Accounts of Companies – CA Inter Law Study Material

Accounts of Companies – CA Inter Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Accounts of Companies – CA Inter Law Study Material

Question 1.
XYZ Ltd. wants to maintain its books of account on cash basis, is this a valid act of XYZ Ltd?
Answer:
Maintenance of Books of account:

Sec. 128(1) of the Companies Act, 2013 requires every company to prepare books of account and other relevant books and papers and financial statement for every financial year on accrual basis and double entry system of accounting.
No exception has been given by the Act to any class or classes of companies from the above requirement.

Conclusion: XYZ Ltd. cannot maintain its books of account on cash basis.

Question 2.
The registered office of the company is situated in a classified backward area of Maharashtra. The Board wants to keep its books of account at its corporate office in Mumbai which is conveniently located. The Board seeks your advice about the feasibility of maintaining the accounting records at a place other than die registered office of die company. Advise.
Answer:
Place of Keeping Books of Account:

As per Sec. 128(1) of the Companies Act, 2013, every company is required to prepare and keep the 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.

Proviso to Sec. 128(1) provides 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 7 days thereof, file with the Registrar a notice in writing giving the full address of that other place.

Further company may keep such books of account or other relevant papers in electronic mode as per the Rule 3 of the Companies (Accounts) Rules, 2014.

Conclusion: Board of Bharat Ltd. can keep its books of account at its corporate office in Mumbai by complying the above stated requirements.

Question 3.
Answer the following:
(i) Ravi Limited maintained its books of account under Single Entry System of Accounting. Is it permitted under the provisions of the Company Act, 2013?
(ii) State the person responsible for complying with the provisions regarding maintenance of Books
of Account of a company. [MTP-March 21, Oct. 21]
(iii) Whether a Company can keep books of Account in electronic mode accessible only outside India. [Nov. 19 (6 Marks), MTP-Oct. 20]
Answer:
Maintenance of Books of Account:

(i) Method of Accounting: As per Sec. 128(1) of the Companies Act, 2013, every company shall prepare “books of account” and other relevant books and papers and financial statement for every financial year.

These books of account should give a true and fair view of the state of the affairs of the company, including that of its branch office(s). These books of account must be kept on accrual basis and according to the double entry system of accounting.
Hence, maintenance of books of account under Single Entry System of Accounting by Ravi Limited is not permitted.

(ii) Persons responsible to maintain books: As per Sec. 128 (6) of the Companies Act, 2013, the person responsible to take all reasonable steps to secure compliance by the company with the requirement of maintenance of books of account etc. shall be:

Managing Director,
Whole-Time Director, in charge of finance,
Chief Financial Officer, or
Any other person of a company charged by the Board with duty of complying with provisions of Sec. 128.

(iii) Books in electronic mode: A Company has the option of keeping such books of account or other relevant papers in electronic mode as per Rule 3 of the Companies (Accounts) Rules, 2014. Rule 3 provides as follows:

(1) The books of account and other relevant books and papers maintained in electronic mode shall remain accessible in India so as to be usable for subsequent reference:

Provided that for the financial year commencing on or after the 1st day of April, 2022, every company which uses accounting software for maintaining its books of account, shall use only such accounting software which has a feature of recording audit trail of each and every transaction, creating an edit log of each change made in books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled.

(2) There shall be a proper system for storage, retrieval, display or printout of the electronic records as the Audit Committee, if any, or the Board may deem appropriate and such records shall not be disposed of or rendered unusable, unless permitted by law.

(3) The back-up of the books of account and other books and papers of the company maintained
in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a periodic basis.

Hence, a company cannot keep books of account in electronic mode accessible only outside India.

Question 4.
Green Limited is a company dealing in trading of spices. It has maintained its books of account under Single Entry System of Accounting. The company has recently hired a new accountant The new accountant Mr. Dubey, is doubtful that the accounts can be maintained under Single Entry System. Advise the company whether it is allowed to do so? [MTP-March 21]
Answer:
Method of Accounting:

As per Sec. 128(1) of the Companies Act, 2013, every company shall prepare “books of account” and other relevant books and papers and financial statement for every financial year. These books of account should give a true and fair view of the state of the affairs of the company, including that of its branch office(s).

These books of account must be kept on accrual basis and according to the double entry system of accounting.
Hence, maintenance of books of account under Single Entry System of Accounting by Green Limited is not permitted.

Question 5.
Adil is a student of CA Intermediate. His friend (who is also in CA Intermediate) has approached him to explain to him the provisions of the Companies Act, 2013, on the following:
(i) Inspection of books of account and other books and papers of the company.
(ii) Period of preservation of books of account, (MTP»April 22]
Answer:
(i) Inspection by Directors:

As per Sec. 128(3) of the Companies Act, 2013, any director can inspect the books of account and other books and papers of the company during business hours. Such inspection may be done by any type of director – nominee, independent, promoter or whole time.

The proviso to sub-section 3 provides that a person can inspect the books of account of the subsidiary, only on authorisation by way of the resolution of Board of Directors.

Assistance by officers and Employees

As per Sec. 128(4), where an inspection is made u/s 128(3), the officers and other employees of the company shall give to the person making such inspection all assistance in connection with the inspection which the company may reasonably be expected to give.

(ii) Period for preservation of books:

As per Sec. 128(5) of the Companies Act, 2013, the books of account, together with vouchers relevant to any entry in such books, are required to be preserved in good order by the company for a period of not less than 8 years immediately preceding the relevant financial year.

