CSR Penalty: RD Waives Director Fines, Reduces Company Penalty for Procedural Errors

The Regional Director, Western Region, modified penalties imposed on Clairvoyant India Private Limited and its directors for violations of Section 135(1) and 135(5) of the Companies Act, 2013, concerning Corporate Social Responsibility (CSR) obligations. The Registrar of Companies, Pune, had initially levied penalties for failing to constitute a CSR committee and for not spending or transferring required CSR funds. The Regional Director reduced the penalty imposed on the company under Section 135(1) from Rs. 2,00,000 to Rs. 42,000, correcting a miscalculation in the default period. Additionally, penalties imposed on directors Baljinder Singh Sabharwal, Bhavna Newle Chopra, and Vikas Bhalla under Section 135(5) were waived, as they were not in office during the default period. The penalty imposed on the company under section 135(5) was confirmed. The Regional Director ordered the company to pay the modified penalties within 90 days and to apply for compounding for non-disclosure of CSR policy in their board report.

BEFORE THE REGIONAL DIRECTOR, WESTERN REGION
MINISTRY OF CORPORATE AFFAIRS, MUMBAI
Order No. 454(5)/Clairvoyant India/135 (1) & (5)/F96021282/2024-25/730 Dated: February 6, 2025

APPEAL UNDER SECTION 454(5) OF COMPANIES ACT, 2013 AGAINST ORDER PASSED FOR OFFENCES COMMITTED UNDER SECTION 135 (1) & (5) OF THE COMPANIES ACT, 2013.

In the matter of CLAIRVOYANT INDIA PRIVATE LIMITED & ORS.

…Appellants

ORDER

Appeal under sub-Section (5) of Section 454 of the Companies Act, 2013 (Act) r/w the Companies (Adjudication of Penalties) Rules, 2014 (Rules) have been filed by ‘Clairvoyant India Private Limited’ (Company) having CIN U72200PN2014FTC153250 and, its Officers/Directors, against Order No. RoCP/ ADJ^./ order/CLAIR/135/23-24/30 dated 10/04/2024 (ROC Order) of Registrar of Companies, Pune for violating provisions of Section 135 (1) & (5) of the Act.

2. The appeal lies within the jurisdiction of the Regional Director, Western Region, Ministry of Corporate Affairs, Government of India.

3. The Registrar of Companies, Pune (RoC Pune) vide Adjudication Order dated 10/04/2024 held the Company and its Officers/Directors, who have defaulted liable for penalty under Section 450 of the Act for violation of Section 135(1) of the Act and penalty under Section 135 (7) of the Act for violation of Section 135(5) of the Act for not constituting a Corporate Social Responsibility Committee even though the net profit pursuant to the provisions of Section 198 of the Companies Act, 2013 for the Financial Year ended 31/03/2020 was Rs.6,57,30,409.89 which triggered the limits as specified under Section 135(1) of the Companies Act, 2013. The company also did not disclose the same in Board’s Report for the year 2020-21, failed to spend the CSR amount by 31/03/2021 and also failed to transfer the unspent amount to one of the specified funds by 30/09/2021 as per Section 135(5) of the Companies Act, 2013.

a. Penalty imposed by RoC Pune in Adjudication Order dt.10/04/2024 for violation of sub-Section (1) of Section 135 read with Section 450:

Date of default is considered from 01/04/2020 to 21/01/2021. Penalty on the old management will be levied separately.

b. Penalty imposed by RoC Pune in Adjudication Order dt.10/04/2024 for violation of sub-Section (5) of Section 135 read with Section 135(7):

Date of default is considered from 01/10/2021 to 13/09/2022 as 14/09/2022 is the date on which the amount was transferred to Prime Minister National Relief Fund. Penalty is levied on management w.e.f. 16/12/2021.

