Vishnuvardhan Reddy Itty Reddy and another V. The Union of India and another

WP/23029/2020

AI Insights

The case involves petitioners Vishnuvardhan Reddy and Rambabu Katta, who challenged the deactivation of their DINs and their disqualification from directorship under Section 164(2) of the Companies Act, 2013. The petitioners argued that their disqualification and the retrospective application of the law were arbitrary and violated the principles of natural justice. The court examined whether the disqualification under Section 164(2)(a) should be applied retrospectively or prospectively and found that it should be applied prospectively, starting from 01.04.2014, based on the legislative intent and supporting circulars from the Ministry of Corporate Affairs. The court also addressed the issue of whether prior notice was required before disqualification, concluding that the statutory provision did not mandate it.

• Counselvise Citation: [2020] 140 COUNSELVISE.COM (IT) 742022 (HC-TELANGANA)
• Appeal Type: Others
• Pronouncement Date: 16-12-2020
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax (Central)-1 New Delhi v. Vatika Township Private Limited, Yashodhara Shroff vs. Union of India, Gaurang Balvantlal Shah s/o Balvantlal Shah vs. Union of India, Bhagavan Das Dhananjaya Das vs. Union of India
• Laws Referred To: Companies Act, 2013, Companies Act, 1956, Constitution of India
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: NAMAVARAPU RAO
• Assessee Lawyers: D KIREET
• Keywords: Annual Returns; Deactivation; Director Identification Number; Disqualification; Financial Statements; Natural Justice
• Section: 154; 11; 164(2); 153(3); 248; 155; 252; 10(6)

Judgement Text

"HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD (Special Original Jurisdiction) WEDNESDAY ,THE SIXTEENTH DAY OF DECET/BER TWO THOUSAND AND TWENTY PRESENT THE HON'BLE SRI JUSTICE CHALLA KODANDA RAM WRIT PETITION NO: 23029 OF 2020 Between 1. Vishnuvardhan Reddy ltty Reddy, S/o. Ramchandra Reddy ltty Reddy, Aged 45 Yrs., Occ. Business, R/o.Flat No.'1403, Kailash Saket Sriyam Apartments, Kapra, Secunderabad - 500062, Telangana. 2. Rambabu Katta, S/o. Gangadhar Rao Katta, Aged 49 Yrs., Occ. Business, R/o. H. No.8-81i5, Plot No.4, 4th Floor, Punnami Residency, Temple Alwal, Alwal, Secunderabad - 500010, Telangana. ...PETITIONERS AND 1. t. The Union of lndia, Rep. by its Secretary tr,tlinistry of Corporate Affairs, A Wing, Shastri Bahvan, Rajendra Prasad Road, New Delhi 1 10001 Registrar of Companies, Telangana 2nd Floor, Corporate Bhavan,GSl post, Tattiannaram, Nagole, Bandlaguda, Hyderabad. ...RES'ONDENTS Petition under Article 226 of the Constitution of lndia praying that in the circumstances stated in the affidavit filed therewith, the High Court may be pleased to issue an appropriate Writ, Order or Direction more particularly one in the nature of Writ of ltilandamus, to permit the Petitioners to continue as Directors of the Company and get appoint or reappointed as Director of any old or new company without any interference and declare terminating ongoing Directorship of the Petitioner's and further deactivating DIN as arbitrary, illegal and contrary to the Principles of Natural Justice, set asrde the same. Petition under Section 151 CPC praying that in the circumstances stated in the affidavit filed in support of the petition, the High Court may be pleased To suspend the disqualification as directors and further direct the Respondents to restore/ reactive the DIN 01551745 and DIN 01551769 of the petitioners pending disposal of the main Writ Petition. lA NO: 1 OF 2020 Counsel for the Petitioner : SRI D. KIREET Counsel for the Respondents: SRI NAMAVARAPU RAJESHWAR RAO, ASST,SOLICITOR GENERAL The Court at the stage of admission made the following: ORDER THE HON'BLE SRI JUSTICE CHALLA KODANDA RAM WRIT PETITION No.23029 o 020 f 2 ORDER: The petitioners challenge deactivatlon of thelr Dlrector Identiflcation Numbers (DIN) viz., 01551745, and 01551769, and their d isqua lification from Directorship under Section 164(2) of the Companies Act, 2013, for alleged default in filing financial statement/An n ual Returns, and consequently seek restoration of their Director Identiflcation Numbers. When the matter is taken up, it is submilted by the learned counsel for the petitioners that the issue raised in the present Writ Petition is squarely covered by the common order dated 18.07.2019 passed in W.P.No.5422 of 2018 and batch. Learned Standing Counsel for the Registrar of Companies (For the State of Telangana) appearing for respondent No.2 does not dispute the aforesaid submission. Operative portion of the aforesaid order reads as under: \"For the foregoing reasons, the impugned orders in the writ petitions to the extent of disqualifying the petitioners under Section 164(2Xa) of the Act and deactivation ot their 0lNs, are set aside, and the 2nd respondent is directed to activate the DlNs of the petitioners, enabling them to function as Directors other than in strike off companies. It is made clear that this order will not preclude the 2''d respondent from taking appropriate action in accordance with law for violations as envisaged under Section 164(2) of the Act. giving the said provision prospective effect from 01.04.2014 and for necessary action against OIN in case of violations of Rule '11 of the Rules. It is also made clear that if the petitioners are aggrieved by the action of the respondents in striking off their companies under Section 248 of the Act, they are at liberty to avail alternative remedy under Section 252 of the Act. All the writ petitions are accordingly allowed to the extent indicated above.\" Accordingly, in view of the Common Order dated 18.07.2019 passed in W.P.N0.5422 of 2018 and batch, and for the reasons recorded therein, this Writ Petition is also allowed in terms thereof. No costs. l4iscellaneous Petitions, if any pendlng, shall stand closed. SD/.K.SAILESHI ASSISTAN TREG AR //TRUE COPY// SECTI N OFFICER \"',I:i;\"\":'a5y.yil'B'#'q\"-'jqi$!