MCA Imposes ₹28 Lakh Penalty for Inaccurate Financial Reporting by Company

The Ministry of Corporate Affairs (MCA) initiated adjudication proceedings against M/s Pallava Resorts Private Limited for violations under Section 134 of the Companies Act, 2013. The company, registered in Tamil Nadu, faced scrutiny for discrepancies in its financial statements, particularly relating to investments in Oakdale Property Private Limited. The company’s handling of investment provisions and fixed deposits was found inconsistent with Accounting Standards (AS-13) and the requirements of Schedule III of the Companies Act. The MCA found that Pallava Resorts failed to present a true and fair view of its financial affairs from FY 2014-15 to FY 2020-21, leading to penalties under Section 134(8) for both the company and its officers. Despite the company’s defense that its accounting practices adhered to relevant standards, the MCA observed that repeated auditor disclaimers and a lack of corrective action indicated negligence. Consequently, the Registrar of Companies, Chennai, appointed as the Adjudicating Officer, proceeded with penalties against the company and its directors for failing to meet statutory obligations under the Act.

GOVERNMENT OF INDIA
MINISTRY OF CORPORATE AFFAIRS
OFFICE OF REGISTRAR OF COMPANIES, TAMIL NADU, ANDAMAN & NICOBAR ISLANDS, CHENNAI
II FLOOR, C- WING, SHASTRI BHAVAN, 26, HADDOWS ROAD, NUNGAMBAKKAM, CHENNAI- 6

F.NO.ROC/CHN/ PALLAVA/ADJ/S.134/2024 DATE: 26 JUL 2024

ADJUDICATION ORDER UNDER SECTION 134 OF THE COMPANIES ACT, 2013
IN THE MATTER OF M/S. PALLAVA RESORTS PRIVATE LIMITED

1. Appointment of Adjudicating Officer: –

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

2. Company: –

Whereas the company viz M/s. Pallava Resorts Private Limited with CIN: U55101TN2005PTC057933(herein after referred as ‘ company’ or ‘ subject company’) is a registered company with this office under the Companies Act, 1956 having its registered office as per MCA21 Registry at Alasa Pasadena, Flat No. B1, Pt Floor, New No. 44, Old No. 59, Kilpauk, Chennai, Perambur Purasawalkam, Tamil Nadu 600010. The financial & other details of the subject company as available on MCA-21 portal is stated as under:

3. Directors during the period of violation:

4. Section and Penal Provision as per Companies Act, 2013

Section 134. Financial Statement, Board’s Report, etc.

(3) There shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include—

(a) the web address, if any, where annual return referred to in sub-section (3) of section 92 has been placed

(b) number of meetings of the Board;

(c) Directors’ Responsibility Statement;

(5) The Directors’ Responsibility Statement referred to in clause (c) of sub-section (3) shall state that—

(a) in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;

(b) the Directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period;

(8) 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.

5. Issue of Adjudication Notice:

An Inquiry was conducted on the affairs of the company M/s. Pallava Resorts Private Limited U/s 206(4) of the Companies Act, 2013 by an Officer authorized by the Central Government wherein the observations of the Inquiry Officer are as follows:

5.1 It is observed that there are discrepancies with respect to investment on M/s. Oakdale Property Private Limited. The company has shown Rs.2.09 Crores as Investment. As per Balance sheet FY 2012-13, the company has shown diminution in value of Investment as (Rs.20,959,441/-) and has reduced profit & Loss by way of showing provisions of investment. Hence, in FY 2012-13, the company has booked loss by writing off investment of Rs.20,959,441/- on Oakdale Property Private Limited. As per reply of the company the investment was sold to Mr. Vasu Sumesh of Rs,86,81,400/-. The company should have shown the sale value as Other Income in Profit & Loss Statement and the same amount should have been reflected in Cash flow statement. But the company has not done the above. Instead, the company has reversed the provision of investment in Oakdale Property Private Limited to Rs.2.1 Crores which was already written off and shown in Profit & Loss in FY 2012-13. The company has again booked the loss of Rs.1.23 Crores in FY 2018-19 based on sale value and reversal of provision. The carrying value and disposal of investment was not made as per AS-13 in financial year 2018-19. As :72 financial statements do not give a true and fair view of the affairs of the company for the financial year 2018-19, the company has contravened the provision of Section 134(5)(b) of the Companies Act, 2013. Hence, the Company and Officers in default are liable for punishment under Section 134(8) of the Companies Act,2013.

