ACCOUNTING - Companies Act 2013 states:
The definition of term “financial year” is applicable from 1 April 2014. It requires a company to adopt a uniform accounting year ending 31 March. Companies which are currently following a different financial year need to align with the new requirement within two years. A proviso to the definition states that a company may apply to the NCLT for adoption of different financial year, if it satisfies the following two criteria:
The Central Government has still not notified the NCLT and many provisions relating thereto are not currently notified. Under section 434 of the 2013 Act, certain matters pending with the High Court, District Courts or the CLB, as the case may be, which will be within the jurisdiction of the NCLT, would be transferred to the NCLT from a notified date. Till such time, the courts and the CLB will continue to function. In the absence of NCLT, a company may contact the MCA to seek guidance with regard to which of these authorities they should file an application for adoption of a financial year other than one ending on 31 March.
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In accordance with AS 21, AS 23 and AS 27, a parent company can use financial statements of subsidiaries, associates and joint ventures drawn up to a different reporting date to prepare CFS if it is impractical to have their financial statements prepared up to the same reporting date as the parent. How is the impracticality provision of AS 21, AS 23 and AS 27 impacted by the requirement to have a uniform financial year?
Section 129(4) of the 2013 Act states that “the provisions of this Act applicable to the preparation, adoption and audit of the financial statements of a holding company will, mutatis mutandis, apply to the CFS.” Hence, the requirement concerning uniform financial year applies to both separate financial statements of the parent company as well as CFS of the group.
A parent company has unilateral control over all its subsidiaries. Hence, it should normally be able to obtain their financial statements for the same reporting date as the parent and use them in the preparation of CFS. However, this may not be practical for all the associates/joint ventures. For example, an associate/joint venture incorporated outside India may have non 31 March year-end, either due to requirement of local regulations or requirement prescribed by other significant shareholder. Since the parent company does not have unilateral control over these associates/joint ventures, it may not be in a position to require them to prepare an additional set of financial statements for 31 March year-end for use in its consolidation. Similarly, in case of Indian associates/joint ventures, it is possible that these companies have 31 March year-end for their own statutory reporting. However, their systems may not be geared-up to provide timely information for use in the parent’s CFS. For example, due to requirements of listing agreement, a listed parent needs to finalize its CFS within 60 days of the year-end. However, its non-listed associates/joint ventures need much more time to finalize their financial statements. In such cases, maximum six months gap between the reporting dates of the parent company and its associates or jointly controlled entities may be permitted, provided that companies meet criteria prescribed in accounting standards for use of different period financial statements.
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SUBSIDIARY - Companies Act 2013 states:
Definition of the term “subsidiary”
In accordance with the 2013 Act, “’Subsidiary company’ or ‘subsidiary,’ in relation to any other company (that is to say the holding company), means a company in which the holding company:
The draft rules stated that for the above purpose, total share capital includes both paid-up equity share capital and preference share capital. This resulted in a very unique situation whereby a lender providing finance to a company in the form of redeemable preference shares would treat the borrower as its subsidiary, if the preference shares worked out to be more than 50% of the total share capital.
In the Definition Rules, the definition of total share capital is changed. The Definition Rules state that for the purposes of definition of subsidiary and associate company, “total share capital” comprises paid-up equity share capital and convertible preference share capital. In our view, a convertible preference share includes both optionally as well as compulsorily convertible preference shares. However, preference shares with no option of conversion into equity capital will not be considered for determining if a company is a subsidiary/ associate company. Also, instruments, such as, convertible warrants or options and convertible debentures, are not considered for determining if a company is a subsidiary/ associate company.
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Undoubtedly, the Definition Rules represent an improvement vis-à-vis the draft rules. However, it leaves scope for significant structuring. Consider the following two examples:
Is the definition of the term “subsidiary company” under the2013 Act in sync with the definition under AS 21? If this is not the case, which definition should be used for preparing CFS?
AS 21 read with AS 23 is clear that potential equity shares of the investee are not considered for determining voting power. Also, control under AS 21 is based on voting power, as against total share capital ownership under the 2013 Act. Hence, the definition of the term “subsidiary company” under the 2013Act is different from that under AS 21.
However, there are others who do not appear to be convinced with the view expressed in the previous paragraph. They point out that it is a well settled position in India that in case of conflicting requirements between the statute and accounting standards, the law will prevail. They further argue that the final rule requires the use of accounting standards (AS 21) for preparing CFS but is not relevant for identifying the subsidiaries that will be included in the CFS. For identifying the subsidiaries, definition under the 2013 Act should be used.
This is an area where MCA/ICAI needs to provide guidance. Until such guidance or clarification is provided or AS 21 is revised, our preferred view is that identification of subsidiaries for consolidation should be based on the economic substance; rather than, mere legal form. If definition given in the 2013Act is used to identify subsidiaries for CFS, one may end-up consolidating companies where the reporting company has provided loan in the form of convertible preference shares that do not have any voting power. Hence, our preference is to apply the first view. Under this view, a company applies AS 21 definition to identify subsidiaries to be consolidated. For legal and regulatory purposes, definition of subsidiary as per the2013 Act should be used
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CONSOLIDATED FINANCIAL STATEMENTS Companies Act 2013 states:
Section 129(3) of the 2013 Act requires that a company having one or more subsidiaries will, in addition to separate financial statements, prepare CFS. Hence, the 2013 Act requires all companies, including non-listed and private companies, having subsidiaries to prepare CFS.
The 2013 Act also provides the below:
While there is no change in section 129(3), rule 6 under the Companies (Accounts) Rules 2014 deals with the “Manner of consolidation of accounts.” It states that the consolidation of financial statements of a company will be done in accordance with the provisions of Schedule III to the Act and the applicable accounting standards. The proviso to this rule states as below:
Given below is an overview of key requirements under the Schedule III concerning CFS:
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AS 21 does not mandate a company to present CFS. Rather, it merely states that if a company presents CFS for complying with the requirements of any statute or otherwise, it should prepare and present CFS in accordance with AS 21. Keeping this in view and proviso to the rule 6, can a company having subsidiary take a view that it need not prepare CFS?
This question is not relevant to listed companies, since the listing agreement requires listed companies with subsidiaries to prepare CFS. This question is therefore relevant from the perspective of a non-listed company.