In case of a company incorporated less than 8 years before the financial year, the books of account for the entire period preceding the financial year together with the vouchers shall be so preserved. As per proviso to sub-section 5, where an investigation has been ordered in respect of a company, the Central Government may direct that the books of account may be kept for such period longer than 8 years, as it may deem fit and give directions to that effect.

Question 6.
Diya Limited, incorporated under the provisions of the Companies Act, 2013, has two subsidiaries – Jai Limited and Vijay Limited. All the three companies have prepared their financial statements for the year ended on 31st March, 2022. Examining the provisions of the Companies Act, 2013, explain in what manner the subsidiaries – Jai Limited and Vijay Limited shall prepare their Balance Sheet and Statement of Profit & Loss? (Dec. 21 (3 Marks)]
Answer:
Manner of preparation of financial statements:

As per Sec. 129(3) of the Companies Act, 2013, where a company has one or more subsidiaries or associate companies, it shall, in addition to financial statements, prepare a consolidated financial statement of the company and of all the subsidiaries and associate companies in the same form and manner as that of its own and in accordance with applicable accounting standards, which shall also be laid before the AGM of the company along with the laying of its financial statement.

Holding Company is also required to attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in prescribed Form (Rule 5 of Companies (Accounts) Rules, 2014 prescribes Form AOC-1 for this purpose).

Since, consolidation of accounts is to be done by the holding company (i.e. Diya Limited), Jai Limited and Vijay Limited shall prepare their Balance Sheet and Statement of Profit and Loss Account normally following the relevant provisions of the Companies Act, 2013 compliant with the applicable Accounting Standards.

Question 7.
XYZ Ltd. received a communication from Central Government for preparation of periodical financial results and complete audit or limited review of such periodical financial results. The Board of Directors have raised an objection on the ground that as, it is an unlisted company, periodical financial results need not to be prepared. Examine, referring the provisions of the Companies Act, 2013, in this regard. (May 2 2 (4 Marks)]
Answer:
Periodical Financial results:
As per Sec. 129A of the Companies Act, 2013, the C.G. may, require such class or classes of unlisted companies, as may be prescribed:

(a) to prepare the financial results of the company on such periodical basis and in such form as may be prescribed;
(b) to obtain approval of the Board of Directors and complete audit or limited review of such periodical financial results in such manner as may be prescribed; and
(c) file a copy with the Registrar within a period of 30 days of completion of the relevant period with such fees as may be prescribed.

In the given case, XYZ Ltd. received a communication from Central Government for preparation of periodical financial results and complete audit or limited review of such periodical financial results. The Board of Directors have raised an objection on the ground that as, it is an unlisted company, periodical financial results need not to be prepared.

Conclusion: Objection of the Board of Directors is not tenable as provisions of Sec. 129A relating to periodical financial results are applicable in case of unlisted companies.

Question 8.
The Tribunal has ordered the reopening of the accounts of MIT Ltd. The directors of the company has approached you to explain to them the provisions of the Companies Act, 2013 in respect of the reopening of accounts on court’s or Tribunal’s order. [MTP-Oct. 18]
Answer:
Reopening of Accounts on Court’s or Tribunal Order:
Sec. 130 of the Companies Act, 2013, deals with the provisions relating to Reopening of Accounts on Court’s or Tribunal Order. Provisions as stated in Sec. 130 are:

(1) Filing of an application: A company shall not reopen its books of account and not recast its financial statements, unless an application in this regard is made by the C.G., the Income tax authorities, the SEBI, any other statutory regulatory body or authority or any person concerned and an order is made by a court of competent jurisdiction or the Tribunal to the effect that:

the relevant earlier accounts were prepared in a fraudulent manner; or
the affairs of the company were mismanaged during the relevant period, casting a doubt on the reliability of financial statements:

Provided that the court or the Tribunal, as the case may be, shall give notice to the C.G., the Income tax authorities, the SEBI or any other statutory regulatory body or authority concerned or any other person concerned and shall take into consideration the representations, if any, made by that Government or the authorities, SEBI or the body or authority concerned or the other person concerned before passing any order under this section.

(2) Nature of Revised Accounts: The accounts so revised or recast shall be final.

(3) Time Period: No order shall be made in respect of reopening of books of account relating to a period earlier than 8 financial years immediately preceding the current financial year:

Provided that where a direction has been issued by the C.G. under the proviso to Sec. 128(5) for keeping of books of account for a period longer than 8 years, the books of account may be ordered to be re-opened within such longer period.

Question 9.
The Income Tax Authorities in the current financial year 2022-23 observed, during the assessment proceedings, a need to reopen the accounts of Chetan Ltd. for the financial year 2011-12 and, therefore, filed an application before the National Company Law Tribunal (NCLT) to issue the order to Chetan Ltd. for reopening of its accounts and recasting the financial statements for the financial year 2011-12.

Examine the validity of the application filed by the Income Tax Authorities to NCLT. [May 19 (3 Marks); MTP-Oct. 20, Nov. 21; RTP-May 21]
Answer:
Reopening of Accounts on Court’s or Tribunal Order:

As per Sec. 130 of the Companies Act, 2013, a company shall not reopen its books of account and not recast its financial statements, unless an application in this regard is made by the Central Government, the Income-tax authorities, the SEBI, any other statutory body or authority or any person concerned and an order is made by a court of competent jurisdiction or the Tribunal to the effect that:

the relevant earlier accounts were prepared in a fraudulent manner; or
the affairs of the company were mismanaged during the relevant period, casting a doubt on the reliability of financial statements.

