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Maintenance of records: An analysis of various laws

Records, documents, and books of account are maintained by every business or person to keep track of historical things. This article analyses the provisions of various laws regarding the period of maintenance of such records and the consequences of non-maintenance.

Maintenance of records: An analysis of various laws

I. Introduction


Any organization carrying out business is required to maintain and preserve its records – both from the perspective of functioning efficiently as well as to adhere to statutory requirements. A regular business may be required to maintain its invoices and debit notes for its receipts, while preserving also its expenditure vouchers, credit notes, etc. for its expenses. Also, other critical documents would include various agreements, memorandums, employee registers, besides other things. There may be specific business verticals, for instance, which may be laden with statutory responsibilities to maintain customer records (e.g., KYC records), internal and external audit records, cost audit reports, valuation reports etc. In its own prudence, the business may preserve its records forever, but in law, the time period for which these records ought to be preserved is a matter of intense legal discussion. This article analyses requirements and mandates in various laws regarding this subject matter.


II. Company law


Provisions related to keeping, maintaining, and inspecting books of accounts of any company have been provided under section 128 of the Companies Act, 2013 ('Companies Act'). The said provision applies to both the private company as well as the public company.


Section 128(1) of the Companies Act makes it mandatory for the companies to prepare and keep for every financial year, its books of account and other relevant books and papers, which shall give a true and fair view of the state of the affairs of the company [refer Prithavi Tea Co. Ltd. v. Regional Director, Eastern Region, Registrar of Companies 2019 SCC Online NCLAT 1363].


Under section 128(5) of such Act, companies are directed to maintain such records for a minimum period of eight financial years immediately preceding a financial year. Thus, presently if we are running in F.Y. 2022-23, records ought to be maintained from F.Y. 2014-15 till present. However, In case, the company had been in existence for a period less than eight years, it shall maintain the books of account and relevant vouchers in respect of all such preceding years.


Moreover, if an investigation has been initiated in respect of the company under Section 206–229 of the Companies Act (i.e., either by the office of the Regional Director, or the Serious Fraud Investigation Office (SFIO)), then the Central Government can instruct the company to keep the books of account for more than eight years as it may deem fit.


Furthermore, Section 128(6) of such Act underlines the liability of the persons, which includes The Managing Director; the Whole-time Director in charge of finance; The Chief Financial Officer; or any other person of a company charged by the Board of Directors with the duty of complying with the provisions of section 128, if any contravention of section 128 discovered [refer Dr. Rajesh Kumar Yaduvanshi vs Serious Fraud Investigation Office 2020 SCC Online Del 1222].


It is to be noted, however, that the time limit of eight (8) years as laid down in section 128 of the Companies Act applies only to books of account. By definition (s. 2(13) of the Companies Act), books of account include records maintained in respect of receipts and expenditures, sales and purchases of goods and services, assets and liabilities, and cost items (relevant to cost audit). Thus, the very many registers and other documents and certificates which the Companies Act requires a company to maintain (e.g., memorandum and articles of association, register of members, minute books, registers of charges and investments etc.) are not covered in such definition. This means that the Companies Act does not prescribe any time limit for their preservation and they ought to be maintained in perpetuity.


[In case of Limited Liability Partnerships also, the Limited Liability Partnership Act, 2008 prescribes that books of account be maintained for a period of eight years from the date on which they are made. The definition of ‘books of account’ is similar to the definition laid down in the Companies Act.]


III. Tax laws


A. Income-tax law


Rule 6F (5) of the Income Tax Rules, 1962 (‘IT Rules’) provides that an assessee should keep the records of his books of accounts and other documents for at least six years from the end of the relevant assessment year (AY). In case the assessment for any assessment year has been reopened under section 147 of the Income-tax Act, 1961 (‘IT Act’), the books of account shall be maintained till such assessment has been completed.


It is noteworthy that under section 147 r/w/s 149 of the IT Act, as amended recently (by Finance Act, 2021), the time limit for reopening an assessment has been changed to (i) 3 years, in any case of escapement of income, or (ii) 10 years, in case where escapement of income is more than Rs. 50 lakhs. Rule 6F of the IT Rules has not been amended with this statutory amendment, and the time limit in such Rule continues to be six years for maintenance of books of account.


Now, section 142(1) of the IT Act provides that in case an assessment (or, reassessment / reopening) is carried out for any assessment year, the Assessing Officer may require the production of an accounts till a period of three years prior to the financial year which is being assessed. This makes it imperative for any person to maintain records for the earlier fourteen (14) years.


Illustration

In the presently running F.Y. 2022-23, in case the income-tax department feels that any person has evaded tax on an income exceeding Rs. 50 lakhs, he may go back till A.Y. 2012-13 (as per section 149 of the IT Act) and reopen the case. Now, the financial year for A.Y. 2012-13 is F.Y. 2011-12. As per section 142(1), the Assessing Officer may legally ask to produce accounts going back three years from this financial year – that is, he may ask such person to produce accounts for F.Y. 2008-09 onwards. Any person, thus, ought to maintain records keeping such possible reopening or reassessment in mind.


Separately, Rule 10D of the IT Rules lays down that every person who has entered into an international transaction or a specified domestic transaction has to maintain the book of accounts for eight years from the end of the relevant assessment year (i.e., the transfer pricing documentation).


B. GST law


The Central Goods and Services Tax Act, 2017 (in short, ‘CGST Act’) also contains specific provisions for the maintenance of records and accounts. Regarding the contents of what all records and documents have to be maintained, probably the GST law is the most comprehensive in laying down specifically their details.


