Comprehensive Compliance of Corporate Social Responsibility (CSR) – Section 135

Corporate Social Responsibility (CSR) under Section 135 of the Companies Act, 2013 mandates eligible companies to contribute to social development by spending at least 2% of the average net profits of the preceding three financial years on CSR activities. CSR applies to companies with net worth ≥ ₹500 crore, turnover ≥ ₹1,000 crore, or net profit ≥ ₹5 crore, including private and foreign companies. Companies must form a CSR Committee to recommend and monitor CSR policy, approve expenditure, and ensure implementation. CSR funds can be spent directly, through trusts, societies, or Section 8 companies, following Schedule VII activities. Surplus arising from CSR projects must be ploughed back or transferred to approved funds. Accounting standards require CSR expenditure to be charged to the profit and loss account, while CSR donations are not deductible under Income Tax Act Section 37(1), though 80G exemptions may apply for certain funds. Disclosure in Board reports, website, and financial statements is mandatory. Proper planning, compliance, and reporting are key to CSR effectiveness.

Objective of Corporate Social Responsibility: The main objective of CSR provisions is to involve the corporates as partners in the social development process.

Relevant Sections, Rules, Schedules, and Forms relating to CSR and related financial thresholds under the Companies Act, 2013:

Applicability of CSR Provision – Section 135:

The CSR provisions is applicable during the financial year if any one of the following criteria meets during the preceeding financial year

Net Worth – ₹500 crore or more

Turnover – ₹1,000 crore or more

Net Profit – ₹5 crore or more

Whether CSR Applicable to Foreign Company ?
Yes, Applicable

Whether CSR Applicable to Private Limited Company ?
Yes, It is applicable to all the companies including Private Limited Companies, provided they fulfil the criteria as mentioned above since the section starts with every company.

Even when the company which has not completed three financial years since incorporation could be covered by CSR provisions provided it should satisfy any one the conditions as mentioned above

Net Worth as per Audited Balance Sheet as per section 2(57)  C = A-B x x x x x

But does not include reserve created out of revaluation of assets, write back of depreciation and amalgamation

Meaning of Net Profit:

As per Explanation to Section 135 – For the purpose of section 135, ”net profit” shall not include such sums as may be prescribed and shall be calculated in accordance with the provisions of section 198.

CSR Spending Requirement :

The company must spend at least 2% of the average net profits of the last 3 immediately preceding financial years on CSR activities.

Whether CSR expenditure is deductible in computing net profits under section 198 ?

There are two opinion as given below

The CSR expenditure is being deductile in computing the net profits

The CSR expenditure is Not being deductile in computing the net profits

Support of Opinion 1:

Section 198(4)(j) – In making the computation profits the outgoings inclusive of contributions made under section 181 shall be deducted.

Section 181 – Company to contribute to bonafide and charitable funds., etc.

Support of Opinion 2

CSR Expenditure is not the companies regular expenditure and not deductible

Final Opinion of the Author :

-Yes, It is deductible expenditure for computing profit under section 198 on the following grounds

-Section 181 says contribution to bonafide charitable and other funds

-Section 198(4)(j) says out going contribution is deductible expenditure

-CSR expenditure is considered as outgoing contribution of the company

-If the contribution to other charitable funds is deductible then CSR fund also deductible

-Funds include all the funds specified in Schedule VII

-If contribution to PM National relief funds as mentioned in Schedule VII is deductible then other CSR expenditure also deductible

Example

Net profit of the preceding 3 years are Rs 10 Crores, Rs 15 Crores and Rs 20 Crores

Total profit of the preceding three years is Rs 45 Crores

Average net profit is Rs 15 crores (Rs 10 Crs + Rs 15 Crs + Rs 20 Crs = Rs 45 Crs, Rs 45 Crs / 3 Years = Rs 15 Crs)

2% of Average Net Profit is Rs 30 Lakhs ( Rs 15 Crs * 2%)

Amount to be incurred as CSR expenditure is Rs 30 L in the 4th year

Net Profit of the 4th year is Rs 25 Crores

Now, the net profit of the 4th year to be considered in the subsequent year as Rs 25 crores minus Rs 30 Lakhs.

