TaxTMI 
TaxTMI 
2026 (5) TMI 873
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.... determination that lie at the heart of this Petition are whether the penalty is at all attracted in the facts of the case, and if so, whether the quantum of penalty imposed is compliant with the Companies Act and is a product of appropriate and reasonable exercise of jurisdiction. Alleged Default and Relevant Provisions: 4. The Learned Adjudicating Officer was essentially adjudicating monetary penalty under Section 39(5) of the Act. The relevant portions of Section 39 are extracted below: "39. Allotment of securities by company.- (1) to (3) ***** (4) Whenever a company having a share capital makes any allotment of securities, it shall file with the Registrar a return of allotment in such manner as may be prescribed. (5) In case of any default under sub-section (3) or sub-section (4), the company and its officer who is in default shall be liable to a penalty, for each default, of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less." [Emphasis Supplied] 5. The upshot of the aforesaid provisions is that whenever a company allots securities, Section 39(4) of the Companies Act require....
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.... to monetary penalty stipulated in Section 39(5) of the Companies Act. 9. The meaning of the expression "shall be liable to a penalty" preceding the per-day rate, or Rs. 1 lakh, "whichever is less" is vital for purposes of this Petition. This expression in Section 39(5) is the basis on which the Respondents canvass that the liability is absolute, with no judicial discretion being permitted for adjudication of penalty, regardless of the facts and circumstances surrounding a default. Contentions of Parties: 10. Mr. Pradyumna Agrawal, Learned Advocate on behalf of the Petitioners would contend that the Petitioners are not liable to a penalty at all, on an accurate interpretation of the facts and the relevant provisions. The core basis of such contention is that the Form PAS-3, which is the prescribed form for the return of allotment has an affirmation clause for signature, that confirms that all the annexures are accurate and the list of allottees is complete and correct as per the company's records. The affirmation clause in Form PAS-3 confirms that the person signing it vouches for the accuracy of all its contents including all attachments to it. The verification clause in ....
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....otment Rules clearly requires the signatory to the return of allotment to also certify the list of allottees with all the particulars to be contained therein as being correct and complete. The certification requirement, Ms. Ganoo would submit, is specific and in addition to the signature on the return of allotment. Therefore, if the upload of the return of allotment has not been made in the manner prescribed in the Allotment Rules, the default is liable to be visited with a penalty. 14. Ms Ganoo would also submit that each of the Petitioners, namely, the Company and every director of the Company, is liable to a monetary penalty under Section 39(5). Further, she would contend that the penalty imposed on the Company and its directors is the minimum penalty because there is no discretion with the Adjudicating Officer to impose anything less than Rs. 1,000/- per day because of the expression "shall be liable to a penalty" in Section 39(5) of the Companies Act. The expression "whichever is less", she would indicate, points to the provision being a minimum penalty clause. The period of continuing default in the instant case is way above 100 days in each case, and therefore at the rate....
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.... member of the Board of Directors is liable to a penalty, and therefore, the cumulative sum of the penalty, however large it may be canvassed to be, is but the statutory minimum penalty, Ms. Ganoo would submit. Being in strict compliance with the statutory provisions, Ms. Ganoo would contend, no case for interference by this Court in exercise of the writ jurisdiction is made out. Analysis and Findings: 17. Having heard the parties and considered the issues presented by them, I must mention at the threshold that another identically drafted penal provision, namely Section 15-A of the Securities and Exchange Board of India Act, 1992 ("SEBI Act"), has undergone three rounds of interpretation by the Supreme Court, culminating in a ruling by a larger three-judge bench endorsing the latter view that led to the reference to the larger bench. Section 2(95) of the Companies Act specifically provides that words and expressions not defined in the Companies Act would have the same meaning as they have in, among others, the SEBI Act, which makes the SEBI Act, a cognate legislation. Therefore, interpretation by the Supreme Court, of a provision in the SEBI Act containing the very same expre....
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....ay penalty amount; (iii) followed by a fixed sum as an outer limit; and (iv) the usage of the expression "whichever is less" to connote the outer limit. 21. Before proceeding to analyse the Supreme Court's rulings on Section 15-A of the SEBI Act, which would squarely apply to the interpretation of Section 39(5) of the Companies Act, it would also be necessary to examine the provisions entailing the manner of exercise of discretion by the Adjudicating Officer. Ms. Ganoo would contend that for imposing a penalty under Section 39(5) of the Companies Act, the Adjudicating Officer has no discretion whatsoever and he must compute and impose a penalty of Rs. 1,000/- per day. If the default exceeds 100 days, he must impose the minimum penalty of Rs. 1 lakh, which is canvassed as a minimum penalty. 22. Whether imposition of a penalty of Rs. 1,000 per day is a mandatory statutory minimum or whether the Adjudicating Officer has the power (coupled with the duty) to exercise discretion to impose penalty of less than Rs. 1,000 per day, is the question to answer. In my opinion, the reading of Section 39(5) of the Companies Act, a penal provision, as a stipulation that does not permit the Ad....
