J.K. INDUSTRIES LTD. & ANR. v. UNION OF INDIA AND ORS.

The Judgment of the Court was delivered by KAPADIA, J. 1. A short question which arises for determination in this batch of civil appeals is : E "Whether Accounting Standard 22 (AS 22) entitled "accounting for taxes on income" insofar as it relates to deferred taxation is inconsistent with and ultra vires the provisions of the Companies Act, 1956 (the Companies Act), the Income-tax Act, 1961 (LT. F Act) and the Constitution of India?"

2Copy pinpoint2. Mis. J.K. Industries Ltd. is a public limited company. It was incorporated in 1951. It carries on the business of manufacture and sale of automotive tyres, tubes, sugar and agrigenetics. It has a registered office at Calcutta. It seeks to challenge AS 22 issued by Institute of Chartered G Accountants of India (for short, "Institute") which has been made mandatory for all companies listed in Stock Exchanges in India in preparation of their accounts for the financial year 2001-02 onwards.

3Copy pinpoint3. On 7.12.06 the Central Government prescribed AS 22 under Section 211 (3C) of the Companies Act by the Companies (AS) Rules H

p. 148 Copy page pinpoint

A 2006. Before that date, AS 22, when issued in 2001, was challenged in r- writ petitions filed before Madras, Kamataka, Calcutta and Gujarat High Cou1ts. On transfer petitions, under Section 139A of the Constitution, filed by the Institute, this Court vide order dated 17.2.03 was pleased to transfer the writ petitions filed in various High Courts to the Calcutta High B Court. Meaning and purpose of AS:

4Copy pinpoint4. In its origin, Accounting Standard is a policy statement or document framed by Institute. Accounting Standards establishes rules relating to recognition, measurement and disclosures thereby ensuring that all enterprises that follow them are comparable and that their financial statements are true, fair and transparent. Accounting Standards ("A.S." for short) are based on a number of accounting principles. They seek to arrive at true accounting income. One such principle is the matching principle. The other is fair value principle. The aim of the Institute is to go for paradigm shift from matching to fair value principle.

5Copy pinpoint5. Today the revised Accounting Standards seeks to arrive at true accounting income. In the age of globalization the attempt is to reconcile the accounts oflndian companies with their joint venture partners abroad. E The aim is to harmonise Indian Accounting Standards with International Accounting Standards. With the object of bridging gap between IAS and IFRS, the Institute formulated new A.S. and introduced new concepts, e.g., Deferred Tax Accounting (AS 22 impugned herein), Segment Reporting (AS 17) etc .. However, as a matter of prudence and necessary adjustment, to arrive at real iPcome, Accounting Standards F require provision to be made for liabilities payable in future, provision to be made for contingencies, provision to be made for diminution, provision to reflect impairment and so on which have the effect of reducing incomes and were, therefore, not readily accepted by some enterprises and tax authorities. G

6Copy pinpoint6. The core of Accountar1cy is Book-keeping. T11e rules of Book- keeping are clear. For example, the value of a fixed asset mentioned in a /- Balance Sheet is based on cost which may involve subjective estimation of the amount to be apportioned. Similarly. the quantum of depreciation is again an estimate, which can vary depending on the persons preparing

/ f J.K. INDUSTRIES LTD. v. UNION OF INDIA [KAP ADIA,J.] 149

-\ the accounts as to when and at what stage he wants to record the depreciation. Accounting Standards are an attempt to overcome some of these deficiencies of Accountancy. Accounting Standards involve codification of fundamental accounting rules, rules which explain and standardiz.e the application of the fundamental rules to a variety of uncertain situations like-retirement, contingencies, intangibles, consolidation, merger etc. Accounting Standards basically attempt to reduce the subjectivity and lay down rules so as to arrive at the best possible estimates. For example, net assets refer to the difference between total assets less liabilities but the value attributable to each asset and each liability is often subjective. It depends on estimates. This is where the Accounting Standards help. c They reduce the subjectivity. Therefore, Accounting Standards help to arrive at the best possible estimates. This estimation/subjectivity is also on account of the conceptual difference between "accounting incoll.le" and "taxable income". Accounting income is the real income. Tax laws lay down rules for valuation of inventories, fixed assets, depreciation, bad debts, etc. based on artificial rules and not on the basis of accounting > estimates, which results in mismatch between accounting and taxable incomes: For example, a fixed rate of depreciation may, for some companies, result in computing lower than the actual income if the actual erosion in the value of the asset is lower than the depreciation calculated at the fixed rate and higher than actual income for others where assets erode faster. Accounting income is nonnally used as a relevant measure by most stakeholders. However, on account of artificial set of rules used in computation of taxable income one finds that accounting income differs from taxable income. Looking to these problems, the evolution of :\ Accounting Standards and their greater application is necessary as it results in reducing the need for tax laws to depend upon artificial rules. The object of Accounting Standards is, therefore, to standardize and to narrow down the options. The object of Accounting Standards is to evolve methods by which "accounting income" is determined. The object behind the Accounting Standards is to evolve methods by which accounting income is determined, made more transparent and leave less and less room for subjective selection of methods and provide for more attention to the quality of estimates used in arriving at accounting income.

7Copy pinpoint7. The main object sought to be achieved by Accounting Standards H

150 SUPREME COURT REPORTS [2007] 12 S.C.R. ~

A which is now made mandatory is to see that accounting income is adopted as taxable income and not merely as the basis from which taxable income is to be cmnputed. Thus, if the rules by which inventories are to be valued are laid down in the Accounting Standards artd are followed in. the determination of accounting income, then tax laws do not need to lay B down the rules and the tax authorities do not need to examine the computation of the value of inventories and its effect on computation of · income. Similarly, if there is an accounting standard on depreciation which requires estimation of the useful life and prescribes the appropriate method for apportionment of cost of fixed assets over their useful life, it is c unnecessary for tax laws to apply an artificial rule to decide the extent of allowance for depreciation.

8Copy pinpoint8. Finally, the adoption of Accounting Standards and of accounting income as ''taxabl.e income" would avoid distortion of accounting income which is the real ·income. D Reasons Joi- introducing AS 22: J..

9Copy pinpoint9. In the ba1;kdrop of globalization and liberalization the world has become an economic village. Today, the capital market all over the world knows no barriers. Fiscal distances and barriers have been removed by E developments in transport, communication and e-commerce. In this backdrop, Conv ergence of Accounting Standards is aimed at removing 1

barriers in the flow of financial information and capital. Ba5ed on the above developments in the global economy and the Indian economy, the conceptual differences and consequent deviations in the National F Accounting Standards and IFRS have got to be eliminated. For example, exchange difference in respect of unpaid liability for acquisition of an imported asset has been allowed in the past to be adjusted with the carrying costs of the fixed assets instead of recognizing the exchange difference in the profit and loss account. G

10Copy pinpoint10. Lastly, it is important to note that Accounting Standards and taxation of income are two independent subjects. The object behind AS is to remove this divergence by making Accounting Income a Taxable Income. Accounting income can never negate True Income. H

p. 151 Copy page pinpoint

[KAPADIA, J.] Relevant provisions ofthe Companies Act, 1956 and Analysis thereof A