4. The punishment for contravention of Section 135 (1) is prescribed under Section 450 of the Act and punishment for contravention of Section 135 (5) is prescribed under Section 135(7) of the Act which states that-

“Section 450: f 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 liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, 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.” {Notified w.e.f. 20/12/2020 vide Companies (Amendment) Act, 2020)

“Section 135(7): If a company is in default in complying with the provisions of sub-section ( 5 ) or sub section ( 6), the company shall be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or one crore rupees, whichever is less, and every officer of the company who is in default shall be liable to a penalty of one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or two lakh rupees, whichever is less.” (Notified w.e.f. 21/01/2021 vide Companies (Amendment) Act, 2020)

5. Appellants have filed Form-ADJ vide SRN F96021282 dt. 08/06/2024. As per provisions of sub-Section (6) of Section 454, every appeal under sub-Section (5) shall be filed within sixty (60) days from the date on which the copy of the order made by the adjudicating officer is received by the aggrieved person. On examination of the application/appeal, it is seen that the said application/appeal has been filed within 60 days from the date of passing of the adjudication order dated 10/04/2024.

6. Grounds of Appeal & Relief sought:

a. With the insertion of sub-Section (9) of Section 135 of the Act, by the Companies (Amendment) Act, 2020 vide notification dt.28/09/2020 effective from 22/01/2021, the provisions of Section 135(1) ceased to apply to Petitioner No.1 on 22/01/2021.

b. Compliance with the provisions of Section 135(1) and 135(5) of the Act were to be made by March 31, 2021 and September 30, 2021 respectively. On both these dates, Petitioner Nos.2, 3 & 4 were not directors of Petitioner No.1. Their respective appointments (all) were made on December 16, 2021.

c. With the change in the management and on realization that the erstwhile directors had not made the statutory contribution to CSR project for the Financial Year and in order to make good the default, the Petitioners acting in good faith contributed the CSR funds of INR 891,311 during the Financial Year 2021-22.

d. To exonerate Vikas Bhalla, Baijinder Singh Sabharwal and Bhavna Newle Chopra from the said Adjudication proceedings since they are not officers in default as per Section 2(60) of the Companies Act, 2013.

e. To order and direct the Respondent (RoC, Pune) not to take strict action against the company and against the directors.

f. To set aside the order of Adjudication passed by RoC, Pune and to waive the penalty completely.

g. For the reasons set out in the Petition, including 100% of the shortfall in CSR obligation in the immediately succeeding Financial Year, the Petitioners having acted in a bona fide manner and in good faith, with the contravention of Section 135(5) of the Act having occurred inadvertently and unintentionally, and being one-time and first-time non-compliance in this regard.

7. The matter was posted for personal hearings on 25/08/2024, 10/09/2024, and finally on 18/12/2024 as per Section 454(5) read with Section 454(7) of the Act. Robert Pavrey, Practicing Company Secretary (PCS), appeared on behalf of Appellants as their authorized representative. The authorized representative reiterated the submission made by the applicants in their application and have admitted the contravention of Section 135 (1) & (5) of the Companies Act, 2013. However, he argued that compliance of provisions of Section 135(1) and 135(5) of the Act were to be made by March 31, 2021 and September 30, 2021 respectively whereas Appellant No. 2, 3 & 4 were appointed on 16/12/2021 i.e. after 31/03/2021 and after finalization of Board’s Report for 2020-21 which was done on 08/11/2021. Therefore, ROC’s Adjudication Order against these 03 directors (new management) appointed w.e.f. 16/12/2021 is incorrect and should be set aside as they were not officers in default as on the cause of action date i.e. 30/09/2021.

He further argued that Companies (Amendment) Act, 2020 for invoking Section 135(7) of the Act should be applied prospectively then during 22/01/2021 to 21/07/2021 (06 months period) the company has no ongoing CSR Projects under Section 135(6) of the Companies Act, 2013 and therefore these directors do not fall under the default period of CSR Expenditure for 2020-21. Therefore, these directors may be exonerated from the adjudicating proceedings. The Learned PCS has stated that the applicant directors have inadvertently applied (suo-moto) for adjudication u/s.135 for 2020-21 in spite of their appointment on 16/12/2021.

