Our perception of values is dramatically subjective. Few years ago, a couple of Harvard Business School professors published an article titled Creating Shared Value (CSV). It was about maximising revenues, whilst also offering benefits that add to the local community. All profits are not equal, the profits which additionally does social good is better. There is an award winning economics documentary on YouTube about how social entrepreneurs are using business to create value beyond profit. Real Value documentary
The emerging market businesses are embracing Shared Value as a smart, sustainable and profitable business model. There is a subtle difference between CSV and CSR. CSR is about responsibility; CSV is about creating value.
CSRreflects the relationship between a company and the society within which it operates. CSR in essence is a corporate’s responsibility towards the society where it contributes towards the betterment of society i.e. actions that appear to further some social good.
CSR was initially introduced on April 1, 2014. India became the first country to legally mandate corporate social responsibility. Section 135 of The Companies Act, 2013 requires companies of a certain net worth / turnover / profitability to spend 2 % of their average net profit for the past three years on CSR.
We have summarised some FAQ’s covering the concept, compliances, obligations and liabilities under CSR by addressing some popular queries here.
Further, for your easy reference the FAQ’s are being arranged in following heads/categories:
Recent interesting reads:
Ques-1 Which all companies are required to comply with CSR norms?
Section 135 (1) of the Companies Act, 2013 (“the Act”) provides the threshold to constitute the CSR Committee. The companies, in order to be covered by the provisions under the aforesaid section are required to satisfy any of the following criteria during the immediately preceding financial year –
Ques-2 Is it mandatory for a company to undertake CSR activities by itself?
The Company can undertake CSR activities either on its own or with any other company or through any registered trust/non-profit organisation/society.
Ques-3 Whether applicability of CSR provisions are to be considered every year?
Rule 3(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 states that:
Every company which ceases to be a company covered under subsection (1) of section 135 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 sub-section (2) to (5) of the said section, till such time it meets the criteria specified in sub-section (1) of section 135.”
Accordingly, the applicability of CSR is not required to be checked every year except where the company ceases to be covered under section 135(1) for 3 consecutive financial years.
In other words, once CSR provisions are applicable in any financial year, then it remains applicable for three financial years.
Ques-4 What would be the course of action if CSR provisions ceases to apply for three consecutive financial years?
The Company can dissolve the CSR Committee by passing a Board Resolution.
Note that the amount already earmarked as “CSR Expenditure” would still be required to be spent as per the provisions of Section 135 and all the provisions relating to disclosures and reporting would be complied with. Further, the expenditure and project activities shall be monitored by the Board itself.
Ques-5 Which year’s profits, turnover and net worth will be reckoned for understanding the applicability of CSR?
Immediately preceding financial year profit, turnover and net worth shall be taken into consideration.
Ques-6 What would be the composition of CSR Committee?
Where a company is required to have appointed Independent Directors, the composition shall be minimum three or more Directors and out of which minimum one Director shall be an Independent Director.
Where there is no requirement of appointment of Independent Director, the composition shall be minimum two or more Directors.
Ques-7 When should the CSR Committee hold its first meeting, its quorum and frequency of meetings?
Since the first task of the CSR Committee is to frame the policy, the Committee should hold its meeting soon after it is constituted. While nothing specifically is mentioned in the Act, the quorum shall be as that of Board Meetings i.e. minimum 2 or one third of total members; whichever is higher. There is no minimum number of meetings specified, although, to consider Annual CSR Expenditure Budget and monitoring the activities, it’s advisable to have appropriate number of meetings of this Committee.
Ques-8 What are the contents of CSR policy and its approval?
According to our understanding following should be the part of CSR policy among others:
The CSR policy shall be approved by the Board.
Ques-9 What are the circumstances under which a company is not required to form a CSR Committee?
In view of the amendments notified by the Companies Amendment Act, 2020 where the CSR expenditure required to be spend is less than INR 50 Lakhs, the Company is not required to constitute a CSR Committee, and the duties and functions of CSR committee shall be discharged by the Board of the Company.
Ques-10 What is the amount of CSR expenditure that a company is required to make every year?
At least 2% of the Average Net Profits of the Company made during the three immediately preceding financial years from the year in which the provisions of CSR became applicable to the Company.
Ques-11 How would the average net profit be calculated?
