CORPORATE SOCIAL RESPONSIBILITY UNDER THE COMPANIES ACT, 2013

For conducting its business activities, a company exploits various resources of the society and the environment. Corporate Social Responsibility (CSR) is an act of incorporating the social and environmental concerns into the business model of the company.

CSR is not a voluntary act on part of the company as it has been mandated by provisions of The Companies Act, 2013. According to Section 135 of the Act, every Company meeting the requisite criteria has to mandatorily set up a CSR Committee, formulate a CSR policy, and spend in every financial year at least 2% of the average net profits of the company made during the three immediately preceding financial years toward its CSR activities:

(i) Company having net worth of Rs. 500 Cr or more, or

(ii) Company having turnover of Rs. 1000 Cr or more, or

(iii) Company having net profit of Rs. 5 Cr or more during the immediately preceding financial year

The provisions of CSR would not be applicable on a company where neither of the three criteria- the net worth nor turnover nor the net profit is being met by the company are being fulfilled. The same was held in the matter of Bilfinger Neo Structo Private Limited[1].

Corporate Social Responsibility - 3d render concept of blue arrow pointing to text

Composition of the CSR Committee

  • The Committee shall consist of three or more directors, out of which at least one director shall be an independent director
  • Provided that where a public company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its CSR Committee two or more directors
  • The composition of the CSR Committee has to be disclosed in the Board’s report under section 134(3)

Role of the CSR Committee

  • Formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be undertaken by the company in areas or subject, specified in Schedule VII of the Act
  • Recommend the amount of expenditure to be incurred on the CSR activities
  • Monitor the CSR Policy of the company from time to time.

CSR Policy

The CSR Committee has to formulate and recommend a CSR Policy for the company which shall indicate the activities to be undertaken by the company in areas or subject, specified in Schedule VII of the Act.

The CSR Policy should include the activities relating to the following areas or subject:

  • Eradicating hunger, poverty and malnutrition, promoting health care and sanitation
  • Promotion of education, including special education and employment enhancing vocation skills and livelihood enhancement projects
  • Promotion of gender equality, women empowerment and measures for reducing inequalities faced by socially and economically backward groups
  • Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water
  • Protection, promotion and development of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art
  • Measures for the benefit of armed forces veterans, war widows and their dependents
  • Training to promote rural sports, nationally recognised sports, paralympic sports and olympic sports
  • Contribution to the prime minister’s national relief fund (PM CARES Fund) or any other fund set up by the central government for socio economic development
  • Contribution to incubators funded by Central Government or State Government or any agency
  • Rural development projects
  • Slum area development
  • Disaster management, including relief, rehabilitation and reconstruction activities

The company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities.

Responsibility of the Board in implementation of CSR

  • Take recommendations made by the CSR Committee and approve the CSR Policy for the company
  • Disclose contents of such Policy in its report and also place it on the company’s website, if any
  • Ensure that the activities as are included in CSR Policy of the company are undertaken by the company
  • Ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years in pursuance of its CSR policy
  • Under Section 134 (3)(o), The Board has to specify the details about the policy developed and implemented by the company on CSR initiatives taken during the year

Penalty for violation of CSR provisions

  • For Company: punishment with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 25,00,000
  • For Officer in default: punishment with imprisonment for a term which may extend to three years or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5,00,000, or with both

Corrective Measures for violation of CSR provisions

  • If the company has failed to make the necessary CSR disclosures in its Board’s Report, it can by virtue of Section 131, prepare a revised report after obtaining approval of the Tribunal
  • If the company fails to spend the threshold amount toward CSR activities, the Board has to, in its report made under Section 134 (3) (o), specify the reasons for not spending the threshold amount
  • The unspent amount from the threshold limit of 2% has to be transferred by the company to a special account to be opened by the company to be called the Unspent CSR Account, and such amount has to be spent by the company in pursuance of its obligation towards the CSR Policy within a period of 3 years from the date of such transfer
  • The company and its officers can make good the offence by applying for compounding of offence under Section 441 of the Act.

