Penalty for non-compliance - If any auditor’s report or any document of the company is signed or authenticated otherwise than in conformity with the requirements of section 229, the auditor concerned and the person, if any, other than the auditor who signs the report or signs or authenticates the document shall, if the default is willfull, be punishable with a fine which may extend upto Rs. 10,000/- (section 233).
Wednesday, 18 January 2012
BOARD’S REPORT
BOARD’S REPORT (SECTION 217):
(1) 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 company’s 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.
(2) The Board’s report shall, so far as is material for the appreciation of the state of the company’s affairs by its members and will not in the Board’s 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 company’s business;
(b) in the company’s subsidiaries or in the nature of the business carried on by them; and
(c) generally in the classes of business in which the as an interest.
(2A) (a) The Board’s 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 may be prescribed; 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 may be prescribed; 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.
(b) The statement referred to in clause (a) 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.
Explanation : Remuneration has the meaning assigned to it in the Explanation to section 198.
(2AA) The board’s 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 judgements 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.
(2B) The Board’s 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.
(3) 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.
(4) The Board’s 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.
(5) 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 Board’s 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, provided that no person shall be sentenced to imprisonment for any such offence unless it was committed willfully, provided further that in any proceedings against a person 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 was in a position to discharge that duty.
(6) If any person, not being a director, 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, provided that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully.
FORM AND CONTENTS OF PROFIT AND LOSS ACCOUNT
REQUIREMENTS AS TO PROFIT AND LOSS ACCOUNT
It is already observed that section 211 requires that profit and loss account of a company should give a true and fair view of the profit or loss of the company for the financial year and should comply with the requirements of Part II of Schedule VI, so far as they are applicable thereto.
The said requirements do not apply to insurance or banking company or any company engaged in the generation or supply of electricity or to any other class of company for which a form of profit and loss account has been specified in or under the Act governing such class of company. The power of the Central Government to exempt any company from the above provisions has been already discussed. The Act does not prescribe any form of profit and loss account but it merely gives the requirements in regard to the matters to be stated in the profit and loss account.
The requirements of the said Part II, apply in like manner to the income and expenditure account as they apply to a profit and loss account.
The general requirements in regard to the profit and loss account are as under :
1. The profit and loss account should be so made out as clearly so as to disclose the result of the working of the company during the period covered by the account.
2. It should disclose every material feature relating to the working results of the company’s business.
3. It should also disclose clearly credits or receipts and debits or expenses in respect of nonrecurring transactions or transactions of an exceptional nature.
4. It should set out the various items relating to the income and expenditure of the company arranged under the most convenient heads.
5. The comparative figures relating to the corresponding previous period, whether a year, half year or a quarter, should be given in the profit and loss account. The comparative figures should be regrouped wherever necessary and in that case a note should be placed at the foot of the profit
and loss account to that effect.
6. It should disclose in particular the information required by clause 3 of Part II and it should contain or give by way of a note information required by clauses 4, 4A, 4B, 4C and 4D.
Under clause 3, profit and loss account should disclose, in particular the following information in respect of the period covered by the account.
(I) Turnover
The aggregate amount for which sales are effected by the company, must be shown as the gross figure, giving the amount of sales in respect of each class of goods dealt with by the company, and indicating the quantities of such sales for each class separately. The turnover may be shown after making adjustments in respect of return of goods, trade discounts and allowances etc.
The following amounts should not be deducted from sales but should be shown separately :
(a) Commission paid to sole selling agents within the meaning of Section 294 of the Act.
(b) Commission paid to other selling agents.
(c) Brokerage and discount on sales, other than the usual trade discount. The usual trade discount
according to standard accounting practice should be deducted from the sales but the particulars
of any unusual trade discount should be separately disclosed.
(II) Stocks, Purchases, etc.
1. In the case of manufacturing companies the following information must be disclosed :
(a) The value of raw materials consumed, giving item-wise break-up and indicating the quantities thereof. In this break-up all important basic raw materials should be shown as separate items as far as possible. The intermediates or components procured from other, manufacturers may be grouped under suitable headings without mentioning the quantities, if their list is too large to be included in the break-up. All those raw material items which in value, individually, account for 10% or more of the total value of the raw material consumed shall be shown as separate and distinct items with value and quantities thereof in the break up. The usual practice is to show the opening stock plus purchase of raw materials, minus the closing stock so as to show the amount of raw materials consumed.
