Corporate Social Responsibility (CSR) under Companies Act 2013- Concept, Applicability, Provisions, Penalty

Corporate social responsibility (CSR) is how companies manage their business processes to produce an overall positive impact on society. It covers sustainability, social impact and ethics, and done correctly should be about core business – how companies make their money – not just add-on extras such as philanthropy.

1. Applicability of Corporate Social Responsibility (CSR)

135(1) Section 135 is applicable to every Company including its holding or subsidiary having a net worth of Rs.500 Cr or more, OR turnover of Rs.1000 Cr or more OR a net profit of Rs. 5 Cr or more during the immediately preceding financial year.

*Net Profit means ‘NET PROFIT BEFORE TAX’

2. Necessary Step to Be Taken to Implement CSR

Once a company is covered under the ambit of the CSR, it shall be required to comply with the provisions of the CSR -Section 135(1), required to do the following activities.

COMMENT: 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.

Constitute CSR Committee

Board’s report shall disclose the compositions of the CSR Committee

Spend 2% of Average Net Profits of the last 3 years on CSR activities

#There is no need to prepare director report for Foreign company so whether it is mandatory for foreign Company also to give reporting of CSR activity?

In case of a foreign company, the balance sheet filed under sub-clause (b) of sub-section (1) of section 381 shall contain an Annexure regarding report on CSR.

3. CSR Committee

Constitutions of CSR Committee: Company to which CSR is mandatory should constitute a CSR Committee to undertake and monitor CSR activities:

The CSR Committee shall consist of 3 (Three) or more Director, out of which at least one director shall be an Independent Director.

  • An Unlisted Public Company: This is covered under CSR provisions, but need not to have Independent Director on the CSR Committee.
  • Private Limited Company: which is covered under CSR provisions

√ Need not have Independent director on the CSR Committee

√ Can have CSR committee with only Two Directors.

  • In case of Foreign Company: The CSR committee should have at least Two person, out of which
  • One person shall be specified under section 380(1)(d) of the 2013 Act and
  • Another person nominated by the Foreign Company.

4. Role Of Board Of Directors Of Companies to Which CSR is Applicable

The Board of Directors of every company on which CSR is applicable shall,

  • After taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the Company.
  • Review activity included in policy undertake by the Company or not.
  • Check Whether Company is spending the amount if not discuss in the Meeting.
  • The Board of Director’s report undertakes Section 134(3) of the 2013 Act shall disclose the composition of the Corporate Social Responsibility Committee.

# Whether resolution can be pass by Circulation resolution by CSR Committee?

Yes there is no restriction to pass resolution by circulation resolution by the committee. It can pass such resolution.

5. CSR Expenditure

The Board of every company on which CSR is applicable shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the 3 immediately preceding financial years* in pursuance of its Corporate Social Responsibility Policy.

(*where the company has not completed the period of 3 financial years since its incorporation, during such immediately preceding financial years)

Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR Activities.

#Net Profit Require spending on CSR Activity:

To ensure that at least 2% of average net profit of 3 immediately preceding financial years to be spent on CSR activities every year. Exp. For Financial Year 2017-18 Calculation: Average net profit of FY 2012-15, 2015-16 & 2016-17 needed to be considered.

“Net profit” means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include the following, namely:

1. any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and

2. Any dividend received from other companies in India, which are covered under and complying with provisions of Section 135.

Most Imp: average net profit is calculated as per section 198 i.e. calculation done for managerial calculation. (example of calculation as per section- 198 given below)

Net Profit for Foreign Company: In case of a foreign company covered under these rules, net profit means the net profit of such company as per profit and loss account prepared in terms of clause (a) of sub-section (1) of section 381 read with section 198 of the Act.

Whether the average net profit criteria in section 135(5) is Net profit before tax or Net profit after tax?

The explanation to section 135(5) states that “average net profit” shall be calculated in accordance with section 198 of the Companies Act, 2013. In terms of section 198(5)(a) in making computation of net profits, income-tax and super-tax payable by the company under the Income-tax Act, 1961 shall not be deducted. Therefore, the net profit criterion in section 135(5) is NET PROFIT BEFORE TAX.

CALCULATION OF PROFITS FOR CSR
Net Profit Before Tax (earned in India) XXX
LESS: Dividends Received from other companies in India to whom Section 135 is applicable and are carrying out CSR Activities (i.e. 2% of Avg. PBT) (XXX)
LESS: Profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise XXX
Net Profit for CSR Activities

Net worth meaning 

As per Section 2(57), ‘NW’ = (Paid Up Share Capital + All Reserves Created Out of Profits + Securities Premium Account) – (Accumulated Losses + Deferred Expenditure and Miscellaneous Expenditure not Written Off).