He also stated that the provisions of Section 135(1) ceased to apply to Petitioner No.1 on 22/01/2021.

8. RoC, Pune vide letter dt.02/08/ 2024 has stated that since the amount mentioned is unspent CSR amount, which was required to be transferred was kept lying in specified fund under schedule VII till the actual date of transfer which is 14/09/2022. Hence, the new management is also to be held responsible for non-transferring the said amount even after taking control of the management. Accordingly, the penalty levied is appropriate.

9. RoC, Pune vide further letter dt.23/08/2024 has stated that –

a. Pursuant to provisions of Section 135(1) the CSR Committee is to consist of the Members of the Board of Directors who are required to formulate and recommend the CSR policy for the financial year indicating the activities to be undertaken, expenditure to be incurred etc. by the company under CSR and monitor the CSR policy from time to time.

b. Any committee formed at the closure of financial year of on March, 30, 2021 [as argued by the appellant – Ref – Para 4(C)] indicates an absurd argument and defeats the purpose of the CSR provisions.

c. The first Board meeting for FY 2020-2021 was held on 16/06/2020 and before such exemption for non-constitution of CSR committee on 22.01,2021, the Board held 06 (six) Board meetings and no CSR committee was established despite the provisions were applicable during this time. For all these meeting, there is no ways and means to predict that the provisions will not be applicable w.e.f. 22.01.2021 which is a future date. Thus the company and its Director did not seem to contribute to the society through CSR.

d. The Adjudicating Officer while adjudicating the penalty under Section 135(1) r.w. Section 450 of the Act has imposed Rs.2,00,000/- on the company by calculating the period of default from 01/04/2020 to 21/01/2021, whereas the Section 450 of the Act is adjudicable w.e.f. 21/12/2020. Accordingly, the number of days default reduces to 32 days and thus the penalty imposed on the company may be reduced from Rs.2,00,000/- to Rs.42,000/-(Rs.10,000+1000*32= Rs.42,000/-).

e. The new management even if joined the company on 16/12/2021, had the liability of transferring the unspent CSR amount to fund specified in Sch.VII which has been done on 14/09/2022. Thus, for the period from 16/12/2021 to 14/09/2022, the management running the company is in charge of the affairs and in accountable towards complying with the provisions.

f. It is not clear as to what treatment can be given to the unspent CSR amount from 16/12/2021 to 14/09/2022. It can not be left to whims of the Company and Directors as to when to transfer the amount. It is also not submitted as to why the amount then finally transferred in September, 2022 and why not earlier or later.

g. To understand the provisions and the intent of the law in letter and spirit, the clarifications issued by the Ministry vide E-file no.CSR-05/01/2021-CSR-MCA – General Circular No. 14/2021 dated 25th August 2021 are perused and it is understood that the objective of CSR provisions is to involve the corporates as partners in the social development process. It is not a one time/formal act which is expected out of the corporates. They are supposed to be partners in the social development. Social development too is vast subject and requires meticulous planning and execution. That is the reason, a dedicated committee is envisaged in the Act to form a policy and ensure that it is implemented. It is thus clearly established that any willing and duty bound Board of Directors, would haves taken efforts from the beginning of the financial year in which the CSR activities are required to be performed by the company.

h. Any delay over and above the statutorily specified timelines is a delay getting translated into default punishable under Section 135(7) of the Act. Thus, the appellants are liable for the said default from 16.12.2021 till the amount was finally transferred to the fund specified in Sch VII. Thus, penalty levied is submitted to be correct.

i. Company and officers in default may be directed to apply for compounding under Section 441 of the Act for the default committed under Section 134(3)(o) of the Act for non-disclosure of CSR policy and reasons for non-expenditure of CSR amount for FY 2020-21.