Some argue that because neither AS 21 nor Schedule III mandates preparation of CFS, the Accounts Rules have the effect of not requiring a CFS. Instead, a company should present statement containing information, such as share in profit/loss and net assets of each subsidiary, associate and joint ventures, as additional information in the Annual Report. In this view, the Accounts Rules would override the 2013 Act. If it was indeed the intention not to require CFS, then it appears inconsistent with the requirement to present a statement containing information such as share in profit/loss and net assets of each of the component in the group.
Others argue that the requirement to prepare CFS is arising from the 2013 Act and the Accounts Rules/ accounting standards cannot override/ change that requirement. To support this view, it is also being argued that the Accounts Rules refer to AS 21 for the requirement concerning preparation of CFS and AS 21, in turn, refers to the governing law which happens to be the 2013 Act. Hence, the Accounts Rules/ AS 21 also mandate preparation of CFS. According to the supporters of this view, the proviso given in the Accounts Rules deals with specific exemptions in AS 21 from consolidating certain subsidiaries which operate under severe long-term restrictions or are acquired and held exclusively with a view to its subsequent disposal in the near future. If this was indeed the intention, then the proviso appears to be poorly drafted, because the exemption should not have been for preparing CFS, but for excluding certain subsidiaries in the CFS.
In our view, this is an area where the MCA/ ICAI need to provide guidance/ clarification. Until such guidance/ clarifications are provided, our preferred approach is to read the “proviso” mentioned above in a manner that the Accounts Rules do not override the 2013 Act. Hence, our preference is to apply the second view, i.e., all companies (listed and non-listed) having one or more subsidiary need to prepare CFS.
IFRS exempts non-listed intermediate holding companies from preparing CFS if certain conditions are fulfilled. Is there any such exemption under the 2013 Act read with the Accounts Rules?
Attention is invited to discussion on the previous issue regarding need to prepare CFS. As mentioned earlier, our preferred view is that all companies having one or more subsidiary need to prepare CFS. Under this view, there is no exemption for non-listed intermediate holding companies from preparing CFS. Hence, all companies having one or more subsidiaries need to prepare CFS.
Currently, the listing agreement permits companies to prepare and submit consolidated financial results/financial statements in compliance with IFRS as issued by the IASB. For a company taking this option, there is no requirement to prepare CFS under Indian GAAP. Will this position continue under the 2013 Act?
Attention is invited to discussion on the earlier issue regarding the requirement to prepare CFS. As mentioned earlier, our preferred view is that CFS is required for all companies having one or more subsidiary. The Accounts Rules are clear that consolidation of financial statements will be done in accordance with the provisions of Schedule III to the 2013 Act and the applicable accounting standards. Hence, companies will have to mandatorily prepare Indian GAAP CFS, and may choose either to continue preparing IFRS CFS as additional information or discontinue preparing them.
In the presentation of the Union Budget 2014–15, the Honourable Minister for Finance, Corporate Affairs and Information and Broadcasting proposed the adoption of Ind AS. In accordance with the Budget statement, the MCA has notified Company (Indian Accounting Standard) Rules 2015 vide its G.S.R dated 16 February 2015.
Salient features of the roadmap
Phase I applicable from 1 April 2016 onward to:
Early adoption permitted from 1 April 2015, with one year comparatives.
Once adopted, cannot be revoked.
Companies not covered by the roadmap to continue to apply existing standards under Companies (Accounting Standards) Rules, 2006 Indian GAAP.
An explanation to section 129(3) of the 2013 Act states that “for the purpose of this sub-section, the word subsidiary includes associate company and joint venture.” The meaning of this explanation is not clear. Does it mean that a company will need to prepare CFS even if it does not have any subsidiary but has an associate or joint venture?
The following two views seem possible on this matter:
We understand that the MCA/ICAI may provide an appropriate guidance on this issue in the due course. Until such guidance is provided, from our perspective, the second view appears to be more logical reading of the explanation. Hence, our preference is to apply the second view.
Section 129(4) read with Schedule III to the 2013 Act suggests that disclosure requirements of Schedule III mutatis mutandis apply in the preparation of CFS. In contrast, explanation to paragraph 6 of AS 21 exempts disclosure of statutory information in the CFS. Will this exemption continue under the 2013 Act?
A company will need to give all disclosures required by Schedule III to the 2013 Act, including statutory information, in the CFS. To support this view, it may be argued that AS21 (explanation to paragraph 6) had given exemption from disclosure of statutory information because the 1956 Act did not require CFS. With the enactment of the 2013 Act, this position has changed. Also, the exemption in AS 21 is optional and therefore this should not be seen as a conflict between AS21 and Schedule III. In other words, the statutory information required by Schedule III for SFS will also apply to CFS.
The disclosures given in the CFS will include information for parent, all subsidiaries (including foreign subsidiaries) and proportionate share for joint ventures. For associates accounted for using equity method, disclosures will not apply. This ensures consistency with the manner in which investments in subsidiaries, joint ventures and associates are treated in CFS.
Some practical challenges are likely to arise in implementing the above requirement. For example,
ICAI should provide appropriate guidance on such practical issues. Until such guidance is provided, differing views are possible. One view is that the MCA has mandated these disclosures to present information regarding imports/exports made and foreign currency earned/spent by Indian companies. To meet disclosure objective, CFS should contain disclosures such as import, export, earnings and expenditure in foreign currency for the parent plus Indian subsidiaries (100% share) and Indian joint ventures (proportionate share). These disclosures may be omitted for foreign subsidiaries and joint ventures. Since disclosures for foreign operations are not being given, there may not be any intra-group elimination.
The second view is that Schedule III has mandated specific disclosures and one should look at disclosures required and ensure compliance. Hence, for each subsidiary and joint venture, import, export, earnings and expenditure in foreign currency is identified based on its domicile country and reporting currency. To illustrate, for a US subsidiary having USD reporting currency, any sale and purchase outside US is treated as export and import, respectively. Similarly, any income/ expenditure in non-USD currency is foreign currency income/ expenditure. Under this view, intra-group transactions may either be eliminated or included in both import and export.
In the absence of specific guidance/clarification, we believe that first view is the preferred approach. To explain the approach adopted, we recommend that an appropriate note is given in the financial statements.
Assume that the 2013 Act requires even non-listed and private groups to prepare CFS. Under this assumption, the following two issues need to be considered:
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DEPRECIATION - Companies Act 2013 states:
Amendments in Schedule II to the 2013 Act
Minimum vs. indicative rates
In Schedule II originally notified, all companies were divided into three classes.
