All About Corporate Social Resonsibility (CSR)

With the Corporate Social Responsibility (CSR), Companies are able to develop their own social investment strategies and decide where to invest and implement programs, but the government has recommended particular areas of need, including eradicating hunger and poverty, maternal and child health, promoting gender equality and environmental sustainability etc. Companies should give preference to the local areas where they operate. If a company does not conduct its own Corporate Social Responsibility (CSR), it can give the required amount to the government’s socio-economic welfare programs such as the Prime Minister’s National Relief Fund.

When the provision for Corporate Social Responsibility (CSR) was introduced by Companies Act 2013, It was being said by the Government that the provision for Corporate Social Responsibility (CSR) will follow what is globally known as “Comply or Explain (COREX)”, Which means the Companies will not be mandated to spend on Corporate Social Responsibility (CSR) and the Board Report will only give reasons for not spending. However, now the scenario is different then before.

This Article provides the information with relation to the Corporate Social Responsibility (CSR) with relation to the following facets;

Applicability CSR Provisions

Applicability of CSR Committee 

Applicability of CSR Committee

• The Company to which the above-mentioned provisions are applicable shall constitute a Corporate Social Responsibility Committee of the Board which shall consist of 3 or more Directors, out of which at least one Director shall be an Independent Director*.

* If the Company is not required to appoint the Independent Director under the provisions of the Section 149 of the Companies Act, 2013 then such Company shall have the CSR Committee with two or more Directors without Independent Director.

Functions of CSR Committee

• Following are the functions of the CSR Committee;

√ Formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be under taken by the Company in areas or subject, specified in Schedule VII;

√ Recommend the amount of expenditure to be incurred on the activities referred to above;

√ Monitor the CSR Policy of the Company from time to time.

Duty of the Board with relation to CSR Policy and CSR Spending

• The Board shall after taking into consideration the recommendations made by the CSR Committee, approve the CSR Policy and shall disclose the contents of such Policy in the Board’s Report and shall also place it on the website of the Company, if any.
• It shall be the duty of the Board to ensure that the activities which are included in the CSR Policy of the Company are undertaken by the Company.
• The Board of the Company shall ensure that the Company spends, in every financial year, at least 2% of the average net profits which shall be calculated in accordance with the provisions of the Section 198 of the Companies Act, 2013, of the Company made during the 3 immediately preceding financial year or where the Company has not completed the period of 3 Financial Year since its incorporation, during such immediately preceding financial years, in pursuance of its CSR Policy.
• The Company shall give preference to the local area and areas around it where it operates for spending the amount earmarked for CSR activities.

Consequences of failure of spending CSR funds

• It shall be noted that if any amount remains unspent which related to the ongoing project* then such unspent amount shall be transferred to the funds specified in Schedule VII, within a period of 6 months of the expiry of the Financial Year.

* “Ongoing Project” means a multi-year project undertaken by a Company in fulfilment of its CSR obligation having timelines not exceeding 3 years excluding the Financial Year in which it was commenced and shall include 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. 

• Further, it shall be noted that if any amount remains unspent pursuant to any ongoing project which has been undertaken by the Company in pursuance of its CSR Policy then such amount shall be transferred by the Company within period of 30 days from the end of the Financial Year to a special account to be opened by the Company in any Scheduled Bank which shall be called as the Unspent Corporate Social Responsibility Account. 
• The amount in Unspent CSR Account shall be spent by the Company towards the CSR obligation within a period of 3 Financial Year from the date of such Transfer. 
• If the Company fails to do so then the Company shall transfer the such amount to a Fund specified in Schedule VII, within a period of 30 days from the date of completion of Financial Year.

CSR Implementation

• The Board shall ensure that the CSR activities shall be undertaken by the Company itself or through;

• It shall be noted that every entity which are covered herein above and who intends to undertake any CSR activities, shall register itself with the Central Government by filing the e-form CSR-1 with the Registrar with effect from 1^st April, 2021.
• It shall be noted that on submission of the e-form CSR-1 on the portal, a unique CSR Registration Number shall be generated by the system automatically.

