The Companies Act and Accounts.

Revolutionary changes have been taking place in the process of financial reporting. IFRS and XBRL (eXtensible Business Reporting Language) are the new stars in the field of financial reporting. All these are intended to give an international standard for the business there by the global market converged into a single market. Things are going in such a way. But the basic concept of accounting is still stands as untouched.

Accounting is the language of business. It communicates the results of the business of an organization to those who interested in it. The origin of accounting can be traced with the origin of money. Chanakya’s “Arthasasthra” explains the art of account keeping, besides politics and economics. An organized and standardized form of accounting has been introduced by an Italian, Luca Pacioli. He published his first book on Double entry System of accounting in 1494. We can summarize accounting as the art of recording, classifying, summarizing, analyzing and interpreting the financial transactions and communicating the results thereof to the persons interested in such information.

The Companies Act gives predominant importance to accounting through its various sections. The main object of such provisions is to protect the share holder’s investment from being misused. Section 209 (4) of the Act provides that Books relating to a period not less than eight years immediately preceding the current financial year shall be preserved. Section 2(8) defines “book and paper” and “book or paper” includes accounts, deeds, vouchers, writings and documents. Thus it clearly instructs the companies to keep their accounts together with supporting documents for eight years immediately proceeding the current financial year in good condition. Default to this section shall be punishable with imprisonment or fine or with both. The compliance of Section 209(4) cannot be ignored because of Section 209A. This Section grants power to the Registrar of Companies, Central Government and SEBI to inspect the books of accounts and other books of every company at anytime during business hours. Moreover the Act makes the directors and other officers of a company duty bound to provide all assistance to such inspection including produce required books and documents, giving copies etc. The person making an inspection under this section shall have the power of a civil court.

Default to this section has two parts. Defaulting officer of the company shall be punishable with fine of not less than fifty thousand rupees and also imprisonment for a term not exceeding one year. The term “officer” is defined in Section 2(30) of the Act which includes any director, manager or secretary or any person in accordance with whose direction or instruction the Director/Directors is/are accustomed to act. As second part where a Director or any officer has been convicted under this section, he shall deemed to have vacated his office and disqualified from holding such office in any company for a period of five years [Section 209(A)(9)]. Such a vacation of Directorship is not given in Section 283(1).    

Intention of Section 209(1) is also to ensure the authenticity of accounting. According to this Section every company shall keep at its Registered Office proper books of accounts such as all sums of money received and expended, all sales and purchases of goods, all assets and liabilities and cost records, if production, processing or mining is there. The Board may decided to keep the above books anywhere in India, then the company shall inform the matter together with the address of the new place with the Registrar of Companies by filing form 23AA within seven days of such decision.

Under section 294(4) the books of accounts and other books and papers shall be open to inspection by any Director during business hours. But members do not have the right to inspect the books of accounts (Latika Rajyalekshmi v. Indian Motor Company Limited). But in order to prove allegations made in petition under section 307 and 398, members are entitled to be allowed inspection of books of accounts and other relevant papers. Section 227(1) provides the right to access of company’s accounts at all times to the statutory auditor.

Section 541 also makes it necessary for Companies to keep books of accounts. This Section relates to a situation involving winding up of a company, but as a general rule also, it is relevant. Violation of this section result into punishment of imprisonment for one year.

Balance Sheet.

Balance sheet means a statement prepared from the books of a concern debit and credit balances after the Trading and Profit and Loss Account have been prepared.

It is a classified summary of the debit and credit balances existing in the ledger after Profit and Loss Account has been constructed.

In Legal Remembrance v. Aktul Bandhu Gupta (1937) case it was held that a Balance Sheet is a pictorial representation of the trading position of a company, easily appreciated not by ignorant people, but persons who are reasonably able to understand commercial expressions and commercial conditions. Section 211 provides that Balance sheet of a company shall give a true and fair view of the state of affairs of the company at the end of the financial year and shall be in the form set out in part I of schedule VI or near thereto. This is not applicable to those Companies for which a form of Balance sheet has been prescribed in the separate Acts governing such Companies.

Balance sheet may either in vertical form or horizontal form. From 23^rd December, 1978, Government has allowed Companies to prepare their Balance sheet in either form.

Company’s Balance sheet is generally prepared in order of performance. Assets of fixed nature are given first and liability to be discharged at the end will have to be shown first. The following are some important facts regarding Balance sheet of a company.

