Technicolor India (P.) Ltd. v. Registrar Of Companies

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Introduction

M/ s. Technicolor India Private Limited (‘Petitioner’) has filed C.P.No.124 of 2019 u/ s 131 R/ w Section 134 of the Companies Act, 2013 r/ w Rule 77 of the NCLT Rules, 2016, seeking, among other things, to allow the Company to amend the Board’s Report and, in particular, the annexure to the report relating to Corporate Social Responsibility, as well as some other order(s).

Facts

The following are some of the case’s key facts, as stated in the Company Petition, that are important to the matter at hand:

M/s. Technicolor India Private Limited (hereinafter referred to as) was originally incorporated on 06.07.2004 with the Registrar of Companies, Tamilnadu, and later moved its registered office from Tamilnadu to the National Capital of Delhi, and then again from Haryana to Karnataka. The company’s registered office is located at Level 9, Navigator International Tech Park, Whitefield Road, Bangalore – 560 066. The company’s authorised share capital is Rs.70,05,00,000.

The company fulfilled the net profit requirements of Section 135 of the Companies Act 2013 and had a Corporate Social Responsibility (CSR) committee. During the fiscal year 2017-18, the Company invested some money in accordance with its CSR Policy, but it stayed below the threshold set out in Section 135 (5) of the Companies Act. The concerned department misreported the sums spent on CSR in the CSR Annexure to the Directors’ report for the fiscal year ended Company 31st March 2018 as opposed to the amount recorded in the audited financials due to a human error. 

It is reported that the shareholders approved the audited financial statements for the year ended March 31, 2018, including the audited balance sheet as of March 31, 2018, at the annual general meeting held on September 28, 2018. the benefit and loss account, along with the board of directors’ and auditors’ reports The sum spent on CSR and related detail is improperly reported in the annexure to the Director’s report for the fiscal year ended March 31, 2018, as opposed to the amount recorded in the audited financials against CSR operations, and the problem was discovered during the pre-scrutiny stage of filing the audited financials.

As a result, the Board has decided to make it right by filing a suo-moto application under Section 131 ( 1) (b) to correct the error in the Board’s paper. As a result, the Board has granted permission to submit this submission.

Arguments

The Regional Director has filed an affidavit dated December 3rd, 2019, in which he states, among other things: 

On review of the application, it appears that the Petitioner met the net benefit requirements set out in Section 135(1) of the Companies Act 2013 but only had one member on the corporate social responsibility (CSR) committee in 2017-18, which is less than the legislative provision set out in the section. During the fiscal year, the Company invested “any sum as per the Company’s policy remained below the threshold specified in CSR 2017-18 where the Companies Act.

“Where copies of the previous financial statement or report have been sent out to members, delivered to the Registrar, or laid before the company in general meeting, the revisions must be limited to:

 a. The correction in respect to which the previous financial statement or report does not comply with the provisions of Section 129 or section 134;

b. The making of any necessary consequential alteration”.

According to the provisions of the preceding clause, revision must be limited to the alteration of accounts and not the absolution of the offence. The financial statement adjustment is for the purpose of correcting the books, not for the purpose of correcting a breach committed under Section 135 of the Companies Act 2013, for which compounding of the offence is the law of the country.

The shareholders of M/ s. Technicolor India have accepted / adopted the (a) Draft financial statement, according to the statement. b. the report of the board of directors c. draught report for the fiscal year ending March 31, 2018, which was approved at the Board Meeting on September 21, 2018, and which was later submitted to the auditors for their report. According to Section 131(2), “copies of the previous financial statement or report” must be submitted to members, delivered to the Registrar, or laid before the Company in general meetings, but “Draft Previous financial statement or report” is not needed. As a result, the Company’s Board of Directors cannot be prepared.

From the Director’s survey, it is shown that the Company was \sto invest Rs. 1,13,79,802/ – being 2 percent of the average net profit \sof the last three years in the year 2017-18 . However, the Company has invested only Rs. 3,00,240 / – far below the sum prescribed in the \sAct to which no clear explanations have been provided for non-spending, which is expected to be given in the Director’s report u/ s 135 (5) of the companies Act, 2013.