Case Laws

In the recent case of Technicolor India (P.) Ltd. v. Registrar Of Companies[2] the Company met the net profit criteria, U/ s 135 of the Companies Act, 2013, and had a CSR committee but it spent some amount as per the CSR Policy of the Company during the fiscal year 2017-18, which remain below the threshold mentioned in Section 135 (5) of the Act for which a reason was duly provided by the company in its Director’s Report. However it was found that the amount spent on the CSR and associated detail is incorrectly captured in the Director’s report hence the company forwarded an application to NCLT Bangalore. The tribunal allowed the application of the company to revise its report giving liberty to the company to file for compounding under section 441 of the Act.

Alok Pharmaceuticals and Industrial Company Private Limited[3], Rapid Estates Private Limited[4], Avinash Developers Private Limited [5] where This Compounding Application was filed before the Registrar of Companies, Chattisgarh (hereinafter as RoC) and the same has been forwarded to the NCLT, Mumbai along with the RoC Report. The Learned RoC has informed that, this application was filed because the Company has violated the provision of S. 134 (3) (o) of the Companies Act, 2013 (hereinafter as Act) r.w. Rule 8 of Companies (Corporate Social Responsibility Policy) Rules, 2014 wherein the Company fails to give explanation for the non-spending of the CSR amount for the Financial Years 2011-12 to 2013-14 in respective year‟s Director‟s Report.

It has been observed that the compounding of offence in respect of violation of Section 134 (3) (o) for non-disclosure of the CSR policy details in the Board’s Report can be done by forwarding an application under Section 441 of the Act.

In the matters of Pan Asia Logistics India Private Limited[6] K. Anantha Padmanabha Swamy, Member (Judicial):— Under consideration is an Application which has been filed by Petitioner(s) before the Registrar of Companies, Tamil Nadu and Andaman & Nicobar Islands, Chennai, for compounding of the offences committed under Section 135 along with Schedule VII and rule 3 of the Companies (Corporate Social Responsibility Policy) Rules, 2014. These provisions have come into effect from 1 April, 2014. The Deputy Registrar of Companies, along with his Report dated 07.08.2017, has forwarded the Application to the Registry of this Bench, which has been numbered as CA/80/(441)/CB/2017.

2. Brief averments of the application are that the Company is Private Limited Company, it was incorporated on 18.04.2005 under the companies Act, 1956,having its registered office at No. 46 & 48, Ehrlich Labs Building, 2 Floor, Masilamani Road, Balaji Nagar, Royapettah, Chennai-600014.

3. The Petitioners are the Company and its two officers who have filed E-form No. GNL-1 vide dated 12.04.2017 for violation of the provisions of section 135 r/w section 450 of the companies Act, 2013.The offence arose when the Company and its Officers failed to constitute the Corporate Social Responsibility for the Financial Year 2014-2015 and 2015-2016 policy has been formulated and company has comply with discloser related provisions accordingly in the ensuring the financial year 2016-2017.

“As per section 135(1) of the Companies Act, 2013, every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director”

4. The Applicant Company and its directors have, suo moto, submitted that they would like to compound the said offence under section 135 r/w section 450 of the companies Act, 2013and further submitted that the present application is being filed voluntarily for violation of the provisions of section 135 r/w section 450 of the companies Act, 2013 for non-constitution of CSR Committee for the Financial year 2014-2015 and 2015-2016. It is further submitted that for the financial year 2014-2015 and 2015-2016 none of the provisions of section 135 were complied with as the company and its officers were ill informed the applicability of CSR to the company for these years. The applicability of CSR to the company for financial years 2014-2015 and 2015-2016 aroseon the basis of General Circular No. 21/2014 dated 18.06.2014 which extended the applicability of CSR to “three preceding financial years” instated of “any financial year” as originally mentioned in the act and the Rules.

5. The Dy. Registrar vide report dated 07.08.2017 has stated that if any person being the director of the company fails to take all reasonable steps to comply with the provisions of the section 135 r/w 450 of the companies Act, 2013,the company and every officer of the company, who is in default, shall be liable to be punishable with fine which may extend to ten thousand rupees and where the contravention one, with a further fine which may extended to one thousand rupees for very day after first during which the contravention continues.

6. Further, the Deputy Registrar of Companies stated in his report that there is no prosecution pending in relation to the said offence, and his Office has no objection, if the offence is compounded, e-form LNC28 is filed along with compounding Order.

