Category Companies Act

APPLICABILITY:

CARO 2020 is applicable to all the companies which were covered under CARO 2016. There has been absolutely no change on the applicability of CARO with respect to CARO 2016. It is applicable to all the statutory audits commencing on or after 1^st April, 2021 corresponding to the financial year 2020-21.

Previously, there were 16 clauses and 10 sub-clauses, but after CARO 2020, there are 21 clauses and 28 sub-clauses. 7 clauses were newly entered, 1 clause has been merged and 1 has been deleted.

The amendments made under CARO 2020 have been divided into 4 categories:

SCHEDULE III AMENDMENTS –

1. Clause 3(i)(c) Title Deeds of Immovable Properties: There had been an amendment in this clause as-

“Whether the title deeds of all the immovable properties (other than the properties where the company is the lessee and the lease agreements are duly executed in favor of the lessee) disclosed in the financial statements are held in the name of the company, if not, provide the details thereof”.

2. Clause 3(i)(d) PPE Revaluation: This clause has been newly added under CARO 2020.

“Whether the company has revalued its Property, Plant and equipment (including the Right to Use assets) or intangible assets or both during the year and, if so, whether the revaluation is based on the valuation by a Registered Valuer; specify the amount of change, if change is 10% or more in the aggregate of the net carrying value of each class of Property, Plant and Equipment or intangible assets”;

3. Clause 3(i)(e) Benami Property: This clause has been newly added under CARO 2020.

“Whether any proceedings have been initiated or are pending against the company or holding any benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and rules made thereunder, if so, whether the company has appropriately disclosed the details in its financial statements.”

4. Clause 3(ii)(b) Working Capital: This clause has been newly added under CARO 2020.

“Whether during any point of time of the year, the company has been sanctioned working capital limits in excess of five crore rupees, in aggregate, from banks or financial institutions on the basis of security of current assets; whether the quarterly returns or statements filed by the company with such banks or financial institutions, are in agreement with the books of account of the Company, if not, give details;

FAQs on Working Capital

Q1. Can working capital loan be sanctioned on the basis other than current assets?

A. No, working capital loan cannot be sanctioned other than on the basis of current assets.

Q2. If the amount of loan sanctioned is more than 5 crores, but the amount utilized is 1 crore – is it covered here?

A. Yes, it is covered here too since the provision only states about the sanction of the loan not about utilization.

Q3. Does the term ‘Sanction’ include Renewal?

A. Yes, renewal is allowed but it should be only on the basis of current assets.

Q4. If the company is also submitting monthly returns – whether the same also need to be verified by the auditor?

A. Guidance Note provides that the auditor will verify the returns on quarterly basis only.  Even if the returns are submitted monthly, it will be verified by the auditor quarterly.

5.  Clause 3(viii) Surrender or disclosure of Unrecorded income: This clause has been newly added under CARO 2020.

“Whether any transactions not recorded in the books of account have been surrendered or disclosed as income during the year in the tax assessments under the Income Tax Act, 1961, if so, whether the previously unrecorded income has been properly recorded in the books of accounts during the year”;

6. Clause 3(iii)(f) Loans /Advances to Promoters/ Related Parties: This clause has been newly added under CARO 2020.

“Whether the company has granted any loans or advances in the nature of loans either repayable on demand or without specifying any terms or period of repayment, if so, specify the aggregate amount, percentage thereof to the total loans granted, aggregate amount of loans granted to Promoters, Related Parties as defined in clause (76) of section 2 of the Companies Act, 2013.

7. Clause 3(ix)(b) Wilful Defaulter: This clause has been newly added under CARO 2020.

“Whether the company is a declared wilful defaulter by any bank or financial institutions or other lender”;

If the company is declared as a wilful defaulter, then the details such as date of declaration, date of default, amount of default and it’s nature, shall be disclosed to the Auditor.