11Copy pinpoint11. Before analyzing the provisions of the Companies Act, we quote hereinbelow the following provisions from the Companies Act which read as follow: "PREAMBLE" B The Companies Act, 1956 (ACT 1 OF 1956) [18th January, 1956] An Act to consolidate and amend the law relating to companies and certain other associations. c Be it enacted by Parliament in the 'Sixth Year of the Republic oflndia as follows:-" I

..--! "PRELIMINARY D Section 2(33) "prescribed" means, as respects the provisions of this Act relating to the winding up of companies except sub-section (5) of section 503, sub-section (3) of section 550, section 552 and sub-section (3) of section 555, prescribed by rules made by the Supreme Comi in consultation with The Tribunal, and as E respect.;; the other provisions of this Act including sub-section (5) of section 503, sub-section (3) of section 550, section 552 and sub-section (3) of section 555, prescribed by rules made by the Central Government;" ~ F "ACCOUNTS Section 209. Books of account to be kept by company (1) Every company shall keep at its registered office proper books of account with respect to- G j (a) all sums of money received and expended by the companJ and the matters in respect of which the receipt and expenditure take place; (b) all sales and purchases of goods by the company; H

' .~ 152 SUPREME COURT REPORTS [2007] 12 S.C.R. ~

r- ,, A (c) the assets and liabilities of the company; and (d) in the case: of a company pertaining to any class of companies engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material or labour or to other items of cost as may be prescribed, if such class of B companies is required by the Central Government to include such particulars in the books of account: Provided that all or any of the books of account aforesaid may be kept at such other place in India as the Board of directors may c decide and when the Board of directors so decides, the company shall, within seven days of the decision, file with the Registrar a notice in writing giving the full address of that other place. (2) Where a :ompany has a branch office, whether in or outside India, the company shall be deemed to have complied with the D ._ provisions of sub-section (I), if proper books of account relating to the transactions effected at the branch office are kept at that office and proper summarised returns, made up to dates at intervals of not more than three months, are sent by the branch office to the company at its registered office or the other place referred to E in sub-section (1 ). (3) For the purposes of sub-sections (1) and (2), proper books of account ~:hall not be deemed to be kept with respect to the matters specified therein,- (a) if there are not kept such books as are necessat)' to give a true and fair view of the state of the affairs ,,> F of the company or branch office, as the case may be, and to explain its transactions; and (b) If such books are not kept on accrual basis and according to the double entry system of accounting. G (4) The books of account and other books and papers shall be \- (' open to inspection by any director during business hours. (4A) The books of account of every company relating to a period of not less than eight years immediately preceding the current year H

) J.K.INDUSTRIESLTD. v. UNION OF INDIA 153 [KAPADIA,J.] '" together with the vouchers relevant to any entry in such books of account shall be preserved in good order : Provided that in the case of a company incorporated less than eight years before the current year, the books of account for the entire period preceding the current year together with the vouchers relevant to any entry in such books of account shall be so preserved. (5) If any of the persons referred to in sub-section (6) fails to take all reasonable steps to secure compliance by the company with the requirements of this section, or has by his own wilful act been c the cause of any default by the company thereunder, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both : Provided that in any proceedings against a person in respect of D ,_,\

an offence under this section consisting of a failure to take reasonable steps to secure compliance by the company with the requirements of this section, it shall be a defence to prove that a competent and reliable person was charged with the duty of seeing that those requirements were complied with and was in a position to discharge that duty : Provided further that no person shall be sentenced to imprisonment for any such offence, unless it was committed wilfully. (6) The persons referred to in sub-section (5) are the following namely:- (a) where the company has a managing director or manager, such managing' director or manager and all officers and other employees of the company; and; . (d) where the company has neither a managing director nor manager, every director of the company; G

Sect ion 210. Annual accounts and balance sheet H

154 SUPREME COURT REPORTS [2007] 12 S.C.R. '\' (1) At every annual general meeting of a company held in pursuance A of section 166, the Board of directors of the company shall lay "' before the company- (a) a balance sheet as at the end of the period specified in sub- section (3); and B (b) a profit and loss account for that period. (2) In the case of a company not carrying on business for profit, an income and expenditure account shall be laid before the company at its annual general meeting instead of a profit and loss c account, and all references to "profit and loss account", "profit" and "loss" in this section and elsewhere in this Act, shall be construed, in relation to such a company, as references respectively to the "income and expenditure account", "the excess of income over expenditure", and "the excess of expenditure over income". D (3) The profit and loss account shall relate- "' (a) in the case of the first annual general meeting of the company, to the period beginning with the incorporation of the company and ending with a day which shall not precede the day of the meeting by more than nine months; and (b) in the case of any subsequent annual general meeting of the company, to the period beginning with the day immediately after the period for which the account was last submitted and ending with a day which shall not precede the day of the meeting by more \. ~ than six months, or in cases where an extension of time has been granted for holding the meeting under the second proviso to sub- section (1) of section 166, by more than six months and the extension so granted. G (4) The period to which the account aforesaid relates is referred to in this Act as a "financial year" and it may be less or more than a calendar year, but it shall not exceed fifteen months : I. Provided that it may extend to eighteen months where special permission has been granted in that behalf by the Registrar. H

J.K. INDUSTRIES LTD. v. UNION OF INDIA 155

[KAPADIA, J.] __, A (5) If any person, being a director of a company, fails to take all A reasonable steps to comply with the provisions of this section, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both : Provided that in any proceedings against a person in respect of an B -I offence under this section, it shall be a defence to prove that a competent and reliable person was charged with the duty of seeing j that the provisions of this section were complied with and was in a position to discharge that duty : c Provided further that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully. (6) If any person, not being a director of the company, having been charged by the Board of directors with the duty of seeing that the provisions of this section are complied with, makes default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may exterid to ten thousand rupees, or with both : Provided that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully. Section 210A. Constitution of National Advisory Committee on Accounting Standards ,.,\ (1) The Central Government may, by notification in the Official F Gazette, constitute an Advisory Committee to be called the National Advisory Committee on Accounting Standards (hereafter in this section referred to as the "Advisory Committee") to advise the Central Government on the formulation and laying down of accounting policies and accounting standards for adoption by G ::) companies or class of companies under this Act. (2) The Advisory Committee shall consist of the following members, namely :-

- (a) a Chairperson who shall be a person of eminence well versed H

156 SUPREME COURT REPORTS [2007] 12 S.C.R.

.. A in accountancy, finance, business administration, business law, economics or similar discipline; (b) one member each nominated by the Institute of Chartered Accountants oflndia constituted under the Chartered Accountants Act, 1949, the Institute of Cost and Works Accountants of India B constituted under the Cost and Works Accountants Act, 1959 and the Institute of Company Secretaries of India constituted under the Company Secretaries Act, 1980; (c) one representative of the Central Government to be nominated c by it; (d) one representative of the Reserve Bank of India to be nominated by it; (e) one representative of the Comptroller and Auditor-General of D India to be nominated by him; (f) a person who holds or has held the office of professor in accountancy, finance or business management in any university or deemed university; E (g) the Chairman of the Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 or his nominee; (h) two members to represent the chambers of commerce and industry to be nominated by the Central Government, and