The average net profit for the purpose of determining the spending on CSR activities is to be computed in accordance with the provisions of Section 198 and will also be exclusive of the items given under Rule 2(f) of the CSR Rules.
In nutshell, Section 198 of the Companies Act, 2013 specifies certain additions/deletions (adjustments) to be made while calculating the net profit of a company (mainly it excludes capital payments/receipts, income tax, set-off of past losses). Additionally, the computation of net profit for CSR expenditure, would be based on profit before tax (PBT) rather profit after tax (PAT).
Ques-12 What if in any of the three immediately preceding financial years under consideration, the company has loss or negative profit?
Companies are expected to spend 2 % of the average net profit of the last three financial years. Hence, even for two consecutive years if the company has been in loss, but on an average, the company has been in profit over the last three years, then the company would be required to spend 2 % of the average net profit on CSR.
However, if the average net profit of three years is negative, then there would be no requirement to spend on CSR.
Ques-13 What if the Company doesn’t/ could not spend the 2% of the Average Net Profit in any financial year?
There is no penalty or fine notified to be levied on failure to spend the amount earmarked for a relevant financial year towards CSR expenditure.
However, there is one obligation on the company that the Board has to disclose in its Board Report the amount not spent along with appropriate reasons of not spending.
Please also read Ques-15 below.
Ques-14 What happens if the Company fails to disclose the amount and reasons of not spending CSR amount?
Where the Company fails to spend 2% of the Average Net profit and also fails to disclose in the Board Report then following penal provision shall apply u/s 134(8) of the Companies Act 2013, the prescribed penalties are as follows;
On the Company;
Penalty of three lakh rupees.
On Every officer in default;
Penalty of fifty thousand rupees
Ques-15 What happens to the unspent CSR amount and what are the implications of amendments* introduced by Companies Amendment Act, 2020?
Sub-section 5 and sub-section 6 of section 135 (hereinafter called as “Transfer Provisions”) provides for transfer of unspent amount to specified bank account elaborated in the subsequent paras. Consequences for not complying with transfer provisions are specified in sub-section 7. The perplexing thing is that though sub section 7 (hereinafter called as “Penal Provisions”) has been notified but transfer provisions are yet to be notified.
Where the unspent CSR amount is pursuant to an ongoing project: The company has unspent CSR amount and the same shall be transferred to a special bank account, opened by Company on this behalf for a relevant financial year, to be called as Unspent CSR Account, opened with any scheduled bank within 30 days from the end of financial year, This amount shall be spent according to the provisions of the CSR and project undertaken by the company within three financial years from the date of transfer and if not spent, the same shall be transferred to a specified fund in Schedule VII of the Companies Act, 2013, within a period of 30 days from the completion of third financial year.
Where the unspent amount doesn’t belong to an ongoing project: The same shall be transferred to a specified fund in Schedule VII of the Companies Act, 2013, within six months of the end of the financial year.
Pursuant to penal provisions specified in sub-section 7 (which has been notified through Amendment Act 2020), where a company neither spent 2% of the Average Net Profit, nor transfer unspent CSR amount to special Unspent CSR Account/ Fund under Schedule VII, as the case may be, then following penalty shall apply;
In the light of amendments brought in by the Companies Amendment Act, 2020, we fail to understand the basic implication of the amendments since the penal provisions are of no significance unless the transfer provisions are applicable.
Ques-16 Can a company set-off the excess CSR amount spent i.e. in excess of 2% of the Average Net Profit?
Earlier there was no such provision w.r.t. to set off of the excess amount spent. However, after Companies (Amendment) Act, 2020 dated 28th September, 2020, provisions of Section 135(5) of the Companies Act, 2013, has been amended and a company can now take the benefit of excess amount spent against the required CSR amount to be spent in succeeding financial years.
Ques-17 What if the Company has negative profit or loss in all/any of the three immediately preceding financial year(s)?
As we have already mentioned in question 12 above, no amount is required to be spend if the Company has incurred losses or has negative profit due to which the company has negative Average Net Profit of three immediately preceding financial years.
Ques-18 What does not constitutes CSR Expenditure?
Following shall not be considered as CSR activities:
Ques-19 A company incurred some expenditure such as salary of the employees, utility bill payments etc for its CSR. Does these expenditures be covered as CSR expenditure?
