Corporate Social Responsibility (CSR) has become an integral part of corporate strategy, aiming to positively impact society. Section 135 of the Companies Act, 2013, lays down provisions for CSR expenditure, ensuring companies contribute towards social welfare.
1. MEANING:
Corporate social responsibility is a business model that helps a company in integrating with the strategies of the social well-being and creating a positive impact on the social environment. These policies and strategies adopted describe the company’s commitment to carry out the business in an ethical manner and to contribute to the sustainability of the society.
2. VOLUNTARY CONTRIBUTION TO CSR
A company has the option to voluntarily contribute any amount to the CSR funds as a part of their concern towards the society. In addition to such an option, the government prescribes certain class of companies who are mandatorily required to contribute towards the CSR initiative. This ensures the societal growth along with the growth of the company financially and ethically.
3. CLASSES OF COMPANIES.
The Act lays down the prescribed criteria whereby, any company which falls under such limits would be required to mandatorily comply with the provisions of Section 135 of The Company’s Act, 2013.
Any company which falls under any one of the below levels laid down is liable to comply the rules as per the said Act. Every Company including its holding, subsidiary, and a foreign company having its branch office or project in India having:
i. Net worth of Rupees 500 crore or more,
ii. Turnover of rupees 1000 crore or more,
iii. Net profit of rupees 5 crore or more
During the immediately preceding financial year.
Therefore any company which achieves any one of the above limits would be liable to contribute an amount as prescribed by the Act, towards the CSR initiative.
4. PRESCRIBED CONTRIBUTION TO BE MADE:
Every company falling under the above class of companies exceeding the limit prescribed is required to contribute, at least 2% of the average net profits of the company made during the immediate 3 preceding financial years. Where any company has not completed a period of 3 years since its incorporation, such immediate preceding financial years to be considered.
5. CSR COMMITTEE:
Every company under the category mentioned in point 3, is required to constitute a CSR committee, comprising of its Board consisting of three or more directors, out of which at least one of the director shall be an independent director.(Independent director is a director who is not associated with the company in any manner acting like a non-executive director and is only concerned to look after the credibility and governance of the company)
EXCEPTION TO CSR COMMITTEE:
A company whose total contribution in a year to the CSR fund does not exceed 50 Lakh rupees; need not be liable to appoint a CSR committee as such. The Board of Directors by themselves can execute and process the functions of the CSR committee.
6. CSR POLICY:
The CSR committee or the Board of Directors as the case may be, is required to maintain the CSR policy drafted and approved by the Board from time to time. The policy contains inter alia, the details of the objectives of the Company towards CSR, the plan of action to such initiatives, the functions and powers of the CSR committee, implementation of the CSR activity, monitoring mechanism and reporting.
7. COMPUTATION OF AVERAGE NET PROFIT:
There have been a lot of discussions and opinions on the net profit amount to be considered in order to compute the CSR liability. With the multiple views and suggestions, below are the few pointers in clearing these confusions.
The net profit to be considered by the company in computing the average net profits would be the “Net profit before tax” as per the audited financial statements.
Though the computation states on considering the “net profits after tax”, upon consideration of the deductions and additions, the resulting value is the net profit before tax as per section 198. A draft format on this point is given below:
| CSR COMPUTATION FOR FY 2022-23 | ||||
| SL NO | Particulars | 2022 | 2021 | 2020 |
| Net Profit after Tax | xxx | xxx | xxx | |
| Total (1) | xxx | xxx | xxx | |
| Add: | Allowed Credits | |||
| 1 | Profit on sale of immovable property | – | – | – |
| (Original Cost – WDV) | ||||
| Less: | Credits Disallowed | |||
| 1 | Premium on shares or debentures | – | – | – |
| 2 | Profit on sale of forfeited shares | – | – | – |
| 3 | Profit on sale of immovable property | – | – | – |
| (Sale Value of Immovable Property – Original Cost) | ||||
| 4 | Surplus in P&L on measurement of asset or liability at fair value | – | – | – |
| Total (2) | – | – | – | |
| Less: | Expenses Allowed | |||
| 1 | All the usual Working Charges | – | – | – |
| 2 | Director’s Remuneration | – | – | – |
| 3 | Bonus or Commission paid to Staff | – | – | – |
| 4 | Tax on excess or abnormal profits | – | – | – |
| 5 | Tax on business profits imposed for special reasons | – | – | – |
| 6 | Interest on Debentures | – | – | – |
| 7 | Interest on Loans | – | – | – |
| 8 | Expenses on repairs (other than Capital Expenditure) | – | – | – |
| 9 | Contributions made under section 181 (Bona fide Charitable Trusts) | – | – | – |
| 10 | Depreciation | – | – | – |
| 11 | Prior period items | – | – | – |
| 12 | Legal liability for compensation or damages | – | – | – |
| 13 | Insurance Expenses | – | – | – |
| Total (3) | – | – | – | |
| Add: | Expenses Disallowed | |||
| 1 | Income Tax and Deferred Tax | xxx | xxx | xxx |
| 2 | Compensations, damages or payments made voluntarily | – | – | – |
| 3 | Capital Loss on sale of undertaking or part thereof (Not include losses on sale of asset) | – | – | – |
| 4 | Expenditure in P&L on measurement of asset or liability at fair value | – | – | – |
| Total (4) | – | – | – | |
| Profit as per Section 198 (1-2-3+4) (5) | xxx | xxx | xxx |
8. RECURRING APPLICABILITY
Once a company falls under the class of companies mentioned in point 3 above, the company should mandatorily contribute the prescribed amount to the CSR fund every year “unless” the company fails to qualify as the class of company for a period of 3 continuous financial years. That is to say, the company earns the net worth, turnover and the net profit below the prescribed limit for a period of 3 continuous financial years; the company is not liable to pay the CSR amount.
9. PAYMENT OF CSR AMOUNT:
The CSR expenditure incurred on within the defined list of activities under the act is mandatorily required to be debited from the current account of the Company and not third party payments can be made on behalf of the company.
10. DISCLOSURE OF EXPENDITURE IN THE COMPANY’S FINANCIAL RETURN.
The year in which the company has incurred such expenditure towards CSR is also required to disclose the details of such expenditure in Segment III of FORM AOC-4.
Conclusion: Section 135 of the Companies Act, 2013, outlines crucial provisions for CSR expenditure, ensuring companies actively contribute to social welfare. Understanding these regulations is essential for companies to align their CSR initiatives with legal requirements and societal needs
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