F (i) one representative of the Securities and Exchange Board oflndia to be nominated by it. (3) The Advisory Committee shall give its recommendations to the Central Government on such matters of accounting policies and standards and auditing as may be referred to it for advice from time to time. (4) The members of the Advisory Committee shall hold office for such terms as may be determined by the Central Government at the time of their appointment and any vacancy in the membership in the Committee shall be filled by the Central Government in the

f J.K. INDUSTRIES LTD. v. UNION OF INDIA 157 [KAPADIA,J.] same manner as the member whose vacancy occurred was filled. A (5) The non-official members of the Advisory Committee shall be entitled to such fees, travelling, conveyance and other allowances as are admissible to the officers of the Central Government of the highest rank. B Section 211. Form and contents of balance sheet and profit and loss account

( 1) Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit or in such other form as may be approved by the Central Government either generally or in any particular case; and in preparing the balance sheet due regard shall be had, as far as may be, to the general instructions for preparation of balance sheet under the heading "Notes" at the end of that Part: Provided that nothing contained in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a forn1 of balance sheet has been specified in or under the Act governing such class of company. (2) Every profit and loss account of a company shall give a true \ ..- and fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirements of Pm1 II of Schedule VI, so far as they m·e applicable thereto: Provided that nothing contained in this sub-section shall apply to any insurm1ce or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of profit and loss account has been specified in or under the Act governing such class of company. (3) The Central Government may, by notification in the Official Gazette, exempt any class of companies from compliance with any H

158 SUPREME COURT REPORTS [2007] 12 S.C.R.

.A of the requirements in Schedule VI if, in its opinion, it is necessary to grant the exemption in the public interest. Any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification. B (3A) Every profit and loss account and balance sheet of the company shall comply with the accounting standards. >-- (3B) Where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and balance c sheet, the following, namely:- (a) the deviation from the accounting standards; (b) the reasons for such deviation; and

D (c) the financial effect, if any, arising due to such deviation. ).

(3C) For the purposes of this section, the expression "accounting standards" means the standards of accounting recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 as may be prescribed by E the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of section 210A: Provided that the standard of accounting specified by the Institute F of Chartered Accountants of India shall be deemed to be the Accounting Standards until the accounting standards are prescribed .' by the Central Government under this sub-section. (4) The Central Government may, on the application, or with the consent of the Board of directors of the company, by order, modify G in relation to that company any of the requirements of this Act as to the matters to be stated in the company's balance sheet or profit and loss account for the purpose of adapting them to the circumstances of the company. (5) The balance sheet and the profit and loss account of a company H

J.K. INDUSTRIES LTD. v. UNION OF INDIA 159

[KAPADIA,J.] shall not be treated as not disclosing a true and fair view of the A state of affairs of the company, merely by reason of the fact that they do not disclose-

(i) in the case of an insurance company, any matters which are not required to be disclosed by the Insurance Act, 1938; B

(ii) in the case of a banking company, any matters which are not required to be disclosed by the Banking Companies Act, 1949;

(iii) in the case of a company engaged in the generation or supply of electricity, any matters which are not required to be disclosed by both the Indian Electricity Act, 1910, and the Electricity (Supply) Act, 1948;

(iv) in the case of a company governed by any other special Act for the time being in force, any matters which are not required to be disclosed by that special Act; or

(v) in the case of any company, any matters which are not required to be disclosed by virtue of the provisions contained in Schedule VI or by virttie of a notification issued under sub-section (3) or an order issued under sub-section (4).

(6) For the purposes of this section, except where the context otherwise requires, any reference to a balance sheet or profit and loss account shall include any notes thereon or documents annexed thereto, giving information required by this Act, and allowed by this Act to be given in the form of such notes or documents.

(7) If any such person as is referred to in sub-section (6) of section 209 fails to take all reasonable steps to secure compliance by the company, as respects any accounts laid before the company in general meeting, with the provisions of this section and with the other requirements of this act as to the matters to be stated in the accounts, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with H

160, SUPREME COURT REPORTS [2007] 12 S.C.R.

A fine which may extend to ten thousand rupees, or with both :

Provided that in any proceedings against a person in respect of an offence under this section, it shall be a defence to prove that a competent and reliable person was charged with the duty B of seeing that the provisions of this section and the other requirements aforesaid were complied with and was in a position to discharge that duty :

Provided further that no person shall be sentenced to imprisonment for any such offence, unless it was committed c ~- (8) If any person, not being a person referred to in sub-section (6) of section 209, having been charged by the managing director or manager, or Board of directors, as the case may be, with the D duty of seeing that the provisions of this section and the other requirements aforesaid are complied with, makes default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months or with fine which may extend to ten thousand rupees, or with both: E Provided that no person shall be sentenced to imprisonment for any such offence, unless it was committed wilfully.

F SCHEDULE VI

(See section 21 I)

I [PART I

Form of Balance-sheet] G The balance sheet of a company shall be either in horizontal form or vertical form A. HORIZONTAL FORM]

Balance sheet of............ ..... . [Here enter the name of the Company] As at. ...... ...... .. .. . [Here enter the date as at which the balance-sheet is made out.]

1nstructions LIABILITIES ASSETS Instructions in in accordance Figures for Figures Figures for the Figures accordance with with which the for previous year for which assets liabilities previous the Rs. (b) the should be should be year current current made out made out Rs. (b) Rs. (b) Rs. (b)

*SHARE *FIXED ASSETS CA PITAL *Tenns of Authorised .... Distinguishing *Under eac h head the

red em ptro11or conversion ... shares ot Rs .... each. as raras- possible ongma-i--rost, and the additions thereto and - 0\ N

(if any), or any between deductions therefrom redeemable expenditure during the year, and preference upon (a) total depreciation written capital to be goodwill, (b) off or provided up to stated, together land, (c) the end of the year to be with earliest buildings, (d) stated. date of leaseholds, (e) redemption or railway conversion. sidings, (f) plant and machinery, (g) furniture and fittings, (h) development of property, (i) patents, trade marks and I designs, (j) live-stock and (k) vehicles, etc. Where the original cost

atoresatct ano add1t1ons and deductions thereto, relate to any fixed asset which has been acquired from a country outside India, and in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there has been an increase or reduction in the liability of the company, as expressed in Indian currency, for making payment towards the whole or a part of the cost of the asset or for repayment of the whole or a pa1t of moneys borrowed by the company from any person, directly or indirectly in any foreign currency specifically for