Rule 4(6) of CSR rules specifies that a company can build CSR capacities of their own personal i.e. the expenditure on training the CSR staff regarding the CSR project. However, such expenditure is not to exceed 5% of the total CSR expenditure of the Company in one financial year.
Ques-20 What disclosures are required under Companies Act, 2013 and Listing Regulations?
A company which is a listed entity, the provisions of SEBI (Listing Obligations & Disclosure Requirements), 2015 are also applicable. Following disclosures are required:
| Companies Act, 2013 | SEBI (LODR) |
| Disclosure in Board’s Report of the composition and CSR Policy | Disclosure in the Corporate Governance Report in Annual Report |
| Disclosure on website of the Company | Any recommendation of the CSR committee which the Board has not accepted |
Ques-21 Is there any CSR reporting framework?
Yes, the reporting framework along with format of annual report on CSR is provided in CSR rules. The Ministry has laid down the format vide the CSR Rules, in which the company is required to report the CSR expenditure.
Ques-22 What is the treatment of profits/surplus arising out of CSR activities?
Rule 6(2) of the Companies (CSR Policy) Rules, 2014 provides that the CSR policy of the Company shall specify that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company. Ideally, the surplus should be rolled over to CSR Corpus.
Ques-23 Will CSR amount spent be an appropriation or a charge on P&L?
According to ICAI FAQs on CSR, CSR expenditure shall be treated as appropriation of profit and loss account and not allowed to be as deductible expenditure from profit & loss account. Thus, CSR Expenditure cannot be made part of business expenditure.
Ques-24 What would be the tax treatment or tax implications of the CSR expenditure? Whether CSR expenditure be allowed as deductible expenditure from profit & loss account?
There are two major things to consider.
| Prime Minister’s Armenia Earthquake Relief Fund | National Children’s Fund |
| Prime Minister’s National Relief Fund | Rajiv Gandhi Foundation |
| National Defence Fund | National Blood Transfusion Council |
| Jawaharlal Nehru Memorial Fund | Army Central Welfare Fund |
| Prime Minister’s Drought Relief Fund | National Illness Assistance Fund |
| Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund) | |
As per the aforesaid table, Section 80G of the IT Act enlist funds where deduction from income tax shall be available. In case an activity is not covered u/s 80G, then if such an activity has capital expenditure which is deductible u/s 35 etc. then it is deductible expenditure otherwise no deduction or exemption for such capital expenditure will be available.
In case if the company was in a IBC proceedings and the Resolution Professional is required to make payments as per waterfall mechanism provided. Under such waterfall mechanism, payments for CSR is not to be made. However, as per Section 135 of the Companies Act, a company is liable to incur CSR expenditure.
1. Whether the company who is under IBC proceedings required to incur CSR expenditure? (i.e. whether waterfall mechanism will override CSR provision of Companies Act?)
Dear Reader,
Corporate Social Responsibility (CSR) is considered as an expenditure and it is not a statutory obligation that shall hold a priority status for payment in accordance with Section 53 of the Insolvency and Bankruptcy Code 2016.
In our view, Resolution Professional is not required to make payments for CSR expenditure.
I would like to know whether the implementing agency/NGO can provision office rent in CSR project and if yes under which specification of the law
Dear Reader,
Section 135 (3)(a) of Companies Act, 2013 (“the Act”), provides the CSR activities that can be undertaken by a Company in areas or subjects listed under Schedule-VII of the Act. Hence, a broad classification has been prescribed under the law for CSR activities. A company may undertake its activity according to the specified list in Schedule VII.
Also, the definitions under The Companies (Corporate Social Responsibility Policy) Rules, 2014, define the term ‘Corporate Social Responsibility (CSR)’ as activities undertaken by a Company in pursuance of its statutory obligation laid down in section 135 of the Act but shall not include “Activity undertaken in pursuance of normal course of business of the company”.
Hence, to answer your query, provision for office rent shall NOT be considered as a CSR activity under the provisions of the Act.
Dear Samrish Sir,
Thank you for these article on FAQs and responses. very well explained. May i request your views on 1 practical query on time frame/cut-off for CSR spending if there is a change of financial year as allowed for foreign subsidiaries. Eg. the obligation of spending CSR amount basis March 31, 2022 would be during the FY until March 31, 2023. However, during the year , the Co receives order for change of FY to be followed as Jan to Dec, basis which the current FY would be for only 9 months i.e. April 2023 to Dec 2023, in that case, does the timeframe for spending CSR changes to Dec 31, 2022 or we can take practical view to allow it to be spent by March 31, 2023 basis the original FY prior to its change. Your views/guidance will be highly appreciated.