CSR Expenditure

• The Board shall ensure that the Administrative Overheads shall not exceeds 5% of total CSR Expenditure of the Company for the Financial Year;
• Any surplus arising out of CSR activities shall not form part of the business profit of a Company and shall be ploughed back into the same project OR shall be transferred to the Unspent CSR Account and spent in pursuance of CSR Policy and annual action plan of the Company OR transfer such surplus amount to a fund specified in Schedule VII, Within a period of 6 months of the expiry of the Financial Year;
• It shall be noted that where a Company spends an amount in excess of requirement CSR Obligation then such excess amount may be set off against the requirement to spend the CSR Obligation of immediate succeeding 3 Financial Years subject to following conditions;

√ The excess amount available for set off shall not include the surplus arising out of the CSR activities, if any;

√ The Board of Directors shall pass a resolution to that effect.

• It shall be noted that the CSR amount may be spent by the Company for creation or acquisition of a Capital Assets, which shall be held by;

√ A Company established under Section 8 of the Companies Act, 2013 or a Registered Public Trust or Registered Society having charitable objects and CSR Registration Number;

OR

√ Beneficiaries of the said CSR Project, in the form of self help groups, collectives, entities;

OR

√ A Public Authority

CSR Reporting

• It shall be noted that the Board’s Report of a Company to which the CSR provisions are applicable shall include an Annual Report on CSR containing particulars as specified below;
• It shall be noted that that EVERY COMPANY having average CSR obligation of Rs.10 Crore in the 3 immediately preceding financial year, shall undertake impact assessment, through an independent agency of those CSR Projects which are having outlays of Rs. 1 Crore or more and which have been completed net less than one year before undertaking the impact study;
• The impact assessment Report shall be placed before the Board and shall also be annexed to the Annual Report on CSR;
• It shall be noted that the impact assessment expenditure may be booked towards CSR for that particular Financial Year which shall not exceed 5% of the total CSR expenditure for that Financial Year or Rs.50 Lakhs whichever is less.

FORMAT FOR THE ANNUAL REPORT ON CSR ACTIVITIES TO BE INCLUDED IN THE BOARD’S REPORT FOR FINANCIAL YEAR COMMENCING ON OR AFTER 1^ST DAY OF APRIL, 2020

1. Brief outline on CSR Policy of the Company:

2. Composition of CSR Committee: 

3. Provide the web-link where the composition of CSR Committee, CSR Policy and CSR Projects approved by th Board are disclosed on the website of the Company;

4. Provide the details of Impact assessment of CSR Projects carried out in pursuance of sub-rule (3) of Rule 8 of the Companies (Corporate Social Responsibility Policy) Rules, 2014, if applicable [Report shall be attached]

5. Details of the amount available for set off in pursuance of sub-rule (3) of Rule (7) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 and amount required for set off for the financial year, if any

6. Average Net Profit of the Company as per Section 135(5):

 7. (a) 2% of average Net Profit of the Company as per Section 135(5):

 (b) Surplus arising out of the CSR projects or programmes or activities of the previous financial year:

 (c) Amount required to be set off for the financial year, if any:

 (d) Total CSR obligation for the Financial Year (7a + 7b – 7c):

8. (a) CSR amount spent or unspent for the financial year: 

(b) Details of CSR Amount spent against ONGOING PROJECT for the financial year:

(C) Details of CSR amount spent against OTHER THAN ONGOING PROJECTS for the financial year:

(d) Amount spent in Administrative Overheads:

(e) Amount spent on Impact assessment, if applicable:

(f) Total amount spent for the Financial Year (8b + 8c + 8d + 8e)

(g) Excess amount for set off, if any

9 (a) Details of Unspent CSR amount for the preceding 3 Financial Years;

(b) Details of CSR amount spent in the financial year for ONGOING PROJECTS of the preceding financial years:

10. In case of creation of acquisition of capital assets, furnish the details relating to the assets so created or acquired through CSR spent in the Financial Year (Asset wise details).

a. Date of creation or acquisition of the Capital Assets;

b. Amount of CSR spent for creation or acquisition of Capital assets

c. Details of the entity or public authority or beneficiary under whose name such capital assets is registered, their address etc.

d. Provide details of the capital assets created or acquired (including complete address and location of the capital asset)

11. Specify the reasons, if the Company has failed to spend 2% of the average net profit as per Section 135(5). 

Display of CSR Activities on its website

• The Board of Director shall mandatorily disclose the composition of the CSR Committee and CSR Policy and projects approved by the Board on their website, if any for Public access.

