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TMI Blog2019 (9) TMI 1161X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 socia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies Act, 2013 is unconstitutional as it is violative of Entries 43 and 44 of List-1 List under the 7th Schedule of the Constitution. Learned counsel for the petitioner has taken this Court to the said entries and has submitted that the provisions contained under Section 135 of the Companies Act, is regulatory in nature and not mandatory. 3. It is also submitted by the counsel for the petitioner that unless a specific authorization under the Constitution is with the respondents, no such law can be enacted. It is also submitted by the counsel for the petitioner that the provisions under Section 135 of the Companies Act is analogous to the imposition of tax. Moreover, the counsel for the petitioner has also submitted that the criteria for applicability of Section 135 of the Companies Act is also ambiguous and has taken this Court to various type of definitions of the term profit , which is referred to in Section 135 read with Section 198 of the Companies Act. The provisions for the calculation of the profit before tax , profit after tax and profit before exceptional and extraordinary items have been referred to. Learned counsel for the petitioner has also referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made effective from 2018 onwards, the same is to be read with Circular No.21/2014 and in fact no retrospectivity has been given to the said circular. Only for the purpose of calculation of average net profit, the earlier years are to be looked into, otherwise, the liability starts with effect from 1st April, 2014 onwards. 7. It is also submitted by counsel for the respondents that the provisions of law cannot be quashed merely because the provisions may be misused by the concerned officer. Even if a wrong show cause notice has been issued, it does not mean that the entire Section deserves to be quashed and set aside. It is also submitted by the counsel for the respondents that the show cause notice which is referred time and again during the course of the arguments has not been finally adjudicated upon by the respondents. It is also submitted by the counsel for the respondents that no error has been committed by the respondents in issuing notice upon the petitioner under Section 134(3) of the Companies Act. Learned counsel for the respondent has also submitted that details of the petitioner company, about their liability has been mentioned in the counter affidavit filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount earmarked for Corporate Social Responsibility activities: Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount. Explanation .-For the purposes of this section average net profit shall be calculated in accordance with the provisions of section 198. (emphasis supplied) 10. Under the Companies Act, 2013, Companies (Corporate Social Responsibilities Policy) Rules, 2014 have been enacted. For ready reference, Rules 2 and 3 thereof are also extracted hereunder:- 2. Definitions. - (1) In these rules, unless the context otherwise requires, (a) Act means the Companies Act, 2013; (b) Annexure means the Annexure appended to these rules; (c) Corporate Social Responsibility (CSR) means and includes but is not limited to (i) Projects or programs relating to activities specified in Schedule VII to the Act; or (ii) Projects or programs relating to activities undertaken by the board of directors of a company (Board) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with the provisions of clause (a) of sub-section (1) of section 381 and section 198 of the Act. (2) Every company which ceases to be a company covered under sub section (1) of section 135 of the Act for three consecutive financial years shall not be required to (a) constitute a CSR Committee; and (b) comply with the provisions contained In sub-section (2) to (5) of the said section, till such time it meets the criteria specified In sub-section (1) of section 135. 11. 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. 12. The applicability of the provisions of Section 135 of the Companies Act is mentioned under sub-Section (1) of Section 135 where 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 immediately preceding financial year shall constitute a Corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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. 16. Moreover, looking to the totality of the circumstances, as pointed out under Section 135 of the Companies Act and looking to their profit and total turnover, the objects sought to be achieved by these provisions has direct nexus with the classification. Hence, 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. 17. Further, looking to the counter affidavit filed by the respondents, particularly para-9, 10 and 18 thereof read as under:- 9) That query no. 4 of frequently asked questions of General Circular no. 1/2016 provides as under: Computation of net profit for section 135 is as per section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be adjudicated upon. We are not going into the merits of the facts, mentioned in the show cause notice or the facts which are referred to in the memo of the writ petition nor we want to refer to the facts which are enumerated in the counter affidavit filed by the respondents so far as, it affects the actual corporate social responsibility in terms of a particular amount. The said show cause notice will be adjudicated upon, by the respondents, in accordance with law. Suffice would it be to say that there are no valid reasons for quashing and setting aside the impugned show cause notice issued under Section 134(3) of the Companies Act at this stage. 21. In view of the aforesaid facts and reasons, 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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