2019 (7) TMI 1484 - AT - Companies Law

Expenditure on account of CSR - threshold limit of Net Profit mentioned in Section 135(1) of Companies Act, 2013 - whether the appellant is covered under Section 135(1) of the Act or not?. Constitution of CSR committee for the Board - HELD THAT - Section 135(1) of the Act provides that 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 crores or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility of the Board consisting of three or directors, out of which at least one director shall be as independent director - As per the appellant s own calculation as quoted above the net profit is ₹ 5,68,70,023/- for the FY 2013-14 which is apparently more than ₹ 5 crores i.e. threshold limited prescribed under Section 135(1) of the Act. Therefore, the company is covered under Section 135(1) of the Act. As such Appellant was liable to constitute Corporate Social Responsibility Committee of the Board in the year 2014-15. Expend sum towards CSR - it is argued by the appellant that even if it is the company is deemed to be covered under Section 135(1) of the Act, then also it is not liable to expend any sum towards CSR in as much since the company had incurred losses in FY 2011-2012 and 2012-13 and the average net profit calculated for the three FY comes in negative - HELD THAT - The appellant has submitted the calculation at Page 38 (Annexure 1) of the appeal paper book in which net profit for FY 2011-12 is -2,32,31,787/- and for FY 2012-13 is -1,97,68,641 and for FY 2013-14 is ₹ 5,68,70,023/-. Thus in the last three years the company is made a profit of ₹ 1,38,69,595/- and average net profit of three years will come to ₹ 46,23, 198/- - The method of calculation of average net profit for immediately preceding three years as discussed is applicable - The company is liable to spend money towards CSR. The appellant was liable to constitute Corporate Social Responsibility Committee of the Board in terms of Section 135(1) in 2014-15 as net profit of the company in the preceding year was more than ₹ 5 crores - Appeal disposed off.

Summary

Issues Involved:
1. Applicability of Section 135(1) of the Companies Act, 2013 to the appellant company.
2. Calculation of net profit for the purpose of Corporate Social Responsibility (CSR) spending under Section 135(5).
3. Compliance with CSR provisions and constitution of CSR Committee.
4. Revision of financial statements or Board’s report incorporating CSR information.

Issue-wise Detailed Analysis:

1. Applicability of Section 135(1) of the Companies Act, 2013:
The appellant argued that the threshold limit of net profit in Section 135(1) is profit after tax, and thus, the provisions of CSR are not attracted. They contended that since their average net profit for the three preceding financial years was negative, they were not obligated to spend on CSR. The Tribunal, however, held that the net profit before tax for FY 2013-14 was ?5,68,70,023/-, which exceeds the ?5 crore threshold. Therefore, the company was covered under Section 135(1) and was required to constitute a CSR Committee.

2. Calculation of Net Profit for CSR Spending:
The appellant claimed that the calculation of net profit should be as per Rule 2(f) of the Companies (CSR Policy) Rules, 2014, which considers profit after tax. The respondent countered that the net profit should be calculated as per Section 198 of the Companies Act, 2013, which considers profit before tax. The Tribunal agreed with the respondent, stating that the net profit before tax for FY 2013-14 should be considered, and the average net profit for the three preceding financial years should be used to determine CSR spending. The Tribunal clarified that the method of calculation should not involve deducting losses from previous years twice to arrive at a negative figure.

3. Compliance with CSR Provisions and Constitution of CSR Committee:
The appellant admitted that they did not constitute a CSR Committee or disclose the CSR policy in their Board report, arguing that the provisions of Section 135 were not applicable. The Tribunal held that the company was required to constitute a CSR Committee in 2014-15 and ensure compliance with CSR provisions, as their net profit before tax for FY 2013-14 was above the threshold limit.

4. Revision of Financial Statements or Board’s Report Incorporating CSR Information:
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. The appellant did not challenge this direction, and the Tribunal did not express any further opinion on this issue, allowing the direction to stand.

Conclusion:
The Tribunal partially modified the impugned order, holding that the appellant was liable to constitute a CSR Committee in 2014-15 and that the method of calculation for CSR spending should be as indicated in the judgment. The appeal was disposed of accordingly, with no costs awarded.