- -- the purpose of acquiring the asset (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability is so increased or reduced during the year, shall be added to, or, as the case may be deducted from the cost, and the amount arrived at after such addition or deduction shall be taken to be the cost of the fixed asset. Explanation 1: This paragraph shall apply in relation to all balance- sheets that may be made out as at the 6th day of June, 1966, or any day

thereafter and where, at the date of issue of the notification of the ....... Government of India, in ~ ........ the Ministry oflndustrial z 0 Development and c:::: Company Affairs [/J -l (Department of Company ~ ........ Affairs), G.S.R. No. 129, ,........., trl dated the 3rd day of January, 1968,any ~~ >i::J -l balance sheet, in relation, :i>o o· ........ ;<:! to which this paragraph ?> c:::: applies, has already been '.- z ............... made out and laid before 0 the company in Annual z General Meeting, the 0 'Tl adjustment referred to in ....... this paragraph may be z0 ........ made in the first balance- > sheet made out after the issue of the said notification. O'\ Vi

delay, the valuation shown by the books shall be given. For the purposes of this paragraph, such valuation shall be the net amount at which an asset stood in the company's books at the commencement of this Act after deduction of the amounts previously provided or written off for depreciation or diminution in value, and where any such asset is sold, the amount of sale proceeds shall be shown as ...... deduction.] z 0 +Particulars +Issued Where sums have been ...... of any option (distinguishing written off on a reduction > on un-issued between the of capital or a revaluation share capital various of assets, every balance to be specified. classes of sheet, (after the first

capital ana stating the oa1ance sneet) subsequent to the - 0\ 00

particulars reduction or revaluation specified shall show the reduced below, in figures and with the date respect of of the reduction in place each class) of the original cost. ... shares of Rs ..... each +Particulars of +Subscribed Each balance sheet for the the different (distinguishing first five years subsequent classes of between the to the date of the reduction, preference various shall show also the amount shares to be · classes of of the reduction made. given. Capital and stating the particulars ........, specified N 0 below in 0 -..J respect of .......... each class.) (c) ..... shares Similarly, where sums have of Rs .... each. been added by writing up

the assets, every t>alance- sheet subsequent to such writing up shall show the increased figures with the date of the increase in place of the original cost. Each balance sheet for the first five years subsequent to the date of writing up shall also show the amount of increase made. Rs ..... Explanation.- Nothing called up. contained in the preceding two paragraphs shall apply to any adjustment made in accordance with the second paragraph. Of the above shares ... shares are allotted as

,_. fully paid- -..J 0 up pursuant to a contract without payments being received in cash. +Specify the Of the source from above which bonus shares shares are ... shares issued, e.g., are capitalisation allotted as of profits or fully paid- Reserves or up by from Share way of w 0 0 Premium bonus -..J ......., Account. shares+ +Any capital Less: calls profit on unpaid: reissue of

forfeited shares should be transferred to Capital Reserve. 1[(i) By managing agent or secretaries and treasurers and where the managing agent or secretaries and treasurers are a firm, by the partners thereof, and where the managing agent or secretaries and treasurers are

a pnvate company by the directors or members of that company.] (ii) By directors. (iii) By others. +Add: Forfeited shares (amount originally paid up)]. *Additions *RESERVES INVESTMENTS *Aggregate amount of ,......, N and deductions AND company's quoted 0 0 since last SURPLUS investment and also the -.J .......... balance sheet market value thereof to be shown shall be shown. under each !of the

spec1t1ed heads. The word (I) Capital Showing nature Aggregate amount of "fund" in Reserves. of investments company's unquoted relation to and mode of investments shall also any valuation, for be shown. "Reserve" example, cost should be or market used only value and where such distinguishing Reserve is between- specifically represented by earmarked investments. (2) Capital *( 1) Investments All unutilised monies Redemption in Government out of the issue must Reserve. or Trust be separately Securities. disclosed in the Balance Sheet of the company indicating the form in which such unutilised funds

have been invested. (3) Share *(2) Investments Premium in shares, Account (cc). debentures or bonds (showing separately shares fully paid-up and partly paid-up and also distinguishing the different classes of shares and showing also in similar details investments in shares, debentures or bonds of subsidiary ,.--, N companies. 0 0 (4) Other (3) Immovable -...J .......... Reserves properties. specifying the nature of each

Ke serve and the amount in respect thereof. Less: Debit (4) Investments balance in in the Capital profit and of partnership loss account firms. (if any) (h). (5) Surplus (5) Balance of i.e., balance unutilised in profit and monies raised loss account by issue. after providing for proposed allocations, namely:- Dividend, Bonus or Reserves. { <>) Proposed

aamttons to Reserves. (7) Sinking Funds.] SECURED CURRENT ASSETS, LOANS: LOANS AND ADVANCES: Loans from +(I) A.CURRENT +Mode of valuation of Directors, Debentures ASSETS stock shall be stated Manager ++ and the amount in should be respect of raw shown material shall also be separately. stated separately where practicable. Interest +(2) Loans ( 1) Interest ++Mode of valuation accrued and accrued on of works-in-progress and due Advances Investments shall be stated. ......., N on Secured from Banks. 0 0 Loans -.....) .......... should be included under the appropriate

sub-heads under the head "SECURED LOANS". +The nature +(3) Loans +(2) Stores and @In regard to Sundry of the and spare parts. Debtors particulars security to Advances to be given separately be specified from of- (a) debts in each case. subsidiaries. considered good and in respect of which the company is fully secured; and (b) debts considered good for which the company holds no security other than the debtor's personal security; and (c) debts considered doubtful or bad. When~ loans +(4) Other (3) Loose Debts due by directors have been Loans and Tools. or other officers of the guaranteed Advances. company or any of

I oy managers them enner severauy ........ -l and/or or jointly with any 00

directors, a other person or debts mention due by firms or private thereof shall companies respectively also be made in which any director and the is a partner or a aggregate director or a members amount of to be separately such loans stated. under each head ++Terms of +(4) Stock-in-trade. Debts due from other redemption or companies under the conversion same management (if any) of within the meaning of debentures sub-section (IB) of ,........, issued to be section 370, to be N 0 stated disclosed with the 0 -l together with names of the .......... earliest date Companies. of redemption or conversion.

++(5) Works-in- The maximum amount Progress. due by directors or other officers of the company at any time during the year to be shown by way of a note. @(6) Sundry The provisions to be debtors- shown under this head should not exceed the amounts of debts stated to be considered doubtful or bad and any surplus of such provision if already created, should be shown at every closing under "Reserves and I Surplus" (in the liabilities side) under a separate sub-head "Reserve for Doubtful or Bad Debts".

...... (a) Debts In regard to bank 00 0 outstanding for balances, particulars a period to be given s.eparately exceeding six of- months. (b) Other (a) the balances lying debts. with Scheduled Banks on current acc~unts, call accounts and deposit accounts; Less: Provision (b) the name of the bankers other than Scheduled Banks and the balance lying with ; each such banker on current accounts, call accounts and deposit ,......, N account the maximum 0 0 amount outstanding at -.) .......... ~ny time during .the ...... N year from each such · Cl'J , banker; and \ ' n (7A) Cash (c) the nature of the ?o

t5a1ance interest, JI.any, or a11y on hand. director or his relative or the in each of the bankers (other than Scheduled Banks) referred to in (b) above. (7B) Bank All unutilised monies balances- out of the issue must be separately disclosed in the Balance Sheet of the company indicating the form in which such unutilised funds have been invested. (a) with Scheduled Banks, and (b) with others. B.LOANS *The above ,_.. 00 ,_..