Pursuant to a recent amendment to Schedule II, distinction between class (i) and class (iii) has been removed. Rather, the provision now reads as under:
From the use of word “different”, it seems clear that both higher and lower useful life and residual value are allowed. However, a company needs to disclose justification for using higher/lower life and/or residual value. Such disclosure will form part of the financial statements.
Continuous process plant
Under Schedule II as originally notified, useful life of the CPP, for which there is no special depreciation rate otherwise prescribed, was 8 years. This was a major concern for certain companies using CPP as they would have been required to write-off their entire plant over 8 years. The amendment to Schedule II has resolved the issue as useful life of the CPP has now been increased to 25 years. Moreover, the impact of amendment as explained in the preceding paragraph is that a company can depreciate its CPP over a period shorter or longer than 25 years, with proper justification.
BOT assets
In accordance with amendment made to Schedule XIV to the1956 Act in April 2012, a company was allowed to use revenue based amortization for intangible assets (toll roads) created under BOT, BOOT or any other form of PPP route (collectively, referred to as “BOT assets”). Since Schedule II as originally notified did not contain a similar provision, an issue had arisen whether revenue based amortization will be allowed going forward.
The recent amendment to Schedule II has addressed this concern. In accordance with the amendment, a company may use revenue based amortization for BOT assets. For amortization of other intangible assets, AS 26 needs to be applied.
Double/ triple shift working
Under Schedule II, no separate rates/ lives are prescribed for extra shift working. Rather, it states that for the period of time, an asset is used in double shift depreciation will increase by50% and by 100% in case of triple shift working.
Let us assume that a company has purchased one plant and machinery three years prior to the commencement of the2013 Act. Under Schedule XIV, single, double and triple shift depreciation rates applicable to the asset are 4.75%, 7.42% and10.34%, respectively. Under Schedule II, its life is 15 years. For all three years, the company has used the asset on a triple shift basis and therefore, depreciated 31.02% of its cost over three years. For simplicity, residual value is ignored.
On transition to Schedule II, the asset has remaining Schedule II life of 12 years, i.e., 15 years – 3 years. The management has estimated that on single shift basis, remaining AS 6 life is also 12 years. The company will depreciate carrying amount of the asset over 12 years on a straight-line basis. If the company uses the asset on triple shift basis during any subsequent year, depreciation so computed will be increased by 100%. In case of double shift, depreciation will be increased by 50%.
Transitional provisions
With regard to the adjustment of impact arising on the first- time application, the transitional provisions to Schedule II state as below:
“From the date Schedule II comes into effect, the carrying amount of the asset as on that date:
After retaining the residual value, will be recognised in the opening balance of retained earnings where the remaining useful life of an asset is nil.”
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Proviso in the latest amendment to Schedule II states that if a company uses a useful life or residual value of the asset which is different from limit given in the Schedule II, justification for the difference is disclosed in its financial statements. How is this proviso applied if notified accounting standards, particularly, AS 6 is also to be complied with?
AS 6 states that depreciation rates prescribed under the statute are minimum. If management’s estimate of the useful life of an asset is shorter than that envisaged under the statute, depreciation is computed by applying the higher rate. The interaction of the above proviso and AS 6 is explained with simple examples:
Whether the amendment regarding BOT assets allows revenue based amortization only for toll roads? Or can a company apply revenue based amortization to other type of intangible assets created under the BOT model?
The amendment in Schedule II reads as follows “For intangible assets, the provisions of the accounting standards applicable for the time being in force shall apply except in case of intangible assets (Toll roads) created under BOT, BOOT or any other form of public private partnership route in case of road projects.” The amendment clearly suggests that revenue based amortization applies to toll roads. The same method cannot be used for other intangible assets even if they are created under PPP schemes, such as airport infrastructure.
Schedule II clarifies that the useful life is given for whole of the asset. If the cost of a part of the asset is significant to total cost of the asset and useful life of that part is different from the useful life of the remaining asset, useful life of that significant part will be determined separately. This implies that component accounting is mandatory under Schedule II. How does component accounting interact with AS 6 requirements and the amendment in the Schedule II, which allows higher or lower useful life, subject to appropriate justification being provided?
Component accounting requires a company to identify and depreciate significant components with different useful lives separately. The application of component accounting is likely to cause significant change in the measurement of depreciation and accounting for replacement costs. Currently, companies need to expense replacement costs in the year of incurrence. Under component accounting, companies will capitalize these costs as a separate component of the asset, with consequent expensing of net carrying value of the replaced part.
The application of component accounting, including its interaction with Schedule II rates and AS 6 requirements, is likely to vary depending on whether a company treats useful life given in the Schedule II as maximum life of the asset (including its components) or it is treated as indicative life only. Particular, attention is invited to earlier discussions regarding interaction between AS 6 and the proviso added through the recent amendment to Schedule II. Let us assume that the useful life of an asset as envisaged under the Schedule II is 10 years. The management has also estimated that the useful life of the principal asset is 10 years. If a component of the asset has useful life of 8 years, AS 6 requires the company to depreciate the component using 8 year life only. However, if the component has 12 year life, the company has an option to either depreciate the component using either 10 year life as prescribed in the Schedule II or over its estimated useful life of12 years, with appropriate justification. The company should apply the option selected consistently.
Is component accounting required to be done retrospectively or prospectively?
Component accounting is required to be done for the entire block of assets as at 1 April 1 2014. It cannot be restricted to only new assets acquired after 1 April 2014.
How do transitional provisions in Schedule II apply to component accounting?
AS 10 gives companies an option to follow the component accounting; it does not mandate the same. In contrast, component accounting is mandatory under the Schedule II. Considering this, we believe that the transitional provisions of Schedule II can be used to adjust the impact of component accounting. If a component has zero remaining useful life on the date of Schedule II becoming effective, i.e., 1 April 2014, its carrying amount, after retaining any residual value, will be charged to the opening balance of retained earnings. The carrying amount of other components, i.e., components whose remaining useful life is not nil on 1 April 2014, is depreciated over their remaining useful life. The transitional provisions relating to the principal asset minus the components are discussed elsewhere in this publication.
In case of revaluation of fixed assets, companies are currently allowed to transfer an amount equivalent to the additional depreciation on account of the upward revaluation of fixed assets from the revaluation reserve to P&L. Hence, any upward revaluation of fixed assets does not impact P&L. Will the same position continue under the 2013 Act also? If not, how can a company utilize revaluation reserve going forward?