Ø  Every Balance sheet and Profit and Loss Account shall comply with the accounting standards specified by the Institute of Chartered Accountants of India and by the Central Government.

Ø  Any deviation from accounting standards should be disclosed together with reasons for such deviation.

Ø  Central Government has the power to grant exemption to any class of Companies from compliances with the requirements of schedule VI.

Ø  Default regarding compliance with schedule VI shall be punishable with imprisonment up to six months or fine Rs. 10000 or with both.

Ø  MCA through notification No GSR 545(E) dated 1-08-2002, allows Companies to round of the figures of their balance as prescribed.

Ø  Through notification no: GSR 762(E) dated  13-11-2000, make it mandatory for the Companies to credit the following assets to the investor education and protection fund

                             i.        Unpaid dividend

                            ii.        Unpaid application money

                          iii.        Unpaid matured deposits

                          iv.        Unpaid matured debentures and

                           v.        Interest accrued on any of the above.

According to Section 211(6) Balance sheet and Profit and Loss Account include any attachment annexed thereto including notes. Further Section 216 provides that Profit and Loss Account and auditors report should be attached with the Balance sheet. Section 218 provides for penalty for improper issue, circulation or publication of Balance sheet or Profit and Loss Account or without attachment like director’s report, auditors report and every Officer in Default shall be punishable with fine. So it is mandatory to issue Balance sheet of a company always with its attachments.

Even though the books of accounts are not accessible to members, who are the owners of the company, the Act through Section 219 ensure that every Balance sheet and Profit and Loss Account together with annexure must be sent 21 days before the Annual General Meeting to every member, every debenture trustee and all other persons who are entitled to have notice of Annual General Meeting. A non member but a depositor has the right to obtain a copy of Balance sheet together with attachments.

Responsibility of ensuring the truthfulness of these financial statements is bestowed to the directors and secretary through Section 215(1). This Section provides that every Balance Sheet and Profit and Loss Account of a company shall be signed by the Manager, Secretary, if any and by not less than two Directors of the company, one of whom shall be the Managing Director, if any. Further sub Section 2 to this Section provides that if only one Director is in India for the time being, the Balance sheet and Profit and Loss Account shall be signed by such Director and attach a statement by the Director explaining the reasons for non-compliance of Section 215(1). Before signing the Balance sheet and Profit and Loss Account and before submitted to auditors for report, it should be approved by the Board of Directors.

MCA through letter dated 27-10-1976 clarified that in the absence of any specific provision in Section 215, the power of Directors to approve annual accounts cannot be delegated to some of the Directors or committee of Directors.

As per provisions of Sections 205, 215, 216 and 220(2) the Balance sheet and accounts are finally accepted when placed before and considered by the general body of share holders. Placing of accounts before share holders is not a routine work. Accounts can be adopted only by Annual General Meeting. Certain court decisions also emphasis this. In CIT v. National Industrial Corporation (1983) case, it was held that the Balance sheet and accounts of the company are finalized only after the seal of approval of the share holders is obtained. If accounts are not ready, Annual General Meeting may adjourn. MCA clarified that (No 2/85 dated 25-03-1985) the adjourned Annual General Meeting should inter alia be held within the time frame laid down in Section 166 and 210.

As far as listed company is concerned, the above mentioned documents may keep at the Registered Office for inspection during working hours for the 21 days before the Annual General Meeting.

Further Section 220 provides that within 30 days of adoption of accounts by Annual General Meeting, it should be filed with the Registrar of Companies. After that these documents become public documents. By giving the prescribed fee anybody can obtain these documents from Registrar of Companies except profit and loss account of a private limited company. That is why proviso to this Section provides that Balance sheet and Profit and Loss Account of a private company should be filed separately.

It was held in Kishan Prasad Palaypu v. Registrar of Companies (2008) that default in complying with Section 220(1) is a continuing offence.

Certain clarifications given by MCA .

                            I.        Balance sheet and Profit and Loss Account, which are not laid before Annual General Meeting, but submitted to Registrar of Companies under section 220 would not be taken on record and may initiated prosecution in such case.

                          II.        Company can reopen and revive its accounts even after their adoption and filing with Registrar of Companies in order to comply with technical requirements of any other law to achieve the object of exhibiting true and fair view. The revised annual accounts would be required to be adopted either in EGM or subsequent Annual General Meeting (1/2003 dated 13 Jan 2003).