19384sm Cal Finalnew Cp1

1 Accounts & Audit

1.0 Maintenance of Books of Accounts According to Section 209(1) of the Companies Act, 1956, every company is required to maintain at its registered office proper books of account with respect to- (a) all sums of money received and expended by the company and the matters in respect of

which receipt and expenditure take place; (b) all sales and purchases of goods by the company; (c) all assets and liabilities of the company; and (d) in the case of a company pertaining to any class of companies engaged in production,

processing, manufacturing or mining activities, such particulars relating to utilization of material or labour or other items of costs as may be prescribed, if such class of companies is required by the Central Government to include such particulars in the books of account.

1.1 Place of maintenance of books of account As it is stated above, the books of account are required to be kept at the registered office of the company. However, proviso to Section 209 of the Companies Act, 1956 allows the company to keep all or any of the books of accounts at any other place in India as the Board of directors may decide. In such a case, the company should file with the Registrar of Companies, a notice in writing giving the full address of that place within seven days of the Boards decision.

1.2 Proper books of account in relation to a branch of the company According to Section 209(2) of the Act, where a company has a branch office, whether in or outside India, the company shall be deemed to have complied with the provisions of Section 209(1), if proper books of account relating to the transactions effected at the branch office are kept at that office and proper summarized returns, made up to dates at intervals of not more than three months, are sent by the branch office to the company at its registered office or the other place as the Board of directors might have decided pursuant to proviso to sub-section (1).

1.3 Nature of books of account Sub-Section (3) of Section 209 provides that proper books of accounts shall not be deemed to be kept with respect to the matters specified in Section 209(1) & (2),-

The Institute of Chartered Accountants of India

1.2 Corporate and Allied Laws

(a) 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

(b) if such books are not kept on accrual basis and according to the double entry system of accounting.

1.4 Period of Maintenance According to Sub-section (4A) of Section 209, the books of account of every company relating to a period of not less than eight years immediately preceding the current year together with the vouchers relevant to any entry in such books of account should be preserved in good order. However, in case of a company incorporated less than eight years before the current year, the books of account for the entire period preceding the current year together with the vouchers relevant to any entry in such books of account should be so preserved.

1.5 Persons responsible for maintenance & penalty According to Section 209(6) of the Act, the following persons are responsible for the maintenance of proper books of account- (a) where the company has a managing director or manager, such managing director or

manager and all officers and other employees of the company; and (b) where the company has neither a managing director nor manager, every director of the

company. If any of the persons mentioned above fails to take all reasonable steps to ensure that the

provisions of Section 209 are duly complied with by the company or has by his own willful act been the cause of such default by the company, 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 `10,000/- or with both. [Section 209(5)]

In any penal proceedings against a person, it shall be a defence to prove that a competent and reliable person was charged with the duty of seeing that those requirements were complied with and that such person was in a position to discharge that duty. Further a person shall be sentenced to imprisonment only if the offence was committed wilfully [Proviso to Section 209(5)]. If any person, not being a person referred to in Sub-section (6), who has been charged by the managing director, manager or Board of directors, as the case may be, with responsibility of compliance with provisions of Section 209, makes default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to 6 months or with fine which may extend to `10,000/- or with both [Sections 209(7)]. Similar provisions are contained in Section 211 [Section 211(7) and (8)].

1.6 Persons who can inspect According to Section 209(4) of the Act, the books of account and other books and papers shall be open to inspection by any director during business hours.


Accounts & Audit 1.3

Further, Section 209A(1) states that the following persons shall have the right to inspect the books of account during business hours-. (a) Registrar of Companies, or (b) Such officer of the Government as may be authorized by the Central Government in this

behalf, . (c) Such officers of the SEBI as may be authorized by it. The inspection may be made without giving any previous notice to the company or any officer thereof. Inspection by the SEBI can be made in respect of matters covered under sections referred to in Section 55A. A shareholder has no statutory right of inspection of the books of account unless the articles specifically provides for it . Key Points

Books of Accounts of a Company

Items (i) Income and Expenditure (ii) Sale and Purchase (iii) Assets and Liabilities

Place of maintenance

(i) Registered Office; or (ii) Any other place as Board of directors decides by sending

notice of full address to Registrar of Companies within 7 days Branch office Proper summarized returns by Branch Office at intervals of not

more than three months are sent to the registered office Period of maintenance

Eight Years

Persons responsible

(i) Managing Director or Manager, if any and all officers and other employees; and

(ii) If no Managing Director or Manager, then every Director (iii) Any other person charged by Managing Director, Manager or

Board of Directors Penalty Imprisonment upto 6 months if default committed willfully or fine

upto ` 10,000 or both Inspection (i) Directors

(ii) Registrar of Companies (iii) Officers authorized by Central Government (iv) Officers authorized by SEBI



1.7 Laying of annual accounts and balance sheet According to Section 210(1), at every annual general meeting of a company, the Board of directors of the company shall lay before the company (a) a balance sheet as at the end of the period specified in sub-section (3); and (b) a profit and loss account for that period. Section 210(3) provides that in the case of the first annual general meeting of the company, the profit and loss account shall relate to the period beginning with the incorporation of the company and ending with a day which shall not precede the day of the meeting by 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 by more than six months, or in cases where an extension of time has been granted for holding the annual general meeting under the second proviso to sub-section (1) of section 166, by more than six months and the extension so granted. The period to which the account aforesaid relates is referred to as a financial year and it may be less or more than a calendar year, but it shall not exceed fifteen months. It may be extended to eighteen months if special permission has been granted in that behalf by the Registrar. [Section 210(4)] If any person, being a director of a company, or any person, not being a director of the company, having been charged by the Board of directors with the duty of seeing that the provisions of this section are complied with, fails to take all reasonable steps to comply with the provisions of this section, 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.[Section 210(5) and 210(6)] No person shall be sentenced to imprisonment for any such offence unless it was committed wilfully. In any proceeding against a director of the company 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 were complied with and such person was in a position to discharge that duty.

