Accounts, Reopening and Revision in Companies Act 2013

Accounts, Reopening and Revision

Desai Saksena & Associates


By CA Alok K Saksena, Partner, Desai Saksena & Associates

[email protected]

Until now, the corporate world was subjected to reopening & Revision of Assessments under

Taxation laws Viz... Income Tax Act etc. they would now have to brace themselves for

reopening and revision of accounts under the Companies 2013. The provisions have far reaching

consequences to the company, its management and auditors. Arising out of reopening and

revision of Financial Statements, there is a potential of further consequences under other Acts.

Sections 209-223 of the old act of 1956 concerning Account & Sections 224-233B concerning

Audit have been replaced by two new Chapters. Chapter IX – Accounts of Companies & chapter

X –Audit and Auditors. The new chapters have completely recast the old provisions. Taking

Chapter IX - Accounts of Companies, “Books of Accounts” are defined for the first time in Sec

2(13) of Co.`s Act 2013 and is in line with that prescribed in Sec 209(1) of the old Act. There is

a new definition of “Financial Statement” in Sec 2 (40) Co.`s Act 2013 in place of Profit & Loss

& Balance Sheet described in Sec 211 of the old Act. “Financial Statements” are required to give

true and fair view and are to be in accordance with “Accounting Standards”. These financial

statements are required to be prepared, audited and adopted by Shareholders. “Financial

Statement” includes ( i ) Balance Sheet (ii) Profit & Loss account (iii) Cash flow statement (iv) a

statement of changes in Equity (v) Notes to Accounts. In the case of One Person Company

(OPC), small Company and dormant Company the financial statements may not include Cash

flow Statement.

Therefore, now it is mandatory for all Companies to prepare, and audit the Cash flow statement

and a statement of changes in Equity which would be an additional requirement. Cash flow may

not be prepared for OPC (One Person Company) and small Company and dormant Company. It

is important to note the word “may”. It implies that OPC, small companies and dormant

companies have an option at their discretion to prepare a “Cash flow statement” [Briefly, as per

Companies Act 2013 and Rules, (i) OPC are private Companies and those which have only one

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Shareholder and have net worth of not Exceeding Rs 50 Lacs and Average Annual Income (3yrs

average) of not Exceeding Rs 2 Crores. (ii) Small Companies are defined in Sec 2(85) as

Companies which are not Public Company and presently not having a paid up capital Exceeding

Rs 50 Lacs or turnover as per last Balance Sheet not Exceeding Rs 2 Crores, Which are not

Holding & Subsidiary Companies, Sec 8 (old Sec 25 Companies) & those governed by special

Acts. (iii) Dormant companies are in accordance with Sec 455 which is having no significant

accounting transactions.] Financial Statement shall be for every Financial Year. ”Financial Year”

has been defined u/Sec 2(41) of Companies Act 2013 to mean the period ending 31st March

every year. In case of newly incorporated company after 1st January of the year it shall be 31

st

March next in the following year. The Companies are required to align to the new financial

period within 2 years of commencement of the act. There is an exception which may be granted

by the Tribunal wherein the Indian Company is a holding Company or a Subsidiary Company of

the Company incorporated outside India and is required to follow different financial year for

consolidation of accounts outside India. The other feature is Consolidation of Accounts. All

provisions relating to preparation & audit of accounts as applicable to stand alone Financial

Statement are applicable to Consolidated Financial Statements. All Companies irrespective of

whether they are listed or not, private or public are required to prepare consolidated accounts

Consolidation shall be done of all subsidiaries, associate companies and joint venture companies

as per Sub Sec (3) of Sec 129. Financial statement shall be in form provided for in Schedule III

of Companies Act 2013. Schedule III also gives “general introduction for the preparation of

Consolidated Financial Statements”. These introductions are very broad and it appears that

consolidation will have to be done as per AS-21, 23 and 27. AS-21 gives detailed guidelines for

consolidation. Briefly,”Subsidiary Co.” is defined in Sec 2(27) of Co.`s Act 2013. Subsidiary

company in relation to any other company (holding company) means a company in which the

holding company controls the composition of the Board of Directors or controls more than half

of the total paid up capital either on its own or together with one or more of its subsidiary

companies. “Associate Company” in relation to another company means a company in which

that other company has a “significant influence” and includes a JV Company. “Significant

influence” means control of at least 26% of the share capital.



Apart from consolidation Sec129(3) also requires that a separate statement containing the salient

features of financial statement of the subsidiaries , associate company and joint venture company

be attached to the financial statement. This statement is required to be in form AOC-1. Form

AOC-1 has two parts, PART”A”-subsidiaries and PART”B”-Associates and Joint ventures. The

details in FORM AOC-1 are easy extractable from the balance sheets. It may be noted that the

FORM AOC-1 is designed for investment in corporate structure as it uses the words “share

capital” and “shares held in associates.……” It is not clear how investments in partnerships and

J.V. Entities are to be reflected.

The Companies Act 1956 did not provide for re – opening of accounts and Restating or Revision

of financial statements. A Circular in January 2003 for Restating of accounts issued by the

Department of Company affairs provided for Restating of Account due to mistake (not arising

out of fraud or mismanagement) and for the limited purpose of complying with the technical

requirements of the laws viz Income Tax etc. Now, there are two independent provisions. One is

Sec 130 relating to Reopening of Accounts and the other is Sec 131 relating to Voluntary

Revision of financial statements or Board Report.

