Corporate and Other Laws · Accounts of Companies

Books of Account and Financial Year (Section 128 and Section 2(41))

Updated 4 October 2026 · Fact-checked

Section 128 requires every company to keep books of account at its registered office, on accrual basis and double entry, giving a true and fair view. Directors can inspect them, and they must be preserved for at least eight financial years. Financial year is covered by Section 2(41). Answer by stating the provision, applying facts, then concluding.

Understand Books of Account and Financial Year

Books of account are the company's permanent financial record. Financial statements are prepared from them, and the auditor checks them. If the books are weak, the whole accounts and audit chain is weak. That is why the Companies Act, 2013 lays down how they must be kept.

Section 128(1) says every company must prepare and keep, at its registered office, books of account and other relevant books and papers and financial statement for every financial year. They must give a true and fair view of the state of affairs of the company, including its branch offices. They must explain transactions at the registered office and at branches. The books must be kept on the accrual basis and the double entry system.

The Board may decide to keep the books at another place in India. If it does, the company must file a written notice with the Registrar within seven days of the decision, giving the full address of that place. The books may also be kept in electronic mode, in the manner prescribed. The prescribed manner is in the Companies (Accounts) Rules, 2014, so state those details only in general terms unless you are sure of them.

Branches get relief under Section 128(2). If a branch (in India or outside) keeps proper books for its own transactions and sends proper summarised returns periodically to the registered office or the other place, the company is deemed to have complied with sub-section (1).

Section 128(3) gives directors a right to inspect the books during business hours at the registered office or other place in India. For financial information kept outside India, copies must be maintained and produced for inspection by any director, subject to prescribed conditions. Inspection of a subsidiary's books is done only by a person authorised by a Board resolution of the company. Officers and employees must give reasonable assistance (Section 128(4)).

Books must be kept in good order for not less than eight financial years immediately preceding a financial year, along with vouchers (Section 128(5)). If the company is younger than eight years, keep them for all preceding years. If an investigation has been ordered under Chapter XIV, the Central Government may direct a longer period.

Financial year is defined in Section 2(41). In plain words, it is the period ending on 31st March every year, and for a company incorporated on or after 1st January, it is the period ending on 31st March of the following year. A company that is a holding or subsidiary of a company incorporated outside India and needs a different year for consolidation can apply to the Tribunal for a different financial year. Treat the conditions of that exception as a point to verify in your study material.

Key rules to remember

Section 128(1): how books are kept: Registered office + accrual basis + double entry + true and fair view (including branches); These are the core conditions. Books, other relevant papers and the financial statement are all to be kept for every financial year.
Other place in India: Board decision → notice to Registrar within 7 days → full address of the place; The 7 days run from the Board's decision. The notice must be in writing.
Electronic mode: Books and papers may be kept in electronic mode in the prescribed manner; This is a proviso to Section 128(1). The manner is in the rules.
Branch office (Section 128(2)): Proper books at branch + periodic summarised returns to registered office = deemed compliance; Applies to branches in India or outside India.
Inspection (Section 128(3)): Any director can inspect during business hours; subsidiary's books only by a person authorised by Board resolution; Foreign-held financial information: copies must be kept and produced for director inspection, subject to conditions.
Preservation period (Section 128(5)): Not less than 8 financial years immediately preceding a financial year, with vouchers; If the company is under 8 years old, keep all preceding years. Longer period if the Central Government directs after an investigation.
Penalty (Section 128(6)): Fine: minimum ₹50,000, maximum ₹5,00,000; Imposed on the managing director, whole-time director in charge of finance, CFO or other person charged by the Board. Imprisonment was removed by an amendment in 2020.
Financial year (Section 2(41)): Year ending 31st March; company incorporated on or after 1 January: ending 31st March of the following year; A different year is possible for certain companies that are subsidiaries or holding companies of a foreign company, with Tribunal approval.

How to solve Books of Account and Financial Year questions

Most questions on this topic are short case-based questions. Use the same pattern each time: provision, facts, conclusion.

1Read the facts and identify what is being tested: place of keeping, electronic records, branch books, director inspection, retention period, penalty or financial year.
2State the rule of Section 128 (or Section 2(41)) in one or two plain sentences, with the exact condition such as the 7 days or the 8 years.
3Match each fact to the rule. Note dates, who made the decision (Board or management) and where the books are kept.
4Check for an exception or relief: another place in India, electronic mode, branch summarised returns, or Board authorisation for a subsidiary's books.
5Decide whether there is compliance or contravention.
6If there is contravention, state who is liable and the fine range (₹50,000 to ₹5,00,000).
7Write a one-line conclusion that answers the exact question asked.

Quickest way: Trigger-word method for MCQs and short written answers

When to use it: Use this when you have under three minutes for a question, especially MCQs, which carry 1 or 2 marks and have no negative marking.

Spot the number in the question. 7 days means notice to Registrar. 8 years means preservation. ₹50,000 and ₹5,00,000 mean the penalty range.
Spot the place. Registered office is the default. Other place must be in India and needs a Board decision plus notice.
Spot who is acting. A director has inspection rights. For a subsidiary's books, only a Board-authorised person inspects.
Eliminate options that say cash basis, single entry or imprisonment. Books must be accrual and double entry, and imprisonment has been removed.
For written answers, use three labelled lines: Provision, Application, Conclusion. This earns step marks even if the final call is debatable.

