The Registrar of Companies (RoC) in Coimbatore issued an adjudication order under Section 454 of the Companies Act, 2013, against Adisankara Spinning Mills Pvt Ltd for non-compliance with CSR requirements as per Sections 135(5), 135(4)(a), and 134(3)(o). The company became eligible for CSR spending in FY 2014-15 but failed to allocate the mandated funds and provide adequate reasons in its Board’s Report. The same issues persisted in FY 2015-16, though the company eventually fulfilled its CSR obligations in FY 2016-17. Despite the company’s explanation that it was identifying appropriate projects, RoC found the disclosures insufficient and launched prosecution. The offenses were later decriminalized under amendments in 2019 and 2020, and the case was reclassified as a civil matter. After reviewing the company’s explanations and financial records, RoC determined that the company’s intentions were genuine, and no non-compliance occurred. Consequently, no penalties were imposed for the CSR-related violations.
Considering the fact that the Company has spent the entire CSR amount for the relevant period fully and disclosing the CSR details in Board’s Report in a plain manner, it is clear that the Company has satisfied the substantial provisions of Section 135. However the details in Para 5 of Rule 8 ought to be disclosed in Tabular Form instead of the plain manner as disclosed by the company. It is an established legal principle that a procedural irregularity cannot vitiate a substantial action itself. Whatever non compliances made out in this case are procedural irregularities, which may not attract the same penalty as that of a substantial violation of Section 135. However, since Section 450 mandates a minimum penalty of Rs. 10,000/- for the Company and the Officers in default, the quantum of the penalty cannot be reduced less than the minimum amount.
Hence a penalty of Rs. 10,000/- is imposed on both the Company and the Officer in default, Mr. Chennimalai Gounder Kandaswamy, Managing Director for the non-compliance of Section 135(4)(a) of the Companies Act 2013 read with Rule 8 of Companies (CSR) Rules.
GOVERNMENT OF INDIA
MINISTRY OF CORPORATE AFFAIRS
OFFICE OF THE REGISTRAR OF COMPANIES
TAMILNADU — COIMBATORE
No. 7 A G T BUSINESS PARK, PHASE II,1ST FLOOR,
CIVIL AERODROME POST, COIMBATORE – 641014
e-Mail :[email protected]
Order Ref: ROCCBE/ADJ/135/5944/2024 Date: 30.08.2024
Order for Penalty under Section 454 for violation of Section 135(5), 135(4)(a) and 134(3)(o) of the Companies Act, 2013 read with the Companies (Adjudication of Penalties) Rules, 2014
Company Name: ADISANKARA SPINNING MILLS PRIVATE LIMITED
CIN: U17111TZ1995PTC005944
1. Appointment of Adjudicating Officer:
Ministry of Corporate Affairs vide its Gazette Notification No.A-42011/112/2014-Ad.II dated 24.3.2015 appointed undersigned as Adjudicating Officer in exercise of the powers conferred by the Companies Act, 2013 (hereinafter known as Act) read with Companies (Adjudication of penalties) Rules, 2014 for adjudging penalties under the provisions of this Act.
2. Company:
M/s ADISANKARA SPINNING MILLS PRIVATE LIMITED having CIN U17111TZ1995PTC005944 (Herein after referred to as “the Company”) is a company incorporated under the Companies Act, 1956, and it’s having registered office address at “207, Mangalam Road, Karuvampalayam, Tirupur – 641604, Tirupur District, TamilNadu, India “. Mr. Chennimalai Gounder Kandaswamy has been the Managing Director (Key Managerial Personnel) of the Company from 29/09/1999 to 10/06/2022. Since the period of offence is from 2014-15 to 201617, Mr. Chennimalai Gounder Kandaswamy is the Officer in Default as per section 2(60)(ii) of the Companies Act 2013.
3. Facts of the case:
A. In the Financial Year 2014 – 15, the Company became eligible for CSR spending attracting Section 135 of the Companies Act 2013 as the Net Profit for the previous Financial Year was more than Rs. 5 Crores. Since the Company has not spent any money for CSR activities in that Financial Year, the Company has explained in the Board’s Report that it “is in the process of identifying appropriate eligible CSR projects” as mandated under Section 135(4)(a).
B. In the next Financial Year (2015-16) too, the CSR amount was unspent, and the Company has given the same explanation as in the previous Financial Year in the Board’s Report as mandated by section 134(3)(o). In the Financial Year 2016-17, the Company has spent all the eligible amount in CSR activities. The same was disclosed in the Board’s Report for the Financial Year 2016-17. However, the disclosure was not in the prescribed tabular format as given in Companies (CSR) Rules 2014.
C. Subsequently this Office has launched prosecution (Spl CC. 42/2019) in the Court of Additional District and Sessions Judge I, Coimbatore after issuing necessary Show Cause Notice to the Company and the Officers in default.
D. The alleged violations/non-compliances were committed during the period from 2014-15 and 2016-17. During the said time, these violations were treated as Criminal Offences. Subsequently, these two offences were de-criminalized in Companies Amendment Act, 2019 and Companies Amendment Act, 2020 and became Civil Non Compliances/Defaults to be adjudicated by the Adjudication Authority. It is a well-established legal principle that an offence shall be tried under the penal provisions prevalent at the time of committing the offence.
