CORPORATE SOCIAL RESPONSIBILITY

 

Introduction

Section 135 of the Companies Act 2013 deals with the provisions of Corporate Social Responsibility (CSR).

Corporate Social Responsibility (CSR, also called corporate conscience, corporate citizenship, social performance, or sustainable responsible business / Responsible Business) is a form of corporate self-regulation integrated into a business model. CSR policy functions as a built-in, self-regulating mechanism whereby a business monitors and ensures its active compliance with spirit of the law, ethical standards, and international norms. In some models, a company's implementation of CSR goes beyond compliance and engages in "actions that appear to further some social good, beyond interests of the company, and that which is required by law."

CSR is a process with the aim to embrace responsibility for the company's actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders, and all other members of the public sphere who may also be considered stakeholders.

The term "corporate social responsibility" became popular in the 1960s and has remained a term used indiscriminately by many to cover legal and moral responsibility more narrowly construed.

Application to the Companies

Section 135 of the Companies Act, 2013 makes it mandatory for following companies having in immediately preceding financial year:

• Every company having net worth of rupees five hundred crore or more, or
• Every company having turnover of rupees one thousand crore or more, or
• Every company having net profit of rupees five crore or more.

to comply with CSR provisions.

In case of Specified IFSC Public / Private Company - Section 135 shall not apply for a period of five years from the commencement of business of a Specified IFSC company -  Notification Dated 4th January, 2017

Action Points to comply with CSR Provisions

1. Constitute a CSR Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director. 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 consisting of two or more directors;Where the amount to be spent by a company under CSR does not exceed fifty lakh rupees, the requirement for 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

2. Disclose the composition of the CSR Committee in the Board's report under sub-section (3) of Section 134;
3. After taking into account recommendations made by the CSR Committee, approve the CSR Policy for the company;
4. Disclose contents of such policy in its report and also place it on the company's website, if any, as per annexure attached to the Companies (Corporate Social Responsibility Policy) Rules, 2014; and
5. Ensure that the activities as are included in CSR Policy of the company are undertaken by the company;
6. Give preference to the local area and areas around it where the company operates, for spending the amount earmarked for CSR activities (It has been clarified by the MCA that, this provision should be followed in letter and spirit.);
7. If the company fails to spend the 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;
8. Net Profit not to include profit arising from any overseas branch and dividends from other company;
9. Every foreign Company operating in India fulfilling the criteria to fulfill CSR Regulations;
10. Entities eligible for CSR spending - India only:

(a)  a company established under section 8 of the Act or a registered trust or a registered society, 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 any entity established under an Act of Parliament or a State legislature :

         If, the Board of a company decides to undertake its CSR activities through a company established under section 8 of the Act or a registered trust or a registered society, other than those specified herein, such company or trust or society shall have an established track record of three years in undertaking similar programs or projects; and the company has specified the projects or programs to be undertaken, the modalities of utilisation of funds of such projects and programs and the monitoring and reporting mechanism.”

11. A company is allowed to collaborate with other companies for CSR activities;
12. CSR spending on own employees and their family cannot exceed 5% of total CSR expenditure;
13. Political Contribution is not a CSR spending. 

Functions of CSR Committee

1. Formulate and recommend to the Board, a CSR Policy indicating activities to be undertaken by the company as specified in Schedule VII to the Companies Act, 2013;
2. Recommend the amount of expenditure to be incurred on the CSR activities;
3. Monitor CSR Policy of the company from time to time.

The Board of a company may decide to undertake its CSR activities approved by the CSR Committee, through

(a)    a company established under section 8 of the Act or a registered trust or a registered society, established by the company, either singly or alongwith 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 any entity established under an Act of Parliament or a State legislature:

         Provided that- if, the Board of a company decides to undertake its CSR activities through a company established under section 8 of the Act or a registered trust or a registered society, other than those specified in this sub-rule, such company or trust or society shall have an established track record of three years in undertaking similar programs or projects; and the company has specified the projects or programs to be undertaken, the modalities of utilisation of funds of such projects and programs and the monitoring and reporting mechanism. 

