Introduction
Section 209 is one of the most important sections in the Companies Act, 1956. This section deals with the requirements of maintenance of books of accounts and penalties for non compliance. A detailed analysis of the provisions of Section 209 and its implication on other related sections is brought out in this article.
Analysis of Section 209
Section 209 (1) of the Companies Act, 1956 requires every company to maintain necessary books of accounts relating to—
a) All sums of money received and spent by the company together with details as to receipts and expenditure;
b) All sales and purchases of goods by the company;
c) All assets and liabilities of the company; and
d) In case the company is engaged in production, processing, manufacturing or mining activities, such particulars relating to utilization of labour, or material or other items of costs as may be prescribed, if required by the Central Government to be included in the books of accounts.
It would be clear from the above every company has to maintain books of accounts reflecting true and fair view of transactions mentioned in (a) to (d) of Section 209 (1) .
Exception to maintenance of books at Registered office
The Proviso to the Sub section (1) permits maintenance of all or any of the books of account at such other place in India as the Board of Directors may decide subject to fulfillment of conditions mentioned there in.
Many people have a misconception that there is no need to declare a particular place as a branch although records are maintained at that branch and if reports are sent from the branch periodically, it will amount to due compliance of Section 209. It must be noted that section 209(1) requires that all books of account must be maintained at the Registered office. However if it is decided by the Board of directors to maintain books of accounts relating to transactions of a branch which is away from the Registered office, then the following conditions have to be satisfied:-
1. The Board of directors must pass a resolution to the effect that books of account will be maintained at a place other than the Registered office.
2. A notice in writing within 7 days of such decision must be given to the Registrar of companies by filing prescribed Form no.23 AA. The Form must disclose the full address of the location of branch.
3. Summarized returns of branch transactions are sent to Registered office at regular intervals not exceeding 3 months.
Clue to the exception
If one carefully reads sub Section 2 of Section 209, the matter will be clear. Sub Section 2 of 209 provides that the company shall be deemed to have complied with the provisions of sub section (1), if proper books of accounts relating to transactions of branch whether in India or outside are kept at that branch and proper summarized returns at intervals of not more than 3 months are submitted to the Registered office. This only means that the requirement of maintenance of books of account at the Registered office with respect to clauses (a) to (d) need not be at the Registered office but proper summarized returns reflecting the transactions at the branch have to be sent to Registered office at Regular intervals of not more than 3 months.
What constitutes books of accounts?
Section 2(8) defines "Book and paper" and "book or paper" include accounts, deeds, vouchers, writings and documents ]. The word 'vouchers' was included by the Companies (Amendment) Act of 1965. Thus books and papers include vouchers. Vouchers are necessarily to be maintained along with other books and papers. "Documents" include summons, notices, requisitions, orders, other legal process, and registers whether issued, sent or kept in pursuance of this or any other Act or otherwise [section 2(15)].
True test of compliance (True and fair view)
Sub Section (3) emphasizes that the books of accounts must be capable of giving "a true and fair view of the state of affairs of the company or its branch office, as the case may be, and explain its transactions". The true test of compliance is maintenance of books of accounts on double entry principle and accrual basis.
Who can inspect Books of account?
Sub-section (4) of Section 209 provides that "the books of account and other books and papers shall be open to inspection by any director during business hours".
Similarly the Sub Section (1) of Section 209-A provides that the books of account and other papers shall be open for inspection during the business hours by the Registrar of companies and or officers authorized by the Central Government or SEBI.
What is the Purpose of inspection?
Routine inspections are carried out by Registrar of companies for checking compliance of various provisions of the Companies Act, 1956 keep a watch on the performance/efficiency of the companies. Inspections are also carried out under SEBI/ CRPC to ensure that the company has not falsified its books of accounts or the company’s funds have not been misappropriated or the management has not misused its fiduciary position for any personal advantage.
Time limit for preservation of books of accounts
Sub Section 4A requires that these books of account along with relevant vouchers (of entries) must be preserved in good order for a minimum period of eight years in the case of existing companies. In case of company is less than 8 years old, books of account be preserved for the entire period from the previous year. However for income tax purposes one may keep the records even beyond 8 years as some assessments may be re-opened and create problem, if records are destroyed.
What is to be done in case of Change of Location/Place?
There are divergent views on this issue. In case of change of location of books of account within the same place, whether the Board of directors have to pass a fresh resolution again? The author is of the view that there is no need to pass another board resolution, if the change is within the same place but a notice of location of the books of account has to be intimated to the Registrar of Companies. However if the branch is shifted from one place to another place, then board has to pass a resolution as the previous resolution will no longer be effective. The prescribed form no.23AA has to be filed within 7 days of change.
Why intimation of change of place is required?
Section 209-A (1) provides that the books of account and other papers shall be open for inspection during the business hours by the Registrar of companies and or officers authorized by the Central Government or SEBI. Inspections can be carried out with prior notice or without prior notice. In case of allegation of mismanagement, or on orders from a court under CRPc, inspection of books of account can be done even without a prior notice. This intimation of place of books of account will facilitate inspection referred in Section 209(4) and also section 209A, 234 and 235 of the companies Act,1956.
Who are responsible for maintenance of books of account?
The primary responsibility for making proper books of accounts of a company is that of the Managing Director or Manager and all officers and other employees who have been charged with the responsibility by the Board of Directors. If the company has neither a Managing director nor Manager, then all directors are collectively responsible.
What are the consequences of non compliance of Section 209?
If provisions of section 209 are violated, Managing director or Manager and all charged officers and other employees of the company are liable for imprisonment for a term which may extent to 6 months or a fine of Rs.10,000/- or with both. In case the company has not appointed a Managing director or Manager then, every director of the company will liable for prosecution.
If the accused persons can prove that the act was not committed willfully imprisonment is unlikely. However in any proceedings against any person for violation of Section 209, that person can defend by showing that a competent and reliable person was charged with the duty for complying with the requirements of the section 209 and that person was in a position to discharge that duty.
Conclusion: Section 209 has link with section 209-A and Section 627.And any person convicted of offence u/s 209A shall be disqualified for holding such office for a period of 5 years from the date of conviction. Therefore all directors must ensure that officers are charged with responsibility and they comply with the requirements of both 209 and 209A
G S Rao, Chief Manager(Legal) OCL India Limited
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