,_. ANlJ mstrucuons regardmg 00 ADVANCES N "Sundry Debtors" apply to "Loans and Advances" also. (8) (a) Advances and loans to subsidiaries. (b) Advances and loans to partnership firms in which the company or any of its subsidiaries is a partner. (9) Bills of Exchange. (10) Advances recoverable in cash or in kind or for value to be

recervect, e.g., Rates, Taxes, Insurance, etc. (11)***] (12) Balances with Customs, Port Trust, etc. (where payable on demand). UNSECURED MISCELLANEOUS LOANS: EXPENDITURE (to the extent not written off or adjusted): +Loans from (I) Fixed (1) Preliminary directors, Deposits. expenses. manager should be shown separately. Interest accrued - 00 w

ant ctue on Unsecured Loans should be included under the appropriate sub-heads under the head "Unsecured Loans".] +Where loans +(2) Loans (2) Expenses have been and including guaranteed Advances commission or by managers from brokerage on and/or subsidiaries. underwriting directors, or subscription a mention , bf shares or thereof shall debentures. be made and also aggregate amount of

such loans under each head. *See note (d) +*(3) Short (3) Discount at foot of Tenn Loans allowed on Form and the issue of Advances: shares or debentures. (a) From Banks. (4) Interest paid out of capital during construction (also stating the rate or interest.) (b) From (5) Development others. expenditure not adjusted. (4) Other (6) Other items Loans and . (specifying Advances: nature). (a) Froni Banks. 00 V>

lbJ trom 00 0\ others. CURRENT +PROFIT AND +Show here the debit LIABILITIES LOSS ACCOUNT. balance of profit and AND loss account carried PROVISIONS: forward after deduction of the uncommitted reserves, if any. The name (s) A. CURRENT of the small LIABILITIES scale industrial undertaking (s) to whom the Company owe a sum exceeding Rs. I lakh which is outstanding for more than 3 0 days,

are to oe disclosed. ( 1) Acceptances. (2) Sundry creditors. (i) Total outstanding dues of small scale industrial undertaking( s); and (ii) Total outstanding dues of creditors other than small scale industrial undertakings ( s ). (3) Subsidiary companies.

(4) Advance 00 payments 00

and un~xpired discounts for the portion for which value has still to be given e.g., in the case of the follo\\'.ing classes of companies:- Newspaper, Fire Insurance, Theatres, Clubs, Banking, Steamship Companies, etc. (5) Unclaimed Dividends. ,

(6) Other Liabilities (if any). (7) Interest

a~crued but not due on loans. B. PROVISIONS (8) Provisions for taxation. (9) Proposed dividends. (10) For contingencies. (11) For provident fund scheme. (12) For. insurance, pension and similar staff benefit schemes.

( IJ) Other provisions. A foot-note to the balance-sheet may be added to show separately: (1) Claims against the company not acknowledged as debts. (2) Uncalled liability on shares partly paid. The period ++(3) for which the dividends are Arrears of fixed . in arrear of cumulative if there is dividends.

more than one class of shares, the '- dividends on ~ ......... each such class are in zt:l arrear, shall c: r::/J be stated. >-l :::0 ......... The amount (4) Estimated .......... trl shall be amount of stated before contracts ~~ '"t) >-l deduction of remaining > t:l .t:l income-tax, to be ....... ~

except that in the case executed on capital r c: ~z ........... ......... of tax-free account 0 dividends the and not z provided 0 amount shall >-rj ......... be shown free of for. z t:l ......... income-tax and the > fact that it is so shown ..... '°

shall be stated. The amount +(5) Other of any money for guarantees which the given by the company is company on contingently behalf of liable Directors or I

other officers of the company shall be stated and ;

where practicable, the general nature and amount of each such contingent liability, if material, shall also be snecified.

J.K.INDUSTRIESLTD. v. UNION OF INDIA 193

[KAPADIA, J.] General instructions for preparation of balance sheet.- A (a) The information required to be given under any of the items or sub-items in this Form, if it cannot be conveniently included in the balance sheet itself, shall be furnished in a separate Schedule or Schedules to be annexed to and to form part of the balance sheet. This is recommended when items are numerous. B (b) Naye Paise can also be given in addition to Rupees, if desired. (c) In the case of subsidiary companies the number of shares held by the holding company as well as by the ultimate holding company and its subsidiaries must be separately stated. C The auditor is not required to certify the correctness of such shareholdings as certified by the management. (cc) The item "Share Premium Account" shall include details of its utilisation in the manner provided in section 78 in the year of D utilisation. (d) Short Tenn Loans will include those which are due for not more than one year as at the date of the balance-sheet. (e) Depreciation written off or provided shall be allocated under the different asset heads and deducted in arriving at the value of E Fixed Assets. (f) Dividends declared by subsidiary companies after the date of the balance sheet should not be included] unless they are in respect of period which closed on or before the date of the balance sheet. F (g) Any reference to benefits expected from contracts to the extent not executed shall not be made in the balance sheet but shall be made in the Board's report. [(h) The debit balance in the Profit and Loss Account shall be shown as a deduction from the uncommitted reserves, if any. G (i) As regards Loans and Advances, amounts due by the Managing Agents or Secretaries and Treasurers, either severally or jointly with any other persons to be separately stated; the amounts due from other companies under the san1e management within the meaning H

194 SUPREME COURT REPORTS (2007] 12 S.C.R.

A of sub-section (lB) of s~ction 370 should also be given with the names of the companies the maximtun amount due from every one of these at any time during the year must be shown. G) Particulars of any redeemed debentures which the company has power to issue should be given. B (k) Where any of the company's debentures are held by a nominee or a trustee for the company, the nominal amount of the debentures and the amount at which they are stated in the books of the company shall be stated. c (1) A statement of investments (whether shown under "Investment" or under "Current Assets" as stock-in-trade) separately classifying trade investments and other investments should be annexed to the balance sheet, showing the names of the bodies corporate (indicating separately the names of the bodies corporate under the same management) in whose shares or debentures, investments have been made (including all investments whether existing or not, made subsequent to the date as at which the previous balance sheet was made out) and the nature and extent of the investment ; so made in each such body corporate; provided that in the case of an investment company that is to say, a company whose principal business is the acquisition of shares, stock, debentures or other securities, it shall be sufficient if the statement shows only the investments existing on the date as at which the balance sheet has been made out. In regard to the investments in the capital of partnership firms, the names of the firms (With the names of all their partners total capital and the shares of each partner) shall be given 'in the statement. (m) If, in the opinion of the Board, any of the current assets, loans and advances have not a value on realisation in the ordinary course of business at least equal to the amount at which they are stated, the fact that the Board is of that opinion .shall be stated. (n) Except in the case of the first balance sheet laid before the company after the commencement of the Act, the corresponding amounts for the immediately preceding financial year for all items H

J.K.INDUSTRIESLTD. v. UNIONOFINDIA 195

[KAPADIA,J.] shown in the balance sheet shall be also given in the balance sheet A The requirement in this behalf shall, in the case of companies preparing quarterly or half-yearly accounts, etc., relate to the balance sheet for the corresponding date in the previous year. (o) The amounts to be shown under Sundry Debtors shall include the amounts due in respect of goods sold or servi~es rendered or B in respect of other contractual obligations but shall not include the amounts which are in the nature of loans or advances. (p) Current accounts with directors, and Manager, whether they are in credit or debit, shall be shown separately. c (q) A small scale industrial undertaking has the same meaning as assigned to it under clause G) of section 3 of the Industries (Development and Regulation) Act, 1951 .

