(1) AMENDMENT IN CARO-2003

Companies (Auditor´s Report)(Amendment ) order,2004- Notification No. GSR 766(E) Dt. 25.11.2004

In exercise of the powers conferred by Sub-section (4A) of Section 227 of the Companies Act,1956 (1 of 1956) and after consultation with the Institute of Chartered Accountants of India (constituted under the Chartered Accountants Act,1949 (38 of 1949), the Central Government hereby makes the following amendments in Companies (Audit Report) Order,2003, namely:-

1. (1) This Order may be called the Companies (Auditor´s Report) (Amendment) Order,2004

(2) It shall come into force on the date of its publication in the Official Gazette.

2. In the Companies (Auditor´s Report) Order,2003,-

(1) In paragraph 1, in sub –paragraph (2) for clause (iv) , the following clause shall be substituted namely:-

“(iv) a private limited company with a paid up capital and reserves not more than rupees fifty lakh and which does not have loan outstanding exceeding rupees twenty five lakh from any bank or financial institution and does not have a turnover exceeding rupees five crore at any point of time during the financial year”.

(2) in paragraph 2, the clauses (c) to (i) shall be omitted;

(3) in paragraph 4,

(a) for clause (iii) ,the following clause shall be substituted, namely:-

“(iii) (a) has the company granted any loans ,secured or unsecured to companies, firms or other parties covered in the register maintained under section 301 of the Act. If so, give the number of parties and amount involved in the transactions; and

(b) whether the rate of interest and other terms and conditions of loans given by the company secured or unsecured , are prima facie prejudicial to the interest of the company; and

(c) whether receipt of principal amount and interest are also regular; and

(d) if overdue amount is more than rupees one lakh, whether reasonable steps have been taken by the Company for recovery of the principal amount and interest ;page 2 of 3

(e) has the company taken any loans , secured or unsecured from companies ,firms or other parties covered in the register maintained under section 301 of the Act . If so, give the number of parties and the amount involved in the transactions; and

(f) whether the rate of interest and other terms and conditions of loans taken by the company secured or unsecured, are prima fade prejudicial to the interest of the company; and

(g) whether payment of the principal amount and interest are also regular.”

(4) for clause (iv) the following clause shall be substituted ,namely:-

“(iv) is there an adequate internal control system commensurate with the size of the company and the nature of its business, for the purchase of inventory and fixed assets and for the sale of goods and services. Whether there is a continuing failure to correct major weaknesses in internal control system;”

(4) in clause (v), for sub-clauses (a) and (b) , the following clauses shall be substituted , namely-

“(a) whether the particulars of contracts or arrangements referred to in section 301 of the Act have been entered in the register required to be maintained under that section; and

(b) whether transactions made in pursuance of such contracts or arrangements have been made at prices which are reasonable having regard to the prevailing market prices at the relevant time,”

(5) in clause (vi)

(i) for the words, figures and letters “sections 58A and 58AA of the Act,” the words figures and letters “ sections 58A ,58AA or any other relevant provisions of the Act” shall be substituted.(ii) for the words “ Company Law Board”. The words “Company Law Board or National Company Law Tribunal or Reserve Bank of India or any Court or any other Tribunal” shall be substituted;

(6) in clause (ix)

(i) In sub-Clause (a) for the words “Wealth Tax”, the words “Wealth tax, Service tax” shall be substituted´

(ii) for sub-clause (b) , the following sub-clause shall be substituted ; namely:- (b) in case dues of income tax/ Sales Tax Wealth tax Service tax/custom duty /Excise duty / cess have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending shall be mentioned.”

(7) in clause (x) for the words “ in the financial year immediately preceding such financial year also” the words” in the immediately preceding financial year” shall be substituted;

(8) in clause (xiii); page 3 of 3

(i) in sub –clause (b) , for the word “default” the word “doubtful” shall be substituted;

(ii) in clause (xiv), for the words “ other securities” the words “ other investments” shall be substituted

(9) in clause (xvii), the words “ and vice-versa” shall be omitted

(10) in clause (xix), for the words “ securities have”, the words “security or charge has “ shall be substituted.

