BOOKS OF ACCOUNT OF COMPANY
OBLIGATION OF THE COMPANY TO MAINTAIN BOOKS OF ACCOUNT
Provisions relating to accounts of companies are dealt with under Chapter IX (sections 128 to 138) of the Companies Act, 2013 (hereinafter referred to as ‘the Act’/’the 2013 Act’).
Section 128(1)/(2) of the Act deals with obligations of company to maintain books of account.
1.1-1 General
Every company shall prepare and keep books of account [para 1.1-7] and other relevant books and papers and financial statements (see Chapter 2) for every financial year [para 1.1-8].
1.1-2 Accrual basis and Double entry
Books of account shall be kept on accrual basis [para 1.1-10] and according to the double entry system of accounting. Unlike the 1956 Act, the 2013 Act does not state that in case of non-compliance with this requirement, it shall be deemed that proper books of account have not been kept.
1.1-3 True and Fair and Explanatory
The books of account shall:
(i) give a true and fair view of the state of the affairs of the company, including that of its branch office or offices, if any, and
(ii) explain the transactions effected both at the registered office and its branches.
1.1-4 Electronic mode
Company may keep such books of account or other relevant papers in electronic mode in such manner as may be prescribed. [Para 1.1-9]
1.1-5 Place of keeping books of account
♦ Such books of account or other relevant papers shall be kept in the registered office of the company.
♦ However, all or any of the books of account aforesaid and other relevant papers may be kept at such other place in India as the Board of Directors may decide.
♦ If the Board of Directors so decide, the company shall, within 7 days thereof, file with the Registrar a notice in writing giving the full address of that other place.
♦ Where a company has a branch office within India or outside, it shall be deemed to have complied with the above provisions, if :
– proper books of account relating to the transactions effected at the branch office are kept at that office, and
– proper summarised returns periodically are sent by the branch office to the company at its registered office or the other place referred to above. [Section 128(2)]
1.1-6 Deeming provision that proper books of account have not been kept
Section 338(2) of the 2013 Act provides that, in the context of a company being wound up, it shall be deemed that proper books of account have not been kept,—
(a) if such books of account as are necessary to exhibit and explain the transactions and financial position of the business of the company, including books containing entries made from day-to-day in sufficient detail of all cash received and all cash paid, have not been kept; and
(b) where the business of the company has involved dealings in goods, the following statements are not kept :
– statements of the annual stock takings, and
– except in the case of goods sold by way of ordinary retail trade, statements of all goods sold and purchased, showing the goods and the buyers and the sellers thereof in sufficient detail to enable those goods and those buyers and sellers to be identified.
Although the above definition is in the context of a company being wound up, it needs to be complied with even for a perfectly functional company. This is because section 338(1) punishes officer-in-default if it is shown that proper books of account were not kept by the company throughout the period of 2 years preceding the commencement of the winding up.
One does not know when company would go into winding up. So, it is better that section 338(2) is complied with by perfectly functional companies from day one.
1.1-7 Definition of ‘books of account’
Section 2(13) of the 2013 Act defines the expression ‘books of account’. However, there is no definition of the expression ‘proper books of account’.
The following features of the definition of ‘books of account’ in section 2(13) of the Act may be noted:
♦ The definition is an inclusive definition.
♦ The expression includes records maintained in respect of—
(i) all sums of money received and expended and matters in respect of which receipts and expenditure take place.
(ii) all sales and purchases of goods and services by the company.
(iii) the assets and liabilities of the company.
♦ In case of a company which belongs to any class of companies specified (See section 148 of the 2013 Act), the expression also includes cost records as prescribed.
♦ Sections 2(12)* and 128(1) of the 2013 Act, for the first time, permit companies to maintain their books of account in electronic form. [see Para 1.1-9]
♦ The purpose of an inclusive definition appears to be to make it compulsory for all companies to maintain records in respect of items (i) to (iii) above. In case of specified classes of companies, maintenance of prescribed cost records shall also be compulsory.
♦ However, the books of account enumerated in section 2(13) do not exhaust the records/books of account to be maintained by a company.
♦ The ‘books of account’ maintained shall (i) give a true and fair view of the company’s state of affairs and (ii) explain its transactions. So, all records necessary to achieve the above twin objectives will have to be maintained.
As the definition of ‘books of account’ is an inclusive one, the ordinary and commercial meaning of the expression as per decided cases is relevant. The following judicial decisions are relevant :—
■ Books of account do not include balance sheet and profit and loss account. – J.K. Industries Ltd. v. Union of India [2007] 80 SCL 283 (SC)
■ “Account” means to reckon. A book which contains successive entries of items may be a good memorandum book; but until those entries are totalled or balanced, or both as the case may be, there is no reckoning and no accounts. A book which merely contains entries of items of which no account is made at any time, is not a ‘books of account’ in commercial sense. – Sheraton Apparels v. Asstt. CIT [2002] 123 Taxman 238 (Bom.)
