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Bookkeeping is a way of recording a company’s financial transactions in an organised manner. Bookkeeping creates a trail of all the transactions and serves as evidence for financial reporting. This practice of bookkeeping or maintaining books of account is not an option; multiple laws, like the Companies Act, 2013, Income Tax Act, and Good and Service Tax (GST), mandate maintenance and retention of the books of account in the prescribed manner.

As maintenance of books of account has transitioned from physical record-keeping to electronic mode, the bookkeeping laws have evolved. Section 128 (1) of the Companies Act, 2013 stipulates that every company shall prepare and keep its books of account and other relevant books, papers, and financial statements yearly. It also mentions that these books can be kept in electronic mode. While Section 128(1) mentions the allowance for maintaining books in electronic mode, the specific requirements for electronic bookkeeping, like format, accessibility, and security, are typically provided in the rules made under the Act. For example, the Companies (Accounts) Rules, 2014, especially Rule 3, provides detailed requirements for maintaining books of account in electronic form.

Most of the provisions related to physical books apply to books maintained in electronic mode. Hence, the common points between manual and digital books are as follows:

• The statutory laws recognise both physical and digital books of account.
• Both manual and digital books must always be accessible in India.
• The physical books and digital books are subject to inspection.
• Both manual and digital books must be accurate and complete.
• The time period for retention of manual and digital books is same.

Key requirements that are unique to digital books of account as per the provision of the Companies Act, 2013 are as listed below:

Particulars	Requirement
Maintenance	Given the nature of digital books and the maturity of accounting systems, it is mandatory that the data from books maintained outside India should be always accessible in India.
Retention	The books of account and other important books and papers shall be retained in the original format in which they have been generated, sent, or received or in a format that will present the information generated, transmitted, or received accurately. The information must remain complete and unaltered.
Branch Office	The information received from the branch office shall not be altered and shall be kept in a manner that depicts the information initially received from the branches.
Storage	A proper system for displaying, storing, retrieving, or printing electronic records. The records must be retained unless expressly allowed by the law.
Backup	The electronic copies of account books and other relevant documents, even if stored overseas, must be accessible daily through physical servers situated in India.
Service Provider (Outsourced Vendor maintaining accounts)	At the time of filing financials annually, the company must inform the Registrar: the name of the service provider the IP address of the service provider the location of the service provider (wherever applicable) if maintained in the cloud, then the address as given by the service provider

Recent amendments

Maintenance:

The books of account and other relevant books and papers maintained in electronic mode shall remain accessible in India, at all times. Before the amendment it was only accessible in India, however now the words at all times have been added.

Backup:

The backup of books of account and other books and papers of the company which is maintained in electronic mode, even if stored at a place outside India shall be kept in servers physically located in India on a daily basis. Before the amendment, it was on a periodic basis.

Audit trail in the accounting software:

For the financial year commencing on or after the period 1^st April 2023, every company that uses accounting software to maintain books of account shall use only such accounting software that can record an audit trail of each and every transaction as per MCA notification. This will help create an audit log with the changes made and the date it is made. Also, it must be ensured that the audit trail cannot be disabled.

Service provider outside India:

If the service provider is outside India, then the company must inform the Registrar of Companies, the name and address of the person in control of the books of accounts and books and papers in India.

The above amendments in light of the digital evolution in book keeping has given rise to the below mentioned challenges for the companies:

• When books are maintained outside India, daily data backup poses a challenge for companies where the data backup is centralised outside India and servers are physically located outside India.
• For data from outside India to be accessible in India at all times, there must be seamless integration and real-time transfers. This can be challenging for companies with multiple locations outside India.
• Section 128 (5) of the Companies Act, 2013 requires that the books of account must be maintained for eight financial years immediately preceding the financial year, and accordingly, the backup must also be held for eight years. Hence, the company must have the facility to store the backups safely or upload them to cloud storage.

Compliance checklist

To comply with all the provisions of Rule 3, the company needs a robust system in place, and auditors need to check the system in place to certify total compliance. A compliance checklist as given below will ensure that there are no lapses.