1.8 Form and contents of balance sheet and profit and loss account According to Section 211 of the Companies Act, 1956, 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 by 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. Similarly, as per Section 211(2) of the Act, 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 aforesaid, comply with the requirements of Part II of Schedule VI, so far as they are applicable thereto. The Central Government may, by 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. [Section 211(3)]

Every profit and loss account and balance sheet of the company shall comply with the accounting standards. [Section 211(3A)] According to Section 211(3B) of the Act, 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: (a) the deviation from the accounting standards; (b) the reasons for such deviation; and (c) the financial effect, if any, arising due to such deviation. According to section 133 of the Companies Act, 2013, Accounting Standards means the standards of accounting or any addendum thereto as recommended by the Institute of Chartered Accountants of India constituted under section 3 of the Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by the Central Government in consultation with and after examination of the recommendations made by the National Financial Reporting Authority constituted under section 132 of the Companies Act, 2013. The Ministry of Corporate Affairs vide General Circular No. 15/2013 dated 13th September, 2013 has clarified that till the Standards of Accounting or any addendum thereto are prescribed by Central Government in consultation and recommendation of the National Financial Reporting Authority, the existing Accounting Standards notified under the Companies Act, 1956 shall continue to apply. If any such person as is referred to in sub-section (6) of section 209 fails to take all reasonable steps to secure compliance by 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. However, 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 such person was in a position to discharge that duty. No person shall be sentenced to imprisonment for any such offence unless it was committed wilfully [Section 211(7)]



The Ministry of Corporate Affairs has revised Schedule VI pertaining to the preparation of Balance Sheet and Profit & Loss Account with a view to harmonize and synchronize the general disclosure requirements under Schedule VI with respect to Accounting Standards, IFRS and keeping in view the existing economic and regulatory environment. Key points

Form and contents of balance sheet and profit and loss account

Form of balance sheet

Part I of Schedule VI

Form of profit and loss a/c

Part II of Schedule VI

Exemption Any Insurance or Banking Company or any company engaged in the generation or supply of electricity or any other company exempted in the public interest by the Central Government by notification in the Official Gazette

Compliance Every Profit and Loss A/c and Balance Sheet shall comply with the accounting standards as recommended by the ICAI and prescribed by the Central Government in consultation with NFRA

If not in compliance with accounting standards

Following disclosure in Profit and Loss A/c and Balance Sheet: (a) deviation from the accounting standards (b) reasons for such deviation (c) financial effect, if any, arising due to such deviation.

Person responsible

(i) Managing Director or Manager, if any and all officers and other employees; and (ii) If no Managing Director or Manager then every Director (iii) Any other Person charged by Managing Director, Manager or Board of Director

Penalty Imprisonment upto 6 months If default committed willfully or fine upto `10,000 or both

1.9 Authentication of annual accounts According to Sub-section (1) of Section 215 of the Act, every balance sheet and every profit and loss account of a company shall be signed on behalf of the Board of directors by its manager or secretary, if any, and by not less than two directors of the company one of whom shall be a managing director where there is one. In the case of a banking company, they shall be signed by the persons specified in clause (a) or clause (b), as the case may be, of sub-section (2) of section 29 of the Banking Companies Act, 1949. In the case of a company not being a banking company, when only one of its directors is for the time being in India, the balance sheet and the profit and loss account shall be signed by



such director; but in such a case there shall be attached to the balance sheet and the profit and loss account a statement signed by him explaining the reason for non-compliance with the provisions of Sub-section (1). [Section 215(2)] The balance sheet and the profit and loss account shall be approved by the Board of directors before they are signed on behalf of the Board in accordance with the provisions of this section and before they are submitted to the auditors for their report thereon. [Section 215(3)]

1.10 Boards report According to Section 217(1) of the Act, there shall be attached to every balance sheet laid before a company in general meeting, a report by its Board of directors, with respect to (a) the state of the companys affairs; (b) the amounts, if any, which it proposes to carry to any reserves in such balance sheet; (c) the amount, if any, which it recommends should be paid by way of dividend; (d) 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;

(e) the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed.

As per Sub-section (2) of Section 217 of the Act, the Boards report shall, so far as is material for the appreciation of the state of the companys affairs by its members and will not in the Boards 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 (a) in the nature of the companys business; (b) in the companys subsidiaries or in the nature of the business carried on by them; and (c) generally in the classes of business in which the company has an interest. Sub Section (2A) of Section 217 of the Act provides that the Boards report shall also include a statement showing the name of every employee of the company who (i) 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 prescribed i.e sixty lakh rupees increased from rupees twenty-four lakhs under the Companies (Particulars of Employees) Amendment Rules, 2011 issued by Ministry of Corporate Affairs through Notification dated 31st March, 2011; or

(ii) 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 prescribed i.e. five lakh rupees increased from rupees two lakhs under the Companies (Particulars of Employees) Amendment Rules, 2011 issued by Ministry of Corporate Affairs through Notification dated 31st March, 2011 or



(iii) 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 by the managing director or whole-time director or manager and holds by himself or along with his spouse and dependent children, not less than two per cent, of the equity shares of the company.

The statement shall also indicate, (i) whether any such employee is a relative of any director or manager of the company and

if so, the name of such director, and (ii) such other particulars as may be prescribed. Remuneration for the purpose of this section has the meaning assigned to it in the Explanation to section 198.

