Corporate Social Responsibility (CSR)
In this article, we are going to discuss -
the background,
applicability of CSR provisions,
constitution of the CSR committee,
role of the CSR committee;
calculation of CSR obligation,
set off for excess amount spent for CSR;
treatment of unspent CSR funds,
valid CSR activities,
activities that are not considered CSR,
implementation of CSR,
upper cap on administrative overheads,
CSR reporting,
mandatory impact assessment,
consequences of non-compliance with the CSR provisions, and
taxation aspects of CSR expenditure.
Background
Perhaps India was the first country to bring a legal structure for carrying on the social responsibility of corporates. The idea behind CSR was that business entities grow in society by utilizing the resources of society, so business entities also have some responsibility towards the development of the weaker sections of society. Although taxes are already imposed on business entities for this purpose, but the expertise, ideas and knowledge that entrepreneurs and corporates are having can not be utilized for social development, just by imposing taxes on them. If the corporates will utilize their ideas and expertise in social development, it will definitely have a great impact. Further, the government is also willing to create a sense of responsibility in the corporates for the development of society, therefore large-scale corporates are not only required to set aside a part of their profit for CSR, but they are also free to spend it in the way they want to spend for the social causes.
Corporate Social Responsibility was initially introduced as a compliance requirement applicable to certain companies on comply or report basis, as certain Companies were required to set aside 2% of the Net Profits of the Company for CSR purposes and the Board of Directors of the Company was required to explain the reason behind the non-compliance (if any) in this regard in the Board's Report only. There was no penalty clause for non-compliance with CSR provisions. But, the present scenario has been completely changed. Now, Companies are required to mandatorily spend the CSR fund or they shall transfer the same in the funds specified in Sch. VII of the Companies Act, 2013.
Applicability of CSR
In terms of the sub-section 1 of Section 135 of the Companies Act, 2013, any Company meeting any one of the below-given conditions, during the immediately preceding financial year, shall be required to comply with the provisions of CSR:
Net worth of ₹ 500 crores or more;
Turnover of ₹ 1000 crores or more; or
Net profit of ₹ 5 crores or more.
If any Company meets any one of the abovementioned criteria during the immediately preceding financial year, then it is required to form a CSR Committee as detailed below in this article.
It is very important to note that the calculations done for the assessment of the applicability of CSR shall be very accurate, otherwise it may result in a heavy cost to the Company either in terms of expenditure which the Company was never required to do or in terms of penalty for not spending the required CSR fund. So, let us understand the meaning of Net Worth, Turnover & Net Profits to make our calculations accurate:
1. Net Worth:
As per Section 2(57) of the Companies Act, 2013, "net worth" means the aggregate value of the paid-up share capital and all reserves created out of the profits, securities premium account and debit or credit balance of profit and loss account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation;
2. Turnover:
As per Section 2(97) of the Companies Act, 2013, "turnover" means the gross amount of revenue recognized in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year.
3. Net Profit:
As per the explanation to sub-section (5) of Section 135 of the Companies Act, 2013, for the purposes of this section (i.e., Section 135, CSR) "net profit" shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of section 198.
The text of Section 198 is quoted below for ready reference:
"(1) In computing the net profits of a company in any financial year for the purpose of section 197,—
(a) credit shall be given for the sums specified in sub-section (2), and credit shall not be given for those specified in sub-section (3); and
(b) the sums specified in sub-section (4) shall be deducted, and those specified in sub-section (5) shall not be deducted.
(2) In making the computation aforesaid, credit shall be given for the bounties and subsidies received from any Government, or any public authority constituted or authorized in this behalf, by any Government, unless and except in so far as the Central Government otherwise directs.
(3) In making the computation aforesaid, credit shall not be given for the following sums, namely:—
(a) profits, by way of premium on shares or debentures of the company, which are issued or sold by the company, unless the company is an investment company as referred to in clause (a) of the Explanation to section 186.
(b) profits on sales by the company of forfeited shares;
(c) profits of capital nature including profits from the sale of the undertaking or any of the undertakings of the company or of any part thereof;
(d) profits from the sale of any immovable property or fixed assets of a capital nature comprised in the undertaking or any of the undertakings of the company, unless the business of the company consists, whether wholly or partly, of buying and selling any such property or assets:
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;
(e) any change in the carrying amount of an asset or of liability recognized in equity reserves including surplus in profit and loss account on measurement of the asset or the liability at fair value.
(f) any amount representing unrealized gains, notional gains or revaluation of assets
(4) In making the computation aforesaid, the following sums shall be deducted, namely:—
(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 2[Omitted], 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.
(5) In making the computation aforesaid, the following sums shall not be deducted, namely:—
(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 liability such as is referred to in clause (m) of sub-section (4);
(c) loss of 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 liability recognized in equity reserves including surplus in profit and loss account on measurement of the asset or the liability at fair value."