CSR Spending

The Board 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, in pursuance of its CSR Policy. The Companies (Amendment) Act 2019 has provided that, where the company has not completed the period of three financial years since its incorporation, average net profit is calculated with reference to such immediately preceding financial years.

Any financial year

“Any financial year” referred under sub-section (1) of Section 135 of the Act read with Rule 3(2) of Companies CSR Rules 2014, implies ‘any of the three preceding financial years’ (Clarification vide MCA General Circular No. 21/2014).

What does not constitute CSR spending?

Rule 4 of the Companies (Corporate Social Responsibility Policy) Rules, 2014, requires that the CSR activities that shall be undertaken by the companies for the purpose of Section 135 of the Act shall exclude activities undertaken in pursuance of its ‘normal course of business.’ The Rules also specify that CSR projects or programmes or activities that benefit only the employees of the company and their families shall not be considered as CSR activities in accordance with the requirements of the Act. Such programmes or projects or activities, that are carried out as a pre-condition for setting up a business, or as part of a contractual obligation undertaken by the company or in accordance with any other Act or as a part of the requirement in this regard by the relevant authorities cannot be considered as a CSR activity within the meaning of the Act. Similarly, the requirements under relevant regulations or otherwise prescribed by the concerned regulators as a necessary part of running of the business, would be considered to be the activities undertaken in the ‘normal course of business’ of the company and, therefore, would not be considered CSR activities.

Calculation of Net Profit

For the purposes of CSR spending, "net profit" shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of section 198(amended by the Companies Amendment Act 2017 with effect from 19/09/2018).

Net profit as per Section 198 is to be calculated in following manner:

Net Profit as per Profit and Loss Account	XXX
Add: 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 (if not credited to Profit and Loss Account).	XXX
Less: Following items (if credited to Profit and Loss Account): (a)    profits, by way of premium on shares or debentures of the company, which are issued or sold by the company; (b)    profits on sales by the company of forfeited shares; (c)    profits of a 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 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.	XXX
Less: Usual working charges and other expenses as stated in sub-section (4) of section 198 (if not debited to Profit and Loss Account)	XXX
Add: Following items (if debited to Profit and Loss Account): (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.	XXX

Format for the 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

1. Brief outline on CSR Policy of the Company:
2. Composition of CSR Committee: 
3. Provide the web-link where the composition of CSR Committee, CSR Policy and CSR Projects approved by th Board are disclosed on the website of the Company;
4. Provide the details of Impact assessment of CSR Projects carried out in pursuance of sub-rule (3) of Rule 8 of the Companies (Corporate Social Responsibility Policy) Rules, 2014, if applicable [Report shall be attached]
5. Details of the amount available for set off in pursuance of sub-rule (3) of Rule (7) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 and amount required for set off for the financial year, if any
   
   6. Average Net Profit of the Company as per Section 135(5):  
6. (a) 2% of average Net Profit of the Company as per Section 135(5):  (b) Surplus arising out of the CSR projects or programmes or activities of the previous financial year:  (c) Amount required to be set off for the financial year, if any:  (d) Total CSR obligation for the Financial Year (7a + 7b – 7c):
7. (a) CSR amount spent or unspent for the financial year

(b) Details of CSR Amount spent against ONGOING PROJECT for the financial year

(C) Details of CSR amount spent against OTHER THAN ONGOING PROJECTS for the financial year:

(d) Amount spent in Administrative Overheads: (e) Amount spent on Impact assessment, if applicable: (f) Total amount spent for the Financial Year (8b + 8c + 8d + 8e) (g) Excess amount for set off, if any

9 (a) Details of Unspent CSR amount for the preceding 3 Financial Years;

(b) Details of CSR amount spent in the financial year for ONGOING PROJECTS of the preceding financial years:

10. In case of creation of acquisition of capital assets, furnish the details relating to the assets so created or acquired through CSR spent in the Financial Year (Asset wise details). a. Date of creation or acquisition of the Capital Assets; b. Amount of CSR spent for creation or acquisition of Capital assets c. Details of the entity or public authority or beneficiary under whose name such capital assets is registered, their address etc. d. Provide details of the capital assets created or acquired (including complete address and location of the capital asset) 11. Specify the reasons, if the Company has failed to spend 2% of the average net profit as per Section 135(5). 

