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2019 (9) TMI 1161 - HC - Companies LawConstitutional validity of Corporate social responsibility (CSR) - Vires of Section 135 of the Companies Act, 2013 - Rules 2 and 3(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2013 - whether CSR is analogous to the imposition of tax - various type of definitions of the term profit - validity of circular dated 18.6.18 and its effect as retrospective or prospective - petitioner had also submitted that other Partnership Firms, Sole Proprietorship, Trusts etc. are not brought under the purview of Section 135 of the Companies Act and only the companies are covered, hence the said Section 135 is discriminatory in nature. HELD THAT - It appears from the provisions of the Companies Act, especially Section 135 thereof and also looking to Entries No.43 and 44 of List-I to the 7th Schedule to the Constitution of India, the respondents are vested with power, jurisdiction and authority to enact Section 135 of the Companies Act. Much has been argued by the counsel for the petitioner about the term net profit . - Even if any error is committed by the respondents in the calculation of the net profit and in calculation of the corporate social responsibility, the amount to be spent by the company covered under Section 135, that does not mean that Section 135 deserves to be quashed and set aside. Such errors can be corrected either by the authorities under the Companies Act or by the competent Court. There is vast difference between a Sole Proprietorship and a company. There is vast difference between a Trust and a Company. Trusts, Sole Proprietorship, Partnership Firms etc. cannot be compared to a Company. There is a difference in the liability also. For instance, in Sole Proprietorship, the person who is a sole proprietor, is not a separate legal entity, whereas, in case of companies, they are separate legal entity which can be sued and can sue. - Both the tests of equality have been satisfied and hence there is no distinction at all. Hence, the provision of Section 135 of the Companies Act is not violative of Article 14 of the Constitution of India. Regarding applicability of circular of 2018 - Only for the calculation of the average net profit, the earlier years are to be looked into otherwise, the corporate social responsibility starts with effect from 1st April, 2014. There is no substance in the writ petition and Section 135 of the Companies Act, 2013 is not violative of any of the provisions of the Constitution of India - Similarly, the provisions of Rule 2 and 3(2) of the CSR Rules are not violative either of any of the provisions of the Constitution of India or of any of the provisions of the Companies Act, 2013 - Moreover, the Circular No.21/2014, especially para (v) thereof, is also legally valid and deserves not to be quashed and set aside. Petition dismissed.
Issues Involved:
1. Constitutionality of Section 135 of the Companies Act, 2013. 2. Validity of Rules 2 and 3(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2013. 3. Validity of Para (v) of Circular No. 21/2014. 4. Validity of the clarification issued by the Ministry of Corporate Affairs in Circular No. 1/2016. 5. Validity of the show cause notice dated 24.11.2016 under Section 134(3) of the Companies Act, 2013. Detailed Analysis: 1. Constitutionality of Section 135 of the Companies Act, 2013: The petitioners argued that Section 135 is unconstitutional as it violates Entries 43 and 44 of List-1 under the 7th Schedule of the Constitution, asserting that the provision is regulatory and not mandatory. They also contended that the criteria for applicability of Section 135 are ambiguous, particularly the definitions of 'profit.' The court, however, upheld the constitutionality of Section 135, stating that the respondents have the power, jurisdiction, and authority to enact it. The court emphasized that the classification of companies under Section 135 is reasonable and satisfies the tests of equality, thus not violating Article 14 of the Constitution. 2. Validity of Rules 2 and 3(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2013: The petitioners sought to quash these rules, arguing they are ultra vires Section 135 and inconsistent with the Companies Act. The court found no merit in these arguments, stating that the rules are in line with the provisions of the Companies Act. The court highlighted that any errors in the calculation of net profit or CSR expenditure can be challenged separately, but do not warrant the quashing of the rules themselves. 3. Validity of Para (v) of Circular No. 21/2014: The petitioners argued that this circular, issued by the respondents, should be quashed as it was made operational with retrospective effect. The court clarified that the circular is not retrospective; it merely requires looking at previous years for the calculation of average net profit. The court found no reason to quash the circular, stating it is consistent with the Companies Act. 4. Validity of the clarification issued by the Ministry of Corporate Affairs in Circular No. 1/2016: The petitioners challenged the clarification issued in response to Query No. 4, arguing it should be quashed. The court upheld the clarification, stating it aligns with the provisions of the Companies Act and provides necessary guidance on the computation of net profit for CSR purposes. 5. Validity of the show cause notice dated 24.11.2016 under Section 134(3) of the Companies Act, 2013: The petitioners sought to quash the show cause notice issued under Section 134(3). The court found no reason to quash the notice, stating that the petitioner is at liberty to respond, and the notice will be adjudicated upon in accordance with the law. The court emphasized that the issuance of the notice is within the jurisdiction of the respondents and does not warrant judicial interference at this stage. Conclusion: The court dismissed the writ petition, upholding the constitutionality of Section 135 of the Companies Act, 2013, and the validity of Rules 2 and 3(2) of the CSR Rules, Circular No. 21/2014, and the clarification in Circular No. 1/2016. The show cause notice under Section 134(3) was also deemed valid, with the court stating that it should be adjudicated in accordance with the law.
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