CSR – Understanding CSR provisions

CSR applicable to Private as well as Public Companies including foreign companies

CSR APPLICABILITY:

As per sec 135(1) of Companies Act, 2013

CSR applicable to a company which complies any of the following conditions in the immediately preceding financial year

  • Company is having net worth of rupees five hundred crore or more, or
  • Company is having turnover of rupees one thousand crore or more or
  • Company is having a net profit of rupees five crore or more

CSR Computation:

As per sub section 5 of sec 135 of Companies Act, 2013

The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years 7[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:

Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities:

Net profit has to be taken as net profits as computed as per sec 198 of Companies Act, 2013.

PBT (Profit before tax) and net profit for the purpose of Sec 198 of Companies Act may or may not be same. If there are no additions and deductions as per Sec 198 of Companies Act, 2013 for a particular company, both might be same.

Points to consider here is with what we are starting our computation,

If we start with Gross profit we have to deduct allowable expenses and we have to add allowable incomes.

If we already starts with PBT (Profit before tax), then no need to deduct expenses again which is already deducted. Only we have to add back the expenses which are not allowed but deducted and in the same way we have to deduct the incomes which has already added but not allowed to be part of PBT like notional gains if any.

Since tax should not be considered, we have considered PBT and hence need not deduct taxation.

Boards Report :  if the company fails to spend prescribed CSR amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount 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.

CSR Committee:

As per sec 135 of the Companies Act 2013, if a company has comply with any of the conditions below in the immediately preceding financial year

  • Company is having net worth of rupees five hundred crore or more, or
  • Company is having turnover of rupees one thousand crore or more or
  • Company is having a net profit of rupees five crore or more

It has to 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

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.

Hence a Listed and unlisted Public Companies to which CSR is applicable has to appoint three or more Directors, out of which at least one director shall be an independent director

A Private Limited Company which is not required to appoint independent director can have in its Corporate Social Responsibility Committee two or more Directors.

As per Sec 135 (9) of Companies Act 2013, Where the amount to be spent by a company under sub-section (5) does not exceed fifty lakh rupees, the requirement under sub-section (1) for constitution of the Corporate Social Responsibility Committee shall not be applicable and the functions of such Committee provided under this section shall, in such cases, be discharged by the Board of Directors of such company

Understanding CSR Provisions

Multiple modes of CSR expenditure:

CSR expenditure can be incurred in multiple modes as under:

(i) ‘Activities route’, which is a direct mode wherein a company undertakes the CSR projects or programmes as per Schedule VII of the Act, either by itself or by engaging implementing agencies as prescribed in Companies (CSR Policy) Rules, 2014.

(ii)‘Contribution to funds route’, which allows the contributions to various funds as specified in Schedule VII of the Act.

(iii) Contribution to incubators and R&D projects, as specified in item (ix)(a) and contribution to institutes/organisations, engaged in research and development activity, as specified under item (ix)(b) of Schedule VII of the Act.

CSR Policy:

Company has to enclose its CSR policy in Director’s report and has to place the same in company website

CSR Disclosure: Annual Report on CSR Activities to be Included in the Board’s Report for Financial Year Commencing on or After 1st Day of April, 2020 must be as per Annexure II

What actions need to be taken if a company spends less than the amount required to be spent under CSR obligation in a particular year?

If a company spends less than the amount required to be spent under their CSR obligation, the Board shall specify the reasons for not spending in the Board’s report as per clause (o) of sub-section (3) of section 134, and shall deal with the unspent amount in the following manner:

What actions need to be taken if a company spends less than the amount required to be spent under CSR obligation in a particular year?

Nature  of unspent amount Action required Timelines
Unspent  amount pertains           to ‘on going projects’ Transfer such unspent amount to a separate bank account of the company to be called as ‘Unspent CSR Account’. 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.
Unspent  amount pertains to ‘other than  ongoing projects’ Transfer  unspent amount  to  any  fund included in Schedule VII of the Act.

Within  6 months  from the end of the financial year.

  Penalty for Non-compliance:

As per sub sec7 of sec 135 of Companies Act 2013, 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 one crore rupees, 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.

Author Bio

Qualification: CS
Company: MADHURIMA
Location: Hyderabad, Telangana, India
Member Since: 22 Apr 2022 | Total Posts: 2
Hi, My self Madhurima Sane. I am from Tirupati. I am a CA CS. Tax laws and Company law are my core areas of practice and I love teaching students. View Full Profile

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