1.11 Directors Responsibility Statement According to Section 217 (2AA) of the Act, the Boards report shall also include a Directors Responsibility Statement, indicating therein, (i) that in the preparation of the annual accounts, the applicable accounting standards had

been followed along with proper explanation relating to material departures; (ii) 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 or loss of the company for that period;

(iii) 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;

(iv) that the directors had prepared the annual accounts on a going concern basis.

1.12 Disclosures in Boards Report The Boards 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. [Section 217(2B)] Sub-section (3) of Section 217 provides that 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. The Boards report and any addendum thereto shall be signed by its chairman if he is authorised in that behalf by the Board; and where he is not so authorised, shall be signed by such number of directors as are required to sign the balance sheet and the profit and loss account of the company by virtue of sub-sections (1) and (2) of section 215. [Section 217(4)] 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 Boards 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. [Section 217(5)] In any proceeding against a director of the company in respect of an offence under Sub-section (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 such person was in a position to discharge that duty. If any person, not being a director of a company, having been charged by 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. [Section 217(6)] Further, no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully. Key points

Boards report A report by Board of Directors shall be attached with every balance sheet with respect to (a) State of companys affairs; (b) Amount in reserves; (c) Recommended Dividend (d) Material changes and commitments affecting the financial position of the company occurring between the date of the balance sheet and date of the report (e) conservation of energy, technology absorption, foreign exchange earnings and outgo

Disclosure in Boards Report:

(i) Details of employees as covered under section 217 (2A)

(ii) Directors Responsibility Statement (iii) Reasons of failure to complete buy back within

specified time (iv) Information and explanations on qualification or

adverse remark contained in auditors report Signing of Boards Report

By Chairman if authorized by Board of directors or if Chairman is not authorized then by such directors as are required to sign Balance Sheet and Profit and Loss A/c.

Person Responsible Director and any person having been charged by Board of directors.

Penalty Imprisonment upto 6 months if default committed wilfully or fine upto ` 20,000 or both.

Coverage of Directors Responsibility

(i) Compliance with applicable Accounting Standards



Statement (ii) Selection of accounting policies for a true and fair view of state of affairs and Profit and Loss A/c

(iii) Maintenance of adequate accounting records (iv) Preparation of Annual Accounts on a going concern

basis

1.13 Right of members to copies of balance sheet and auditors report According to Section 219(1) of the Act, a copy of every balance sheet (including the profit and loss account, the auditors report and every other document required by law to be annexed or attached, as the case may be, to the balance sheet) which is to be laid before a company in general meeting shall, not less than twenty-one days before the date of the meeting, be sent to every member of the company, to every trustee for the holders of any debentures issued by the company, whether such member or trustee is or is not entitled to have notices of general meetings of the company sent to him, and to all persons other than such members or trustees, being persons so entitled. A copy of the documents need not be sent (i) to a member, or holder of debentures, of the company, who is not entitled to have notices

of general meetings of the company sent to him and of whose address the company is unaware;

(ii) to more than one of the joint holders of any shares or debentures none of whom is entitled to have such notices sent to him;

(iii) in the case of joint holders of any shares or debentures some of whom are and some of whom are not entitled to have such notices sent to them, to those who are not so entitled;

(iv) in the case of a company whose shares are listed on a recognized stock exchange, if the copies of the documents aforesaid are made available for inspection at its registered office during working hours for a period of twenty-one days before the date of the meeting and a statement containing the salient features of such documents in the prescribed form or copies of the documents aforesaid, as the company may deem fit, is sent to every member of the company and to every trustee for the holders of any debentures issued by the company not less than twenty-one days before the date of the meeting;

If the copies of the documents aforesaid are sent less than twenty-one days before the date of the meeting, they shall, notwithstanding that fact, be deemed to have been duly sent if it is so agreed by all the members entitled to vote at the meeting. On 29th April, 2011, the Ministry of Corporate Affairs through Circular No. 18/2011 has clarified that the company would be in compliance of sections 219(1) of the Companies Act, 1956, in case, a copy of Balance Sheet etc., is sent by electronic mail to its member subject to the fact that company has obtained-



(a) e-mail address of its member for sending the Notice with Balance Sheet, Profit and Loss Account, Auditors Report, Directors Report, and Explanatory Statement etc through e-mail, after giving an advance opportunity to the member to register his e-mail address and changes therein from time to time with the company or with the concerned depository.

(b) Companys website displays full text of these documents well in advance prior to mandatory period and issue advertisement in prominent newspapers in both vernacular and English language stating that the copies of the aforesaid documents are available in the website and for inspection at the Registered Office of the company during office hours. Website must be designed in a way so that documents can be opened easily and quickly.

(c) In cases where any member(s) has not registered his e-mail address for receiving the Balance Sheet etc through e-mail, the Balance Sheet etc., will be sent to him by other modes of services as provided under section 53 of the Companies Act, 1956.

(d) In case any member(s) insist for physical copies of above documents, the same should be sent to him physically, by post free of cost.

