1.62 - Query

Accounting treatment of expenses incurred
for the benefit of subsidiaries.

A holding company maintains a showroom in India and an office abroad for purposes of promoting the local and export sales and rendering services incidental thereto for its subsidiaries. These offices are maintained solely on behalf and for the benefit of the subsidiary companies. The holding company is acting as a mere agent of the subsidiary companies in maintaining these offices. The entire expenses incurred on the showroom and the office abroad and recovered fully from the subsidiary companies. This expenditure consists of salaries to employees on the rolls of the holding company and working in these offices, contribution to provident and other funds, welfare expenses, rent, repairs and maintenance etc. Proper books and records including vouchers etc. in respect of these transactions have been maintained by the holding company in accordance with Section 209 of the Companies Act and amounts thereof rendered to the subsidiary companies.

In view of the fact that expenses incurred on behalf of the subsidiary companies are fully recovered from them, it is considered that it is not necessary to include figures relating to these transactions in the profit and loss account of the holding company, and so, they are not as such disclosed in the profit and loss account. A note, however, is put in the profit and loss account as given below:

“Profit and Loss Account does not include the following amounts for maintenance of showroom in India and an office abroad (mentioning name of the country) as the transactions are made strictly on behalf of and for the benefit of the participating companies in the group.

Recovered from the companies in the group Rs. ……..
Commission received from :
Subsidiaries Rs. ……..
Others Rs. ……..
Salaries Rs. ……..
Company’s contribution to provident fund Rs. ……..
Other funds Rs. ……..
Welfare expenses Rs. ……..
Rent Rs. ……..
Repairs and Maintenance Rs. ……..
Other expenses Rs. ……..

The commission received from subsidiary companies and others is deducted from the total expenses and net only recovered from the subsidiary companies.

Any surplus or short-fall in recoveries effected from group companies as at the close of any financial year is carried forward to the following year and subsequent recoveries adjusted accordingly”.

It is now proposed to delete this note in view of the fact that expenses and income of these offices pertain to third parties and do not constitute expenses and income of the holding company, since as explained above the holding company merely maintains these offices on behalf of subsidiary companies. Is it strictly necessary to have this note in the accounts? Can this note be eliminated in the profit and loss account of the holding company?

If the opinion is that these transactions relating to third party need not be included in the figures appearing in profit and loss account or disclosed as a note thereon, it may be clarified as to how the following should be dealt with in the holding company’s accounts:

(a) Remuneration paid to employees drawing more than Rs. 36,000/- or Rs. 3000/- p.m. as the case may be employed in the offices maintained for the benefit of subsidiaries.

(b) Expenditure incurred in foreign currency for the office maintained abroad.

(c) Earnings in foreign exchange, if any, that may be included in the note under the item “commission received from subsidiaries and others”.


June 3, 1980

From the facts given by the querist it would appear that the show rooms are being maintained for the benefit of the subsidiaries. The contention that the transactions are being carried out on behalf of the subsidiaries has not been conclusively proved by the details given. In the absence of actual Deed of Agreement between the holding company and its subsidiaries, it is not possible to find out whether the transactions are entered into by holding company as agent of subsidiary companies or not. The fact that the entire expenses are recovered and no service charges in the form of margin to the holding company are recovered may not lead to the legal conclusion that the transactions are being done on behalf of others. It may only mean that these activities are carried on for the benefit of others.

In the above circumstances it will be a better procedure either to continue to give the note or to disclose expenses and recovery in profit and loss account instead of doing away with the note altogether. In view of the above position all the information required in Part I of Schedule VI should be disclosed in the holding company’s accounts.

If however it could legally be contended that the transactions are on behalf of the subsidiaries (which can be said only by proper documentation of agreements and original records) then the note could be dispensed with.

As regards disclosure of salaries above Rs. 3000/- p.m. it would depend upon the documentation and the legal aspect. An employee should necessarily be on a company’s payroll and therefore the disclosure would be made by that company. The fact that with which company the employees will have employer-employee relationship and which company will be liable for various responsibilities under labour laws etc. will also have a material bearing on the issue of disclosure of information about employees.

The expenditure and earnings of foreign exchange will have to be disclosed by the company accountable to the Reserve Bank of India.