Under the 1956 Act, depreciation was to be provided on the original cost of an asset. Considering this, the ICAI Guidance Note on Treatment of Reserve Created on Revaluation of Fixed Assets allowed an amount equivalent to the additional depreciation on account of the upward revaluation of fixed assets to be transferred from the revaluation reserve to the P&L.
In contrast, schedule II to the 2013 Act requires depreciation to be provided on historical cost or the amount substituted for the historical cost. In Schedule II as originally notified, this requirement was contained at two places, viz., Part A and notes in Part C. Pursuant to recent amendment in Schedule II, the concerned note from part C has been deleted. However, there is no change in Part A and it still requires depreciation to be provided on historical cost or the amount substituted for the historical cost. Therefore, in case of revaluation, a company needs to charge depreciation based on the revalued amount. Consequently, the ICAI Guidance Note, which allows an amount equivalent to the additional depreciation on account of upward revaluation to be recouped from the revaluation reserve, may not apply. Charging full depreciation based on the revalued amount is expected to have significant negative impact on the P&L.
AS 10 allows amount standing to the credit of revaluation reserve to be transferred directly to the general reserve on retirement or disposal of revalued asset. A company may transfer the whole of the reserve when the asset is sold or disposed of. Alternatively, it may transfer proportionate amount as the asset is depreciated.
Schedule II to the 2013 Act is applicable from 1 April 2014. Related rules, if any, also apply from the same date. It may be noted that the requirements of Schedule II are relevant not only for preparing financial statements, but also for purposes such as declaration of dividend. Given this background, is Schedule II applicable to financial years beginning on or after 1 April 2014 or it also needs to be applied to financial statements for earlier periods if they are authorized for issuance post 1 April 2014?
Schedule II is applicable from 1 April 2014. As already mentioned, Schedule II contains depreciation rates in the context of Section 123 dealing with “Declaration and payment of dividend” and companies use the same rate for the preparation of financial statements as well. Section 123, which is effective from 1 April 2014, among other matters, states that a company cannot declare dividend for any financial year except out of (i) profit for the year arrived at after providing for depreciation in accordance with Schedule II, or (ii) …
Considering the above, one view is that for declaring any dividend after 1 April 2014, a company needs to determine profit in accordance with Section 123. This is irrespective of the financial year-end of a company. Hence, a company uses Schedule II principles and rates for charging depreciation in all financial statements finalized on or after 1 April 2014, even if these financial statements relate to earlier periods.
The second view is that based on the General Circular 8/2014, depreciation rates and principles prescribed in Schedule II are relevant only for the financial years commencing on or after 1April 2014. The language used in the General Circular 8/2014, including reference to depreciation rates in its first paragraph, seems to suggest that second view should be applied. For financial years beginning prior to 1 April 2014, depreciation rates prescribed under the Schedule XIV to the 1956 Act will continue to be used.
In our view, second view is the preferred approach for charging depreciation in the financial statements. For dividend declaration related issues, reference is drawn to discussion under the section “Declaration and payment of dividend.”
How do the transitional provisions apply in different situations? In situation 1, earlier Schedule XIV and now Schedule II provide a useful life, which is much higher than AS 6 useful life. In situation 2, earlier Schedule XIV and now Schedule II provide a useful life, which is much shorter than AS 6 useful life.
In situation 1, the company follows AS 6 useful life under the1956 as well as the 2013 Act. In other words, status quo is maintained and there is no change in depreciation. Hence, the transitional provisions become irrelevant. In situation 2, when the company changes from Schedule XIV to Schedule II useful life, the transitional provisions would apply. For example, let’s assume the useful life of an asset under Schedule XIV, Schedule II and AS 6 is 12, 8 and 16 years respectively. The company changes the useful life from 12 to 8 years and the asset has already completed 8 years of useful life, i.e., its remaining useful life on the transition date is nil. In this case, the transitional provisions would apply and the company will adjust the carrying amount of the asset as on that date, after retaining residual value, in the opening balance of retained earnings. If, on the other hand, the company changes the useful life from12 years to 16 years, the company will depreciate the carrying amount of the asset as on 1 April 2014 prospectively over the remaining useful life of the asset. This treatment is required both under the transitional provisions to Schedule II and AS 6.
Let us assume that a company has adjusted WDV of an asset to retained earnings in accordance with the transitional provisions given in Schedule II? Should such adjustment be net of related tax benefit?
Attention is invited to the ICAI announcement titled, “Tax effect of expenses/income adjusted directly against the reserves and/ or Securities Premium Account.” The Announcement, among other matters, states as below:
Considering the above, it seems clear that amount adjusted to reserves should be net of tax benefit, if any.
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CORPORATE SOCIAL RESPONSIBILITY - Companies Act 2013 states:
The 2013 Act requires that every company with net worth of`500 crore or more, or turnover of `1,000 crore or more or a net profit of `5 crore or more during any financial year will constitute a CSR committee.
The CSR Rules state that every company, which ceases to be a company covered under the above criteria for three consecutive financial years, will not be required to (a) constitute the CSR Committee, and (b) comply with other CSR related requirements, till the time it again meets the prescribed criteria.
Constitution of CSR committee
The 2013 Act requires a company, which meets the CSR applicability criteria, to constitute a CSR committee comprising three or more directors. The 2013 Act also states that outof these three directors, at least one director should be anindependent director.
The CSR Rules state that a non-listed public company or a private company, which is not required to appoint an independent director as per the 2013 Act/ Directors’Appointment Rules, can have its CSR Committee without an independent director. Also, a private company having only two directors on its board can constitute the CSR Committee with the two directors.
Some people argue that the CSR Rules are changing the requirements of the 2013 Act. Hence, an issue arises whether a subordinate legislation can override the main legislation. However, most people are likely to welcome the clarifications provided in the CSR Rules.
CSR expenditure
In accordance with the 2013 Act, the board of each company covered under the CSR requirement needs to ensure thatthe company spends, in every financial year, at least 2% of its average net profits made during the three immediately preceding financial years in pursuance of CSR policy. Neither the 2013 Act nor the CSR Rules prescribe any specific penal provision if a company fails to spend the 2% amount. However, the board, in its report, needs to specify the reasons for not spending the specified amount.