7. Originally the Assistant Registrar of Companies, Tami Nadu, Chennai sent notice dated 20.03.2017 (Annexure A6) pointing out the default under section 134 read with section 134(8) and section 135 read with section 450 of the Companies Act, 2013.In this regard the counsel for petitioner has placed a copy of order dated 23.02.2018 passed in CA/79/(441)/CB/2018 by NCLT, Single Bench, Chennai, where in petitioners were permitted to compound the offence under section 134(3)(o) of the Companies Act, 2013 by imposing penalty of Rs. 1 lakhs each to the Company and its 2 officers (who are petitioners herein).

8. While submitting above, the counsel for petitioner prayed to take lenient view on the ground that this is the first offence committed by them. The ROC Report also conforms the same being the first offence. Therefore, the Application of the company and the officers in default is allowed and the offence is compounded in exercise of the powers conferred under section 441 of the Companies Act, 2013.The fine imposed on the Company and its Directors are given below:

Name of defaulters Period of Default Penalty Pan Asia Logistics India Private Limited 2014-2015 And 2015-2016 1,00,000/- Mr. Siva Kumar Achanta (Managing Director) 2014-2015 And 2015-2016 1,00,000/- Mr. Thirumala Vinjamoori Sreedhar (Whole Time Director) 2014-2015 And 2015-2016 1,00,000/-

9. The Company is directed to remit the penalty from its accounts and the two Directors in default shall pay the penalty from their own resources. The Petitioners shall comply with order within three weeks from the date; the order is uploaded on the website of NCLT. The company is directed to file a copy of this order along with required from with the Registrar of Companies, Chennai, within the stipulated time.

10. Accordingly, the Application No. 80/ (441)/2017 is disposed of. The certified copy of the Order is permitted to be issued to the Petitioner(s) only after deposit of the amount of fine, as per the procedure prescribed,

Shoft Shipyard Private Limited[7], thus it has been observed that the compounding of offence in respect of violation of CSR provisions under Section 135 can be done by forwarding an application under Section 441 of the Act.

The determination of the Quantum of the CSR responsibility can only be ascertained after the finalization of accounts at the close of the Books of Accounts of a particular financial year. As a result, the amount to be contributed for charitable purpose as CSR responsibility can be intimated to the concerned authorities thereafter only i.e. after the finalization of accounts of a particular financial year. The same view has been taken up by the tribunal in the matter of M/s. Hira Power and Steels Limited[8]. The Applicants / Defaulters herein had violated the Provision of S. 134 (3) (o) of the Act. And for the said violation the punishment is provided u/Section 134 (8) of Companies Act, 2013. The Sections which are relevant in this case are as follows:

“S. 134 (3) (o) : There shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year.”

“S. 134 (8): If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.”

11. This Bench has also taken into consideration that, this provision regarding CSR is newly incorporated in the Statute and thereafter number of circulars were issued and as a result of those circulars no clear clarification regarding the provision can be recorded by the Company or its Directors.

The further important argument taken into consideration that, the determination of the Quantum of the CSR responsibility can only be ascertained / quantified after the finalization of accounts at the close of the Books of Accounts of a particular financial year. As a result, the amount to be contributed for charitable purpose as CSR responsibility can be intimated to the concerned authorities thereafter only i.e. after the finalization of accounts of a particular financial year.

12. It is also noticed that the Company had made the default good by constituting the CSR committee and by furnishing declaration in the Director’s Report for the F. Y. 2015-16. 13. On the above facts and circumstances it is noticed that Application made by the Applicants/ Defaulters herein for compounding of offence committed under S. 134 (3) (o) of the Companies Act, 2013, merits consideration, though belatedly the default has been made good.

———————————-

[1] 2019 SCC OnLine NCLT 108, CP No. 54/441/NCLT/MB/MAH/2018

[2] 2020 (7) TMI 423

[3]2018 SCC OnLine NCLT 28915, C.P. No. – 396/441/ND/2018

[4]2018 SCC OnLine NCLT 545, C.P. No. 11/441/ND/2017

[5] 2018 SCC OnLine NCLT 29665, CP No. 2710/441/NCLT/MB/MAH/2018

[6] 2018 SCC OnLine NCLT 11589, CA/80/(441)/CB/2018

[7] 2018 SCC OnLine NCLT 13576, C.P. No. 431(MB)/2017

[8] CP No.: 2707/441/NCLT/MB/MAH/2018

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