{\"ff \"ii%*ii:::,:,T::[::: ii,1#tti'H*{ii,rfrt;ilffi #[t*lt.,s..,.,GeneraAdv'ca'ie .-. r'/ IOPUCI s. two CD Copies HIGH COURT DATED:1611212O2O ORDER ALLOWING THE WP WITHOUT COSTS lttE s74 ( o o 19 I)EC 2U0 (1( :aI * qF-o l I , C ) I co0' eA )vro, rrt\"\" WP.No.23029 of 2020 v^ .t THE HON'BLE SRI ]USTI E A.RA]ASHEKER REDDY 1 4 5 o 37A3 13n 5 L4 o 3 n Nn dnoE? nF, o I A qC47 E( 5669 5687 c7QE ANAT ANAT I ) B 5 6 B 6958 6 B1 70 01 7 7 69 -rrr'r? 'r1rta. -rla) 1Ac. 4 ', ', 2 7< o 5 '7 732 7765 77 7 R' 4 70'ra AR 8111. 8223. 8586. 8590. 9333. 934o. 9381. 9468. 9563. 9584. 9623. 9726. 9737. 10058. 10099. 1120 a, 1L223, 11239, 11263. 11aa9. 11991. 12018. 12036. 12040. 12 69, 12108, t2144, 12186. 12L94. t2200. 12209. 122t5. 12217.12 43, L2.260, 12262, 12288. 12342. t2350, L24L7, L2432, 12472, t2494, 12506, L2574, 12598, L262L, t2702, L2735, L2740, 12A45,12850, 12865. 12866, 13013, 13618. 13730. L3749. 13779. t378a. 13 39, 13455, 13474, 13912. L39L7. 13945. 14101. L4L74. 14207.14350. L4361. 14390. 14392. t4397. 14409, 14582 AND 14597 0F 2019 Since, the issue jnvolved in all the writ petitions is one and the same, they are heard together and are being disposed of by this common order. 3. The petitionersT who were directors of the struck off companies, 2. The petitioners are the directors of the private companies, registered under the Companies Act, 2013 (18 of 2013) (for short'the Act'). Some of the such companies are active, and some of them have been struck off from the register of companies under Section 248(1)( c ) of the Act, for not carrying on any business operation for the specified period mentioned in the said provision, and for not making any application within the specified period, for obtaining the status of a dormant company under Section 455 of the Act. and who are presently directors of active companies, during annual the releva nt returns for a period in question, failed to file financial statements or continuous period of three years. Therefore, the 2'd respondent passed the impugned order under Section L6a(2) of the Act, disqualifying them as directors, and further making them ineligible to be re-appointed as directors of that company, or any other company, for a period of five years from the date on which the respective companies failed to do so. The Director Identification Numbers (DINs) of the petitioners were also deactivated. Aggrieved by the same, the present writ petitions have been filed. COMMON ORDER 4. This court granted interim orders in the writ petitions directing the 2nd respondent to activate DINs of the petitioners, to enable them to function other than in strike off companies. 5. Heard the learned counsel appearing for the petitioners in all the writ petitions, Sri K.Lakshman, learned Assistant Solicitor General appearing for the respondents - Union of India. 6. Learned counsel for the petitioners, contend that before passing the impugned order, notices have not been issued, giving them opportunity, and this amounts to violation of principles of natural justice, and on this ground alone, the impugned orders are liable to be set aside. 7. Learned counsel submits that Sectron 164(2)(a) of the Act empowers the authority to disqualify a person to be a director, provided he has not filed financial statements or annual returns of the company to which he is director, for any continuous period of three financial years. Learned counsel further submits that this provision came into force with effect from 7.4.2074, and prior thereto i,e., under Section 27+(t)(g) of the Companies Act, 1956 (1 of 1956), which is the analogous provision, there was no such requirement for the directors of the private companies. They contend that this provision under Act 18 of 2013, will have prospective operation and hence, if the directors of company fail to comply with the requirements mentioned in the said provision subsequent to the said date, the authority under the Act, is within its jurisdiction to disqualify them. But in the present cases, the 2nd respondent, taking the period prior to 1.4.2O14, i.e., giving the provision retrospective effect, disqualiFied the petitioners as directors, which is illega I and arbitrary. B. With regard to deactivation of DINs, learned counsel for the petitioners submit that the DlNs, as contemplated under Rule 2(d) of the Companies (Appointment and Qualificatton of Directors), Rules, 2014 (for { short'the Rules), are granted for life time to the applicants under Rule 10(6) oF the said Rules, and cancellation of the DIN can be made only for the grounds mentioned in clauses (a) to (f) under Rule 11 of the Rules, and the said grounds does not provide for deactivation for having become ineligible for appointment as Directors of the company under Section 164 of the Act. Learned counsel further submits that as against the deactivation, no appeal is provided under the Rules, and appeal to the Tribunal under Section 252 of the Act is provided only against the dissolution of the company under Section 248 of the Act. 9. Learned counsel further submits that 1'r respondent - Government of India represented by the lvlinistry of Corporate Affairs, has floated a scheme dated 29.12.2O17 vtz., Condonation of Delay Scheme - 2018, wherein the directors, whose DINs have been deactivated by the 2\"d respondent, allows the DINs of the Directors to be actlvated. However, such scheme is not applicable to the companies which are struck off under Section 2aB(5) of the Act. In case of active companies, they can make application to National Company Law Tribunal under Section 252 of the Act, seeking for restoration, and the Tribunal can order for reactivation of DIN of such directors, whose DIN are deactivated. However, under Section 252 only the companies, which are carrying on the business, can approach the Tribunal and the companies/ which have no business, cannot approach the Tribunal for restoration. They submit that since the penal provision is given retrospective operation, de hors the abovc scheme, they are entitled to invoke the jurisdiction of this court under Article 226 of the Constitution of India. 