(b) The opening and closing stock of goods produced giving break-up in respect of each class of goods and indicating the quantities thereof.
2. In case of trading companies, the purchases made and the opening and closing stocks, giving break-up in respect of each class of goods traded in by the company and indicating the quantities thereof should be stated.
3. In the case of companies rendering or supplying services, the gross income derived from services rendered or supplied should be stated.
4. In case of a company which falls under more than one of the categories mentioned in items 1, 2 and 3 above, it shall be sufficient compliance with the requirements, if the total amounts, in respect of the opening and closing stocks, purchases, sales and consumption of raw material with value and quantitative break up and the gross income from services rendered are shown.
For the disclosure of above information the following points should be noted :
(i) The quantities should be expressed in quantitative denominations for which raw materials,
purchases, stocks, and the turnover are normally purchased or sold in the market as the case may be (Note 1).
(ii) For the purposes of disclosure in respect of items 1, 2 and 4 above, the items for which the
company is holding separate industrial licences should be treated as separate class of goods. In case where a company has more than one industrial licence for production of the same item at different places or for expansion, the item covered by all such licences shall be treated as one class. In case of trading companies, import items should be classified according to the classification adopted by the Controller of Imports and Exports in granting the import licences (Note 2).
(iii) All those items which in value individually account for 10% or more of the total value of the
purchases, stocks, or turnover, as the case may be, are to be shown as separate and distinct items with quantities thereof in the break-up. In respect of items other than the above items, in giving the break-up of purchases, stocks and turnover, items like spare parts and accessories, the list of which is too large to be included in the break-up, may be grouped under suitable headings without quantities (Note 3).
5. In the case of concerns other than the above, the gross income derived under the different heads should be shown.
(III) Work-in-progress
In the case of all concerns having work-in-progress there should be shown :
1. The amounts for which such works have been completed at the commencement of the accounting period, and
2. the amounts for which such works have been completed at the end of the accounting period.
In the case of manufacturing concerns it is recommended that the opening and the closing stocks of semi-finished goods or the opening and the closing amount of work-in-progress, as the case may be, should be stated.
(IV) Provision for depreciation
The amount provided for depreciation, renewals or diminution in the value of fixed assets should be separately stated. It is suggested that the particulars of any obsolescence loss written off should be separately given. Where such provision is not made by means of a depreciation charge, the method adopted for making such provision and the amount should be stated.
In case no provision is made for depreciation, the fact that no provision has been made should be stated. The quantum of arrears of depreciation computed in accordance with section 205(2) of the Act should be disclosed by way of a note. The provision for depreciation, in excess of the amount, which, in the opinion of the directors is reasonably necessary for the purpose, should be treated as a reserve and not as a provision. If there has been any change in the method of depreciation the effect of the change should be clearly stated by way of a note.
(V) Interest
The amount of interest on the company’s debentures and loans for fixed periods should be separately stated. There should be stated separately the amount of interest, if any, paid or payable to the managing director and the manager.
(VI) Provision for taxation
The amount of charge for Indian income-tax and other Indian taxation on profits should be shown separately. Where practicable, with Indian income-tax there should be also stated any taxation imposed elsewhere to the extent of the relief, if any, from the Indian Income-tax.
Where practicable, a distinction should be made between income-tax and other taxation. Different types of taxes should be shown separately. Any adjustment to the provision for taxation on determination of the actual liability should be adjusted through the profit and loss appropriation account and the difference, if material, should be clearly shown.
In cases where a company has made a profit during the year but no tax is payable on account of carry forward of loss, depreciation, etc. it is recommended that an appropriate note may be given explaining the reasons why provision for taxation has not been made.
(VII) Reserves for repayment of share capital or loans
The amounts reserved for :
1. Repayment of share capital; and
2. Repayment of loans are to be shown separately.
It is unusual for a company to make provision for repayment of share capital. However, in the case of redeemable preference shares it is possible that the terms of issue may require the company to reserve a part of the profit for ultimate redemption of such preference shares.