Constitution of CSR Committee
Any company which meets the abovementioned criteria given under sub-section 1 of Section 135 shall be required to constitute a CSR committee.
The CSR committee shall consist of:
03 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.
Exemption from the constitution of the CSR Committee:
Where the amount to be spent by a company for CSR activities does not exceed ₹ 50 lakh, the requirement for the constitution of the Corporate Social Responsibility Committee shall not be applicable and the functions of such Committee provided under Section 135 shall, in such cases, be discharged by the Board of Directors of such company.
Role of CSR Committee
The Corporate Social Responsibility Committee shall,— (a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company in areas or subjects, specified in Schedule VII; (b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and (c) monitor the Corporate Social Responsibility Policy of the company from time to time.
The Board of every company to whom the provisions of CSR are applicable shall,— (a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose the contents of such Policy in its report and also place it on the company's website, if any, in such manner as may be prescribed; and (b) ensure that the activities as are included in the Corporate Social Responsibility Policy of the company are undertaken by the company.
Calculation of CSR obligation
The Board of every company, which is required to comply with CSR provisions, shall ensure that the company spends, in every financial year, at least 2% 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:
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:
Provided further that if the company fails to spend such 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.
Set off for excess amount spent on CSR
Where a company spends an amount in excess of the requirement provided under sub-section (5) of section 135, such excess amount may be set off against the requirement to spend under sub-section (5) of section 135 up to immediate succeeding three financial years subject to the conditions that – (i) the excess amount available for set-off shall not include the surplus arising out of the CSR activities, if any, in pursuance of sub-rule (2) of this rule. (ii) the Board of the company shall pass a resolution to that effect.
Treatment of unspent CSR fund
To understand the treatment of unspent CSR fund, we should understand the meaning of "Ongoing Project" first. “Ongoing Project” means a multi-year project undertaken by a Company in fulfillment 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. Treatment of unspent amount of ongoing project: Any amount remaining unspent, pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in pursuance 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. Treatment of unspent amount of non-ongoing project: Transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year. Further, the Board shall always specify the reason for not spending the required amount on CSR activities in the report of the Board of Directors made u/s 134(3)(o) irrespective of the type of the project.
Valid CSR activities
Valid CSR activities are activities carried out for the benefit of the general public without profit motive in accordance with Schedule VII of the Companies Act, 2013 or such other activities, which are not specifically prohibited to be considered as CSR activities. Schedule VII of the Companies Act, 2013 provides a list of the following activities, which may be included by the companies in their CSR policy: (i) Eradicating hunger, poverty and malnutrition, ‘‘promoting health care including preventinve 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. (ii) promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects. (iii) promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups. (iv) ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water 4[including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga. (v) 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; (vi) measures for the benefit of armed forces veterans, war widows and their dependents, 9[ Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans, and their dependents including widows]; (vii) training to promote rural sports, nationally recognised sports, paralympic sports and olympic sports (viii) contribution to the prime minister's national relief fund 8[or Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund)] or any other fund set up by the central govt. for socio-economic development and relief and welfare of the schedule caste, tribes, other backward classes, minorities and women; (ix) (a) Contribution to incubators or research and development projects in the field of science, technology, engineering and medicine, funded by the Central Government or State Government or Public Sector Undertaking or any agency of the Central Government or State Government; and (b) Contributions to public funded Universities; Indian Institute of Technology (IITs); National Laboratories and autonomous bodies established under Department of Atomic Energy (DAE); Department of Biotechnology (DBT); Department of Science and Technology (DST); Department of Pharmaceuticals; Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy (AYUSH); Ministry of Electronics and Information Technology and other bodies, namely Defense Research and Development Organisation (DRDO); Indian Council of Agricultural Research (ICAR); Indian Council of Medical Research (ICMR) and Council of Scientific and Industrial Research (CSIR), engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs). (x) rural development projects. (xi) 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. (xii) disaster management, including relief, rehabilitation and reconstruction activities.