However, no order shall be made in respect of reopening of books of account relating to a period earlier than 8 financial years immediately preceding the current financial year.

In the given case, an application was filed for reopening and recasting of the financial statements of Chetan Ltd. for the financial year 2010-11 which is beyond 8 financial years immediately preceding the current financial year.

Conclusion: Though application filed by the Income Tax Authorities to NCLT is valid, its recommendation for reopening and recasting of financial statements for the period earlier than eight financial years immediately preceding the current financial year i.e. 2022-23, is invalid.

Question 10.
The directors of Element Ltd. want to voluntary revise the financial statements of the company. They have approached you to state to them the provisions of the Companies Act, 2013 regarding voluntary revision of financial statements. [MTP-March 18, RTP-Nov. 18]
Answer:
Voluntary revision of financial statements:
Sec. 131 of the Companies Act, 2013, deals with the provisions relating to voluntary revision of financial statements. Provisions as stated in Sec. 131 are:

(1) Preparation of revised financial statement or revised report on the approval of Tribunal:
If it appears to the directors of a company that:

(a) the financial statement of the company; or
(b) the report of the Board,

do not comply with the provisions of Sec. 129 or Sec. 134, they may prepare revised financial statement or a revised report in respect of any of the 3 preceding financial years after obtaining approval of the Tribunal on an application made by the company in such form and manner as may be prescribed and a copy of the order passed by the Tribunal shall be filed with the Registrar.

Tribunal to serve the notice: Tribunal shall give notice to the C.G. and the Income tax authorities and shall take into consideration the representations, if any, made by that Government or the authorities before passing any order under this section.

Number of times of revision and recast: Such revised financial statement or report shall not be prepared or filed more than once in a financial year.

Reason for revision to be disclosed: Detailed reasons for revision of such financial statement or report shall also be disclosed in the Board’s report in the relevant financial year in which such revision is being made.

(2) Limits of revisions: Where copies of the previous financial statement or report have been sent out to members or delivered to the Registrar or laid before the company in general meeting, the revisions must be confined to:

(a) the correction in respect of which the previous financial statement or report do not comply with the provisions of section 129 or section 134; and
(b) the making of any necessary consequential alternation.

(3) Framing of rules by the C.G. in relation to revised financial statement or director’s report:
The C.G. may make rules as to the application of the provisions of this Act in relation to revised
financial statement or a revised director’s report and such rules may, in particular:

(a) make different provisions according to which the previous financial statement or report are replaced or are supplemented by a document indicating the corrections to be made;

(b) make provisions with respect to the functions of the company’s auditor in relation to the revised financial statement or report;

Question 11.
Explain the following in brief with reference to Companies Act, 2013: National Financial Reporting Authority (NFRA). [Nov. 20, Jan. 21 (3 Marks)]
Answer:
National Financial Reporting Authority (NFRA):

As per Sec. 132 of the Companies Act, 2013, the C.G. may, by notification, constitute the National Financial Reporting Authority (NFRA) to provide for matters relating to accounting and auditing standards under this Act.

Not withstanding anything contained in any other law for the time being in force, the NFRA shall:

make recommendations to the Central Government on the formulation and laying down of accounting and auditing policies and standards for adoption by companies or class of companies or their auditors, as the case may be;
monitor and enforce the compliance with accounting standards and auditing standards in such manner as may be prescribed;
oversee the quality of service of the professions associated with ensuring compliance with such standards, and suggest measures required for improvement in quality of service and such other related matters as may be prescribed; and
perform such other functions relating to clauses (a), (b) and (c) as may be prescribed.

Question 12.
The Board of Directors of ABC Ltd. wants to circulate unaudited accounts before the Annual General Meeting of the shareholders of the Company. Whether such an act of ABC Ltd. is tenable?
Answer:
Circulation of unaudited accounts:

As per Sec. 129(2) of the Companies Act, 2013, at every AGM of a company, the Board of Directors of the company shall lay before such meeting financial statements for the financial year.
As per Sec. 134(7) of the Companies Act, 2013, signed copy of every financial statement, including consolidated financial statement, if any, shall be issued, circulated or published along with a copy each of:

(a) any notes annexed to or forming part of such financial statement;
(b) the auditor’s report; and
(c) the Board’s report.

Conclusion: Unaudited accounts cannot be sent to members or unaudited accounts cannot be filed with the Registrar of Companies. So, such an act of ABC Ltd. is not tenable.

Question 13.
ABC Company is a one person company and has only one director. Who shall authenticate the balance sheet and statement of profit & loss and the Board’s report?
Answer:
Authentication of financial statements of OPC:

In case of a One Person Company, the financial statements shall be signed by only one director, for submission to the auditor for his report thereon.

So, the financial statements signed by one director shall be considered in order.

Question 14.
Altar Limited has on its Board, four Directors viz. W, X, Y and Z. In addition, the company has Mr. D as the Managing Director. The company also has a full time Company Secretary, Mr. Wise, on its rolls. The financial statements of the company for the year ended on 31st March, 2022 were authenticated by two of the directors, Mr. X and Y under their signatures.
Referring to the provisions of the Companies Act, 2013:

Examine the validity of the authentication of the Balance Sheet and Statement of Profit & Loss and the Board’s Report
What would be your answer in case the company is a One Person Company (OPC) and has only one Director, who has authenticated the Balance Sheet and Statement of Profit & Loss and the Board’s Report? [RTP-May 18, MTP-May 20)

Answer:

Authentication of Financial Statements:

As per Sec. 134(1) of the Companies Act, 2013, the financial statements, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board by:

the Chairperson of the company where he is authorized by the Board or 2 directors out of which one shall be the managing director and
the Chief Executive Officer, the Chief Financial Officer and the Company Secretary of the company, wherever they are appointed.

