COMPANY LAW-II PROJECT ON

BOOKS OF ACCOUNTS

PROJECT SUBMITTED BY:-

ANKIT NANDE

1783015

B.A.LL.B.(A)

PROJECT GUIDED BY:-

CS(MS.) PRATITI NAYAK

ASSISTANT PROFESSOR
 ACKNOWLEDGEMENT
I, ANKIT NANDE, feel myself highly elated, as it gives me tremendous pleasure to come
out with work on the topic “BOOKS OF ACCOUNTS”.

First and foremost, I take this opportunity to thank CS(Ms.) Pratiti Nayak Faculty,
Company Law, KIIT School of Law, Bhubaneswar for allotting me such topic to work on which
also helped me in doing a lot of Research and I came to know about so many new things I am
really thankful to them.

Secondly I would also like to thank my parents and friends who helped me a lot in finalizing this
project within the limited time frame.

ANKIT NANDE,

BATCH -2017-22,

B.A.
LL.B. (A).
 BOOKS OF ACCOUNTS

INTRODUCTION:-

The Companies Act, 1956 referred to the expression “books of account” in section 209 by listing
the books required to be kept by the company. The expression is now defined in clause (13) of
section 2 of the Act which provides an inclusive definition of the books of accounts. As per
definition, it includes records maintained in respect of

a) all sums of money received and expended by a company and matters in relation to which
the receipts and expenditure take place;
b) all sales and purchases of goods and services by the company;
c) the assets and liabilities of the company; and
d) the items of cost as may be prescribed under section 148 in the case of a company which
belongs to any class of companies specified under that section;

Further, clause (12) of section 2 of the Act defines the term “book and paper” and “book or
paper” to include books of account, deeds, vouchers, writings, documents, minutes and registers
maintained on paper or in electronic form. The word ‘record’ has been defined in Black’s Law
Dictionary as “A written account of some act, transaction, or instrument, drawn up, under
authority of law, by a proper officer, and designed to remain as a memorial or permanent
evidence of the matters to which it relates”1 or “Information that is inscribed on a tangible
medium or that, having been stored in an electronic or other medium, is retrievable in
perceivable form.”2 It is to be noted that just records in respect of all sums of money received
and expended by a company shall not be sufficient but records evidencing genesis/ trail of such
receipt/ expenditure shall also be required to be maintained. Under the new Act the maintenance
of records in respect of sales/purchase of services by the company has also been mandated in
addition to records in respect of sales/purchase of goods by the company. Further the
requirement of maintenance of books of accounts under any other law viz. Income Tax Act, 1961
1
Black’s Law Dictionary (4th Edition, p.1513).
2
Black’s Law Dictionary (8th Edition, p.3989)
is in addition to the provisions of the Act. Therefore if Income Tax Act, 1961 requires for
maintenance of books of accounts in a particular manner/form, the company shall be required to
maintain books of accounts to fulfill the requirement of both laws.

PREPARATION AND KEEPING OF BOOKS OF ACCOUNTS AND

OTHER RELEVANT BOOKS AND PAPERS:-

All the deeds, vouchers, writings, documents, minutes and registers to the extent relevant shall
also be required to be prepared and kept by the company. Sub-section (1) of section 128 of the
Act, requires every company to prepare and keep books of account and other relevant books and
papers and financial statement for every financial year. Key features of such books of account,
books and papers, financial statements are as under:

(i) It gives a true and fair view of the state of the affairs of the company;
(ii) It explains the transactions effected both at the registered office and its branch(s), if
any; and
(iii) Such books shall be kept on accrual basis and according to the double entry system of
accounting.

