Corporate Social Responsibility (CSR) Provisions revamped w.e.f. 22-1-2021
V S Datey
Provisions relating to Corporate Social Responsibility (CSR) have been revamped w.e.f. 22-1-2021, by making amendments to section 135 of Companies Act, 2013 and amending Companies (CSR Policy) Rules, 2014. The amended provisions are explained in this article.
Company is a part of society and has duties towards it.
Corporate Social Responsibility (CSR) is pragmatic responsiveness to stakeholders, consumers and civil society. It is deliberate inclusion of public interest into corporate decision making.
In National Textile Workers Union v. P R Ramakrishnan AIR 1983 SC 75 = (1983) 1 SCC 228 = 53 Comp Cas 184 (SC 5 member bench 3 v. 2 judgment), it was observed – ‘Company is not ‘property’ of shareholders. They provide only capital, but there are other factors of production like labour, financial institutions, depositors, consumers and rest of members of community. Then why only capital, which is only one of the factors of production should be regarded as owner having an exclusive dominion over the concern ? – . – Company is a social institution having duties and responsibilities towards the community in which it functions. Its objective is to bring about maximization of social welfare and common good. [In this case, it was held that workers can appear before High Court in winding up petition of company as they have interest. They can even file an appeal].
Ministry of Corporate Affairs had issued Corporate Social responsibility Voluntary guidelines in 2010.
Now, under the 2013 Act, specific provisions have been made in section 135 of Companies Act, 2013. Companies (Corporate Social Responsibility Policy) Rules, 2014 were notified, which have been substantially changed w.e.f. 22-1-2021.
It seems India is the only country so far, where CSR has been made mandatory.
CSR provisions revamped w.e.f. 22-1-2021 – Provisions relating to CSR have been revamped w.e.f. 22-1-2021. The major changes are as follows –
- If CSR activities of company are carried through section 8 company, registered public trust or registered society, such section 8 company, registered public trust or registered society would require registration with MCA [rule 4(2)] [Hopefully, this will reduce siphoning off of CSR funds through such trusts, societies or companies].
- If CSR spending exceeds 2% of average net profits of company made during preceding three financial years, the excess amount can be carried forward and set off against CSR spent required in subsequent three financial years [third proviso to section 135(5)]
- Capital Assets can be created but those will have to be transferred to trust, society or section 8 company [rule 7(4)]
- If CSR spending is less than 2%, the unspent amount should be transferred to specified fund except in case of ongoing project [second proviso to section 135(5), section 135(6) and rule 10].
- If not so transferred, penalty provisions apply [section 135(7)]
- Capital assets can be created out of CSR funds but those assets should be transferred to specified entity [rule 7(4)]
The provisions are discussed below.
2. Activities which are not eligible as ‘Corporate Social Responsibility’
As per Rule 2(d) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021, “Corporate Social Responsibility (CSR)” means the activities undertaken by a Company in pursuance of its statutory obligation laid down in section 135 of the Companies Act, 2013, in accordance with the provisions contained in these rules, but shall not include the following, namely:-
(i) activities undertaken in pursuance of normal course of business of the company. However, 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 organisations mentioned in Schedule VII(ix) 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 undertaken by the company outside India except for training of Indian sports personnel representing any State or Union territory at national level or India at 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 section 2(k) of the Code on Wages, 2019.
(v) activities supported by the companies on sponsorship basis for deriving marketing benefits for its products or services.
(vi) activities carried out for fulfilment of any other statutory obligations under any law in force in India.
Employee under Code on Wages – “Employee” means, any person (other than an apprentice engaged under the Apprentices Act, 1961), employed on wages by an establishment to do any skilled, semi-skilled or unskilled, manual, operational, supervisory, managerial, administrative, technical or clerical work for hire or reward, whether the terms of employment be express or implied, and also includes a person declared to be an employee by the appropriate Government, but does not include any member of the Armed Forces of the Union – section 2(k) of Code on Wages, 2019.
3. Companies to which CSR provisions are applicable
Every company having (a) net worth of rupees five hundred crore or more, or (b) turnover of rupees one thousand crore or more or (c) a net profit of rupees five crore or more during immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board – section 135(1) of Companies Act, 2013 [words in italics substituted w.e.f. 19-9-2018].
