Companies ActNCLATRulingsTribunal & Appellate

NCLAT orders appellant to constitute CSR Committee finding its net profit exceeding the prescribed threshold

Shri Santosh Meenakshi Textiles Pvt Ltd. vs. Registrar of Companies, Tamil Nadu, Coimbatore

NCLAT holds appellant liable to constitute CSR committee of the Board in terms of Section 135(1) as
the net profit of the company exceeds the threshold limit under Section 135(1) of the Act; prescribes
method for calculation of average net profit for immediately preceding three years for the purpose of
Section 135(5).

The present appeal has been filed by Shri Santosh Meenakshi Textiles Pvt Ltd. (appellant) under
Section 421 of the Companies Act, 2013 against the impugned order of National Company Law
Tribunal, Chennai by which the appellant company is held liable to spend the amount of Corporate
Social Responsibility (CSR) for the FY 2014-15 taking into account only the net profit for the FY
2013-14; the appellant company is held liable to adhere to the other provisions of Section 135 of the
Act and the company is permitted to file an application for revision of financial statement or Board
report after incorporating the information of CSR.

When the appellant filed its financial statement along with Board Report with the ROC, the ROC
observed the same and issued a Show Cause Notice to the Company as to why they have not complied
with Section 135(1), 135(5) and Section 134(3)(o) of the Companies Act, 2013. The appellant filed
Company Petition before the NCLT, Chennai under Section 131 of the Companies Act, 2013 and the
NCLT passed the impugned order wherein it held that – “…… petitioner company is liable to spend
the amount on account of CSR for FY 2014-15 taking into account only the net profit before tax
for the FY 2013-14….”

NCLAT identifies the issue involved as whether the appellant is covered under Section 135(1) of the
Act or not. NCLAT observes that as per the appellant’s own calculation the net profit is
Rs.5,68,70,023/- for the FY 2013-14 which is apparently more than Rs. 5 crores i.e. threshold limited
prescribed under Section 135(1) of the Act. Therefore, the company is covered under Section 135(1)
of the Act and as such appellant was liable to constitute Corporate Social Responsibility Committee of
the Board in the year 2014-15. Section 135(5) of the Act stipulates that Board of every company who
comes under Section 135(1) of the Act shall ensures that the company spends in every year at least
2% of the average net profit of the company made during the three immediately preceding financial
years in pursuance of the CSR. The net profit will be calculated as per Section 198 of the Companies
Act, 2013 and that the profit before tax will be taken as ‘Net Profit’.

Further, NCLAT examines the next issue argued by the appellant that even if it is the company is
deemed to be covered under Section 135(1) of the Act, then also it is not liable to expend any sum
towards CSR in as much since the company had incurred losses in FY 2011-2012 and 2012-13 and
the average net profit calculated for the three FY comes in negative. NCLAT disagrees with the
observations of the NCLT which directed the appellant herein to spend the amount on account of CSR
for the FY 2014-15 taking into account only the net profit before tax for the FY 2013-14 as it is
clearly against the mandate of law that the amount to be spent is to be at least 2% of the average net
profit of the company made during the three immediately preceding financial years in pursuance to its
CSR Policy. NCLAT observes that the calculations submitted by the appellant shows that in the last
three years the company is made a profit of Rs.1,38,69,595/- and average net profit of three years will
come to Rs.46,23, 198/- and further that the company would never be covered under the average net
profit of three preceding years. NCLAT observes that that the appellant has resorted to deducting the
losses twice over to somehow arrives at a negative figure to show that it is not required to spend any
amount on the CSR for the FY 2014-15. NCLAT states that the method of calculation of average net profit for immediately preceding three years as directed by the NCLT will not be applicable. NCLAT
further observes that the company is a defaulter for spending an amount on CSR activities during the
year 2014-15 since company has not constituted the CSR Committee and no proof substantiating the
amount spent by the company on CSR activities has been placed.

NCLAT passes an order modifying the impugned order holding that the appellant is liable to
constitute Corporate Social Responsibility Committee of the Board in terms of Section 135(1) in
2014-15 as net profit of the company in the preceding year was more than Rs.5 crores; and further
prescribes a method of calculation for the purpose of Section 135(5).

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