In the accrual basis of accounting, the effects of transactions and other events are recognised and
recorded when they occur (and not as cash or a cash equivalent is received or paid) and are
reported in the financial statements of the periods to which they relate. In J. K. Industries Ltd. &
Anr vs Union Of India & Ors3 It was held that the Supreme Court explained the concept of
‘accrual accounting’ as follows: “In the conventional sense, amounts which become
receivable/recoverable are shown as income actually received and the liabilities incurred are
shown as amounts actually disbursed in a given year. Therefore, under the aforestated system of
accounting, entries are posted in the books of accounts on the date of the transaction, i.e., on the
date on which rights accrue or liabilities are incurred, irrespective of the date of payment. In such
cases, a company has to account for its income or loss as per the above system and not otherwise,
if that company has adopted mercantile system of accounting which is also known as accrual
system of accounting. However, accrual does not mean confinement of items of
revenue/expenditure to a given year. As stated above, mergers and acquisitions are undertaken to

3
(2008) 143 Com Cases 325.
defer revenue expenditure over future years by invoking matching principles. Therefore, the said
principle forms an important part of accrual accounting.” Double-entry system, in accounting, is
a system of book keeping wherein every entry to an account requires a corresponding and
opposite entry to a different account. For instance, recording earnings of Rs. 2000 would require
making two entries: a debit entry of Rs.2000 to an account called “Cash” and a credit entry to an
account called “Revenue”.

MEANING OF TRUE AND FAIR VIEW:-

The expression “true and fair view” though not defined in the Act, but has been used in four
sections relating to books of account under sub-section (1) of section 128, subsection (1) of
section 129, clause (c) of sub-section (5) of section 134 and sub-section (2) of section 143. Sub-
section (1) of section 128 and sub-section (1) of section 129 cast an obligation regarding
preparation of books of accounts and financial statements to give true and fair view of state of
affairs of the company. Clause (c) of sub-section (5) of section 134 requires the board to include
directors responsibility statement in the Board report stating that the directors had selected such
accounting policies and applied them consistently and made judgments 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 and loss of the company for that period. Further,
sub-section (2) of section 143 casts an obligation on the auditors of the company to confirm that
the financial statements prepared by the company give true and fair view of the state of affairs of
the company.

It is mentioned at para 46 of Framework for Preparation and Presentation of Financial Statements

released by Institute of Chartered Accountants of India (ICAI) as follows:

“Financial statements are frequently described as showing a true and fair view of the financial
position, performance and cash flows of an enterprise. Although this Framework does not deal
directly with such concepts, the application of the principal qualitative characteristics and of
appropriate accounting standards normally results in financial statements that convey what is
generally understood as a true and fair view of such information.”
PLACE OF KEEPING BOOKS OF ACCOUNTS:-

All books of account and other relevant books and papers and financial statements of a company
are required to be kept at the registered office of the company. In case of a company having a
branch office or offices, the company is required to keep proper books of account relating to the
transactions effected at the branch office are kept at that office and proper summarised returns
periodically sent by the branch office(s) at the registered office or at other place where the books
are maintained. The returns are required to be sent periodically as against the provision of
sending quarterly returns under the Companies Act, 1956. By removing the word ‘quarterly’,
option is given to the company to decide the frequency of returns from the Indian branch office.
Rule 4, on the other hand, prescribes quarterly summarised returns for foreign branches. Further,
for foreign branches, the returns are required to be sent to the registered office as per rule 4 (1).
There is no format prescribed for the returns. Hence, a comprehensive format may be designed
by the company as per the nature of the transactions carried out at the branch office to comply
with the criteria of ‘proper’ summarized returns. However, a company may keep all or any of the
books of account and other relevant papers at such other place in India as the board may decide.
In such a case, the company shall file with the Registrar, a notice in Form AOC-5, giving the full
address of that decided place within 7 days of such decision taken by the board. It looks like the
time period provided under section 403 may not be available to file AOC-5 by additional fee.
Further, ‘all or any’ the books of accounts may be maintained at such other place. Hence, any of
the records may be maintained at such other place. Books of accounts for earlier period may be
kept at one place and other books for the latest period at registered office. However, a book
cannot be maintained in part at more than one place. Another question arises whether such places
can be more than one. A reading of the term ‘at such other place’ and the context suggests that
such other place may not be more than one. However, the sub-section (2) of section 128 indicates
the possibility of having only one place (either registered office or any other place) where the
books are kept.
MAINTENANCE OF BOOKS OF ACCOUNT IN ELECTRONIC MODE:-

