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Explore the evolving landscape of Corporate Social Responsibility (CSR) under the Companies Act, 2013. Understand criteria, committee formation, expenditure, and consequences for non-compliance.

The world we know today is changing its shape and talks every second, every minute and every day. However, one thing that lingers is the topic “how necessary it has become to look at the need of the planet we live on”. Everyone and everywhere there is a talk about how to be more considerate towards the environment and live hand in hand with environment. This concern has taken a strike on the world and in order to address this issue the Companies Act has introduced the concept of Corporate Social Responsibility (“CSR”). If we talk about CSR, it is giving back to the society and integrate social and environmental concern in their business operations.

Section 135 of the Companies Act, 2013 (“the Act”) deals with Corporate Social Responsibility. It states that every Company falling under following criteria during the immediately preceding financial year is required to contribute at least 2% of the average net profit of last 3 immediately preceding financial year towards CSR activities as specified in schedule VII of the Act. (if the Company has not completed the period of 3 financial year since its incorporation, then CSR expenditure will be 2% of such immediately preceding financial year) [135(5)]

  • Turnover of Rs. 1000 crores or more
  • Net worth of Rs. 500 Crores or more or
  • Net profit of Rs. 5 Crore or more

While calculating net profit it does not include: –

  • any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and
  • any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act.

Every Company fulfilling the eligibility criteria is required to constitute CSR Committee consisting of 3 or more Director out of which one shall be an Independent Director, However, Company who is not required to appoint Independent Director can constitute CSR committee with only 2 or more Director.

Where the amount of expenditure towards CSR activities does not exceed Rs. 50 Lakhs then requirement for constitution of CSR committee is not applicable and function of CSR committee will be discharged by the Board of Directors of the Company.

However, the Company having any amount in its Unspent Corporate Social Responsibility Account as per sub-section (6) of section 135 shall constitute CSR Committee and comply with the provisions contained in sub-sections (2) to (6) of the said section.

The CSR committee shall

1. formulate and recommend to the Board CSR policy which shall indicate the activities to be undertaken by the Company specified in schedule VII of the Act.

2. recommend the amount of expenditure to be incurred in the activities and

3. monitor CSR policy from time to time

If the amount remains unspent pursuant to an ongoing project*, the transfer of such unspent amount shall be made within 30 days of the end of financial year to Special Account called Unspent Corporate Social Responsibility Account and shall be spent by the Company within a period of 3 financial years from the date of such transfer. If Company fails to utilise the unspent amount, it shall transfer the amount to the fund specified in schedule VII within a period of 30 days from the date of completion of third financial year. [135(6)]

If the amount remained unspent other than ongoing project, transfer such unspent amount to the fund specified in schedule VII within a period of 6 months of 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 three 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;”

Where a Company spends an amount in excess of the requirement to be spend, such excess amount may be set off against the requirement to spend upto immediate succeeding three financial years subject to the condition that:

  • the excess amount available for set off shall not include the surplus arising out of the CSR activities, if any,
  • the Board of the company shall pass a resolution to that effect.

The Company can implement its CSR activities in following ways:

  • By the Company itself or
  • Through company registered under Section 8 of the Act, Registered Public Trust, 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 80G of the Income Tax Act, 1961 either:
    • established by the company or
    • having an established track record of atleast 3 years in undertaking the project or
    • Entity established by the Parliament or State Legislature or
    • Registered Trust or Registered Society approved by State Government or Central Government

Entity intended to undertake CSR activity shall register itself with the Central Government by filling Form CSR-1 electronically with the Registrar w.e.f 01st April, 2021

The Board Report of the Company shall include an annual report on CSR as per Annexure-I (CSR Activities undertaken by the Company for financial year commenced prior to 01st day of April, 2020) or Annexure-II (CSR activities undertaken by the Company for financial year commencing on or after 01st day of April, 2020), as applicable. The Board’s Report shall also disclose the composition of CSR committee.

The Board in its report shall specify the reason for failure if the Company fails to spend the amount. If a Company is in default in complying with the provisions of sub-section (5) or sub-section (6), the  Company shall be liable to a penalty of twice the amount required to be transferred by the  Company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or Rs. 1 crore, whichever is less, and every officer of the Company who is in default shall be liable to a penalty of one-tenth of the amount required to be transferred by the  Company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or two lakh rupees, whichever is less.

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June 2024