SPECIFIC PROVISIONS AS REGARDS ACCOUNTS IN THE COMPANIES ACT, 1956

The provisions in the matter of books of account which a company is required to maintain are contained in section 209 of the Companies Act, 1956. They are briefly summarised below :

(1) Every company must maintain at its registered office proper books of account with regard to :

  •  all sums of money received and expended the company and the matters in respect of which the receipts and expenditure take place;
  •  all sales and purchases of goods the company;
  •  the assets and liabilities of the company; and
  •  in case, it is a company engaged in production, processing, manufacturing or mining activities, particulars relating to utilisation of material or labour or other items of cost, provided there is such a requirement the Central Government in respect of the class of companies to which it belongs.
    N.B. – It is permissible, however, for all or any of the books of account to be kept at such place in India as the Board of directors may decide but, when a decision in this regard is taken, the company must file with the Registrar of Companies a notice giving full address of the other place.

(2) When a company has a branch office, whether in or outside India, to comply with the aforementioned provisions, the company must maintain proper books of account relating to transactions effected at the branch office, also arrange to obtain from the branch proper summarised returns, at intervals of not more than three months, for being kept at the registered office or the other place.
(3) For the purposes of sub-sections (1) and (2), proper books of account shall not be deemed to be kept with respect to the matters specified therein :

  • if there are not kept such books as are necessary to give a true and fair view of the state of affairs of the company or branch office, as the case may be, and to explain its transactions; and
  •  if such books are not kept on accrual basis and according to the double entry system of accounting.

(4) The books of account and other books and papers shall be open to inspection any director during business hours.
(4A) The books of account together with vouchers relevant to any entry made therein for a period of not less than eight years immediately preceding the current year must be preserved the company in good condition.
(5) If any of the persons referred to in sub-section (6), fails to take reasonable steps to secure compliance with the requirements of law aforementioned or a wilful act causes any default the company, he shall be punishable for each offence with imprisonment for a term which may extend to six months or a fine which may extend to Rs. 10000 or with both. But he may be relieved from such a liability if he can show that he has reasonable ground to believe that a competent and responsible person was charged with the duty of seeing that these requirements were complied with and he was in a position to discharge that duty.
(6) Where the company has a managing director or manager, such managing director or manager and all officers and other employees of the company; and where the company has neither a managing director nor manager, every director of the company.
(7) If a person, not being a person referred to in the foregoing paragraph, who has been charged with the duty of seeing that requirements of law in regard to the books of account is complied with, makes a default in doing so, he shall, in respect of each offence, be punishable with a fine which may extend to Rs. 10,000. Section 541(2) (applicable to a company in the course of winding up) is also relevant. Inspection of Books of Account, etc. of Companies – Section 209 A provides that the books of account and other books and papers of every company shall be opened to inspection during business hours:  the registrar, or such officer authorised the Central Government, or (iii) such officer authorized the SEBI.

Such inspection may be made without giving any previous notice to the company or any officer thereof. It shall be the duty of every director, other officer or employee of the company to produce to the person making inspection of such books of account and other books and papers of the company in his custody
or control and to furnish him with any statement, information or explanation relating to the affairs of the company as the said person may require to him within such time and at such place as he may specify. Further it shall also be the duty of every director, other officer or employee of the company to give to the person making inspection under this section all assistance in connection with the inspection which the company may be reasonably expected to give.
The person making the inspection is also emto make copies of books of account and other books and papers and put any marks of identification in token of the inspection have been made. The person making the inspection under this section shall make a report to the Central Government. Annual accounts and balance sheet : Section 210 requires that the Board shall lay before the company at every annual general meeting a balance sheet as at the end of the period and a profit and loss account for that period. In case of a company not carrying on business for profit an income and expenditure account shall be laid. The profit and loss account shall relate—

  •  in the case of the first annual general meeting of the company, to the period beginning with the incorporation of the company and ending with a day which shall not precede the day of the meeting more than nine months; and
  •  in the case of any subsequent annual general meeting of the company, to the period beginning with the day immediately after the period for which the account was last submitted and ending with a day which shall not precede the day of the meeting more than six months, or in cases where an extension of time has been granted for building the meeting under the second proviso to sub-section (1) of section 166, more than six months and the extension so granted. The period to which the account aforesaid relates is referred to in this Act as a ‘financial year’; and it may be less or more than a calendar year, but it shall not exceed fifteen months: Provided that it may be extended to eighteen months where special permission has been granted in that behalf the Registrar.

