Companies Amendment Act, 2019– Section 135: Corporate Social Responsibility (CSR) – In-depth Analysis

Section 135 has been amended with respect to spending of CSR amount by companies, transfer of unspent amount, penal provisions and power to CG to issue directions.

Amendment: Clause (a) in sub-section (5), —

(i) after the words “three immediately preceding financial years,”, the words “or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years,” shall be inserted;

Pursuant to amendment, the calculation of 2% of average profits under section 198 for the entities wherein 3 immediately preceding financial years have not elapsed, such companies shall take immediately preceding financial year since incorporation.

Ex: If a company incorporated in 2017 has earned net profit of Rs. 5 Crore in 2018-19, then CSR would be applicable for such companies in FY 2019-20 to spend 2% of average net profits as calculated under section 198 of immediately preceding financial years since incorporation.

Such a company shall take 2% average of net profits u/s 198 of 2017-18 & 2018-19 and spend in FY 2019-20.

Amendment: Clause (ii) in the second proviso, after the words “reasons for not spending the amount” occurring at the end, the words, brackets, figure and letters “and, unless the unspent amount relates to any ongoing project referred to in sub-section (6), transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year” shall be inserted;

(b) after sub-section (5), the following sub-sections shall be inserted, namely:—

“(6) Any amount remaining unspent under sub-section (5), pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in persuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account, and 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.

(7) If a company contravenes the provisions of sub-section (5) or sub-section (6), the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.

(8) The Central Government may give such general or special directions to a company or class of companies as it considers necessary to ensure compliance of provisions of this section and such company or class of companies shall comply with such directions.”

A new concept of fund transfer on non-utilisation of CSR spent is introduced wherein if a company fails to spend CSR amount, then the company shall transfer the unspent amount to a fund under Schedule VII or if a company holds amount for ongoing projects, then such amount be transferred to Unspent Corporate Social Responsibility A/c within a period of 30 days from the end of financial year and spend the same within 3 years for the project.

If a company fails to spend for ongoing project within a period of 3 years of transfer to unspend CSR A/c, the same be transferred to fund under schedule VII within 30 days of closure of Financial Year.

The same is illustrated as follows:

If a company fails to spend CSR amount for FY 2019-20 as on 31st March 2020 Then the company shall transfer on or before 30th September 2020 to the Funds as mentioned in Schedule VII.
If a company is holding the unspent amount for ongoing project for FY 2019-20 as on 31st March 2020 Then open an account Unspent Corporate Social Responsibility A/c and transfer the unspent amount of CSR before 30th April 2020.

Such amount shall be spend within 3 years from the date of transfer i,e., on or before 30th April 2023.

If a company fails to spend amount in unspent CSR A/c – for a period of 3 years Then the company shall transfer on or before 30th April 2023 to the Funds as mentioned in Schedule VII.

In case of default, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of such company who is in default, shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.”

Frequently asked questions:

If a company is incorporated on 2nd August 2018 and earns a net profit of Rs. 5 crores in financial year 2018-19 and profits calculated under section 198 of CA 2013 is Rs. 3. 5 crores, will the company CSR is applicable to the Co and has to spent 2% of Rs. 3. 5 Crores  in FY 2019-20?

Yes, even a newly incorporated entity shall follow provisions of CSR.

Will the existing company has to amend its policy on CSR?

As per Companies (Corporate Social Responsibility) Rules, 2014 amended as on date, the companies are required to disclose the following in CSR Policy:

(a) a list of CSR projects or programs which a company plans to undertake areas or subjects specified in of the Schedule VII of the Act, specifying modalities of execution of such project or programs and implementation schedules for the same; and

(b) monitoring process of such projects or programs:

Provided that the CSR activities does not include the activities undertaken in pursuance of normal course of business of a company.

Provided further that the Board of Directors shall ensure that activities included by a company in its Corporate Social Responsibility Policy are related to the areas or subjects specified in Schedule VII of the Act.

(2) The CSR Policy of the company shall specify that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company.

However, if a company has also included the manner of spending CSR amount and categorization of unspent amount without clause that the policy be read in light of recent amendments.

It is highly suggested to amend the policy in accordance with CAA 2019.

Is there any penalty on non-compliance with non-spending of CSR amount under section 135?

Yes, with the latest amendment, in case of non-compliance of provisions of CSR including non-spending or non-transfer of unspent amount to Fund under Schedule VII, the penal action will be initiated against the company punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.

Does Central Government has power to issue specific directions to any company?

Yes, the CG is empowered to issue specific or general directions to any company as it considers necessary for compliance with CSR.

Any fund or any account number issued by Government in this regard?

As on date, there is no such clarity, the Government may issue with amendments in the rules.

Did the Government released any effective date of amended section?

No, the amendments are still not effective as on date.

Author Bio

More Under Company Law

18 Comments

  1. Brajesh Kumar says:

    Well explained the amendments…

    I want to know that we have to spend on CSR only in the FY in which CSR provisions applicable as specified in Section 135(1) or have to consider Rule 3(2) of CSR rules, 2014 i.e. once CSR provisions applicable, have to calculate CSR expenditure for next years.

    Thanks

  2. Yuktha says:

    What does net profit mean in CSR applicability criteria? Is it profit computed as per Section 198 or net profit before tax as per books?

  3. Nandhiswaran K says:

    FY 16-17- 1 Cr loss, FY 17-18-1 Cr loss FY 18-19-2 Cr profit FY 19-20- 5 Cr profit. profit includes loss, so for the CY we need not earmark any funds for CSR?

  4. nipun says:

    Has the this new csr rule been notified ?
    I mean will the rule relating to transferring the amount to unspent csr account become effective for 2019-20.

  5. Kinnar Shah says:

    Penal Provision of Section 135 applicable for Non Compliance regarding non-disclosure of reason for not spending CSR amount in Director Report of FY 2018-19 prepared in September 2019?

    1. Priyanka Rajora says:

      Section 135 amendment under 2019 Act is still not effective.. the penal provisions would come into picture on issue of show cause notice from concerned roc…

  6. Sanil P says:

    What is the meaning of Financial Year? If a company has 6 Cr profit in 2018-19, the company has to do CSR activities in 2019-20. So which of the following will be treated as Financial Year – 2018-19 or 2019-20?

  7. Vijay says:

    Supposing a company spends Rs.100 on CSR activity and the sale proceeds arising from the CSR activity eg. basket weaving by village women is Rs.70, so will the CSR spending be regarded as Rs.100 or Rs.30?

  8. vidya P says:

    will this amendment to CSR also affect the years for which the Amount is unspent or only for the coming years?
    for Ex. the Co. has not spent for the year 2015 and 2016 so does this will also affect and the company will require to contribute this amount as well.

    1. Priyanka Rajora says:

      The section says… amount unspent… if the amount of FY 2015, 2016 is not spent till now, its as good as unspent … hence it may be required to give it to the Govt.. MCA Directions are awaited.

      1. k sridar says:

        some finance experts say that still the law is not mandatory and holding back from spending. Is that correct, is the law still not mandatory. can we keep telling some reasons for not spending since there is not mandatory word in the laws and also the reason penalty clause is yet to be notified, how can we say it is mandatory/ Which word of the Company act 2013 made CSR mandatory. Pls explain

    1. Priyanka Rajora says:

      The amount unspent shall be transferred… if it persist to previous years…. yes it shall be transferred.. as per intention of law… However, MCA will is expected to come with new directions along with notification of section.

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

November 2020
M T W T F S S
 1
2345678
9101112131415
16171819202122
23242526272829
30