‘Any Financial year’ referred to in section 135(1) of Companies Act, 2013 read with rule 3(2) of CST Rules implies ‘any of the three preceding financial years’.
Holding, subsidiary and foreign company liable – Every company including its holding or subsidiary, and a foreign company defined under section 2(45) of the Companies Act having its branch office or project office in India, which fulfils the criteria specified in section 135(1) of the Companies Act, 2013 shall comply with the provisions of section 135 of the Act and the CSR rules – Rule 3(1) of Companies (CSR Policy) Rules, 2014.
Provisions of CSR apply to foreign branch/project office of foreign company – CSR provisions will apply to foreign companies also – section 384(2) of Companies Act, 2013 amended w.e.f. 9-2-2018.
The provisions of CSR (Corporate Social Responsibility) are applicable to foreign company having branch office or project in India if it fulfils criteria of net worth or turnover or net profit – Rule 3(1) of Companies (Corporate Social Responsibility Policy) Rules, 2014.
The criteria of net profit etc. applies only to business operations in India in case of foreign company/project office.
Net worth, turnover or net profit in case of a foreign company – Net worth, turnover or net profit of a foreign company of the Act shall be computed in accordance with balance sheet and profit and loss account of such company prepared in accordance with the provisions of section 381(1)(a) and section 198 of the Companies Act, 2013 – proviso to Rule 3(1) of Companies (CSR Policy) Rules, 2014.
CSR spending not required if net worth, turnover and net profit falls below prescribed limit for three consecutive years – Every company which ceases to be a company covered under section 135(1) of the Act for three consecutive financial years shall not be required to— (a) constitute a CSR Committee; and (b) comply with the provisions contained in sections 135(2), 135(3), 135(4), 135(5) and section 135(6) till such time it meets the criteria specified in section 135(1) of Companies Act, 2013 – Rule 3(2) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
CSR provisions apply to section 8 company also – CSR provisions apply to ‘every company’ and hence apply to section 8 company also, if it fulfils criteria – MCA circular No. 01/2016 dated 12-1-2016.
4. CSR Committee of Board to undertake and monitor CSR activities.
Company to which CSR spending is mandatory should appoint a CSR Committee to undertake and monitor CSR activities.
Composition of the committee – The Corporate Social Responsibility Committee shall consist of three or more directors, out of which at least one director shall be an independent director – section 135(1) of Companies Act, 2013.
An unlisted public company or a private company which is covered under CSR provisions as per section 135(1) of Companies Act, 2013, but is not required to have independent director on the CSR Committee, can have two or more directors on CSR Committee – proviso to section 135(1) of Companies Act, 2013 inserted w.e.f. 19-9-2018].
Separate CSR Committee not required if CSR amount to be spent is less than Rs 50 lakhs per annum – In case of companies where amount to be spent under CSR foes not exceed Rs 50 lakhs, the Board of Directors will discharge functions of CSR Committee. It shall not be necessary to constitute separate CSR Committee – section 135(9) of Companies Act, 2013 inserted w.e.f. 22-1-2021.
Constitution of CSR committee in case of private company, foreign company or where no independent director – The companies mentioned in rule 3 shall constitute CSR Committee as under – (i) a company covered under section 135(1) which is not required to appoint an independent director pursuant to section 149(4) of the Act, shall have its CSR Committee without such director (ii) a private company having only two directors on its Board shall constitute its CSR Committee with two such directors (iii) with respect to a foreign company covered under these rules, the CSR Committee shall comprise of at least two persons of which one person shall be as specified under section 380(1)(d) of the Companies Act, 2013 [i.e. person resident in India authorized to receive notices to be served on company] and another person shall be nominated by the foreign company – Rule 5(1) of Companies (CSR Policy) Rules, 2014.