6. CSR Policy

The CSR policy of the company mainly include such as,

  • Elaborates the activities to be undertaken by the Company subject to Schedule VII to the Act.
  • The activities mentioned in the policy must be undertaken by the company
  • The monitoring process of such projects or programs
  • A clause specifying that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of the company

7. CSR Activities

The CSR activities shall be undertaken by the company, should be recommended by CSR Committee & it should be mentioned  CSR Policy, excluding activities undertaken in pursuance of its normal course of business.

SCHEDULE VII (List of Permitted Activities for CSR)

Schedule VII of the Companies Act 2013, indicate the list of probable activities which may be included by companies in their Corporate Social Responsibility Policies Activities relating to,

  • 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.

  • Promoting education, including special education and employment

enhancing vocation skills especially among children, women, elderly and the differently-abled and livelihood enhancement projects.

  • Promoting gender equality, empowering women,

setting up homes and hostels for women and orphans; setting up old age homes, daycare centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.

  • Ensuring environmental sustainability, ecological balance, protection of flora and fauna,

animal welfare, agroforestry, conservation of natural resources and maintaining the quality of soil, air and water including contribution to the Clean Ganga Fund set-up by the Central Government 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 art and handicrafts;

  • Measures for the benefit of armed forces veterans, war widows, and their dependents;
  • Training to promote rural sports, nationally recognized sports

paralympic sports, and Olympic sports

  • Contribution to the prime minister’s national relief fund

or any other fund set up by the central govt. for socio-economic development and relief and welfare of the scheduled caste, tribes, other backward classes, minorities, and women

  • Contribution to incubators funded by Central Government or State Government or any agency or Public Sector Undertaking of Central Government or State Government,

and contributions to public-funded Universities, Indian Institute of Technology (IITs), National Laboratories and Autonomous Bodies (established under the auspices of Indian Council of Agricultural Research (ICAR), Indian Council of Medical Research (ICMR), Council of Scientific and Industrial Research (CSIR), Department of Atomic Energy (DAE), Defence Research and Development Organisation (DRDO), Department of Science and Technology (DST), Ministry of Electronics and Information Technology) engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs)

  • Rural development projects
  • Slum area development.

(Explanation- For the purposes of this item, the term `slum area’ shall mean any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force.)

  • Disaster management, including relief, rehabilitation, and reconstruction activities.

8. CSR Activities Through Trusts, Societies Or Section 8 Companies

Contribution to Corpus of a Trust/ Society/ section 8 Companies etc. will qualify as CSR expenditure until unless:

(a) the Trust/ society / Section 8 company etc. is created exclusively for undertaking CSR activities and [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, or otherwise]

(b) If not 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] shall have an established track record of three years in undertaking similar programs or projects;

(c) the company has specified the project or programs to be undertaken through these entities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism

(d) Where the corpus is created exclusively for a purpose directly relatable to a subject covered in Schedule VII of the Act.

# Is CSR spending required to be done by the Company directly or such amounts can be contributed to charity/ NGO/ section 25 company. Will such contribution qualify as CSR spend?

Yes. Contribution by the Company to such trusts, NGOs etc also qualify for CSR spend if it meets the track record and other criteria as per Rule 4(2) of Companies (CSR Policy) Rules, 2014.

9. Activities Which Would Not Qualify As CSR Expenditure

The CSR projects or programs or activities NOT to be considered as CSR Activities:

  • Activities undertaken in normal course of business.
  • Activity undertaken outside India.
  • CSR projects or programs or activities that benefit only the employees of the company and their families shall not be considered as CSR activities.
  • Contribution of any amount directly or indirectly to any political party under section 182 of the Act, shall not be considered as CSR activity.
  • Activity not covered within schedule VII of the 2013 Act.
  • One-off events such as marathons/ awards/ charitable contribution/ advertisement/ sponsorships of TV programmes etc. would not be qualified as part of CSR expenditure.
  • 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

10. Some Other Important Provisions On CSR

  • Maximum 5% administrative overheads: Companies may build CSR capacities of their own personnel but such expenditure including administrative overhead shall not exceed 5% of total CSR expenditure of the company in one financial year
  • Surplus arising out of CSR activities: The CSR policy of the company shall specify that surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of the company.
  • Annual Report on CSR: The Board’ Report of the company shall include an annual report on CSR containing particulars as specified in Annexure under Companies(CSR) Rules, 2014.
  • Display CSR activities on the Website of the company, if any: The Board of Directors of the company shall approve CSR policy as recommended by the CSR committee and shall place the same on the website of the company, if any.