10. With the above contentions, learned counsel sought to set aside the impugned orders and to allow the writ petitions. 11. On the other hand learned Assistant Solicitor General submlts that fallure to file financial statements or annual returns for any continuous perjod + of three financial years, automatically entail their disqualification under Section rcaQ)G) oF the Act and the statute does not provide for issuance of any notice. Hence, the petitioners, who have failed to comply with the statutory requirement under Section 164 of the Act, cannot complain of violation of principles of natural justice, as it is a deeming provision. Learned counsel further submits that the petitioners have alternative remedy of appeal under Section 252 of lhe Act, and hcncc writ petitions may not be cntertained. 12. To consider tl.re contention of the learncd Assistant Solicitor Gencral with rcgard to alternative remedy of appeal under Sectron 252 of the Act, the said provision is required to be considered, and the same is extracted as under for better appreclation: 252. Appeal to Tribunal (1) Any person aqqrieved by an orderofthe Registrar, notifying a company as dissolved under Section 248, may file an appeal to the Tribunal within a period of three years from the date oF the order of the Regrstrar and if the Tribunal is of the opinion that the removal of the name of the company from the register of companies is not justified in view of the absence of any of the grounds on which the order was passed by the Registrar, it may order restoration of the name of the company in the register of companies; Provided that before passing an order under this section, the Tribunal shall give a reasonable opportunity of making representations and of being heard to the Registrar, the company and all the persons concerned: Provided further that rF the Registrar is satisfied, that the name of the company has been struck off from tl're register of companies either inadvertently or on basis of incorrect information furnished by the company or its directors, which requires restoration in tl're register of companies, lle rnay within a period oF three years from the date of passing of the order dissolving the cornpany under Sectron 248, file an appllcation before the Tribunal seeking restoratron of name of such com pany. (2) A copy of tlre order passed by the Tribunal shall be filed by the company wrth the Regrstrar within thirty days frorn the date of the order arrd on receipt of tlre order, the Registrar shall cause the name of the comp.-rlry to lle restored n the regisLer of cornpanies and slrall issLre a fresh certlfrcate of incorporatron. (l) lf a cornpany, or al]y n]cmber or cre{:lrtor oT wo|ker thcreof fcels agqfleved by tlre conrpany hdving tts namc sLruck o[f fron] lhe regisLer of con]panies, tlrc Tflbunal or an applrcaton ll]ade by the corI]p.-Iry, nre|nber, credrtor or ! /orkman l]cFore the expiry oF twenty years frorn tlre publrcat on rn lhe OfFrcra Gazetle oF the nolice under sull sectron (5) oF Scctron 243, if sdtisfied that tlre company was, at tlre timc of its name being slruck off, carrying on business or in operatior-r or otherwise rt is lust that tl're name of the conrpany be rcstored to the register of companies, order the narne of the company to be restored to the register of companies, and the Tribunal may, by the order, give sucl'r other directions and make such provisions as deemed just for placing the company and all other persons in the same position as nearly as may lle as if the name of the company has not been struck off from the register of companies. I ) A reading of above provision goes to show that if the company is dissolved under Section 248 of the Act, any person aggrieved by the same, can file an appeal. Thus the said provision provides the forum for redressal against the dissolution and striking off the company from the register of companies. It does not deal with the d isq ua lification of the directors, and deactivation of their DINs. In the present case, the petitioners are only aggrieved by their disqualification as directors and deactivation of DINs, but not about striking off companies as such. Hence, Section 252 of the Act, cannot be an alternative remedy for seeking that relief, and the contention of the learned Assistant Solicltor General, in this regard, merits for rejection. 13. Under Section t64(2)(a) of the Act, if the Director of a company fails to file financial statements or annual Teturns for any continuous period of three financial years, he shall not be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so. The said provision under the Act 1B of 2013, came into force with effect from 0L.O4.2014, and the petitioners are disqualified as directors under the said provision. At this stage, the issue that arises for consideration is - whether the d isq ua lification envisaged under Section 16a(2)(a) of the Act, which provision came into force with effect from 07.O4.2074, can be made applicable with prospective effect, or has to be given retrospective operation? In other words, the issue would be, from which financial year, the default envisaged under Section 164(2)(a) of the Act, has to be calculated, to hold the director of the company liable? 