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Scope/ applicability
Section 135(1) of the 2013 Act, dealing with the applicability criteria for CSR requirements, refers to net worth/turnover/ net profit ‘during any financial year’. What is meant bythe phrase ‘during any financial year’? Does it require a company to consider its net worth/turnover/net profit for the immediately preceding financial year or the current financial year?
One view is that ‘financial year’ refers to completed period/year in respect of which the financial statements of a company are made-up. The supporters of this view refer the following:
Thus, a company uses its financial statements for the immediately preceding financial year to determine CSR applicability.
The supporters of the second view emphasize on the use of the word ‘during’. They mention that dictionary meaning of the word ‘during’ is ‘throughout the course’ or ‘at one point within a period of time’3. Hence, this word is more connected with the concurrent evaluation or evaluation through-outthe period. Considering these arguments, the supportersof this view believe that a company considers its net worth/ turnover/net profit during the current year to determine CSR applicability. For example, none of the thresholds are currently met in the case of ABC Limited. They are likely to be met during the financial year 2015-16. ABC complies with the CSRrequirements as soon as it meets those criteria in 2015-16, and cannot delay it to 1 April 2016 and onwards.
A clarification from the MCA will help in settling this issue. Until such guidance or clarification is provided, our preferred approach is to apply the second view, i.e., a company considers its net worth/turnover/net profit during the current year to determine CSR applicability. Under this view, it may so happen that a company may meet the prescribed criteria toward the year-end. Thus, it may not be able to spend 2% of its average net profit on CSR activities during the current year. This may require the company to explain its factual position and reason for not spending in the board report.
Whilst two views seem possible for deciding the CSR applicability, the provisions for exit from the CSR requirements seem more clear. The rules state that a company can move out of CSR requirements only if the prescribed criteria are not met for three consecutive years.
Paragraph 3(1) of the CSR rules states as below:
“Every company including its holding or subsidiary, and a foreign company defined under clause (42) of section2 of the Act having its branch office or project office in India, which fulfils the criteria specified in sub-section (1) of section 135 of the Act shall comply with the provisions of section 135 of the Act and these rules.”
Does it mean that if a company is covered under the CSR requirements, its parent/subsidiary will also be automatically covered by the CSR requirements?
The reason for referring to holding/subsidiary company in the rule is not clear. Apparently, two views seem possible. The first view is that a parent/subsidiary company cannot claim exemption from the CSR applicability merely because itssubsidiary/parent company complies with the same. Although, the paragraph contains the phrase ‘including its holdingor subsidiary,’ it also states that ‘which fulfils the criteria specified in sub-section (1) section 135 of the 2013 Act’. Hence, each company in the group should evaluate whether it meets the prescribed criteria. If so, it will comply with the CSR requirements.
The second view is that if a company satisfies the prescribed criteria for CSR applicability, CSR requirements automatically become applicable to its holding and subsidiary companies. It does not matter whether they satisfy the prescribed criteria or not.
The former view seems a more plausible intention, which theMCA should confirm.
Do the CSR requirements also apply to the foreign companies, viz., Indian branch/project offices of foreign companies operating in India?
Neither section 135 of the 2013 Act nor sections 379 to 393 dealing with foreign companies nor the Foreign Companies Rules refer to applicability of the CSR requirements to foreign companies having Indian/branch project office.
However, paragraph 3(1) of the CSR Rules, as reproduced in the previous discussion, makes it clear that a foreign company having its branch/project office in India will comply with the CSR requirements, if the branch/project office fulfils the prescribed criteria.
Meaning of net profit
In accordance with section 135(1) of the 2013 Act, one of the criteria for the CSR applicability is that a company has a net profit of `5 crore or more during any financial year. The 2013Act does not specifically explain the meaning of net profit forthis purpose.
In accordance with section 135(5) of the 2013 Act, a company meeting the CSR applicability criteria needs to spend, in every financial year, at least 2% of its average net profits made during the three immediately preceding financial years, in pursuance of its CSR policy. An explanation to the section 135(5) states that for the purpose of this section,the average net profit will be calculated in accordance with section 198. Section 198 deals with calculation of profitfor managerial remuneration and requires specific addition/deduction to be made in the profit for the year.
In addition, CSR Rules define “net profit” as below. The CSR Rules do not refer whether the definition is relevant for the applicability criteria or CSR expenditure.
“’Net profit’ means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include the following, namely:
How should one resolve the above contradiction?
There may be two possible ways of looking at the definition of net profit in the CSR Rules. The first view is that the CSR Rules define net profit for the purposes of applicability as well as the amount to be spent on CSR activities. The supporters of this view argue that both under section 198 and the CSR Rules, starting point to make adjustments is net profit as per the financial statements. To reconcile two requirements, they believe that a company uses net profit as per the financial statements as starting point and make adjustment required under the CSR Rules to arrive at “net profit” under theCSR Rules. The company uses “net profit” so determined to make specific adjustments required under section 198. The supporters of this view argue that it better achieves the objective for which the term “net profit” was defined in theCSR Rules, i.e., a company can exclude dividends received from other companies covered under CSR from net profit so as to ensure that a group does not incur CSR expenditure on the same income twice. Also, it helps in ensuring that only income earned in India is subject to CSR expenditure.
The second view is that the CSR Rules define net profit in the context of the applicability criterion for CSR requirements. The amount that needs to be spent on CSR is based on the average net profitsdetermined in accordance with section 198. The supporters of this view believe that under section 198, debits and credits are allowed only for items specified in the section. If a company makes any debit/credit for any other item, including, items specified in the CSR Rules, net profit so determined is not as per section 198. Hence, if this view is taken, there will be no conflict between the 2013 Act and the CSR Rules. However, it implies that profit arising from overseas branches and dividend received from other Indian companies covered under the CSR requirement will not get excluded from the ‘average net profit’, for determining CSR spend.
It may be argued that the first view better reflects intention of including ‘net profit’ definition in the CSR Rules. Also, one may argue that it conforms to the harmonious interpretation of the 2013 Act and the CSR Rules. Hence, the first view ispreferred approach. However, this view is not beyond doubt and arguments can be made to support second views also. Sincethis is a legal matter, we suggest that a company consults the legal professionals before taking any final view on the matter.
