Section 135 of the Companies Act, 2013 provides for CSR i.e. Corporate Social Responsibility of a Company read with the CSR Policy Rules, 2014 and Schedule VII of CA 2013. The Ministry of Corporate Affairs (MCA) has time to time issued clarifications with regard to provisions of Corporate Social Responsibility under section 135 of the Companies Act, 2013 viz. General Circular No. 21 of 2014 dated 18-06-2014, General Circular No. 36 of 2014 dated 17-09-2014 and General Circular 1/2016 dated 12-01-2016.
While complying with the Corporate Social Responsibility (CSR) provisions of the CA 2013, the Board of Directors of the eligible companies are empowered to appraise and approve their CSR policy including CSR projects or programmes or activities to be undertaken.
FAQs on CSR i.e. Corporate Social Responsibility
These Frequently Asked Questions (FAQs) and clarifications shall provide the broad frame work within which eligible companies are required to formulate their CSR policies including activities to be undertaken and implement the same in the right earnest.
Question: Is it compulsory to have CSR policy for all companies? Whether CSR provisions is applicable to every company?
Answer: The provisions related to CSR under section 135 of the Companies Act 2013 is applicable to every company incorporated in India and having either of the following during any financial year:
i) Net Worth of ₹500 crore or more; or
ii) Turnover of ₹1,000 crore or more; or
iii) Net Profit of ₹5 crore or more.
Question: What is meaning of ‘any financial year’ for CSR applicability? Is it implying to the current financial year or previous financial year?
Answer: The term “Any Financial year” referred under Sub-Section (1) of Section 135 of the CA 2013 read with Rule 3(2) of Companies CSR Rule, 2014 implies any of the three preceding financial years. You may refer MCA General Circular No. 21/2014, dated 18th June, 2014.
Section 135 is effective from 01-04-2014 and therefore CSR is applicable from financial year 2014-15. In other words, all eligible companies who falls under the provisions of Section 135 of CA 2013 shall constitute CSR Committee, formulate CSR Policy and spend requisite amount on CSR activities from the first day of April, 2014.
For Example: For the current financial year 2018-19, you have to check the criteria u/s 135(1) in any of the following three financial years:
Financial Year 2017-18
Financial Year 2016-17
Financial Year 2015-16
Question: Whether expenditure by Companies on activities covered under Schedule VII for the fulfillment of any Act/Statute of Regulations will count as CSR expenditure?
Answer: Any expenditure incurred by companies for fulfillment of any Act/ Statute of Regulations shall not be counted as CSR expenditure even the same is covered under Schedule VII. You may refer point no. (iii) of MCA General Circular No. 21/2014, dated 18-06-2014.
Question: Can the expenditure incurred towards personnel exclusively appointed by the companies for implementing the CSR activities of the company, be included in the expenditure earmarked for CSR activities?
Answer: As per Rule 4(6) of the CSR Policy, Rules 2014, Companies may build CSR capacities of their own personnel as well as those of their Implementing agencies through Institutions with established track records of at least 3 FYs but such expenditure including expenditure on administrative overheads, shall not exceed five percent of total CSR expenditure of the company in one financial year.
Therefore, salary paid by the companies to regular CSR staff as well as employees, who render their services for CSR will be part of Administrative overheads and should not exceed 5% of the total CSR expenditure.
Question: Whether CSR expenditure of a company can be claimed as a business expenditure?
Answer: The Finance Act, 2014 provides that any expenditure incurred by an assessee on the activities relating to CSR u/s 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. Thus, the amount spent by a company towards CSR cannot be claimed as business expenditure.
Question: Whether the ‘average net profit’ criteria for section 135(5) is Net profit before tax or Net profit after tax?
Answer: The average net profit for the purpose of computation of net profit for section 135 is as per section 198 of the Companies Act, 2013 which is primarily Profit Before Tax (PBT).
As per Section 135(5) of CA 2013, the Board of every company shall ensure that the company spends, in every financial year, at least 2% of the average net profits made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.
Question: If a company spends in excess of 2% of its average net profit of three preceding years on CSR in a particular year, can the excess amount spent be carried forward to the next year and be offset against the required 2% CSR expenditure of the next year?
Answer: Any excess amount spent (i.e., more than 2% as specified in Section 135 of CA 2013) cannot be carried forward to the subsequent years and adjusted against that year’s CSR expenditure.
Question: Can the unspent amount from out of the minimum required CSR expenditure be carried forward to the next year?
Answer: The Board is free to decide whether any unspent amount from out of the minimum required CSR expenditure is to be carried forward to the next year.
However, the carried forward amount should be over and above the next year’s CSR allocation equivalent to at least 2% of the average net profit of the company of the immediately preceding three years.
Question: Can the CSR expenditure be spent on the activities beyond Schedule VII?
Answer: The MCA vide General Circular No. 21/2014 dated 18-06-2014 has clarified that the statutory provision and provisions of CSR Rules, 2014, is to ensure that while activities undertaken in pursuance of the CSR policy must be relatable to Schedule VII of the Companies Act 2013.
However, 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. Accordingly, the items enlisted in the Schedule VII of the CA 2013 are broad-based and are intended to cover a wide range of activities.
