Companies Act: Section 135 Validated, Show Cause Notice Upheld

The court upheld the constitutionality of Section 135 of the Companies Act, 2013, and the validity of related rules and circulars. The show cause notice issued under Section 134(3) was also deemed valid, with the court dismissing the writ petition challenging these aspects.

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Issues Involved:
1. Constitutionality of Section 135 of the Companies Act, 2013.
2. Validity of Rules 2 and 3(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2013.
3. Validity of Para (v) of Circular No. 21/2014.
4. Validity of the clarification issued by the Ministry of Corporate Affairs in Circular No. 1/2016.
5. Validity of the show cause notice dated 24.11.2016 under Section 134(3) of the Companies Act, 2013.

Detailed Analysis:

1. Constitutionality of Section 135 of the Companies Act, 2013:
The petitioners argued that Section 135 is unconstitutional as it violates Entries 43 and 44 of List-1 under the 7th Schedule of the Constitution, asserting that the provision is regulatory and not mandatory. They also contended that the criteria for applicability of Section 135 are ambiguous, particularly the definitions of 'profit.' The court, however, upheld the constitutionality of Section 135, stating that the respondents have the power, jurisdiction, and authority to enact it. The court emphasized that the classification of companies under Section 135 is reasonable and satisfies the tests of equality, thus not violating Article 14 of the Constitution.

2. Validity of Rules 2 and 3(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2013:
The petitioners sought to quash these rules, arguing they are ultra vires Section 135 and inconsistent with the Companies Act. The court found no merit in these arguments, stating that the rules are in line with the provisions of the Companies Act. The court highlighted that any errors in the calculation of net profit or CSR expenditure can be challenged separately, but do not warrant the quashing of the rules themselves.

3. Validity of Para (v) of Circular No. 21/2014:
The petitioners argued that this circular, issued by the respondents, should be quashed as it was made operational with retrospective effect. The court clarified that the circular is not retrospective; it merely requires looking at previous years for the calculation of average net profit. The court found no reason to quash the circular, stating it is consistent with the Companies Act.

4. Validity of the clarification issued by the Ministry of Corporate Affairs in Circular No. 1/2016:
The petitioners challenged the clarification issued in response to Query No. 4, arguing it should be quashed. The court upheld the clarification, stating it aligns with the provisions of the Companies Act and provides necessary guidance on the computation of net profit for CSR purposes.

5. Validity of the show cause notice dated 24.11.2016 under Section 134(3) of the Companies Act, 2013:
The petitioners sought to quash the show cause notice issued under Section 134(3). The court found no reason to quash the notice, stating that the petitioner is at liberty to respond, and the notice will be adjudicated upon in accordance with the law. The court emphasized that the issuance of the notice is within the jurisdiction of the respondents and does not warrant judicial interference at this stage.

Conclusion:
The court dismissed the writ petition, upholding the constitutionality of Section 135 of the Companies Act, 2013, and the validity of Rules 2 and 3(2) of the CSR Rules, Circular No. 21/2014, and the clarification in Circular No. 1/2016. The show cause notice under Section 134(3) was also deemed valid, with the court stating that it should be adjudicated in accordance with the law.

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