Form CSR-2

The Ministry of Corporate Affairs vide Notification dated February 11, 2022 prescribed the Companies (Accounts) Amendment Rules, 2022.

As per the Notification, every Company covered under the provisions of the Section 135(1) of the Companies Act, 2013 shall furnish a report on its Corporate Social Responsibility in the Form CSR-2 to the Registrar of Companies for the preceding Financial Year 2020-21 and thereafter the same shall be filed as a addendum to Form AOC-4 as the case may be.

It shall be noted that for the Financial Year 2020-21, Form CSR-2 shall be filed separately on or before 31st March, 2022 which has been extended up to 31st May, 2022.

FAQs with relation to Form CSR-2

Q.1 Net Profit of the Company as on 31st March, 2020 was more than Rs. 5 Crore. CSR applicable on the Company for the F.Y. 2020-21. Whether for this situation the Company is required to file Form CSR-2?

Ans. As CSR was applicable on the Company for the F.Y. 2020-21, therefore such Company requires to file form CSR-2 for the F.Y. 2020-21.

Q.2 Net Profit of the Company as on 31st March, 2019 was Rs.8 Crore, therefore CSR was applicable on Company for the F.Y. 2019-20. Net Profit as on 31st March, 2020 was 1 Crore. Whether in this situation, the Company is required to file Form CSR-2?

Ans. Due to Profit as on 31st March, 2019, CSR was applicable on the Company in the F.Y. 2019-20. However, the Profit as on 31st March, 2020 was reduced to Rs.1 Crore, therefore the provisions of CSR are not applicable on the Company in the F.Y. 2020-21. Therefore, the Company is not required to file Form CSR-2.

Q.3 What is the due date of CSR-2 for the F.Y. 2021-22 and onwards?

Ans. It shall be noted that for the F.Y. 2021-22 and onwards Form CSR-2 is required to be filed as linked form with e-form AOC-4. Therefore, the due date of the same shall be as e-form AOC-4 that is within 30 days from the date of AGM.

Q.4 Whether Form CSR-2 is STP mode or Non-STP mode form?

Ans. Form CSR-2 is STP Mode form.

Q.5 Whether the Trust/ Societies/ Section 8 Companies (Implementing Agencies) are required to file CSR-2?

Ans. It shall be noted that the CSR-2 is required to be filed by the Companies on which the provisions of Section 135(1) of the Companies Act, 2013 are applicable. Therefore, implementing agencies are not required to file Form CSR-2.

Q.6 CSR was first time applicable to the Company as per the Financial Year 2020-21, so the contribution to be made in the Financial Year 2021-22. Will the Company be required to file CSR-2 for the Financial Year 2020-21?

Ans. As the CSR is first time applicable to the Company in the Financial Year 2021-22, therefore, there is no need to file CSR-2.

Implications of the Income-tax Act, 1961

The Finance (No. 2) Act, 2014 has amended the provisions of Section 37 of the Income-tax Act 1961 to provide that for the purposes of Section 37(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 have been incurred for the purpose of business and hence shall not be allowed as deduction under Section 37 of the Income-tax Act, 1961.

However, the CSR expenditure which is of the nature described in Sections 30 to 36 of the Income-tax Act 1961 shall be allowed deduction under those sections subject to fulfilment of conditions, if any, specified therein. This apart, if the CSR spending is made by way of donation to a permitted entity, the same can be allowed as deduction under Section 80G of the Income-tax Act, 1961.

