CSR Section 135(5) Violation- MCA Imposes Rs.16.48 Penalty

Ministry of Corporate Affairs (MCA) has recently imposed a penalty on Smith N Smith Chemicals Limited for violating CSR Section 135(5) of the Companies Act, 2013. This section mandates companies to spend at least 2% of their average net profits on Corporate Social Responsibility (CSR) activities. Non-compliance can result in significant penalties. This article aims to dissect the situation surrounding this specific case, providing an in-depth look at the legal aspects, the decision-making process, and the consequences for the board of directors.

Appointment of Adjudicating Officer

The Ministry of Corporate Affairs had earlier appointed the Registrar of Companies, NCT of Delhi & Haryana, as the Adjudicating Officer to judge penalties related to the Companies Act. This sets the stage for the legal proceedings that follow violations, including those related to CSR activities.

The Case Facts

Smith N Smith Chemicals Limited admitted to not meeting their CSR obligations for the Financial Year 2020-21. Although required to spend Rs. 6,86,480.21, they could only meet their obligations by 2023. This delay brought them under scrutiny and led to the issuing of a Show-Cause Notice (SCN).

Arguments and Defense

The company argued that their non-compliance was due to a lack of awareness among the directors, especially as the CSR provisions had recently come into effect for them. They also noted the disruptions caused by the COVID-19 pandemic and requested leniency in the penalty proceedings.

Adjudication Factors

The Adjudicating Officer considered the following:

1. Company’s own admission of the default.
2. The responsibility of the Board as mandated by Section 135(5).
3. The clarification that CSR is a Board-driven process.

Penalty Outcome

Both the company and its directors were levied penalties based on a formula specified under Section 135(7) of the Act. The company faced a penalty of Rs. 13,72,960.42, while each of the four directors were fined Rs. 68,648.02. Total penalty amounted to Rs. 16,47,552.5

Conclusion

The case of Smith N Smith Chemicals Limited serves as a wake-up call for companies and their boards about the importance of adhering to CSR obligations under Section 135(5) of the Companies Act. It also sheds light on the rigorous process followed by the Adjudicating Officer in determining the penalty. Companies should be vigilant about meeting their CSR requirements, as failure to do so can lead to stringent penalties and legal repercussions. Therefore, an understanding of the law, alongside a strong CSR strategy, is imperative for corporate governance.

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Government of India
Ministry of Corporate Affairs,
Office of Registrar of Companies,
NCT of Delhi & Haryana
4th Floor, EFCI Tower, 61, Nehru Place,
New Delhi – 110019

Order of Penalty Pursuant to Section 135 of the Companies Act, 2013 in the Matter of Adjudication of Smith N Smith Chemicals Limited (CIN: U24100DL2013PLC252186)

Order No. ROC/D/Adj Order/Section 135/Smith/3452-3457 Date: 05/09/2023

1. Appointment of Adjudicating Officer : –

Ministry of Corporate Affairs vide its Gazette Notification No. A-42011/112/2014-Ad.II, dated 24.03.2015 appointed Registrar of Companies, NCT of Delhi & Haryana as Adjudicating Officer in exercise of the powers conferred by section 454(1) of the Companies Act, 2013 (hereinafter known as Act) r/w Companies (Adjudication of Penalties) Rules, 2014 for adjudging penalties under the provisions of this Act.

2. Company: –

Whereas the company viz. SMITH N SMITH CHEMICALS LIMITED (herein after known as ‘company’) incorporated under the Companies Act, 1956 having its registered office as per MCA21 Registry at address 4TH & 5TH FLOOR, BLOCK-A, NDM-1, NETAJI SUBHASH PLACE, DELHI, North West, Delhi, 110034, India. The financial & other details of the subject company for immediately preceding F.Y 2021-22. as available on MCA-21 portal is stated as under:

3. Facts about the Case: –

i. This office was in receipt of application on 16.03.2023 (GNL 1 SRN F59634840) wherein the company admitted non-compliance of Section 134(3)(o) and Section 135(5) of the Act. It is stated that in the F.Y. 2019-20, the net profit of the Company exceeded Rs. 5 crores, due to which company was required to spent Rs.6,86,480.21 as part of its CSR obligation during F.Y. 2020-21. That the company could spend Rs. 6,86,500 as the part of its CSR obligation for the F.Y. 2020-21 in PMCARES on 07.02.2023 only.

ii. As per Section 135(5) and 135(6) of the Act, the company was required to spend the entire obligation during the financial year. If a company fails to spend the amount required to be spent under their CSR obligation, the Board shall specify the reasons for not spending in the Board’s report and shall deal with the unspent amount in the following manner:

iii. An SCN was issued on 30.06.2023 in response to which company submitted a reply on 11.08.2023. In its written submission company submitted that out of four directors of the company only one director namely Rajesh Kumar Jindal being an executive director was officer in default and remaining three directors namely Sh. Surinder Kumar Chaudhary, Sh. Neeraj Kumar Jindal and Sh. Piyush Jindal were non-executive directors at the time of default. Hence, non-executive directors may not be treated as officer in default.

iv. In view of submissions made in reply, a hearing in the matter was scheduled for oral submissions on 22.08.2023. Sh. Sumit Kumar, PCS an Authorised representative (AR) of the Company appeared for hearing and submitted as under:

A. The default pertains to the period FY 2020-21 when CSR provisions became applicable to the company for the first time. Therefore, the default took place on account of lack of awareness of the directors.

