Malayala Manorama Co. Ltd. Vs. Registrar of Companies - Court Judgment

T.L. Viswanatha Iyer, J.

1. Section 58A of the Companies Act, 1956, was introduced by the Companies (Amendment) Act, 1974, enabling the Central Government to prescribe the limits up to which, the manner in which, and the conditions subject to which, deposits may be invited or accepted by a company either from the public or from its members. The prescriptions made mention of in Section 58A are contained in the Companies (Acceptance of Deposits) Rules, 1975 (hereinafter referred to as 'the Rules'), dated February 3, 1975. Rule 3 prescribes the conditions relating to acceptance of deposits by companies. Sub-rule (1) provides, inter alia, that, on and from the commencement of the Rules, the deposits accepted by a company shall not exceed 10% of the aggregate of the paid-up share capital and free reserves of the company. The Explanation to the rule states that, for the purpose of the rule, in arriving at the aggregate of the paid-up share capital and free reserves of a company, there shall be deducted from the aggregate of the paid-up share capital and free reserves as appearing in the latest audited balance-sheet of the company, the amount of accumulated balance of loss, balance of deferred revenue expenditure and other intangible assets, if any, as disclosed in the said balance-sheet. In other words, the Explanation provides the mode in which the aggregate of the paid-up share capital and free reserves of a company is to be arrived at.

2. Rule 10 of the Rules requires every company to file with the Registrar of Companies on or before the 30th day of June of every year a return in the form annexed to the rules, furnishing the information required therein as on the 31st day of March of that year duly certified by the auditor of thecompany. The form appended contains a certificate to be attested by the manager of the company certifying, inter alia, that the aggregate of the paid-up capital and free reserves, etc., is arrived at on the lines indicated in the Explanation to Rule 3.

3. The controversy between the parties relates to the certificate to be so attested by the manager. The Registrar of Companies takes the view that the aggregate of the paid-up share capital and the free reserves referred to in the certificate should be as appearing in the balance-sheet of the company for a year in relation to which the audit has been completed before the 31st of March of the year in which the return is filed while, according to the petitioner, it can be as per the latest audited balance-sheet of the company available before the 30th of June, irrespective of whether the audit was completed before or after March 31. The petitioner's contention, therefore, is that the return can be with reference to the latest audited balance-sheet, irrespective of the date of audit, provided it was completed by the time the return was filed on or before June 30.

4. The matter arises this way. The financial and accounting year of the petitioner-company is the calendar year ending on December 31. The audit for the year ending December 31, 1983, had been completed on May 19, 1984. The accounts and the balance-sheet were also approved by the general body at its meeting held on June 29, 1984. In submitting the return, exhibit P-3, under Rule 10, of the deposits as on March 31, 1984, the petitioner-company arrived at the aggregate paid-up capital and free reserves with reference to the balance-sheet as on December 31, 1983, as the accounts for the year ending that date had been audited by May 19, 1984, and approved by the general body on June 29, 1984. The return under Rule 10 as on March 31, 1984, was, accordingly, filed with reference to the balance-sheet as on December 31, 1983.

5. In doing so, the petitioner followed the same practice which they had adopted in previous years for which their returns had been accepted. It is true that in two prior years, in relation to the returns as on March 31, 1980, and March 31, 1981, the respondent had raised a dispute that the petitioner should have adopted the figures as per the balance-sheets for the years ending December 31, 1978, and December 31, 1979, respectively, instead of those as on December 31 of the years 1979 and 1980. But this objection was not persisted in after the petitioner explained its stand by the letter, exhibit P-2, dated July 15, 1982, that the latest audited balance-sheets as on the date of filing of the return were for the years ending December 31, 1979, and December 31, 1980, respectively. The matter rested there, and no objection was raised subsequently in relation to the returns as on March 31, 1982, and March 31, 1983, made, following the same pattern. But the matter was raked up again when the petitionersubmitted its return in the same manner containing the information as on March 31, 1984. A large volume of correspondence passed between the parties, both sides sticking to their respective positions. The respondent was firmly of the view, as evident from his letters, exhibits P-4, P-6, P-8 and P-11, that the petitioner has to arrive at the aggregate of paid-up share capital and free reserves with reference to the balance-sheet as on December 31, 1982, since that was the last audited balance-sheet as on March 31, 1984. But the petitioner equally firmly stuck to its point that the return can reflect the state of affairs as on December 31, 1983, inasmuch as that was the latest audited balance-sheet as on the date on which the return was filed, namely, June 30, 1984. This is the controversy to be resolved in these proceedings.