Meaning Of Turnover:

Turnover as defined in section 2(91) means the gross amount of revenue recognised in the profit and loss account from the sale, supply or distribution of –

-goods or

-an account of services rendered or

-both

by the company during the financial year.

Note : GST collected but not routed through profit and loss account and will not form part of turnover

CSR Committee:

Upon applicability of section 135(1), the Board of Directors is required to constitute a CSR committee.

Formation of CSR committee is mandatory for all types of companies to which section 135 applies including private limited companies.

However where the amount to be spent by the company does not exceeds Rs 50 lakhs, the requirement for constitution of the CSR committee is not applicable and functions can be discharged by the Board of Directors of such company.

The CSR Committee shall:

Formulate and recommend a CSR Policy

Recommend the amount of expenditure to be incurred

Monitor the CSR Policy from time to time

Composition of CSR Committee:

The CSR Committee shall consist of three or more directors, out of which at least one shall be an independent director. However where a company is not required to appoint independent director under section 149(4), the CSR committee of such company shall consist of two or more Directors. Private limited company having only two directors on its board shall constitute CSR committee with two directors.

 Duties of the Board:

-Approve the CSR Policy

-Disclose the contents of the CSR Policy in the Board’s Report

-Ensure that CSR activities are undertaken by the company

Administrative overheads do not exceed 5% of the total CSR expenditure of the company for a financial year.

As per Rule 7(2) of the Companies (CSR Policy) Rules, 2014 – Any surplus arising out of CSR activities shall not form part of the business profit of the company.

The surplus must be Ploughed back into the same CSR project or

Transferred to the Unspent CSR Account, and used for CSR purposes, or

Transferred to a Fund specified in Schedule VII of the Act within a period of six months of the expiry of the financial year.

Whether the company spend more ? – Yes

Whether excess spending may be set off against future obligations ? – Yes

What is Surplus in CSR?
Surplus refers to any extra income or gains arising from CSR activities, which is over and above the money spent for CSR projects.

Examples of Surplus:

-Interest earned on CSR funds

-Revenue from assets created under CSR

-Savings from CSR project implementation

-disposal/sale of materials used in CSR project

-Other similar income

The impact assessment arises only if the average CSR obligation of the preceeding three years is Rs 10 crores or more. No impact assessment is required in respect of contribution to funds specified in schedule VII. Eg : PM Care Fund.

Meaning of “Ongoing Project” in CSR:

As per Companies (CSR Policy) Rules, 2014, an ongoing project means a multi-year CSR project that has been approved by the Board and is in progress, where the implementation and utilization of funds extend beyond the financial year in which it was approved. The maximum permissible period for any on going project is three financial years excluding the financial year in which it is commenced. that means 1+3 financial years.

The company can implement its CSR activities through implementing agencies as follows

-Company/Trust/Society established by the company

-Company/Trust/Society established by the Government

-Entity established under an Act of Parliament

-Other Company/Trust/Society

The registration under section 12A/12AB of the income tax Act, 1961 and approval under section 80G of the income tax act, 1961 is applicable to all the three types of entities as mentioned above. The company need not required to have track record of 3 years for the first 3 types of implementation. However CSR registration required and the required CSR form is CSR-1.

For other company/Trust/Society – must be registered under the IT Act, 1961 and must have track record of alteast three years in undertaking similar programme or projects and must be registered with Central Government under CSR Rules

Accounting aspect:

1. Contribution to a fund specified in Schedule VII to the Act :
Contribution to be treated as expense of the year and to be charged to profit and loss account

2. Implementation though a Trust, Society or Section 8 company:
Contribution to be treated as expense of the year and to be charged to profit and loss account

3. Direct Implementation:

(a) Revenue expenditure to be charged as expense of the year and to be charged to profit and loss account.

(b) Cost of an asset transferred by the company to third party pursuant to CSR should not be recognised a as asset in its books and such expenditure should be charged to statement of profit and loss account as and when incurred

(c) Where the company retains the control of the asset should not be recognized as an assets unless any future economic benefits accrues to the company.

(d) Supply of the goods manufactured by the company should be recognised when the control on the goods manufactured by the company is transferred and valued as per AS 2.

(e) Supply of services should be recognised when the allowable services are rendered by its employees and should be valued at cost.

