Since Company exists in a society it must do something for its betterment, so in simple terms CSR is the responsibility of the companies toward the society. CSR is the concept whereby organizations serve the interests on environmental, ethical, social, and economic issues.
The Companies Act, 2013 also makes it mandatory for some class of companies to contribute towards CSR. Now let’s understand the provisions governing CSR under The Companies Act,2013 and rules thereunder.
Governing Provisions under the Act:
- Section 135 of The Companies Act, 2013
- Companies (Corporate Social Responsibility Policy) Rules, 2014.
APPLICABILITY
A company satisfying any of the following criteria during the immediately preceding financial year is required to comply with CSR provisions
- Net worth – 500 crores or more
- Turnover – 1,000 crores or more
- Net Profit – 5 Crores or more
While computing the net profits for CSR Provisions, company need to make adjustment as per section 198 in Profit before tax which has been calculated as per schedule III. In addition to adjustment required in section 198, “Net Profit” shall also not include the following namely:-
i. Any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise;
ii. Any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act.
NOTE : 1. Once the CSR provisions become applicable to a company, they will continue to be applicable unless the company ceases to meet any of the above criteria for three consecutive years.
Under the amended rules, the limit under Section 135(1) is to be checked on yearly basis only. For instance, if in the Financial year(FY) 2022-23, company touchs the limit under the said section then CSR provisions will become applicable for the FY2023-24. Now suppose if in the FY 2023-24 the company doesn’t satisfy the limits under the said section then for the FY 2024-25 the provisions will not be applicable to it.
2. Whether provisions of CSR are applicable to a section 8 Company, if it claims that it contributes the CSR amount towards its own activities and such is in line with CSR approved areas of spent?
Yes, section 135(1) of the Act commences with the words “Every company……” and thus applies to section 8 companies as well. In such, case section 8 company will be required to spend on activities other than its normal activity. For example: Section 8 company incorporated with the objective to promote education (since any spending by company on promoting education will fall under Schedule VII) company needs to spend in other activity specified under schedule VII to qualify its CSR expenditure.
CSR COMMITTEE:
A company satisfying any of the following criteria given under Section 135(1) of The Companies Act, 2013 shall constitute a CSR committee constituting of:
|
3 or more directors, out of which at least one shall be an independent director |
In case Company is required to appoint an independent director |
| Two or more directors | In case Company is not required to appoint an independent director |
| Two persons of which one shall be a person resident in India authorized by the foreign company to receive notices in its behalf and other person nominated by foreign company | In case of Foreign Company |
Where the amount required to be spent by a company on CSR does not exceed fifty lakh rupees, the requirement for constitution of the CSR Committee is not mandatory and the functions of the CSR Committee, in such cases, shall be discharged by the Board of Directors of the company.
However, as per the amended rules if Company have any amount in the “unspent CSR account” then the constitution of CSR Committee is mandatory even if the amount required to be spent by company on CSR does not exceed fifty lakh rupees.
FUNCTIONS OF CSR COMMITTEE:
The CSR Committee shall formulate and recommend a CSR policy to the Board.
1. CSR Committee shall recommend the amount of expenditure to be incurred on the CSR activities to be undertaken by the company.
2. CSR Committee shall monitor the CSR policy of the Company from time to time.
3. The committee shall establish a transparent controlling mechanism for the implementation of the CSR projects or programs or activities undertaken by the company.
ELIGIBLE CSR ACTIVITIES
- The Board shall ensure that the activities included by a company in its CSR Policy fall within the purview of the activities included in schedule VII.
- However, the entries in the said schedule must be interpreted liberally so as to capture the essence of subjects given in the said schedule.
- 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:
Eradicating poverty, hunger and malnutrition, promoting health care which includes sanitation and preventive health care, contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water.
Improvement in education which includes special education and employment strengthening vocation skills among children, women, elderly and the differently-abled and livelihood enhancement projects.
Improving gender equality, setting up homes and hostels for women and orphans, setting up old age homes, day care centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.
Safeguarding environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining a quality of soil, air and water which also includes a contribution for rejuvenation of river Ganga.
Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts.
Measures for the benefit of armed forces veterans, war widows and their dependents, Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans, and their dependents including widows.
Training to stimulate rural sports, nationally recognized sports, Paralympic sports and Olympic sports.
Contribution to the Prime Minister’s National Relief Fund, Contribution to the Prime Minister’s National Relief Fund (PM-CARES) or any other fund set up by the Central Government for socio-economic development providing relief and welfare of the Scheduled Castes, the Scheduled and backward classes, minorities and women.
Contribution to incubators or research and development projects in the field of science, technology, engineering and medicine, funded by the Central Government, State Government, Public Sector Undertaking or any agency of the Central Government or State Government.
Contributions to public funded Universities, IITs, National Laboratories and autonomous bodies established under DAE, DBT, DST, Department of Pharmaceuticals, Ministry of AYUSH, Ministry of Electronics and Information Technology and other bodies, namely DRDO, ICAR, ICMR and CSIR, engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs).
Rural development projects.
Slum area development.
Disaster management, including relief, rehabilitation and reconstruction activities.
