Regulatory Framework Relating to Books of Accounts of a Company under the Companies Act, 2013

Introduction

A Company needs capital to run the business, and it is provided by its shareholders, who are known as the deemed owners of the company. However, all shareholders cannot directly participate in managing the affairs of the company. The company is managed by directors, and the annual information about the operations and financial position of the company is disclosed to the shareholders. All business establishments and companies are required to keep a record of their day-to-day businesses and financial transactions in order to know how the results of their operations are handled by the Board of Directors. This record is referred to as “books of accounts.” Section 128 of the Companies Act, 2013 outlines the provisions for maintaining books of accounts, among other requirements, by the company. The terms “books of accounts,” “book and papers,” “financial statement,” and “financial year” have been defined under the Companies Act, 2013.

Meaning of Books of Accounts 

The books of accounts mean records and documents that a company or firm maintains to track its financial transactions, its assets and liabilities, and overall financial performance. These records are essential for preparing financial statements such as the balance sheet, profit and loss and cash flow statement, which provide performance or financial position of a company. The components of books of accounts are ledger, cash book, bank book, journal, financial statements (balance sheet, profit and loss account, cash flow statement) etc.

Important Definitions

• “Book and Paper” and “Book or Paper”: According to Section 2(12) of the Companies Act, 2013, it includes books of account, vouchers, deeds, documents, minutes and registers maintained on paper or in electronic forms are called books and papers.
• Books of Account: According to Section 2(13) of the Companies Act, 2013, it includes records maintained in respect of all sale and purchase of goods and services, assets and liabilities, all receipts and expenditures that take place, and the cost of the items under Section 148 of the Act for specified companies.
• Financial Statements: According to Section 2(40) of the Companies Act, 2013, financial statements include a balance sheet, profit and loss accounts at the end of the financial year, cash flow statement of every financial year, statement of changes in equity, and any other explanatory note if required of a company. These are known as the financial statement of the company.
• Financial Year: According to Section 2(41) of the Companies Act, 2013, it refers to the period starting from 1^st April and ending on 31^st March of every year, which typically constitutes a financial year in India.

Place of keeping Books of Accounts

According to Section 128(1) of the Companies Act, 2013, every company is to prepare and keep the books of account and other relevant books and papers and financial statements at its registered office. However, all or any of the books of accounts may be kept at such other place in India as the Board of Directors may decide. When the place is decided by the board, the company is required to file a notice of this decision within seven days with the Registrar of Companies giving the full address of that other place. Such information is provided in e-form AOC-5 to the RoC.

Maintenance of Books of Account in Electronic Form

Under the Companies Act, 2013, maintenance of books of account is an essential requirement for every company to ensure transparency and compliance and helps in the representation of the financial position of a company.

• The maintenance of books of account and other books and papers in electronic mode is permitted and is optional. Such documents maintained in electronic form shall remain accessible in India so as to be usable for subsequent use, as per Rule 3(1) of the Companies (Accounts) Rules 2014[1].
• The information contained in the records shall be in the format in which they were originally generated, and it shall remain complete and unaltered as per Rule 3(2) of the Companies (Accounts) Rules, 2014.
• The information received from the branch office shall not be altered and shall be kept in a manner where it shall depict what was originally received from the branches as per Rule 3(3) of the Companies (Accounts) Rules, 2014.
• There shall be a proper system of storage, retrieval, display, or printout of the electronic records as the Board may deem appropriate and such records shall not be disposed of or rendered unusable unless permitted by law.
• The company shall intimate to the Registrar of Companies on an annual basis at the time of filing the financial statement, the name of the service provider, the IP address (Internet Protocol), the location of the service provider, cloud storage, etc.
• If any other financial information maintained outside India is required by the company, the director shall furnish a request to the company setting out the full details of the financial information sought and the period for which the information is sought. The company shall produce such information within 15 days of the date of request received. The financial information required by the director shall be sought by the director himself and not by his holder of power of attorney or any representative or agent. In Vakharia v. Supreme General Films Exchange Co. Ltd.[2], the court stated that a person can exercise his right of inspection through his agent only if he is unable effectively to take inspection that has any substance in it. However, it is open to the party opposing inspection to show that the person seeking inspection is guided by improper motives; if he succeeds in doing so, the court may refuse inspection through an agent. The principles that apply to the right of inspection of a partner are equally applicable to the right of inspection conferred on a director under Section 130(2) of the Companies Act, 2013.

Preservation of Books of Account

According to Section 128(5), the books of accounts of every company shall be kept in systematic order for a period of not less than eight financial years immediately preceding the current financial year, or where the company had been in existence for a period less than eight years, in respect of all the preceding years along with the vouchers relevant to any entry in such books of accounts. However, where an investigation has been ordered in respect of the company, the Central Government may direct that the books of account be kept for such a longer period as it may be deemed fit.

Re-open of Accounts

The Court or Tribunal may order to re-open the books of accounts relating to the period within eight immediately preceding financial years under Section 130(1) of the Companies Act, 2013. The proviso of Section 128 states that where a direction has been issued by the Central Government, for the keeping of books of account for a period a longer than eight years, the books of accounts may be ordered to reopen for such a longer period. In Hari Sankaran v. Union of India and Others[3], the Supreme Court of India observed that the tribunal may, under Section 130 of the Act, pass an order of re-opening of accounts if it is of opinion that the relevant earlier accounts were prepared in a fraudulent manner or the affairs of the company were mismanaged during such period.  

Who is responsible for maintaining books?

According to Section 128(6) of the Companies Act, 2013, the Managing Director (MD), Whole-Time Director (WTD) (in charge of finance), Chief Financial Officer (CFO) or any other person of a company charged by the Board with the duty of complying under this section are responsible to take all reasonable steps to secure compliance by the company with the requirement of maintenance of books of accounts.

Penalties for Non-compliance

If any person (MD, WTD, CFO etc), who is authorised by the Board to maintain Books, referred to under Section 128(6), contravenes such provisions, shall be punishable with a fine of a minimum of fifty thousand rupees and up to five lakhs rupees.

Conclusion

The Companies Act mandates that every company shall maintain accurate and systematic books of account to ensure the transparency, regulatory compliance and its proper representation of financial position. The responsibility for maintaining these records rests with the Managing Director, Whole Time Director and Chief Financial Officer, or any other person, as specified by the Board of Directors. The books must be kept at the registered office or any other place within India as decided by the Board, and they can be maintained in electronic mode. Companies are required to preserve their books of account for at least eight years and make them accessible for inspection. The law ensures that accurate financial records are available for shareholder review and regulatory scrutiny, and it allows for the re-opening of accounts if necessary, especially in cases of fraud or mismanagement. Thus, the provisions under the Companies Act, 2013 emphasize the importance of diligent record-keeping, transparency, and accountability in corporate governance.

[1] ICSI Company Law & Practices 418.

[2] [1948] 50 BOM LR 140.

[3] [2019] SCC 584.