10. In response to RoC Pune’s submissions vide letter dt. 23/08/2024, the company has submitted its rejoinder vide mail dt.09/09/ 2024 which is as under:

a. Section 135(1) of Companies Act. 2013 (“Act”) read with rule 5 of the Companies (Corporate Social Responsibility Policy) Rules, 2014, does not specify any timeline for constitution of the CSR committee. Compliance of CSR provisions is to be tested/ determined at the end of the financial year during which CSR provisions are applicable, and therefore the constitution of the CSR committee can be made at any time during the financial year, that is, by 31-03-2021.

b. The stand taken by the Registrar of Companies assumes that the CSR Committee has to be constituted on the very first day of the financial year, that is. April 1. 2020, and if the CSR committee was formed on any day after April 1. 2020, the Company would be in default of Section 135(1) of the Act. This stand in fact will lead to absurd results and is not in line with the provisions of Section 135 of the Act. The Company reiterates its stand that no specific time period has been provided in the Act for constitution of the CSR Committee, and compliance therefore has to be determined at the end of the financial year. Since Section 135(9) was amended prior to the end of the financial year 2020-2021, i.e. on 22-01-2021, the Company was not required to constitute a CSR committee for the financial year 2020-2021.

c. There was no mala-fide intention on part of the Company and accordingly, the order levying penalty on the Company deserves to be set aside.

d. The Company denies the charge that the new management incurred liability to make the CSR contribution as the compliance of Section 135 of the Act is to be determined as on the last date of the financial year in which the CSR contribution is to be made. Pursuant to the amendment of second proviso to sub-Section (5) of Section 135, effective as of 22.01.2021, transfer of unspent amount was permitted to a Fund specified in Schedule VII, within a period of six months from the expiry of the financial year, and therefore the Company and its erstwhile directors had time till 30-09-2021 to transfer the unspent CSR amount. The directors who were on the board as on 30-09-2021 are therefore liable for the default and not directors appointed on or after 01­10-2021. Since all the directors of the new management on whom the penalties are levied were appointed after 30-09-2021, i.e., on 16-12-2021, no penalties can be attached to such new directors and the order of the Registrar of Companies needs to be set aside.

e. Further, the Company would like to put on record, as soon as it was brought to the attention of the new directors that the Company and the old management did not make the CSR contribution, the new directors made a voluntary contribution in a good faith and to observe the spirit of the law.

f. The Company craves leave to refer to settled law in the matter of Section 135 which has held that a default under Section 135(5) is a one-time offence and not a continuing offence.

g. The Hon’ble NCLT Mumbai has passed orders as stated below to the appeal filed under Section 454(5) of the Companies Act, 2013:

*In the matter of GMP Technical Solutions Pvt Lid. (NCLT Mumbai Bench – CP No. 186(MB)/2018) and;

*In the matter of Delta Finochem Private Limited (NCLT Mumbai Bench:C-IV – CP No.: 231/MB/ 2021).

h. In the matter of GMP Technical Solutions Pvt Ltd. (order dated 15 March 2019), the petitioner submitted that the offence of non-compliance with obligations under Section 135 of the Companies Act, 2013 was a one-time offence and not a continuing one. The Hon’ble NCLT Mumbai found merit in this submission and allowed the petition accordingly. Similarly, in the much more recent matter of Delta Finochem Private Limited (order dated 27 January 2023), the petitioner’s plea that the offence was not a continuing one was found to merit consideration and accepted by the Hon’ble NCLT Mumbai.

i. The Company will take steps to make the compounding application for default under Section 134(3)(o) of the Companies Act, 2013 for non-disclosure of CSR Policy and reasons for non-expenditure of CSR amount for FY 2020­-2021.

j. Considering that the offence is a one-time offence and not a continuing offence, the adjudication order against the old management effectively closes this matter. Hence, the Appellate Authority is requested to grant relief to the existing directors from the penalties levied on them.

k. Additionally, as informed to the Appellate Authority at the hearing held on 05-08-2024, the suo moto application by the existing directors was made inadvertently and we request the Appellate Authority to grant relief to the existing directors from the penalties levied on them as they were not the officers in default under Section 135 of the Act.

