2018 (7) TMI 2027 - Tri - Companies Law

Corporate Social Responsibility (CSR) - failure to set apart an amount for CSR spending - average net profit u/s 135(5) is negative - Approval for revision of Board's Report - applicability of provisions of Section 135 of the Companies Act, 2013 - financial year 2014-15. HELD THAT - The method of calculating the net profit is mentioned in section 198 by which the calculation for arriving at the average net profit is applicable from the FY 2014-15 is also mentioned. It is seen that subsection 4 of section 198 does not mention about taking into account the losses during the financial year prior to the commencement of this Act. However, there is no mention about excluding profit also for calculation of average net profit. In view of this the Tribunal is of the opinion that the petitioner company is liable to spend the amount on account of CSR for the FY 2014-15 taking into account only the net profit before tax for the FY 2013-14. The Company is directed to adhere to the other provisions of section 135 regarding constitution of the Board' s committee on CSR and evolving a policy for implementing the same. Petition disposed off.

Summary

Issues:
1. Interpretation of Corporate Social Responsibility (CSR) provisions under Section 135 of the Companies Act, 2013.
2. Applicability of CSR spending requirements for a Private Limited Company.
3. Compliance with CSR provisions for the financial year 2014-15.
4. Understanding and disclosure of CSR Committee and CSR Policy by the Company.
5. Calculation of average net profit for CSR spending.

Analysis:

1. The Applicant, a Private Limited Company, sought approval to revise its Board's Report for the financial year ended 31.03.2015, contending that the threshold limit of profit in Sec. 135(1) is profit after tax, hence exempting it from CSR provisions. The ROC, Coimbatore disagreed, asserting that the Company should comply with CSR provisions for the financial year 2014-15.

2. The Company argued that it did not understand the new CSR provisions clearly, leading to non-disclosure of CSR Committee and CSR Policy in its Report for the financial year ended 31.03.2015, prompting the petition.

3. The ROC contended that even if the Company falls within the purview of Sec 135(1) of the Companies Act, 2013, the average net profit u/s 135(5) being negative did not exempt it from CSR provisions. The Company's deduction of excess expenditure over income from previous years was found impermissible under the Act, resulting in the Company's net profit for FY 13-14 exceeding the threshold limit in sec 135(1).

4. The Tribunal noted that the Company's net profit for FY 13-14 was above the threshold limit mentioned in sec 135(1) of the Companies Act, 2013, as the method of calculating net profit under section 198 did not exclude losses from previous financial years. The Company was directed to adhere to CSR spending requirements for FY 2014-15 based on the net profit before tax for FY 2013-14 and comply with other provisions of section 135 regarding CSR Committee and policy.

5. The Tribunal permitted the Company to file an application for revision of financial statements or board's report after incorporating CSR information for FY 2014-15 as the financial year fell within the "three preceding financial years," as per section 131 of the Companies Act, 2013. The Company's petition was disposed of with these directions.