8. Clause 3(ix)(d) Short term fund utilization for long term: This clause has been newly added under CARO 2020.

“Whether the funds raised on short term basis have been utilized for long term purposes, if yes, the nature an amount to be indicated”;

9. Clause 3(xix) Capacity of meeting current liability: This clause has been newly added under CARO 2020.

“On the basis of financial ratios, ageing and expected dates of realization of financial assets and payment of financial liabilities, other information accompanying the financial statements, the auditor’s knowledge of the Board of Directors and management plans, whether the auditor is of the opinion that no material uncertainty exists as on the date of the audit report that the company is capable of meeting  its liabilities existing at the date of balance sheet as and when they fall due within a period of one year from the balance sheet date.

10. Clause 3(xx) Transfer of CSR fund: This clause has been newly added under CARO 2020.

(a) “Whether, in respect of other than ongoing projects, the company has transferred unspent amount to a Fund specified in Schedule VII to the Companies Act within a period of six months of the expiry of the financial year in compliance with second proviso to sub-section (5) of section 135 of the said Act”;

(b) “Whether any amount remaining unspent under sub-section (5) of the section 135 of the Companies Act pursuant to any ongoing project, has been transferred to special account in compliance with the provision of sub-section (6) of section 135 of the said Act”;

FUND RELATED AMENDMENTS

11. Clause 3(iii)(a) Investment/Guarantee/Security: There had been an amendment as well as new addition in this clause as-

“Whether during the year the company has made investments in, provided any guarantee or security or granted any loans or advances in the nature of loans, secured or unsecured, to companies, firms, Limited Liability Partnerships or any other parties, if so –

(a) Whether during the year the company has provided loans or provided advances in the nature of loans, or stood guarantee, or provided security to any other entity [not applicable to companies whose principal business is to give loans], if do, indicate –

(A)The aggregate amount during the year, and balance outstanding at the balance sheet date with respect to such loans or advances and guarantees or security to subsidiaries, joint venture and associates;

(B)The aggregate amount during the year, and balance outstanding at the balance sheet date with respect to such loans or advances and guarantees or security to parties other than subsidiaries, joint ventures and associates;

12. Clause 3(iii)(b) Investment, Guarantee, Security, Loan/Advance given – not prejudicial: There had been an amendment in this clause as-

“Whether the investments made, guarantees provided, security given and the terms and conditions of the grant of all loans and advances in the nature of loans and guarantees provided are not prejudicial to the company’s interest;

13. Clause 3(iii)(e) Ever-greening of Loan: This clause has been newly added under CARO 2020.

“Whether the loan or advance in the nature of loan granted which has fallen due during the year, has been renewed or extended or fresh loans granted to settle the overdues of existing loans given to the same parties, if so, specify the aggregate amount of such dues renewed or extended or settled by fresh loans and the percentage of the aggregate to the total loans or advances in the nature of loans granted during the year [not applicable to companies whose principal business is to give loans];

14. Clause 3(v) Deemed Deposit: There had been an amendment in this clause as-

“In respect of deposits accepted by the company or amounts which are deemed to be deposits, whether the directives issued by the Reserve Bank of India and the provisions of sections 73 to 76 or any other relevant provisions of the Companies Act and the rules made thereunder, where applicable, have been complied with, if not, the nature of such contraventions be stated; if an order has been passed by Company Law Board or National Company Law Tribunal  or Reserve Bank of India or any court or any other tribunal, whether the same  has been complied with or not;

15. Clause 3(ix)(a) Default in Repayment: There had been an amendment in this clause as-

“Whether the company has defaulted in repayment of loans or other borrowings or in the payment of interest thereon to any lender, if yes, the period and the amount of default to be reported in the format given – to give lender wise details in case of banks, financial institutions and Government only and not in respect of other lenders.