Constitution of National Advisory Committee on Accounting Standards : Section 210A has been inserted the Companies (Amendment) Act, 1999 which provides that the Central Government may, notification in the Official Gazette constitute a National Advisory Committee on Accounting Standards to advise the Central Government on the formulation and laying down of accounting policies and accounting standards for adoption companies or class of companies under this Act. A notification constituting the said committee was issued in July 2001 the Central Government. Form and contents of balance sheet and profit and loss account : Section 211 states :
(1) Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit or in such other form as may be approved the Central Government either generally or in any particular case; and in preparing the balance sheet due regard shall be had, as far as may be, to the general instructions for preparation of balance sheet under the heading “Notes” at the end of that Part : Provided that nothing contained in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity or to any other class of
company for which a form of balance sheet has been specified in or under the Act governing such class of company.
(2) Every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year and shall, subject as the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirements of Part II of Schedule VI, so far as they are applicable thereto : Provided that nothing contained in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of profit and loss account has been specified in or under the Act
governing such class of company.
(3) The Central Government may, notification in the Official Gazette, exempt any class of companies from compliance with any of the requirements in Schedule VI if, in its opinion, it is necessary to grant the exemption in the public interest. Any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification.
(3A) Every profit and loss account and balance sheet of the company shall comply with the accounting standards.
(3B) Where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and balance sheet, the following namely :—

  •  the deviation from the accounting standards;
  •  the reasons for such deviation; and
  •  the financial effect, if any arising due to such deviation.

(3C) For the purposes of this section, the expression “accounting standards” means the standards of accounting recommended the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of section 210A : Provided that the standard of accounting specified the Institute of Chartered Accountants of India shall be deemed to be the Accounting Standards until the accounting standards are prescribed the Central Government under this sub-section.
(4) The Central Government may, on the application, or with the consent of the Board of directors of the company, order, modify in relation to that company any of the requirements of this Act as to the matters to be stated in the company’s balance sheet or profit and loss account for the purpose of adapting them to the circumstances of the company.
(5) The balance sheet and the profit and loss account of a company shall not be treated as not disclosing a true and fair view of the state of affairs of the company, merely reason of the fact that they do not disclose—

  •  in the case of an insurance company, any matters which are not required to be disclosed the Insurance Act, 1938 (4 of 1938);
  •  in the case of a banking company, any matters which are not required to be disclosed the Banking Companies Act, 1949 (10 of 1949);
  •  in the case of a company engaged in the generation or supply of electricity, any matters which are not required to be disclosed both the Indian Electricity Act, 1910 (9 of 1910), and the Electricity (Supply) Act, 1948 (54 of 1948);
  • in the case of a company governed any other special Act for the time being in force, any matters which are not required to be disclosed that special Act; or
  •  in the case of any company, any matters which are not required to be disclosed virtue of the provisions contained in Schedule VI or virtue of a notification issued under sub-section (3) or an order issued under sub-section (4).

(6) For the purposes of this section, except where the context otherwise requires, any reference to a balance sheet or profit and loss account shall include any notes thereon or documents annexed thereto, giving information required this Act, and allowed this Act to be given in the form of such notes or documents.
(7) If any such person as is referred to in sub-section (6) of section 209 fails to take all reasonable steps to secure compliance the company, as respects any accounts laid before the company, in general meeting with the provisions of this section and with the other requirements of this Act as to the matters to be stated in the accounts, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both : Provided that in any proceedings against a person in respect of an offence under this section, it shall be a defence to prove that a competent and reliable person was charged with the duty of seeing that the provisions of this section and the other requirements aforesaid were complied with and was in a position to discharge that duty. Provided further that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully.
(8) If any person, not being a person referred to in sub-section (6) of section 209, having been charged the managing director or manager, or Board of directors, as the case may be, with the duty of seeing that the provisions of this section and the other requirements aforesaid are complied with, makes default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months or with fine which may extend to ten thousand rupees, or with both. Provided that no person shall be sentenced to imprisonment for any such of offence unless it was committed wilfully.

