Company cannot exclude amalgamation reserves from net worth calculations in subsequent years to avoid CSR obligations under Section 135

The HC dismissed a revision petition where a company sought to quash prosecution proceedings for non-compliance with CSR obligations under Section 135 of the Companies Act. The company argued it fell outside CSR purview by excluding amalgamation reserves from net worth calculations in subsequent years. The court held that while companies receive amalgamation benefits under Section 2(57) for the amalgamation year, they cannot continue claiming these benefits in subsequent financial years (2011-2015) to avoid CSR liability. The court found prima facie evidence of the alleged offence and ruled the case should proceed to trial.

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Issues Involved:
1. Quashing of Proceedings: Whether the proceedings of Complaint Case No. (Comp.) 10 of 2019 should be quashed.
2. Corporate Social Responsibility (CSR) Compliance: Whether the company complied with the provisions of Section 135 read with Section 134(3)(o) of the Companies Act, 2013.
3. Calculation of Net Worth: Whether the reserves created out of amalgamation should be included in the Net Worth calculation for CSR applicability.

Summary:

Quashing of Proceedings:
The petitioners sought to quash the proceedings of Complaint Case No. (Comp.) 10 of 2019 under Section 135 read with Section 134(3)(o) of the Companies Act, 1956, pending before the Learned 2nd Special Court, Calcutta. The Court found sufficient materials on record making out a prima facie case against the petitioners and dismissed the application, allowing the trial to proceed expeditiously.

Corporate Social Responsibility (CSR) Compliance:
The complaint alleged that the company did not comply with the CSR provisions despite having a net worth exceeding the prescribed limit. The company failed to spend any amount on CSR activities or state reasons for not spending in the Board's Report for the financial year 2014-15. The petitioners argued that the net worth was above the threshold due to amalgamation and therefore, CSR provisions were not applicable. However, the Court noted that the company continued to show reserves created out of amalgamation as liabilities in subsequent years to avoid CSR responsibilities, which is not permissible.

Calculation of Net Worth:
The Court examined whether reserves created out of amalgamation could be excluded from the net worth calculation. It was determined that the company could only exclude such reserves in the financial year of the amalgamation, not in subsequent years. The company's continued practice of excluding these reserves in later years to avoid CSR obligations was deemed improper.

Conclusion:
The Court emphasized that the company's conduct to avoid CSR responsibilities by manipulating net worth calculations post-amalgamation is not to be encouraged. The complaint against the company for non-compliance with CSR provisions stands, and the trial will proceed. The revisional application (CRR 1874 of 2019) is dismissed, and all interim orders are vacated.

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