B. VERTICAL FORM D Name of the Company ...... .... . Balance Sheet as at... ............ . Schedule Figures as Figures as No. at the end at the end E of current of previous financial year financial year ,., 1 2 .) 4 5 F I. Sources of funds: (1) Shareholder's funds (a) Capital (b) Reserves and Surplus G (2) Loan funds (a) Secured loans (b) Unsecured loans TOTAL: H

196 SUPREME COURT REPORTS (2007] 12 S.C.R.

A II. Applications of funds: (I) Fixed assets (a) Gross block (b) Less depreciation

B (c) Net block (d) Capital work-in-progress (2) Investments (3) Current assets, loans, and advances: (a) Inventories c (b) Sundry debtors (c) Cash and bank balances (d) Other current assets (e) Loans and advances D Less: Current liabilities and provisions: (a) Liabilities (b) Provisions E Net current assets (4) (a) Miscellaneous expenditure to the extent not written off or adjusted (b) Profit and Loss account F TOTAL: Notes.- I . Details under each of the above items shall be given in separate Schedules. The Schedules shall incorporate all the information required to be given under A-Horizontal Fonn read with notes G containing general instructions for preparation of balance sheet.

2. The Schedules, referred to above, accounting policies and explanatory notes that may be attached shall fonn an integral part of the balance sheet. ·

) J.K.INDUSTRIESLTD. v. UNIONOFINDIA [KAPADIA,J.] 197

3. The figures in the balance sheet may be rounded off to the A nearest "000" or "00" as may be convenient or may be expressed in terms of decimals of thousands. (TO BE COMPARED)

4. A foot-note to the balance sheet may be added to show separately contingent liabilities. B PART II Requirements as to Profit and Loss Account

1. The provisions of this Part shall apply to the income and expenditure account referred to in sub-section (2) of section 210 c of the Act, in like manner as they apply to a profit and loss account, but subject to t~e modification of references as specified in that sub-section.

2. The profit and loss account- (a) shall be so made out as clearly to disclose the result of the D working of the company during the period covered by the account; and (b) shall disclose every material feature, including credits or receipts and deb its or expenses in respect of non-recurring transactions or transactions of an exceptional nature. E

3. The profit and loss account shall set out the various items relating to the income and expenditure of the company arranged under the most convenient heads; and in particular, shall disclose the following information in respect of the period covered by the account:- F (i) (a) The turnover, that is, the aggregate amount for which sales are effected by the company, giving the amount of sales in respect of each class of goods dealt with by the company, and indicating the quantities of such sales for each class separately. (b) Commission paid to sole selling agents within the meaning G of section 294 of the Act. (c) Commission paid to other selling agents. (d) Brokerage and discount on sales, other than the usual trade discount. H

198 SUPREME COURT REPORTS [2007] 12 S.C.R. \

'\, A (ii) (a) In the case of manufacturing companies,- >-- (1) The value of the raw materials consumed, giving item-wise break-up and indicating the quantities thereof. In this break-up, as far as possible, all important basic raw materials shall be shown as separate items. The intermediates or components procured from B other manufacturers may, if their list is too large to be included in the break-up, be grouped under suitable headings without mentioning the quantities, provided all those items which in value individually account for 10 per cent or more of the total value of the raw material consumed shall be shown as separate and distinct c items with quantities thereof in the break-up. (2) The opening and closing stocks of goods produced, giving break-up in respect of each class of goods and indicating the quantities thereof. (b) In the case of trading companies, the purchases made and the opening and closing stocks, giving break-up in respect of each class of goods trade in by the company and indicating the quantities '. thereof. (c) In the case of companies rendering or supplying services, the gross income derived from services rendered or supplied. (d) In the case of a company, which falls under more than one of the categories mentioned in (a), (b) and (c) above, it shall be sufficient compliance with the requirements herein if the total amounts are shown in respect of the opening and closing stocks, purchases, sales and consumption of raw material with value and quantitative break-up and the gross income from services rendered is shown. (e) In the case of other companies, the gross income derived under different heads. G Note 1.- The quantities of raw materials purchases, stocks, and the turnover shall be express:ed in quantitative denominations in which these are normally purchased or sold in the market. Note 2.- For the purpose of items (ii)( a), (ii)(b) and (ii)(d), the items for which the company is holding separate industrial licences,

/ J.K. INDUSTRIES LTD. v. UNION OF INDIA 199 [KAPADIA, J.] shall be treated as separate classes of goods, but where a company has more than one industrial licence for production of the same item at different places or for expansion of the licensed capacity, the item covered by all such licences shall be treated as one class. In the case of trading companies, the imported items shall be classified in accordance with the classification adopted by the Chief B Controller of Imports and Exports in granting the import licences. Note 3.-In giving the break-up of purchases, stocks and turnover, items like spare parts and accessories, the list of which is too large to be included in the break-up, may be grouped under suitable headings without quantities, provided all those items, which in value C individually account for 10 per-cent or more of the total value of the purchases, stocks, or turnover, as the case may be, are shown as separate and distinct items with quantities thereof in the break- up, D (iii) In the case of all concerns having works-in-progress, the amounts for which such works have been completed] at the commencement and at the end of the accounting period. (iv) The amount provided for depreciation, renewals or diminution in value of fixed assets. If such provision is not made by means of E a depreciation charge, the method adopted for making such provision. If no provision is made for depreciation, the fact that no provision has been made shall be stated and the quantum of arrears of depreciation computed in accordance with section 205(2) of the F Act shall be disclosed by way of a note. (v) The amount of interest on the company's debentures and other fixed loans, that is to say, loans for fixed periods, stating separately the amount of interest, if any, paid or payable to the managing G director and the manager, if any. (vi) The amount of charge for Indian income-tax and other Indian taxation on profits, including, where practicable, with Indian income-tax any taxation imposed elsewhere to the extent of the H

200 SUPREME COURT REPORTS [2007] 12 S.C.R.

\'"-, A relief, if any, from Indian income-tax and distinguishing, where practicable, between income-tax and other taxation. (vii) The amounts reserved for- (a) repayment of share capital; and B (b) repayment ofloans. (viii) (a) The aggregate, if material, of any amounts set aside or proposed to be set aside, to reserves, but not including provisions made to meet any specific liability, contingency or commitment known to exist at the date as at which the balance-sheet is made c up. (b) The aggregate, if material, of any amounts withdrawn from such reserves. (ixXa) The aggregate, if material, of the amounts to set aside to D provisions made for meeting specific liabilities, contingencies or commitments. (b) The aggregate, if material, of the amounts withdrawn from such provisions, as no longer required. E (x) Expenditure incurred on each of the following items, separately for each item:- (a) Consumption of stores and spare parts. (b) Power and fuel. ,......_ F (c) Rent. (d) Repairs to buildings. (e) Repairs to machinery. (t) (1) Salaries, wages and bonus. G (2) Contribution to provident and other funds. (3) Workmen and staff welfare expenses to the extent not adjusted )<" from any previous provision or reserve. Note I-Information in respect of this item should also be given in H the balance sheet under the relevant provision or reserve account.

' ~ / J.K. INDUSTRIES LTD. v. UNION OF INDIA 201 [KAPADIA, J.]