Dear Reader,
The applicability of the CSR provisions is determined on the basis of parameters set under Section 135(1) of the Companies Act, 2013. Further, the liability to spend the CSR expenditure incurs in the subsequent financial year.
Going through the referred issue, we understand that the financial year has been changed during the year it was required to spend the CSR amount. Per our understanding, the current period per the NCLT order should be considered rather than following the year previous to the change. Even though the order might have been received in the latter half of the year, the change would be effective for the whole year.
When will the CSR expenditure be applicable to a company and whether the CSR expenditure that has already been mandated under Companies Act for the same company mentioned above, needs to be spent in the current FY or does the obligation start from the succeeding year?
Dear Reader,
As per the provisions of Section 135 (1) of the Companies Act, 2013 (“the Act”), every Company that satisfies any of the following criteria during the immediately preceding financial year –
· Net worth of Rs. 500 crores or more; or
· Turnover of Rs. 1000 crores or more; or
· Net Profit of Rs. 5 crores or more.
shall constitute a CSR Committee of the Board and shall spend at least 2% of the average net profits of three immediately preceding financial years towards CSR activities.
Thus to check the applicability of CSR provisions, a company is required to examine its audited financial statements of the immediately preceding financial year and accordingly comply with all the applicable provisions.
For example, for FY 22-23, a company is required to check the audited financials of the FY 21-22. If a company is satisfying any of the criteria specified under Section 135(1), it shall be required to constitute the CSR committee and spend at least 2% of average net profits for FY 22-23 (i.e., current FY).
I would like to know whether there is any rule stating that a certain percentage of CSR funds need to be spent in the State where the company is registered?
As per the MCA circular dated 28th May 2018 the first proviso to section 135(5) of the Act lays down that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities, which may be followed in letter and spirit.
Further as stated in the Report of HLC-2018, the emphasis on local area in the Act is only directory and not mandatory in nature. Further for a company which has a pan-India presence, there may not really be a local area of operation. Hence, while preference should be given to local areas, there is no explicit prohibition to spend CSR funds outside the local areas of operation.
what are the obligations on the company A when the company A transferred the 2% of the amount to company B(NPO)(100% subsidiary of company A) which the company A formed company B for csr activities .But some amount unspend for the year.who is liable to keep the unspent amount in a separate account .whether it is COMPANY A or COMPANY B?
Dear Reader,
The provisions of the Companies Act, 2013 read with the rule 4(1)(a) Companies (Corporate Social Responsibility Policy) Rules, 2014 provides that every company which is required to undertake CSR expenditure can do so either itself or through a section 8 company established by the company itself or along with any other company.
Further, in question 32 of frequently asked questions on CSR issued by The Institute of Company Secretaries of India, it has been clarified that in case the implementing agency fails to spend the whole amount disbursed to it for undertaking CSR activities it shall be the duty of the company to transfer the unspent amount to a specified fund in Schedule VII within six months of the expiry of the financial year or in a separate bank account if the amount was disbursed towards any on-going project as defined in the CSR Rules within 30 days of expiry of the financial year.
Thus, in your case Company A is liable to transfer the amount to unspent account or fund as the case may be.
While calculating CSR, Dividend received from companies is specifically excluded. Pls help me on this, whether we can exclude Profit/Loss from partnership firm/LLP
Dear Reader,
With reference to your query, we assume that you intend to seek suggestion on – “whether Profit/Loss from partnership firm/LLP shall be excluded from “Net profits” to determine the CSR applicability and the CSR spent for the particular FY.
In this respect, kindly note, the average net profit for the purpose of determining the spending on CSR activities is to be computed in accordance with the provisions of Section 198 of the Companies Act 2013 and will also be exclusive of the items given under Rule 2(h) of the Companies (CSR) Rules 2014.
While the above stipulated section and rules are silent on any specific inclusion/exclusion of profits/losses from partnership firm/LLP, the same has to be read co-jointly in terms of the explicit inclusions/exclusions which mainly excludes profits from overseas branches of the company, losses of capital nature, income tax losses., etc.