Submission of annual action plan by CSR Committee to Board – The CSR Committee shall formulate and recommend to the Board, an annual action plan in pursuance of its CSR policy, which shall include the following – (a) the list of CSR projects or programmes that are approved to be undertaken in areas or subjects specified in Schedule VII of the Companies Act (b) the manner of execution of such projects or programmes as specified in rule 4(1)(c), the modalities of utilisation of funds and implementation schedules for the projects or programmes (d) monitoring and reporting mechanism for the projects or programmes; and (e) details of need and impact assessment, if any, for the projects undertaken by the company. – – Board may alter such plan at any time during the financial year, as per the recommendation of its CSR Committee, based on the reasonable justification to that effect – Rule 5(2) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
Responsibilities of Corporate Social Responsibility Committee – The Corporate Social Responsibility Committee shall – (a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activity or activities to be undertaken by the company in areas or subject, 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 – section 135(3) of Companies Act, 2013 [The words in italics inserted w.e.f. 19-9-2018].
Government will not monitor implementation of CSR policies by companies – In MCA circular No. 01/2016 dated 12-1-2016, it has been clarified that Government will have no role in monitoring implementation of CSR policies by companies.
5. CSR Policy
“CSR Policy” means a statement containing the approach and direction given by the board of a company, taking into account the recommendations of its CSR Committee, and includes guiding principles for selection, implementation and monitoring of activities as well as formulation of the annual action plan – Rule 2(f) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
6. Actions required by Board of Directors
The Board of every company shall, (a) after taking into account the recommendations made by 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, in prescribed manner (b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company [section 135(4) of Companies Act, 2013.
7. Spending at least 2% of average net profits of CSR
The Board of Directors shall ensure that at least 2% of average net profits of the company made during 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, is spent in every financial year on CSR. – section 135(5) of Companies Act, 2013. The words in italics are inserted vide Companies (Amendment) Act, 2019 w.e.f. 22-1-2021.
Thus, after 22-1-2021, provisions of CSR will apply even in first three financial years, if other conditions in respect of CSR like profits and net worth are fulfilled.
Net profit is basically PBT – Net profit is primarily PBT (Profit Before Tax) – MCA circular No. 01/2016 dated 12-1-2016.
Exclusion from ‘ net profit’ – Net Profit shall not include such sums as may be prescribed and shall be calculated as per section 198 of Companies Act, 2013 – Explanation to section 135 of Companies Act, 2013.
Meaning of ‘Net Profit’ – “Net profit” means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include the following – (i) any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and (ii) any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act – Rule 2(h) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
Net profit in case of foreign company – In case of a foreign company covered under CSR rules, net profit means the net profit of such company as per profit and loss account prepared in terms of section 381(1)(a), read with section 198 of the Companies Act, 2013 – proviso to Rule 2(h) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
8. Activities which may be included by a company in its CSR Policies
A company may include following activities in its CSR policy [schedule VII of Companies Act, 2013]
(i) eradicating hunger, poverty and malnutrition, promoting health care including preventive 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 [as amended w.e.f. 24-10-2014].
(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, including contribution to the Clean Ganga Fund set up by the Central Government for rejuvenation of river Ganga (amended w.e.f. 24-10-2014).
(v) protection of national heritage, alt and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts:
(vi) measures for the benefit of armed forces veterans, war widows and their dependents; Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans, and their dependents including widows [words in italics inserted w.e.f. 23-6-2020]
(vii) training to promote rural sports, nationally recognised sports, paralympic sports and Olympic sports;
(viii) 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 Caste, the Scheduled Tribes, other backward classes, minorities and women; or Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund) [words in italics inserted w.e.f. 28-3-2020]
(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) [substituted w.e.f. 24-8-2020] – earlier the words were -(ix) contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government and contribution to public funded Universities, IIT, Laboratories and bodies set up by ICAR, CSIR, DAE, DRDO, DST etc. [words in italics were inserted w.e.f. 11-10-2019].
(x) rural development projects
(xi) Slum Area Development (inserted w.e.f. 6-8-2014) [slum area means aa area declared as such by Central Government, State Government or any other competent authority].
(xii) Disaster management, including relief, rehabilitation and reconstruction activities [inserted w.e.f. 30-5-2019].
