Section 128 of the Companies Act, 2013 has been notified by the Ministry of Corporate Affairs (MCA) vide Notification No. S.O. 902(E) issued dated 27.03.2014. This notification shall come into force from 1st April, 2014 i.e. the commencement date of section 128 is 01-04-2014.
In other words, the provisions of section 128 in respect of the books of account, etc., to be kept by a company are effective from 1st day of April, 2014. Section 128 shall be applicable for the private company as well as the public company.
Maintenance of books of accounts [Section 128(1)]
1) Accounts maintained by Private and Public Company:
The provision of sub-section (1) of section 128 of the Companies Act, 2013 states that every company shall prepare and keep for every financial year:
i) Books of Account; and
ii) Other relevant Books and Papers; and
iii) Financial Statement;
Such books of account and other papers shall give a true and fair view of the state of the affairs of the company, including that of its branch office or offices, if any. Further, the company shall be in a position to explain the transactions effected both at the registered office and its branches.
As per section 2(13) of the Companies Act, 2013 the term “books of account” includes records maintained in respect of—
(i) All sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place;
(ii) All sales and purchases of goods and services by the company;
(iii) The assets and liabilities of the company; and
(iv) 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.
2) Accrual Basis and Double Entry System:
Every company shall keep and maintain the aforesaid books of accounts on accrual basis and according to the double entry system of accounting. Therefore, if any company maintain its books of account either on Cash Basis or Single/Mixed entry System then it contravene the provisions of section 128 of the Companies Act, 2013.
3) Books at Registered Office and Other Places:
All books of account and other papers of a company are required to be kept at the registered office of the company.
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 of Directors (BOD) may decide.
In such a case, the company shall file with the ROC (Registrar of Companies), a notice (Form AOC-5) in writing giving the full address of that decided place within 7 days of such decision taken by the Board.
4) Electronic form of Books of accounts:
According to the second proviso of section 128(1), the company may keep its books of account or other relevant papers in electronic mode in such manner as may be prescribed.
Consequently, the Central Government makes the Companies (Accounts) Rules, 2014 to prescribe the manner of books of account to be kept in electronic mode by companies. Accordingly, the books of account and other relevant books and papers maintained in electronic mode:
a) Shall remain accessible in India;
b) Shall remain complete and in original format;
c) Information received from branch offices shall not be altered;
d) To be displayed in readable form; and
e) Keep back-up of the books of account in servers physically located in India.
Additionally, the company shall intimate to the ROC on an annual basis at the time of filing of financial statement:
i) Name of service provider;
ii) IP address of service provider;
iii) Location of the service provider;
iv) If the Books of Account and other Papers are maintained on cloud, such address as provided by the service provider.
Thus, you may say that it is not mandatory or necessary to keep books of account and records of a company in physical form but the same may be kept in electronic mode.
Books of Accounts of a Branch Office [Section 128(2)]
The branch office of a company shall have to abide by the provisions mentioned in the sub-section (2) of section 128 otherwise it shall be deemed to have not complied with the provisions of section 128(1) of the Companies Act, 2013.
a) Books of Accounts at Branch Office:
If the company has a branch office either in India or outside India, the proper books of account relating to the transactions effected at the branch office must be kept at that branch office.
b) Summarised Returns to Registered Office:
Every branch office should send periodically the proper summarised returns to the company at its registered office or the other place as decided by the Board of directors of the company.
Inspection of Books of Account of a Company [Section 128(3)]
a) Inspection of books in India:
During business hours, any director of a company may inspect the books of account and other books and papers maintained by the company within India either at the registered office or at such other place in India.
b) Financial Information outside India:
In the case of financial information, if any, maintained outside the country, copies of such financial information shall be maintained and produced for inspection by any director subject to such conditions as may be prescribed.
Accordingly, the Ministry of Corporate Affairs (MCA) vide notification number G.S.R.239 (E) dated 31-03-2014 has prescribed such conditions under the Rule 4 of the Companies (Accounts) Rules, 2014:
i) Quarterly Summarised Returns: The summarised returns of the books of a/c kept and maintained outside India shall be sent to the registered office of the company at quarterly intervals and the same shall be kept open to directors for inspection.
ii) Further Information to Directors: Where any other financial information maintained outside the country is required by a director, the director shall furnish a request to the company setting out the full details of the financial information required and the period for which such information is sought.
Note that the company shall produce such financial information to the director within 15 days of the date of receipt of the written request.
Further note that the required financial information shall only be sought for by the director himself and not by or through his power of attorney holder or agent or representative.
c) Inspection of Subsidiary Company:
A board resolution must be passed to authorise the person for inspection in respect of any subsidiary of the company. In other words, the inspection of subsidiary company shall be done only by the person authorised in this behalf by a resolution of the Board of Directors of the company.
As per section 128(4) of the Companies Act, 2013, the officers and other employees of the company shall give to the person making such inspection all assistance in connection with the inspection which the company may reasonably be expected to give.
Period of maintenance of Books of Account of a Company [Section 128(5)]
a) Every Company keep records upto 8 Years:
Every company must keep the books of account in good order together with the vouchers relevant to any entry in such books of account for a minimum period of 8 financial years immediately preceding a financial year.
b) Maintain Books for less than 8 Years:
In case, the company had been in existence for a period less than eight years, it shall maintain the books of account and relevant vouchers in respect of all such preceding years.
c) CG order to keep books for more than 8 Years:
Where an investigation has been ordered in respect of the company under Chapter XIV (Section 206-229) of the Companies Act, 2013, the Central Government may direct that the books of account may be kept for such longer period as it may deem fit.
Did you know? Such provision related to the CG direction for keeping books and records for more than eight years was not present under section 209 of the Companies Act, 1956.
Persons responsible for Maintenance and Penalty [Section 128(6)]
a) MD, WD, CFO and Authorised Person:
The following persons are responsible u/s 128(6) of the Companies Act, 2013 for the maintenance of proper books of account of a company:
1) The Managing Director (MD);
2) The Whole-time Director (WD) in charge of finance;
3) The Chief Financial Officer (CFO); or
4) Any other person of a company charged by the Board of Directors with the duty of complying with the provisions of section 128.
Note that the MCA vide General Circular No. 08/2014 dated 4th April, 2014 has clarified that the financial statements and reports (Board/Auditor) in respect of FY that commenced earlier than 01-04-2014 shall be governed by the Companies Act, 1956 and that in respect of financial years commencing on or after 1st April, 2014, the provisions of the Companies Act, 2013 shall apply.
b) 1 Year Jail and/or Fine upto ₹ 5 Lakh:
If any of the persons responsible for the maintenance of proper books of account of a company contravenes such provisions, they shall be punishable with:
1) Imprisonment for a term which may extend to 1 year; or
2) Minimum fine of ₹ 50,000 which may extend to ₹ 5 lakhs; or
3) With both i.e. imprisonment as well as fine.
Whether Section 128 applies to a Foreign Company?
It depends on whether the foreign company have its principal place of business in India or not. Section 384(3) of the Companies Act, 2013 specifically mentioned that the provisions of section 128 shall apply to a foreign company:
1) To the extent of requiring such foreign company to keep
2) At its principal place of business in India,
3) The books of account referred to in section 128 with respect to:
a) Monies received and spent;
b) Sales and Purchases made; and
c) Assets and Liabilities,
in the course of or in relation to its business in India.
Thus, if any foreign company have its principal place of business in India then the provisions of section 128 of the Companies Act, 2013 shall be applicable to them in respect of books of account referred in that section.