[Opinion] ROC Penalizes Company and Its Directors for Failing to Meet CSR Obligations
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- Last Updated on 10 December, 2024
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Prof R Balakrishnan – [2024] 169 taxmann.com 132 (Article)
1. Background of the case
M/s. Ingeteam India Private Limited, company based out of Kancheepuram Mambakkam village of Tamil Nadu was penalised for violating the section pertaining to corporate social responsibility (CSR). The company, which crossed the profit threshold was required to spent corporate social responsibility expenditure, failed to meet the CSR obligation for the financial year 2022. The CSR amount of Rs.5,09,148 was not spent within the required timeline, and the unspent amount was not transferred to the designated specified fund also within the stipulated time period of six months. The company transferred the unspent CSR amount much later, subsequently in the month of April 2024 i.e. with a delayed period of 292 days.
The above said violation of the CSR under the Companies Act attracted the penalty, and the penalty was twice the unspent amount upon the company amounting to Rs. 10,18,296. In addition to the above, the three directors of the company were also penalized to an extent of 10% of the unspent amount of CSR i.e. Rs. 50915 each. The penalty levied by the regulator reflects the seriousness of non-compliance with CSR regulations. Let us go through this case in details so that the provisions of CSR could be understood along with the consequences of default and the rationale for the levy of penalty by the regulator.
2. Relevant provisions under the Companies Act 2013 on this matter
The relevant provisions under the Companies Act 2013 is section 135 read with the Companies (Corporate Social Responsibility Policy) Rules 2014 and the relevant extracts are as given below.
| Companies Act 2013 Chapter IX – Company Accounts Section 135 – Corporate Social Responsibility |
|
| Section | Provision |
| 135 (1) | 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 the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more Directors, out of which at least one director shall be an independent director. |
| 135 (5) | The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy. |
| Proviso | Provided that the company shall give preference to the local area and areas around it where it operates, for spending 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 and, unless the unspent amount relates to any ongoing project referred to in sub-section (6), transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year. |
| Proviso | Provided also that if the company spends an amount in excess of the requirements provided under this sub-section, such company may set off such excess amount against the requirement to spend under this sub-section for such number of succeeding financial years and in such manner, as may be prescribed. |
| 135 (6) | Any amount remaining unspent under sub-section (5), pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in pursuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account, and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year. |
| Penalty for default/non-compliance | |
| 118(7) | If a company is in default in complying with the provisions of sub-section (5) or sub-section (6), the company shall be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or one crore rupees, whichever is less, and every officer of the company who is in default shall be liable to a penalty of one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or two lakh rupees, whichever is less. |
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