Key points Copies of Annual Accounts

Who are entitled? (i) Every member (ii) Every trustee for the holders of debentures (iii) Any other person so entitled

Specified time Not less than 21 days before the date of meeting

If sent less than 21 days Must be agreed by all the members entitled to vote

By Electronic Mail (i) Company has obtained E-mail address of its members (ii) Documents must be displayed on companys website (iii) If no E-mail is provided then documents will be sent by

other modes (iv) Send physical copies free of cost if any member insists

1.14 Filing with the Registrar According to Section 220(1) of the Act, after the balance sheet and the profit and loss account have been laid before a company at an annual general meeting as aforesaid, there shall be filed with the Registrar within thirty days from the date on which the balance sheet and the profit and loss account were so laid, or where the annual general meeting of a company for any year has not been held, there shall be filed with the Registrar within thirty days from the latest day on or before which that meeting should have been held. A copy of the balance sheet and the profit and loss account, signed by the managing director,



manager or secretary of the company, or if there be none of these, by a director of the company, together with a copy of all documents which are required by this Act to be annexed or attached to such balance sheet or profit and loss account: In the case of a private company, copy of the balance sheet and copy of the profit and loss account shall be filed with the Registrar separately. Further as per sub-section (2), if the annual general meeting of a company before which a balance sheet is laid as aforesaid does not adopt the balance sheet, or is adjourned without adopting the balance sheet, or, if the annual general meeting of a company for any year has not been held, a statement of that fact and of the reasons therefore shall be annexed to the balance sheet required to be filed with the Registrar. If default is made in complying with the requirements of sub-sections (1) and (2), the company, and every officer of the company who is in default, shall be liable to the like punishment as is provided by section 162 for a default in complying with the provisions of section 159, 160 or 161 i.e. he shall be punishable with fine which may extend to five hundred rupees for every day during which the default continues. The Ministry of Corporate Affairs through General Circular No. 09/2011 dated 31st March, 2011 has mandated certain class of companies to file balance sheets and profit and loss account for the year 2010-11 onwards by using XBRL taxonomy. Further the Ministry of Corporate Affairs vide its General Circular No. 16/2012 dated 6th July, 2012 has mandated the following select class of companies to file their Balance Sheet and Profit & Loss and other documents as required u/s 220 of the Companies Act, 1956 in XBRL mode for the financial year commencing on or after 1.4.2011: (i) All companies listed with any Stock Exchange(s) in India and their Indian subsidiaries; or (ii) All companies having a paid up capital of ` 5 crore and above; or (iii) All companies having a turnover of Rs 100 crore and above: or (iv) All companies who were required to file their financial statements for Financial Year 2010-

11, using XBRL mode. However, banking companies, insurance companies, power companies and Non-Banking Financial Companies (NBFCs) are exempted from XBRL filing for the financial year commencing on or after 1st April, 2011.



Key points

1.15 Holding & Subsidiaries Accounts According to section 212, the balance sheet of a holding company having one or more subsidiaries should have the following documents made upto their repective financial year ending date in respect of each such subsidiary, attached to it: (1) a copy of the balance sheet of the subsidiary; (2) a copy of its profit and loss account;

If AGM does not adopt the B/S; or

AGM adjourned without adopting B/S; or

AGM has not been held

Statement of the fact and reasons shall be annexed to the B/S required to be filed with Registrar

If AGM held If no AGM held

Within thirty days of laying the Balance Sheet and Profit and Loss A/c

Within thirty days from the latest day on or before meeting should have been held

Filing with Registrar



(3) a copy of the report of its Board of directors; (4) a copy of the report of its auditors; (5) a statement of the holding companys interest in the subsidiary; (6) the statement referred to in sub-section (5), if any; (7) the report referred to in sub-section (6); if any. Holding companys interest in subsidiary: The statement of the holding companys interest in the subsidiary shall specify (a) the extent of the holding companys interest in the subsidiary at the end of the financial

year; (b) the net aggregate amount, so far as it concerns members of the holding company and is

not dealt with in the companys accounts, of the subsidiarys profits after deducting its losses or viceversa (i) for the financial year or years of the subsidiary aforesaid; and (ii) for the previous financial years of the subsidiary since it became the holding

companys subsidiary; (c) the net aggregate amount of the profits of the subsidiary after deducting its losses or vice

versa (i) for the financial year or years of the subsidiary aforesaid; and (ii) for the previous financial years of the subsidiary since it became the holding

companys subsidiary. Where the financial year or years of the holding company and its subsidiary do not coincide, a statement signed by the persons who signed the holding companys balance sheet, shall be attached to the balance sheet of the holding company containing the information as to the matters: (1) whether there has been any, and, if so, what, change in the holding companys interest in

subsidiary between the end of the financial year or of the last of the financial years of the subsidiary and the end of the holding companys financial year,

(2) details of any material changes which have occurred between the end of the financial year or last of the financial years of the subsidiary and at the end of the holding companys financial year in respect of (i) the subsidiarys fixed assets, (ii) its investments, (iii) the money lent by it, (iv) the moneys borrowed by it for any purpose other than that of meeting current

liabilities.



However, the Central Government may, on the application of or with the consent of the Board of directors of the company, direct that in relation to any subsidiary, the provisions of Section 212 shall not apply, or shall apply only to such extent as may be specified in the direction, [Section 212(8)]. Where the persons responsible for securing compliance with the provisions of Section 212 fail to take all reasonable steps to do so, they shall be punishable with imprisonment for a term which may extend to six months or with fine which may extend to `10,000, or with both. But no such person shall be sentenced to imprisonment for any offence under Section 212 unless it was committed wilfully. These persons may entrust any other competent and reliable person with the discharge of the responsibility under Section 212 and if he was in a position to discharge it, he is liable for any default in complying with the requirements of Section 212. Financial year of holding company and subsidiary: Section 213(1) of the Companies Act, 1956 states as follows: Where it appears to the Central Government desirable for a holding company or a holding companys subsidiary to extend its financial year so that the subsidiarys financial year may end with that of the holding company, and for that purpose to postpone the submission of the relevant accounts to a general meeting, the Central Government may, on the application or with the consent of the Board of directors of the company whose financial year is to be extended, direct that in the case of that company, the submission of accounts to a general meeting, the holding of an annual general meeting or the making of an annual return, shall not be required to be submitted, held or made, earlier than the dates specified in the direction, notwithstanding anything to the contrary in the Companies Act, 1956 or in any other Act for the time being in force. The Central Government shall, on the application of the Board of directors of a holding company or a holding companys subsidiary, exercise the powers conferred on that Government if it is necessary so to do, in order to secure that the end of the financial year of the subsidiary does not precede the end of the holding companys financial year by more than six months, where that is not the case at the commencement of this Act, or at the date on which the relationship of holding company and subsidiary comes into existence, where that date is later than the commencement of the Companies Act. Consider the following practical problems and advise. S. Ltd. is a subsidiary company of H Ltd. The financial year of H Ltd. is from 1st April to 31st March, whereas the financial year of S Ltd. is 1st July to 30th June every year. This is now causing difficulties particularly in view of the requirement of reporting and circulating the consolidated annual accounts as required by accounting year of S Ltd. for the year 1st July, 2010 to 30th June, 2011 be extended from present 12 months to 21 months, i.e. 1st July, 2010 to 31st March, 2012, so that the financial years of the holding company and the subsidiary company end on the same date. The management can extend the financial year of S. Ltd. from 12 months to 21 months as mentioned in the question.