Liberal interpretation permissible – Entries in Schedule VII of Companies Act, 2013 should be interpreted liberally so as to capture essence of the subjects enumerated in the Schedule – MCA Circular No. 21/2014 dated 18-6-2014 – reiterated in – MCA circular No. 01/2016 dated 12-1-2016.
Covid-19 (Corona) related issues under CSR – MCA, vide Circular No. 15 /2020 dated 10-4-2020 has clarified various issues as follows.
1. Contribution to ‘PM CARES Fund’ shall qualify as CSR expenditure under item no (viii) of Schedule VII of the Companies Act, 2013. It was further clarified vide Office memorandum F. No. CSR-05/1/2020-CSR-MCA dated 28-3-2020 [Now, specific provision has been made]
2. However, contribution made to Chief Minister’s Relief Funds’ or State Relief Fund for COVID-19’ shall not qualify as CSR expenditure.
3. 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, as clarified vide MCA circular No. 10/2020 dated 23-3-2020.
4. Spending CSR funds for COVID-19 related activities shall qualify as CSR expenditure, as clarified vide MCA circular No. 10/2020 dated 23-3-2020. 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. As per MCA circular No. 21/2014 dated 18.06.2014, items in Schedule VII are broad based and may be interpreted liberally for this purpose.
5. Payment of salary/wages to employees and workers and casual/daily workers, including contract labour, during the lockdown period cannot be adjusted against the CSR expenditure of the company, as it is moral obligation of employer.
6. Payment of ex-gratia to temporary /casual /daily wage workers over and above the disbursement of wages, specifically for the purpose of fighting COVID 19, shall be admissible towards CSR expenditure as a one-time exception, provided there is an explicit declaration to that effect by the Board of the company, which is duly certified by the statutory auditor.
9. How to undertake CSR activities
As per Rule 4(1) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021, 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, 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 having an established track record of at least three years in undertaking similar activities.
Registration with Government by entity which intends to undertake CSR activity on behalf of other companies – Every entity, covered under rule 4(1), who 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 1-4-2021 – Rule 4(2)(a) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
The provisions of rule 4(1) shall not affect the CSR projects or programmes approved prior to 1-4-2021 – proviso to Rule 4(2)(a) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
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 – Rule 4(2)(b) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
On the submission of the Form CSR-1 on the portal, a unique CSR Registration Number shall be generated by the system automatically – Rule 4(2)(c) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
Purpose of the provision – Presently, many companies syphon out CSR funds through trusts or section 8 companies. Now, there will be some control on such syphoning.
Engagement of international organisations for CSR projects – A company may engage international organisations for designing, monitoring and evaluation of the CSR projects or programmes as per its CSR policy as well as for capacity building of their own personnel for CSR – Rule 4(3) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
“International Organisation” means an organisation notified by the Central Government as an international organisation under section 3 of the United Nations (Privileges and Immunities) Act, 1947, to which the provisions of the Schedule to the said Act apply – Rule 2(g) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
Company can collaborate with other companies, but should report separately – 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 the CSR rules – Rule 4(4) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
Monitoring and certification of disbursement of CSR funds – The Board of a company shall satisfy itself that the funds so disbursed have been utilised 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 – Rule 4(5) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
Monitoring of ‘ongoing project’ – In case of ongoing project, the Board of a Company shall monitor the implementation of the project with reference to the approved time lines 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 – Rule 4(6) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
“Ongoing Project” means a multi-year project undertaken by a Company in fulfilment 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 – Rule 2(i) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
CSR activities as programmes – CSR activities should be undertaken as projects/programmes. One-off events such as marathons, awards, charitable contribution/ advertisement/ sponsorship of TV programmes etc. would not be clarified as part of CSR expenditure – – MCA Circular No. 21/2014 dated 18-6-2014.
CSR expenditure to be within India – Projects undertaken outside India will not be considered for CSR expenditure. However, some expenditure outside India is permitted.
Foreign holding company to route CSR expenditure through Indian subsidiary – If Indian subsidiary is required to undertake CSR activities as per section 135(1) of Companies Act, 2013, the Foreign holding company should route CSR expenditure through Indian subsidiary – MCA Circular No. 21/2014 dated 18-6-2014.