Sr. no.	Requirement	Complied (yes/no)	Remarks
1.	If the books of account and other relevant books and papers are maintained in electronic mode, whether it is always accessible in India for its subsequent use?
2.	From 1st April 2023, whether the accounting software has a feature of: recording the audit trail of each and every transaction, creating an edit log of each change made in books of account along with the date when such changes were made, and ensuring that the audit trail cannot be disabled?
3.	Whether it is ensured that the books of account are entirely retained in the format in which they were originally generated, sent, or received, or in a format which shall present accurately the information generated, transmitted, or received, and the information contained in the electronic records remains complete and unaltered.
4.	Is it ensured that the information received from branch offices is not altered and is kept in a manner that depicts what was originally received from the branches?
5.	Is it ensured that the information can be displayed in a legible form?
6.	Is it ensured that there is a proper system for: storage, retrieval, display or printout of the electronic records?
7.	Is there a proper system to ensure that such records are not disposed of or rendered unusable unless permitted by law?
8.	Is it ensured that the backup is taken daily?
9.	Is it ensured that the server on which the backup is maintained is physically located in India?
10.	Has the company intimated the following information to RoC? the name of the service provider, the IP address of the service provider, the location of the service provider (wherever applicable), where the books of account and other books and papers are maintained on the cloud, such address as provided by the service provider, where the service provider is located outside India, the name and address of the person in control of the books of account and other books and papers in India?

Comparison between various Acts

The following table summarises requirements pertaining to the maintenance of books of account per the Companies Act, 2013, Income Tax Act, 1961, and Central Goods and Services Act, 2017.

Sr. No	Particulars	Companies Act, 2013	Income Tax Act, 1961	GST Act, 2017
1	Maintenance	At the registered office. If maintained elsewhere, notice to the Registrar to be given within seven days (Section 128(1))	Where any person carries on business or profession other than specified professions mentioned in Section 44AA(1), then he is required to maintain books of account if income from business or profession exceeds INR 1,20,000 or total sales/turnover/gross receipts exceed INR 10 lakh in any of the three years immediately preceding the previous year. However, in case the Assessee is an individual or HUF, such limits should be read as INR 2,50,000 and INR 25 lakhs respectively. Or where the business or profession is newly set up, the income from the business or profession is likely to exceed the threshold limits.	At the principal place of business (Rule 56 of CGST Rules 2017)
2	Scope of transactions to be recorded	All transactions of registered and branch offices (Section 128(1))	As may enable computation of total income (Sections 44AA(1), 44AA(2))	Production/manufacture, supply, stock of goods, input tax credit, output tax payable/paid, etc. (CGST 2017)
3	Basis of accounting	Accrual basis and double-entry system (Section 128(1))	Cash or Accrual	Not specifically mentioned
4	Intimation requirement if maintained outside registered office	File notice within seven days with the Registrar (Section 128(1))	Not specifically mentioned	Not specifically mentioned
5	Mode of maintenance	Can be maintained in electronic mode as prescribed (Section 128(1))	Not specifically mentioned	As per Section 35(1) and Rule 56(7) of CGST Rules, 2017, the registered person may keep and maintain such accounts and other particulars in electronic form.
6	Branch office compliance	Maintain at branch office; summarized returns to registered office to be sent (Section 128(2))	Not specifically mentioned	As per Section 35(1), where more than one place of business is specified in the certificate of registration, the accounts relating to each place of business shall be kept at such places of business.
7	Retention Period	For eight financial years or all preceding years if less than eight (Section 128(5))	For six years from the end of the relevant assessment year i.e. for a total period of eight previous years (prescribed by rules (Section 44AA(4)))	For at least 72 months (6 years) from the due date of annual return (Section 36 CGST Act 2017)
8	Definition of Books and Papers	Includes books of account, deeds, vouchers, writings, documents, minutes, and registers in paper or electronic form (Section 128(12))	Specific books of account to be maintained for Legal, Medical, Engineering, Architectural, Accountancy, Technical Consultancy, Interior Decoration	Not specifically mentioned
9	Other records included	Receipts and payments, purchases and sales, assets and liabilities, and cost items as prescribed (Section 128(13))	Not specifically mentioned	Manufacture of goods, inward and outward supply, stock of goods, input tax credit, output tax payable and paid, etc. (CGST 2017)

Conclusion:

Digitalisation brings in its wake both solutions and unique challenges. The recent amendments prevent the unique challenges from becoming vulnerabilities and hence, implement stringent measures. Companies and auditors need to adapt to the book keeping in digital age and ensure total compliance with respective applicable laws.

This article, originally submitted to the Bombay Chartered Accountants Society (BCAS), is republished here with permission. We are grateful to BCAS for allowing us to share these insights with a wider audience on our platform.