Following steps are required to be taken for this purpose: (i) To convene a Meeting of the Board of directors of S. Ltd. where at the resolution for

extending the financial year 1st July, 2010 to 30th June, 2011 (12 months) to 1st July, 2010 to 31st March, 2012 (21 months) is to be passed so that the year ending matches with the year ending of H. Ltd.

(ii) To make an application under section 213(1) of the Companies Act, 1956 to the Central Government giving full details and specific reasons for seeking the extension in the year ending. The application may be made on a plain paper as there is no prescribed form for this purpose.

(iii) To attach the following to the application: (a) A certified true copy of the last Balance Sheet and Profit and Loss Account of H Ltd. and

S. Ltd.

(b) A certified true copy of the Memorandum of Association and Articles of Association of both the Companies.

(c) A certified true copy of the resolution of the Board of Directors proposing the extension of the financial year ending from 12 months to 21 months.

(d) Requisite fee payable to the Central Government as per the Companies (Fees on Application) Rules, 1999.

Rights of holding companys representatives and members (Section 214)

A holding company may, by resolution, authorize representatives named in the resolution to inspect the books of account kept by any of its subsidiaries; and the books of account of any such subsidiary shall be open to inspection by those representatives at any time during business hours.

The rights conferred by Section 235 (which deals with investigation of the affairs of a company) upon members of a company may be exercised, in respect of any subsidiary, by members of the holding company, as if they alone were the members of the subsidiary.

Audit 1.16 Qualifications of an auditor According to Section 226(1) of the Act, a person shall not be qualified for appointment as auditor of a company unless he is a chartered accountant within the meaning of the Chartered Accountants Act, 1949. Further in the case of a firm whereof all the partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company, in which case any partner so practising may act in the name of the firm.



1.17 Disqualifications of auditors According to 226(3), the following persons shall not be qualified for appointment as auditor of a company (a) a body corporate; (b) an officer or employee of the company; (c) a person who is a partner, or who is in the employment, of an officer or employee of the

company; (d) a person who is indebted to the company for an amount exceeding one thousand rupees,

or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for an amount exceeding one thousand rupees;

(e) a person holding any security of that company after a period of one year from the date of commencement of the Companies (Amendment) Act, 2000.

Security for the purpose of this section means an instrument which carries voting rights. Further as per Sub-section (4), a person shall also not be qualified for appointment as auditor of a company if he is disqualified for appointment as auditor of any other body corporate which is that companys subsidiary or holding company or a subsidiary of that companys holding company, or would be so disqualified if the body corporate were a company. If an auditor becomes subject, after his appointment, to any of the disqualifications specified in sub-sections (3) and (4) of section 226, he shall be deemed to have vacated his office as such.[Section 226(5)]

1.18 First auditors According to Section 224(5) of the Act, the first auditor or auditors of a company shall be appointed by the Board of directors within one month of the date of registration of the company; and the auditor or auditors so appointed shall hold office until the conclusion of the first annual general meeting. If the Board fails to exercise its powers i.e. appointment of first auditor or auditors, the company in general meeting may appoint the first auditor or auditors. However the company may, at a general meeting, remove any auditor or auditors appointed by the Board of directors and appoint in his or their places any other person or persons who have been nominated for appointment by any member of the company and of whose nomina-tion notice has been given to the members of the company not less than fourteen days before the date of the meeting

1.19 Subsequent Auditors As per Section 224(1) of the Act, every company shall appoint subsequent auditor or auditors at each annual general meeting by way of an ordinary resolution. The auditor or auditors so appointed shall hold office from the conclusion of that meeting until the conclusion of the next



annual general meeting and the company shall within seven days of the appointment, give intimation thereof to every auditor so appointed. Before any appointment or re-appointment of auditor or auditors is made by any company at any annual general meeting, a written certificate shall be obtained by the company from the auditor or auditors proposed to be so appointed to the effect that the appointment or reappointment, if made, will be in accordance with the limits on the number of audits specified in sub-section (1B). Every auditor appointed shall within thirty days of the receipt from the company of the intimation of his appointment, inform the Registrar in writing that he has accepted, or refused to accept, the appointment.

1.20 Re-appointment of retiring auditor As per Section 224(2) of the Act, at any annual general meeting, a retiring auditor shall be deemed to be re-appointed, unless (a) he is not qualified for re-appointment; (b) he has given the company notice in writing of his unwillingness to be re-appointed; (c) a resolution has been passed at that meeting appointing somebody instead of him or

providing expressly that he shall not be re-appointed; or (d) where notice has been given of an intended resolution to appoint some person or

persons in the place of a retiring auditor, and by reason of the death, incapacity or disqualification of that person or of all those persons, as the case may be, the resolution cannot be proceeded with.