CSR expenditure and its accounting
The 2013 Act requires the board of each company covered under the CSR to ensure that the company spends, in every financial year, at least 2% of its average net profits made during the three immediately preceding financial years in pursuance of its CSR policy. If a company fails to spend the2% amount, is there any legal/constructive obligation on companies to spend the shortfall in the subsequent years
Neither the 2013 Act nor the CSR Rules prescribe any specific penal provision if a company fails to spend the amount.Also, there does not appear to be any legal obligation on companies to make good short spend of one year in the subsequent years. This indicates that there is no legal obligation on companies to incur CSR expenditure. However, due to disclosure of short spend in the board report, many reputed companies can ill-afford not to spend the prescribed amount. Hence, the naming and shaming policy will create an implied pressure on companies to spend the requisite amount. Also, reputed companies, who have not been able to spend the requisite amount in one year, may try to spend the shortfall in subsequent years.
What is the appropriate accounting for CSR expenditure incurred? Is a company required to charge such amount asan expense to P&L? Alternatively, can a company take a view that CSR is not a mandatory expense and/or expense relating to business and therefore, it should be charged directly to equity?
The argument that CSR expense is a voluntary cost and/or expense not related to business does not appear to be tenable. A company needs to incur this expenditure under the governing law, viz., the 2013 Act. Non-incurrence of this expenditure may severely impact the reputation of a company.
Attention is drawn to paragraph 5 of AS 5 which states as below:
The Framework for the Preparation and Presentation of
Financial Statements defines the term “expense” as below:
Considering the above, we believe that CSR expenditure is an item of expense for the company which needs to be charged to P&L. This approach may also support the company’s claim to a tax deduction.
Let us assume that a company has incurred lower amount on CSR activities in year 1. It expects to cover-up the short- spent amount in the subsequent years. Is the company required to create a provision toward such short-spent amount?
As discussed earlier, there is no legal obligation on a company to spend on CSR or cover for the shortfalls in the spend in subsequent years. It may so happen that a company does not spend the requisite amount, but discloses that it will cover the shortfalls in subsequent years, thereby creating a constructive obligation for itself.
Whilst there is no doubt that provision for constructive obligation is required under IFRS and Ind-AS; the answer to this question under Indian GAAP seems clear from the two EAC opinions. In both these opinions, the EAC seems to have taken a view that constructive obligation are not provided for. In the recent opinion published in The Chartered Accountant of July 2013, the EAC opined “Since as per Department of Public Enterprises Guidelines, there is no such obligation on the enterprise, provision should not be recognised. Accordingly, the committee is of the view that the requirement in the DPE Guidelines for creation of a CSR budget can be met through creation of a reserve as an appropriation of profits rather than creating a provision as per AS 29. On the basis of the above, the committee is of the view that in the extant case, it is not appropriate to recognise a provision in respect of unspent expenditure on CSR activities. However, a CSR reserve may be created as an appropriation of profits.”
Another opinion is contained in Volume 28, Query no 26. In this query EAC opined “A published environmental policy of the company by itself does not create a legal or contractual obligation. From the Facts of the Case and copies of documents furnished by the querist, it is not clear as to whether there is any legal or contractual obligation for afforestation, compensatory afforestation, soil conservation and reforestation towards forest land. In case there is any legal or contractual obligation, compensatory afforestation, felling of existing trees or even acquisition of land could be the obligating event depending on the provisions of law or the terms of the contract.”
Let us assume that a company incurs higher CSR expenditure during any financial year, say, 3% of its average net profit. Can it carry forward the benefit of higher expenditure and use the same to spend lower amount in the subsequent years?
Neither the 2013 Act nor CSR Rules provide any guidance on whether a company can carry forward the benefit of higher expenditure and use the same to spend lower amount in subsequent years.
Since there is no legal obligation for CSR expenditure in the first place, the question of carrying forward the benefit of higher expenditure in one year to spend lower amounts in subsequent years may not be so relevant. Also, from an accounting perspective, the excess expenditure may not meet the definition of an asset, exactly like the lower expenditure not meeting the definition of a liability. This requires a company to charge off the entire expenditure incurred during the year to its P&L.
Can a company incur capital expenditure on CSR related activities? If so, how such expenditure will be included in the 2% limit? Will the company include the entire amount in the year in which capital expenditure is incurred or only depreciation of the capital expenditure will be included in 2% limit for each year?
Paragraph 7 of the CSR Rules explains CSR expenditure in an inclusive manner. It states as below:
Considering the above, one may argue that a company can incur both capital and revenue expenditure on CSR activities. However, no guidance is available on how capital expenditure will be included in the CSR limit. Many believe that if the contribution is made to a trust, then it does not matter whether the trust has spent it on capital assets or operating expenditure, and both would be counted in the 2% limit of the current year. However, if a company itself is incurring CSR expenditure, the capital assets will be owned by the company. Consequently, in such cases, one may argue that only depreciation on the capital asset will be counted as the CSR expenditure. Some income may be generated from use of the capital asset earmarked for CSR activity, say, fee collected from school run for poor children. The CSR Rules are clear that such income will not form part of the business profit for the company; rather, it needs to be incurred on CSR activities.
The MCA may consider clarifying this issue. Until such guidance is provided, it may be appropriate for a company to consult legal professionals before taking final view.
The rule 4(5) states that the CSR projects/programs/ activities, which benefit only the employees of a company and their families, will not be considered as CSR activity. Let us assume that a company is incurring expenditure on CSR activities which benefit both (i) general public, and (ii) employees of the company and their families. Will the expenditure on such activities be included in the 2% CSR expenditure limit?
A reading of the rule 4(5) indicates that employees of a company and their family should not be sole beneficiaries of the CSR activities being carried out by a company. However, it may be acceptable, if together with the general public, some employees also get benefit from the CSR activities of a company. In our view, to meet this requirement in substance, it needs to be ensured that employees and their families are not the most significant users.
To illustrate, assume that a company is operating a school for poor children. In the same school, children of some low paid workers of the company have also been granted admission. These children constitute 5-10% of the total school population. In this case, expenditure on running the school will qualify as the CSR activity. Consider another scenario. The company has a factory at a place which is very far from the city. To facilitate education for children of its employees, the company is operating a school near to its factory. In the school, the company has also granted admission to the children of some villagers staying close to the factory; however, the number of such children is relatively small, say, 5-10%. In this case, it may be difficult to argue that the expenditure qualifies as CSR expenditure.