1n this regard, the learned counsel brought to the notice of this Court, the General Circular No.0B/14 datcd 4.4.2074 issued by the Ministry of Corporation affairs, which clarifies the applicabillty of the relevant financial years. Tlre relevant portron of the said circular is as under: \"A number of provisions of the Companies Act, 2013 including those relating to maintenance of books of account, preparatjon, adoption and filing of financial statements (and documents required to be attached thereto), Auditors reports and the Board of Drrectors report (Board's report) have been brought into force wrth 6 effect from 1st April, 2014. Provisions of Schedule I1 (useful lives to compute depreciation) and Schedule III (format of financial statements) have also been brought into force from that date. The relevant Rules pertaining to these provisions have also been notified, placed on the website of tlre Ministry and have come into force from tl're same date. The 14inistry has rcceived requests for clarlfication wlth regard to the relevant financial years with eFfect from which such provisions of tlle new Act relating to maintenance of books of account, preparation, .rdoption and filing of financial statcments (and attachments thcreto), audrtors report and Board's report will be appl c(rblc. Although the position 1n thrs behalf rs quite clear, to make lhings absolLrtely clcar rt rs hereby notified that the financial statements (and documents required to be attached thereto), audrtors report and Board's report in respect of firlancial years that commenced earlier tiran 1't April shall be qoverned by the relevant provrsions/schedules/rules of the Companies Act, 1956 an(l that in respect of frnancial years commencing on or .rfter lstApril, 2014, the provrs ons of the new Act shall apply. \" A rcading of Ihe abovc circular nrakcs the documents required to be attached report in respect of financial years that it clear the financial statements and thereto, a ud itors report commenced ea rlier than and Boa rd's be noticed that the analogous of 2013, is Section 274(L)(g) of 1of 1956 is extracted as under shall be governed by the provisions under the Companies Act, 07.04.2074, 1956 and in respect of financial years commencing on or after O1.O4.2074, the provisions of the new Act shall apply. 14. At this stage it is provision to Section 164( 2 )(a ) Act 1 of 1956. The said provision under Act for ready reference: Section 274(1) A person slrall not be capable oF bcing apporntcd director oF a company, if - required to of the Act 18 A reading of the above provision under Act 1 of person capable of being appointed director of a already a director of a public company, which (9) such pcrson s already a drrector of a public conrpany ,r'lrch, (A) has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first day oF April, 1999; or (B) Provided that suclr person sllall not be eligrble to be appointed as a drrector of any other public company for a period of five years fronr the ddlc on which slclr public company, in which he is a director, failed to file annual accounts and annual retLrrns under sub-clause (A) or has failed to repay its deposits or interest or redeem its debentures on due date or pay dividend referred to in clairse (B). 1956, makes company and it clea r that if a such has not filed annual person rs accounts and annual returns For any continuous three financlal years commencing on I and after the first day of April 1999, shall not be cligible to be crppointed as a director of any other public company for a period of five years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns. So the statutory requirement of filing annual accounts and annual returns, is placed on the directors of a 'public company'. There is no provision under the Act 1oF 1956, which places similar obligations on the directors of a 'private company'. Therefore, non- filing of annual accounts and annual returns by the directors of the private company, will not disqualify them as directors under the provisions of Act 1 of 1956. 15. Under Section 164(2) of the new legislation i.e., Act 1B of 2013, no such distinction between a 'private company' or a 'public company' is made and as per the said provision goes to show that no person who is or has been a director of a'company', fails to file financial statements or annual returns for any continuous period of three financial years, will not be eligible for appointment as a director of a company. As already noted above, the said provision, came into force with effect from O1.O4.201,4. 16. Coming to the facts on hand, the 2nd respondent has disqualified the petitioners under Section 16a(2)(a) of the Act 18 of 2013, for not filing financial statements or annual returns, for period prior to 01.04.2014. The action of the 2nd respondent runs contrary to the circular issued by the Ministry of the Corporate Affairs, and he has given the provisions of Act 1B of 2013, retrospective eFfect, which is impermissible. t7. The Apex Court in CaMMISSIONER OF INCOME TAX (CENTRAL)-L NEW DELHI v, VATIKA TOWNSHIP PRIVATE LIMITEDI has dealt with the general principles concerning retrospectiv ity. The relevant portion of the judgment is thus: 27. A legislatron, be it a statutory Act or a statutory Rule or a statutory Notifrcation, may physrcally consists of words printed on papers. HoweveT, c0l5)lsccl 3 conceptually it is a grcat deal more than an ordinary prose. There is a special peculiarity in the n]ode of verbal comfirunication by a legislation. A legislation is not JUSt a senes ot statements, such .,rs one ftnds in a work oF fictlon/non fictiorl or even Ir .r ludgment of a court of law. Tlrere is a techn que required to draft a legislatrorl as !ell as to understand a legislation. Former [ecllt que is known as legrslative dr.rFting and latter one is to be forrnd rn thc various prnciDles oF'lnterpretation of Statutes'. Vis-a-vis ordinary prose, .r leqislation difFers ir'l its provenance, lay-out and fcatures as also rn the ]lrp]rcatron as to rts mean]lrg th.]t ariscs by presunlpttons as to the intent of the mdkcr tllereof. 2U. Of the various rules guid ng how a egisatron has to llc nterpreted, olle estatllishcd rule rs that unless a contrary rntentron appears, a cg slatron is prcsun]ed not to be intendcd to have a retrospective opcration. The dea IJeh nd the rule ls that a currerlt law should govern cuTrent activities. La!