6. The respondent relies on the Explanation to Rule 3 to contend that the aggregate has to be arrived at with reference to the latest audited balance-sheet, which, according to him, was the one as on December 31, 1982. As mentioned earlier, the Explanation to Rule 3 lays down the mode in which the aggregate is to be arrived at for the purpose of that rule. The Explanation runs as under :

'For the purpose of this rule, in arriving at the aggregate of the paid-up share capital and free reserves of a company, there shall be deducted from the aggregate of the paid-up share capital and free reserves as appearing in the latest audited balance-sheet of the company, the amount of accumulated balance of loss, balance of deferred revenue expenditure and other intangible assets, if any, as disclosed in the said balance-sheet.'

7. According to the respondent, this has to be related to the manager's certificate in the form of return as well. The manager's certificate is in the following terms : --

'Certified that the figures of deposits, liquid assets and interest rates under Parts A, B and C have been verified and found to have been correctly prepared. Certified also that the aggregate of the paid-up capita! and free reserves, etc., as arrived at on the lines indicated in Explanation 2 to Rule 3 of the Rules are as follows : Rs.Paid-up capital Free reserves (specify)Free reserves (specify)TotalRsLess:(i) Accumulated balance of loss(ii) Balance of deferred revenue expenditure(iii) Other intangible assets (specify)Deposits of the kinds referred to in the first proviso to sub-rule (1) of rule 3 (vide item I of Part A of the return)( % of paid-up capital and free reserves)Deposits of the kinds referred to in sub-rule (2) of rule 3 (vide item II of Part A of the return)( % of paid-up capital and free reserves)......................................Signature of authorised official NameDesignation'

8. On the other hand, the petitioner's contention is that the Explanation is applicable only for the purpose of Rule 3. What Rule 10 and the form appended thereto require is only the aggregate to be arrived at on the lines indicated in the Explanation. In other words, what is to be done is to deduct the various items mentioned in the Explanation from the paid-up capital and free reserves in the latest audited balance-sheet which can be the one as on the date of filing of the return.

9. The petitioner points out, in this connection that when once the accounts are audited, and they are approved by the general body, as in this case, the balance-sheet relates back to the last date of the year to which it pertains. Reliance is placed on the decisions in C1T v. Mysore Electrical Industries Ltd., : [1971]80ITR566(SC) of the Supreme Court, CIT v. Aryodaya Ginning and . : [1957]31ITR145(Bom) of the Bombay High Court and Southern Roadways Ltd. v. CIT [1981] 51 Comp Cas 513, of a Full Bench of the Madras High Court.

10. After hearing counsel on both sides, I am of the view that, having regard to the purpose and the scheme of Section 58A and of the rules, the petitioner's contention has to be accepted. Section 58A empowered the Central Government to prescribe the limits up to which, the manner in which and the conditions subject to which, deposits may be invited or accepted by a company either from the public or from its members. The provision is intended to achieve a definite public purpose, namely, to checkindiscriminate/fraudulent receipt or acceptance of deposits by a company, resulting in hardship to the investing public where the companies fail or are unable to repay the deposits. While conferring this power, Parliament left it to the Central Government to lay down the prescriptions necessary for effective implementation of the check, as warranted by the circumstances prevailing from time to time. It is in this background that Rule 3, limiting the deposits to be accepted by a company to 10 % of the aggregate of its paid-up share capital and free reserves, computed in the manner provided in the Explanation, was framed. The very purpose of the rules prescribing limits on deposits and enjoining disclosure of the company's affairs by means of returns filed every year is to ensure proper control and check on such activities of companies and to shield the investors from possible frauds. Reckless and excessive acceptance of deposits is controlled by the ceiling prescribed in Rule 3, and relating it to the paid-up share capital and free reserves. Since the audited balance-sheet authentically reflects the true state of affairs of the company, that is made the basis for the information to be contained in the return. The figures appearing in the latest audited balance-sheet are, therefore, made relevant in the computation of the ceiling on deposits.