In case of a One Person Company, the financial statements shall be signed by only one director, for submission to the auditor for his report thereon.

Conclusion: Based on the provisions of Sec. 134(1) as stated above, following conclusions are drawn:

Authentication done by two directors is not valid. Managing Director Mr. D should be one of the two signatories. Since, the company has also employed a full time Secretary, he should also sign the Balance Sheet and Profit & Loss Account.
In case of OPC, the financial statements should be signed by one director and hence, the authentication is in order.

Question 15.
State any four contents of a Directors Responsibility Statement as required under Section 134 of the Companies Act, 2013. (May 18 (4 Marks))
Or
The Companies Act, 2013 has prescribed an additional duty on the Board of directors to include in the Board’s Report a Directors’ Responsibility Statement’. Briefly explain any three matters to be furnished in the said statement [Dec 21 (3 Marks)]
Answer:
Contents of Directors Responsibility Statement
As per Sec. 134(5) of the Companies Act, 2013, the Directors’ Responsibility Statement referred to in 134(3)(c) shall state the following:

that in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;
that the directors had selected such accounting policies and applied them consistently and made judgments 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 and loss of the company for that period;
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;
that the directors had prepared the annual accounts on a going concern basis;
that the directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.
that the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

Question 16.
Yellow Limited has prepared its financial statements for the year 2022-23. Mr. Prateek, the Managing Director the company is declining to sign these financial statements on the grounds that it is only the duty of the Board of the Directors to sign the financial statements as approved by the Board and he is not liable to sign the same.

Now, Mr. Prateek has approached you to advise him regarding his responsibility for signing the financial statement Advise Mr. Prateek regarding his responsibility for signing the financial statements as per the provisions of the Companies Act, 2013.

Mr. Prateek has also provided to you the following more information:

The Board as a policy does not authorise the chairperson of the company to sign the financial statements.
The company has appointed Ms. Sunanina as its Company Secretary. [RTP-Nov. 19]

Answer:
Authentication of Financial Statements:

As per Sec. 134(1] of the Companies Act, 2013, the financial statements, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board by:

the Chairperson of the company where he is authorized by the Board or 2 directors out of which one shall be the managing director and
the Chief Executive Officer, the Chief Financial Officer and the Company Secretary of the company, wherever they are appointed.

In case of a One Person Company, the financial statements shall be signed by only one director, for submission to the auditor for his report thereon.

In the given case, the Board has not authorised the chairperson of the company to sign the financial statements. Hence, the financial statement shall be signed by two directors out of which one shall be managing director.

Question 17.
The Board of Directors of Vishwakarma Electronics Limited consists of Mr. Ghanshyam (Director), Mr. Hyder (Director) and Mr. Indersen (Managing Director). The company has also employed a full time Secretary. The Profit and Loss Account and Balance Sheet of the company were signed by Mr. Ghanshyam and Mr. Hyder. Examine whether the authentication of financial statements of the company was in accordance with the provisions of the Companies Act, 2013? [RTP-May 20, Jan. 21 (3 Marks)]
Answer:
Authentication of financial statements:

As per Sec. 134(1) of the Companies Act, 2013, the financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board by the chairperson of the company where he is authorised by the Board or by 2 directors out of which one shall be managing director, if any, and the Chief Executive Officer, the Chief Financial Officer and the company secretary of the company, wherever they are appointed, or in the case of One Person Company, only by one director, for submission to the auditor for his report thereon.

In the instant case, the Balance Sheet and Profit and Loss Account have been signed only by Mr. Ghanshyam and Mr. Hyder, the directors.

Conclusion: Mr. Indersen, the Managing Director should be one of the two signing directors. Since, the company has also employed a full-time Secretary, he should also sign the Balance Sheet and Profit and Loss Account.

Question 18.
The statutory auditors of a company were required to issue a certificate on the net worth of the company as per the requirement of the management as on 30th September, 2022 computed as per the provision of Sec. 2(57} of the Companies Act, 2013.

The company had fair valued its property, plant and equipment in the current year which was mistakenly taken into retained earnings of the company in its books of account. Please advise whether this fair valuation would be covered in fire net worth of the company for the purpose of legal requirements of CSR u/s 135 of Companies Act, 2013.
Answer:
Determination of Net Worth:

As per sec 2(57) of the Companies Act, 2013, any reserves created out of revaluation of assets doesn’t form part of net worth. The company fair valued its property, plant and equipment and took that to retained earnings.
Even if the company has taken the fair valuation to the retained earnings in its books of account, the resultant credit in reserves (by whatever name called) would be in the category of ‘reserves created out of revaluation of assets’ which is specifically excluded in the definition of ‘net worth’ in Sec. 2 (5 7) and hence should be excluded by the company.
Further the auditors should also consider the matter related to accounting of this reserve separately at the time of audit of books of account of the company.