10. Carry forward, set off and Restrictions on CSR Expenditure,
The provisions in respect of restrictions on CSR expenditure, set off and carry forward are as follows.
Restrictions on administrative overheads for CST expenditure – The board shall ensure that the administrative overheads shall not exceed 5% of total CSR expenditure of the company for the financial year – Rule 7(1) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
“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 – Rule 2(b) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
Plough back of surplus from CSR activities – Any surplus arising out of the CSR activities shall not form part of the business profit of a company and shall be ploughed back into the same project or shall be transferred to the Unspent CSR Account and spent in pursuance of CSR policy and annual action plan of the company or transfer such surplus amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year – Rule 7(2) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
Carry forward of excess CSI expenditure and its set off – If company spends amount in excess of requirements under section 135(5), the company may set off such excess amount against requirement to spend under section 135(5) for such number of succeeding financial years and in such manner, as may be prescribed – third proviso to section 135(5) of Companies Act, 2013 inserted w.e.f. 22-1-2021.
Where a company spends an amount in excess of requirement provided under section 135(5), such excess amount may be set off against the requirement to spend under section 135(5) 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 rule 7(2) of CSR Rules (ii) the Board of the company shall pass a resolution to that effect – Rule 7(3) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
Spending of CSR for capital assets – The CSR amount may be spent by a company for creation or acquisition of a capital asset, which shall be held by – (a) a company established under section 8 of the Act, or a Registered Public Trust or Registered Society, having charitable objects and CSR Registration Number under rule 4(2); or (b) beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities; or (c) a public authority – Rule 7(4) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
“Public Authority” means ‘Public Authority’ as defined in section 2(h) of the Right to Information Act, 2005 – Rule 2(j) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
As per section 2(h) of RTI Act, “public authority” means any authority or body or institution of self-government established or constituted— (a) by or under the Constitution (b) by any other law made by Parliament (c) by any other law made by State Legislature (d) by notification issued or order made by the appropriate Government, and includes any—(i) body owned, controlled or substantially financed;(ii) non-Government organisation substantially financed, directly or indirectly by funds provided by the appropriate Government.
Capital assets existing as on 22-1-2021 – Any capital asset created by a company prior to the commencement of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 (i.e. prior to 22-1-2021), shall within a period of 180 days from such commencement comply with the requirement of rule 7, which may be extended by a further period of not more than ninety days with the approval of the Board based on reasonable justification – proviso to Rule 7(4) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
11. CSR Activities to be stated in Board report
The Board of Director’s report under section 134(3) of Companies Act, 2013 shall disclose the composition of the Corporate Social Responsibility Committee – section 135(2) of Companies Act, 2013.
The Board’s Report of a company covered under these rules pertaining to any financial year shall include an annual report on CSR containing particulars specified in Annexure I or Annexure II to Companies (CSR Policy) Rules, as applicable – Rule 8(1) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
In case of a foreign company, the balance sheet filed under section 381(1)(b) of the Companies Act, 2013 shall contain an annual report on CSR containing particulars specified in Annexure I or Annexure II, as applicable – Rule 8(2) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
12. Impact assessment of CSR expenditure
The provisions are as follows.
(a) Every company having average CSR obligation of ten crore rupees or more in pursuance of section 135(5) of the Act, in the three immediately preceding financial years, shall undertake 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. (b) The impact assessment reports shall be placed before the Board and shall be annexed to the annual report on CSR (c) A Company undertaking impact assessment may book the expenditure towards Corporate Social Responsibility for that financial year, which shall not exceed 5% of the total CSR expenditure for that financial year or fifty lakh rupees, whichever is less – Rule 8(3) of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
13. Display of CSR activities on company’s website
The Board of Directors of the Company shall mandatorily disclose the composition of the CSR Committee, and CSR Policy and Projects approved by the Board on their website, if any, for public access – Rule 9 of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
14. Effect of not complying with CSR provisions
Till 22-1-2021, spending on CSR activities was not mandatory and no penalty could be imposed for non-compliance. The only effect was that matter has to be reported in Board report with reasons – second proviso to section 135(5) of Companies Act, 2013 as existing upto 22-1-2021.
