1.49     Query

Provision of “Losses” of the Subsidiary Companies

In the Books of “Holding Company”

 Our Corporation is a Government Company under Section 617 of the Companies Act, 1956.  This Corporation is having four subsidiary companies at different places.  Out of the four subsidiary companies, only one factory of a subsidiary company conducted operations during the relevant year and the factories of the remaining three companies were still in the “Project Stage”.  The first subsidiary company incurred a loss during the relevant year.

The accounts of the Corporation are subject to audit by the Comptroller and Auditor General of India u/s 619(4) of the Companies Act, 1956.  While auditing the final accounts of the Corporation for the year under aforesaid section, the Comptroller and Auditor General of India raised the following objections:

 “Para 3(xiii)(b) of Part II of Schedule VI requires for provision for losses of Subsidiary Companies.  The reasons of not providing loss of the subsidiary company may please be recorded”.

 The main point arising out of the above is whether the “losses” of the subsidiary company in proportion to the equity share capital of the holding company invested in the subsidiary company should be provided in the books of holding company.  We disagreed with the views of the CAG. Our arguments in this respect are as follows:

 (1)We feel that para (xiii) (b) of Schedule VI to the Companies Act, 1956 requires that where any provision for losses of subsidiary companies has been made in the books of the holding company, then only the “provision for losses of subsidiary companies” should be disclosed separately in the “Profit and Loss Account”.  In this context, we would also like to mention that the Corporation had not made any provision against losses of subsidiary company for the year (in fact this was never the practice in the previous years also) and therefore, the question of showing such loss separately in the “Profit and Loss Account” did not arise at all.  In other words, in our opinion, the Companies Act, 1956 does not make it obligatory for the holding company to provide for “losses” of subsidiary companies in the books.

   (2)In our opinion, a company which is earning “profits”, can make provision for losses of subsidiary companies in its books, if it so desires.  This opinion is based on the reasoning that provision for losses of subsidiary companies in an “appropriation of the profit”.  Since this corporation has itself sustained loss, the question of providing for loss of subsidiary company as “appropriation of profit” does not arise.

 (3)It may  further be added here that this Corporation has already disclosed its interest in its subsidiary companies in the statement prepared under section 212 of the Companies Act, 1956.  Such statement has also been attached with the annual accounts as required by law.  In that statement, it has been very clearly mentioned that the loss of the subsidiary company has not been dealt with in the accounts.  It is felt that such disclosure can be considered proper compliance with the law.

 (4)There have been many cases where the holding companies (whether earning “profits” or incurring “losses”) have not provided for the losses of their subsidiary companies. They have, however, disclosed this fact of non-provision in the statement prepared by these companies under Section 212 of the Companies Act, 1956 which they have attached with their accounts.

            The Committee is requested to please advise us whether the points raised by the CAG are valid.

                                                   Opinion                                                                     September 25, 1978

In the opinion of the Committee, there is no provision in the Companies Act, 1956 which requires a company to make provision in its accounts for the loss sustained by its subsidiary.  Such a provision would be required only if “Consolidated Accounts” are prepared or if the “equity method” of accounting is followed.  Neither of these methods of accounting is required under the Companies Act or accounting practice in the country.

    The provisions of Part II of Schedule VI to the Companies Act, 1956, are only concerned with the disclosure of various items in the Profit and Loss Account and cannot be extended to mean that provision would be made for all items shown therein.  Compliance with this part only requires that if provision is made in the accounts for the loss sustained by the subsidiary, that provision has to be separately shown in the Profit and Loss Account.

 This view is bases on the provisions of Section 212 of the Companies Act which require the accounts of a subsidiary to be attached to the accounts of the holding company and a disclosure by way of note of the profit and loss of subsidiaries not dealt with in the accounts of the holding company.

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