Further, as per Sub-section (3), where at an annual general meeting no auditors are appointed or re-appointed, the Central Government may appoint a person to fill the vacancy. As per Sub-section (4) of the Act, the company shall within seven days of the Central Governments power to appoint a auditor to fill the vacancy becoming exercisable, give notice of that fact to that Government; and, if a company fails to give such notice, the company, and every officer of the company who is in default, shall be punishable, with fine which may extend to five thousand rupees.

1.21 Ceiling on number of audits According to Sub-section (1B) of section 224, no company or its Board of directors shall appoint or re-appoint any person who is in full-time employment elsewhere or firm as its auditor if such person or firm is, at the date of such appointment or re-appointment, holding appointment as auditor of the specified number of companies or more than the specified number of companies. In the case of a firm of auditors, specified number of companies shall be construed as the number of companies specified for every partner of the firm who is not in full-time employment elsewhere.



Where any partner of the firm is also a partner of any other firm or firms of auditors, the number of companies which may be taken into account, by all the firms together, in relation to such partner shall not exceed the specified number in the aggregate. Further where any partner of a firm of auditors is also holding office, in his individual capacity, as the auditor of one or more companies, the number of companies which may be taken into account in his case shall not exceed the specified number, in the aggregate. The ceiling on number of company audits does not include a private company. specified number means, (a) in the case of a person or firm holding appointment as auditor of a number of companies

each of which has a paid-up share capital of less than rupees twenty-five lakhs, twenty such companies;

(b) in any other case, twenty companies, out of which not more than ten shall be companies each of which has a paid-up share capital of rupees twenty-five lakhs or more. [Explanation I to sub-Sections (IB) & (IC) of Section 224].

In computing the specified number, the number of companies in respect of which or any part of which any person or firm has been appointed as an auditor, whether singly or in combination with any other person or firm, shall be taken into account.

1.22 Filling up casual vacancy Section 224(6) states that the Board may fill any casual vacancy in the office of an auditor; but while any such vacancy continues, the remaining auditor or auditors, if any, may act: Where such vacancy is caused by the resignation of an auditor, the vacancy shall only be filled by the company in general meeting. Any auditor appointed in a casual vacancy shall hold office until the conclusion of the next annual general meeting. Further as per Section 224(7) of the Act, any auditor appointed under this section may be removed from office before the expiry of his term only by the company in general meeting, after obtaining the previous approval of the Central Government in that behalf.

1.23 Remuneration of Auditors According to Section 224(8) of the Act, the remuneration of the auditors of a company shall be fixed by the company in general meeting or in such manner as the company in general meeting may determine. In the case of an auditor appointed by the Board of directors or the Central Government, his remuneration may be fixed by the Board or the Central Government, as the case may be. In the case of an auditor appointed under section 619 by the Comptroller and Auditor-General of India, his remuneration shall be fixed by the company in general meeting or in such manner as the company in general meeting may determine. The expression remuneration includes any sums paid by the company in respect of the auditors expenses.



The company is required to disclose in the Statement of Profit and Loss, by way of notes, payments to the auditor as, (a) auditor, (b) for taxation purposes, (c) for company law matters, (d) for management services, (e) for other services, (f) for reimbursement of expenses. Key points

First Auditor Appointed by Board of Directors If Board fails then appointed by Company in General Meeting Within 1 month of registration of the company Hold office until the conclusion of first AGM May be removed by company in general meeting Subsequent Auditor Appointed by Company in AGM If no auditor is appointed then by Central Government Hold office from the conclusion of that meeting until the conclusion of next AGM Intimation by company within 7 days to auditor so appointed Intimation by auditor to Registrar within 30 days of getting intimation from company Before appointment, company shall obtain written certificate from auditor about specified limit May be removed by company in general meeting after obtaining previous approval of Central Government Casual Vacancy May be filled by Board but if vacancy is caused by resignation then it shall be filled by company in general meeting

Specified Limit of Audit

When the Paid up share capital is less than 25 lakhs, 20 such companies

In any other case, 20 companies out of which not more than 10 shall be companies each of which has a paid up share capital of 25 lakhs or more



1.24 Auditors Appointment by special resolution According to Section 224A (1) of the Act, the appointment or re-appointment at each annual general meeting of an auditor or auditors shall be made by a special resolution in the case of a company in which not less than twenty-five per cent of the subscribed share capital is held, whether singly or in any combination, by (a) a public financial institution or a Government company or Central Government or any

State Government, or (b) any financial or other institution established by any Provincial or State Act in which a

State Government holds not less than fifty-one per cent of the subscribed share capital, or

(c) a nationalised bank or an insurance company carrying on general insurance business, Further as per sub-section (2), if any company omits or fails to pass at its annual general meeting any special resolution appointing an auditor or auditors, it shall be deemed that no auditor or auditors had been appointed by the company at its annual general meeting, and thereupon the provisions of sub-section (3) of section 224 shall become applicable in relation to such company i.e. Central Government shall appoint an Auditor to fill the vacancy.

1.25 Removal of auditors Removal of auditor only requires an ordinary resolution. However Section 225 prescribes certain procedure for the removal of an auditor. (1) Special notice shall be required for a resolution at an annual general meeting appointing

as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be re-appointed.

(2) On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor.