/ passed today cannot apply to tlre events of the past. lF we do son'rething today, wc do it keeping ln the law of today and in force and not tomorrow's backward adjUStment of lt. Our belieF in the nature of the law is founded on the bed rock that every hrrman being rs entrtled to arrange his affairs by relying or'r the existrnq law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit : law looks forward not backward. As was obscrved in Phillips vs. Eyre [(1870) LR 6 QB 1], a retrospective legislation is contrary to tlre general principle that legislation by whiclr the conduct of mankind is to be regulated wh€n introduced for the first tinre to deal witlr future acts ought not to change the character of past transactions carried on upon the faith of the then existing law. 29. The obvious basis of the principle against retrospectivity is the principle of 'fairness', which must be the basis of every legal rule as was observed in the decision reported in L'Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Co. Ltd. [{1994) 1 Ac 486]. Thus, legislations wl'rich modified accrued riglrts or which impose obligations or inrpose new duties or attach a new disability have to be treated as prospective unless the legislative intent is clearly to give tl.re enactment a retrospective effect; unless the legislation is for purpose of supplying an obvrous omission in a former iegislation or to explain a former legislalion. We need not note that cornucopia oF case law available on the sutllect because aforesaid legal position clearly emerges fron] the various decislons arrd this legal position,,!as conceded by tlre counsel for the parties. In any case, we shall refer to few JUdgments conta ning this dicta, a little laler. 30. We !,/ould also like to point out, For the s.rke of coflrpleteness, that wherc a bcnefit is cooFerred by a legislation, tlre rule agarnst a retrospective construction is different. If a legislatron confers a bcnefrl on sorne persons but wlthout inflrcting a corresponding detriment on some oIl]cr person oT on the public generally, and where to confer such benefit appears to have been tlre lcgislators obJect, then the presumptron would be that such a legrslation, grvir'rg rt a purposive construction, would warrant it to be given a retrospective effcct. Tlris exactly s the lustiFication to treat procedural provrsions as retrospective. ln Governmcnt of India & Ors. v. Indran Tobacco Assocratlon, [(2005) 7 SCC 396], the doctflne of fairness ,v!as lreld to be relevar'lt Factor to construe a st.ltlrte confernng .-r bcncFrt, in tlre context of it to be given a rctrospeclive opcratioD. The sanre doclrne oF iarrncss, to hold that a statute was retrospectrve in l]atLrc, wds applred rn thc case oF VrJay v. Statc of lulalraraslrtra & Ors., [(2006) 6 SCC 239]. lt was hcld that r,!here a la ,v rs crracted for the benefit of comn]unrty as a lvhole, even tn tlle absence of a provtsron the statute Inay be held to be retrospective in nature. However, we are (sic nof) confronted witlt any sLlch situation here, 31. ln suclr cases, retrospectivity is attached to benefit the persons in contradistinction to the provisior'r in.rposing some burden or liability where the presumptron attached towards prospectivity. In tlre instant case, the proviso added to Section 113 of the Act is not beneficial to the assessee. On the contrary, it is a provision wlrich is onerous to the assessee. Therefore, in a case like this, we have to proceed with the normal rule of presumption against retrospective operatron. Thus, the rule against retrospective operation is a fundarnental rule of law that no statute shall be construed to have a retrospectrve operation unless such a construction appears very clearly in the terms of the Act, or arises by necessary and distinct lmplication. Dogmatically framed, the rule is no more tlran a presumption, and thus could be displaced by out weighing factors. 43. There is yet another very interesting piece of evidence that clarifies that provision beyond any pale of doubt viz., the understanding of CBDT itself regarding this provision. It is contained in CBDT Circular No.B of 2002 dated 27.8.2002, with the subject \"Finance Act, 2002 - Explanatory Notes on provision relating to Direct Taxes\". This circular lras bcen rssued afler the passing of the Finance Act, 2002, by wllrch anrendment to sectlon 113 was made. In this circular, vaTious amendrnents to lhe lncome tax Act are drscusscd amply dcntonstral ng as lo whtch anrendments are cla Flcatory/retrospect vc in o[)eratron .-]nd wl]lclt amendnleltts are prospecttve. I { 9 For example, Explanation to section 158-BB is stated to be clarificatory in nature. Likewise, rt is mentioned that amendments in Sectlon 145 whereby provisrons of that section are made applicable to block assessments is made clarificatory and would take effect retrospectively from 1sr cjay of luly, 1995. When it comes to amendment to Sectron 113 of the Act, thrs very circular provides that the said amendment along with the amendments in Section 158-BE, would be prospective i.e., will take effect from 1.6.2OO2.\" 18. Thus, the Apex Court in the above judgment, has made it clear that unless a contrary intention appears, a legislation has to be presumed to have prospective effect. A reading of Section 164 of the Act does not show that the legislation has any intention, to make the said provision applicable to past transactions. Further. the Apex Court in the above judgment at paragraph No.43, found that the circular issued by the authority after passing of the legislation, clarifying the position with regard to applicability of the provisions, has to be construed as an important piece of evidence, as it would clarify the provision beyond any pale of doubt. In the present case, as already noted above, the lvlinistry of Corporation affairs has issued the circular No.0B/2014 dated 4.4.2014 clarifying that financlal statements commencing after 01.04.2014, shall be governed by Act 18 of 2013 i.e., new Act and in respect of financial years commencing earlier to 01.04.2014, shall be governed by Act 1. of 1956. At the cost of repetition, since in the present casesi as the 2\"d respondent / competent authority, has disqualified the petitioners as directors under Section 164(2)(a) of the Act 1B of 2013, by considering the period prior to 0I.O4.2014, the same is contrary to the circular, and also contrary to the law laid down by Apex Court in the above referred judgment. 