Question 19.
ABC Ltd. is a company with a turnover of more than ₹ 1,000 crores in the preceding three financial years and having incurred a loss in one of the preceding three financial years. Will it be required to comply with CSR?
Answer:
Compliance with CSR:

As per Sec. 135(1) of the Companies Act, 2013, if any one of the three criteria (whether net worth, or turnover or net profit) gets satisfied then the company is mandatorily required to comply with the CSR provisions.
Hence ABC Ltd. will be required to comply with CSR based on its turnover.
The mere fact that company has incurred loss in one of the preceding three financial years will not be considered for determining the applicability of CSR to the companies.

Question 20.
Tirupati Limited, a listed company has made the following profits, the profits reflect eligible profits under the relevant section of the Companies Act, 2013.

Financial year	Amount (₹ in crores)
2017-18	20
2018-19	40
2019-20	30
2020-21	7
2021-22	50

(i) Calculate the amount that the company has to spend towards CSR for the financial year 2022-23.
(ii) State the composition of the CSR committee of unlisted company and a private company. [RTP-May 18]
Answer:
Spending for CSR:
Sec. 135 read with Companies (CSR Policy] Rules, 2014 of the Companies Act, 2013 deals with the provisions related to the Corporate Social Responsibility.

As per the given facts, following are the answers in the given situations:

(i) Amount that Company has to spend towards CSR: As per Sec. 135 of the Companies Act, 2013, the Board of every company shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its CSR Policy.

Accordingly, net profits of Tirupati Limited for three immediately preceding financial years is f 50 crores (₹ 30 + ₹ 70 + ₹ 50 = ₹ 150 / 3 = ₹ 50 crores] and 2% of the average net profits of the company made during these three immediately preceding financial years will constitute f 1 crore, can be spent towards CSR in financial year 2022-23.

(ii) Composition of CSR Committee: The CSR Committee shall be consisting of 3 or more directors, out of which at least one director shall be an independent director.

(a) an Unlisted public company or a private company covered under section 135(1) which is not required to appoint an independent director, shall have its CSR Committee without such director;

(b) a private company having only two directors on its Board shall constitute its CSR Committee with two such directors.

Question 21.
Rera Ltd., a company incorporated under the Companies Act, 2013 having turnover of ₹ 100 crore, net profit ₹ 3 crore, accumulated loss of ₹ 50 crore and securities premium ₹ 300 crore as per the audited accounts of the company for the Financial Year 2021-22. The CFO of the company informed the directors of the company that the Corporate Social Responsibility (CSR) committee is required to be constituted as per the Companies Act, 2013. The directors seek your advice as a professional regarding the criteria required to constitute CSR committee and whether it is applicable to Rera Ltd. or not. [May 18 (6 Marks)]
Answer:
Corporate Social Responsibility Committee:
As per Sec. 135 of the Companies Act, 2013 read with the Companies (Corporate Social Responsibility) Rules, 2014, every company having:

net worth of ₹ 500 crore or more, or
turnover of ₹ 1,000 crore or more or
a net profit of ₹ 5 crore or more

during immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board.

As per Sec. 2(57) the term ‘Net worth’ means the aggregate value of the paid-up share capital and all reserves created out of the profits, securities premium account and debit or credit balance of profit and loss account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation.

In the present case, turnover is ₹ 100 crore, net profit is ₹ 3 crore and net worth is ₹ 253 crore (Net profit + securities premium – accumulated loss = ₹ 3 crores + ₹ 300 crores – ₹ 50 crores = ₹ 253 crores).

Conclusion: RERA Ltd. is not fulfilling any criteria prescribed for constitution of CSR committee. So, it is not obligatory for Rera Ltd. to constitute CSR Committee.

Note 1: It can also be presumed that net profit of the current year has already been considered while calculating accumulated losses.

Note 2: Since paid-up share capital value is not given in the question, it has been presumed that accumulated losses as stated in the question is given after taking into consideration the paid-up share capital, i.e. net of accumulated losses less paid-up share capital.

Question 22.
Examine the validity of the following with reference to the relevant provisions of the Companies Act; 2013:
Mary Ltd is a listed company having turnover of ₹ 1,200 crores during the financial year 2021-22. The CSR committee of the Board formulated and recommended a CSR project which was approved by the Board.

The company finalised the project under its CSR initiatives which require funds @ 5% of average net profit of the company for last three financial years. Will such excess expense be counted in subsequent financial years as a part of CSR expenditure? Advise the company. [RTP-Nov. 18]
Answer:
Spending for CSR:
As per Sec. 135(5) of the Companies Act, 2013, the Board of every company to which section 135 is applicable, shall ensure that the company spends, in every Financial year at least 2% of average net profits of the company made during the three immediately preceding financial years, in pursuance of its CSR policy.

If the company spends an amount in excess of the requirements, such company may set off such excess amount against the requirement to spend under this sub-section for such number of succeeding three financial years and in such manner, as may be prescribed.

Conclusion: Excess amount may be set off against the requirement to spend u/s 135(5) up to
immediate succeeding 3 financial years subject to the compliance of conditions.

Question 23.
Explain the following in brief with reference to Companies Act, 2013: Corporate Social Responsibility (CSR) Committee. [Nov. 20, Jan. (3 Marks)]
Answer:
Corporate Social Responsibility (CSR) Committee:
As per Sec. 135(1) of the Companies Act, 2013, every company having:

net worth of ₹ 500 crore or more, or
turnover of ₹ 1,000 crore or more or
a net profit of ₹ 5 crore or more

during the immediately preceding financial year shall constitute a CSR Committee of the Board consisting of 3 or more directors, out of which at least one director shall be an independent director: Provided that where a company is not required to appoint an independent director u/s 149(4), it shall have in its CSR Committee 2 or more directors.