Additionally, the General Circular also provides an illustrative list of activities that can be covered under CSR and in a similar way many more expenditure can be covered. Therefore, it is for the Board of the company to take a call on this.
Question: What tax benefits can be availed under CSR?
Answer: As such there is no any specific tax exemption have been extended to CSR expenditure. The Finance Act, 2014 also clarifies that expenditure on CSR does not form part of business expenditure.
However, the expenditures on several activities like contributions to Prime Minister’s Relief Fund, Scientific Research, Rural Development Projects, Skill Development Projects, Agricultural Extension Projects, etc., which find place in Schedule VII, already enjoy exemptions under different sections of the Income Tax Act, 1961.
Question: Which activities would not qualify as CSR Expenditure?
Answer: Following activities shall not qualify as CSR Expenditure:
i) The CSR projects or programs or activities that benefit only the employees of the company and their families shall not be considered as CSR activities.
ii) One-off events such as marathons/ awards/ charitable contribution/ advertisement/sponsorships of TV programmes etc. would not be qualified as part of CSR expenditure.
iii) Expenses incurred by companies for the fulfillment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as CSR expenditure.
iv) Contribution of any amount directly or indirectly to any political party shall not be considered as a CSR activity.
v) Activities undertaken by the company in pursuance of its normal course of business shall also not qualify as CSR expenditure.
Question: Whether a holding or subsidiary of a company which fulfils the criteria under section 135(1) has to comply with section 135, even if the holding and subsidiary itself does not fulfill the criteria.
Answer: Being a holding or subsidiary company of a company which fulfils the criteria under section 135(1) doesn’t make the company liable to comply with section 135, unless the company itself fulfills the criteria.
Question: Whether provisions of CSR are applicable on Section 8 Company, if it fulfills the criteria of section 135(1) of the Act?
Answer: No specific exemption to section 8 companies has been provided with regard to applicability of Section 135, therefore Section 8 companies are required to comply with the provisions related to CSR under the CA 2013.
Question: Can contribution/ donation of money to a trust/ Society/ Section 8 Companies by a company be treated as CSR expenditure of the company?
Answer: General Circular No. 21/2014 of MCA dated June 18, 2014 clarifies that 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 company 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 of the CA 2013.
Question: Whether contribution to political party is considered as CSR activity?
Answer: As per Rule 4(7) of CSR Policy, Rules 2014, Contribution of any amount directly or indirectly to any political party under section 182 of the Act, shall not be considered as CSR activity.
Question: Whether reporting of CSR is mandatory in Board’s Report?
Answer: The Board’s Report of a company qualifying u/s 135(1) pertaining to a financial year commencing on or after 01-04-2014 shall include an annual report on CSR containing particulars specified in Annexure. For more details, refer Rule 9 of the CSR Policy, Rules 2014.
Question: There is no need to prepare director’s report for Foreign company so whether it is mandatory for foreign Company also to give reporting of CSR activity?
Answer: In case of a foreign company, the balance sheet filed under sub-clause (b) of sub-section (1) of section 381 shall contain an Annexure regarding report on CSR.
Question: Whether involvement of employees of the company in CSR project/ programmes of a company can be monetized and accounted for under the head of CSR expenditure?
Answer: Contribution and involvement of employees in CSR activities of the company will no doubt generate interest/ pride in CSR work and promote transformation from CSR (Corporate Social Responsibility) as an obligation to SRC (Socially Responsible Corporate) in all aspects of their functioning.
Companies therefore, should be encouraged to involve their employees in CSR activities. However, monetization of pro bono services of employees would not be counted towards CSR expenditure.
Question: Whether CSR projects and programme undertaken outside India consider as CSR activity?
Answer: CSR projects and programme undertaken by company outside India shall not be considered as CSR activity.
Question: How can companies with small CSR funds take up CSR activities in a project/ programme mode?
Answer: A well designed CSR project or programme can be managed with even small fund Further, there is a provision in the CSR Policy Rules, 2014 that such companies can combine their CSR programs with other similar companies by way of pooling their CSR resources.
Question: Whether expenditure incurred on disaster relief qualifies for CSR or not?
Answer: Disaster relief can cover wide range of activities that can be appropriately shown under various items listed in Schedule VII of the Companies Act, 2013.
(i) medical aid can be covered under ‘promoting health care including preventive health care.’
(ii) food supply can be covered under eradicating hunger, poverty and malnutrition.
(iii) supply of clean water can be covered under ‘sanitation and making available safe drinking water’.
Question: Whether contribution in kind is permissible as CSR or not?
Answer: The provision of Section 135(5) of CA 2013 states that “The Board of every company referred to in sub-section (1), shall ensure that company spends, ….”.
Thus, the company has to spend the amount and therefore, the contribution in kind is not permissible as CSR.
Question: Whether display of CSR policy of a company on website of the company is mandatory or not?
Answer: In accordance with the provisions of clause (a) of Sub-Section (4) of Section 135 of the Companies Act, 2013, the Board of Directors of eligible companies shall, after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any. You may also refer to Rules 8 and 9 of the Companies (Corporate Social Responsibility Policy) Rules, 2014.
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