Companies Act Section 128

Companies Act Section 128 - Requirement for Companies to Maintain Books of Account and Related Records

Section 128 of the Companies Act, 2013, establishes the mandatory obligation for all companies to maintain proper books of account, financial statements, and other relevant financial records. This section ensures that companies operate with financial transparency and maintain a clear and accurate record of their financial transactions.

The purpose of this requirement is to enable directors, shareholders, auditors, and regulators to have a true and fair view of the company’s financial health and business operations at any given point. These books serve as the foundation for financial reporting, taxation, regulatory compliance, and audits.

Requirement to Maintain Books of Account

Every company incorporated under the Companies Act is legally required to prepare and keep:

Books of account

Relevant supporting papers

Financial statements

These records must cover each financial year and they must present a true and fair view of the state of affairs of the company. This obligation includes the financial position not just of the company’s registered office, but also the branch offices, if any exist.

Accounting Standards to be Followed

The books of account must be maintained on an accrual basis, meaning transactions are recorded when they occur, regardless of when cash actually changes hands.

The accounts must follow the double-entry system, ensuring every transaction affects at least two accounts to maintain the integrity and accuracy of financial data.

Location of Books of Account

By default, these books must be kept at the registered office of the company.
However, the Board of Directors has the authority to decide to keep these records at another location in India. If the Board makes such a decision, the company is legally required to:
File a notice in writing with the Registrar of Companies (ROC) within seven days of passing the Board resolution.

The notice must specify the complete address of the new location where the books are maintained.

Electronic Maintenance of Records

Companies are also permitted to store their books of account and relevant papers electronically, provided they do so in the manner prescribed under the rules made under the Act. This allows for digital record-keeping, which is becoming increasingly common.

Books of Account for Branch Offices

If the company operates one or more branch offices, whether located within India or outside India, the company shall be deemed compliant with the requirement to maintain books if:

The branch office itself maintains proper books of account relating to its own transactions, and

The branch office sends periodic summarized financial returns to the company’s registered office or the alternate location where the main books are kept.

This ensures that the financial data from the branch office is consolidated with the main company accounts, providing a complete picture of the company’s financial affairs.

Inspection Rights for Directors

The books of account, along with any other books and papers, that are maintained within India must be made available for inspection to any director of the company. This inspection must be allowed during business hours, either at the registered office or at the alternate location where the records are kept.

If the company maintains financial information related to overseas transactions (where financial records are held outside India), then:

Copies of those financial records must be kept within India.

These copies must be made available for inspection by any director, subject to any prescribed conditions under the applicable rules.

Special Provision for Subsidiary Companies

Where the inspection involves the books of account of a subsidiary of the company, the inspection rights are restricted. In such cases, only a person who is specifically authorised by a resolution of the Board of Directors may inspect the subsidiary’s books. This adds an extra layer of control when it comes to group companies and subsidiaries.

Duty to Assist in Inspection

When a director (or authorised person) is conducting an inspection, all officers and employees of the company are legally required to provide full cooperation and assistance. They must:

Produce records and documents as required.

Provide any clarification necessary to understand the transactions.

Ensure that the inspection process is not obstructed in any way.

Retention Period for Books of Account

Every company must preserve its books of account for a minimum period of eight financial years immediately preceding the current financial year. If the company is less than eight years old, it must maintain records for all the years since incorporation.

This period may be extended if the company is subject to any investigation ordered under Chapter XIV of the Companies Act. In such cases, the Central Government has the authority to direct the company to preserve its books for a longer period as deemed necessary for the investigation.

Consequences for Non-Compliance

If a company fails to comply with any requirement under this section, the responsibility falls on the following individuals:

The Managing Director,

The Whole-time Director in charge of finance,

The Chief Financial Officer (CFO), and

Any other person designated by the Board to ensure compliance.

Penalties for Non-Compliance

Each of the above individuals shall be liable to a fine, which shall be:

Minimum: ?50,000

Maximum: ?5,00,000

This ensures personal accountability for proper financial record-keeping and reinforces the importance of maintaining accurate and accessible financial records.