Permitted CSR Activities

Sr No.	Description of Activities	Benefit available under the Income-tax Act, 1961 (apart from section 80G)
1.	Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation and making available safe drinking water;	35AC (Not available from Assessment Year 2018-19)
2.	Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently able and livelihood enhancement projects;	35AC (Not available from Assessment Year 2018-19)
3.	Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;	35AC (Not available from Assessment Year 2018-19)
4.	Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro forestry, conservation of natural resources and maintaining quality of soil, air and water;	35AC, (Not available from Assessment Year 2018-19) 35CCB
5.	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 and handicrafts;	35AC (Not available from Assessment Year 2018-19)
6.	Measures for the benefit of armed forces veterans, war widows, and their dependents;	35AC (Not available from Assessment Year 2018-19)
7.	Training to promote rural sports, nationally recognised sports, para Olympic sports and Olympic sports;	35AC (Not available from Assessment Year 2018-19)
8.	Contribution to the 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;	35AC (Not available from Assessment Year 2018-19)
9.	Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;	35(2AA), 35AC (Not available from Assessment Year 2018-19)
10.	Rural development projects.	35CCA, 80GGA

 Essence of CSR

1. Activities undertaken in pursuance of the CSR policy must be relatable to areas or subject as specified in
   Schedule VII to the Companies Act 2013. The entries in the said Schedule VII must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule. The items enlisted in the amended Schedule VII of the Act are broad-based and are intended to cover a wide range of activities as illustratively mentioned in the Annexure.
2. CSR activities should be undertaken by the companies in project/programme mode. One-off events such as marathons/awards/charitable contribution/advertisement/ sponsorships of TV programmes, etc. would not be qualified as part of CSR expenditure.
3. Expenses incurred by companies for the fulfilment of any Act/Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as CSR expenditure under the Companies Act 2013.
4. Salaries paid by the companies to regular CSR staff as well as to volunteers of the companies (in proportion to company’s time/hours spent specifically on CSR) can be factored into CSR project cost as part of the CSR expenditure.
5. “Any financial year” referred under Sub-Section (1) of Section 135 of the Act read with Rule 3(2) of Companies CSR Rule, 2014, implies ‘any of the three preceding financial years’.
6. Expenditure incurred by Foreign Holding Company for CSR activities in India will qualify as CSR spend of the Indian subsidiary if, the CSR expenditures are routed through Indian subsidiaries and if the Indian subsidiary is required to do so as per Section 135 of the Act.
7. ‘Registered Trust’ (as referred in Rule 4(2) of the Companies CSR Rules, 2014) would include Trusts registered under Income-tax Act 1961, for those States where registration of Trust is not mandatory.
8. 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 companies, 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 to the Act.

ICAI’s Guidance Note

The ICAI has come out with Guidance Note on CSR effective May 15, 2015. In view of this, FAQs. issued by the ICAI as an interim guidance to the members stand withdrawn.

The objective of the Guidance Note is to provide guidance on recognition, measurement, presentation, and disclosure of expenditure on activities relating to CSR.

The Guidance Note does not deal with identification of activities that constitute CSR activities, but only provides guidance on accounting for expenditure on CSR activities in line with the requirements of the generally accepted accounting principles including the applicable Accounting Standards.

The provisions of the Act clearly lay down that the expenditure on CSR activities is to be disclosed only in the Board’s Report in accordance with the Rules made there under. In view of this, no provision for the amount which is not spent, i.e., any shortfall in the amount that was expected to be spent as per the provisions of the Act on CSR activities and the amount actually spent at the end of a reporting period may be made in the financial statements. However, if a company has already undertaken certain CSR activity for which a liability has been incurred by entering into a contractual obligation, then in accordance with the generally accepted principles of accounting, a provision for the amount representing the extent to which the CSR activity was completed during the year, needs to be recognised in the financial statements.

Where a company spends more than that required under law, a question arises as to whether the excess amount ‘spent’ can be carried forward to be adjusted against amounts to be spent on CSR activities in future period. Since ‘2% of average net profits of immediately preceding three years’ is the minimum amount which is required to be spent under section 135 (5) of the Act the excess amount cannot be carried forward for set off against the CSR expenditure required to be spent in future.