Duties of CSR Committee:

As per Sec. 135(3) of the Companies Act, 2013, the CSR Committee shall:
(A) formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be undertaken by the company in areas or subject, specified in Schedule VII;
(B) recommend the amount of expenditure to be incurred on the activities referred above; and
(C) monitor the CSR Policy of the company from time to time.

Question 24.
The balances extracted from the financial statement of ABC Limited are as below:

Sr. No.	Particulars	Balances as on 31-03-2022 as per Audited Financial Statement (₹ in crore)	Balances as on 30-09-2022 Provisional (₹ in crore)
1.	Net Worth	100.00	100.00
2.	Turnover	500.00	1,000.00
3.	Net Profit	1.00	5.00

Explaining the provisions of the Companies Act, 2013, you are requested to examine whether ABC Limited is required to constitute ‘Corporate Social Responsibility Committee’ (CSR Committee) during the second half of the financial year 2022-23. [July 21 (3 Marks)]
Answer:
Corporate Social Responsibility (CSR) Committee:

As per Sec. 135(1) of the Companies Act, 2013, every company having net worth of ₹ 500 crore or more, or turnover of ₹ 100 crore or more, or a net profit of ₹ 5 crore or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of 3 or more directors, out of which at least one director shall be an independent director.

In the given question, the company does not fulfil any of the given criteria (net worth/turnover/net profit) for the immediately preceding financial year (i.e., 1.4.2021 to 31.3.2022).

Conclusion: ABC Limited is not required to constitute Corporate Social Responsibility Committee for
the financial year 2022-23.

Question 25.
SKIP Limited (the Company) was incorporated on 01.04.2020. The balances extracted from its audited financial statement are as given below:

Financial Year (FY)	Net Profit before tax	Net Profit after tax (Ignore Income Tax Computation)
2020-21	₹ 5.00 Crore	₹ 3.75 Crore
	₹ 7.00 Crore	₹ 5.25 Crore

The Company proposes to allocate the minimum required amount for CSR Activities to be undertaken during FY 2022-23, if it is mandatory. You are requested to advice the Company in this regard and compute the minimum amount to be allocated, if so required, taking into account the relevant provisions of the Companies Act, 2013. [May 22 (3 Marks)]
Answer:
Amount to be allocated for CSR:

As per Sec. 135(5) of the Companies Act, 2013, the Board of every company referred in Sec. 135(1), shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the 3 immediately preceding financial years or where the company has not completed the period of 3 financial years since its incorporation, during such immediately preceding financial years, in pursuance of its CSR Policy.

Conclusion:

In the given case, net profit of the company for immediately preceding financial year is ₹ 7 crore, hence the provisions of CSR are applicable over the company.
As the company has not completed 3 financial years since its incorporation, hence average of preceding 2 financial years is to be considered for CSR spending.
Amount to be allocated for this purpose will be ₹ 12 lakh [2% of Average profits of preceding two FYs, ₹ 5 crore + ₹ 7 crore/2 = ₹ 6 crore]

Question 26.
Reliance Industries Limited, a company incorporated under the Companies Act, 2013, has its shares listed on a recognized Stock Exchange in India. One of the subsidiary of Reliance Industries Limited is a foreign company incorporated outside India. In the annual general meeting of the company, Reliance Industries Limited has placed its audited financial statement including consolidated financial statement on its website.

Reliance Industries Limited has also placed on its website separate audited accounts of all its subsidiary located in India except one subsidiary, which is a foreign company and located outside India on the grounds that such foreign company is not required to get its financial statement audited under the company law of its incorporation. You are required to examine whether Reliance Industries Limited has complied with the provisions of section 136?
Answer:
Placing Financial statements on website:

As per Sec. 136(1) of the Companies Act, 2013, a listed company shall place its financial statements including consolidated financial statements, if any, and all other documents required to be attached thereto, on its website, which is maintained by or on behalf of the company.
Every listed company having a subsidiary or subsidiaries shall place separate audited accounts in respect of each of subsidiary on its website, if any.
A listed company which has a subsidiary incorporated outside India (foreign subsidiary):

(a) where such foreign subsidiary is statutorily required to prepare consolidated financial statement under any law of the country of its incorporation, the requirement of this proviso shall be met if consolidated financial statement of such foreign subsidiary is placed on the website of the listed company;

(b) where such foreign subsidiary is not required to get its financial statement audited under any law of the country of its incorporation and which does not get such financial statement audited, the holding Indian listed company may place such unaudited financial statement on its website and where such financial statement is in a language other than English, a translated copy of the financial statement in English shall also be placed on the website.

Conclusion: Based on the provisions as stated above, it can be concluded that Reliance Industries Limited has not complied with the provisions of Sec. 136 because Reliance Industries Limited is also required to place unaudited financial statement of its foreign subsidiary on its website even if such foreign subsidiary is not required to get its financial statement audited.

Question 27.
Vandana Ltd., based out of India, has many subsidiaries in India and outside India. It also had associates and Joint ventures. For the purpose of finalization of the consolidated financial statements of the company for the year ended on 31 March, 2022, the company’s management requested its foreign subsidiary, based out of Italy, to provide its standalone financial statements.

