2024 (3) TMI 647 - HC - Companies Law

Initiation of prosecution proceedings for the alleged offence of non-copliance with Corporate Social Responsibility (CSR) obligation - Company fall within the purview of section 135 of Companies Act or not - whether the reserves created out of amalgamation (as in this case), can be kept out of Net Worth in the years following the year of amalgamation? - HELD THAT - Corporate social responsibility (CSR) or corporate social impact is a form of international private business self-regulation which aims to contribute to societal goals of a philanthropic, activist, or charitable nature by engaging in, with, or supporting professional service volunteering through pro bono programs, community development, administering monetary grants to non-profit organizations for the public benefit, or to conduct ethically oriented business and investment practices. In the present case the amalgamation took place on 01.04.2008 - All assets, liabilities, properties interest of the Transferee Company was vested into the Transferee Company (petitioner no. 1) vide order dated July 14, 2009 of the Hon ble Court and order dated 09.08.2011 when the other companies (2) merged with the petitioner Company - Thus as per Section 2(57) of the Act. The Company gets the benefit of Section 2(57) of the Act, for the said financial year and not there after (subsequent financial years) - But the Company herein continued filing the Balance Sheet for the subsequent financial years being 2011-2012, 2012-2013, 2013-2014 2014-2015 in this case to take the benefit of amalgamation, year after year, to avoid their corporate social liability for which the case has been initiated by the complainant. There is thus sufficient materials on record making out a prima facie case against the petitioners in respect of the offences alleged, and as such the case is required to be permitted to proceed towards trial. Interference at this stage would amount to abuse of the process of Court. Revision dismissed.

Summary

Issues Involved:
1. Quashing of Proceedings: Whether the proceedings of Complaint Case No. (Comp.) 10 of 2019 should be quashed.
2. Corporate Social Responsibility (CSR) Compliance: Whether the company complied with the provisions of Section 135 read with Section 134(3)(o) of the Companies Act, 2013.
3. Calculation of Net Worth: Whether the reserves created out of amalgamation should be included in the Net Worth calculation for CSR applicability.

Summary:

Quashing of Proceedings:
The petitioners sought to quash the proceedings of Complaint Case No. (Comp.) 10 of 2019 under Section 135 read with Section 134(3)(o) of the Companies Act, 1956, pending before the Learned 2nd Special Court, Calcutta. The Court found sufficient materials on record making out a prima facie case against the petitioners and dismissed the application, allowing the trial to proceed expeditiously.

Corporate Social Responsibility (CSR) Compliance:
The complaint alleged that the company did not comply with the CSR provisions despite having a net worth exceeding the prescribed limit. The company failed to spend any amount on CSR activities or state reasons for not spending in the Board's Report for the financial year 2014-15. The petitioners argued that the net worth was above the threshold due to amalgamation and therefore, CSR provisions were not applicable. However, the Court noted that the company continued to show reserves created out of amalgamation as liabilities in subsequent years to avoid CSR responsibilities, which is not permissible.

Calculation of Net Worth:
The Court examined whether reserves created out of amalgamation could be excluded from the net worth calculation. It was determined that the company could only exclude such reserves in the financial year of the amalgamation, not in subsequent years. The company's continued practice of excluding these reserves in later years to avoid CSR obligations was deemed improper.

Conclusion:
The Court emphasized that the company's conduct to avoid CSR responsibilities by manipulating net worth calculations post-amalgamation is not to be encouraged. The complaint against the company for non-compliance with CSR provisions stands, and the trial will proceed. The revisional application (CRR 1874 of 2019) is dismissed, and all interim orders are vacated.