A related issue arises in cases where a company is distributing its products at free of cost, purely as CSR activity. Let us assume that a pharmaceutical company distributes free medicine for treatment of poor people. It is also assumed that the activity qualifies as CSR under the 2013 Act read with the CSR Rules. The cost of production of medicine given free is `65 and their maximum selling price is `100. The 2013 Act or the CSR Rules do not provide any guidance on whether the cost or selling price of medicine should be included in the CSR expenditure. However, from common parlance perspective, it may be argued that actual cost is the expenditure incurred by a company and it may not include any opportunity cost. Hence, the preferred view is that actual cost of production (i.e., actual expenditure incurred) should be considered for this purpose and the amount spent by pharmaceutical company on CSR is `65
Let us assume that a company has created a trust to carry out its CSR activities. Should the company consolidate that trust under AS 21?
The ICAI has considered the issue regarding the consolidation of trust in the Guidance Note on Accounting for Employee Share-based Payment.The Guidance Note states that AS 21 requires consolidation of only those controlled entities which provide economic benefits to the company. Since an ESOP trust does not provide any economic benefit to the company in the form of return on the investment, it is not required be consolidated.
Typically, trusts created for CSR activities are independent and the company is not a beneficiary. One may argue that no economic benefits, in form of return on investment, flow back to the company. Hence, the CSR trust should not be consolidated.
A company makes payment to an implementation agency for carrying out CSR activities on its behalf. Should the company treat payment made to an implementation agency or actual expenditure incurred by the agency as CSR expenditure?
The implementation agency carries out the underlying activities on the company’s behalf. The rules require the CSR committee to monitor the activities of the agency. Further, the agency needs to provide periodic reports on the projects/activities undertaken and expenditure incurred to the company. These aspects suggest that any payment made by a company to the implementation agency does not discharge the company of its obligation. Rather, the agency is holding money on the company’s behalf and it needs to be ensured that the amount is actually spent on the stated purpose. Hence, one may argue that any amount paid by a company to the implementing agency is only an advance payment. It cannot be treated as CSR expenditure, until the expenditure is actually incurred by the agency.
How should a newly incorporated company comply with the requirement concerning 2% CSR expenditure? Let us assume that MNO Limited is incorporated during the financial year 2014-15. MNO met CSR applicability criteria in the first year of incorporation itself. How can MNO comply with the requirement concerning CSR expenditure @ 2% of average net profit for the three immediately preceding financial years?
Two views seem possible. The first view is that section 135(5) requires 2% of the average net profits made during three immediately preceding financial years to be spent on CSR activities. Since MNO was not in existence for the past three years and does not have profit/loss available for three preceding financial years, CSR expenditure requirement is not applicable to it. In other words, the CSR requirement for MNO will be met only after it has a history of three financial years.
The second view is that when a company is in existence for less than three years, the average of periods in existence should be considered. Just because the company is in existence for less than three years, does not make the requirement of CSR redundant.
It may be appropriate for the MCA to clarify this issue. Until such guidance or clarification is provided, one may argue that it is not necessary for a company to be in existence for 3 years to start incurring CSR expenditure. Hence, the second view seems to be the preferred approach.
Can a company incur expenditure on activities not covered under the Schedule VII and include the same in the 2% expenditure limit?
The CSR Rules are clear that only the expenditure incurred on activities mentioned in the Schedule VII is included in the 2% expenditure limit.
Transitional requirements
The requirements concerning CSR are applicable from 1 April 2014. For companies covered under the requirement, how does the requirement concerning 2% expenditure apply in the first year?
A reading of the 2013 Act and the CSR rules suggests that in the first year of application, a company covered under the requirement needs to incur 2% of its average net profit for past 3 years (i.e., financial year 2011-12, 2012-13 and 2013-14) on the CSR activities. Let us assume that a company covered under the CSR requirements has earned net profit of `50 crores, (`12 crores) (net loss) and `34 crores during the immediately preceding three years. In this case, the company’s average net profit is `24 crores i.e., one-third of (`50 crores - `12 crores + `34 crores). Hence, the company needs to spend 2% of its average net profit, i.e., 2% of `24 crores, on CSR activities.
For companies having other than 31 March year-end, an additional issue is whether they are required to apply the CSR requirements from 1 April 2014 or from the beginning of their next financial year. Will a company having 31 December year- end apply the requirement from 1 April 2014 or 1 January 2015 onward?
Interestingly, the CSR Rules state that reporting requirements of the 2013 Act will apply to financial years commencing on or after 1 April 2014. However, there is no such clear guidance on the constitution of CSR committee and/or CSR expenditure.
One view is that a company determines if it meets the thresholds specified in section 135(1) on a financial year basis. Once the applicability criteria is met, the company sets up a CSR committee and starts spending 2% of its average net profits determined in accordance with section 198 of the 2013 Act. Thus, a company with a calendar year end will examinethis requirement at 1 January 2015 and start spending for the calendar year 2015. Thus, it will not be required to spend on CSR for the year ended 31 December 2014.
The second view is that since the section is applicable from 1 April 2014, the intention is to make companies spend from that date onwards. The three years of average net profit for a calendar year company would comprise of calendar year 2011, 2012 and 2013.
The MCA may clarify this issue. Pending the issue of such guidance/clarification, it may be noted that CSR requirements of the 2013 Act are primarily driven by disclosure requirements. Since it is clear that disclosures will apply from the financial year beginning on or after 1 April 2014, it may be argued that other CSR requirements will also apply from the same date. Hence, view 1 is the preferred approach. This implies that a company, which has calendar year-end and meets the prescribed criteria, will apply CSR requirements from 1 January 2015 onward
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Companies (Amendment) Act, 2015: Key Highlights
The Government of India (GOI) had received several representations from industry stakeholders for amending various provisions of Companies Act, 2013 (CA 2013) to ensure ease of doing business in India. Towards this, the Companies (Amendment) Act, 2015 (CA Amendment 2015) received the assent from the President of India on 25 May 2015 after both the houses of the Parliament approved the CA Amendment 2015. The CA Amendment 2015 has been published in the Official Gazette on 26 May 2015 and is a welcome step towards addressing some of the concerns under CA 2013, though there are several other concerns which are yet to be addressed by the GOI.
The Central Government is authorised to appoint different dates for implementation of different provisions in the CA Amendment 2015. Accordingly, while most provisions have become effective from 29 May 2015, certain amendments are yet to be notified (as specifically mentioned below).