In case the expenditure incurred by the company is of such nature which may give rise to an ‘asset’, a question may arise as to whether such an ‘asset’ should be recognised by the company in its balance sheet. In this context, it would be relevant to note the definition of the term ‘asset’ as per the Framework for Preparation and Presentation of Financial Statements issued by the ICAI. An ‘asset’ is a “resource controlled by an enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise.” Hence, in cases where the control of the ‘asset’ is transferred by the company, e.g., a school building is transferred to a Gram Panchayat for running and maintaining the school, it should not be recognised as ‘asset’ in its books and such expenditure would need to be charged to the statement of profit and loss as and when incurred. Where a company retains the control of ‘asset’, then it would need to be examined whether any future economic benefits accrue to the company. Invariably future economic benefits from a ‘CSR asset’ would not flow to the company as any surplus from CSR cannot be included by the company in business profits in view of Rule 6(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014.

In some cases, a company may supply goods manufactured by it or render services as CSR activities. In such cases, the expenditure incurred should be recognised when the control on the goods manufactured by it is transferred or the allowable services are rendered. The goods manufactured by the company should be valued in accordance with the principles prescribed in Accounting Standard (AS) 2, Valuation of Inventories. The services rendered should be measured at cost. Indirect taxes (like excise duty, service tax, VAT or other applicable taxes) on the goods and services so contributed will also form part of the CSR expenditure.

Where a company receives a grant from others for carrying out CSR activities, the CSR expenditure should be measured net of the grant.

Any surplus arising out of CSR project or programme or activities shall be recognised in the statement of profit and loss as income and since this surplus cannot be a part of business profits of the company, the same should immediately be recognised as liability for CSR expenditure in the balance sheet and recognised as a charge to the statement of profit and loss. Accordingly, such surplus would not form part of the minimum 2% of the average net profits of the company made during the three immediately preceding financial years in pursuance of its Corporate Social Responsibility Policy.

From the perspective of better financial reporting and in line with the requirements of Schedule III to the Companies Act 2013, it is recommended that all expenditure on CSR activities, that qualify to be recognised as expense should be recognised as a separate line item as ‘CSR expenditure’ in the statement of profit and loss. Further, the relevant note should disclose the break-up of various heads of expenses included in the line item ‘CSR expenditure’.

The notes to accounts relating to CSR expenditure should also contain the following:

(a)    Gross amount required to be spent by the company during the year.

(b)    Amount spent during the year on:

		In cash	Yet to be paid in cash	Total
(i)	Construction/acquisition of any asset
(ii)	On purposes other than (i) above

The above disclosure, to the extent relevant, may also be made in the notes to the cash flow statement, where applicable.

Details of related party transactions, e.g., contribution to a trust controlled by the company in relation to CSR expenditure as per Accounting Standard (AS) 18, Related Party Disclosures.

Where a provision is made (the company has incurred liability), same should be presented as per the requirements of
Schedule III to the Companies Act 2013. Further, movements in the provision during the year should be shown separately.

ICAI FAQs

Corporate Laws & Corporate Governance Committee ICAI has come out with Frequently Asked Questions On the provisions of Corporate Social Responsibility under Section 135 of the Companies Act 2013which are reproduced hereunder.

1. Whether CSR expense is a Capital expenditure or a revenue expenditure Treatment in books of account

In case the expenditure incurred by the company is of such nature which may give rise to an ‘asset’, it should be recognised by the company in its balance sheet, provided the control over the asset is with the Company and future economic benefits are expected to flow to the company. Where any CSR asset is recognized in its balance sheet, the same may be classified under natural head (e.g. Building, Plant & Machinery, etc.) with specific subhead of ‘CSR Asset’ if the expenditure satisfies the definition of ‘asset.’ For example, a building used for CSR activities where the beneficial interest has not been relinquished for Lifetime by a company and from which any economic benefits flow to a company, may be recognised as ‘CSR Building’ for the purpose of reflecting the same in the balance sheet. If an amount spent on an asset has been shown as CSR spend, then the depreciation on such asset cannot be claimed as CSR spend again. Once cost of the asset is included for CSR spend, then the depreciation on such asset will not be included for CSR spend even if the asset is capitalized in the books of account and depreciation charged thereon. Where an expenditure does not give rise to an ‘asset’ as explained above, the same may be treated as expenditure of revenue nature and dealt with in accordance with FAQ 4 below.

