Availing
Security Deposit to cover for non-payment by the buyer is a common practice in
case of companies dealing with continuous supply of goods and services i.e.
cellular services, electricity utilities, gas utilities, 2-3 years
subscription, security deposit in case of medium term lease agreement, companies
dealing with continuous contract for supply of goods, etc.
Section 2 (31) of the
Companies Act, 2013 defines deposits as follows:
“deposit” includes any receipt of money by way of deposit or loan
or in any other form by a company, but does not include such categories of
amount as may be prescribed in consultation with the Reserve Bank of India;
Rule 2
(1) (c) (xii) of Companies (Acceptance of Deposits) Rules, 2014 clarifies that
an amount received in the normal course of business as an advance for the
supply of goods and services accounted for in any manner whatsoever provided
that such advance is appropriated against supply of goods or provision of
services within a period of three hundred and sixty five days from the date of
acceptance of such advance, shall not be treated as Deposit.
The
Ministry vide Companies (Acceptance of Deposits) Amendment Rules, 2016, further
added that following advances also shall not be considered as Deposits:
·
“as an advance towards consideration for
providing future services in the form of a warranty or maintenance contract as
per written agreement or arrangement, if the period for providing such services
does not exceed the period prevalent as per common business practice or five
years, from the date of acceptance of such service whichever is less;
· as an advance received and as allowed by
any sectoral regulator or in accordance with directions of Central or State
Government;
·
as an advance for subscription towards
publication, whether in print or in electronic to be adjusted against receipt
of such publications;"
This
excluded the earnest money deposits, advance allowed by sectoral regulator and 2-3
years subscription to publications. However, it has not excluded security
deposit taken by utilities although allowed by the spectral regulator and
security deposit taken in continuous contracts.
In such
case, a company accepting Security Deposit to secure against non-payment in
case of continuous contracts of more than 365 days will have to consider the
same as deposit and will have to abide by the provision of section 76 read with
section 73 (2) of the Companies Act, 2013.
An
accountant in me would immediately come out with a solution that it is better
to adjust the security deposit against the account of such buyer on annual or
six monthly basis so as to avoid it being considered as Deposit and avoid the
additional compliances under the Companies Act. However, at the same time a tax
guy in me warns that such a book entry adjustment for repayment of security
deposit may lead to non-contravention to section 269T of the Income Tax Act,
1961.
In my
humble opinion, considering the industry practice of taking security deposit to
avoid non-payment in case of continuous contract, the Ministry may consider
proposing an amendment to Companies (Acceptance of Deposits) Rules in following
manner:
"(iv)
in sub-clause (xii),-
(f) as an advance
or security deposit received
and as allowed by any sectoral regulator or in accordance with directions of
Central or State Government;
(g) ….
(h) as an security deposit in case of continuous
contracts to be adjusted against non-payment by the buyer of goods or
services."