Sub-section (1) of section 128 of the Act enables the preparation and keeping of Books of
Account, books and papers, financial statement in electronic mode. A company may keep books
of account in electronic mode in such manner as may be prescribed in the rule 3. For the
purposes of this rule, the expression “electronic mode” includes “electronic form” as defined in
clause (r) of subsection (1) of section 2 of Information Technology Act, 2000 (21 of 2000) and
also includes an electronic record as defined in clause (t) of sub-section (1) of section 2 of the
Information Technology Act, 2000 (21 of 2000) as defined below:

“electronic form” with reference to information means any information generated, sent,
received or stored in media, magnetic, optical, computer memory, micro film, computer
generated micro fiche or similar device;

“electronic record” means data, record or data generated, image or sound stored, received or
sent in an electronic form or micro film or computer generated micro fiche;

The books of account and other relevant books and papers maintained in electronic mode shall
remain accessible in India so as to be usable for subsequent use. Such books of account and other
relevant books and papers shall be retained completely –

a) in the format in which they were originally generated, sent or received, or

b) in a format which shall present accurately the information generated, sent or received
and
c) the information contained in the electronic records shall remain complete and unaltered.

Other general requirements for keeping Books of account in electronic mode shall be as under:

a) The information received from branch offices shall not be altered and it shall be kept in a
manner where it shall depict what was originally received from the branches.
b) The information in the electronic record of the document shall be capable of being
displayed in a legible form.
 c) There shall be a proper system for storage, retrieval, display or printout of the electronic
records as the Audit Committee, if any, or the Board may deem appropriate. Such records
shall not be disposed of or rendered unusable unless permitted by law.
d) The back-up of the books of account and other books and papers of the company
maintained in electronic mode, including at a place outside India, if any, shall be kept in
servers physically located in India on a periodic basis.
e) The company shall intimate to the Registrar on an annual basis at the time of filing of
financial statement
i. the name of the service provider;
ii. the internet protocol address of service provider;
iii. the location of the service provider (wherever applicable);
iv. where the books of account and other books and papers are maintained on cloud,
such address as provided by the service provider.

INSPECTION BY THE DIRECTOR:-

As provided in sub-section (3) of section 128, the books of account and other books and papers
maintained by the company within India can be inspected by the director either at the registered
office or such other place where the books are maintained during business hours. In case of any
financial information maintained outside India, copies of such financial information can be
produced subject to rule 4 (2) to (4). The said rule provides that the director shall furnish a
request to the company mentioning the details of information required. Such request needs to be
made by director himself and not through power of attorney or agent or representative. The
company shall produce such information within 15 days of request.

In Vakharia v. Supreme General Films Exchange Co. Ltd. 4 The judge stated that “I do not think,
therefore, that the argument that a person can exercise his right of inspection through his agent
only if he is unable effectively to take inspection has any substance in it. Of course it may be that
in a proper case it is open to the party opposing inspection to show that the person seeking
inspection is guided by improper motives, and if he succeeded in doing so the Court may refuse

4
(1948) 50 BOMLR 140
inspection through an agent. The principles that apply to the right of inspection of a partner arc to
my mind equally applicable to the right of inspection conferred on a director under Section
130(2) of the Indian Companies Act. “A person entitled to inspect is prima facie entitled to
employ an agent or expert to inspect at his instance.” 5 The authorities relied upon for this
proposition are the cases of Beavan v. Webb, Norey v. Keep, and Dodd v. Amalgamated Marine
Workers’ Union, I think the ratio of these cases is equally applicable to the right of a director to
inspect accounts, and I, therefore, hold that under Section 130. a director is entitled to take
inspection of accounts not only personally but through an agent, provided there is no reasonable
objection to the person chosen as agent and the agent undertakes not to utilise the information
obtained by him for any purpose other than the purpose of his principal.” Hence, the inspection
may be done by a properly authorized agent. In the same case, it was also held that the right of
inspection is a statutory right and the restrictions placed through the articles are ultra vires.