Section 35 of the CGST Act, read with Rule 56 of the CGST Rules, 2017 (‘CGST Rules’) prescribes that every registered person shall keep and maintain at his principal place of business a true and correct account of:


  • Production or manufacture of goods;

  • Inward and outward supply of goods or services or both;

  • Stock of goods;

  • Input tax credit availed;

  • Output tax payable and paid;

  • Goods or services imported or exported;

  • Supplies involving payment of tax on reverse charge basis;

  • Details of suppliers, customers, and premises where goods are stored;

  • Detailed account of maintenance of stock;


The law further specifically provides that invoices, bills of supply, delivery challans, credit notes, debit notes, receipt vouchers, payment vouchers, and refund vouchers shall be maintained. There are other requirements for specific business also laid down – for instance, an owner or operator of a warehouse or godown or transporter is required to maintain records of the consigner, consignee and other relevant details of the goods, irrespective of being registered or not under GST law. Similarly, there are specific provisions for agents, contractors etc. to maintain records particular to their manner of business.


The consequence of not maintaining the accounts as described above is that it would result in such goods to be deemed as ‘supplied’ by such person and he would have to pay tax on such deemed supply u/s 73 and 74 of the CGST Act.


The period of retention or maintenance of the abovementioned records is 72 months from the due date of furnishing of annual return for the year pertaining to such accounts and records. In case there are any pending proceedings (e.g., appeal, revision, investigation for an offence etc.) then in such case the records shall be maintained till one year after the disposal of such proceedings (or, 72 months as above, whichever is later).

Earlier, the central excise law and service tax law prescribed a preservation period of 5 years from the end of the financial year to which such records pertained.


IV. Criminal law


It is a well-known fact that the limitation period doesn’t apply to criminal cases, thus, a criminal case can be initiated at any time i.e., even after fifty years [refer Ravindra Singh v The State of Chhattisgarh Criminal Revision No. 527 of 2011]. This poses a great discomfort to parties as it is very much possible that they have lost the document or any records pertaining to the case. Though it is to be noted that section 468 of the Code of Criminal Procedure, 1973 prescribes certain limitation periods for less grave offences (i.e., offences punishable with fine or with imprisonment up to three years), it is to be noted that economic offences are excluded from such limitation (vide the Economic Offences (Inapplicability of Limitation) Act, 1974) and so are offences punishable with imprisonment of three years or more. Thus, for the sake of our discussion, it could be safely presumed that limitation does not apply to criminal procedural law.


The thumb rule then would be that, given that one may be prosecuted or need to prosecute anytime in the future, one may desire to maintain and preserve records in perpetuity. This is more so considering the difficulty that is faced in legal proceedings in prosecuting as well as defending any case, in the absence of original, primary documents and records.


For the sake of completeness of this discussion on criminal law, it would be required to visit relevant aspects as they arise under the Indian Evidence Act, 1872 (‘Evidence Act’), against whose touchstone criminal proceedings are conducted.


Private vs public documents: Broadly and most often we deal with “private documents”. Documents such as letters, agreements, emails, etc. exchanged between contesting parties to a litigation are private documents, while on the other hands, documents such as a birth certificate, marriage certificate, or an FIR filed before the police station are public documents. Public documents or their certified copies are easy to be recovered even if decades have passed, hence, producing little difficulties for the parties. However, in the case of private documents, their loss causes serious trouble in legal proceedings.


Consequences of lost documents in evidence law: In case of loss of documents, the first thing which needs to be established is the very factum of loss of such document and that despite diligent search, the same is not available. Secondary evidence (e.g., a photocopy) cannot be allowed as evidence unless this proof of loss is established in court [Benga Behera v. Braja Kishore Nanda (2007) 9 SCC 728]. Not just that, in order to completely admit the secondary evidence, appropriate proof about how the secondary evidence was obtained and made from the original will also have to be led in accordance with the manner set out in Section 65 and 66 of the Evidence Act.


Old documents: Now, it may not be possible to maintain records or not maintain them in their entire context (for instance, to maintain all the connected records, vouchers, invoices, agreements etc.) for an exceedingly long period. The Evidence Act contains an excuse for such old documents. Section 90 of the Evidence Act provides that documents which are more than 30 years old, would be presumed to be genuine and their attestation or execution would be presumed to be as appearing on the face of such documents.


Reasonable period of maintenance of records: It is to be noted that courts have paid due regard to the fact that though no limitation applies to criminal cases, yet persons cannot be expected to face proceedings at any time. Courts have held that parties cannot be expected to face proceedings for extremely old allegations and irregularities. [Refer State of Madhya Pradesh v. Bani Singh 1990 Supp SCC 738, Mohamad Kavi Mohamad Amin v. Fatmabai Ibrahim(1997) 6 SCC 71, and Government of India v. Citedal Fine Pharmaceuticals, Madras (1989) 3 SCC 483].


V. Conclusion


The Supreme Court recently in a case involving the Foreign Exchange Regulation Act, 1973 (‘FERA’) has found the initiation of proceedings, for a period much prior to the limitation prescribed (eight years) under FERA for maintenance of records, to be unfair and unreasonable [Refer Union of India v Citi India 2022 SCC Online SC 1073].


Thus, the statutory limitation periods as prescribed under various laws do carry weight and a person may choose to not maintain records once all statutory limitation periods (from the above discussion, income-tax law lays down the longest of such periods) have lapsed. In cases where no time limit has been given under the statute then in those cases as held by the Supreme Court in State of Gujarat v. Patil Raghav Natha (1969) 2 SCC 187, the reasonable time period will be considered. The reasonable time period in turn will depend upon the facts and circumstances of each case.


Authored by: Editorial Team, Metalegal Advocates

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