Students may note that sub-section (3A), (3B) and (3C) were added in section 211 making it mandatory on the part of the management of the company to comply with the accounting standards as specified in sub-section (3C). Hence, statutory recognition has been amended to the accounting standards the legislation. It is incumbent on the company, in case of noncompliance, to mention the fact of deviation, reason for deviation and the financial effect, if any, as well. Balance sheet of holding company to include certain particulars as to its subsidiaries : Section 212 requires that there shall be attached to the balance sheet of a holding company having a subsidiary or subsidiaries at the end of the financial year as at which the holding company’s balance sheet is made out. (Note : Students may note that as per section 227 of the Act, the duty of the auditor extends to expressing an opinion on balance sheet and profit and loss account and all other documents annexed thereto. Since section 212 requires that particulars of subsidiary company are required to be attached to balance sheet of holding company, the same shall not be covered auditor’s report. Also refer to section 222 which deals with construction of references to documents annexed to accounts. The Board’s Report under section 217 is also attached to every balance sheet of a company.

Profit and loss account to be annexed and auditor’s report to be attached to balance sheet – The profit and loss account shall be annexed to the balance sheet and the auditors’ report including the auditors’ separate, special or supplementary report, if any shall be attached thereto. Board’s report (Section 217):
(1) There shall be attached to every balance sheet laid before a company in general meeting, a report its Board of directors, with respect to—

  •  the state of company’s affairs;
  •  the amounts, if any, which it proposes to carry to any reserves in such balance sheet;
  • the amount, if any, which it recommends should be paid way of dividend;
  • material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the balance sheet relates and the date of the report;
  •  the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed.

(2) The Board’s report shall, so far as is material for the appreciation of the state of the company’s affairs its members and will not in the Board’s opinion be harmful to the business of the company or of any of its subsidiaries, deal with any changes which have occurred during the financial year—

  •  in the nature of the company’s business;
  •  in the company’s subsidiaries or in the nature of the business carried on them; and
  •  generally in the classes of business in which the as an interest.

(2A) 1. The Board’s report shall also include a statement showing the name of every employee of the company who—

  •  if employed throughout the financial year, was in receipt of remuneration for that year which, in the aggregate, was not less than such sum as may be prescribed; or
  •  if employed for a part of the financial year, was in receipt of remuneration for any part of that year, at a rate which, in the aggregate, was not less than such sum per month as may be prescribed; or
  •  if employed throughout the financial year or part thereof, was in receipt of remuneration in that year which, in the aggregate, or as the case may be, at a rate which, in the aggregate, is in excess of that drawn the managing director or whole-time director or manager and holds himself or along with his spouse and dependent children, not less than two per cent, of the equity shares of the company.

2. The statement referred to in clause (a) shall also indicate,—

  •  whether any such employee is a relative of any director or manager of the company and if so, the name of such director, and
  •  such other particulars as may be prescribed. Explanation : Remuneration has the meaning assigned to it in the Explanation to section 198.

(2AA) The board’s report shall also include a Directors’ Responsibility Statement, indicating therein, –

  •  that in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;
  •  that the directors had selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit or loss of the company for that period;
  •  that the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;
  •  that the directors had prepared the annual accounts on a going concern basis.

(2B) The Board’s report shall also specify the reasons for the failure, if any, to complete the buy back within the time specified in sub-section (4) of section 77A.
(3) The Board shall also be bound to give the fullest information and explanations in its report aforesaid, or, in cases falling under the proviso to section 222, in an addendum to that report, on every reservation, qualification or adverse remark contained in the auditors’ report.
(4) The Board’s report and any addendum thereto shall be signed its chairman if he is authorised in that behalf the Board; and where he is not so authorised, shall be signed such number of directors as are required to sign the balance sheet and the profit and loss account of the company virtue of sub-sections (1) and (2) of section 215.
(5) If any person, being a director of a company, fails to take all reasonable steps to comply with the provisions of sub-sections (1) to (3), or being, the chairman, signs the Board’s report otherwise than in conformity with the provisions of sub-section (4), he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to twenty thousand rupees, or with both : Provided that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully : Provided further that in any proceedings against a person in respect of an offence under subsection (1), it shall be a defence to prove that a competent and reliable person was charged with the duty of seeing that the provisions of that sub-section were complied with and was in a position to discharge that duty.
(6) If any person, not being a director, having been charged the Board of directors with the duty of seeing that the provisions of sub-sections (1) to (3) are complied with, makes default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to twenty thousand rupees, or with both: Provided that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully.

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