[Opinion] RD Grants Relief for Delayed Transfer of Unutilized CSR Funds Due to COVID-19 Pandemic and National Lockdown

Prof R Balakrishnan – [2024] 160 taxmann.com 354 (Article)

1. Background of the case

This case of appeal was decided by the Regional Director of South Eastern Region, Hyderabad. This case is pertaining to an appeal filed under section 454(5) of the Companies Act 2013, against the adjudication order passed by the Registrar of Companies of Bangalore. The adjudication order was passed by the Registrar of Companies for default in compliance with the requirements of section 135 of the Companies Act 2013. The default committed by the company was that the company failed to transfer the unspent CSR amount to a separate bank account within the stipulated time by the regulators in the financial year 2020-21 and 2021-22.

The Adjudication officer levied a penalty of Rs. 67.16 lacs for the default committed by the company for both years vide his order dated 3rd August 2023 after following the due adjudication procedure by issuing a show cause notice, granting a personal hearing etc.
The company filed an appeal against this order and represented the matter in its appeal that they could not transfer the unutilized CSR amount in 2020-21 due to unprecedented challenges posed by the COVID-19 pandemic and the subsequent national lockdown. The company also stated that they faced constrained from their workforce as a significant portion of their employees transitioned to remote work arrangements which resulted in the default as the company encountered difficulties in establishing a distinct bank account for CSR purposes.

Similarly in the year 2021-22 also the company could not transfer the unspent CSR funds within a specified time as the company was actively engaged in an acquisition process and regrettably due to the voluminous data coupled with sheet complexity and magnitude of these transactions, the company inadvertently overlooked the timely transfer of the unutilized CSR funds to a separate bank account.

The matter was heard by the Regional Director on 20th November 2023 for which an order was passed by the Regional Director of (SER), Hyderabad whereby he reduced the penalty to an extent of 20% of the penalty levied by the Adjudication officer i.e. from Rs. 67.16 lakh to Rs. 13.43 lakhs considering the grounds taken by the company and also based on its representation at the time of the personal hearing.

It is an interesting case through which, one would know that in cases of merit and extraordinary circumstances resulting in unprecedented challenges to a company which is beyond the control of the company, the regulators do consider the circumstances and provide an appropriate relief which happened in this case. Let us go through the case in detail to understand the matter threadbare.

2. Details of the company

M M/s Sannkhya Labs Private Limited, is a registered company incorporated effective from 20th December 2006 under the provisions of the Companies Act 1956 and its registered office is situated at 3rd Level, Mezaninne Floor, No.3, Infantry Road, Vasanth Nagar, Embassy Icon Building, Bangalore, in the state of Karnataka and the company falls under the jurisdiction of the Registrar of Companies of Karnataka and the Registrar of Company is situated at Bangalore. The company currently have seven on its board and one of them is a managing director and two of them are nominee directors. The company provides IT and software development services such as mobile application development and web designing services.

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