Further, on 29 May 2015, in order to align CA 2013 and the rules thereunder with the CA Amendment 2015, the Ministry of Corporate Affairs (MCA) has also issued amendments to relevant Rules under CA 2013 (namely, the Companies (Share Capital and Debenture) Second Amendment Rules, 2015, the Companies (Declaration and Payment of Dividend) Secondment Amendment Rules, 2015, the Companies (Incorporation) Second Amendment Rules, 2015, the Companies (Registration of Charges) Amendment Rules, 2015 and Companies (Registration Offices and Fees) Second Amendment Rules, 2015), however, these amendments to the rules are yet to be notified in the Official Gazette.
Some of the key amendments and clarifications in the CA Amendment 2015 are as follows:
- No Minimum Paid-up Share Capital: The minimum paid-up share capital requirement of INR 100,000 (in case of a private company) and INR 500,000 (in case of a public company) under CA 2013 has been done away with. Consequently, the definitions of private and public companies stand amended.
Accordingly, no minimum paid-up capital requirements will now apply for incorporating private as well as public companies in India. - Relaxations vis-a-vis Related Party Transactions:
- Section 188 of CA 2013 lists out such related party transactions, which require approval from the board of directors and/or the shareholders, as prescribed. If such related party transactions meet the thresholds prescribed in CA 2013 and the rules thereunder, approval from the shareholders by way of passing of a special resolution (i.e. requiring approval of three-fourth majority of shareholders) was required.
The CA Amendment 2015 has relaxed the approval requirement from a special resolution(i.e. requiring approval of three-fourth majority of shareholders) to an ordinary resolution (i.e. requiring approval of simple majority of shareholders) in case of related party transactions which require shareholders' approval. - Further, Section 188 and the rules thereunder provided that in case of related party transactions between a holding company and its wholly owned subsidiary, a special resolution passed by the holding company was sufficient.
The CA Amendment 2015 has relaxed and done away with the requirement of a special resolution in the above cases provided the accounts of the wholly owned subsidiary are consolidated with the accounts of the holding company, and placed before the shareholders at a general meeting for approval. - In order to align with Clause 49 of the Listing Agreement, Section 177 has been amended to include a proviso to enable the concerned audit committee to provide omnibus approval for related party transactions subject to prescribed conditions.
The above amendment to Section 177 has not been notified as yet.
- Section 188 of CA 2013 lists out such related party transactions, which require approval from the board of directors and/or the shareholders, as prescribed. If such related party transactions meet the thresholds prescribed in CA 2013 and the rules thereunder, approval from the shareholders by way of passing of a special resolution (i.e. requiring approval of three-fourth majority of shareholders) was required.
- Inspection of Resolutions, etc. filed with the Registrar: Earlier, under Section 117 read with Section 399 of CA 2013, certain resolutions (e.g. all special resolutions, resolutions for terms of appointment of managing director, winding-up resolutions, resolutions in relation to sale of undertaking / borrowings, etc.) filed by a company with the Registrar of Companies were open for inspection by any person or to obtain copies.
The CA Amendment 2015 has limited public access of such resolutions relating mainly to strategic business matters. Such documents will no longer be available for public review or permitted to take copies of. This addresses the concerns raised by several corporates in India, specifically private companies, in terms of exposure of critical business matters in public. - Common Seal Optional: CA 2013 required common seal to be affixed on certain documents (such as bill of exchange, share certificates, etc.) Now, the use of common seal has been made optional. All such documents which required affixing the common seal may now instead be signed by two directors or one director and a company secretary of the company.
Consequently, several sections of CA 2013 dealing with common seal have been amended to incorporate the above requirement. - No declarations for commencement of business, etc.: CA 2013 required all companies to file following additional declarations with the Registrar of Companies prior to commencement of business or exercising any borrowing power: (i) declaration by a director that minimum paid-up share capital has been paid; and (ii) company has filed verification of registered office.
The CA Amendment 2015 has removed the above requirements and deleted Section 11 of CA 2013. This reduces the filings to be made by companies in India. - Violation of Acceptance of Deposits, etc.: CA 2013 introduced stringent provisions in relation to acceptance/ renewal / repayment of deposits. However, no specific penalty was prescribed for non-compliance with the relevant provisions i.e. Section 73 and Section 76. This lacuna has been filled by the CA Amendment 2015.
A new Section 76 A has been introduced for the above non-compliances. The defaulting company will be liable for fine of a minimum amount of INR 10,000,000 and a maximum of INR 100,000,000 in addition to the amount of deposit or part thereof, along with interest. Further, every officer of the company in default is punishable with imprisonment which may extend upto 7 years or with a fine amounting to a minimum of INR 2,500,000 and maximum of INR 20,000,000 or both. Such officer may attract additional penalty for fraud under CA 2013 if the non-compliance was done knowingly or with the intention to deceive the company, shareholders, depositors, creditors or tax authorities. - Reporting by Auditors in respect of Fraud: CA 2013 introduced the reporting obligations on auditors of companies to the Central Government if the auditor has reason to believe that a fraud has been committed by officers or employees of the company, irrespective of the amounts involved. The CA Amendment 2015 has provided that thresholds will be prescribed for reporting of frauds to the Central Government, or the audit committee or the board of directors. All such instances of frauds falling below prescribed thresholds will be reported to the board or the audit committee and will need to be disclosed in the annual report of the company, instead of mandatory reporting to the Central Government.
The above amendment eases the administrative burden for the auditors, however, these amendments have not been notified as yet. - Exemptions to Section 185: Section 185 includes restrictions on loans by a company to a director or other interested persons / entities. However, the rules prescribed under Section 185 exempted any loans / guarantee / security by a holding company to its wholly owned subsidiary, and any guarantee or security by a holding company to a financial institution for loan availed by its subsidiary, provided the loan in each of these cases is utilised by the subsidiary for its principal business.
The above provisions of the Rules have now been inserted under Section 185 of CA 2015 itself. - Dividend: Section 123 is an enabling provision for companies to declare divided in a financial year, subject to fulfilment of prescribed conditions. The CA Amendment 2015 has introduced a new proviso which states that a company cannot declare dividend for a financial year, unless the losses and depreciation carried over from past years have been set-off against the profits of the company, in the year it proposes to declare a dividend.
- Special Courts: Section 435 read with Section 436 provides the Central Government the power to set up special courts to try offences under CA 2013.
By way of the above amendment, special courts may now only try offences punishable under CA 2013, with imprisonment for 2 years or more. All other offences are to be tried by a Metropolitan Magistrate or a Judicial Magistrate of the First Class.
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