All about Form CSR-2

♦ APPLICABILTY:

• The Ministry of Corporate Affairs through Notification dated 11^th February, 2022 notified the Companies (Accounts) Amendment Rules, 2022 which is applicable to the companies which are covered under Section 135(1) of the Companies Act, 2013;
• As per such amendment, every Company covered under the provisions of the Section 135(1) of the Companies Act, 2013 shall furnish a report on its Corporate Social Responsibility in the Form CSR-2 to the Registrar of Companies for the preceding Financial Year 2020-21 and thereafter the same shall be filed as a addendum to Form AOC-4 as the case may be;
• It shall be noted that for the Financial Year 2020-21, Form CSR-2 shall be filed separately on or before 31^st March, 2022 which has been extended up to 31^st May, 2022.

 FAQs with relation to Form CSR-2

Q.1 Net Profit of the Company as on 31^st March, 2020 was more than Rs. 5 Crore. CSR applicable on the Company for the F.Y. 2020-21. Whether for this situation the Company is required to file Form CSR-2?

Ans. As CSR was applicable on the Company for the F.Y. 2020-21, therefore such Company requires to file form CSR-2 for the F.Y. 2020-21.

Q.2 Net Profit of the Company as on 31^st March, 2019 was Rs.8 Crore, therefore CSR was applicable on Company for the F.Y. 2019-20. Net Profit as on 31^st March, 2020 was 1 Crore. Whether in this situation, the Company is required to file Form CSR-2?

Ans. Due to Profit as on 31^st March, 2019, CSR was applicable on the Company in the F.Y. 2019-20. However, the Profit as on 31^st March, 2020 was reduced to Rs.1 Crore, therefore the provisions of CSR are not applicable on the Company in the F.Y. 2020-21.

Therefore, the Company is not required to file Form CSR-2.

Q.3 What is the due date of CSR-2 for the F.Y. 2021-22 and onwards?

Ans. It shall be noted that for the F.Y. 2021-22 and onwards Form CSR-2 is required to be filed as linked form with e-form AOC-4.

Therefore, the due date of the same shall be as e-form AOC-4 that is within 30 days from the date of AGM.

Q.4 Whether Form CSR-2 is STP mode or Non-STP mode form?

Ans. Form CSR-2 is STP Mode form.

Q.5 Whether the Trust/ Societies/ Section 8 Companies (Implementing Agencies) are required to file CSR-2?

Ans. It shall be noted that the CSR-2 is required to be filed by the Companies on which the provisions of Section 135(1) of the Companies Act, 2013 are applicable. Therefore, implementing agencies are not required to file Form CSR-2.

Q.6 CSR was first time applicable to the Company as per the Financial Year 2020-21, so the contribution to be made in the Financial Year 2021-22. Will the Company be required to file CSR-2 for the Financial Year 2020-21?

Ans. As the CSR is first time applicable to the Company in the Financial Year 2021-22, therefore, there is no need to file CSR-2.

General FAQs with relation to CSR

Q.1 Whether the Average Net Profit criteria for Section 135 (5) is Net Profit before tax or net Profit after tax?

Ans. Computation of net profit for Section 135 is as per Section 198 of the Companies Act, 2013 which is primarily Profit Before Tax (PBT). 

Q.2 What tax benefit can be availed under CSR?

Ans. No specific tax exemptions have been extended to CSR expenditure per se. It shall be noted that the Finance Act also clarifies that the expenditure on CSR does not for part of business expenditure. While no specific tax exemption has been extended to expenditure incurred on CSR, spending on several activities like contribution to Prime Minister’s Relief Fund, Scientific Research, Rural Development Projects etc. which find place in Schedule VII, already enjoy exemptions under different sections of the Income Tax Act, 1961.

Q.3 Whether the provisions of CSR are applicable on Section 8 Company, if it fulfils the criteria of Section 135(1) of the Companies Act, 2013?

Ans. It shall be noted that Section 135 of the Companies Act, 2013 reads, “EVERY COMPANY……” so there is no specific exemption to Section 8 Company with regard to applicability to Section 135. Therefore, the provisions of CSR are also applicable to Section 8 Company.

Q.4 For Companies having multi-locational operations, which local area of operations should be chosen for spending the amount allocated for CSR activity?