The Italian subsidiary company prepares its financial statements in the local language of the country and the same is provided to die Indian parent company as unaudited as the audit is not required by die Italian subsidiary company. Please advise how should die Indian parent deal with this financial statement
Answer:
Filing of Financial Statements of Foreign Subsidiary:

Sec. 137(1) of the Companies Act, 2013 requires that in the case of a foreign subsidiary, which is not required to get its financial statement audited under any law of the country of its incorporation and which does not get such financial statement audited, holding Indian company is required to file such unaudited financial statement along with a declaration to this effect and where such financial statement is in a language other than English, along with a translated copy of the financial statement in English.

Vandana Ltd. would have to get the standalone financial statements of Italian subsidiary company translated in English language and also get those aligned as per its accounting policies for the purpose of consolidation.

Vandana Ltd. would need to file such unaudited financial statement of Italian subsidiary company along with a declaration to this effect along with a translated copy of the financial statement in English.

Further the format of accounts of Italian subsidiary company should be, as far as possible, in accordance with requirements under the Companies Act, 2013. In case this is not possible, a statement indicating the reasons for deviation may be placed/filed along with such accounts.

Question 28.
The AGM of R Ltd., for laying the Annual Accounts thereat for the year ended on 31 March, 2022 was not held. What remedy is available with the company regarding compliance of the provisions of Sec. 137 of the Companies Act, 2013 for filing of copies of financial statements with the Registrar of Companies?

Will it make any difference in case the Annual Accounts were duly laid before the AGM held on 27 September, 2022 but the same were not adopted by the shareholders.
Answer:
Filing of Financial Statements if no AGM held:

As per Sec. 137(2) of the Companies Act, 2013, where the AGM of a company for any year has not been held, the financial statements along with the documents required to be attached, duly signed along with the statement of facts and reasons for not holding the AGM shall be filed with the Registrar within 30 days of the last date before which the AGM should have been held, in prescribed manner, with prescribed fees.

In the present case, though AGM was not held, it ought to be held by 30 Sep., 2022.

Conclusion: Financial statements along with the required documents shall be filed with the Registrar by 30 October, 2022 along with prescribed fees.

Question 29.
A Housing Finance Ltd. is a bousing finance company having a paid-up share capital of ₹ 11 crores and a turnover of 1145 crores during the financial year 2021-22. Explain with reference to the relevant provisions and rules, whether it is necessary for A Housing Finance Ltd. to file its financial statements in XBRL mode. [Nov. 18 (3 Marks)]
Answer:
Filing of financial statements in XBRL Mode:

As per Rule 3 of the Companies (Filing of Documents and forms in Extensible Business Reporting Language) Rules, 2015, the following class of companies shall file their financial statements and other documents u/s 137 of the Act with the Registrar in e-form AOC-4 XBRL as per Annexure-I of this Rule:

companies listed with stock exchanges in India and their Indian subsidiaries;
companies having paid-up capital of ₹ 5 crore or above;
companies having turnover of ₹ 100 crore or above;
all companies which are required to prepare their financial statements in accordance with Companies (Indian Accounting Standards) Rules, 2015.

It is also provided that Non-banking Financial Companies, housing finance companies and companies engaged in the business of banking and insurance sector are exempted from filing of financial statements under these rules.

Conclusion: A Housing Finance Ltd. being a housing finance company is exempted from filing its financial statement in XBRL mode.

Question 30.
The Government of India is holding 51% of the paid-up equity share capital of Sun Ltd. The Audited financial statements of Sun Ltd. for the financial year 2020-21 were placed at its AGM held on 31st August, 2022. However, pending the comments of the Comptroller and Auditor General of India (CAG) on the said accounts the meeting was adjourned without adoption of the accounts.

On receipt of CAG comments on the accounts, the adjourned AGM was held on 15th October, 2022 whereat the accounts were adopted. Thereafter, Sun Ltd. filed its financial statements relevant to the financial year 2021 22 with the Registrar of Companies on 12th November, 2022.

Examine, with reference to the applicable provisions of the Companies Act, 2013, whether Sun Ltd. has complied with the statutory requirement regarding filing of accounts with the Registrar? [May 19 (4 Marks)]
Answer:
Filing of accounts with the Registrar:

As per 1st proviso to Sec. 137(1) of the Companies Act, 2013, where the financial statements are not adopted at AGM or adjourned AGM, such unadopted financial statements along with the required documents shall be filed with the Registrar within 30 days of the date of AGM and the Registrar shall take them in his records as provisional till the financial statements are filed with him after their adoption in the adjourned AGM for that purpose.

As per 2nd proviso to Sec. 137(1) of the Companies Act, 2013, financial statements adopted in the adjourned AGM shall be filed with the Registrar within 30 days of the date of such adjourned AGM with such fees or such additional fees as may be prescribed.

In the given case, the accounts of Sun Ltd. were adopted at the adjourned AGM held on 15th October, 2022 and filing of financial statements with Registrar was done on 12th November, 2022 i.e. within 30 days of the date of adjourned AGM. But Sun Ltd. has not filed its unadopted financial statements within 30 days of the date of the AGM held on 31st August, 2022.

Conclusion: Sun Ltd. has not complied with the statutory requirement regarding filing of unadopted accounts with the Registrar, but has certainly complied with the provisions by filing of adopted accounts within the due date with the Registrar.

Question 31.
Perfect Ltd. is a listed company. The company is in the business of manufacturing of steel and had its head office at Karnataka. The company’s operations are spread out across India. The company appointed a firm of Chartered Accountants, N & Co LLP, as its internal auditors for the year ended on 31st March, 2022.