(3) Where notice is given of such a resolution and the retiring auditor makes with respect thereto representations in writing to the company (not exceeding a reasonable length) and requests their notification to members of the company, the company shall, unless the representations are received by it too late for it to do so,

(a) in any notice of the resolution given to members of the company, state the fact of the representations having been made; and

(b) send a copy of the representations to every member of the company to whom notice of the meeting is sent, whether before or after the receipt of the representations by the company;

and if a copy of the representations is not sent as aforesaid because they were received too late or because of the companys default the auditor may (without prejudice to his right to be heard orally) require that the representations shall be read out at the meeting. The copies of the representations need not be sent out and the representations need not be read out at the meeting if, on the application either of the company or of any other person who claims to be



aggrieved, the Central Government is satisfied that the rights conferred are being abused to secure needless publicity for defamatory matter; and the Central Government may order the companys costs on such an application to be paid in whole or in part by the auditor, notwithstanding that he is not a party to the application.

1.26 Powers of Auditors 1. As per Section 227(1) of the Act, every auditor of a company shall have a right of access

at all times to the books and accounts and vouchers of the company, whether kept at the head office of the company or elsewhere.

2. He shall be entitled to require from the officers of the company such information and explanations as the auditor may think necessary for the performance of his duties as auditor.

3. Section 228(2) provides that where the accounts of any branch office are audited by a person other than the companys auditor, the companys auditor (a) shall be entitled to visit the branch office, if he deems it necessary to do so for the performance of his duties as auditor, and (b) shall have a right of access at all times to the books and accounts and vouchers of the company maintained at the branch office.

4. He has the right to attend any general meeting of the company and be heard on matters that concern him as an auditor.

1.27 Duties of auditors 1. The auditor shall make a report to the members of the company on the accounts

examined by him, and on every balance sheet and profit and loss account and on every other document declared by this Act to be part of or annexed to the balance sheet or profit and loss account, which are laid before the company in general meeting during his tenure of office, and the report shall state whether, in his opinion and to the best of his information and according to the explanations given to him, the said accounts give the information required by this Act in the manner so required and give a true and fair view [Section 227(2)]

2. It is the duty of the auditor to inquire (a) whether loans and advances made by the company on the basis of security have been

properly secured and whether the terms on which they have been made are not prejudicial to the interests of the company or its members;

(b) whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company;

(c) where the company is not an investment company within the meaning of section 372 or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;



(d) whether loans and advances made by the company have been shown as deposits;

(e) whether personal expenses have been charged to revenue account;

(f) where it is stated in the books and papers of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading.

(3) The auditors report shall also state (a) whether he has obtained all the information and explanations which to the best of his

knowledge and belief were necessary for the purposes of his audit;

(b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books, and proper returns adequate for the purposes of his audit have been received from branches not visited by him;

(c) whether the report on the accounts of any branch office audited under section 228 by a person other than the companys auditor has been forwarded to him as required by clause (c) of sub-section (3) of that section and how he has dealt with the same in preparing the auditors report;

(d) whether the companys balance sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns;

(e) whether, in his opinion, the profit and loss account and balance sheet comply with the accounting standards referred to in sub-section (3C) of section 211;

(f) in thick type or in italics the observations or comments of the auditors which have any adverse effect on the functioning of the company;

(g) whether any director is disqualified from being appointed as director under clause (g) of sub-section (1) of section 274;

(4). Where any of the matters is answered in the negative or with a qualification, the auditors report shall state the reason for the answer.

1.28 Audit of accounts of branch office of company 1. Section 228 requires that where a company has a branch office, the accounts of that

office shall be audited by the companys auditor appointed under section 224 or by a person qualified for appointment as auditor of the company under section 226, or where the branch office is situate in a country outside India, either by the companys auditor or a person qualified as aforesaid or by an accountant duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country.

2. Where the accounts of any branch office are audited by a person other than the companys auditor, the companys auditor



(a) shall be entitled to visit the branch office, if he deems it necessary to do so for the performance of his duties as auditor, and

(b) shall have a right of access at all times to the books and accounts and vouchers of the company maintained at the branch office.

Further in the case of a banking company having a branch office outside India, it shall be sufficient if the auditor is allowed access to such copies of, and extracts from, the books and accounts of the branch as have been transmitted to the principal office of the company in India.

3. Where a company in general meeting decides to have the accounts of a branch office audited otherwise than by the companys auditor, the company in that meeting shall, for the audit of those accounts, appoint a person qualified for appointment as auditor of the company under section 226, or where the branch office is situate in a country outside India, a person who is either qualified as aforesaid or an accountant duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country, or authorise the Board of directors to appoint such a person in consultation with the companys auditor.

4. The person so appointed as the branch auditor shall have the same powers and duties in respect of audit of the accounts of the branch office as the companys auditor has in respect of the same.

5. The branch auditor shall prepare a report on the accounts of the branch office examined by him and forward the same to the companys auditor who shall in preparing the auditors report, deal with the same in such manner as he considers necessary.

6. The branch auditor shall receive such remuneration and shall hold his appointment subject to such terms and conditions as may be fixed either by the company in general meeting or by the Board of directors if so authorised by the company in general meeting.

7. The Central Government may make rules providing for the exemption of any branch office from the provisions of this section to the extent specified in the rules and in making such rules the Central Government shall have regard to all or any of the following matters, namely : (a) the arrangement made by the company for the audit of accounts of the branch office by

a person otherwise qualified for appointment as branch auditor even though such person may be an officer or employee of the company;

(b) the nature and quantum of activity carried on at the branch office during a period of three years immediately preceding the date on which the branch office is exempted from the provisions of this section;

(c) the availability at a reasonable cost of a branch auditor for the audit of accounts of the branch office;

(d) any other matter which in the opinion of the Central Government justifies the grant of exemption to the branch office from the provisions of this section.



