Frequently Asked Questions (FAQs) on Amendment to Rule 3 of Companies (Accounts) Rules, 2014
Shristi Sarayan
Partner
True and Fair Professionals Network
The Ministry of Corporate Affairs vide its notification dated 5th August 2022 had amended the Companies (Accounts) Rules, 2014 (‘Rule’) regarding availability of books of account and other relevant books and papers maintained in electronic mode at all times and also details of person in control, if service provider is located outside India. The Companies has been discussing this amendment and its related requirements, applicability with the consultants, their auditors, Information Technology (IT) Service Providers and so on. There is no specific guidance available for the amendment, its practical applicability from the Regulators. Below are few of the frequently asked questions and suggested responses which has been summarised for better understanding and clarity.
FAQ 1: What is meant by “Books of account and other relevant books and papers” or “books of account and other books and papers” as per Rule 3?
Response:
Below are the definitions of “the books of account and other relevant books and papers” As per Section 2(12) of the Companies Act, 2013 (‘the Act’) “book and paper” and “book or paper” include books of account, deeds, vouchers, writings, documents, minutes and registers maintained on paper or in electronic form;
As per Section 2(13) of the Act “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;
As per Section 2(36) of the Act “document” includes summons, notice, requisition, order, declaration, form and register, whether issued, sent or kept in pursuance of this Act or under any other law for the time being in force or otherwise, maintained on paper or in electronic form.
The below terms which has not been defined by the Act, has been interpreted based on general parlance:
Any written documentation supporting the entries reported in the account books, indicating the transaction's accounting accuracy, can be referred to as a voucher.
A deed is a signed legal document that grants its holder ownership to an asset but may set a number of conditions on the transfer of the title.
Written” or “in writing” means any expression consisting of words or figures which can be read, reproduced and subsequently communicated.
Minutes means a written record, in physical or electronic form, of the proceedings of a Meeting/ Discussion.
Register refers to the act of recording an event, transaction, name, or other information, or an aggregation of stored data, usually containing past events, transactions, names or other information.
Based on the above definitions it is to be noted that besides the accounting transaction entries recorded in the accounting software, all the record/data/ information which causes or impacts the accounting entry in the books of account is relevant to books and paper and books of account.
FAQ 2: What is the change due to this amendment dated 5 th August 2022?
Response:
✔️ The server where “the books of account and other relevant books and papers” maintained in electronic form are stored should either be maintained in India or the daily back-up of the server needs to be maintained in India.
✔️ Such books of account and other relevant books and papers should be accessible in India at all times.
✔️ Each year while filing the Form AOC-4, the Company needs to mention in the form where the service provider is located outside India and the details of the persons who control the access of the books of account and other books and papers in India.
FAQ 3: What is the date when this amendment is effective?
Response:
This amendment is effective from August 5, 2022.
Accordingly, the server / daily backup availability in India should be there from August 5, 2022, with books of account and other relevant books and papers being accessible in India at all times.
For the period prior to August 5, 2022, the server should have been in India or periodic backup should have been maintained in India, with the books of account and other relevant books and papers being accessible in India for all those periods (8 financial years immediately preceding the current financial year) for which the books of account have to be maintained under Section 128(5) of the Act.
The Form AOC-4 filing details for the additional information (as per the Rules) needs to be filed for FY 22-23.
FAQ 4: What will be the implications on the Company in case of non-compliance with this amendment?
Response:
As per Section 128(1) of the Act: ‘Every company shall prepare and keep at its registered office books of account and other relevant books and papers and financial statement for every financial year which 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, and explain the transactions effected both at the registered office and its branches and such books shall be kept on accrual basis and according to the double entry system of accounting: Provided that all or any of the books of account aforesaid and other relevant papers may be kept at such other place in India as the Board of Directors may decide and where such a decision is taken, the company shall, within seven days thereof, file with the Registrar a notice in writing giving the full address of that other place:
Provided further that the company may keep such books of account or other relevant papers in electronic mode in such manner as may be prescribed.
As per Section 128(2) of the Act, ‘Where a company has a branch office in India or outside India, it shall be deemed to have complied with the provisions of sub-section (1), if proper books of account relating to the transactions effected at the branch office are kept at that office and proper summarized returns periodically are sent by the branch office to the company at its registered office or the other place referred to in Section 128(1).
As per Section 384(3) of the Act, ‘The provisions of Section 128 shall apply to a foreign company to the extent of requiring it to keep at its principal place of business in India, the books of account referred to in that section, with respect to monies received and spent, sales and purchases made, and assets and liabilities, in the course of or in relation to its business in India.’
As per Section 128(6) of the Act, ‘If the managing director, the whole-time 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 Section 128, contravenes such provisions, such managing director, whole-time director in charge of finance, Chief Financial officer or such other person of the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees.’
As per Section 143(3)(b) of the Act, ‘The auditor’s report shall also state—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;’
As per Section 147(1) of the Act, ‘If any of the provisions of sections 139 to 146 (both inclusive) is contravened, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees.’
FAQ 5: What will be the implications on the Auditor of the Company in case of non-reporting of non-compliance with this amendment by the Company?
Response:
As per Section 143(3)(b) of the Act, ‘The auditor’s report shall also state—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;’
In case of default in reporting with this amendment, the auditor would be charged with professional misconduct.