11. There is no prescription in the Explanation that the 'latest' audited balance-sheet is not really the latest available in point of time, but only the latest as on March 31. It is not possible to read such a limitation into the Explanation when the very object of Section 58A will be better subserved by relating the information to the latest of the audited balance-sheets available as on the date of filing of the return, before the last date prescribed for it, namely, June 30. The function of the return is to alert the company law administration about any infringement of the rule on ceiling on deposits. The provisions in Section 58A and the rules are made in public interest and for the protection of the investing public. The ceiling should, therefore, be reckoned as far as possible, with reference to the latest available authentic figures. The availability of such figures as on a date nearest to the 31st of March, with reference to which the return is filed, will facilitate effective implementation of the statutory provisions and the supervision and control envisaged thereby. In other words, the availability of an audited balance-sheet with reference to a date nearest to the 31st of March concerned will better achieve the object of Section 58A and the Rules.

12. An ideal state of affairs will be where the latest audited balance-sheet available is as on the 31st day of March of the year to which the return itself relates. Since that is not practicable, the rules have relegated the position to the last of the audited balance-sheets available.

13. I must state here that it is advisable to adopt a construction of a statute that will promote the general legislative purpose underlying the provision. A purposive approach which will advance the cause and the object of the legislation is called for. The interpretation canvassed by the respondent will, according to me, detract from the utility of Section 58A as an effective check on the acceptance of deposits by companies.

14. In the circumstances, I do not find any justification for the respondent's contention that the latest audited balance-sheet should be the one audited before 31st March, and not before the date on which the return is filed before 30th June. The requirement is the latest correct figure in relation to the company and not some figure in relation to a past date which may have considerably changed between that date, and the 31st of March to which the return relates. If, therefore, a latest audited balance-sheet is available, the figures therein ought to be preferred, even though the audit itself might have been completed after the 31st of March of the year to which the return pertains. That alone will disclose the true state of the company's affairs, and as to whether it has violated the limits prescribed by Rule 3 read with Section 58A.

15. In this view of the matter, it is unnecessary for me to consider the decisions cited by counsel for the petitioner which relate to computation of capital for the purpose of the Business Profits Tax Act or the Companies (Profits) Surtax Act. What has to be seen in the adjudication of such a question is whether the legislative intent is subserved by the interpretation placed upon it. According to me, that intent will be well served by the construction which I have placed above on the relevant provisions.

16. I must also mention that the petitioner had been following the same practice in the past years. The respondent himself accepted those returns. Even though an explanation is given in the counter affidavit for such acceptance, I do not think that the petitioner-company was at fault in following the same procedure for the return as on March 31, 1984, as well. It is not as if the petitioner is concealing anything by making the return in the manner done as on March 31, 1984. In fact, the figures under the earlier balance-sheets are all available with the respondent so that the petitioner does not really stand to gain anything by adopting the same procedure which they had adopted in the previous years. The respondent has, therefore, gone wrong in insisting that the petitioner should adopt the figures as per the balance-sheet for the year ending March 31, 1982, for the return as on March 31, 1984.

17. I, therefore, quash exhibits P-4, P-6, P-8 and P-11 and direct the respondent to deal with the return, exhibit P-3, which the petitioner has furnished, as one made in compliance with Rule 10 of the Rules.

18. The original petition is allowed as above.

No costs.