E. However, the Hon’ble High Court of Madras vide its order dated 12/12/2022 in WP 2735/2017 ordered that the De-criminalization Amendment, being a Beneficial Legislation, can be applied retrospectively for the offences committed prior to the 2019 and 2020 Amendments if punishment is reduced for such offences (in our case; de-criminalized). Hence such de-criminalized Offences are to be adjudicated as Civil Proceedings rather than tried in a Special Court. The subject Company has obtained similar orders from Hon’ble High Court of Madras vide Crl OP 14619/2019 on 19/06/2023 and subsequently the Additional District and Sessions Court, Coimbatore has transferred the cases to the Adjudicating Authority viz Registrar of Companies, Coimbatore.
4. This office has issued Adjudication notices 05.08.2024 to the Company and its directors seeking explanations why (a) Despite falling within the ambit of Corporate Social Responsibility provisions by virtue of the previous year’s Net Profit more than Rs. 5.0 Crores, the Company has neither spent the mandated amount (i.e 2% of average Net Profit of the Company in the preceding three Financial Years) for the Financial Year 2014-15 and nor gave specific reasons for not spending the amount in the Board’s Report, which is a violation of section 135(5) r/w section 134(3)(o) of the Companies Act, 2013;
(b) Though the Company has spent the entire eligible CSR amount (including due in previous Financial Years) in the Financial Year 2016-17, and disclosing the CSR Policy, Spending and other relevant details in the Board’s Report for the Financial Year 2016-17, the Spending and Project Details are not given in detailed Tabular Form as per Para 5(c) of the Annexure as prescribed under Rule 8 of Companies (CSR) Rules 2014. This is a violation of section 135(4)(a) r/w section 134(3)(o) of the Companies Act 2013.
The Company has replied vide its letter dated 14/08/2024 that (a) it has given proper explanation in the Board’s Report for Financial Year 2014-15 for not spending the eligible CSR amount and (b) it has spent all the eligible CSR funds in the Financial Year 2016-17 and has disclosed the necessary details in the Board’s Report for the Financial Year 2016-17 as mandated by the Companies Act 2013.
Provisions of the Companies Act, 2013
5. Sub-Section (4) of Section 135 of the Act provides that,
(4) The Board of every company referred to in sub-section (1) shall,—
(a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any, in such manner as may be prescribed; and
(b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company
6. Second Proviso to Sub-section (5) of Section 135 of the Act states that…
“Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.”
7. Clause (o) of Sub-section (3) of Section 134 of the Act provides that the Board, in its Report shall disclose the details about the policy developed and implemented by the company on Corporate Social Responsibility initiatives taken during the year.
8. Penal Provisions: Section 134(8) states that, “If a company is in default in complying with the provisions of this section, the company shall be liable to a penalty of three lakh rupees and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees”.
9. Section 450: Punishment where no specific penalty or punishment is provided.—If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of on thousand rupees for each day after the first during which the contravention continue, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person.
10. Section 135(4) & (5) does not contain any penal provisions during the period during which the default is made. The amended law provides penal provisions for not transferring the eligible amount to a “separate account”, (which was not envisaged during the commission of the offence) but has no penal provisions for not disclosing the details in Board’s Report in the prescribed format.
SCOPE AND LIMITATIONS OF THIS ADJUDICATION PROCESS:
11. This is an Executive Adjudication Proceeding. It is well settled by Hon’ble Supreme Court of India in Union Of India & Anr vs Cynamide India Ltd. & Anr (10 April, 1987), that “adjudication determines past and present facts and declares rights and liabilities”. The aim of this proceeding is to clearly establish the relevant facts and impose penalty for non-compliance/default as mandated under Companies Act 2013.
This proceeding cannot delve deeper into questions of law except insofar as much needed to establish the non-compliances/defaults committed by the parties and for applying relevant penal provisions.
ORDERS
12. The reply letter sent by the Company was scrutinized. During the Adjudication proceedings, the Company’s Authorized Representative (AR) submitted the Ledger Accounts of CSR Accounts and other documents in support of their claims. All the relevant documents are scrutinized. Two questions are framed to establish the relevant facts and penalties:
a. Whether the Company has given proper explanation in Board’s Report for not spending the mandatory CSR amount as mandated under section 135(5):
(i) Reported Non-Compliance: Despite falling within the ambit of Corporate Social Responsibility provisions by virtue of the previous year’s Net Profit more than Rs. 5.0 Crores, the Company has neither spent the mandated amount (i.e 2% of average Net Profit of the Company in the preceding three Financial Years) for the Financial Year 2014-15 and nor gave specific reasons for not spending the amount in the Board’s Report for the Financial Year 2014-15. This is in non-compliance with Section 135(5) of the Companies Act 2013
(ii) Company’s Averments: The AR has submitted extracts of Financial Statements and ledger accounts related to CSR accounts. He further explained that the Company was willing to spend the eligible CSR amount for the Financial Years 2014-15 and 2015-16. He further averred that since the Company could not identify proper and appropriate CSR Projects, they just postponed the spending. He further explained and shown that the explanation as mandated under section 135(5) read with sec 134(3)(o) is clearly present in Annexure IV of the Board’s Report for the Financial Year 2014-15, which reads, “the Company is in the process of identifying appropriate eligible CSR projects”.