Since the Company has breached the provisions of Section 135 of the Companies Act, 2013, it could be ordered to make good the violation and have the violation aggravated under Section 441 of the Companies Act. for failing to form a CSR Committee with the required number of members and for failing to state the precise reason for not spending the required amount of CSR in the fiscal year 2017-18. Furthermore, under a proposed provision to the Companies Act of 2013, all money left over from the CSR Policy must be stored in a different account. As a result, the Petitioner must adhere to the protocol. In addition, the Petitioner Company has another choice.

The Petitioner Company’s Approved Signatory has filed an Affidavit dated 02.01.2020 in response to the above findings, citing, among other things, the following:

Explanatory notes attached to, or forming part of, any records referred to in sub-clause I to sub-clause (iv) of s. 2 (40) of the Companies Act, 2013 are included in the financial statement (hereinafter the Act). The auditor’s report and the Directors report are expected to be added to the financial statement under sections 134 (2) and 134(3) of the Act, respectively. After securing this Hon’ble Bench’s consent, the Company will file the financial reports along with the amended Directors’ report. 

The Company is expected to file its financial statements in the expanded corporate reporting language, which includes disclosing the volume of CSR spending. The application for revision of the CSR annexure to the directors’ report was made before this bench due to a mismatch of CSR expenditures in the CSR annexure to the directors’ report with the sum reported in the financial statement, which was discovered during the pre-scrutiny period.

In the CSR annexure to the Directors report, the company stated that after the fiscal year ended, the company took steps to co-opt two board members to serve on the CSR Committee. Furthermore, it stated the reasons for not spending the required amount on CSR operations.

“Technicolor is focusing on ground-breaking projects that further amplify the visual arts trend, in which the organisation has both local and global key competencies.” Each project has been meticulously planned, curated, and reviewed by world-class partner NGOs, and will be carried out with the help of volunteers from the Company’s workforce. The execution time for these programmes is higher. As a result of the pilot projects, our CSR spending in 2018-19 would be significantly and many times higher.

According to Section 131 of the Act, either the prior year’s financial reporting or the Directors’ audit will be amended after receiving Tribunal consent. Furthermore, the Company has requested approval to revise the CSR annexure to the Directors’ report, but no other revisions have been requested. And the instant Petition is filed merely for account correction, not to make the offence good as claimed by the Respondent, and Section 135 of the Act is not applicable to the instant case since no financial statement correction is needed.

There is no breach of section 135 of the Act that is being attempted to be remedied by the appeal. The petition’s sole purpose is to obtain approval for a revision of the Directors report, specifically the CSR annexure to the Directors report, in order to ensure that the CSR expense report in the CSR annexure matches and is consistent with the amount disclosed as CSR expenses in the financial statement, in order to comply with Section 134 (3) (o) of the FDCA.

The aim of Section 131 is to include a procedure, which was not available under the previous Companies Act, for revising the financial statement or directors report for any of the previous three financial years if it does not conform with the provisions of Sections 129 or 134 of the Act, after receiving Tribunal approval.

The Office of the Deputy Commissioner of Income-Tax, Bangalore, has reported, among other things, in its letter No. DCIT-C-7 (1) (1) / BLR/ 2019-2020 dated 19.09.2019:

The assessee’s claim was supported by the assessee’s financial statements and Income Tax Return filed with the Department. On November 30, 2018, the Assesse filed the A.Y. 20181-9 Income-Tax Return. The Assessee has claimed Rs. 3,80,240/- as sum expended on CSR under the heading other expenditures in Page 21 of the ITR, according to the return filed by the Assessee.

It’s worth noting that, according to Explanation 2 of Section 37 (1) of the Income Tax Act, the money paid on CSR is not deductible. As a result, the Assessee has disallowed it in the computation of income. The disallowance of Rs. 3,80,240/- in CSR expense can be found on Page 29 of the Income Tax Return. As a result, the money expended on CSR has no effect on business income or income tax liability under the Income Tax Act.

The Department of this office has no objections to the Assessee Company’s appeal.

Mr. Naman G Joshi, PCS for the Petitioner, and Ms. Prema Hatti, Standing Counsel for the ROC, were all heard. We also thoroughly reviewed the parties’ pleadings as well as existing legal provisions.