# Whether CSR expenditure of a company can be claimed as a business expenditure?

The Finance Act, 2014 provides that any expenditure incurred by an assessed 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 assessed for the purposes of the business or profession. Accordingly, the amount spent by a company towards CSR cannot be claimed as business expenditure.

# Can donation of money to a trust by a company be treated as CSR expenditure of the company?

The Ministry of Corporate Affairs has vide General Circular No. 21/2014 dated June 18, 2014 has clarified that 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 company 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

# Whether company can collaborate with another company for CSR activity and project?

A company may also collaborate with other companies for undertaking projects or

programs 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 programs

11. Penalty for Non-Compliance of CSR Provisions of Companies Act 2013

Section 135 does not lay down any penal provision in case a company fails to spend towards CSR activities. However, Section 135(5) provides that in case the company fails to spend such amount, the Board shall specify in its report reason for not spending the amount under Section 134(3)(o).

In case the company does not comply with Section 134, the company shall be punishable under Section 134(8).

i. Section 134(8): As per Section 134(3)(o) of the Companies Act, companies shall include in its Board Report the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year. If the company contravenes the provisions of Section 134:

The Company shall be punishable with fine which shall not be less than Rs.50,000/- but which may extend to Rs.25,00,000/-; and

Every officer in default shall be punishable with imprisonment for a term which may extend to three years OR fine which shall not be less than Rs.50,000/ – but which may extend to Rs.5,00,000/-; or – Both

ii. Section 450: Where no specific penalty is provided, in case of contravention of any such provision, company, and every officer in default or such other person shall be punishable with:

Fine which may extend to Rs.10,000/-, and

Where contravention is continuing one, a further fine which may extend to Rs.1,000/- for every day after the first during which contravention continues.

12. MCA’S Initiatives or Crackdown to Facilitate CSR Compliance 

In view of the use of the words “Shall ensure that the company spends” under Section 135 of the Act, it is mandatory for eligible companies covered under Section 135(1) to mandatorily spend the prescribed amount and non-spending of CSR amount shall attract penal action as mentioned in the Act unless the regulatory authority accepts the reasons given in the Board reports of the companies. Since the coming into force of this provision i.e. from 01st April 2014, it has been observed that most of the companies are still not spending towards CSR. In order to ensure compliance of Section 135, MCA has taken the following steps:

  • National CSR Data Portal- Ministry has launched the National CSR Data Portal on 19th January 2018 for driving accountability and transparency in Corporate India. The National Corporate Social Responsibility Data Portal is an initiative by Ministry of Corporate Affairs, Government of India to establish a platform to disseminate Corporate Social Responsibility related data and information filed by the companies registered with it.
  • Show Cause Notices to companies: The Show Cause Notices have been issued to more than 1000 companies for initiating prosecution for non-compliance of Section 135 read with Section 134(3)(o). However, as per Section 135, if company fails to spend the CSR amount, it has to give reason under Section 134(3)(o), hence if a company is giving its reason in the Board Report then it is complying with the provisions of Section 135 and Section 134(3)(o). Further, Section 450 will also not be attracted, since Section 135 and Section 134 cannot be considered as contravened if the company has provided its reasons for non-spending of the amount. Hence, this action of MCA can be questioned on behalf of the industry because the law should be clear that if companies do not spend or less spend towards CSR, then it can be prosecuted if the reasons given by them in Board Reports are not acceptable.
  • Unspent CSR amount to be transferred to designated Central Government Funds:   

A. Although the Company Law Committee has suggested not to undertake any transfer of the unspent amount, the Act 2019 , amended the section to provide, inter alia for—

carrying forward the unspent amounts for any financial year unless the same relates to any ongoing project, to a Fund specified in Schedule VII within 6 months of closure of the financial year;

carrying forward the unspent amounts related to ongoing project, to a special account to be spent within three financial years and transfer thereafter to the Fund specified in Schedule VII, in case of an ongoing project;

B. Until this amendment, any company which was unable to incur CSR expenditure was required to explain the reasons for the same in its Board Report. But now in addition to said explanation, such company is also required to undertake the following:

Where the Company is not undertaking any CSR projects and it has not spent the required amount towards CSR during any financial year, then such unspent amount shall be transferred to one of funds specified in Schedule VII within a period of 6 months from the close of financial year, to which the unspent amount relates.

Where the Company has undertaken some projects fulfilling the prescribed conditions and has planned the CSR expenditure on the same, out of which some amount still remains unspent, then such Company is required to open a separate bank account to be called as “Unspent Corporate Social Responsibility Account” within 30 days of closure of the financial year and such amount shall be spent by the Company on the ongoing project, within a period of 3 years from the date of transfer and where at the end of said period of 3 years, some amount remains unspent, then the same shall be transferred to in one of funds specified in Schedule VII within 30 days of completion of the said 3 years.