(2) Investors´ Education Protection Fund Scheme-Circular No.6/2004 dt 10.8.2004(F.No.17/63/99-CL.V

The Department has vide Circular No.22/2002, dated 23.9.2002 clarified inter alia that the Investors´ Education Protection Fund (IEPF) became operational only on 1st October,2001, and all the amounts due for transfer between 1st November,1998 and 30th September,2001 should have been transferred to it within the grace period of 30 days i.e. by 31st October,2001. Accordingly all concerned were advised to transfer to IEPF all the amounts referred to in section 205C immediately after issue of the said circular.

2. In the said circular it was also clarified how, when and the date from which the unpaid and unclaimed dividend due for payment prior to and after the amendment of section 205A and the enactment of section 205C by the |Companies (Amendment ) Act,1999 should be transferred to IEPF.

3.It has come to the notice of the Department that some companies have deposited the requisite amounts within the said 30 days and while some others had deposited the same at a later date. Department has received representations stating that in making the said deposits ,companies were faced with un-avoidable practical difficulties arising from the followingL1) issue of various debt instruments with varied interest dates´)2) Acceptance of fixed deposits from the public and shareholders over a long period of time´(3) Segregation of accounts in respect of debentures redemption proceeds, fixed deposit repayments and interest thereon was time consuming (4) Manual maintenance of records by some companies requiring that old records had to be retrieved and reconciled;(5) time required to obtain the arrear amounts from their respective bankers; (6) Time taken by the Registrar and Transfer Agents with their multiple clients for identification of the unclaimed and unpaid amounts to transfer to IEPF ‘(7) Delay due to the process of complication of data, reconciliation and audit thereof.

4.In view of the above, the matter was carefully considered in the Ministry. Having noted that in depositing the unpaid dividend and other amounts referred to in section 205C(which had become due for payment into the IEPF) subsequent to the issue of Circular No.22/2002, dated 23.9.2002 companies were faced with practical difficulties as noted above and a reasonable period of time was required to resolve the same, it has been decided that in cases where compliance had actually been made by the company in question on or before 31st March,2003 by deposit of the requisite amount into the IEPF, the objective of the said circular shall be deemed to have been satisfied and therefore a company need not be proceeded against for any penal action on grounds of delay upto 31.3.2003. All Regional Directors and Registrars of Companies are advised to take note of the above while contemplating action under the section and proceed in only those cases where compliance had not been made by 31st March,2003. This would equally apply to cases where show cause notice has been issued.

CASE LAWS:

Application of share premium to adjust the loss made in investments-Special resolution passed-Companies Act,1956 –Section 78 and 100-Company Court refusing confirmation-Whether correct Held: No.

Brief Facts:

The appellant company made investments to the tune of Rs.115.30 Lakhs in Nepal Metal Company Ltd. (NMCL). Subsequently the value of the investments became nil and the Board of the appellant company proposed to set of the loss against the share premium account and consequently in the annual general meeting of the company in which a special resolution, for applying the share premium account to of set the loss, was passed with overwhelming majority .The appellant company applied to the Company court for the confirmation of the above special resolution. The company court refused to confirm the resolution and the appellant company came before the Division Bench of the High Court challenging the order of the company court.

Reasons:

In the instant case, the special resolution had been passed in accordance with the Articles of Association. Neither the creditors nor the shareholders are before the court objecting to passing of the resolution. Nothing is brought to the notice of the court that the special resolut8ion affected the interest of the share holder. There is no material available on record that the special resolution had caused any prejudice to any of the shareholders. With the contemplated adjustment, the company´s accounting method in respect of investments would fall in line with the accounting standard of the institute of the Chartered Accountants of India and represent true shareholder value. The setoff would not cause any prejudice to the creditors of the company. The reduction of capital does not involve either result in the diminution of any liability in respect of unpaid capital or the payment to any shar3holders of any paid up capital.. No compromise or arrangement is contemplated. There is no reduction in the value of the security which the creditors had in the company. The purposes for which the special resolution was introduced and approved by the general body are stated in clear and specific terms. The course adopted , in our considered opinion, in no way causes any prejudice to the creditors of the company nor the interest of the shareholders is affected in any manner whatsoever.