16. Clause 3(ix)(e,f) Fund – Subsidiaries, Associates, Joint Ventures: These clauses has been newly added under CARO 2020.

e) “Whether the company has taken any funds from any entity or person on account of or to meet the obligations of its subsidiaries, associates or joint ventures, if so, details thereof with nature of such transactions and the amount in each case;

f) “Whether the company has raised loans during the year on the pledge of securities held in its subsidiaries, joint ventures or associate companies, if so, give details thereof and also report if the company has defaulted in repayment of such loans raised;

17. Clause 3(xvii) Cash Losses: This clause has been newly added under CARO 2020.

“Whether the company has incurred cash losses in the financial year and in the immediately preceding financial year, if so, state the amount of cash losses;

CONTROL RELATED AMENDMENTS

18. Clause3(i)(a) Record of Intangible Assets: This clause has been newly added under CARO 2020.

B. “Whether the company is maintaining proper records showing full particulars of intangible assets”

19. Clause 3(ii)(a) Inventory Physical Verification: There had been an amendment in this clause as-

“Whether physical verification of inventory has been conducted at reasonable intervals by the management and whether, in the opinion of the auditor, the coverage and procedure of such verification by the management is appropriate; whether any discrepancies of 10% or more in the aggregate for each class of inventory were noticed and if so, whether they have been properly dealt with in the books of account;

20. Clause 3(ix) Fraud Related: There had been an amendment in this clause as-

“Whether any fraud by the company or any fraud on the company by its officers or employees has been noticed or reported during the year; if yes, the nature and the amount involved is to be indicated;

“Whether any report under sub-section (12) of Section 143 of the Companies Act has been filed by the auditors in Form ADT-4 as prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014 with the Central Government;

21. Clause 3(ix) Whistle Blower Complaints: This clause has been newly added under CARO 2020.

“Whether the auditor has considered whistle-blower complaints, if any, received during the year by the company;

22. Clause 3(xiv) Internal Audit system and report: This clause has been newly added under CARO 2020.

“Whether the company has an internal audit system commensurate with the size and nature of its business”;

“Whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor”;

23. Clause 3(xviii) Resignation of Statutory Auditor: This clause has been newly added under CARO 2020.

“Whether there has been any resignation of the statutory auditors during the year, if so, whether the auditor has taken into consideration the issues, objections, or concerns raised by the outgoing auditors;

24. Clause 3(xxi) Consolidated Financial Statements: This clause has been newly added under CARO 2020.

The CARO 2016 did not apply to the consolidated financial statements. But the CARO 2020 contains this clause that is now applicable to report on consolidated financial statements.

“Whether there has been any qualifications or adverse remarks by the respective auditors in the Companies (Auditor’s Report) Order (CARO) reports of the companies included in the consolidated financial statements, if yes, indicate the details of the companies and the paragraph numbers of the CARO report containing the qualifications or adverse remarks”

SPECIFIC REGULATION AMENDMENTS

25. Clause 3(xii)(c) Default in Payment: This clause has been newly added under CARO 2020.

“Whether there has been any default in payment of interest on deposits or repayment thereof for any period and if so, the details thereof”;

26. Clause 3(xvi) NBFC/CIC: This clause has been newly added under CARO 2020.

b) “Whether the company has conducted any Non-Banking Financial of Housing Finance activities without a valid Certificate of Registration (CoR) from the Reserve Bank of India as per Reserve Bank of India Act,1934”;

c) “Whether the company is a Core Investment Company (CIC) as defined in the regulations made by the Reserve Bank of India, if so, whether it continues to fulfil the criteria of a CIC, and in case the company is an exempted or unregistered CIC, whether it continues to fulfil such criteria”;

d)” Whether the Group has more than one CIC as part of the Group, if yes, indicate the number of CICs which are part of the Group”;

The aim of CARO 2020 is to enhance the overall quality of reporting by the company auditors. Therefore, CARO 2020 has included the above-mentioned reporting requirements.

