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A. Facts of the Case
1. A company is a non-profit organisation registered under section 25 of the Companies Act, 1956, with the Central Government holding its 100 percent shares. It is presently working under the Department of Scientific and Industrial Research, Ministry of Science & Technology, with the objective to develop, promote and transfer technologies emanating from various national research and development (R&D) institutions. It has been offering the services in improving the manufacturing base in India with innovative technologies and, as per the querist, is acting as an effective catalyst translating innovative research into marketable industrial products. The querist has stated that the company is being used by the Government of India in spreading technical knowledge and providing financial aids to new entrepreneurs. It is also conducting different educational and promotional programmes on behalf of the Government of India. In doing so, the company has been receiving government grants/aids.
2. The company has been licensing indigenous technologies. It has occasionally sold compact disks containing blue print of technologies. But, as per the querist, the sale has not been substantial and did not result in profits.
3. The company had also been entering into transactions of the nature of ‘sale’. It was purchasing ‘Unani’ products from another company, which is using the licensed technology of the company. The product was further sold in market. The querist has stated that the main motto of such trade is to promote its technology and the product produced from the said technology, but it may result into some profit element. The company has, however, stopped these purchase and sale activities in the current year.
4. Since its incorporation, the company has been preparing Income and Expenditure Account. As per the querist, the auditors have stated that they cannot express their opinion in the statutory audit report on the Income and Expenditure Account. The auditors have stated that as per section 227(2) of the Companies Act, 1956, the auditor of the company has to express his opinion on the Balance Sheet and the Profit and Loss Account and any other document declared by the Companies Act to be part of or annexed to the Balance Sheet and the Profit and Loss Account.
5. The querist has further stated that as per clause 117 of the Articles of Association of the company, “at every annual general meeting of the Company held in pursuance of article 58, the Board of Directors of the Company shall lay before the Company a Balance Sheet and Income and Expenditure Account and Profit and Loss Account”, and clause 119 of the Articles of Association prescribes the contents of the Income and Expenditure Account and Profit and Loss Account. Thus, according to the querist, as per the Articles of Association, the company is also required to prepare Income and Expenditure Account.
B. Query
6. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(a) Which financial statement should now be prepared by the company – whether the company should prepare ‘Profit and Loss Account’ or whether it should continue to prepare ‘Income and Expenditure Account’.
(b) Whether there is any violation of or deviation from the Companies Act, 1956 or any Accounting Standard.
C. Points considered by the Committee
7. The Committee, while answering the query, has considered only the issues raised in paragraph 6 above and has not examined any other issue that may arise from the Facts of the Case. From paragraph 5 above, it appears to the Committee that as per its Articles of Association, the company is required to prepare both Income and Expenditure Account and Profit and Loss Account. However, the company is preparing only Income and Expenditure Account.
8. The Committee notes from the Facts of the Case that the company is registered under section 25 of the Companies Act, 1956. The Committee also notes clause 113 of the Articles of Association of the company (separately provided by the querist for the perusal of the Committee) which states as below:
“113. No dividends in any form or shape shall be paid to members so long as the licence granted by the Government of India under Section 25 of the Act remains in force and is not rescinded or withdrawn.”
From the above, the Committee is of the view that the objective of the company is not to earn profits for distribution among its members. The profits earned, if any, will be used for the furtherance of the objectives of the company. The Committee is also of the view that even a not-for-profit organisation may earn profits for its sustenance. Accordingly, even if the company in the present case earns profits, in the view of the Committee, the company is not carrying on business ‘for profit’.
9. The Committee notes section 210(2) of the Companies Act, 1956, which states as below:
“(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 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”.”
From the above, the Committee is of the view that reference to ‘Profit and Loss Account’ in section 227(2) of the Companies Act, 1956, shall be construed, in the case of the present company, as reference to ‘Income and Expenditure Account’. Accordingly, the company should prepare only the Income and Expenditure Account instead of the Profit and Loss Account even though the Articles of Association of the company require preparation of the both.
D. Opinion
10. On the basis of the above, the Committee is of the following opinion on the issues raised by the querist in paragraph 6 above:
(a) The company should prepare Income and Expenditure Account in place of Profit and Loss Account.
(b) Preparation of Income and Expenditure Account in place of Profit and Loss Account by the company, will not tantamount to violation of or deviation from the Companies Act, 1956, or any Accounting Standard.
1Opinion finalised by the Committee on 24.08.2009
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