CORPORATE SOCIAL RESPONSIBILITY (CSR) IN INDIA
Section 135 of Companies Act
What is CSR?
Any company that has a net worth of Rs. 500 crore or more, or turnover of Rs. 1,000 crore or more or net profit of Rs. 5 crore or more (any financial year), needs to spend at least 2% of its average net profit for the immediately preceding three financial years on CSR activities.
The tool of CSR has been introduced under the Companies Act, effective from April 1, 2014, to address the social obligations of the corporate world. The objective of CSR is a noble one and necessary for a robust and sustainable development. The general reaction of the corporate industry towards the reform has been positive.
What is meaning of Any Financial Year mentioned above?
Any Financial Year implies any of the three preceding financial years.
A company which meets the criteria in any of the preceding three financial years (2011-2012, 2012-2013, 2013-2014) but which does not meet the criteria in financial year 2014-2015 will need to constitute a CSR Committee and comply with provisions of 135 (2) to (5) in the year 2014-15.
If the company has made profits in the years earlier to 2011-12, then is there a need to comply with the provisions of Section 135?
If the company has made profits in the years earlier to 2011-12, but not in the years 2011-2012, 2012-2013 or 2013-2014, it need not comply with Section 135.
For compliance under Section 135, from which financial year does the CSR Expenditure & Reporting Begins?
The constitution of CSR Committee, preparation of CSR Policy and the spending of amount on CSR activities must occur during the financial year 2014-2015.
If Section 135 is applicable on any company for 2014-15, then what is the time period for investment on CSR activity?
Companies have to spend the amount on CSR activities as required by section 135 during the financial year 2014-15 and reporting of the same would be in 2015 Board Report, or otherwise state the justification for the same in Board Report.
Will expenditure by a company for fulfillment of any Act/Statute of Regulations count as CSR expenditure?
No, it would not count as CSR expenditure.
In case the company has appointed personnel exclusively for implementing the CSR activities of the company, can the expenditure incurred towards such personnel in terms of staff cost be included in the expenditure earmarked for CSR activities?
Salary paid by the companies to regular CSR staff as well as to volunteers of the company (in proportion to company’s time / hours spent specifically on CSR) can be factored into CSR project cost as part of the CSR expenditure.
Is CSR applicable to a Private Limited Company?
Yes, if it fulfills the applicability criteria.
As per Section 135, a CSR committee requires an independent director. Is the same applicable to a private limited company?
A private limited company CSR Committee may consist only of two board of directors.
Can CSR expenditure of a company be claimed as business expenditure?
The Finance Act, 2014 provides that any expenditure incurred by an assessee on the activities relating to CSR shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. Accordingly, the amount spent by a company towards CSR cannot be claimed as business expenditure
In the net profit criteria in section 135(5) net profit before tax or net profit after tax?
Net profit before tax
Can the CSR expenditure be spent on the activities beyond the items enlisted?
The items enlisted in the Schedule VII of the Act are broad-based and are intended to cover a wide range of activities.
The activities that can be undertaken by a company to fulfill its CSR obligations include eradicating hunger, poverty and malnutrition, promoting preventive healthcare, promoting education and promoting gender equality, setting up homes for women, orphans and the senior citizens, measures for reducing inequalities faced by socially and economically backward groups, ensuring environmental sustainability and ecological balance, animal welfare, protection of national heritage and art and culture, measures for the benefit of armed forces veterans, war widows and their dependents, training to promote rural, nationally recognized, Paralympic or Olympic sports, contribution to the prime minister’s national relief fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of scheduled castes and tribes, backward castes, minorities and women, contributions or funds provided to technology incubators located within academic institutions approved by the Central Government and rural development projects.
However, in determining CSR activities to be undertaken, preference would need to be given to local areas and the areas around where the company operates.
Contribution by a company to such trusts and NGOs also qualify for CSR spend if the trust or NGO works in the above-mentioned ambit of activities, with a proven track record.
Would the following activities qualify as CSR Expenditure?
Event of Marathon – NO Event of Award – NO
Event of Charitable Contribution – NO
Event of Advertisement – NO
Event of sponsored TV programme – NO
Programmes for / donations to Political Party – NO
Programmes for employees and their family – NO
Programmes undertaken outside India – NO
Does being a holding or subsidiary company, which fulfills the CSR criteria, make a company liable to comply with Section 135?
No, It doesn’t make the company liable to comply, unless the company itself fulfills the criteria.
Can donation of money to a trust by a company be treated as CSR expenditure of the company?
Yes, as long as
the Trust/ Society/ Section 8 company is created exclusively for undertaking CSR activities or its corpus is created exclusively for a purpose directly relatable to activities mentioned in the act.
If a CSR-complaint company has incurred loss in any of the preceding three financial years, then is it required to continue to comply?
If a company satisfies the criterion of turnover, although it does not satisfy the criterion of net profit, it is required to comply. Since there are no profits, the company may not spend any amount, but explain the reasons for not spending the amount in its Board Report.
What is the treatment of expenses incurred beyond that of mandated CSR spend?
Expenditure over 2% could be considered as voluntary higher spend. However, in case, a company does not want to spend the 2% in the subsequent year on account of it having spent a higher amount in the previous year, the Board Report may state so.
Can profit arising from surplus of CSR activity form part of profit of the company?
Can a company collaborate with another company’s CSR project?
A company may collaborate with other companies in such a manner that the CSR committees of respective companies are in a position to report separately on such projects.