Ans. As per first proviso to Section 135 (5) of the Companies Act, 2013, the Company shall give the preference to the local area and the areas around which it operates for spending the CSR amount. In case of multi-locational operations, the Company is free to choose the area for which it wants to give preference.

Q.5 Can one-off events such as marathons/ awards/ advertisements/ sponsorships of TV programmes, etc. be part of CSR expenditure?

Ans. The Ministry of Corporate Affairs has clarified vide Circular No.21/2014 dated 18^th June, 2014 that CSR activities should be undertaken by the Companies in project/ programme mode. One off events such as marathons/ awards/ advertisements/ sponsorships of TV programmes, etc. would not qualify as a part of CSR expenditure.

Quick Reference for Procedure for CSR

♦ Following is the procedure for the compliance of Corporate Social Responsibility (CSR):

• Board Resolution shall be passed for the constitution of CSR Committee as per Rule 5 of the Companies (CSR Policy) Rules, 2014;
• CSR Policy shall be formulated;
• It shall be noted that the content of CSR Policy shall be as per the provisions of Section, Rules, and Schedule VII;
• Board Resolution shall be passed for approval of CSR Policy;
• CSR Committee shall formulate and recommend the Annual Action Plan which shall be in accordance with the CSR Policy;
• It shall be noted that the CSR implementation shall be as per Section 135 of the Companies Act, 2013 read with Rule 4 of the Companies (CSR Policy) Rules, 2014;
• The entities which are covered under Rule 4(1) of the Companies (CSR Policy) Rules, 2014 shall file E-form CSR-1 with effect from 1^st April, 2021;
• Certificate shall be given by the Chief Financial Officer or the person responsible for financial management of the company, stating that the funds so disbursed have been utilised for the purpose and in the manner as approved by the Board and Board shall also ensure the same;
• In case of on going project, Board to monitor the implementation of the project with respect to approved timelines and year wise allocation;
• Disclosure in the Board’s Report as per the Format given in the Rule 8 of the Companies (CSR Policy) Rules, 2014;
• CSR contribution of 2% of average net profit of immediately preceding 3 years or where the Company has not completed the period of 3 financial years since its incorporation, during immediately preceding financial years, to be spent on CSR activities in a financial year;
• It shall be noted that the Board shall ensure that CSR Expenditure shall be spent in accordance with the provisions of Rule 7 of the Companies (CSR Policy) Rules, 2014;
• Following are the consequences of failure in spending the amount of 2%;

√  Explanation by the Board in its Report as prepared under Section 134 of the Act; and

√  Transfer such unspent amount to a fund specified in Schedule VII within a period of 6 months of the expiry of the financial year [It shall not be applicable in case the unspent amount relates to any ongoing project].

• In case the company spends an amount in excess of required contribution, such excess amount may be set off against the requirement to spend up to immediate succeeding 3 financial year provided –

√  The excess amount shall not include the surplus arising out of the CSR activities, if any;

√  The Board Resolution is required to be passed.

• In case the unspent amount related to ongoing project –

√ Unspent CSR A/c shall be opened;

√  Transfer of unspent amount within 30 days of the end of the Financial Year to unspent CSR A/c;

√  Spend such amount as per the CSR Policy within a period of 3 financial year from the date of such transfer;

√  In case of failure to spend the said, unspent amount, transfer the same to a fund specified in Schedule VII, within a period of 330 days from the date of completion of the 3^rd Financial Year.

• Companies having average CSR obligation of Rs.10 Crore or more in accordance with the Section 135(5) of the Companies Act, 2013, in the 3 immediately preceding financial year shall undertake impact assessment, through an independent agency of their CSR projects having outlays of Rs.1 crore or more and which have been completed not less than 1 year before undertaking the impact study.
• The impact assessment reports shall be places before the board and shall be annexed to the Annual Report on CSR.
• Company undertaking impact assessment may book the expenditure towards CSR for that Financial Year, which shall not exceed 5% of total CSR expenditure for that financial year OR 50 Lakhs, whichever is less.
• Disclosure of composition of CSR Committee, CSR Policy and Projects as approved by the Board on the website, if any

Disclaimer: The entire contents of this article have been prepared based on relevant provisions and as per the information existing at the time of the preparation. Although utmost care has been taken to ensure the accuracy, completeness, and reliability of the information provided, I assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a piece of professional advice and is subject to change without notice. I assume no responsibility for the consequences of the use of such information.