5.2 It is further observed that, Fixed Deposits have been shown as Other Current Assets. According to Schedule III of the Companies Act, 2013 it should be shown as Cash and Cash equivalent, short term loan and non-current investment for long term. As the company has admitted that the fixed deposits with the banks during the financial year 2008-09 have not been closed till date, it is incorrect to show Fixed Deposits as other current assets and it should be shown as Non-current investment as the deposits are held since 2008 till date. As the financial statements do not give a true and fair view of the affairs of the company from FY 2014-15 to FY 2020-21, the company has contravened the provisions of Section 134(5)(b) of the Companies Act, 2013 and hence the company and Officers in default are liable for punishment under Section 134(8) of the Companies Act, 2013.

5.3 It is further observed that the name of the related party and nature of related party relationship where control exists should be disclosed irrespective of whether or not there have been transactions between the related parties. The company has not disclosed the related party transactions as per AS-18. As the financial statements do not give a true and fair view of the affairs of the company with respect to disclosure of the related party transactions, the company has contravened the provision of Section 134(5)(b) of the Companies Act, 2013.Hence, the company and Officers in default are liable for publishment under Section 134(8) of the Companies Act,2013. Hence, no true and fair view so there is violation of Section 134 of the Companies Act,2013.

5.4 It is observed that, the auditor every year has given disclaimer opinion and has qualified and marked emphasis of matter several times. The company has not made any effort to rectify the inconsistencies pointed out by the auditor but instead has provided mere explanations in Director’s report. There has not been a single year where the auditor has given clean report, and it amounts to gross negligence by the board and absence of due diligence. Hence, there is a violation of Section 134 of the Companies Act, 2013 for the FYs 2014-15 to 2020-21 and therefore, the company and every Officer of the company in default are liable for penal action U/s. 134(8) of the Companies Act, 2013.

After that the Adjudicating Authority has issued Notice to the company and its directors vide Notices No.

(a) ROC/CHN/057933/S.134/P.14(ii)/INQUIRY FOLLOW UP/ 2022 &

(b)ROC/CHN/057933/S.134/P.15(ii)/INQUIRYFOLLOWUP/2022

(c)ROC/CHN/057933/S.134/P.16(li)/ INQUIRYFOLLOWUP/2022

(d) ROC/CHN/057933/S.134/P.27/INQUIRY FOLLOW UP/2022 dt 05.07.2023

6. Reply of Company and Directors for Adjudication Notice issued:

6.1 Pursuant to the Adjudication notices dated 05.07.2023, Ms. Pushpam Appalanaidu, Director vides letter dated 22.07:2023 informed that as a prudent measure, the company made provision for investment in Oakdale. This provision for investment has consistently been carried forward since FY 2012-13. It may be noted that there was no write off but only a provision was created. The provision was made to reflect the decline in the value of investment. As the investment has been ultimately transferred to their holding company, the provision in their books has been reversed.

6.2 Further, stated that the Section 134(5)(b) provides for accounting policies and not about disclosure under Schedule III of the Companies Act, 2013. The notice assumes deviation of Schedule III of the Companies Act, 2013 with respect to classification of Fixed Deposits in their Financial Statement and the same cannot be treated as violation as the matter relates to application of accounting policies.

6.3 During the relevant period, the company does not control the composition of Boa’ of Directors of M/s. Inca Watches and Jewellery Private Limited and M/s. Proquest Technologies Private Limited. In relation to both Inca and Proquest, the company do not have any shareholding in any manner and hence question of Significant influence does not arise. Further, the company do not control their business decisions under an agreement with them. Further, at no point of time the company either participated in the financial and/ or operating policy decisions of both Inca and Proquest or have entered into any material inter-company transactions.

6.4 Our Auditors have only reported a factual position in the Disclaimer option issued with the Audit reports for the financial year 2014-15 to 2020-21.The action referred by the Auditors does not related to our company but our holding company, Questnet Enterprises India Private Limited(QNEI).The notice issued with respect to financial years 2014-15 to 2020-21, eight years has since lapsed and with respect to the last of the last financial years, two years has since lapsed.