19. If the said provision is given prospective effect, as per the circular dated 4.4.2074 and the law laid down by the Apex Court, as stated in the writ affidavits, the first financial year would be from 01-04-2014 to 31.03.2015 and the second and third years financial years would be for the years ending 31.03.2016 and 31.03,2017. The annual returns and financial statements are to be filed with Registrar of Companies only after the conclusion of the annual general meeting of the company, and as per the first lo proviso to Section 96(1) of the Act, annual gcneral meeting for the year cnding 31.03.201-1 , can be held within six months from the closing of financial ycar i.e., by 30.09,2017. Further, the time limit for filing annual returns under Section 92(4) of thc Act, is 60 days from annual gcncral meeting, or the last datc on which annual general rnceting ought to havc been held with normal fee, and within 270 days with additional fee as per the proviso to Section 403 of the Act. Learned counsel submit that if the said dates are calculated, the last date for filing the annual returns would be 30.17.2017, and the balance sheet was to be filed on 30.10.2017 with normal fee and with additional fee, the last date for filing annual returns is 27.O7.2O1a. In other words, the disqualification could get triggered only on or after 27.O7.2018. But the period considered by the 2'd respondent in the present writ petitions for clothing the petitioners with disqualification, pertains prior to 01.04.2014. Therefore, when the omission, which is now pointed out, was not envisaged as a ground for disqualification prior to 1.4.2O14, the petitioncrs cannot be disqualified on the said ground. This analogy is traceable to Article 20( 1) of the Constitution of India, which states that \"/Vo person shall be convicted of any offence except for violation of a law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence\". In view of the same, the ground on which the petitioners were disqualified, cannot stand to legal scrutiny, and the same is liable to be set aside. 20. A learned Single Judge of the Hlgh Court of Karnataka ln YASHODHARA SHROFF vs. UNION OF INDIA2 considering Sectlon l6a(2)(a) of the Act and other provisions of the Act, and various judgments, passed an elaborate order and held that the said provision has no rctrospective operation. The observations of the learned Judge, pertaining to - 'l'No.5291 I ol :017 irrrd brtclr drtcd 12.0r) ll)lq ll '15|ecial CivilApplication No ll-ll5 ol'1017 and balch dirlcll I8.ll.l0I8 { private companies, which are relevant for the present purpose, are extracted as under: 208 . In view of the aforesaid discussion, I have arflved at the following conclusions: It is held that Section 164(2)(a) of the Act is not u/tra ylrus Article 14 of the Constitution. The said provrsion is not manifestly arbitrary and also does not fall within the scope of the doctrine of proportionality. Neither does the said provision violate Artrcle 19(1)(q) of tlle Constitution as rt is made in the interest of general public and a reasonable restrictron on the exerctse of the said right. The oblect and purpose of the said provision is to stipulate the conseclUence of a disqualification on account of the circumstances stated therein and le same is in order to achreve probrty, accountabilrty, and transparency tn corporate 9OVernance. (a) (b) That Article fslc) Sectron 164(2) of the Act applies by operation of law on the basis of the circumstances stated therein, the said provision does not envisage any hearing, neither pre-disqualification nor post-disctualification and this is not in violation of the principles of natural justice, is not ultra ylres Artrcle 14 of the Constitution. (c) That Section $a(2) of the Act does not have retrospective operation and is therefore, neither unreasonable nor arbitrary, in view of the interpretation Dlaced on the same. (d) (e) Insofar as the private companies are concerned, disqualification on account of the circumstances stated under Section 164(2)(a) of the Act has been brought into force for the first time under the Act and the consequences of disqualification could not have been imposed on directors of private companies by taking into consideration any period prior to 01.04.2014 for the purpose of reckoning continLrous period of three financial years under the said provision. The said conclusion is based on the principal drawn by way of analogy from Article 20(1) of the Constitution, as at no point of time prior to the enforcement of the Act, a disqualification based on the circumstances Lrnder Section 164(2) of the Act was ever envisagecJ under the 1956 Act vis-a-vrs directors of private companies. Such a drsqualrfrcatron could vrs t a drrector oF only a public company under Sectron 274(!)19) of 1956 Act and never a dr[ector oF a pr]vate coml)any. SLrch drsqrralrfrcatron oi the petitroners !!lro are d rectors or private companies rs hence quashed. (r) (g) Consequently, where the disqualification under Section 164(2) of the Act is based on a continuous peflod of three frnancral years commencing from 01.04.2014, wherein financral statements or annual returns have not been filed by a public or private company, the directors of such a company stand disqualified and the consequences of the said disqualification woLrld apply to them under the Act. 21. A learned Single of the High Court of Gujarat at Ahmedabad in GAURANG BALVANTLAL SHAH S/O BALVANTLAL SHAH VS. UNION OF INDIA3 expressed similar view as that of the leaned single Judge of High Court of Karnataka (1 supra), and held that Section rca(2) of the Act of 2013, which had come into force with effect from 1.4.2074 would have prospective, and not retrospective effect and that the defaults contemplated under Section 16+(2)(a) with regard to non-filing of financial statements or l annual returns for any continuous period of threc financial years would be the default to be counted from the financial year 2014-15 only and not 2013-14. 