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....nvestors or creditors as a result of the default: Provided that, in no case, the penalty imposed shall be less than the minimum penalty prescribed, if any, under the relevant section of the Act. (13) In case a fixed sum of penalty is provided for default of a provision, the adjudicating officer shall impose that fixed sum, in case of any default therein." [Emphasis Supplied] 25. A plain reading of Rule 3(12) would show that while imposing a penalty, the Adjudicating Officer is required to have due regard to various factors such as the size of the company, the nature of its business, the injury to public interest occasioned by the default, the nature of the default, the repetitive nature of default, and indeed whether any disproportionate gain or unfair advantage, wherever quantifiable, has been made as a result of the default. The amount of loss caused to an investor or a group of investors or creditors as a result of such default is also a factor to be borne in mind. 26. What is evident is that the subordinate legislation has taken care to ensure that a penalty should not be mindlessly imposed without regard to proportionality principles in the context o....
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....th the issue, in Bhavesh Pabari (2019) 5 SCC 90, to hold that discretion under Section 15-J would not be taken away by the language contained in Section 15-A of the SEBI Act. It was held that identically-worded Section 15-A of the SEBI Act could not be a fixed penalty provision and indeed, was also not a minimum penalty provision, with no discretion for imposing a lower penalty. 30. For clarity, the relevant extracts from each of Roofit (2016) 12 SCC 125, Chaturvedi (2016) 12 SCC 119 and Bhavesh Pabari (2019) 5 SCC 90 are extracted below to set out the march of the law. 31. In Roofit (2016) 12 SCC 125, the Supreme Court returned the following view: "6. In the connected appeals before us, the appellant has imposed a penalty of Rs 75 lakhs despite the failure having continued for substantially more than 75 days. The learned Senior Counsel for the appellant has contended that the appellant has discretion to impose a penalty below the number of days of default regardless of the words "whichever is less". He has argued that there would be no purpose to Section 15-J if the adjudicating officer's discretion to fix the quantum of penalty did not exist, and that such an i....
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.... [Emphasis Supplied] 32. The bench that declared the law in Chaturvedi (2016) 12 SCC 119 took the view that such a reading would render the penalty provision arbitrary, inasmuch as it would be a penalty provision that makes no distinction on the basis of the nature of the default or the injury inflicted or benefit gained by the default, the cause of the default etc. Chaturvedi (2016) 12 SCC 119 returned a finding that the factors listed in Section 15-J were illustrative, to hold that the language in Section 15-A of the SEBI Act does not lead to a mandatory fixed penalty or statutory minimum penalty, and that the factors for adjudicating penalty were indeed relevant. The Supreme Court expressed its views in the following words: "10. Prima facie, we find it a little difficult to subscribe to both the views contained in para 4 as well as in para 5 of the said judgment. The expression "shall have due regard to" is a very known legislative device used from the time of Julius v. Bishop of Oxford [Julius v. Bishop of Oxford, (1880) LR 5 AC 214 (HL)], and followed in many judgments both English as well as of our Courts as words vesting a discretion in an adjudicating of....
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....y, has Rs 1 lakh per day as the minimum mandatory penalty under the provisions, which would culminate in the appellants herein having to pay Rs 1 crore in each of the three appeals. We do not think that this could have been the intention of Parliament in enacting Section 15-A, as amended in 2002. We also feel that on the assumption that para 5 of the judgment is correct, it would be very difficult for Section 15-A to be construed as a reasonable provision, as it would then arbitrarily and disproportionately invade the appellants' fundamental rights. 12. This being the case, on both the conclusions reached by this Court in paras 4 and 5, as stated by us hereinabove, these matters deserve consideration at the hands of a larger Bench. The Registry is, accordingly, directed to place the papers of these appeals before the Hon'ble the Chief Justice of India for placing these matters before a larger Bench." [Emphasis Supplied] 33. Dealing with the reference, a three-judge Bench of the Supreme Court framed the following questions in Bhavesh Pabari (2019) 5 SCC 90: "1.1. Whether the conditions stipulated in clauses (a), (b) and (c) of Section 15-J of th....