However, for the financial year 2022-23, the company is planning to have an in-house internal audit system commensurate with its size and operations. If the company does that then it is planning not to continue with N & Co LLP as its internal auditors. Please advise.
Answer:
Internal audit function in a listed company:

As per Sec. 138 of the Companies Act, 2013 read with Rule 13 of Companies (Accounts) Rules, 2014, Internal Auditor shall either be a chartered accountant (whether in Practice or not) or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company.

Internal Auditor may or may not be an employee of the company.
There is no specific requirement under the company law that internal auditor need to be a chartered accountant firm.

Conclusion: If the internal audit function of the company is fine as per its size and operations then it may decide not to continue with N & Co LLP.

Question 32.
Natraj Limited is an unlisted Public company having paid-up share capital of ₹ 80 crores during the preceding financial year 2021-22. The turnover of the company was ₹ 110 crores for the same period. Referring to the provisions of the Companies Act, 2013, discuss the answer to the following:

Is it mandatory for the above company to appoint an internal auditor for the financial year 2022-
What are the qualifications of the Internal Auditor? [MTP-March 18]

Answer:
Class of companies required to appoint Internal Auditor:
Sec. 138 of the Companies Act, 2013 and Rule 13 of the Companies (Accounts] Rules, 2014 prescribes the class of companies required to appoint Internal Auditor. According to it, following class of companies shall be required to appoint an internal auditor or a firm of internal auditors which may be either an individual or a partnership firm or a body corporate, namely:

1. Every listed company;
2. Every unlisted public company having:

(a) Paid-up share capital of ₹ 50 crore or more during the preceding financial year; or
(b) Turnover of ₹ 200 crore or more during the preceding financial year; or
(c) Outstanding loans or borrowings from banks or public financial institutions exceeding ₹ 100 crore or more at any point of time during the preceding financial year; or
(d) Outstanding deposits of ₹ 25 crore or more at any point of time during the preceding financial year; and

3. Every private company having:
(a) Turnover of ₹ 200 crore or more during the preceding financial year; or
(b) Outstanding loans or borrowings from banks or public financial institutions exceeding ₹ 100 crore or more at any point of time during the preceding financial year.

As per the facts given in the question, Natraj Limited is an unlisted public company with the paid up share capital of ₹ 80 cores during the preceding financial year with the turnover of ₹ 110 crores.

Conclusion: As Natraj Limited fulfils the criteria of paid-up share capital during the preceding financial year, it is mandatory for the Natraj Limited to appoint an internal auditor for the financial year 2022 23.

Qualifications of Internal Auditor: Internal Auditor shall either be a chartered accountant (whether in Practice or not) or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company.

Question 33.
X Ltd. is a listed company having a paid-up share capital of ₹ 25 crore as on 31st March, 2022 and turnover of 1100 crore during the financial year 2021-22. The Company Secretary has advised the Board of Directors that X Ltd. is not required to appoint ‘Internal Auditor as the company’s paid-up share capital and turnover are less than the threshold limit prescribed under the Companies Act, 2013.

Do you agree with the advice of the Company Secretary? Explain your view referring to the provisions of the Companies Act, 2013. [Jan. 21 (3 Marks), MTP-March 22]
Answer:
Requirement of Internal Auditor:

Sec. 138 of the Companies Act, 2013 and Rule 13 of the Companies (Accounts) Rules, 2014 prescribes the class of companies required to appoint Internal Auditor. According to it, following class of companies shall be required to appoint an internal auditor or a firm of internal auditors which may be either an individual or a partnership firm or a body corporate, namely:

(A) Every listed company;
(B) Every unlisted public company having:

Paid-up share capital of ₹ 50 crore or more during the preceding financial year; or
Turnover of ₹ 200 crore or more during the preceding financial year; or
Outstanding loans or borrowings from banks or public financial institutions exceeding ₹ 100 crore or more at any point of time during the preceding financial year; or
Outstanding deposits of ₹ 25 crore or more at any point of time during the preceding financial year.

Conclusion: X Ltd. is a listed company and hence is required to appoint an internal auditor, irrespective of its paid-up share capital or turnover (as the limit of paid-up share capital or turnover is applicable for unlisted public company). Hence, the advice of the Company Secretary is not correct.

Question 34.
Kim Private Limited was incorporated on 30th September, 2017. It has a paid-up share capital of ₹ 45 crore. The company had a turnover of ₹ 250 crore for the financial year 2021-22. The accounts manager of the company has intimated to the company that they are not required to appoint internal auditor for the financial year 2022-23.

The management of the company have approached you to advise them about die appointment of internal auditor. Advise them as per the provisions of the Companies Act, 2013. [RTP-Nov. 21]
Answer:
Class of companies required to appoint Internal Auditor:
Sec. 138 of the Companies Act, 2013 and Rule 13 of the Companies (Accounts) Rules, 2014 prescribes the class of companies required to appoint Internal Auditor. According to it, every private company having:

turnover of ₹ 200 crore or more during the preceding financial year; or
outstanding loans or borrowings from banks or public financial institutions exceeding ₹ 100 crore or more at any point of time during the preceding financial year, shall be required to appoint an internal auditor which may be either an individual or a partnership firm or a body corporate.

In the given case, the company has a paid-up capital of ₹ 45 crore and turnover of ₹ 250 crore for the financial year 2021-22.

Conclusion: Since, the company is fulfilling the criteria of turnover [i.e. more than ₹ 200 crore], hence, it is required to appoint an internal auditor for the financial year 2022-23.

Accounts of Companies – CA Inter Law Study Material

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