The Hon’ble Finance Minister presented the Union Budget 2021 on 01 February 2021 wherein announced “No depreciation to be allowable on Goodwill from 01 April 2021” (assessment year 2021-22 onwards).

The tax authorities always argued that the depreciation on goodwill in business restructuring like Merger and Acquisition should be disallowed. The rationale beside that no allocable cost is actually incurred for the creating the goodwill and the goodwill is not specifically included in section 32 (Depreciation allowed on Tangible and Intangible Assets) of the Act. The matter has been argued at many judicial forums including the Supreme Court.

In 2012, Supreme Court settled this controversy in the case of Smifs Securities Limited. In this case, depreciation on goodwill arising in the course of amalgamation, the Supreme Court held that the goodwill arising out of excess consideration paid on and over the fair value of assets on business acquisition would qualify as Intangible assets as “any other business or commercial rights of similar nature” applying the principle of ‘ejusdem generis’ to the words used in the meaning of intangible assets

Finance Bill, 2021, above controversy settled by amendments on prospective basis to clarify that no depreciation would be allowable on goodwill from 01 April 2021 (assessment year 2021-22 onwards).

The proposed amendments by Finance Bill, 2021 are as below:

 1.  Section 2(11) – Block of asset has been amended to clarify it does not include goodwill of a business or profession.

 2.  Section 32 has been amended that intangible depreciation is not allowable on goodwill of a business or profession. Further, definition of asset has been amended to exclude goodwill of a business or profession as an asset for the purpose of section 32.

 3.  Section 50 – Computation of capital gains in case of depreciable assets has been amended to provide that where goodwill forms part of block of asset for assessment year 2020-21 and depreciation has been claimed, the written down value of the block would be determined in the prescribed manner. The rules prescribing the computation mechanism will be notified in due course.

 4.  Section 55 – Cost of acquisition has been amended in relation to goodwill of a business or profession if:

 (i)  Goodwill acquired from a previous owner, the cost would be the purchase price of the owner

(ii) Goodwill acquired as a result of gift, amalgamation, and merger. Goodwill was acquired by previous owner; cost will be the cost to the previous owner

(iii) In all other cases- cost will be nil.

It is also been clarified that where depreciation has been claimed on the goodwill preceding to assessment year 2021-22, the same would be reduced from written down value of the block of intangible assets.

What is Corporate Social Responsibility?

CSR is a responsibility of a Company’s towards the community and environment in which it operates. CSR is a way of conducting business, by which corporates contribute to the social good.

Companies contribute for the betterment of our society out of the profit as a mandatory provision under section 135 of Companies Act, 2013 for betterment of our society.

Applicability of CSR Provisions:

Every Company including its holding or subsidiary during the immediately preceding financial year having:

• Turnover of Rs. 1000 crore or more, or
• Net worth of Rs. 500 crore or more, or
• Net Profit of Rs. 5 crore or more.

This provision also apply to the foreign companies having branch office in India and fulfills the above mention conditions.

However, if a company ceases to meet the above criteria for 3 consecutive financial years then the company need not required to comply with these Provisions till such time it meets the specified criteria.

Composition of CSR Committee:

Every Company which fulfills the above mentioned CSR provision shall be required to constitute a CSR Committee.

• Committee Consist of 3 or more directors, out of that at least one director shall be an independent director. However, if the company is not required to appoint an independent director then shall have 2 or more directors in the Committee.
• CSR Committee Consist of 2 directors in case of a private company.
• CSR Committee Consist of at least 2 persons in case of a foreign Company of which one person shall be its authorized person resident in India and another nominated by the foreign company.
• However, if the expenditure of the company against CSR is not more than Rs. 50 lakhs, then it is not required to form the committee.

Functions of CSR Committee:

The Corporate Social Responsibility Committee shall,—

(a) Formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as per Schedule VII,

(b) Recommend the amount of expenditure to be incurred on the activities referred to in clause (a),

(c) Monitor the Corporate Social Responsibility Policy of the company from time to time.

