Every company, however small, must keep books of account under section 128 of the Companies Act, 2013. Small-company status earns no exemption from this. The books must be on accrual basis and in double entry. They must give a true and fair view of the company’s affairs, and be kept at the registered office or another place in India chosen by the Board. If they are kept electronically, Rule 3 of the Companies (Accounts) Rules, 2014 adds conditions: records accessible in India, daily backup on servers in India, and accounting software with an audit trail that cannot be disabled. The books, with their vouchers, must be preserved for eight financial years.
This post covers what the law requires. For the day-to-day routine that keeps a company compliant, Complianto’s bookkeeping and accounting service maintains the books monthly in a form that meets these rules.
What counts as “books of account”
Section 2(13) of the Act defines books of account to include records of:
- all money received and spent by the company, and the matters to which the receipts and spending relate;
- all sales and purchases of goods and services;
- the company’s assets and liabilities;
- items of cost, for companies in a class required to keep cost records under section 148.
In practice that means a cash book, bank books, journal, ledgers, sales and purchase records, and a fixed asset register, together with the vouchers and documents behind each entry. “Books and papers” under the Act is wider still. It takes in the financial statements and other documents the company produces.
Where the books must be kept
- Default: at the registered office.
- Another place in India: permitted if the Board decides it. The company must then file a notice with the Registrar, giving the full address, within seven days of the decision, under Rule 2A in Form AOC-5.
- Outside India: not permitted for the company’s own books. The proviso to section 128(1) requires them to be kept in India.
- Branches: a branch, in India or abroad, may keep its own books, provided it sends proper summarised returns to the registered office or the place where the main books are kept. Rule 4 requires quarterly summarised returns from books kept outside India.
The ICAI regional council’s guide to Chapter IX sets out these provisions in full.
Electronic books: the Rule 3 conditions
Almost every small company now keeps its books in software, often cloud-based. That is allowed, on these conditions:
- Accessible in India, at all times. The books and papers must remain accessible in India so that they can be used for later reference. An amendment in 2022 strengthened this to “at all times”.
- Original format. Records must be kept in the format in which they were generated, sent or received, or in a format that presents that information accurately, and must stay complete and unaltered.
- Branch data unaltered. Information received from branches must not be altered and must show what was originally received.
- Legible. The records must be capable of being displayed in legible form.
- Proper storage and retrieval. There must be a proper system for storing, retrieving, displaying or printing the records, as the Board (or audit committee) thinks appropriate. Records must not be disposed of or made unusable except as the law permits.
- Backup on servers in India. Backups of electronic books, including any kept outside India, must be kept on servers physically located in India. The rule originally said “on a periodic basis”. The Companies (Accounts) Fourth Amendment Rules, 2022 changed this to a daily basis.
- Annual intimation to the Registrar. At the time of filing financial statements, the company must disclose its service provider’s name, internet protocol address and location. Where the books are on the cloud, it gives the address provided by the service provider. Where the service provider is outside India, it gives the name and address of the person in control of the books in India.
For a company using a cloud accounting product, the practical checks are simple. Where are the provider’s servers? Can you get a daily backup held on a server in India? Do you have the details needed for the annual disclosure?
Audit trail: the requirement from 1 April 2023
A proviso to Rule 3(1) requires every company that uses accounting software to use only software that:
- records an audit trail of each and every transaction;
- creates an edit log of each change made in the books, with the date of the change;
- does not allow the audit trail to be disabled.
The requirement was first set for financial years beginning on or after 1 April 2022, then deferred, and it has applied from financial years beginning on or after 1 April 2023. The statutory auditor also reports on whether the company’s software met this requirement throughout the year. So a gap, such as an old version of the software or the feature switched off for a few months, shows up in the audit report.
What this means in practice: check that your software has an audit trail feature and that it is on. Do not let users edit closed periods without the change being logged. Keep the audit trail itself for the same eight years as the books.
Inspection by directors
Every director may inspect the books during business hours. Where financial information is held outside India, a director may request it in writing, and the company must produce it within fifteen days. The director must make the request personally, not through an agent. Officers and employees must give the inspecting director reasonable help.
How long to keep them
Section 128(5) requires the books, with the relevant vouchers, to be preserved in good order for at least eight financial years before the current year. For a company less than eight years old, that means all years since incorporation. If an investigation has been ordered, the Central Government may direct a longer period. Tax and GST law set their own retention periods, so keep each record for the longest period that applies.
Who is responsible, and the penalty
Responsibility sits with specific people. They are the managing director, the whole-time director in charge of finance, the chief financial officer, or any other person the Board has charged with complying with section 128. If the section is breached, those persons can face a fine of โน50,000 to โน5 lakh. Check the current penalty with your adviser before relying on these figures. In a small company with no CFO, the Board should record by resolution who is responsible for the books. Otherwise the responsibility falls more widely on the directors.
Where small companies do get relief
The relief for small companies is in what they file and report, not in the books. For example, the financial statements of a small company, a one person company or a dormant company may leave out the cash flow statement under section 2(40). The obligation to keep books under section 128 and Rule 3 is the same for a two-director start-up as for a large company.
Frequently asked questions
Can our accountant keep the books at their office?
Yes, if the Board approves that place, it is in India, and you file the notice with the Registrar within seven days. If the books are in software, it is the data, backups and access that must satisfy Rule 3.
Does Excel count as “accounting software” for the audit trail rule?
The rule applies to a company that maintains its books in accounting software. A spreadsheet has no tamper-proof edit log, which makes it difficult to defend as compliant books. Discuss it with your auditor before relying on one.
Do we keep physical vouchers for eight years if we have scans?
Electronic records are accepted if they meet the Rule 3 conditions: complete, unaltered, legible and retrievable. Many companies still keep originals of significant documents.
Complianto (complianto.in), operated by Mentorcorp Private Limited, is a private consultancy and is not affiliated with any government body. We do not issue official documents. We charge a professional fee for application assistance and advisory services. Applicants can apply directly to the government without our fees via the official portals: MCA (mca.gov.in), Income Tax (incometax.gov.in), GST (gst.gov.in), MSME (udyamregistration.gov.in), FSSAI (foscos.fssai.gov.in), Startup India (startupindia.gov.in), and IP India (ipindia.gov.in).
This article is general information, not legal or tax advice.