Note 2. *** A (g) Insurance. (h) Rates and taxes, excluding taxes on income. (i) Miscellaneous expenses: Provided that any item under which the expenses exceed one B per cent of the total revenue of the company or Rs. 5,000 whichever is higher shall be shown as a separate and distinct item against an appropriate account head in the Profit and Loss Account and shall not be combined with any other item to be shown Under "Miscellaneous expenses". C (xi) (a) The amount of income from investments, distinguishing between trade investments and other investments. (b) Other income by way of interest, specifying the nature of the income. D (c) The amount of income-tax deducted if the gross income is stated under sub-paragraphs (a) and (b) above. (xii) (a) Profits or losses on investments showing distinctly the extent of the profits and losses earned or incurred on account of E membership of a partnership firm to the extent not adjusted from any previous provision or reserve. Note.- Information in respect ofthis item should also be given in the balance sheet under the relevant provision or reserve accow1t. F (b) Profits or losses in respect of transactions of a kind, not usually undertaken by the company or undertaken in circumstances of an exceptional or non-recurring nature, if material in amount. (c) Miscellaneous income. (xiii) (a) Dividends from subsidiary companies. G

(b) Provisions for losses of subsidiary companies. (xiv) The aggregate amount of the dividends paid, and proposed, and stating whether such amounts are subject to deduction of income-tax or not. H

202 ~ SUPREME COURT REPORTS [2007] 12 S.C.R. \,

?--. A (xv) Amount, if material, by which any items shown in the profit and loss account are affected by any change in the basis of accounting.

4. The profit and loss account shall also contain or give by way of a note detailed information, showing separately the following B payments provided or made during the financial year to the directors (including managing directors), or manager, if any, by the company, the subsidiaries of the company and any other person:- (i) managerial remuneration under section 198 of the Act paid c or payable during the financial year to the directors (including managing directors), manager, if any; (ii)***; (iii)***;

D (iv)***; (vi) other allowances and commission including guarantee commission (details to be given); (vii) any other perquisites or benefits in cash or in kind.(stating approximate money value where practicable); E (viii) pensions, etc.,- (a) pensions, (b) gratuities, (c) payments from provident funds, in excess of own F subscriptions and interest thereon, (d) compensation for loss of office, (e) consideration in connection with retirement from office.

G 4A. The profit and loss account shall contain or give by way of a note a statement showing the computation of net profits in accordance with section 349 of the Act with relevant details of the calculation of the commissions payable by way of Percentage of such profits to the directors (including managing directors), or manager (if any). H

J.K.INDUSTRIESLTD. v. UNIONOFINDIA 203

[KAPADIA, J.] 4B. The profit and loss account shall further contain or give A by way of a note detailed information in regard to amounts paid to the auditor, whether as fees, expenses or otherwise for services rendered- (a) as auditor; ~. B -~ \ (b) as adviser, or in any other capacity, in respect of-

(i) taxation matters; (ii) company law matters;

(rii) management services; and c (c) in any other manner 4C. In the case of a manufacturing companies, the profit and loss account shall also contain, by way of a note in respect of each -~ class of goods manufactured, detailed quantitative information in D regard to the following, namely:- (a) the licensed capacity (where licence is in force); (b) the installed capacity; and E (c) the actual production. Note 1.- The licensed capacity and installed capacity of the company as on the last date of the year to which the profit and loss account relates, shall be mentioned against items (a) and (b) -' -" above, respectively. F Note 2.-Against item (c), the actual production in respect of the finished products meant for sale shall be mentioned. In cases where semi-processed products are also sold by the company, separate details thereof shall be given. G Note 3.- For the purpose of this paragraph, the items for which ·~ the company is holding separate industrial licences shall be treated as separate classes of goods but where a company has more than one industrial licence for production of the same item at different places or for expansion of the licensed capacity, the item covered H

~\ 204 SUPREME COURT REPORTS [2007] 12 S.C.R. \

>- A by all such licences shall be treated as one class.

40. The profit and loss account shall also contain by way of a note the following infonnation, namely:- (a) value of imports calculated on C.I.F. basis by the company B during the financial year in respect of:- ~ )... (i) raw materials; (ii) components and spare parts; (iii) capital goods; c (b) expenditure in foreign currency during the :financial year on account of royalty, know-how, professional, consultation fees, interest, and other matters; (c) value of all imported raw materials, spare parts and components consumed during the :financial year and the value ~-

of all indigenous raw materials, spare parts and components similarly consumed and the percentage of each to the total consumption; (d) the amount remitted during the year in foreign currencies on account of dividends, with a specific mention of the number of non-resident shareholders, the number of shares held by them on which the dividends related; (e) earnings in foreign exchange classified under the following /-, F heads, namely:- (i) export of goods calculated on F.O.B. basis; (ii) royalty, know-how, professional and consultation fees; (iii) interest and dividend; G (iv) other income, indicating the nature thereof. 1-:-~

5. The Central Government may direct that a company ~hall not be obliged to show the amount set aside to provisions other than those relating to depreciation, renewal or diminution in value H

j J.K.INDUSTRIESLTD. v. UNIONOFINDIA 205 [KAPADIA, J.] of assets, if the Central Government is satisfied that the infonnation A should not be disclosed in the public interest and would prejudice the company, but subject to the condition that in any heading stating an amount arrived at after taking into account the amount set aside as such, the provision shall be so framed or marked as to indicate that fact. B

6. (1) Except in the case of the first profit and loss account laid before the company after the commencement of the Act, the corresponding amounts for the immediately preceding financial year for all items shown in the profit and loss account shall also be given C in the profit and loss account. (2) The requirement in sub-clause (1) shall, in the case of companies preparing quarterly or half-yearly accounts, relate to the profit and loss account for the period which entered on the corresponding date of the previous year." D "AUDIT

Section 227. Powers and duties of auditors (1) Every auditor of a company shall have a right of access at all E times to the books and accounts and vouchers of the company, whether kept at the head office of the company or elsewhere, and shall be entitled to require from the officers of the company such infonnation and explanations as the auditor may think necessary for the perfonnance of his duties as auditor. F (IA) Without prejudice to the provisions of sub-section (1 ), the auditor shall inquire- (a) whether loans and advances made by the company on the basis of security have been properly secured and whether the tenns on which they have been made are not prejudicial to the interest of G the company or its members; (b) whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company; H

206 SUPREME COURT REPORTS [2007] 12 S.C.R. ~ \

A (c) where the company is not an investment company within the r- meaning of section 372 or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company; B (d) whether loans and advances made by the company have been shown as deposits; (e) whether personal expenses have been charged to revenue account; c (f) where it is stated in the books and papers of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance-sheet is correct, regular and not misleading. (2) The auditor shall make a report to the members of the company on the accounts examined by him, and on every balance-sheet and profit and loss account and on every other document declared.by this Act to be part of or annexed to the balance-sheet or profit and loss account which are laid before the company in general meeting during his tenure of office, and the report shall state whether, in his opinion and to the best of his information and according to the explanations given to him, the said accounts give the information required by this Act in the manner so required and I-_, give a true and fair view- (i) in the case of the balance-sheet, of the state of the company's affairs as at the end of its financial years; and

G (ii) in the case of the profit and loss account, of the profit or loss for its financial year. (3) The auditor's report shall also state- y (a) whether he has obtained all the information and explanations H which to the best of his knowledge and belief were necessary for

