security by way of pledge
 of shares, debenture and other securities, it is not required to
 maintain records in respect thereof.
 
 (xiii) In our opinion the company is neither a chit fund nor nidhi /
 mutual benefit fund / society and hence paragraph 4 (xiii) of the
 aforesaid order is not applicable.
 
 (xiv) In our opinion the company is not dealing in or trading in
 shares, securities, debentures and other investments and accordingly
 the provisions of paragraph 4 (xiv) of the aforesaid order is not
 applicable.
 
 (xv) Based on our examination of the records we are of the opinion that
 the company has not given any guarantee for loans taken by others from
 banks or financial institutions.
 
 (xvi) In our opinion, term loans received during the year have been
 applied for the purpose for which they were obtained.
 
 (xvii) According to the information and explanations given to us and on
 an overall examination of the balance sheet of the company, we report
 that funds raised on short term basis have not been used for long term
 investments.
 
 (xviii) During the year the company has not made any preferential
 allotment of shares to parties and companies covered in the register
 maintained under Section 301 of Companies Act, 1956.
 
 (xix) During the year the company had not issued any debentures. The
 company has created security or charge in respect of debentures issued
 in earlier years.
 
 (xx) During the year under review no money was raised by public issue.
 
 (xxi) During the course of our examination of the books and records of
 the company, carried out in accordance with auditing standards
 generally accepted in India, we have not come across any instance of
 fraud by the company or on the company, noticed or reported during the
 year.  We have also not been informed of any such case by the
 management.
 
                                               for B.K. SHROFF & CO.,
 
                                              Chartered Accountants
 
                                      Firm Registration No. 302166E
 
 3/7-B, Asaf Ali Road,
 
 New Delhi-110 002.                                     O.P. SHORFF
 
 Dated : 30th May, 2012                                     Partner
 
                                              Membership  No. 06329