Disclosure of CSR spend

Item 5 (a) of the General Instructions for Preparation of Statement of Profit and Loss under Schedule III to the Companies Act 2013, requires that in case of companies covered under Section 135, the amount of expenditure incurred on ‘Corporate Social Responsibility Activities’ shall be disclosed by way of a note to the statement of profit and loss. The note should also disclose the details with regard to the expenditure incurred in construction of a capital asset under a CSR project.

2. Whether CSR spends are to be shown in books of account under a separate CSR head or are they to be included under the normal heads of accounts or are they to be shown in the notes to accounts.

All expenditure on CSR activities that qualifies to be recognized as expense may either be recognized as a separate line item as ‘CSR expenditure’ or under natural heads of expenses in the statement of profit and loss with disclosure of the break-up and the total amount spent on CSR activities during the year. Some of the items which are charged to the profit & loss account in the normal course, meeting the criteria for CSR expenditure would also be eligible to be considered as CSR expenditure. Disclosure of CSR spend is already covered in answer to question no 1 above.

3. Please give illustrations of certain types of CSR spending apart from CSR spends which are easily identifiable by the company.

The following are examples of expenditure that can be classified as CSR expenditure if it is within the areas or subject covered by Schedule VII and is as per CSR policy approved by the Company’s Board of Directors. These are only illustrations and companies are required to apply facts and circumstances in each case for categorization of such spends.

a) Any company supplying its goods or services manufactured/ provided by it free of cost or at a concessional rate to people affected by natural calamities like flood, earthquake, etc.

b) A company decides that for every pack of pencils sold by the company, Rupee 0.50 will go towards education of a girl child. The amount earmarked from such sale will not be automatically considered as CSR and only such of the amounts which are spent will qualify to be considered as CSR spend

c) Spending in Technical and Vocational Training for skill building based on training cum apprenticeship results in enhancing the employability of such trainees. Cost of such expenses such as stipend, faculty, infrastructure costs, etc will be included as CSR activities. It will not deprive the company which is providing such training to hire a trainee from that pool of talent. However, if such training is provided to existing employees then it shall not qualify as CSR.

The MCA has clarified that, while undertaking CSR activities, the concerned company will have to ensure that, it is not contravening prevailing laws of land including Cigarettes and other Tobacco Act (COPTA) 2003.

4. Will CSR spend be an Appropriation or a charge on P&L.

In general, the CSR spend amount needs to be appropriated unless otherwise its incurred by the company as part of its normal business activity which also qualifies for CSR activity, in which case, it will continue to be charged to P&L in the normal course.

5. Are overseas Branch profits / losses included in Net Profit for calculating CSR spend?

Net Profit for the purpose of calculating CSR spend shall not include any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise. In addition any dividend received from other companies in India which are covered under and complying with the provisions of section 135 of the Act as well as any dividend received from a company incorporated outside India shall also be excluded from the Net Profit. This is built on the rationale that CSR spend outside India does not qualify as CSR spend under Section 135 of the Companies Act 2013. As a corollary, income earned outside India shall also not be considered for determining CSR spend in India.

6. How do we treat CSR spending in the ordinary course of business vs. CSR expenses not incurred in the ordinary course. Does it include CSR spending that also includes employees of the Company or their families who are also beneficiaries of such CSR spend?