B. The default actually took place during the Covid period.

C. Subsequently upon realizing the default the company had transferred an amount of Rs. 6.86 lakhs equivalent to the CSR liability to the PM CARES FUND on 07.02.2023.

D. Therefore, AR requested that the aforementioned factors may be kept in mind while levying the penalties. He additionally submitted that penalty should only be levied on Sh. Rajesh Kumar Jindal being an Executive Director.

E. The AR’s attention was drawn towards the provision of Section 135(4) and Section 135(5) which cast an obligation on the Board of the company to ensure compliance of provisions of Section 135 of Companies Act, 2013.

4. Factors considered for adjudication of penalties: –

i. It is undeniable that at the first instance, the company had applied for adjudication on its own, after admitting its default. Further, the plea has been taken by the company that only executive director be taken as officer in default. The plea regarding officer in default is not in alignment with CSR provisions as contained in Section 135 of the Act whereas, the statute casts a clear obligation on the Board to comply with CSR. Section 135 (5) of the Act reads as follows:

135 (5) “The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two percent of the average net profits of the company made during the three immediately preceding financial years or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:

Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities:

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 [and, unless the unspent amount relates to any ongoing project referred to in sub-section (6), transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.

Provided also that if the company spends an amount in excess of the requirements provided under this sub-section, such company may set off such excess amount against the requirement to spend under this sub-section for such number of succeeding financial years and in such manner, as may be prescribed.

ii. A reference may also be made to sl. no. 2.3 of the Frequently Asked Questions (FAQs) on Corporate Social Responsibility (CSR) issued vide General Circular 14/2021 dated 25.08.2021, which reads as under:

iii. Thus, it is clear that section 135 of the Act and rules made thereunder casts an onus on the Board to comply with the provisions. The responsibility inter alia includes that the Board shall not only ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years but shall also satisfy itself regarding the utilisation of the disbursed CSR funds. The Board here refers to all the directors of the company, whether executive or otherwise. It is a trite principle of law that in case the law casts an obligation upon any person/body, the liability in case of default in complying with such obligation would also squarely lie with such person/body. The FAQs issued by the Ministry also unequivocally point out to the same direction that — CSR is a Board driven process.

iv. As regards, the interpretation of section 2(60) of the Act, which defines an officer-in-default is concerned, it may be noted that section 2 begins with the words, “unless the context requires otherwise”. Thus, the principle of ascertaining the officer-in-default on the basis of section 2(60) would only hold good if the concerned provision does not identify the officer-in-default. Once such officer is identifiable under the relevant provision, the general definition of section 2(60) would no longer hold the sway.

v. In view of the aforesaid reasons all the directors as on that relevant date would be liable on account of the failure to discharge an obligation cast upon them by the law.

5. The relevant provisions of the Companies Act, 2013 are as under:

Section 135 (Corporate Social Responsibility)

> (5) “The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years 7 for where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years], in pursuance of its Corporate Social Responsibility Policy:

Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities:

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 [and, unless the unspent amount relates to any ongoing project referred to in sub-section (6), transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year].

Provided also that if the company spends an amount in excess of the requirements provided under this sub-section, such company may set off such excess amount against the requirement to spend under this sub-section for such number of succeeding financial years and in such manner, as may be prescribed.

> (6) Any amount remaining unspent under sub-section (5), pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in pursuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account, and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.

> (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.

Section 2(60) of the Companies Act, 2013

“officer who is in default”, for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:—

(i) whole-time director,.

(ii) key managerial personnel;

(iii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;

(iv) any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;

(v) any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;

(vi) every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance;

6. Adjudication of penalty: –

i. The subject company does not get covered under the purview of small company as defined u/s 2(85) of the Act. Hence, the benefit of section 446B would not be applicable on the company. Penalty under section 135(7) is leviable on the company and all its directors as on the relevant date of default.

ii. Now in exercise of the powers conferred on me vide Notification dated 24th March, 2015 and having considered the reply submitted by the noticee (s) in response to the notice issued on 30.06.2023 and hearing held in the matter on 11.08.2023, I do hereby impose the penalty on the company and its Board of Directors for violation of section 135 (5) of the Companies Act, 2013 r/w Rule 10 of the Companies (Corporate Social Responsibility Policy) Rules, 2014:

7. Order:

a. Names of parties as mentioned in the table above are hereby directed to pay the penalty amount as per column no. ‘TY therein. In case of parties other than company, such amount is required to be paid out of their own funds.

b. The said amount of penalty shall be paid through online by using the website www.mca.gov.in (Misc. head) in favor of “Pay & Accounts Officer, Ministry of Corporate Affairs, New Delhi, within 90 days of receipt of this order, and intimate this office with proof of penalty paid.

c. Appeal against this order may be filed with the Regional Director (NR), Ministry of Corporate Affairs, B-2 Wing, 2nd Floor, Paryavaran Bhawan, CGO Complex, Lodhi Road, New Delhi-110003 within a period of sixty days from the date of receipt of this order, in Form ADJ [available on Ministry website mca.gov.in] setting forth the grounds of appeal and shall be accompanied by a certified copy of the order. [Section 454(5) & 454(6) of the Act read with Companies (Adjudicating of Penalties) Rules, 2014].

d. Your attention is also invited to section 454(8) of the Act in the event of non­compliance of this order.

(Pranay Chaturvedi, ICLS)
(Adjudicating Officer)
Registrar of Companies
NCT of Delhi & Haryana