22. A learned single Judge of the Hlgh Court of lvladras in BHAGAVAN DAS DHANANJAYA DAS vs. UNION OF INDIA4 also expressed similar view. The relevant portion is as under: 29. In fine, (a) When the New Act 2013 came into effect from 1.4.2014, the second respondent herein has wrongly given retrospective effect and erToneously disqualified the petitioner - directors from 1.1.2016 itself before the deadline commenced wrongly fixing the first financial year fronr 1.4.2A73 to 31.3.2014. (b) By virtue of the new Section 164(2)(a) of the 2013 Act using thc expression 'for any continuous period of three financial year\" and in the light of section 2(41) defininq \"frnancial year'' as well as their own General circular No.08/14 dated 4.4.2A14, the first financral year would be from 1.4.2014 to 31.3.2015, the second financial year would be fronr 1.4.2015 to 31.3.2016 and the third financial ycar would be from 7.4.2016 to 31.3.20i7, whereas the second respondent clearly .rdmitted in paras 15 and 22 of tlre counter affidavit that the default of filinq statutory returns for the final ycars commcnces from 2073-14, 2014 75 and 2015-16 i.e, or'rc year before tl)e Act 2013 can]c into force. Tlris rs the basic incurablc legal infirmity that vitiates tlre errtire impugnecl proceedings. 23. In view of the above facts and circumstances and the judgments referred to supra, as the impugned orders in present writ petitions disqualifying the petitioners as directors under Section 164(2)(a) of the Act, have been passed considering the period prior to 01.04.2014, the same cannot be sustained, and are liable to be set aside to that extent. 24. As far as the contention regarding issuance of prior notice before disqualifying the petitioners as directors is concerned, Section 164(2)(a) is required to be noticed, and the same is extracted as under for ready refere n ce : 164. D isq ua lification for appointment of director: o t '.1,.N., 15.t55 oi20l7 aucl barch darcd 21.07.1018 I 1i (2) No person who is or has been a director of a company which- (a) has not filed financial statements or annual Teturns for any continuous period of three financial years; or / (b) . . . Shall be eligible to be re-appointed as a director of that company or appointed in other companies for a period of five years from the date on which the said company fails to do so. A reading of the above provision makes it clear that it provides disqualification on happening of an event i.e., if a person who is or has been a director of a company has not filed financial statements or annual returns for any continuous period of three financial years, shall be ineligible to be re- appointed as a director of that company or appointed in any other company for a period of five years from the date on which the said company fails to do so. The provision does not provide for issuance of any prior notice or hearing. A learned single Judge ofthe High Court of Karnataka in Yashodara Shroff v. Union of India (1 supra), as well as the learned single Judge of the High Court of Gujarat at Ahmedabad in Gaurang Balvantlal Shah s/o Balvantlal Shah vs. Union of India (2 supra), after analyzing various provisions of the Act and Rules framed thereunder, and by relying on various judgments of the Apex Court, held that Section 16+(2)(a) of the Act applies by operation of law on the basis of the circumstances stated therein, the said provision does not envisage any hearing, neither pre-disqualification nor post-disqualification and this is not in violation of the principles of natural justice and hence, is nol ultra vires Article 14 of the Constitution. I concur with the said reasoning. 25. Thus, from the above, it is clear that Section 164(2)(a) of the Act is a deeming provision and the disqualification envisaged under the said provision comes into force automatically by operation of law on default and Legislature did not provide for issuance of any prior notice, but the respondents notified d isq ua lification even before it incurred, and deactivated DINs, which is illegal arbitrary and against provisions contained in Section 164(2)(a) of the Act. lt 26. The next grievance of the petitioners is with regard to deactivation of their DINs. Tlre contention of the learned counsel for the petitioners is that except for the grounds mentioned under Rule 11 (a) to (f) of the Rules, the DINs cannot be cancelled or deactivated, and the violation mentioned under Section 16a(2)(a) of the Act, is not one of the grounds mentioned under clauses (a) to (f) of Rule 11, and hence for the alleged violation under Section 164(2)(a) of the Act, DIN cannot be cancelled. 27. Rule 10 of the Rules provide 10, it is allotted for for allotment of DIN and under sub ru le (6) of cancellation purpose, is Ru le life time. Ru le 1 1 provid es fo r for the present or deactivation. Rule 11, which is rclevant extracted as under for ready reference: (a) (b) (c) (d) (e) (0 11. Cancellation or surrender or deactivation of DIN: The Central Government or Regional Director (Northcrn Region), Noida or any offrcer authorized by the Regional Director may, upon being satisfied on verrfication of particulars or documentary proof attached with the application received from any person, cancel or deactivate the DIN in case - the DIN is found to De duplicated in respect of thc same pcrson provided thc data related to both the DIN shall be rrerged witlr the validly retained n u n] ber; tlle DIN was obtained in a wrongful manner or by fraudulent means; of tl]e death of the concerned individual; the concerned individual has been declared as a person of unsound mind by a com petent Court; if the concerned individual has been adjudicated an insolvent; Provided that before cancellation or deactivation of DIN pursuant to clause (b), an opportunity of being heard shall be given to the concerned indivrdual; on an application made in Form DIR-5 by the DIN holder to surrender his or her DIN along with declaration that lre has never been appointed as director in any company and the said DIN has never lleen used for frling of any document with