CSR activities shall exclude activities undertaken in pursuance of its ‘normal course of business.’ For example, an electricity distribution company connecting the last house in a village cannot classify such expense as CSR. Similarly a tea plantation company planting trees and shrubs in close proximity to such tea plantations cannot be classified as CSR spending since they are in the ordinary course of business of such businesses. Similarly, Programmes or projects or activities that are carried out as a pre-condition for setting up a business or as part of a contractual obligation undertaken by the company or in accordance with any other law, should not be considered as CSR. Such spending on installation of rain water harvesting or a device to prevent pollution which are mandatorily required to be carried out by law shall not qualify as CSR spend. Such requirements under relevant regulations prescribed as a necessary part of running of the business, would be considered to be the activities undertaken in the ‘normal course of business’ of the company and, therefore, would not be considered CSR activities. CSR projects or programmes or activities that benefit only the employees of the company and their families shall not be considered as CSR. However, programme or activities that are for the benefit of all, but, which also include some employees or their families will still be considered as CSR as long as such benefits are not exclusively for the benefit of such employees. For example, recreational facilities provided for employees and their families in the employee quarters shall not be considered as CSR. However, if the Company maintains say a stadium for promotion of sports in a city used by residents of that place and not exclusively by its employees, then such spending shall be still considered as CSR.

7. Treatment of shortage in CSR spend and disclosure and possibility of carry forward of excess spending of CSR. Is there any need for creation of a provision in the event of a shortage in spending?

Any shortfall in spending in CSR shall be explained in the financial statements and the Board of Directors shall state the amount unspent and reasons for not spending that amount. Any such shortfall is not required to be provided for in the books of account. However, if a company has already undertaken certain CSR activity for which a contractual liability has been incurred then, a provision for the requisite amount payable to record that liability needs to be recognized as per the applicable Accounting Standards. Any amount excess spent (i.e., more than 2% as specified in Section 135) cannot be carried forward to the subsequent years. However, the company is entitled to disclose in their Annual Reports of subsequent years any such excess spending of previous years while giving reasons for not spending in those later years.

The Companies (Amendment) Act 2019 has provided that unless the unspent amount relates to any ongoing project referred to in sub-section (6), the Company should transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.” 

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 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. 

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 spent 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.

 If a company is in default in complying with the provisions of spending the amount as mandated or transferring the unspent amount to the relevant fund as prescribed, 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. 

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.

8. Is CSR spending required to be done by the Company directly or such amounts can be contributed to charity/ NGO/ section 8 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. Net Profit calculation methodology- Net Profit as per Section 135 is required to be calculated as per Section 198 of the Companies Act 2013. However, Net profits as defined in the Companies (CSR Policy) Rules, 2014 defines Net Profit as Net Profit as per Financial statements prepared in accordance with the Act.

As per the Companies Amendment Act 2017, “Net profit" shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of section 198. What will not be included in net profit is not yet prescribed.

Since the Rules specify that the net profits are as per provisions of the Act and the relevant Section 135 of the Act requires such net profits calculation as per Section 198 of the Companies Act the net profit shall be calculated u/s 198 of the Companies Act. This is based on a harmonious interpretation of the specific section in the Act and the relevant Rules framed under that Section. 

Set off of excess amount spent

If a company spends an amount in excess of the requirements provided in the section, such company may set off such excess amount against the requirement to spend under this section for such number of succeeding financial years provided that,

• 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 rule 7.
• the Board of the company shall pass a resolution to that effect. 

COMPANIES (CORPORATE SOCIAL RESPONSIBILITY POLICY) AMENDMENT RULES, 2016 — AMENDMENT IN RULE 4

NOTIFICATION NO. GSR 540(E) [F.NO.05/12/2016-CSR-CELL], DATED 23-5-2016

In exercise of the powers conferred under section 135 and sub-sections (1) and (2) of section 469 of the Companies Act, 2013 (18 of 2013), the Central Government hereby makes the following rules further to amend the Companies (Corporate Social Responsibility Policy) Rules, 2014, namely:—

1. Short title and commencement

(a)  These rules may be called the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2016.

(b)  They shall come into force on the date of their publication in the Official Gazette.

2. In the Companies (Corporate Social Responsibility Policy) Rules, 2014, in rule 4, for sub-rule (2), the following sub-rule shall be substituted, namely:—

"(2)   The Board of a company may decide to undertake its CSR activities approved by the CSR Committee, through

(a)    a company established under section 8 of the Act or a registered trust or a registered society, 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 any entity established under an Act of Parliament or a State legislature:         Provided that if, the Board of a company decides to undertake its CSR activities through a company established under section 8 of the Act or a registered trust or a registered society, other than those specified in this sub-rule, such company or trust or society shall have an established track record of three years in undertaking similar programs or projects; and the company has specified the projects or programs to be undertaken, the modalities of utilisation of funds of such projects and programs and the monitoring and reporting mechanism".