) .._.<., J.K. INDUSTRIES LTD. v. UNION OF INDIA [KAPADIA, J.] the purposes of his audit; 207

A (b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books, and proper returns adequate for the purposes of his audit have been received from branches not B visited by him; ~ (bb) whether the report on the accounts of any branch office audited under section 228 by a person other than the company's auditor has been awarded to him as enquired by clause (c) of sub- section (3) of that section and how he has dealt with the same in c preparing the auditor's report; (c) whether the company's balance-sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns; D -( (d) whether, in his opinion, the profit and loss account and balance:..sheet comply with the accounting standards referred to in sub-section (3C) of section 211; (e) in thick type or in italics the observations or comments of the auditors which have any adverse effect on the functioning of the company; (f) whether any director is disqualified from being appointed as director under clause (g) of sub-section (1) of section 274. ,..l (g) whether the cess payable under section 441 A has been paid and if not, the details of amount of cess not so paid. (4) Where any of the matters referred to in clauses (i) and (ii) of sub-section (2) or in clauses (a), (b), (bb) (c) and (d)] of sub- section (3) is answered in the negative or with a qualification, the auditor's report shall state the reason for the answer. f;_,, (4A) The Central Government may, by general or special order, direct that, in the case of such class or description of companies as may be specified in the order, the auditor's report shall also H

208 SUPREME COURT REPORTS [2007] 12 S.C.R.

include a statement on such matters as may be specified therein: Provided that before making any such order the Central \. >.....

Government may consult the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949), in regard to the class or description of companies B and other ancillary matters proposed to be specified therein unless ihe Government decides that such consultation is not necessary or expedient in the circumstances of the case. (5) The accounts of a company shall not be deemed as not having c been, and the auditors report shall-not state that those accounts have not been properly drawn up on the ground merely that the company had not disclosed certain matters if- (a) those matters are such as the company is not required to disclose by virtue of any provisions contained i_n this or any other D Act,' and ~

(b) those provisions are specified in the balance-sheet and profit ~

and loss account of the company." (emphasis supplied) E "SCHEDULES, FORMS AND RULES Section 641. Power to alter Schedules. (1) Subject to the provisions of this section, the Central Government F may, by notification in the Official Gazette, alter any of the ~. regulations, rules, tables, forms and other provisions contained in any of the Schedules to this Act, except Schedules XI and XII. (2) Any alteration notified under sub-section (1) shall have effect as if enacted in this Act and shall come into force on the date of G the notification, unless the notification otherwise directs : Provided that no such alteration in Table A of Schedule I shall apply / 0. to any company registered before the date of such alteration. (3) Every alteration made by the Central Government under sub- H

J.K. INDUSTRIES LTD. v. UNION OF INDIA 209

[KAPADIA, J.] section (1) shall be laid as soon as may be after it is made before each House of Parliament while it is in session for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately follmving the session or the successive sessions aforesaid, both Houses agree in making any modification in the alteration, or both Houses agree that the alteration should not be made, the alteration ·shall thereafter have effect only in such modified fonn or be of no effect, as the case may be, so, however, that any such modification or annulment shall be without pr~judice to the validi1y of anything previously done in pursuance of that c alteration. Section 642. Power of Central Government lo make rules. (l) In additioa to the powers conferred by section 641, the Central Government may, by notification in the Official Gazette, make rules- D (a) for all or any of the matters which by this Act are to be. or may be, prescribed by the Central Government; and (b) generally to carry out the purposes of this Act. (2) Any rule made under sub-section (1) may provide that a E contravention thereof shall be punishable with fine which may extend to five thousand rupees and \Vhere the contravention is a continuing one, with a further fine which may extend to five hundred rupees for every day after the first dilling which such contravention continues. F (3) Every rnle made by the Central Government w1der sub-section (I) shall be laid as soon as may be after it is made before each :House of Parliament while it is in session for a total period •>f thirty days which may be comprised in one session or in two l'f more successive sessions, and if, before the expiry of the session G immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification in the rnle or both Houses agree that the rule should not be made, the rule shall thereafter have effect only in such modified fonn or be of no H

210 SUPREME COURT REPORTS [2007] 12 S.C.R.

A effect, as the case may be, so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule. (4) Every regulation made by the Securities and Exchange Board of India under this Act shall be laid, as soon as may be after it is B made, before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification c in the regulation or both Houses agree that the regulation should not be made, the regulation shall thereafter have effect only in such modified fonn or be of no effect, as the case may be; so however, that any such modification or annuhnent shall be without prejudice to t1e validity of anything previously done under that regulation." D

12Copy pinpoint12. Analysing the above provisions of the Companies Act the position is that at every AGM of a company the Board of Directors is required to place before it a balance-sheet and a P&L ale for the financial year. Section 210 of the Companies Act requires a company to place before E AGM, a balance-sheet and a P&L ale for the relevant period. The function of a balance-sheet is to show the share capital, reserves and liabilities of the compariy at the date on which it is prepared and the manner in which the total moneys representing them are distributed over several types of assets. A balance-sheet is a historical docunm1t. As a general rule it does not show the net worth of an undertaking at any particular date. It does not show the present realizable value of goodwill, land, plant ~nd machinery etc. It also does not show the realiz.able value of stock-in-trade, except in cases where the realizable value of stock-in-trade is less than cost. Therefore, it canrn it be said that the balance-sheet shows the true financial position. 13 . Section 210A was inse11ed by Companies (Amendment) Act, 1999 with effect from 31.10.98 to provide for constitution of National Advisory Committee (NAC) on Accounting Standards. The said NAC was constituted to advice the Central Government on the fo1mation and H

- I J.K. INDUSTRIES LTD. v. UNION OF INDIA [KAPADIA,J.] 211

14Copy pinpoint14. Section 211(1) requires the balance-sheet to be in the form set out in Part I of Schedule VI "or as near thereto as circumstances admit". The said phrase "or as near thereto as circumstances admit" allows adoption of improved techniques in the presentation of accounts to D -1 shareholders. It is important to note that the information which is requited to be given to shareholders pursuant to Schedule VI should be given in a manner which they will understand and which must give a true and fair view of the company's affairs as also it must give a proper picture of the company's profits(losses) for the relevant year. E

15Copy pinpoint15. By Companies (Amendment) Act, 1999, sub-sections (3A), (3B)

' > and (3C) as well as a proviso thereto stood inserted in Section 211 of the Companies Act w.e.f. 31.10.98 in order to provide for compliance of Accounting Standards by companies in the preparation of P&L ale and balance-sheet. By virtue of the said amendment, Accounting Standards are required to be prescribed by the Central Government in consultation F

with the NAC established under Section 210A. Until the NAC is established and Accounting Standards are prescribed by the Central Government, the Accounting Standards specified by the Institute shall be G followed by all the companies. In the present case, the NAC has been ,., established. In the present case, by the impugned notification dated ~\ 7.12.06, the Accounting Standards have been prescribed by the Central Government. In the present case, by the impugned notification, AS 22 earlier specified by the Institute has been adopted by the Central H

212 SUPREME COURT REPORTS [2007] 12 S.C.R.