Section 128(3) covers not only the books of account but also the other books and papers. The
scope of the term is very wide. The Madras High Court, in K. Kanagasabapathy vs. T.M.
Shanmugham6, held that ‘other books and papers’ will not include all books and papers. It was
held that “Section 209(4)(a) of the Companies Act 1956 directs that the books of accounts and
other books and papers shall be open to inspection by any director during business hours. What
is the legislative intent behind the expression “other books and papers”? Can it be reasonably
construed to embrace “the nomination paper”? The following passage occurs as to how
associated words in a common sense have to be understood: “When two or more words, which
are susceptible of analogous meaning are coupled together noscuntur a sociis. They are
understood to be used in their cognate sense. They take, as it were, their colour from each other,
the meaning of the more general being restricted to a sense analogous to that of the less general.”
7
In the expression “ books of account and other books and papers “ occurring in Section 209(4)
(a) of the Companies Act, the words “ other books and papers” are more general, whereas the
words “ books of account “ are less general. But the more general words take their colour from
the less general and become restrictive in meaning. Even if the ejusdem generis Rule is applied,
the general expression is to be read as comprehending only things of the same kind as that
designated by the preceding particular expressions, unless there is something to show that a
5
Steeble, Company Law and Precedents, 3rd edn. Vol. II, p. 909.
6
(1972) 42 Comp. Cas. 596 (Mad.)
7
Maxwell, Interpretation of Statutes, [1859] 28 L.J. M.C. 213, 12th edn., p. 289
wider sense was intended--vide R. v. Edmundson. It would then follow that the expression “other
books and papers” must be construed as referring to other books and papers of the same kind as
the books of account. The pattern of the different clauses in Section 209 of the Companies Act
along with the heading “Accounts” would also point to the same conclusion. As pointed out by
Maxwell at page 11 of the book cited supra, the headings prefixed to sections or sets of sections
in some modern statutes are regarded as preambles to those sections, and that though they cannot
control the plain words of the statute, yet they may explain ambiguous words. It is true that while
the court is entitled to look at the headings in an Act of Parliament to resolve any doubt, the law
is quite clear that you cannot use such headings to give a different effect to clear words in the
section where there cannot be any doubt as to their ordinary meaning. In my view, it would be
dangerous to construe the words “other books and papers” to embrace every scrap of paper in the
office of the company, whether it is in the nature of a book of account or not. The sub-heading to
Section 209 of the Companies Act is “Books to be kept by company and penalty for not keeping
proper books”. This sub-heading emphasises the fact that the words “proper books” have a
restricted meaning and refer only to books in the nature of accounts. Originally, Section 209(4)
of the Companies Act did not contain the words “other books and papers”. These words were
added by Section 20 of the Companies (Amendment) Act, 1965. The Joint Select Committee’s
Report explained the object of the amendment in the following words : “It is proposed to redraft
Sub-section (4) with a view to making it clear that the Registrar of Companies or any officer
authorised in that behalf may inspect the books of account and other books and papers of the
company without giving any previous notice to the company or any officer thereof, if sufficient
cause exists for such inspection and take copies of and put identification marks on the documents
so inspected. Opportunity is also taken to make it obligatory on the company and its officers to
produce the necessary books of account, etc., for inspection by the Registrar or any other officer
and to give them all possible assistance in connection therewith.” It is, therefore, clear that the
object of the amendment was to cover not only books of account, strictly so-called, but also
books showing such particulars relating to utilisation of material or labour or to other items of
cost as may be prescribed in the case of companies engaged in production, processing,
manufacturing or mining activities, within the meaning of Section 209(1)(d) of the Companies
Act. Clause (d) of Section 209(1) itself was inserted by Section 20 of the Companies
(Amendment) Act, 1965, and it was to cover the records relating to the particulars mentioned in
Clause (d) that the expression, “other books and papers” appears to have been used. I, therefore,
hold that this expression does not extend to the nomination papers, which the complainant
wanted inspection of, and that the failure of the secretary to give inspection thereof does not
constitute an offence within the meaning of Section 209(5) of the Companies Act.”