FOLLOWING ACTIVITIES WILL NOT QUALIFY FOR CSR :-
1. Activities benefitting employees of the company
2. Activities undertaken in pursuance of normal course of business of the company.
3. Activities undertaken outside India
4. Contribution of any amount, directly or indirectly, to any political party
5. Activities for fulfilling statutory obligations under any law in force in India.
6. One-off events such as marathons/awards/charitable contributions/advertisement/sponsorship of TV programmes etc.
AMOUNT TO BE SPENT
Every company which needs to comply with the CSR provisions have to spend 2% of the average net profits made during the preceding 3 years as per the CSR policy. Net profit for computation CSR Expenditure to be incurred will same as described above.
- Whether Contribution in kind is permissible as CSR or not?
The requirement comes from section 135(5) that states that “The Board of every company shall ensure that it spends…” Therefore, CSR contribution cannot be in kind.
CSR IMPLEMENTATION
Pursuant to rule 4 of the Companies (CSR Policy) Rules, 2014 a company may undertake CSR activities through following three modes of implementation:
1. by the company itself
2. by company established under section 8 of the Act, or a registered public trust or a registered society, exempted under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10 or registered under section 12A and approved under 80 G of the Income Tax Act, 1961 (43 of 1961), established by the company, either singly or along with any other company;
3. by a Company established under section 8 of the Act or a registered trust or registered society, established by the Central Government or State Government;
4. by Any entity established under an Act of Parliament or a State legislature.
5. by a company established under section 8 of the Act, or a registered public trust or a registered society, exempted under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10 or registered under section 12A and approved under 80 G of the Income Tax Act, 1961, and having an established track record of at least three years in undertaking similar activities.
Note – Every implementing agencies, who intends to undertake any CSR activity, shall register itself with the Central Government by filing the form CSR-1 electronically with the Registrar.
TREATMENT OF UNSPENT CSR AMOUNT
If a company spends less than the amount required to be spent under their CSR obligation, the Board shall specify the reasons for not spending in the Board’s report and shall deal with the unspent amount in the following manner:
|
Nature of unspent amount |
Action required | Timelines |
| Unspent amount pertains to ‘ongoing projects’* | Transfer such unspent amount to a separate bank account of the company to be called as ‘Unspent CSR Account’. | Within 30 days from the end of the financial year. |
| Unspent amount pertains to ‘other than ongoing projects’ | Transfer unspent amount to any fund included in Schedule VII of the Act | Within 6 months from the end of the financial year. |
*Ongoing Project: Ongoing project has been defined under rule 2(1)(i) of the Companies (CSR Policy) Rules, 2014 as:
- A multi-year project, stretching over more than one financial year;
- having a timeline not exceeding three years excluding the year of commencement;
- includes such project that was initially not approved as a multi-year project but whose duration has been extended beyond one year by the Board based on reasonable justification.
Note:- The project should have been commenced within the Financial Year to be termed as ongoing.
Utilisation of Amount transferred to Unspent CSR Account: such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.
LIMIT ON ADMINISTRATIVE OVERHEAD:
Rule 7 of CSR Rules provides that the administrative overheads shall not exceed two percent of total CSR expenditure of the company or fifty lakhs rupees, whichever is higher, for the financial year. It implies that any expenditure on administrative overheads in excess of the above mentioned limit for the financial year will not be allowed as CSR expenditure.
Administrative overheads will include the expenses incurred by the company on general management and will not include any expenses directly incurred on CSR projects for designing, implementation, evaluation, monitoring.
IMPACT ASSESSMENT
The purpose of impact assessment is to assess the social impact of a particular CSR project. The intent is to encourage companies to take considered decisions before deploying CSR amounts and assess the impact of their CSR spending. This not only serves as feedback for companies to plan and allocate resources better but shall also deepen the impact of CSR.
As per Rule 8(3) of the Companies (CSR Policy) Rules, 2014 mandates following class of companies to conduct impact assessment:
- companies with minimum average CSR obligation of Rs. 10 crore or more in the immediately preceding 3 financial years; and
- companies that have CSR projects with outlays of minimum Rs. 1 crore and which have been completed not less than 1 year before undertaking impact assessment
- Impact assessment shall be carried out project-wise only in cases where both the above conditions are fulfilled. In other cases, it can be taken up by the company on a voluntary basis.
Rule 8(3) of the Companies (CSR Policy) Rules, 2014 requires that the impact assessment be conducted by an independent agency.
INCOME TAX PROVISIONS ON CSR EXPENDITURE
The amount spent by a company towards CSR cannot be claimed as business expenditure. The Finance Act, 2014 provides that any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.
Penalty for Non-Compliance
The non-compliance with regard the provisions regarding transfer of unspent amount is a civil wrong and shall attract the following penalties:
- Company: Twice the unspent amount required to be transferred to any fund included in Schedule VII of the Act or Unspent CSR Account, as the case may be, or one crore rupees, whichever is less.
- Every Officer in Default:1/10th of the unspent amount required to be transferred to any fund included in Schedule VII of the Act or Unspent CSR Account, or two lakh rupees, whichever is less.
- In case of non-compliance with any other provisions of the section or rules, general penalty under section 450 of the Act will be applicable.
As per Section 450 ,the company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default.
(Republished with amednments)
Author Bio
Hi, the Note 1 states that a Company which ceases to meet the criteria laid in Section 135(1) for three consecutive financial years shall not be required to comply with the CSR provisions.
However, the said rule (Rule 3(2))of CSR Rules has been omitted by way of Companies (Corporate Social Responsibility) Amendment Rules, 2022.
Should we assume now that once applicable, the CSR provisions shall continue to apply forever on a Company or do companies need to check the applicability criteria every year? If we have to check it every year, do we keep on constituting and then dispensing the committee basis CSR applicability year on year?