(iii) Observations: The only question to be adjudicated is whether the explanation present in Annexure IV of the Board’s Report for the Financial Year 2014-15, is tenable/proper or not. In order to ensure the genuineness of the explanation, necessary documents like Financial Statements for the Financial Year 2014-15 and Ledger Accounts submitted by the AR were scrutinized. It is observed that an amount of Rs.13,10,000/- was shown as Provision for CSR Spending under the head Short Term Provisions (Current Liabilities). For the FY 2015-16 too, Provision was made for the eligible CSR amount for that year. In the Financial Year 2016-17, the eligible amounts were spent and debited from the Provisions created. This clearly shows that the intention of the Company was to “spend” the eligible amount and hence the explanation given by the Company for not spending the eligible CSR amount viz “the Company is in the process of identifying appropriate eligible CSR projects” holds true and backed by the amount shown in “Short Term Provisions” under the head “Current Liabilities”. Hence the explanation given by the Company in the Board’s Report is proper and fulfils the requirements of Section 135(5) and no non-compliance is found.
(iv) Orders: As no non-compliance is made out in this case, no penalty is imposed.
b. Whether the Company has disclosed CSR related contents in the Board’s Report in the format as prescribed in Companies (CSR) Rules 2014:
(i) Reported Non Compliance: It is stated in the Adjudication Notice that the Company has spent the eligible CSR funds in 2016-17, and necessary disclosures were made in Board’s Report for the Financial Year 2016-17. However, the disclosure is not as per the Tabular Form as prescribed under Rule 8 of Companies (CSR) Rules 2014.
(ii) Company’s Averments: The AR of the Company has submitted that the Company has spent all the eligible CSR amounts, disclosed the CSR spending details necessary disclosures were also made in the Board’s Report as mandated under section 135(4)(a) hence complied with the CSR laws diligently in spirit.
(iii) Observations: On scrutinizing the Board’s Report for the FY 2016-17, it is observed that the Company in Annexure IV of the Board’s report for the FY 2016-17 has disclosed the details of CSR Policy, Amount Eligible etc. However, the amount spent in CSR activities are given plainly and NOT as per the Tabular Column prescribed in Para 5 under Rule 8 of Companies (CSR) Rules 2014. This is in non-compliance with section 135(4)(a) read with Rule 8 of Companies (CSR) Rules 2014. Since there are no specific penal provisions available for non-compliance of 135(4)(a) relating to the disclosure format prescribed under Rule 8, in both the pre-amendment and amended law, Section 450 of the Companies Act 2013 has to be applied for the instant case.
(iv) Orders: Considering the fact that the Company has spent the entire CSR amount for the relevant period fully and disclosing the CSR details in Board’s Report in a plain manner, it is clear that the Company has satisfied the substantial provisions of Section 135. However the details in Para 5 of Rule 8 ought to be disclosed in Tabular Form instead of the plain manner as disclosed by the company. It is an established legal principle that a procedural irregularity cannot vitiate a substantial action itself. Whatever non compliances made out in this case are procedural irregularities, which may not attract the same penalty as that of a substantial violation of Section 135. However, since Section 450 mandates a minimum penalty of Rs. 10,000/- for the Company and the Officers in default, the quantum of the penalty cannot be reduced less than the minimum amount.
Hence a penalty of Rs. 10,000/- is imposed on both the Company and the Officer in default, Mr. Chennimalai Gounder Kandaswamy, Managing Director for the non-compliance of Section 135(4)(a) of the Companies Act 2013 read with Rule 8 of Companies (CSR) Rules.
13. The Penalty imposed shall be paid through the Ministry of Corporate Affairs portal (mca.gov.in under Miscellaneous Fee) only, within a period of ninety days from the date of the receipt of the copy of the order.
14. Appeal, if any against this order may be filed in writing with the Regional Director, Southern Region, Ministry of Corporate Affairs, 5tn floor, Shastri Bhavan, 26, Haddows Road, Chennai — 600 006 within a period of sixty days from the date of receipt of this order, in Form ADJ setting forth the grounds of appeal and shall be accompanied by a certified copy of this order (Section 454 of the Companies Act, 2013 read with the Companies (Adjudicating of Penalties) Rules, 2014).
15. Your attention is also invited to Section 454(8) of the Act regarding consequences of nonpayment of penalty.
16. In terms of the provisions of sub-Rule (9) of Rule 3 of the Companies (Adjudication of Penalties) Rules, 2014, a copy of this order is being sent to the Company and its Directors as mentioned below and Secretary to the Government of India, Ministry of Corporate Affairs, Shastri Bhavan, 5m Floor, A wing, Dr. Rajendra Prasad Road, New Delhi – 110001.
(N VAIRAMUTHU ICLS)
REGISTRAR OF COMPANIES
TAMILNADU, COIMBATORE