Disclosure requirements:

(i) Disclosure in statement of profit and loss – CSR is not an operating expenditure but to be disclosed as other expenses

(ii) Cash flow statement – Make a notes to the cash flow statement where applicable

(iii) Related party disclosure-Contribution to a Trust controlled by the company in relation to CSR to be disclosed

(iv) Provision for liability-As per Schedule III of the Companies Act, 2013. Movements in the provision should also be shown separately

(v)  Disclosure in the directors report-It Includes Annual report on CSR

(vi) Disclosure on the website of the company-Composition of committee, CSR Policy and Projects Approved by the Board

(vii) Reporting of foreign company – It shall contain annexure report on CSR

(viii) Certain  disclosure not required either in the Directors report or website

(ix)  Disclosure in income tax return – Company required to file their return of income

(x)  Consequences of non-disclosure

Whether CSR Expenditure is deductible under the Income Tax Act, 1961 ?

No, not claimed as an expenses of the company as per Explanation 2 of Section 37(1) –

Explanation 2.— For the removal of doubts, it is hereby declared that for the purposes of sub‑section (1), 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.

Whether Donation is deductible under section 80G of the Income Tax Act ?
Yes, Eg: PM Cares Fund

It should be sum of money and not kind as per explanation 5 to section 80G

Explanation 5 of Section 80G – For the removal of doubts, it is hereby declared that no deduction shall be allowed under this section in respect of any donation unless such donation is of a sum of money.

Sample Board resolution to constitute CSR Committee

”RESOLVED THAT pursuant to the provision of Section 135 of the Companies Act, 2013 read with the Companies (Corporate Social Responsibility Policy) Rules, 2014, including any statutory modification(s) and e-enactment(s) thereof for the time being in force, subject to Articles of Association of the company and subject to such approvals, consents, sanctions and permissions from any appropriate authority(ies) as may be necessary, consent of the Board of Directors be and is hereby accorded for the constitution of Corporate Social Responsibility Committee (CSR Committee) consisting of following Directors of the Company.

”RESOLVED FURTHER THAT the CSR Committee roles and responsibilities shall be as provided under section 135 of the Companies Act, 2013 and the Companies (Corporate Social Responsibility Policy) Rules, 2014, inter alia:

(a) Formulate and recommend to the Board the CSR Policy which shall indicate the activities to be undertaken by the Company.

(b) Recommend the amount of expenditure to be incurred on the activities referred to in the CSR Policy

(c) Monitor the CSR Policy from time to time.

”RESOLVED FURTHER THAT Mr. …………….. shall act as Chairman of the CSR Committee and Company Secretary to the Company shall act as Secretary to the CSR Committee

”RESOLVED FURTHER THAT the quorum for the CSR Conunittee Meeting shall be one-third of its total strength (any fraction contained in that one-third be rounded off as one) or two members, whichever is higher.

Sample Board Resolution to approve CSR Policy Draft
“RESOLVED THAT pursuant to Section 135 and Schedule VII of the Companies Act 2013, the consent of the Board be and is hereby accorded to approve the CSR policy as recommended by the CSR committee of the Company.

“RESOLVED FURTHER THAT the CSR policy as laid on the table be and is hereby initialled by the chairman for the purpose of identification.

“RESOLVED FURTHER THAT Mr . . . . . . . . . . . . . Director of the Company be and is hereby authorized to do all such acts, things and deeds necessary to give effect the said resolution.

Sample Board Resolution to approve CSR Expenditure
“RESOLVED THAT the recommendation of CSR committee of the company regarding the approval of the amount Rs . . . . . . (Rs in words . . . . . . . . . . . . . .only) 2 (two) percent of the average net profit of the company for the three years, to be spent on Corporate social responsibility as on 31.03.2026 be and is hereby approved.

“RESOLVED FURTHER THAT the consent of board be and is herby accorded to approve the recommendations of the CSR committee regarding issuance of a cheque or deposit of an amount of Rs . . . . . . ./- (Rupees in words . . . .  . . Only) towards . . . . . . . . . As CSR expenditure of the company.

“RESOLVED FURTHER THAT Mr . . . . . . . . . . . . . Director of the Company be and is hereby authorized to do the needful and to do all all such acts, things and deeds necessary to give effect the said resolution”.