11. The company replied to further queries of this Directorate vide Letter dt.12/12/2024 which is as under:

a. Towards the end of the Financial Year 2019-20, based on best estimates, the company made an advance tax payment of an aggregate amount of Rs.1,14,50,000/- in various instalments. They further added the advance tax paid was approximately 17% of the profit before tax of Rs.6,57,30,409/-. It was only after the close of the Financial Year that the company realized that the advance tax paid was short and paid self-assessment tax of Rs.57,59,110/-by February 14, 2021.

b. They have also attached copy of Adjudication Order passed by ROC, Pune dt.211 08/2024.

12. Facts of the Case:

a. RoC, Pune has passed two Adjudication Orders in the matter. One is Adjudication Order No. RoCP/ADJ/order/CLAIR/135/ 23-24/30 dated 10/04/2024 against the company and its new management and other is Order No. RoCP/ ADJ/ order/CLAIR/135/ 24/1307 to 1311 dated 21/08/2024 against the old management of the company.

b. On examination of the application/appeal, it is seen that the Adjudication Order was passed by the RoC Pune on the grounds that the Company has failed to constitute the CSR committee, has failed to spend the required CSR amount and has further failed to transfer the unspent CSR amount to a fund specified in Schedule VII within a period of six months of the expiry of the Financial Year 2020-21.

c. The present appeal has been preferred by the company and its new management against Adjudication Order No. Ro CP/ ADJ/ order/CLAIR/ 135/23-24/30 dated 10/04/ 2024.

d. Section 135(9) of the Act stated that “Where the amount to be spent by a company under sub-section (5) does not exceed fifty lakh rupees, the requirement under sub-section (1) for constitution of the Corporate Social Responsibility Committee shall not be applicable and the functions of such Committee provided under this section shall, in such cases, be discharged by the Board of Directors of such company.” As per the Act, the company is not required to constitute the Corporate Social Responsibility Committee of Directors with effect from 22/01/2021 vide Companies (Amendment) Act, 2020.

e. Three directors (of the new management) namely Baljinder Singh Sabharwal, Bhavna Newle Chopra and Vikas Bhalla were appointed on 16/12/2021 and were made liable by RoC Pune in his Adjudication Order dt. 10/04/2024 because the CSR amount of Rs. 8,93,311/- for the F.Y ended 31/03/2021 was not incurred till 13/09/2022. The RoC, Pune vide his further report dt. 23/08/2024 has stated that ‘ the new management, even if joined the company on 16/12/2021, had the liability of transferring the unspent CSR amount to fitnd specified in Sch.VII which has been done on 14/0⁹/₂022. Thus, for the period from 16/12/2021 to 14/09/2022, the management running the company is in charge of the affairs and in accountable towards complying with the provisions’.

f. The Learned PCS has submitted that as per provisions of Section 135(5) of the Act, the amount is required to be spent within 06 months w.e.f. 01/04/2020 or it should be transferred to funds specified under Schedule VII of Companies Act, 2013, as the company was not having ongoing CSR payout. Therefore, question of depositing the unspent amount in ‘Unspent CSR Account’ under Section 135(6) of the Act does not arise. The PCS relied upon the view taken by Hon’ble NCLT in the matter of Delta Finochem Private Limited CP No.: 231/MB/2021 that CSR expenditure for 2014-15 was treated as one time default and not a continuing one.

g. The Applicant’s (Appellants) Representative PCS submitted written submissions vide email dt. 23/12/2024 which is reproduced as under:

“On behalf of our client, Clairvoyant India Private Limited (CIN:1172200PN2014FTC153250) (“Company”) with reference to the hearing held on Wednesday, December 18, 2024 at 4.P.M., please find written submission of the Company, in the matter of appeal against adjudication order passed by the ROC, Pune for alleged offences under section 135 of the Companies Act, 2013 (“Act”).