For all the aforesaid reasons, we find that, the resolution of the general body did not suffer from any legal infirmity. The rights of the shareholder and creditors are not prejudicially affected. The resolution, in no manner prejudicially affects the public interest. We find no legal impediment for granting the approval/confirmation by this court. For the aforesaid reasons, the instant order under appeal is set aside. The appeal is, accordingly allowed.

(2) PUNYARK CREDIT & INVESTMENT (P) LTD. V. STATE OF BIHAR (2004) 63 CLA 34 (PAT) (19.3.2004)

Default in filing balance sheet and profit and loss account with ROC-Whether the offence is a continuous offence-Companies Act-Section 220(3)- Held :yes.

BRIEF FACTS:

The petitioner company failed to file its balance sheet and profit and loss account with the ROC for the year 1980. The ROC filed a criminal complaint before the Special Judge, Economic Offences,Patna in 1984. The Trial court had taken cognizance of the offence and issued summons on the company and its directors. In the proceedings, witness of the complainant was examined and the accused directors recorded their statements. At the fag end of the proceedings the petitioner raised the objection of bar of limitation and pleaded for the dismissal or the case. The Trial court rejected the objection and against it the petitioner approached the High Court.

Decision: Petition dismissed.

Reasons: In the case of K.K. Mehra v. ROC,(1191) 6 CLA 318 the Delhi High Court following the judgement of the Supreme Court in CWT v. Suresh Seth (1981) 121 ITR 328 held that the provisions extending the fine for every day of default after the first indicate only the multiplier to be adopted in determining the quantum of penalty and do not have the effect of making the defaults in question continuing ones. But the Suresh Sheth´s case (supra) did not find approval in the subsequent case of Smt. Maya Rani Punj v. CIT (1986) 157 ITR 330 and in Bhagirath Konoria v. state of Madhya Pradesh, AIR 1984 SC 1688. Applying the norms and guidelines given by the Supreme court in Bhagirath Kanoria´s case (supra) and all the more looking to the purpose which has been intended to be achieved by constituting a particular act as the offence, it is held that the default in filing the balance sheet and profit and loss account of the companies within the prescribed statutory period was a continuing offence .

Regarding the nature of the offence it has already been decided by the Supreme Court as well as by this court in a full bench decision that such offences are continuing offence and the plea of limitation under section 468(1) of the CrPC has no application in such cases. In the facts and circumstances of the case, this application is dismissed.

(3) M/s.Aarti Dutta Gupta & Ors. V. Unit Construction Co.ltd. & Ors(2004) 52 SCL 679(CLB )(2204)) 60 CLA 75

(A) Difference in the figures brought forward from the previous year to the current year , is against standard accounting practice which needs explanation of the Board of Directors and the statutory auditors as well.

A petition for relief against oppression and mismanagement was filed to CLB alleging that the funds of the company were siphoned off. The allegation was based on the fact that the corresponding previous year´s figures of the Balance sheet did not tally with the next year´s figures.

The Company Law Board (CLB) although rejected the petition, but held that where there is any difference between the figures of balance sheet of previous year and next year, it is against the standard accounting practices and such difference needs the explanation of Board of Directors or of statutory auditors to avoid any presumption towards siphoning off of funds of the company.

(B) An Act of sub-contracting of work by a company to another family company cannot be called as an act of mismanagement:

A petition for relief against oppression and mismanagement was filed to Company Law Board in the petition, it was alleged that the Company had been sub- contracting certain electrical work to other family company.

The Company Law Board rejecting the petition held that the act of sub-contracting by a Company to another family company cannot be complained of as an act of mismanagement, unless it is established that same work could be given to outside company on more favourable terms. An approval of Board of Directors before sub-contracting can bring the complaint to an end.