The reserve created for redemption of debentures should be separately shown.
(VIII) Reserves
The aggregate, if material, of any amounts set aside or proposed to be set aside to reserves must be separately shown. Such amounts should not include provisions made to meet any specific liability, contingency or commitment known to exist at the date as at which the balance sheet is made out. For this purpose the distinction between “provision” and “reserve” should be borne in mind. The aggregate, if material, of any amounts withdrawn from such reserves also must be separately shown.
(IX) Provisions
The aggregate, if material, of the amounts set aside to make provision for specific liabilities, contingencies or commitments should be separately shown. The aggregate, if material, of the amounts withdrawn from such provisions, as no longer required, should be separately stated.
Where additions to or withdrawals from reserves and provisions have been made during the year and such transfers affect the profit and loss account, the amounts involved, if material, must be shown separately in that account or by way of a note. Where, however, the additions or withdrawals are capital transactions, e.g., a transfer to capital reserve of a capital profit, such transactions should either appear on the face of the balance sheet or in a statement or report annexed thereto. The source from which the increase has been derived or the manner in which the decrease has been applied must be shown clearly. The amount of provision, in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose, should be treated as a reserve and not as a provision. A proper distinction must be made between provisions and liabilities. Only the amount retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy should be termed as a provision. The term “liability” includes all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities.
(X) Other expenditure
The expenditure incurred on each of the following items should be shown separately:
1. Consumption of stores and spare parts: It is not necessary to disclose separately the opening
stock, purchases and closing stock of stores and spare parts. It is suggested that where the sale
of items are material, such amounts should be separately disclosed.
2. Power and fuel.
3. Rent - including rent for factory, office, godowns, etc.
4. Repairs to buildings.
5. Repairs to machinery: Where repairs to buildings or machinery have been carried out departmentally, it is recommended that the expenditure under various heads such as salaries and wages, stores, etc. should be allocated to repairs account and the expenses so allocated should also be indicated by way of a note under their respective heads.
6. (a) Salaries, wages and bonus including gratuity, compensation, etc.
(b) Contribution to provident and other funds.
(c) Workmen and staff welfare expenses to the extent not adjusted from any previous provision or reserve. If such expenditure is adjusted against any previous provision or reserve, such information should also be given in the balance sheet under the relevant provision or reserve account.
7. Insurance
8. Rates and taxes, excluding taxes on income: This item will cover local taxes, property tax, water tax, vehicle tax, State sales-tax, Central sales-tax, etc. It is suggested that the amount of sales-tax should be separately shown.
9. Miscellaneous expenses: Any item under which the expenses exceed 1% of the total revenue of the company or rupees five thousand whichever is higher, should be shown as a separate and distinct item under an appropriate head in the profit and loss account. It should not be combined with any other item to be shown under “Miscellaneous Expenses”.
(XI) Income from investments
The amount of income from : Trade investments and other investments should be separately hown. Other income by way of interest must be separately stated, specifying the nature of the income. If the gross income is stated in respect of the above items, the amount of income-tax deducted must be separately shown.
(XII) Profits or losses etc.
1. The profits or losses on investments to the extent not adjusted from any previous provision or reserve should be shown separately. If the profits or losses on investments are adjusted against any previous provision or reserve such information should also be given in the balance sheet under the relevant provision or reserve such information should also be given in the balance sheet under the relevant provision or reserve account. The profits or losses earned or incurred on account of membership of a partnership firm should be shown separately.
2. Profits or losses, if material in amount, in respect of transactions of a kind, not usually undertaken by the company or undertaken in circumstances of an exceptional or non-recurring nature should be shown separately.
3. Miscellaneous income:It is recommended that where the amount of miscellaneous income is material in amount the nature of the income should be stated.
(XIII) Subsidiary companies
The amount of dividend from subsidiary companies and provisions for losses of subsidiary companies, should be separately stated. Note (f) under the form of balance sheet requires that dividends declared by subsidiary companies after the date of the balance sheet should not be included unless they are in respect of period which closed on or before the date of the balance sheet.
