As per Section 135 (1) following companies in immediately preceding Financial Year:

> Having net-worth of Rs. 500 Crores or;

> Having Turnover of Rs. 1000 Crores or;

> Having net profit of Rs. 5 Crores

shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director if Company has Independent Director on Board.

Independent Director will become part of the CSR Committee only if Company is required to appoint independent Director on Board as per Section 149 of the Companies Act, 2013.


Board of Every Company under purview of Section 135 shall ensure that the company spends, in every financial year, at least 2% per cent. of the average net profits of the company made during the three immediately preceding financial years [or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years], in pursuance of its Corporate Social Responsibility Policy.

Net profit” shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of section 198.


While Calculating Net Profit as per Section 198 of Companies Act, 2013 for CSR following two things needs to be taken into consideration:

Net Profit US 198Section 198(1) –

  • Credits shall be given as per Section 198(2) & Credits shall not be given as per Section 198(3)
  • the sums specified in sub-section (4) shall be deducted, and those specified in sub-section (5) shall not be deducted

Section 198(2) – Credits to be allowed –

Credit shall be given for the bounties and subsidies received from any Government, or any public authority constituted or authorised in this behalf, by any Government, unless and except in so far as the Central Government otherwise directs

Section 198(3) – Credits not to be allowed –

a – Profits by way of premium on shares or debentures by sale

b – profits on sales by the company of forfeited shares

c – Profit of Capital Nature

d – profits from the sale of any immovable property or fixed assets*

e – any change in carrying amount of an asset or of a liability recognized in Equity Reserves including surplus in profit and loss account on measurement of the asset or the liability at fair value

* Provided that where the amount for which any fixed asset is sold exceeds the written-down value thereof, credit shall be given for so much of the excess as is not higher than the difference between the original cost of that fixed asset and its written down value;

Section 198(4) – Deductions allowed –

(a) all the usual working charges;

(b) directors’ remuneration;

(c) bonus or commission paid or payable to any member of the company’s staff, or to any engineer, technician or person employed or engaged by the company, whether on a whole-time or on a part-time basis;

(d) any tax notified by the Central Government as being in the nature of a tax on  excess or abnormal profits;

(e) any tax on business profits imposed for special reasons or in special circumstances and notified by the Central Government in this behalf;

(f) interest on debentures issued by the company;

(g) interest on mortgages executed by the company and on loans and advances secured by a charge on its fixed or floating assets;

(h) interest on unsecured loans and advances;

(i) expenses on repairs, whether to immovable or to movable property, provided the repairs are not of a capital nature;

(j) outgoings inclusive of contributions made under section 181;

(k) depreciation to the extent specified in section 123;

(l) the excess of expenditure over income, which had arisen in computing the net profits in accordance with this section in any year which begins at or after the commencement of this Act, in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained;

(m) any compensation or damages to be paid in virtue of any legal liability including a liability arising from a breach of contract;

(n) any sum paid by way of insurance against the risk of meeting any liability such as is referred to in clause (m);

(o) debts considered bad and written off or adjusted during the year of account.

Section 198(5) – Deductions not allowed –

(a) income-tax and super-tax payable by the company under the Income-tax Act, 1961, or any other tax on the income of the company not falling under clauses (d) and (e) of sub-section (4);

(b) any compensation, damages or payments made voluntarily, that is to say, otherwise than in virtue of a liability such as is referred to in clause (m) of sub-section (4);

(c) loss of a capital nature including loss on sale of the undertaking or any of the undertakings of the company or of any part thereof not including any excess of the written-down value of any asset which is sold, discarded, demolished or destroyed over its sale proceeds or its scrap value;

(d) any change in carrying amount of an asset or of a liability recognised in equity reserves including surplus in profit and loss account on measurement of the asset or the liability at fair value.



“The method of calculating the net profit is mentioned in Section 198 by which the calculation for arriving at the average net profit which is applicable from the FY 2014-15 is also mentioned. It is seen that sub-section (4) of Section 198 does not mention about taking into account the losses during the financial year prior tothe commencement of this Act. However, there is no mention about excluding profit also for calculation of average net profit. In view of this the Tribunal is of the opinion that the petitioner company is liable to spend the amount on account of CSR for the FY 2014- 15 taking into account only the net profit before tax for the FY 2013-14. The Company is directed to adhere to the other provisions of Section 135 regarding constitution of the Board’s committee on CSR and evolving a policy for implementing the same. Hence the company is permitted to file an application for revision of financial statements or board’s report after incorporating the information regard CSR for the FY 2014-15 as the FY in question falls within the “three preceding financial years”, the section 131 reads as follows:

“131 (1) If it appears to the directors of a company that-

(c) The financial statement of the company; or

(d) The report of the Board

Do not comply with the provisions of Section 129 or Section 134 they may prepare revised financial or revised report in respect of any of the three preceding financial years after obtaining approval of the Tribunal on an application made by the company in such form and manner as may be prescribed and a copy of the order passed by the Tribunal shall be filed with the Registrar.”


Disclaimer: 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.  

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April 2021