If a company fails to provide or spend such amount, the Board shall specify reasons for not spending the amount in its report – second proviso to section 135(5) of Companies Act, 2013 [as existing upto 22-1-2021].
Now the provision has been made to transfer the unspent amount to a specified fund, except in case of ongoing project, as explained below. If not so transferred, penalty provisions apply.
Transfer of unspent CSR amount to any fund as specified in Schedule VII Second proviso to section 135(5) of Companies Act, 2013, as amended by Companies (Amendment) Act, 2019 from 22-1-2021, provides that if CSR amount is not spent during a financial year, the Board report shall state reasons for not spending that amount, and unless the unspent amount relates to an ongoing project referred to in section 235(6), the amount shall be transferred to any Fund specified in Schedule VII of Companies Act, 2013 within 6 months from expiry of financial year.
Transfer of unspent CSR amount to fund specified in Schedule VII – Until a fund is specified in Schedule VII for the purposes of sections 135(5) and 135(6) of the Companies Act, 2013, the unspent CSR amount, if any, shall be transferred by the company to any fund included in schedule VII of the Act – Rule 10 of Companies (CSR Policy) Rules, 2014 as amended on 22-1-2021.
Funds specified in Schedule VII are – Swachh Bharat Kosh, Clean Ganga Fund, Prime Minister’s National Relief Fund and Funds for technology incubators which are approved by Central Government.
15. Transfer of funds to separate bank account in case of ongoing projects
In case of unspent amount in respect of ongoing projects, company shall transfer such funds to a separate special account opened by company in scheduled bank, within 30 days from end of financial year in any scheduled bank. The company shall spend that amount within three financial years towards CSR. Otherwise, the amount shall be transferred to any Fund specified in Schedule VII of Companies Act, 2013 within 30 days from completion of third financial year – section 135(6) of Companies Act, 2013 as inserted vide Companies (Amendment) Act, 2019 from 22-1-2021.
16. Penalty for non-compliance with provisions of CSR
Section 135(7) of Companies Act, 2013 as inserted vide Companies (Amendment) Act, 2020 from 22-1-2021 provides for penalty on company of twice the amount required to be transferred to the Fund specified in Schedule VII or Rs one crore, which ever is less.
Further, every officer who is in default is liable to a penalty of one-tenth of amount required to be transferred by the company to such fund specified in Schedule VII or the unspent CSR amount, or Rs two lakhs, whichever is less.
17. Government can issue directions in respect of CSR
Section 135(8) of Companies Act, 2013 as inserted w.e.f. 22-1-2021 from date yet to be notified, makes provisions empowering Central Government to issue directions for complying with provisions of section 135 of Companies Act, 2013 in respect of CSR.
18. Income Tax Aspects of CSR
Expenditure on CSR is not allowable as deduction under section 37 of Income Tax Act. However, such expenditure may be claimed as deduction under any other section, if otherwise applicable – Explanation 2 to section 37(1) of Income Tax Act, inserted w.e.f. 1-3-2014.
In CIT v. Madras Refineries (2004) 266 ITR 170 = 138 taxman 261 (Mad HC), expenditure on CSR was allowed as business expenditure.
In CIT v. Infosys Technologies (2014) 43 taxmann.com 251 = 223 taxman 469 = 360 ITR 714 (Karn HC DB), expenditure incurred in installing traffic signals in Bangalaru city was held as allowable expenditure for corporate social responsibility [However, this was not the only reason. The company had argued that traffic signals were installed as it helped their employees to reduce travel time and come to office in time].
Avenues under Income Tax Act – Following avenues are available –
- Section 80G – only 50% of sum contributed to trust is allowable as deduction. Trust has to comply with various requirements and formalities.
- Section 35AC – Expenditure on eligible projects and schemes.
- Section 35CCA – Payment to institution carrying out rural development program
- Section 35CCB – Payment to institution for carrying on programmes of conservation of natural resources
- Section 35CCC – Expenditure on Agricultural Extension Project
- Section 35CCD – Expenditure on Skill Development Project – deduction is 150%