Corporate social responsibility often abbreviated “CSR,” is a corporation’s initiatives to assess and take responsibility for the company’s effects on environmental and social wellbeing. The term generally applies to efforts that go beyond what may be required by regulators or environmental protection groups.

Earlier in India it is voluntary to do a CSR activity but from fiscal year 2014-2015 under section 135, Companies Act 2013 (2013 Act) which lays down a framework for all companies meeting the prescribed criteria to contribute two per cent of their profits for a CSR purpose.

The CSR Rules (Rules) state that every company including its holding or subsidiary, as well as foreign companies having a project office/branch in India, meeting certain criteria i.e. during any financial year, is required to comply with the CSR provisions.

Under Section 135(1) states that company need to constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director, provided that where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.

With respect to a foreign company covered as above, the CSR Committee shall comprise of at least two persons of which one person shall be as specified under section 380(1)(d) of the Act and another person shall be nominated by the foreign company

(2) The Board’s report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.

(3) The Corporate Social Responsibility Committee shall, —

(a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company [in areas or subject, specified in Schedule VII]

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

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

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

(b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.

(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities, provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.

Note: For the purposes of this section “net profit” shall not include such sums as may be prescribed and shall be calculated in accordance with the provisions of section 198.

Requirements under the Rules

Rule 4 prescribes the manner in which a company should undertake CSR activities:

Rule 4(1) -The CSR activities should be undertaken by the company, as per its stated CSR policy, as projects/programmes/activities (either new or ongoing), excluding activities undertaken in pursuance of its normal course of business.

Rule 4(2) -The Board of a company may decide to undertake its CSR activities approved by the CSR Committee, through a registered trust or a registered society or a company established under Section 8 of the 2013 Act by the company, either singly or alongwith its holding or subsidiary or associate company, or alongwith any other company or holding or subsidiary or associate company of such other company, or otherwise, provided that, if such trust, society or company is not established by the company, either singly or along with its holding or subsidiary or associate company, or along with any other company or holding or subsidiary or associate company of such other company; if the company has specified the project or progammes to be undertaken through these entities, the modalities of utilisation of funds on such projects and programmes and the monitoring and reporting mechanism.

Rule 4(3) – A company may also collaborate with other companies for undertaking projects or programmes or CSR activities in such a manner that the CSR committees of respective companies are in a position to report separately on such projects or programmes in accordance with these Rules.

Exceptions to CSR Activities:

The Companies (CSR Policy) Rules, 2014 provides for some activities which are not considered as CSR activities:

(1) The CSR projects or programs or activities undertaken outside India.

(2) The CSR projects or programs or activities that benefit only the employees of the company and their families.

(3) Contribution of any amount directly or indirectly to any political party under section 182 of the Act.

Some of the activities which may be included by companies in their CSR Policies Activities as specified under Schedule VII are eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water, ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro forestry, conservation of natural resources and maintaining quality of soil, air and water including contribution to the Clean Ganga Fund set up by the Central Government for rejuvenation of river Ganga, rural development projects, slum area development.

Some of the important clarifications issued by MCA vide General Circular No. 21/2014 dated 18th June, 2014 :

(i) It is further clarified that CSR activities should be undertaken by the companies in project/ programme mode. One-off events such as marathons/ awards/ charitable contribution/ advertisement/ sponsorships of TV programmes etc. would not be qualified as part of CSR expenditure.

(ii) Expenses incurred by companies for the fulfillment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as CSR expenditure under the Companies Act.

(iii) Salaries paid by the companies to regular CSR staff as well as to volunteers of the companies (in proportion to company‘s time/hours spent specifically on CSR) can be factored into CSR project cost as part of the CSR expenditure.

(iv) Any financial year‖ referred under Sub-Section (1) of Section 135 of the Act read with Companies CSR Rule, 2014, implies ‗any of the three preceding financial years‘.

(v) Expenditure incurred by Foreign Holding Company for CSR activities in India will qualify as CSR spend of the Indian subsidiary if, the CSR expenditures are routed through Indian subsidiaries and if the Indian subsidiary is required to do so as per section 135 of the Act.

(vi) Contribution to Corpus of a Trust/ society/ section 8 companies etc. will qualify as CSR expenditure as long as (a) the Trust/ society/ section 8 companies etc. is created exclusively for undertaking CSR activities or (b) where the corpus is created exclusively for a purpose directly relatable to a subject covered in Schedule VII of the Act.

Guidance Note on Expenditure on CSR activities issued by the council of Institute of Chartered accountants of India (ICAI) which is as follows:

Contribution to a fund specified in the Schedule VII– In case a company contributes to a fund specified in the Schedule VII to the 2013 Act, the contribution should be treated as an expense for the year and charged to the statement of profit and loss.
Expenditure incurred by a company itself on the CSR activities – In case a company incurs expenditure on any of the activities as per the Schedule VII to the 2013 Act, the company would need to charge the expense in profit & loss statement but sometimes it lead to ‘asset’ the company would need to assess whether it has control over the asset and is able to derive future economic benefits from it. In cases, where the control of the asset is transferred by the company, it should not be recognized as an ‘asset’ in its books and such expenditure should be charged to the statement of profit and loss. In other cases, where the company retains control of the asset then it would need to be examined whether any future economic benefits accrue to the company. Future economic benefits from a ‘CSR asset’ would not flow to the company as any surplus from CSR cannot be included in business profits in view of Rule 6(2).
Expenditure through a trust, society, etc.– Similarly, in case a company incurs expenditure on the CSR activities as per Rule 4(2), it should be treated as an expense for the year and charged to the statement of profit and loss.
Getting grant from other companies for CSR activities – In case a company receives a grant from others for carrying out CSR activities, the CSR expenditure should be measured net of the grant.
Supplying goods manufactured by the company – In case a company supplies goods manufactured by it or renders services as CSR activities, the expenditure incurred should be recognised when the control in the goods is transferred or the allowable services are rendered by the company. Accordingly, the goods manufactured would be accounted for as per principles of AS 2, Valuation of Inventories and services rendered should be measured at cost. Note: The guidance note clarifies that all indirect taxes such as GST or earlier indirect laws on such goods and services contributed would also form part of the CSR expenditure.

Accounting for shortfall/excess spend and creation of provision in case of short spent

The proviso to this sub clause states that if such a company fails to spend such an amount, the board should, in its report as per Section 134(3)(o) give details about the policy developed and implemented by the company on the CSR initiatives taken during the year and specify the reasons for not spending the amount. Further, Rule 8(1) prescribes that the board’s report of a company under these Rules should include an annual report on CSR, containing particulars specified in the annexure to the said Rules, which provide a format in this regard.

Accounting treatment prescribed in the guidance note

As per the 2013 Act, expenditure on the CSR activities is required to be disclosed in the board’s report. The guidance note clearly states that in case there is a shortfall in spending on CSR activities below the prescribed threshold, no provision is required to be made for the shortfall. However, if the company has incurred a contractual liability then a provision should be created for the amount to be spent representing the extent to which the CSR activity was completed during the year in accordance with the generally accepted principles of accounting. The director’s report should disclose the reasons for not spending the prescribed amount as per the 2013 Act.

In case a company spends more than the prescribed threshold of two per cent on the CSR activities in a particular year, then such excess amount spent cannot be carried forward to subsequent years in the books of account for set off against the CSR expenditure required to be spent in the future.

Recognition of income if any earned from CSR projects or during the course of conduct of the CSR activities: Rule 6(2) requires that the surplus arising out of the CSR projects or programmes or activities would not form part of the business profit of a company.

Accounting treatment given in the guidance note

The guidance note provides that a company needs to assess whether the surplus arising from the CSR activities can be considered as an ‘income’. The framework defines ‘income’ as “increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decrease of liabilities that result in increase in equity, other than those relating to contributions from equity participants”. Since the surplus arising out of CSR activities does not arise from transactions with shareholders, accordingly, it meets the definition of ‘income’ for accounting purposes. Accordingly, surplus arising out of the CSR activities should be recognised in the statement of profit and loss. As per the guidance note, since such surplus does not arise out of ‘ordinary course of business’, it cannot be part of the business profits. Thus, the surplus should immediately be recognised as a liability for the CSR expenditure in the balance sheet and recognised as a charge to the statement of profit and loss. So, in order to compute the limit of two per cent of the average net profits criteria as per Section 135 of the 2013 Act, such surplus would not be included in the computation.

Presentation and disclosure in the financial statements

The Schedule III to the 2013 Act provides ‘General Instructions for Preparation of Statement of Profit and Loss’. Under these instructions, a company should disclose the amount of expenditure on the CSR activities by way of a note to the statement of profit and loss.
The guidance note recommends that expenditure on the CSR activities that qualify to be recognised as an expense should be presented as a separate line item as the ‘CSR expenditure’ in the statement of profit and loss. Also, CSR expenditure should disclose break-up of various heads of expenses included in the line item ‘CSR expenditure’.
In case there is a contractual liability incurred for which a provision has been created in the balance sheet for the amount to be spent on the CSR activity. Such provision should be presented as per the Schedule III to the 2013 Act.
Details of related party transactions, e.g. contribution to a trust controlled by the company in relation to the CSR expenditure as per AS 18, Related Party Disclosures.

The guidance note prescribed expenditure on the CSR activities should be disclosed by way of notes to accounts as follows:

Gross amount required to be spent by the company during the year
Amount spent during the year on:

S.no:	C.S.R. Activities	In cash	Yet to be paid in cash	Total
(i)	Construction/acquisition of any asset
(ii)	On purposes other than (i) above

Disclosure to be made by in the notes to the cash flow statement, (where applicable).

Some of the facts from various companies:

S.no:	Name of a company	F.Y. 2016-2017 (INR)	Link:
1	Reliance Industries	674 Crores	http://www.ril.com/ar2016-17/report-on-corporate-social-responsibility.html
2	Tata Consultancy Services	380 Crores	https://www.tcs.com/content/dam/tcs/investor-relations/financial-statements/2016-17/ar/TCS%20Annual%20Report%202016-2017.pdf
3	Infosys	289.44 Crores	https://www.infosys.com/investors/reports-filings/annual-report/annual/Documents/infosys-AR-17.pdf
4	Competent Automobiles company limited (Maruti)	34 Lacs	http://www.competent-maruti.com/investorsarea/pdf/annual-16-17.pdf
5	Wipro	176.4 Crores	https://www.wipro.com/content/dam/nexus/en/investor/annual-reports/2016-2017/Wipro-Annual-Report-for-FY-2016-17.pdf