7. Adjudication Hearing:

The Adjudicating Authority had issued notice for hearing dated 13.02.2024 by fixing the hearing on 20.02.2024. Pursuant to the notice dated 13.02.2024, Shri. G. Srikanth , CA appeared before the Adjudicating Authority on behalf of the company and its directors namely Ms. Applanaidu Pushpam, Shri. Vellandurai Shanmugamurthy and requested to Adjudication may kindly be dropped as the creation of provision , reversal of provision upon sale of investments, and the accounting of loss on sale were strictly in accordance with Accounting Standard-13 on Accounting of Investments . Neither Shri. Kunaseelan Senathirajah nor his authorized representative appeared before the Adjudicating Authority on the said date. Hence, as per Rule 3(8), Companies (Adjudication of Penalties) Rules 2014, the matter is being proceeded with in the absence of such person (ex-parte). Further, it is requested that Adjudication may kindly be dropped as the creation of provision, reversal of provision upon sale of investments, and the accounting of loss on sale were strictly in accordance with Accounting Standard-13 on Accounting of Investments. Further, Ms. Pushpam Appalanaidu vide letter dated 29.02.2024 submitted additional documents to prove the claim wherein it was mentioned that (i) It can be observed from the Director’s responsibility statement therein that clause (b) of subsection (5) of Section 134 has been duly included in the statement and the Board has followed accounting policies and standards in the matter of accounting of investments.

(ii) The Fixed Deposits was initially opened for a period of 90 days. However, the same was frozen by State Enforcement Authorities. Fixed Deposits is properly classifiable as Current Assets and that the company classified the fixed deposits as ‘Other Current Assets’ because the deposit, having been frozen by State enforcement Authorities, could not be considered as liquid in the nature of Cash or Cash Equivalent. The company had correctly represented the Fixed Assets under Other Current Assets from FY 2011-12 to 2017-18, Further, based on the report of the settlement Commissioner settling the claims and paving the way of accessing the deposits the company had classified the same under Cash and Bank Balances for FY 2018-19.

(iii) The company does not have any participation in the financial and /or operating policy decision of the other two parties in order to fulfill the definition of significant control in AS 18. These are clear from the shareholding pattern of the three companies. Hence, the company has not reported Inca Watches P. Ltd and Proquest Technologies Pvt Ltd as related parties.

(iv) The disclaimer of opinion was necessitated by the impact of the ongoing litigation on other group companies. The directors were indeed taking necessary steps to remove the disclaimer option given by the Auditors and have also been largely successful.

8. Analysis of Non-compliance of the Companies Act, 2013

It is noticed that the carrying value and disposal of investment was not made as per AS-13 in financial year 2018-19. Further, as the company had admitted that the fixed deposits with the banks during the FY 2008-09 have not been closed yet, according to Schedule III of the Companies Act, 2013 it should be shown as non-current investment, Consequently, the financial statements for the FY 2014-15 to 2020-21 do not give a true and fair view of the affairs of the company, the company has contravened the provision of Section 134(5)(b) of the Companies Act, 2013.Hence, the company and Officers in default are liable for publishment under Section 134(8) of the Companies Act,2013. Further, the company has not disclosed the related party transactions as per AS-18 and not made any effort to rectify the inconsistencies pointed out by the auditor, its ‘amount amounts to gross negligence by the Board, thereby violated Section 134 of the Companies Act and the company and Officers in default are liable for publishment under Section 134(8) of the Companies Act,2013

The company being a subsidiary of M/s. Questnet Enterprises India Private Limited, so it does not fall under the definition of small company as per provision of section 2(85) of the companies Act, 2013. Therefore, imposing the provision lesser penalty as per section 446(b) shall not be applicable in this case.

8. Decision

Having considered the facts and circumstances of the case and after taking into account the factors above, it is concluded that the company and its directors have violated Section 134 of the Companies Act,2013 for the FYs 2014-15 to 2020-21.

Accordingly, I am inclined to impose a penalty as prescribed under Sub- Section 8 of Section134 of the Companies Act, 2013. The details of the penalty imposed on the company and officers in default are shown in the table below:

I. FY 2014-15

Therefore, in view of the above said violation, in exercise of the powers vested to the undersigned under Section 454(1) & (3) of the Companies Act, 2013 a penalty of Rs.3,00,000/- (Rupees Three lakhs) is imposed on the company and Rs.50,000/- (Rupees fifty thousand) is imposed on the Officer in default. Totally Rs.4,00,000/- (Rupees Four lakhs) is imposed as penalty for violation of Section 134 of the Companies Act, 2013 for the FY 2014-15.