any authority, the Central Government may deactivate sucl'r DIN; Provrded that before deactivation of any DIN in such case, the Central Gove rnme nt slrall verify e-records. Explanation: for the purposes of clause (b) - Tlre terms \"wrongful rnanner\" means rf tlrc DIN is oblained on the strcngth of documents which are not Iegally valrcl or incomplete documents are furnished or on suppression of n]aterial inFormation or on the tlasis of wrong certificatior'r or lly making n]isleading or false information or by rnisrepresentatior'l; (ii) tl're term \"fraudule nt nreans\" means rf the DIN rs obtaincd ,,vrth an intent to decervc any otlrer person or any authonty nclu.lrng thc Ccntral Govenr nrcnt. (r) circumstances under which the DIN can 28. Clauscs (a) to (f) of Rule 11, extracted above, provides for tlte be cancelled or deactivated. The the ground envisaged under said grounds, are diFferent from l5 Section 164(2)(a) of the Act. Therefore, for the alleged violation under Section 164 of the Act, DINS cannot be cancelled or deactivated, except in accordance with Rule 11 of the Rules. 29. Learned Single ludge of the Gujarat High Court in the decision cited 2 supra, held as under: \"29. This takes tl]e Court to the next question as to whether the respondents could have deactivated the DINs of the petrtioner as a consequence of the impugned list? In this regard, it woLrld be appropnate to reFer to the relevant provisions contained rn the Act and the said Rules. Section 153(3) provides that no person shall be appointed as a Drrector of a company, unless he has been allotted the Drrector Identrfrcation Number under Section 154. Sectron 153 requires every rndividual intending to be appo r'rted as Director of a Company to make an application for allotment of DIN to the Central Government in such form and manner as may be prescnlred. Section 154 states that the Centrai Government shall within one month from the recerpt oF tlre application under Section 153 allot a DIN to an applicant in such manner as may be prescri[)ed. Sect]on 155 Drohrllits any individual, who has already been allotted a DIN uncier Sectron 154 fron] applying for or obtaining or possessinq another DlN. Rules 9 and 10 of the said Rules of 2014 prescribe the procedure for making applrcation for allotrnent and for the allotnrent of DIN, and further provide tlrat the DIN allotted by the Central Government under the said Rules would be valid for the ljfe time of the applicant and shall not be allotted to any other person. 30, Rule 11 provides for cancellation or sLlrrender or deactivation of DIN. Accordingly, the Central Government or Regional Director or any authorized officer of Regional Director may, on being satisfied on verification of particulars of documentary proof attached with an application from any person, cancel or deactivate the DIN on any of the grounds mentioned in Clause (a) to (f) thereof. The said Rule 11 does not contemplate any suo motu powers either witlr the Central Government or with the authorized officer or Regional Director to cancel or deactivate the DIN allotted to the Director, nor any of the clauses mentioned in the said Rules contemplates cancellation or deactivation of DIN of the Director of the \"struck off company\" or of the Director having become ineligible under Section 164 of the said Act. The Teason appears to be that once an individual, who is intending to be the Director of a particular company is allotted DIN by the Central Government. such DIN would be valid for the life time of the applicant and on the basis of such DIN he could become Director in other companies also. Hence, if one of the companies in which he ,!as Director, rs \"strLrck off\", hrs DiN could not be cancelled or deactivated as that would run counter to the provisions contained in the RUle 11, which specrfically provides for the circLrmstances under whrch the DIN could be cancelled or deactivated. 31. In that view of the matter, the Court is of the oprnion that the action of the respondents rn deactivating the DlNs of the petitioners - Directors along with the publication of the impuqned list of Directors of \"stftrck off\" companres Lrnder Section 248, also was not legally tenable. Of course, as per Rule 12 of the said Rules, the individual who l]as been allotted the DIN, in tlre event of any change in his partrclrlars stated in Forrn DIR -3 has to intimate such change to the Central Government within the prescribed trme in Form DIR-6, however, if that is not done, the DIN could not be cancelled or deactivated. The cancellation or deactivatron of the DIN could be resorted to by the conceTned respondents only as per the provisions contained in the said Rirles.\" 30. In view of the above facts and circumstances and the judgment referred to supra, the deactivation of the DINs of the petitioners for alleged vlolations under Section 164 of the Act, cannot be sustained. l(r . For the foregoing reasons, the impugned orders in the writ petitions to the extent of disqualifying the petitioners under Section 164(2)(a) of the Act and deactivation of their DINs, are set aside, and the 2nd respondent is directed to activate the DiNs of the petitioners, enabling the m to function as Directors other than in strike off companies. 32. It is made clear that this order will not preclude the 2\"d respondent from taking appropriate action in accordance with law for violations as envisaged under Section 764(2) of thc Act, giving the said provision prospective effect from Ol.O4.2Ol4 and for necessary action against DIN in case of violations of Rule 11 of the Rulcs. 33. It is also made clear that if the petitioners are aggrieved by thc action of the respondents in striking off their companies under Section 248 of the Act, they are at liberty to avail alternative remedy under Section 252 of the Act. 34. All the writ petitions are accordingly allowed to the extent in d icate d a bove. 35. Interlocutory applications pending, lf any, shall stand closed. No order as to costs. A.RAJASHEKER RE DDY,J DATE: 1B-07-2019 AVS I "