C. Fund specified in Schedule VII: As per the amended CSR provisions, the unspent amount towards CSR shall be transferred to any of the funds specified in Schedule VII. As on the date, Schedule VII provides for the following funds:

1. Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation;

2. Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga;

3. Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women.

It is proposed that for the purpose of transferring unspent amount, the Government may set up some specific fund. However, as on date, no such fund has been set-up.

D. Ongoing projects: The amended provisions provide for transferring unspent amount on ongoing projects to a separate bank account and after a period of 3 financial years from the said date of transfer to one of the funds specified in Schedule VII, in this regard, the following may be taken into consideration—

1. It seems that ongoing project(s) shall only mean any CSR program or activity being undertaken by a Company directly and where expenditure on such program or activity, extends beyond the financial year to which the expenditure relates.

2. The ongoing project(s) shall not include any project carried out by a Trust/Society/Section 8 Company as prescribed under Rule 4(2) of the CSR Rules since MCA vide its General Circular No. 21/2014 dated 18.06.2014 (‘Circular’) had clarified that amount transferred to Trust/Society/Section 8 Company for carrying CSR activities shall be deemed to have been spent for the purpose of Section 135 and if the amount is deemed as spent then the provisions of second proviso to Section 135(5) and 135(6) shall not be applicable on such amount.

3. In order to qualify as ongoing project(s), such project(s) should adhere to the prescribed conditions. MCA will prescribe the said conditions in the days to come.

13. Recent Updates on CSR

 A. CSR under CARO 2020

Further, as recently the Ministry of Corporate Affairs (MCA) notified the Companies (Auditor’s Report) Order 2020, Auditor has to give their opinion on CSR in reference to section 135(5) & 135(6) of the Companies Act 2013. These two sections pertain to transferring unspent CSR money to PM National Relief Fund.

Whether, in respect of other than ongoing projects, the company has transferred unspent amount to a Fund specified in Schedule VII to the Companies Act within a period of six months of the expiry of the financial year in compliance with second proviso to sub-section (5) of section 135 of the said Act;

Whether any amount remaining unspent under sub-section (5) of section 135 of the Companies Act, pursuant to any ongoing project, has been transferred to special account in compliance with the provision of sub-section (6) of section 135 of the said Act;

B. Contribution made to the PM CARES Fund shall qualify as CSR expenditure under the Companies Act 2013.

The Government of India has set up the Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund’ (PM CARES Fund) with the primary objective of dealing with any kind of emergency or distress situation such as that posed by COVID 19 pandemic.

Item no. (viii) of the Schedule VII of the Companies Act, 2013, which enumerates activities that may be undertaken by companies in discharge of their CSR obligations, inter alia provides that contribution to any fund set up by the Central Government for socio-economic development and relief qualifies as CSR expenditure. The PM-CARES Fund has been set up to provide relief to those affected by any kind of emergency or distress situation. Accordingly, it is clarified that any contribution made to the PM CARES Fund shall qualify as CSR expenditure under the Companies Act 2013.

C. Spending of CSR funds for COVID-19 shall be considered as an eligible CSR activity.

Keeping in view of the spread of novel Corona Virus (COVID-19) in India, its declaration as pandemic by the World Health Organisation (WHO), and, decision of Government of India to treat this as a notified disaster, it is hereby clarified that spending of CSR funds for COVID-19 is eligible CSR activity.

Funds may be spent for various activities related to COVID-19 under item nos. (i) and (xii) of Schedule VII relating to promotion of health care, including preventive health care and sanitation, and, disaster management. Further, as per General Circular 21/2014 dated 18.06.2014, items in Schedule VII are broad based and may be interpreted liberally for this purpose.

Conclusion

Corporate social responsibility (CSR) encourages businesses accountability to a wide range of stakeholders, shareholders, and investors. The key are of concerns are the environment protection, and the social wellbeing of people in society, both now and in the future. CSR has a variety of policies such as giving to organization, providing products and services to consumers, reducing harmful waste, and treating their employees with moral ethics.

Disclaimer: The Article Is Based On The Relevant Provisions And As Per The Information Existing At The Time Of The Preparation. In No Event I Shall Be Liable For Any Direct And Indirect Result From This Article. This Is Only A Knowledge Sharing Initiative.

The Author – CS Deepak Seth (Associate Partner at Helpinghands Professionals LLP) and can be reached at contacthhpro@gmail.com or 9910248911.

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CS Deepak Seth is an Associate Member of Institute of Companies Secretaries of India having good experience in legal and secretarial matters. He is graduate from Delhi University and Post graduate from IGNOU University. He is also MBA in Finance and LLB Deree holder. He possesses professional experi View Full Profile

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