II. FY 2015-16

Therefore, in view of the above said violation, in exercise of the powers vested to the undersigned under Section 454(1) & (3) of the Companies Act, 2013 a penalty of Rs.3,00,000/- (Rupees Three lakhs) is imposed on the company and Rs.50,000/- (Rupees fifty thousand) is imposed on the Officer in default. Totally Rs.4,00,000/- (Rupees Four lakhs) is imposed as penalty for violation of Section 134 of the Companies Act, 2013 for the FY 2015-16.

III. FY 2016-17

Therefore, in view of the above said violation, in exercise of the powers vested to the undersigned under Section 454(1) & (3) of the Companies Act, 2013 a penalty of Rs.3,00,000/- (Rupees Three lakhs) is imposed on the company and Rs.50,000/- (Rupees Fifty thousand) is imposed on the Officers in default. Totally Rs.4,00,000/- (Rupees Four lakhs) is imposed as penalty for violation of Section 134 of the Companies Act, 2013 for the FY 2016-17.

IV. FY 2017-18

Therefore, in view of the above said violation, in exercise of the powers vested to the undersigned under Section 454(1) & (3) of the Companies Act, 2013 a penalty of Rs.3,00,000/- (Rupees Three lakhs) is imposed on the company and Rs.50,000/- (Rupees Fifty thousand) is imposed on the Officers in default. Totally Rs.4,00,000/- (Rupees four lakhs) is imposed as penalty for violation of Section 134 of the Companies Act, 2013 for the FY 2017-18.

V. FY 2018-19

Therefore, in view of the above said violation, in exercise of the powers vested to the undersigned under Section 454(1) & (3) of the Companies Act, 2013 a penalty of Rs.3,00,000/- (Rupees Three lakhs) is imposed on the company and Rs.50,000/- (Rupees Fifty thousand) is imposed on the Officers in default. Totally Rs.4,00,000/- (Rupees four lakhs) is imposed as penalty for violation of Section 134 of the Companies Act, 2013 for the FY 2018-19.

VI. FY 2019-20

Therefore, in view of the above said violation, in exercise of the powers vested to the undersigned under Section 454(1) & (3) of the Companies Act, 2013 a penalty of Rs.3,00,000/- (Rupees Three lakhs) is imposed on the company and Rs.50,000/- (Rupees Fifty thousand) is imposed on the Officers in default. Totally Rs.4,00,000/- (Rupees four lakhs) is imposed as penalty for violation of Section 134 of the Companies Act, 2013 for the FY 2019-20.

VII. FY 2020-21

Therefore, in view of the above said violation, in exercise of the powers vested to the undersigned under Section 454(1) & (3) of the Companies Act, 2013 a penalty of Rs.3,00,000/- (Rupees Three lakhs) is imposed on the company and Rs.50,000/- (Rupees Fifty thousand) is imposed on the Officers in default. Totally Rs.4,00,000/- (Rupees four lakhs) is imposed as penalty for violation of 134 of the Companies Act, 2013 for the FY 2020-21.

9. The said amount of penalty shall be paid through online by using the website mca.gov.in(Misc. head) within 90 days of receipt of this order, and intimate this office with proof of penalty paid.

10. ‘Whereas Appeal against this order may be filed with the Regional Director (SR), Ministry of Corporate Affairs, 5th Floor, Shastri Bhavan, 26 Haddows Road, Chennai-600006, Tamil Nadu 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 this order. [Section 454(5) & 454(6) of the Act read with Companies (Adjudicating of Penalties) Rules, 2014].

11. Your attention is also invited to section 454(8) of the Act in the event of non-compliance of this order, “(8)(i) Where company fails to comply with the order made under sub­section (3) or sub-section (7), as the case may be within a period of ninety days from the date of the receipt of the copy of the order, the company shall be punishable with fine which shall not be less than twenty five thousand rupees but which may extend to five lakh rupees.

(ii) Where an officer of a company or any other person who is in default fails to comply with the order made under sub-section (3) or sub-section (7), as the case may be within a period of ninety days from the date of the receipt of the copy of the order, such officer shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both,”

(B. SRIKUMAR, ICLS)
REGISTRAR OF COMPANIES
TAMILNADU, CHENNAI.
ADJUDICATING OFFICER