Activities that are not considered as CSR
As per Rule 2(d) of the Companies (Corporate Social Responsibility Policy) Rules, 2014, the following activities shall not be considered as CSR activities: (i) activities undertaken in pursuance of the normal course of business of the company: Provided that any company engaged in research and development activity of new vaccine, drugs and medical devices in their normal course of business may undertake research and development activity of new vaccine, drugs and medical devices related to COVID-19 for financial years 2020-21, 2021-22, 2022-23 subject to the conditions that- (a) such research and development activities shall be carried out in collaboration with any of the institutes or organizations mentioned in item (ix) of Schedule VII to the Act;
(b) details of such activity shall be disclosed separately in the Annual report on CSR included in the Board’s Report; (ii) any activity is undertaken by the company outside India except for training of Indian sports personnel representing any State or Union territory at the national level or India at the international level; (iii) contribution of any amount directly or indirectly to any political party under section 182 of the Act; (iv) activities benefitting employees of the company as defined in clause (k) of section 2 of the Code on Wages, 2019 (29 of 2019); (v) activities supported by the companies on a sponsorship basis for deriving marketing benefits for its products or services; (vi) activities carried out for fulfillment of any other statutory obligations under any law in force in India;
Implementation of CSR
As per rule 4 of the Companies (Corporate Social Responsibility Policy) Rules, 2014 -
(1) The Board shall ensure that the CSR activities are undertaken by the company itself or through -
(a) a company established under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80 G of the Income Tax Act, 1961 (43 of 1961), established by the company, either singly or along with any other company, or
(b) a company established under section 8 of the Act or a registered trust or a registered society, established by the Central Government or State Government; or (c) any entity established under an Act of Parliament or a State legislature; or (d) a company established under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80G of the Income Tax Act, 1961, and has an established track record of at least three years in undertaking similar activities. (2) (a) Every entity, covered under sub-rule (1), which intends to undertake any CSR activity, shall register itself with the Central Government by filing the form CSR-1 electronically with the Registrar, with effect from the 01st day of April 2021: Provided that the provisions of this sub-rule shall not affect the CSR projects or programmes approved prior to the 01st day of April 2021. (b) Form CSR-1 shall be signed and submitted electronically by the entity and shall be verified digitally by a Chartered Accountant in practice or a Company Secretary in practice or a Cost Accountant in practice. (c) On the submission of Form CSR-1 on the portal, a unique CSR Registration Number shall be generated by the system automatically. (3) A company may engage international organizations for designing, monitoring and evaluating the CSR projects or programmes as per its CSR policy as well as for the capacity building of their own personnel for CSR. (4) A company may also collaborate with other companies for undertaking projects or programmes 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 programmes in accordance with these rules. (5) The Board of a company shall satisfy itself that the funds so disbursed have been utilized for the purposes and in the manner as approved by it and the Chief Financial Officer or the person responsible for financial management shall certify to the effect. (6) In case of an ongoing project, the Board of a Company shall monitor the implementation of the project with reference to the approved timelines and year-wise allocation and shall be competent to make modifications, if any, for smooth implementation of the project within the overall permissible time period. Upper cap on administrative overheads
“Administrative overheads” means the expenses incurred by the company for ‘general management and administration’ of Corporate Social Responsibility functions in the company but shall not include the expenses directly incurred for the designing, implementation, monitoring, and evaluation of a particular Corporate Social Responsibility project or programme. The board shall ensure that the administrative overheads shall not exceed 5 percent of the total CSR expenditure of the company for the financial year.
CSR reporting
The Board's Report of a company covered under CSR rules pertaining to any financial year shall include an annual report on CSR containing particulars specified in Annexure I or Annexure II, as applicable. In the case of a foreign company, the balance sheet filed under clause (b) of sub-section (1) of section 381 of the Act, shall contain an annual report on CSR containing particulars specified in Annexure I or Annexure II, as applicable.
Mandatory impact assessment
Every company having an average CSR obligation of ₹ 10 crores or more in the three immediately preceding financial years, shall undertake an impact assessment, through an independent agency, of their CSR projects having outlays of one crore rupees or more, and which have been completed not less than one year before undertaking the impact study. The impact assessment reports shall be placed before the Board and shall be annexed to the annual report on CSR. A Company undertaking impact assessment may book the expenditure towards Corporate Social Responsibility for that financial year, which shall not exceed two percent of the total CSR expenditure for that financial year or fifty lakh rupees, whichever is less. Consequences of non-compliance with the CSR provisions
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.
Taxation aspects of CSR expenditure
Explanation of Section 37(1) of the Income Tax Act, 1961 - "Explanation 2 - it is declared that for the purpose of sub-section (1), any expenditure incurred by an assessee 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 assessee for the purpose of the business or profession." Thus, the expenditure on CSR activities is not deductible for tax purposes unless falling within Section 30 to 36 of the Income Tax Act, 1961. Expenditure related to scientific research shall be allowed under Section 35 of the Income Tax Act, 1961. Also refer to Section 35CCA, Section 35CCB, Section 35CCC & Section 35CCD of the Income Tax Act, 1961 for details of some allowable expenditures related to rural development, conservation of natural resources, agriculture extension projects, and skill development projects. Please refer to the following link for details - Tax Laws & Rules > Acts > Income-tax Act, 1961incometaxindia.gov.in). Author Bio - Name - CS Mohit Bhardwaj Qualification - Company Secretary Organization - MPS & Associates, Company Secretaries Contact - +91-8447729531
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