Dear Sir,
My query is: As per Rule 3(2) Every company which ceases to be a company covered under subsection (1) of section 135 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 1[sub-section (2) to (6)] of the said section,
till such time it meets the criteria specified in sub-section (1) of section 135.
However, as per section 135(5), :The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years 7[or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years], in pursuance of its Corporate Social Responsibility Policy:
I would like to highlight here regarding the wordings mentioned “The Board of every company referred to in sub-section (1),”
My Query is: If for FY 2020-2021, company is ceased to be a company referred in sub section 1, does it still require to spend the amount as referred in 135(5), for consequently three years and then only it can ceased to be company under section 135(1)?
Dear Reader,
Where a company fulfils the criteria mentioned in Section 135(1) of the Companies Act, 2013 (“the Act”), it shall be required to constitute a Corporate Social Responsibility Committee. Thus, a Company which fulfils the above mentioned criteria is required to spend the CSR amount as referred in Section 135(5) of the Act.
Further, as per Rule 3(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014, where a company fails to fulfil the above mentioned criteria for three consecutive financial years, it shall not be required to comply with the provisions of Section 135 till such time it again meets the criteria as specified in Section 135(5) of the Act. Accordingly, the applicability of CSR is not required to be checked every year except where the company ceases to be covered under section 135(1) for 3 consecutive financial years.
Please note that once CSR provisions are applicable in any financial year, then it remains applicable for three financial years.
Therefore, as per your query, the Company has failed to fulfil the criteria for the financial year 2020–2021, thus it is not required to comply with Section 135 (5) of the Act. However, if the Company doesn’t fulfils the criteria for 3 consecutive financial years i.e., 2020-21, 2021-22 and 2022-23, then it is not required to comply with the provisions of Section 135 of the Act.
As per the amended Rule 8 of CSR Rules, 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, as applicable. As per the heading of Annexure II, it appears that disclosure is required for CSR activities. Now, in case the company is not required to spent CSR in view of loss in last 3 years, whether the Company will still be required to hold CSR committee meeting approve the Annual Report and disclose the same in Board Report?.
Hi Sir,
As per the amendment in the CSR Rules, on and after 1st April, 2021, a detailed disclosure on Corporate Social Responsibility has to be provided in the Board Report for CSR Activities undertaken by the Company in the previous financial year including the details of CSR Committee, CSR Policy, Amount spent, amount unspent etc.
One of the responsibilities of the CSR Committee is to submit a report to the Board regarding the CSR Activities undertaken by the Company at the end year which shall form part of the Board Report. Thus, in case the Company is not required to spend the minimum CSR amount due to losses in the last 3 immediately preceding financial years, then also, an Annual report on CSR Activities shall be approved by the CSR Committee in duly convened Committee Meeting and shall also be reported in Board Report.
Further, per the Rule 3(2) of Companies (Corporate Social Responsibility) Rules, if the Company ceases to comply with provisions of Section 135(1) for three consecutive financial years, the Board of Director of the Company can dissolve the CSR Committee. However, the decision can be taken once the Annual report on CSR (for the previous financial year) has been submitted by Committee to Board.
1. Subsection 5 & 6 of Section 135 of CA, 2013 (Transfer provision of unspent CSR amount) are effective now ?
kindly describe the date on which above subsection effective.
2. if Company already has CSR committee. Company can still continue with the committee or it may dissolve the same.?
if yes then how we can dissolve the CSR Committee and what is the correct time to dissolve the CSR Committee.
kindly send a draft Resolution of same if possible.
Dear Sir,
The Ministry of Corporate Affairs, vide its Notification dated 22nd January 2021, appoints 22nd January 2021 as the effective date for the commencement of provisions of subsection 5 and 6 of Section 135 of the Companies Act, 2013.
Re the CSR Committee, please note, the main intention behind the introduction of the provisions of sub section 9 was to provide relaxation to the small companies from the high transaction cost in terms of forming a CSR Committee. Thus, it is up to the discretion of the Board to decide on the dissolution of CSR Committee after taking into consideration the CSR Rules and the business prospects and growth of the Company.
The Existing CSR Committee can be dissolved by the Board of Directors by passing a Board Resolution at any time after 22nd January 2021. Re the draft for Board Resolution for dissolution of CSR Committee, request you connect with a professional.