The Company pleads that Shri Vikas Bhalla, Shri Baljinder Singh Sabharwal and Shrimati Bhavna Newle Chopra, directors of the Company should be exonerated from the said Adjudication proceedings since they were not officers in default as per Section 2 (60) of the Companies Act, 2013 on the date when the offence was committed under section 135(5) of the Act. The compliance of section 135 of the Act is to be determined as on the last date of the financial year (i.e. March 31, 2021) in which the CSR contribution is to be made. Pursuant to the amendment to the second proviso to sub-section (5) of section 135, effective from January 22, 2021, transfer of unspent amount was permitted to a Fund specified in Schedule VII, within a period of six months from the expiry of the financial year, and therefore the Company and its erstwhile directors had time till September 30, 2021 to transfer the unspent CSR amount. The above three directors, namely, Shri Vikas Bhalla, Shri Baljinder Singh Sabharwal and Shrimati Bhavna Newle Chopra, were appointed on the board only on December 16, 2021,and hence did not incur any liability to CSR expenditure to be made in the financial year ended March 31, 2021. The adjudication order passed by the Registrar of Companies, Pune against these directors therefore is liable to be set aside.

This view is supported by the NCLT’s ruling in the Delta Finochem Private Limited case (order passed in CP No.: 231/MB/2021 on January 27, 2023), where it was stated that the failure to make the CSR contribution is a one-time offense and not a continuing one.”

13. Taking into consideration the Adjudication Order dt.10/ 04/2024 of the Registrar of Companies, Pune; submissions made by the Appellants in their application & rejoinders as well as oral submissions of authorized representative during the hearing; further letters of RoC, Pune; this forum is of the view that –

a. The Adjudicating Officer while adjudicating the penalty under sub-Section (1) of Section 135 read with Section 450 of the Act has imposed Rs.2,00,000/-on the company by calculating the period of default from 01/04/2020 to 21/01/2021, whereas the Section 450 of the Act is adjudiciable 21/12/2020. Accordingly, the number of days default reduces to 32 days and thus the penalty imposed on the company is ‘Modified’ under Section 454(7) of the Act from Rs.2,00,000/- to Rs.42,000/- (Rs.10,000+1000*32= Rs.42,000/).

Penalty for violation of sub-Section (1) of Section 135 read with Section 450:

*Date of default is considered from 21/12/2020 to 21/01/2021 (32 days). The ‘modified’ Penalty is Rs.10,000+1000*32= Rs.42,000/-.

b. The penalty imposed on Appellant No.1 for violation of sub-Section (5) of Section 135 read with Section 135(7) is ‘Confirmed’ whereas the penalty imposed on Appellant No.2, 3 Sr 4 is ‘Modified’ under Section 454(7) of the Companies Act, 2013 as these directors who were appointed on 1⁶/₁2/2021 are not officers in default as on the cause of action date i.e. 30/09/2021.

Penalty for violation of sub-Section (5) of Section 135 read with Section 135(7):

14. In view of above, the said appeal /application is hereby disposed off and the appellants are hereby, directed to pay the Adjudication Fees which have been ‘Modified/Confirmed’ by the Regional Director at Para ’13(a) & (b)’ of this order within 90 days from the date of receipt of this order, failing which, Registrar of Companies, Pune, is directed to file prosecution under Section 454(8) of the Companies Act, 2013.

15. The appellants shall also apply for compounding under Section 441 of the Act for the default committed under Section 134(3)(o) of the Act for non-disclosure of CSR policy and reasons for non-expenditure of CSR amount for FY 2020-21

16. The appellants are also directed to submit the proof of payment of penalty imposed upon them (challans) to the Office of Registrar of Companies, Pune, for their record and for further necessary action.

A copy of this order shall be published on the website of the Ministry of Corporate Affairs as per Rules.

Signed and sealed on 06th day of February 2025.

(SANTOSH KUMAR)
REGIONAL DIRECTOR
WESTERN REGION, MUMBAI