Responsibility of Board of Directors:

The Board of every company referred to in sub-section (1) shall,—

(a) After taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the Company and disclose contents of such Policy in its report and also place it on the Company’s website, if any, in such manner as may be prescribed; and

(b) Ensure that the activities as are included in Corporate Social Responsibility Policy is undertaken by the company or not; and

(c) Ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.

(d) If the company fails to spend such amount, the Board shall, in its report, specify the reasons for not spending the amount as clause (o) of sub-section (3) of section 134 of the Companies Act.

For the term above “average net profit” shall be calculated as per the provisions of section 198:

	PARTICULARS	FY
	Net profit after tax*
Add	Allowed Credits
	Profit on sale of Immovable Property (Original Cost – WDV)
Less	Credits Disallowed
	Premium on Shares or Debentures
	Profit on sale of Forfeited Shares
	Profit on sale of Immovable Property (Sale Value – Original Cost)
	Surplus in measurement of asset or liability at fair value
Less	Expenses Allowed
	All the usual working charges
	Director’s Remuneration
	Bonus or Commission paid to Staff
	Tax on excess or abnormal profits
	Tax on business profits imposed for special reasons
	Interest on Debentures
	Interest on Loans
	Expenses on Repairs (other than Capital Expenditure)
	Contributions made under section 181 (Bonafide Charitable Trusts)
	Depreciation
	Prior period items
	Legal liability or compensation or damages
	Insurance Expenses
Add	Expenses Disallowed
	Income Tax
	Compensations, damages, or payments made voluntarily
	Capital Loss on sale of undertaking or part thereof (Not include losses on sale of asset)
	Expenditure in P&L on measurement of asset or liability at fair value

Activities permitted under CSR:

• Eradicating extreme hunger and poverty;
• Promotion of education;
• Promoting gender equality, and empowering women;
• Reducing child mortality;
• Improving maternal health;
• Combating human immunodeficiency virus, acquired, immune deficiency syndrome, malaria, and other diseases;
• Ensuring environmental sustainability;
• Rural development projects
• Slum area development.
• Protection of national heritage, art, and culture
• Employment enhancing vocational skills, social business projects;
• Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development, and
• Relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women, and such other matters as may be prescribed.

Other Important Point:

The Company shall give preference to the local areas around it where it operates, for expenditure earmarked for Corporate Social Responsibility activities.

CSR is not a donation or charity so 80G deduction not allowed on this expenditure.

However, if the expenditure of the company against CSR is not more than Rs. 50 lakhs, then it is not required to form the committee.

Penalty Provision:

The Government has amended the provision of Section 135 through the Companies (Amendment) Act, 2019 and inserted penalty provisions for companies as well as officers in default as follows;

a) Penalty for Companies: The company shall be punishable with a fine which shall not be less than 50,000 rupees and it may extend to 25 lakh rupees, and

(b) Penalty for Officer in default: Every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with a fine which shall not be less than 50,000 rupees but it may extend to 5 lakh rupees, or with both.

Income tax Benefits:

It is very much clear that expenditure incurred as CSR is not incurred wholly and exclusively for the purpose of carrying on business so not allowed as tax deduction. But if such expenditures are in nature described in Section 30 to 36 of the Income Tax Act, 1961 shall be allowed as deduction.

THE ABOVE AMENDMENT SHALL BE APPLICABLE FROM 1ST APRIL, 2015

A private limited company is requires to file certain forms as an annual Compliance.

Form MGT-7

Form MGT-7 which includes information about the company, its shareholders, Directors, KMP etc. as on 31st March and filed with ROC. As per Section 92 & Rule 11, 12 of Companies (Management & Administration) Rule 2014 all class of Companies included small company and one Person Company (OPC) must file this form within 60 days from the date of Annual General Meeting of the company.