Reopening of Accounts

Sec 130 starts with a negative connotation i.e. accounts cannot be reopened and financial

statement cannot be recast by the Company unless there is an application by central

government, Income Tax Authority, SEBI and 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 :

1) The relevant earlier accounts were prepared is a fraudulent manner. OR

2) The affairs of the Company were mismanaged during the relevant period, casting a doubt on

the reliability of Financial Statement.



These provisions have far reaching consequences and an order passed Sec 130 could potentially

reopen all accounts and financial statements for upto 8 previous years [maximum 8 years, as

Books of Accounts are required to be maintained u/Sec128(5) , unless ,there is an order for

maintenance of records for longer period]. In the Earlier Companies Act 1956 there was no such

power to effect reopening of accounts and Financial Statement. The wording of Section 130

leaves much to be desired. The first objection is about the persons authorized to apply. Central

Government, Income Tax authorities, SEBI, other statutory Regulatory authorities [TRAI, IRDA

etc] and any other person concerned are the person authorized to apply for an order. “Any Person

Concerned” has not been defined and leaves the field open to Shareholders [Even a single],

Employees, ex – Employees, VAT, State Governments or even a director and any other person

who may be having information. All such persons could come within the category “any person

concerned”. The Second objection is the reason” the affairs of the Company were mismanaged

during the relevant period, casting a doubt on the reliability of financial statement”. These

wording are very wide, adhoc and arbitrary and open to subjectiveness. The words

“mismanaged” is not linked to chapter XVI - Prevention of oppression & Mismanagement to

provide for Reopening of only those Accounts where mismanagement has been found in those

proceedings and further there are adverse findings on the accounts. Moreover, only a “doubt on

the reliability” needs to be established. This situation could lead to large number of cases being

reopened based on “information” which creates doubts. Some of the situations where accounts

may be reopened would be –detection of havala bills by sales tax/VAT authorities or detection of

havala loans. Considerable litigation is expected whenever Reopening is sought before the

tribunal.

The consequences of passing an order for Reopening of accounts are quite serious as it could

consequentially lead to reopening of proceedings under other Acts viz income tax etc. Although

Section 130 does not provide for steps the tribunal is required to take so as to revise or recast

such Reopened accounts but these steps or manner would probably be part of the tribunal order

so passed. The form for making an application to the tribunal for this purpose would be provided

in the NCLT (Rules) whenever notified. Finally, Sub Section (3) of Section 130 provides that the

account so revised or Recast shall be final.

What would be the Status of already Audited and adopted Financial Statements ?The provisions

of Sec 130 and the other provisions of the Companies Act 2013 relating to the status of already



adopted account (prior to revision or recast) in the annual general meeting are unclear.

It appears that there is no requirement to revise the director‟s report, auditor‟s report or adopt the

same in general meeting. The revised or recast accounts which would be final as per sub Section

(3) would be submitted to the tribunal and be subject to such further directions or orders of the

tribunal. Such revised and reopened accounts would probably trigger in further action of

investigation being ordered u/Sec ( 2) of Section 210 or by the SFIO u/Sec 212 Companies Act

2013. The position of auditors would be very difficult and they could become liable for various

actions contemplated under Chapter X of the Companies Act 2013

Voluntary Revision of financial statement or Board’s Report

This is an altogether new provision which did not exist in the Companies Act 1956. Section 131

of Companies Act 2013 provides the Board of directors may voluntary Revise the Financial

Statements or the Board„s Report where it finds that the Financial Statement do not comply with

the provision of Sec 129 Companies Act 2013 [Briefly Sec 129 Companies Act 2013, provides

that the profit and loss, Balance sheet and cash flow give a true and fair view of the affair and

they are prepared as per Accounting Standards] and /or the Board Report do not comply with

Sec 134 Companies Act 2013.The Revision can be done for 3 preceding financial years. The

Company is required to obtain approval of the tribunal before taking up the Voluntary Revision .

Before passing any order it is provided that a notice needs to be given to the Central government

and the Income tax authorities and their representation considered.

The Second proviso of Sec 131 restricts the Revision to only once in a Financial Year. Sub –

Section 2 of Sec 131 however puts a further Restriction on the ability of the Board of Directors

to Revise Financial Statements or the Board Report in a situation where the audited accounts

which have been sent to members or laid before the Annual General Meeting.

The sub-Section provides that the Revision must in such cases be confined to “(a) Corrections in

respect of Previous Financial Statement or Board Report to the extent they do not comply with

the provision of Section 129 or Section 134 and (b)the making of any necessary consequential

alteration “



There is no clarity on the difference between sub Section (1) and sub Section (2) as both talk of

Revision to set right the non- compliance with the provision of Sec 129.

In fact, most cases would fall under the category of Revision after the accounts are laid before

the Annual General Meeting and fall under sub Section (2). The other category for Revision

would be where accounts are approved by the Board of directors and signed but not laid before

the Annual General Meeting and these cases would be extremely few.

Sub-Section (3) provides for Rules relating to the compliances post the Revision of accounts &

directors report. The Rules are also required to make provisions with respect to the Role and

function of the Companies Auditors in relation to the revised Financial Statements or Report.

The Companies (Account) Rule 2014 has not prescribed any such Rules till date.

After considering the provision of Section 130 and 131 and other provision of the Companies

Act 2013 it appears that the LLP structure would be more apt and workable.

Accounts, Reopening and Revision in Companies Act 2013

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