Covid-19 Related Frequently Asked Questions (FAQs) On Corporate Social Responsibility (CSR)

MCA21 has issued FAQs dated April 10, 2020 with respect to CSR.

1. Whether contribution made to ‘PM CARES Fund’ shall qualify as CSR expenditure?

Reply: Contribution made to ‘PM CARES Fund’ shall qualify as CSR expenditure under item no (viii) of Schedule VII of the Companies Act, 2013 and it has been further clarified vide Office memorandum F. No. CSR-05/1/2020-CSR-MCA dated 28th March, 2020.

2. Whether contribution made to ‘Chief Minister’s Relief Funds’ or ‘State Relief Fund for COVID-19’ shall qualify as CSR expenditure?

Reply: ‘Chief Minister’s Relief Fund’ or ‘State Relief Fund for COVID-19’ is not included in Schedule VII of the Companies Act, 2013 and therefore any contribution to such funds shall not qualify as admissible CSR expenditure.

3. Whether contribution made to State Disaster Management Authority shall qualify as CSR expenditure?

Reply: Contribution made to State Disaster Management Authority to combat COVID-19 shall qualify as CSR expenditure under item no (xii) of Schedule VII of the 2013 and clarified vide general circular No. 10/2020 dated 23rd March 2020. 

4. Whether spending of CSR funds for COVID-19 related activities shall qualify as CSR expenditure?

Reply: Ministry vide general circular No. 10/2020 dated 23rd March, 2020 has clarified that spending CSR funds for COVID-19 related activities shall qualify as CSR expenditure. It is further clarified that funds may be spent for various activities related to COVID-19 under items 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 No. 21/2014 dated 18.06.2014, items in Schedule VII are broad based and may be interpreted liberally for this purpose.

5. Whether payment of salary / wages to employees and workers, including contract labour, during the lockdown period can be adjusted against the CSR expenditure of the companies?

Reply: Payment of salary / wages in normal circumstances is a contractual and statutory obligation of the company. Similarly, payment of salary/ wages to employees and workers even during the lockdown period is a moral obligation of the employers, as they have no alternative source of employment or livelihood during this period. Thus, payment of salary / wages to employees and workers during the lockdown period (including imposition of other social distancing requirements) shall not qualify as admissible CSR expenditure.

6. Whether payment of wages made to casual /daily wage workers during the lockdown period can be adjusted against the CSR expenditure of the companies?

Reply: Payment of wages to temporary or casual or daily wage workers during the lockdown period is part of the moral / humanitarian / contractual obligations of the company and is applicable to all companies irrespective of whether they have any legal obligation for CSR contribution under section 135 of the Companies Act 2013. Hence, payment of wages to temporary or casual or daily wage workers during the lockdown period shall not count towards CSR expenditure.

7. Whether payment of exgratia to temporary /casual /daily wage workers shall qualify as CSR expenditure?

Reply: If any ex-gratia payment is made to temporary / casual workers/ daily wage workers over and above the disbursement of wages, specifically for the purpose of fighting COVID 19, the same shall be admissible towards CSR expenditure as a onetime exception provided there is an explicit declaration to that effect by the Board of the company, which is duly certified by the statutory auditor. 

MCA expands scope of CSR activities, includes CAPF and CPFM veterans, and their dependents come under CSR activities

Notification No. G.S.R. 399(E). Dated 23.06.2020 The Ministry of Corporate Affairs has issued notification No. G.S.R. 399(E) to amend Schedule VII of the Companies Act, 2013. The notification provides that in schedule VII, in item (vi), after the words “war widows and their dependents”, the words “Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans, and their dependents including widows” shall be inserted. This means that now any amount spent by companies towards Central Armed Police Forces and Central Para Military Forces veterans, and their under the activities which may be included by companies in their Corporate Social Responsibility Policies.