SECTION 211

FORM AND CONTENTS OF BALANCE SHEET AND

PROFIT AND LOSS ACCOUNT

Failure to make provision for taxation and proposed dividends - Whether amounts to not showing a true and fair view

Query : Whether, in the view of the Department, failure to provide for taxation and proposed dividend by the companies in their account amounts to not showing a true and fair view of the state of affairs of the defaulting companies?

Ans: Yes.

* LETTER NO.3/126/75-CL-VI, DATED 9.7.1975.

Providing for proposed dividend in profit and loss account and showing the same under the head "Current liabilities and provisions" in balance sheet - Whether statutory obligation breach of which invites prosecution.

Clarification 1

The Department agrees that the dividend becomes a liability only when it is approved by the share holders at the annual; general meeting. It may, however, be appreciated that the payment of dividend and provision for proposed dividend in the balance sheet and the profit and loss accounts are two different aspects. So far as the provision for proposed dividend is concerned, this question has been carefully considered taking into account the following factors:

a) requirements of para 3(xiv) of Part II of Schedule VI and item (9) under the head

"Provision" in Part I of Schedule VI;

b) item (5) given below the heading "Reserves and Surplus" in Part I of Schedule VI.

c) requirements of marginal instruction given against the heading "Reserves and Surplus" in Part I of Schedule VI read with the provisions of the Companies (Declaration of Dividend out of Reserves) Rules, 1975;

d) requirements of the Companies (Transfer of Profits to Reserves) Rules, 1975 in the event of proposed dividend exceeding 10 per cent; and

e) provisions of section 217(1)(c).

In view of the above facts, the Department is of the firm view that there is a statutory obligation on the part of the companies to provide for proposed dividend in their profit and loss accounts and show the same under the head "Current liabilities and provisions" in the balance sheet. The failure to make such provisions in the accounts amounts to contravention of Schedule VI read with section 211 and the accounts which do not incorporate such provisions will not be regarded as reflecting a true and fair view of the state of affairs of the companies, thereby rendering the directors and other officers concerned liable for penal action as envisaged in sub-sections(7) and (8) of section 211.

It is also the duty of the auditors to bring out clearly in their reports the facts of these contraventions, failing which they will be liable for being proceeded against under the Chartered Accountants Act and Rules framed thereunder.

* CIRCULAR NO.3/124/75-CL-V, DATED 22.11.1976.

Clarification 2

Some representations were received from the Chambers of Commerce against the prosecution proceedings launched for contravention of Schedule VI read with section 211 in respect of non-provisions for proposed dividend in the balance sheet and profit and loss account by certain companies. The matter has been carefully considered in the Department and it has now been decided to withdraw the prosecution already launched against the defaulting companies. It has also been decided to take a lenient view against those companies who have not made provisions for proposed dividend in their balance sheet and profit and loss accounts prepared before 15.12.1976. However, if no provision for proposed dividend is made in the accounts prepared after this date, suitable action for initiating prosecution proceedings may be taken against the defaulting companies for contravention of Schedule VI read with section 211.

* LETTER NO.3/124/75-CL-V, DATED 26.2.1977.

Whether companies seeking exemption under the sub-section should indicate in application whether the same has been made with approval of board of directors and forward copy of resolution along with application

It has been noticed that companies who make applications under section 211(4), seeking exemption in regard to the matters to be stated in the balance sheet and profit and loss account do not indicate in the said application whether the same has been made with the approval of the board of directors. In this connection I am directed to say that sub-section (2) of section 210 provides that board of directors of the company shall at every annual; general meeting of the company lay before it a balance sheet and profit and loss account, etc. Section 215 provides for the manner in which the balance sheet and profit and loss account should be authenticated. It is, therefore, clear that the duty to prepare and present the balance sheet and profit and loss account is cast upon the board of directors of the company. A careful examination of section 211(4) would reveal that the Central Government can grant the exemption under the said sub-section either on the application by the board of directors or with its consent.

In view of this position, it is necessary that any company which seeks exemption under section 211(4) should indicate in the application whether the same has been made with the approval of the board of directors and forward a copy of the board's resolution in this regard along with the application.

* CIRCULAR NO.1/ 184-CL AND 383 83CL-VI] DATED 19.4.1984