Form AOC-4

Filing of form AOC-4 for submitting financial statements (Profit & Loss and Balance Sheet) along with Board’s report, Auditors’ report, Statement of subsidiaries in Form AOC-1, details of CSR policy etc. AOC-4 must be certified by Company Secretary or Practising Chartered Accountant  and filed with the ROC.

Form MGT-8

Form MGT-8 is a certification given by a Practising Company Secretary, under Section 92(2) of Companies Act 2013.

MGT-8 filling is applicable on Companies:

• A listed company or
• A company with paid-up share capital of Rs 10 crore or more or
• Turnover of Rs. 50 crore or above

Form DPT-3

DPT 3 is a form to file details of deposits or say transaction not considered as deposit under rule 2(1)(c) of the Companies (Acceptance of Deposit) Rules, 2014.

DPT-3 filling is not applicable on:

• Government companies
• Banking companies
• NBFC

Form ADT-1

Filing form ADT-1 regarding appointment or change in auditor if any during the year

Form DIR-3

Filing  DIR-3 KYC Form for KYC of directors having a Director Identification Number (DIN No.).

Filing of KYC of company on yearly basis.

All the above form need to file within time allowed as per Companies Act. 2013

Some more activities need to be done

• All the Director have to provide MPB-1 to the company specify their interest in other entities in the first board meeting of financial year.
• Dir-8 is to be given by directors to the company every year in the initial board meeting about their disqualification.
• Minutes book of Board Meeting and Annual General Meeting should be maintained in writing, signed and kept by company.
• Apart from all above if there is a change in anything, the company had to take note of it and if required to file the form to ROC, then it should be filed on time.

What is a Producer Company?

A producer company is a body of farmers/ agriculturists, Incorporation of producer company is for benefits given to Farmers Under Companies Act 1956, a Producer Company can be formed as per Section 581C of Chapter II of Companies Act, 1956 by 10 individuals (or more) or 2 institutions (or more) or by a combination of both (10 individuals and 2 institutions) having their business objective as per Section 581B as one of the follows:

• Procurement
• Production
• Harvesting
• Grading
• Pooling
• Handling
• Marketing
• Selling, or Export
• Processing including preserving, drying, distilling, brewing, vinting, canning and packaging of produce of its Members
• Manufacture, sale or supply of machinery, equipment or consumables mainly to its Members
• Providing education on the mutual assistance principles to its Members and others
• Rendering technical services, consultancy services, training, research and development
• Insurance of producers or their primary produce
• Promoting techniques of mutuality and mutual assistance
• Any other activity, ancillary or incidental to any of the activities mentioned above.

 

Registration Procedure

The process of Registering a Producer Company is similar to register a Private Limited Company.

• First step is to obtain Digital Signature (DSC) and Director Identification Number (DIN) for the proposed first Directors of the company.
• An application for name reservation in Form INC-1 is to be filed with the relevant Registrar of Companies (ROC) along with 6 names in the order of preference.
•  As per the Act the name of a producer company must end with the words “Producer Company”.
• an application for incorporation is to be filed in the prescribed format for the incorporation of the Producer Company along with following documents:
• Memorandum of Association
•  Articles of Association
•  A Declaration by a professional in Form- INC-8
• The directors consent Letter in the Form DIR – 2 and details in DIR – 8
• All the drafted documents must be attached to Forms INC – 7, INC – 22 and DIR – 12 and uploaded to the ROC website.
• When Registrar is verified with the application and the documents filed for incorporation of Producer Company, he will approve the same and issue Certificate of Incorporation.

Benefits for Producer Companies

In Indian Economy more than 60% of population depends upon agriculture activities for their livelihood. But our Farmers are struggle a lot to cop of this problem Government of India introduced the Producer Company’s concept to the Indian economy. IN this concept many farmers and Primary Producers come together and get many benefited as follows:

1.    Limited liability and separate legal entity.

2.    Acceptance of deposits

3.    Easy management and Registration

4.    Tax Benefits

5.    More Credibility.