Prism Ltd. has accepted ₹10 lakh as advance towards the supply of goods to certain parties. As per the agreement, the company will supply the goods after two years from the date of deposit. Later on, internal auditors qu

Analysis of Advance Accepted by Prism Ltd. To determine whether the explanation given by the directors of Prism Ltd. is justified, we need to examine the definition of 'deposit' under the Companies Act, 2013, and the Companies (Acceptance of Deposits) Rules, 2014. Relevant Legal Provisions: Section 2(31) of the Companies Act, 2013, read with Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014, defines 'deposit' broadly to include any receipt of money by way of deposit or loan or in any other form by a company. However, it also provides a list of exclusions from this definition. One such exclusion is: "Any amount received in the course of, or for the purposes of, the business of the company as an advance for the supply of goods or provision of services 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." The rule further states that in case of any advance which is subject matter of any legal proceedings before any court of law, the said time limit of three hundred and sixty-five days shall not apply. Application to the Case: In the given scenario: Prism Ltd. accepted ₹10 lakh as an advance for the supply of goods. However, the agreement specifies that the goods will be supplied after two years (i.e., 730 days) from the date of deposit. This period of two years significantly exceeds the maximum permissible period of 365 days for appropriation of such advances to be excluded from the definition of 'deposit'. Conclusion: Considering the legal provisions, the amount of ₹10 lakh accepted by Prism Ltd. as an advance, with a supply period of two years, qualifies as a 'deposit' under the Companies Act, 2013, and the Companies (Acceptance of Deposits) Rules, 2014. The explanation given by the directors that this is required to complete the order does not override the statutory definition and time limit. If the company accepts such amounts, it must comply with all the stringent provisions related to the acceptance of deposits from the public or members, as applicable. Therefore, the internal auditors were justified in qualifying their report, as the company has violated the provisions of the Companies Act, 2013, by treating what is legally a deposit as a mere advance without adhering to deposit regulations.