Books of accounts and other records: robust data maintenance system

CA Sneha Halder

Requirements with respect to books of accounts and other records

Statutory requirement under companies Act –

• Companies Act requires every company to prepare and keep at its registered office, books of account and other relevant books and papers (accounts, deeds, vouchers, writings, documents, minutes and registers maintained on paper or electronic form) and financial statements for every financial year.
• A board resolution is required and it must be intimated to the Registrar of companies within 7 days if the books of accounts are to be maintained at a place other than the registered office.

• Books must 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.
• Books must be on accrual basis and according to the double entry system of accounting.
• Books of accounts will include all records with respect to all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place, all sales and purchases of goods and services by the company and the assets and liabilities of the company.
• Companies under the old Act were maintaining the statutory records in physical form, however under Companies Act, 2013, listed companies and a company having not less than 1000 shareholders, debenture holders and other security holders need to now compulsorily convert all their records from physical mode to electronic mode till 30 September 2014. Other companies can choose either to maintain records in physical or electronic form and if they choose to maintain it in electronic form, then they need to follow the prescribed guidelines.
• Under the new Companies Act, financial year means the period ending on the 31 march every year and where it has been incorporated on or after 1 January of a year, the period ending on the 31 day of March of the following year. Exemption is available to only holding/subsidiary companies of foreign companies with Government approval. All existing companies not having their financial year closing on 31 March have to align latest by 31 March 2016.
• Books of accounts along with vouchers relevant to any entry relating to a period of not less than eight financial years immediately preceding a financial year or where the company is in existence for less than eight years then all the financial years are to be kept in good order as per the Companies Act.
• The managing director, whole time director in charge of finance or chief financial officer or any other person responsible for maintenance of books shall be punishable with imprisonment for a term which may extend to one year or fine which shall not be less than fifty thousand and may extend to five lakh rupees or both if there is any contravention of the above provisions.

Requirement under Income Tax Act?

• Certain professions have been notified by the Income Tax Act like medical, engineering, company secretaries etc who have to compulsorily maintain prescribed books of accounts and documents (eg: cash book, journal, carbon copies of bills, bills and receipts in respect of expense incurred etc).
• In above, maintenance of prescribed books of accounts is not necessary if a person’s total gross receipts in the profession do not exceed Rs 1,50,000 in any one of the 3 years immediately preceding the previous year or if the profession is newly set up and his total gross receipts in the previous year are not likely to exceed Rs 1,50,000. However, such person will have to maintain such books of accounts and other documents as will enable the assessing officer to compute his total income.
• For every other person carrying on business or non specified profession whose total income from business or profession exceeds Rs 1,20,000 or his total sales or gross receipts exceed Rs 10,00,000 in any of the three years immediately preceding the previous year is required to maintain books of accounts which will enable the assessing officer to compute his taxable income.     Otherwise, the requirement to maintain the books of accounts is not there.
• Books of accounts and other documents need to be maintained for a period of at least 6 years from the end of the relevant assessment year. Only in a case where assessment is re-opened or appeal has been made etc then the books of accounts of that assessment year should be preserved till the conclusion of the assessment or appeal.
• Current year’s books of accounts should be maintained and kept at the principal place of business or profession. There is no specified rule as to where the earlier year’s books should be kept.
• Failure to maintain books of accounts and other documents or to retain them attracts a penalty of Rs 25,000.

Some examples of better documentation?

• Having a master file – file for permanent data like agreements, contracts, policies, and registrations of company like PAN card, TAN letter, certificate of incorporation, various licenses etc
• Separate Income Tax file financial year wise containing signed financial statements, auditors and directors reports, income tax returns, tax audit report, transfer pricing report, notices received from department, intimation received, refund orders, various certifications like 115JB, 15CB etc
• Purchases file date wise and entry wise from accounting system
• Sales file date wise and entry wise from accounting system
• Bank statements and reconciliation file
• Asset vouchers and bills referenced to the entries in the fixed register
• Cash expenses file
• Journal voucher file – all expenses bills/ invoices date wise and entry wise from accounting system
• Stock records, valuation notes and reconciliations
• Payroll files – investment declaration file, queries data in soft form, investment proofs file, perquisite file which can have the copies of insurance policies taken for employees, record of loans and recovery given to employees, gifts given, accommodation agreements etc

It is very important to maintain data in a systematic and organised way as the more systemised data, the less time for retrieval. From income tax point of view, this is very helpful when the company is taken for assessment. For assessments, the voucher wise data may be asked for items like assets, travelling, repairs etc. Data is asked for assessment after two years of expiry of the relevant year and hence there is every possibility of not finding the information/documents if the system is not robust.

Some qualities of a robust data maintenance system –

1. Easy for staff to follow it real time
2. Cost effective
3. Secure Storage
4. Maintaining confidentiality and having proper approvals at different stages
5. Providing the trail of transactions
6. Mix of physical and soft form
7. Easy retrieval within seconds of any document means proper referencing should be there
8. Basis for all important calculations to be there in soft form
9. Soft folders to be consistent year wise
10. Access restrictions to soft data
11. Periodic server backup
12. Access restrictions to accounting system
13. Non dependency on individual.