Unspent CSR Funds: MCA slaps Rs. 1.08 Cr on Pvt Ltd Company

Unspent CSR Funds-MCA - Pvt Ltd Company-TAXSCAN

The Ministry of Corporate Affairs (MCA) imposes a penalty of Rs. 1.08 crore on a private limited company for failing to utilize its Unspent Corporate Social Responsibility (CSR) funds.

The issue to be decided was whether, according to Section 135(5) of the Companies Act, the board of every company falling under sub-section (1) was mandated to ensure that the company spent a minimum of two percent of the average net profits made during the three immediately preceding financial years on Corporate Social Responsibility (CSR) activities.

Quest Global Engineering Services Private Limited Company lodged an adjudication application on 10:08, 2023, alleging a breach of Section 135 of the Act. The spotlight was then on the company’s Corporate Social Responsibility (CSR) practices for the financial year 2021-22. Upon closer inspection, it became apparent that Quest Global Engineering Services Private Limited was obligated to allocate Rs. 3, 50, 42,538.39 for CSR activities during the specified financial year. However, a mere sum of Rs. 2, 29, 34,000.39 was actually contributed, bringing to light a significant shortfall.

Companies operating under section 135 of the Act were mandated to allocate a minimum of 2% of their average net profits over the last three financial years for Corporate Social Responsibility (CSR) endeavors. This annual expenditure, as outlined in section 135(5), applied to companies that had completed three financial years since incorporation, or for those in the initial years, to the immediately preceding financial years.

Section 135(6) directed companies to transfer any unspent CSR funds, meeting prescribed conditions, within 30 days from the end of the financial year to a designated Unspent Corporate Social Responsibility Account in a scheduled bank. This unspent amount was required to be utilized for CSR purposes within three financial years from the date of transfer. Failure to do so necessitated the transfer of such funds to a specified Fund in Schedule VII.

Non-compliance with these provisions (section 135(5) or section 135(6)) attracted penalties. Companies failing to meet the spending requirements faced a penalty of twice the mandated transfer amount, capped at one crore rupees. Officers in default were subject to penalties of one-tenth of the required transfer amount or two lakh rupees, whichever was less, as stipulated by section 135(7) of the Act.

Pursuant to the adjudication application filed by the company on 10:08.2023, Notice of hearing was sent on 18.09.2023, and a physical hearing was held on 27.09.2023, attended by Mr. Kunjithapadham Jayachandran, practicing company secretary who made submissions on the same lines as provided in the application. The authorized representative was asked to give the details of the utilization of the unspent amount, and the same was submitted by the company on 05.10.2023.

Therefore, having considered the facts and circumstances of the case and the submissions made by the company/director/key managerial personnel through their authorized representative, in view of the above said violation under the provisions of section 135 of the Act, in exercise of the powers vested under Section 454(3) of the Companies Act 2013, a penalty was imposed on the officers Praveen Hegde, Company Secretary, Kishore Rao, Director, Raman Subramanian, Director, Mr. Shrikant Durga Naik, Director.

The company and its directors/key managerial personnel were directed to pay the penalty amount as tabulated above within 90 days from the date of receipt of that Order and file Form INC-28, attaching a copy of the Order and payment challans. In the case of directors, such a penalty amount was required to be paid out of their own funds.

Section 454(8) of the Companies Act, 2013 would be invoked in case of non-compliance with this Order, wherein necessary penal action would be initiated under 454(8)(i) and (ii) of the Companies Act, 2013 against the company and directors/key managerial personnel without further notice in the matter.

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