1.29 Signature of audit report, etc. According to Section 229, only the person appointed as auditor of the company, or where a firm is so appointed in pursuance of the proviso to sub-section (1) of section 226, only a partner in the firm practising in India, may sign the auditors report, or sign or authenticate any other document of the company required by law to be signed or authenticated by the auditor.

1.30 Special audit (Section 233A) Where the Central Government is of the opinion (a) that the affairs of any company are not being managed in accordance with sound

business principles or prudent commercial practices; or (b) that any company is being managed in a manner likely to cause serious injury or damage

to the interests of the trade, industry or business to which it pertains; or (c) that the financial position of any company is such as to endanger its solvency; the Central Government may at any time by order direct that a special audit of the companys accounts for such period or periods as may be specified in the order, shall be conducted and may by the same or a different order appoint either a chartered accountant whether or not such chartered accountant is a chartered accountant in practice or the companys auditor himself to conduct such special audit and such auditor shall be known as Special auditor. The special auditor shall have the same powers and duties in relation to the special audit as an auditor of a company has under section 227. The special auditor shall, instead of making his report to the members of the company, make the same to the Central Government. The report of the special auditor shall, as far as may be, include all the matters required to be included in an auditors report under section 227 and, if the Central Government so directs, shall also include a statement on any other matter which may be referred to him by that Government. The expenses of, and incidental to, any special audit including the remuneration of the special auditor shall be determined by the Central Government and paid by the company and in default of such payment shall be recoverable from the company as an arrear of land revenue.

1.31 Audit of cost accounts (Section 233B) Where the Central Government is of the opinion that it is necessary so to do in relation to any company required under clause (d) of sub-section (1) of section 209 to include in its books of account the particulars referred to therein, the Central Government may, by order, direct that an audit of cost accounts of the company shall be conducted in such manner as may be specified in the order by an auditor who shall be a cost accountant as defined in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959 (23 of 1959) and who holds a valid certificate of practice under sub-section (1) of section 6 of that Act and includes a firm of cost accountants.



The procedure for Appointment of Cost Auditor has been revised vide General Circular No. 15/2011 dated 11th April, 2011 which is provided as below: The Audit Committee of the Board shall be the first point of reference regarding the appointment of cost auditors; In case of those companies where constitution of an Audit Committee of the Board is not required by law, the words Audit Committee shall stand substituted by the words Board of Directors. The Audit Committee shall ensure that the cost auditor is free from any disqualifications as specified under section 233B (5) read with section 224 and sub-section (3) or sub-section (4) of section 226 of the Companies Act, 1956. While a cost auditor shall have prime responsibility to ensure that he does not violate the limits specified under section 224 (1B) of the Companies Act, 1956, the Audit Committee shall also be responsible for such compliance by the cost auditor. The Audit committee shall obtain a certificate from the cost auditor certifying his/its independence and arms length relationship with the company. The company shall e-file its application with the Central Government on www.mca.gov.in portal, in the prescribed form 23C within ninety days from the date of commencement of each financial year, along with the prescribed fee as per the Companies (Fees on Applications) Rules, 1999 as amended from time-to-time and other documents as per existing practice i.e. (i) certified copy of the Board Resolution proposing appointment of the cost auditor; and (ii) copy of the certificate obtained from the cost auditor regarding compliance of section 224(1B) of the Companies Act, 1956. On filing the application, the same shall be deemed to be approved by the Central Government, unless contrary is heard within thirty days from the date of filing such application. If within thirty days from the date of filing such application, the Central Government directs the company to re-submit the said application with such additional information or explanation, as may be specified in that direction, the period of thirty days for deemed approval of the Central Government shall be counted from the date of re-submission by the company. After expiry of thirty days, as the case may be, the company shall issue formal letter of appointment to the cost auditor, as approved by the Board. Within thirty days of receipt of formal letter of appointment from the company, the cost auditor shall inform the Central Government in the prescribed form, along with a copy of such appointment. The company shall disclose full particulars of the cost auditor, along with the due date and actual date of filing of the cost audit report by the cost auditor, in its Annual Report for each relevant financial year. If a company contravenes any provisions of this circular, the company and every officer thereof who is in default, including the persons referred to in sub-section (6) of section 209 of the Act, shall be punishable as provided under sub-section (2) of section 642 read with sub-sections (5) and (7) of section 209 and sub-section (11) of section 233B of Companies Act, 1956.



If default is made by the cost auditor in complying with the aforesaid provisions, he shall be punishable with fine, which may extend to five thousand rupees. According to Sub-section (3) of section 233B, an audit conducted by an auditor under this section shall be in addition to an audit conducted by an auditor appointed under section 224. Cost auditor shall have the same powers and duties in relation to an audit conducted by him under this section as an auditor of a company has under sub-section (1) of section 227 and such auditor shall make his report to the Central Government in such form and within such time as may be prescribed and shall also at the same time forward a copy of the report to the company. Key points

Cost Audit For Companies covered u/s 209(1)(d) if Central Government is of the opinion Cost Auditor shall be Cost Accountant as defined and holds valid certificate of Practice and includes firm of Cost Accountants Appointment by Audit Committee if any; otherwise by Board of Directors Form 23C by the Company with Central Government within 90 days from the date of commencement of each financial year Deemed to be approved unless contrary is heard within 30 days Required resubmission if Central Government direct within 30 days After expiry of 30 days from submission or resubmission as the case may be, Company shall issue formal Letter of Appointment to Cost Auditor as approved by Board Within 30 days of receiving Letter of Appointment, Cost Auditor shall inform the Central Government in the prescribed form.

Note: For detailed material on Accounts & Audit, students are advised to refer to Study Material on Accounting and Audit respectively.


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