Common mistakes in Books of Account and Financial Year

Saying books must always be kept only at the registered office.
Students remember the main rule and miss the first proviso.
Fix: Add that the Board can choose another place in India, and the company must file written notice with the Registrar within 7 days of the decision.
Writing 7 days from the date the books were shifted instead of from the Board decision.
The words are similar and students read them loosely.
Fix: The text says the company files notice within seven days of the decision. Count from the decision.
Stating the retention period as 8 years from the date of the transaction.
Students ignore the wording about preceding financial years.
Fix: Say: books for not less than eight financial years immediately preceding a financial year, with vouchers. For a company under 8 years old, all preceding years.
Still quoting imprisonment as a penalty under Section 128(6).
Old notes and older editions carry the earlier punishment.
Fix: Quote only the fine: not less than ₹50,000 and up to ₹5,00,000. Imprisonment and the 'or both' words were omitted w.e.f. 21 December 2020.
Allowing any director to inspect a subsidiary's books by right.
Students generalise the director's inspection right.
Fix: For a subsidiary, inspection is done only by a person authorised by a resolution of the Board of the company. State this proviso.
Saying a branch must send full books to the registered office every year.
Students confuse branch compliance with consolidation.
Fix: Under Section 128(2), proper books at the branch and periodic summarised returns to the registered office are enough for deemed compliance.

Worked examples

Example 1

The Board of Zenith Ltd. decided on 10 June to keep its books of account at the company's head accounts centre in Pune instead of the registered office in Mumbai. On 25 June the company filed a notice with the Registrar giving the full address. Examine whether the company has complied with Section 128.

Show the solution

Provision: Section 128(1) requires books to be kept at the registered office. The first proviso lets the Board decide that they be kept at another place in India. The company must then file written notice with the Registrar, giving the full address, within seven days of the decision.
Application: Pune is in India, and the Board took the decision, so the place is permissible.
Time check: the decision was on 10 June. Seven days end on 17 June. The notice was filed on 25 June, which is 15 days after the decision.
Conclusion: the shifting itself is allowed, but the notice was filed late. The company has contravened Section 128, and the managing director, whole-time director in charge of finance, CFO or other person charged by the Board is liable to a fine of ₹50,000 to ₹5,00,000.

Answer: Zenith Ltd. was entitled to keep its books in Pune, but it did not file the notice within seven days of the Board's decision. It has contravened Section 128, and the responsible officers face a fine of ₹50,000 to ₹5,00,000.

Example 2

Orbit Ltd. was incorporated 5 years ago. Its Mumbai office has a subsidiary, Orbit Retail Ltd. A director of Orbit Ltd., Mr. Rao, wants to inspect the books of account of Orbit Retail Ltd. without any Board resolution. Separately, the accountant proposes to destroy vouchers older than 3 years. Advise the company.

Show the solution

Inspection: Section 128(3) lets any director inspect the books of the company during business hours. The proviso says inspection of a subsidiary's books is done only by a person authorised by a resolution of the Board of Directors.
Application to Mr. Rao: he is a director of the holding company, but he has no Board authorisation for the subsidiary's books. He cannot inspect them as of right.
Retention: Section 128(5) requires books for not less than eight financial years immediately preceding a financial year, or all preceding years if the company is less than eight years old, with the relevant vouchers.
Application: Orbit Ltd. is 5 years old, so it must keep the books and vouchers for all 5 preceding years. Destroying vouchers older than 3 years would breach the section.
Conclusion: advise the Board to pass a resolution authorising Mr. Rao if inspection is needed, and to retain all vouchers.

Answer: Mr. Rao may inspect the subsidiary's books only if the Board authorises him by resolution. The accountant must not destroy the vouchers, because the company, being 5 years old, must keep books and vouchers for all preceding years.

Exam tips

Memorise four numbers: 7 days, 8 financial years, ₹50,000 and ₹5,00,000. Many MCQs test only these.
In written answers, quote the exact words 'accrual basis' and 'double entry system'. They are easy marks.
When a question mentions a branch, think of Section 128(2) and write 'proper books plus periodic summarised returns'.
For a subsidiary's books, always mention the Board resolution authorising the person. This is a frequent trap.
For penalty, name the persons liable first, then give the fine range. Do not mention imprisonment.

Practice questions from Accounts of Companies

Books of Account and Financial Year in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Books of Account and Financial Year: frequently asked questions

Where must a company keep its books of account under Section 128?

The default place is the registered office. The Board can decide to keep them at another place in India. If it does, the company must file a written notice with the Registrar within seven days of the decision, giving the full address.

Can a company keep books of account in electronic form?

Yes. The proviso to Section 128(1) allows books and other relevant papers to be kept in electronic mode in the manner prescribed. The detailed conditions are in the Companies (Accounts) Rules, so check your study material for them.

For how long must books of account be preserved?

Not less than eight financial years immediately preceding a financial year, along with the relevant vouchers. If the company has existed for less than eight years, keep the books for all the preceding years. The Central Government can direct a longer period if an investigation is ordered under Chapter XIV.

What is the penalty for contravening Section 128?

The managing director, the whole-time director in charge of finance, the CFO or any other person charged by the Board is punishable with a fine of not less than ₹50,000 which may extend to ₹5,00,000. Imprisonment was removed by an amendment effective 21 December 2020.

What is the financial year under Section 2(41)?

It is the year ending on 31st March. For a company incorporated on or after 1 January, it ends on 31st March of the following year. Certain companies that are holding or subsidiary companies of a foreign company may seek a different year from the Tribunal.