As previously reported, the instant business petition asks the Tribunal to authorise the Company’s decision to update the Board’s report with particular regard to Corporate Social Responsibility, which is annexed to the Board’s report for the fiscal year ending on March 31, 2018. And the reasons given are due to a discrepancy between the amount spent on CSR as specified therein and the amount listed in the audited financial statements under the subsequent reporting of the activities on which CSR money was spent, prompting: Members’ meeting for the introduction of the new Director’s report on the CSR revision and the filing of the necessary E-form with the Karnataka Register of Companies.

After receiving the Tribunal’s permission, Section 131 of the Companies Act, 2013, empowers the Company to attempt to amend financial statements or reports for any of the three previous financial years by submitting an effective application in prescribed form. As a result, the problem is solely to obtain Tribunal permission to amend the Board’s report, not to pursue any offence compounding, as claimed. Furthermore, the Tribunal has the authority to investigate any matter brought before it, as well as any other concerns that might arise, such as a breach of any Act provisions.

The first issue of corporate responsibility is addressed in Section 135 of the Companies Act, which reads as follows:

’Corporate Social Responsibility.— 

(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 any 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. 

(2) The Board’s report under sub-section 

(3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.

 (3) The Corporate Social Responsibility Committee shall,— 

(a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII;

(b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and (c) monitor the Corporate Social Responsibility Policy of the company from time to time. 

(4) The Board of every company referred to in sub-section 

(1) shall,— (a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any, in such manner as may be prescribed; and (b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company. 

(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, in pursuance of its Corporate Social Responsibility Policy: 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. Explanation.—For the purposes of this section ―average net profit‖ shall be calculated in accordance with the provisions of section 198.’’

As  per  the  above  Section,  if  the  Company  fails  to  spend,  the

requisite amount, the Board in its report should specify the reasons for not spending the amount.

According to the Annual Report on Corporate Social Responsibility (CSR) Activities (Annexure -4) Page 138, in accordance with ‘Section 135 (4) of the Companies Act, 2013 r/w Rule 8 of the Companies (Corporate Social Responsibility Policy) Rules, 2014,’ the following reasons for not spending the required amount are mentioned.

A concise summary of the company’s CSR strategy, including a description of planned projects or programmes and a link to the CSR policy and projects or programmes on the company’s website.

The Company’s CSR policy was created in response to the provisions of Section 135 of the Companies Act, 2013 (Corporate Social Responsibility Policy).

The Composition of the CSR Committee:

Mr. Tim Sarnoff is a member of the Company’s Corporate Social Responsibility Committee.

The company is not required to have an independent director and does not have one. The CSR Committee is in charge of developing and overseeing the Company’s CSR Policy. Following the close of the fiscal year, the Company took action to co-opt two board members to serve on the CSR Committee.

As a result, the Petitioner has met the requirements for requesting a review of the Board’s report in question.

the instant petition is filed in accordance with law and due notice were ordered to the ROC and the Income-Tax Department, and they have also filed respective affidavits as stated supra. Therefore, we are convinced with the reasons furnished by Petitioner to seek the relief as sought for. Therefore, we are inclined allow the application as sought for in the interest of justice, and on the principle of ease of doing business, however, without prejudice to the right(s) of Registrar of Companies to initiate appropriate proceedings, if the Company viofate any provisions of the Companies Act of 2013 and the Rules promulgated under it If the Petitioner believes there has been a mistake, it is therefore free to file an application suo moto seeking to have the violation compounded.

Judgment 

In  the  result  C.P  No. 124/BB/ 2019  1s  disposed   of  with  the following directions:

The Petitioner Company is granted permission to rewrite the Board’s report, as requested, in accordance with Annexure-4, and is directed to comply with all requirements of Section 135 of the Companies Act, 2013, the Company (CSR) Rules, 2014, as amended from time to time, and Rule 77 of the NCLT Rules, 2016.

Summary

In the recent case of Technicolor India (P.) Ltd. v. Registrar Of Companies the Company met the net profit criteria, U/ s 135 of the Companies Act, 2013, and had a CSR committee but it spent some amount as per the CSR Policy of the Company during the fiscal year 2017-18, which remain below the threshold mentioned in Section 135 (5) of the Act for which a reason was duly provided by the company in its Director’s Report. However it was found that the amount spent on the CSR and associated detail is incorrectly captured in the Director’s report hence the company forwarded an application to NCLT Bangalore. The tribunal allowed the application of the company to revise its report giving liberty to the company to file for compounding under section 441 of the Act.

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