The inspection in respect of any subsidiary of the company shall be done only by a person
authorized in this behalf by a board resolution of the holding company. The person authorized
need not be the director of the subsidiary company.

INSPECTION BY THE MEMBER:-

In case of section 8 companies, members can inspect the accounts as per the clause 9 of Form
INC 13(Memorandum of Association) issued under rule 19 (2) of Companies (Incorporation),
Rules 2014. In case of other companies, this right is not available.

PRESERVATION OF BOOKS AND ACCOUNTS:-

Sub-section (5) of section 128 provides that books of accounts and vouchers relevant to any
entry in such books shall be preserved for a period of 8 financial years immediately preceding a
financial year. Where the company is in existence for a period lesser than eight calendar years,
books in respect of all preceding years are required to be maintained. Central government may
direct such preservation for a longer period as it may deem fit where an investigation has been
ordered under Chapter XIV. Listed companies are further required to follow document
preservation policy formulised as per regulation 9 of the SEBI (LODR) Regulations, 2015 as
given below.

Regulation 9. The listed entity shall have a policy for preservation of documents, approved by
its board of directors, classifying them in at least two categories as follows

a) documents whose preservation shall be permanent in nature ;

 b) documents with preservation period of not less than eight years after completion of the
relevant transactions:

Provided that the listed entity may keep documents specified in clauses (a) and (b) in electronic
mode.

PUNISHMENT AND COMPOUNDABILITY:-

On contravention of the provisions of this section, managing director, the wholetime director in
charge of finance, the Chief Financial Officer or any other person of a company charged by the
Board with the duty of complying with the provisions of this section are made liable for
punishment. In case no person is charged with the responsibility by the Board then it seems that
legislature intend to make all the officers of the company liable for prosecution. The concerned
person is liable for punishment for a term of upto one year of imprisonment or with a minimum
fine of Rs. 50,000/- which may extend to Rs. 5.00 lacs or both. The offence under this section is
compoundable with the permission of the special court as provided in clause (a) of sub-section
(6) of section 441 of the Act.

APPLICABILITY TO FOREIGN COMPANIES:-

Whether Section 128 applies to foreign companies or not depends on the principal location of the
business. If it is located in India, then it would have to follow the provisions of Section 128 of
the Companies Act, 2013.

According to Section 384 (3) of the Companies Act, 2013, the provisions of Sec 128 shall apply
to a foreign company in the following cases:

 The principal location of the business is in India;

 Books of Accounts as defined in Section 128 of the Companies Act, 2013 w.r.t:

 Sales and purchase made;

  Money spent and received;

 Assets and Liabilities.

in relation to or in the course of its business in India.

CONCLUSION:-

It’s quite apparent from the above discussion that the maintenance of books of accounts is
mandatory for every company. Besides, the companies need to ensure that it is kept on an accrual
basis and at its registered office.

Moreover, the accounts must represent the actual and fair view of the financial transactions of
the company. Apart from these, it must be inspected only by the director of the company and
kept in electronic format.

If the company doesn’t maintain the books of account, it will have to pay hefty penalties.
Therefore, maintaining such accounts is a mandatory compliance for every form of company. In
case of queries, leave a comment below.
BIBLIOGRAPHY:-

 https://www.caclubindia.com/articles/companies-act-2013-sec-128-books-of-accounts-
23127.asp
 https://taxguru.in/company-law/maintaining-books-account-place-registered-office.html
 https://yourfinancebook.com/company-books-of-account-section-128-companies-act-
2013/
 https://www.indiafilings.com/learn/maintaining-book-accounts-company-companies-act/
 https://cleartax.in/s/maintenance-books-accounts
 https://www.slideshare.net/shalusaraf/chapter-ix-of-companies-act-2013