(XIV) Dividends
The aggregate amount of dividends paid and proposed should be stated separately. It should also be stated whether such amounts are subject to deduction of income-tax or not.
(XV) Basis of accounting
The amount, by which any items shown in the profit and loss account are affected by any change in the basis of accounting, if material, should be disclosed. If there has been any change in the method of valuation of stock-in-trade or work-in-progress or in the basis of providing for depreciation or any change from the cash to the mercantile system of accounting, the effect should be clearly disclosed. Clause 4, Part II, Schedule VI, requires that the profit and loss account should contain or give by way of a note detailed information in respect of payments provided or made during the financial year to :
1. Directors;
2. Managing directors; or
3. Manager.
The disclosure should be not only in respect of payments provided or made by the company but also by the subsidiaries of the company and any other person. Such information should be detailed as under :
1. Managerial remuneration under section 198 of the Act paid or payable during the financial year to the directors (including managing directors), or manager, if any.
2. Other allowances and commission including guarantee commission (details to be given).
3. Any other perquisites or benefits in cash or in kind (stating approximate money value where practicable).
4. Pensions, etc. :
(a) Pensions
(b) Gratuities
(c) Payments from provident funds, in excess of own subscriptions and interest thereon.
(d) Compensation for loss of office.
(e) Consideration in connection with retirement from office.
It should be noted that section 221 casts a duty on the officer of the company and other persons to give particulars and information required to be given in the balance sheet or profit and loss account of a company. Such particulars and information should be furnished by them in as full a manner as possible whenever so required by the company’s auditor.
Clause 4A requires that the profit and loss account should contain or give by way of a note a statement showing the computation of net profits in accordance with section 349 of the Act together with relevant details of the calculation of the commissions payable by way of percentage of such profits to :
1. Directors;
2. Managing directors; or
3. Manager.
Clause 4B requires that the profit and loss account should contain, or give by way of a note, detailed information in regard to amounts paid to the auditor, whether as fees, expenses, or otherwise for services rendered :
(a) as auditor;
(b) as adviser, or in any other capacity, in respect of
(i) taxation matters;
(ii) company law matters;
(iii) management services; and
(c) in any other manner.
The Institute of Chartered Accounts of India has recommended that the disclosure be made under the following heads :
(1) Audit fee;
(2) Fee for tax representation;
(3) Fee for company law matters;
(4) Fee for management services;
(5) Fee for internal auditing;
(6) Expenses reimbursed to auditors;
(7) Other services.
Clause 4C requires that in the case of manufacturing companies, the profit and loss account shall also contain by way of a note, detailed quantitative information in respect of each class of goods manufactured, in regard to the following :
(a) licensed capacity (Where license is in force) as on the last date of the year;
(b) the installed capacity as on the last date of the year; and
(c) the actual production in respect of the finished products meant for sale. In cases where semi-processed products are also sold, separate details thereof shall be given. For the above purposes the items for which there are separate industrial licenses shall be treated as separate classes of goods. In respect of an item where there is more than one industrial license for production at different places or for expansion of the licensed capacity, the item covered by all such licenses shall be treated as one class.
Clause 4D requires that the profit and loss account shall also contain by way of a note the following information :
(a) value of imports calculated on C.I.F. basis during the financial year in respect of :
(i) raw materials;
(ii) components and spare parts;
(iii) Capital goods.
(b) expenditure in foreign currency during the year on account of royalty, know-how, professional consultation fees, interest, and other matters.
(c) the value of:
(i) all imported raw materials, spare parts and components consumed,
(ii) the value of all indigenous raw materials, spare parts and components consumed, and
(iii) the percentage of each item in (i) and (ii) above, to the total consumption.
(d) the amount remitted during the year in foreign currencies on account of dividends. A specific mention should be made of the number of non-resident shareholders, the number of shares held by them on which the dividends were due and the year to which the dividends relate.
(e) earnings in foreign exchange classified as under :
(i) export of goods calculated on F.O.B. basis;
(ii) royalty, know-how, professional and consultation fees;
(iii) interest and dividend;
(iv) other income, indicating the nature thereof.
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