The Registrar of Companies, Pune ("RoC") imposed a penalty of INR 5.03 lakhs on Clairvoyant India Private Limited ("Company") and its directors for failure to constitute a corporate social responsibility ("CSR") committee, under Section 135 of the Companies Act, 2013 ("Act").
Requirement under the law:
1. Section 135(1) of the Act provides that every company having a net worth of Rs. 500 crores or more, or turnover of INR 1000 crore or more, or a net profit of INR 5 crores or more, during the immediately preceding financial year, shall constitute a CSR committee of the board of directors.
2. Section 135(5) of the Act provides that the board of directors of every such company shall ensure that it spends at least 2% of their average net profit of the preceding 3 financial years to undertake CSR activities as per its CSR Policy (which is formulated and recommended by the CSR committee to the Company's board of directors) ("CSR Allocation"). Further, if a company fails to spend the CSR Allocation, they are required to transfer such CSR Allocation to any of the funds specified in Schedule VII of the Act, within 6 months of the expiry of the financial year.
3. Section 135(9) of the Act exempts a company from the requirement of constituting a CSR committee under Section 135(1) where the CSR Allocation to be spent by such company does not exceed INR 50 lakhs and provides that the functions to be performed by the CSR committee can be discharged by the board of directors of such company. Section 135(9) of the Act was inserted vide the Companies (Amendment) Act, 2020, with effect from January 22, 2021.
Brief facts:
The Company earned a net profit of Rs. 6.5 crores in the financial year 2019-2020, and accordingly became liable to constitute a CSR committee in the next financial year, i.e., 2020-2021. However, the Company failed to form a CSR committee, and also failed to spend the CSR Allocation in accordance with Section 135 of the Act. The Company also failed to transfer its required CSR Allocation to any of the funds specified in Schedule VII of the Act, within the stipulated time period.
The Company filed a suo-moto application on May 8, 2023 for adjudication proceedings.
Company's submissions:
1. The Company submitted that during the financial year 2020-2021 and 2021-2022, owing to the pandemic, their business operations were significantly disrupted and overall functioning of the Company was impacted. Consequently, the provisions of Section 135 of the Act were inadvertently misinterpreted to mean that the CSR Allocation is to be calculated based on 'profit after tax' which was INR 4.7 crores for the financial year 2019-2020. They explained that such miscalculations initially led them to believe that the CSR provisions were not triggered for the financial year 2020-2021; and that it only subsequently came to their attention that the net profit to be used for computing their CSR Allocation was INR 6.5 crores.
2. The Company further submitted that their CSR Allocation calculation arrived at only INR 8.9 lakhs, which being below INR 50 lakhs, and in accordance with Section 135(9) of the Act, made the requirement of forming a CSR committee in the financial year 2020-2021 optional. Accordingly, they urged that at the time of default, the requirement for forming a CSR committee did not apply to them.
3. Accordingly, the Company urged the adjudicating officer ("AO") to take a lenient view and charge a minimal penalty for non-compliance with Section 135(5) of the Act.
Decision by the AO:
1. The AO noted that the Company failed to spend its CSR Allocation for the financial year 2020-2021, as per Section 135(5); and also noted that the Company's submission that the requirement to form a CSR committee was optional for them is not tenable, as (i) the provision was only inserted in the Act on September 28, 2020, and was made effective from January 22, 2021; (ii) the Company held its first board meeting for the financial year 2020-2021 on June 16, 2020, and a total of six board meetings were held by the Company before the insertion of Section 135(9) in the Act, i.e., when the mandatory requirement to constitute a CSR committee still applied to the Company; yet, during these board meetings, the Company could not have anticipated that a possible exemption will be provided at a future date. However, no CSR committee was formed.
Further, the AO noted that the management of the Company had changed on December 16, 2021, and since the new management also failed to rectify the earlier non-compliance of provisions of Section 135 of the Act, they would also be liable. The AO also noted that the RoC had issued notices to both the current and the new management but they did not receive any reply from the erstwhile directors or the new directors. Therefore, the old directors were also held to be liable for the non-compliance, along with the new directors.
Therefore, the AO held that the Company's directors liable for violation of Section 135(1) and Section 135(5) and of the Act, and hence, imposed a penalty of INR 5.03 lakhs.
Please find attached a copy of the order.
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