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....dium of enacting the Explanation to Section 15-J vide Act 7 of 2017, which also states that the adjudicating officer shall always be deemed to have exercised and applied the provision. We, therefore, deem it appropriate to hold that the provisions of Section 15-J were never eclipsed and had continued to apply in terms thereof to the defaults under Section 15-A(a) of the SEBI Act. 6. Reference order in Siddharth Chaturvedi on the said aspect has observed that Section 15-A(a) could apply even to technical defaults of small amounts and, therefore, prescription of minimum mandatory penalty of Rs 1 lakh per day subject to maximum of Rs 1 crore, would make the section completely disproportionate and arbitrary so as to invade and violate fundamental rights. Insertion of the Explanation would reflect that the legislative intent, in spite of the use of the expression "whichever is less" in Section 15-A(a) as it existed during the period 29-10-2002 till 7-9-2014, was not to curtail the discretion of the adjudicating officer by prescribing a minimum mandatory penalty of not less than Rs 1 lakh per day till compliance was made, notwithstanding the fact that the default was technical, ....
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.... a result could not have been intended by the legislature. We, therefore, hold and take the view that conditions stipulated in clauses (a), (b) and (c) of Section 15-J are not exhaustive and in the given facts of a case, there can be circumstances beyond those enumerated by clauses (a), (b) and (c) of Section 15-J which can be taken note of by the adjudicating officer while determining the quantum of penalty. 11. At this stage, we must also deal with and reject the argument raised by some of the private appellants that the conditions stipulated in clauses (a) to (c) of Section 15-J are mandatory conditions which must be read into Sections 15-A to 15-HA in the sense that unless the conditions specified in clauses (a) to (c) are satisfied, penalty cannot be imposed by the adjudicating officer under the substantive provisions of Sections 15-A to 15-HA of the SEBI Act. The argument is too far-fetched to be accepted. Section 15-J of the SEBI Act enumerates by way of illustration(s) the factors which the adjudicating officer should take into consideration for determining the quantum of penalty imposable. The imposition of penalty depends upon satisfaction of the substantive prov....
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....rder invokes Rule 3(12) but shows no application of mind to the factors to be applied for determining the quantum. The Impugned Order invokes both Rule 3(12), the proviso to which refers to minimum penalty provisions of the Companies Act; and Rule 3(13) which refers to fixed penalty provisions, when imposing penalty under Section 39(5). Suffice it to say, Section 39(5) cannot be both at one - a provision with a fixed penalty and a provision with a minimum penalty. It is not necessary to examine which provision of the Companies Act is in fact a fixed penalty provision for Rule 3(13) to have meaning, and answer whether any such provision would at all be constitutionally valid - that is not the subject matter of controversy in this Petition. 39. What is clear is that the usage of the expression "whichever is less" does not make Section 39(5) of the Act a provision imposing a minimum penalty. For the very same reasons, that provision would also not qualify as a provision imposing a fixed penalty regardless of aggravating or mitigating circumstances. Either way it would be arbitrary. On the other hand, Section 39(5) of the Companies Act would be constitutionally valid when read with ....
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.... 43. This list is required to be certified by the same signatory of the Form PAS-3. The affirmation clause in Form PAS-3 simply states that the list of allottees is complete and correct as per the company's records. If I were to accept Mr. Agrawal's contention, I would necessarily have to hold that the proforma affirmation clause would efface the explicit stipulation in subordinate legislation i.e. Rule 12(2) of the Allotment Rules. Subordinate legislation that is tabled on the floor of Parliament for the specified period, after which it becomes part of the law cannot be wished away by an interpretation of the format of the return. The need for data integrity of a vital element of a company's operations, can indeed be backed by the reiterative element of Rule 12(2) - requiring the signatory of Form PAS-3 to also certify the list attached to the return. 44. The certification of the list and then the certification of the return of allotment is a requirement of dual iteration. This has not been done and therefore there is a default. Indeed, the affirmation clause does render the breach, in the facts of this case, where no aggravating circumstances are brought to bear, to be a tech....
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....the default. Under Section 454A, double the penalty is stipulated for a repeat violation that is indulged in after imposition of a penalty. Therefore, it is apparent that the legislative objective of the Companies Act in the matter of penalty includes an element of remediation, and penalty is not meant to be imposed merely because the power to impose it exists. This, further underlines the importance of Rule 3(12) of the Penalty Rules. A disproportionate penalty on the wrong premise that the penalty provision entails a minimum penalty, and in the same breath also a fixed penalty; and then multiplying the penalty by the sheer number of directors who happen to occupy the Board of the Company, is wholly arbitrary. 48. Indeed, Section 2(60), which defines "officer who is in default" has sub-clause (iii) that leads to all directors being officers in default if no officer in default has been designated, but equally sub-clause (vi) of Section 2(60) deals with the terms on which "every director" would become an officer in default. Such director has to be aware of the contravention by virtue of his participation in the proceedings of the Board of Directors and he participated without obj....