■ ‘Books of account’ means such books of account as are usual in the business. It does not extend to letters, cheques and vouchers from which books of account can be made up. (Per Cave, J., Re.Winslow, 55 LJQB)
1.1-8 Definition of “financial year”
Section 129(2) of the 2013 Act provides that at every Annual General Meeting, the Board of Directors shall lay before the company the financial statements for the financial year. Therefore, definition of ‘financial year’ is important.
The ingredients of the definition of ‘financial year’ in section 2(41) of the 2013 Act are as under:
♦ The expression “financial year” is defined with reference to companies and bodies corporate (see para 1.1-8c).
♦ “Financial year” means the period ending on the 31st day of March every year, i.e. 1st April to 31st March.
♦ A company or a body corporate existing as at the commencement of the 2013 Act shall within 2 years from such commencement align its financial year as above.
The above requirement of uniform financial year of 12 months from 1st April to 31st March for all companies is subject to two exceptions [see para 1.1-8a and para 1.1-8b].
1.1-8a Exception carved out for first financial year where company incorporated on or after the 1st January of a financial year
♦ Where a company or body corporate has been incorporated on or after the 1st day of January of a year, the (first) financial year is the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate laid before it in its annual general meeting is made up.
♦ In other words, if a company of body corporate is incorporated on 31-12-2014, its first financial year shall be the period from 31-12-2014 to 31-3-2015.
If a company or body corporate is incorporated on 1-1- 2015, its first financial year will be 1-1-2015 to 31-3-2016.
1.1-8b Exception carved out for holding company or subsidiary of a foreign company
♦ On an application made by a company or body corporate, which is a holding company or a subsidiary of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Tribunal may, if it is satisfied that the circumstances so warrant, allow any period as its financial year, whether that period is a year or more or less than a year. [1st proviso to section 2(41)]
1.1-8c Application of section 2(41) to bodies corporate
The term ‘financial year’ is defined with reference to companies and bodies corporate. In this regard, the following points are noteworthy:
♦ “Body corporate” is a wider expression than “Company”.
♦ The latter expression covers only companies incorporated in India under the Companies Act, 2013 or earlier Companies Acts in India.
♦ The former is a wider expression. It covers foreign companies, LLPs incorporated under the LLP Act, 2008, statutory corporations, nationalized banks etc.
♦ It would appear that section 2(41) needs to be read with section 1(4)(f).
♦ Section 1(4)(f) provides for applicability of the 2013 Act to bodies corporate.
♦ According to section 1(4)(f), the 2013 Act shall apply to a “body corporate” other than a company if:
■ it is incorporated by any Act for the time being in force. It appears that foreign bodies corporate are not envisaged by section 1(4)(f).
■ it is specified by the Central Government by notification in this behalf.
♦ Applicability is subject to exemptions, modifications or adaptations as may be specified in the notification.
Thus, it appears that definition of ‘financial year’ in section 2(41) would apply only to bodies corporate covered by section 1(4)(f).
1.1-9 Manner of maintenance of books of account in electronic mode
Rule 9.1 of the Draft Companies Rules, 2013 (hereinafter referred to as ‘Draft Rules’) deals with maintenance of books of account in electronic mode. A company may maintain its books of account or other relevant records or documents in electronic mode subject to compliance with the following provisions of Draft Rule 9.1:
(i) “Electronic mode” includes an electronic record as defined in clause (t) of sub-section (1) of section 2 of the Information Technology Act, 2000. Section 2(1)(t) of the Information Technology Act, 2000 defines ‘electronic record’ to mean data, record or data generated, image or sound stored, received or sent in an electronic form or micro film or computer generated microfiche.
(ii) The books of account or other relevant document/records/information maintained in electronic mode shall remain accessible in India so as to be usable for subsequent reference.
(iii) They shall be retained completely :
♦ in the format in which they were originally generated, sent or received, or
♦ in a format which shall present accurately the information generated, sent or received and present in the same form as it was received.
(iv) The information contained in the electronic records shall remain complete and unaltered.
(v) The information in the electronic record of the document shall be capable of being displayed in a legible form.
(vi) There is a proper system for storage, retrieval, display or printout of the electronic records. No such records shall be disposed of or rendered unusable, unless permitted by law.
It appears that the measures listed out in para 1.8-1a for maintenance and security of electronic records would also be relevant.
1.1-10 “Accrual” means true and fair accrual and not true and correct accrual
Question arises whether ‘accrual’ envisaged in the Act is ‘true and fair accrual’ or ‘true and correct accrual’.
In J.K. Industries Ltd. v. Union of India [2007] 80 SCL 283 (SC), it was held as under:
♦ The concept of “true and fair accrual” is wider than the concept of “true and correct accrual”.
♦ Accrual basis means true and fair accrual, which would include not only matching principles but also fair valuation principles. These principles do not contravene accrual system of accounting.