Concise Note on CSR

NOTE ON CSR

Eligibility

Every company (Private or Public) having

1. Networth of Rs. 500 Crore or more or
2. Turnover of Rs. 1000 Crore or more or
3. Net profit of Rs. 5 Crore or more in any of the 3 preceding Financial years. (Circular 18 June by MCA)

Board Constitution

• Will constitute a CSR Committee consisting at least 3 Directors (out of which 1 should be independent director)
• Independent director is exempted for Unlisted Public or private company and those do not required by CG u/s 149(4)
• Private company having only two director on Board can compose the Committee with 2 director only.

Functions of CSR Committee

1. Formulate and Recommend to the board – CSR Policy as per Schedule VII
2. Recommend the amt of Expenditure on above
3. Monitor the CSR policy

Board

1. will approve the CSR Policy after considering recommendation and disclose the Policy contents in its Report and in Company’s Website.
2. Ensure the activities are undertaken

Expenditure

Minimum 2% of Avg Net profit of imm. Preceding Three years as calculated as per Section 198 – Does not include Income from Foreign Branches

Memorandum Explaining Finance Bill – Clarification on Disallowance of Expenditure

Corporate Social Responsibility (CSR)

The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditures cannot be allowed under the existing provisions of section 37 of the Income-tax Act.

Therefore, in order to provide certainty on this issue, it is proposed to clarify 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. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed deduction under those sections subject to fulfilment of conditions, if any, specified therein. This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years.

[Clause 13]

Activities which may be included by companies in their Corporate Social

Responsibility Policies

Activities relating to:—

(i) eradicating extreme hunger and poverty;

(ii) promotion of education;

(iii) promoting gender equality and empowering women;

(iv) reducing child mortality and improving maternal health;

(v) combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases;

(vi) ensuring environmental sustainability;

(vii) employment enhancing vocational skills;

(viii) social business projects;

(ix) contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and

(x) 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 of the Act.

(xi) 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 three financial years but such expenditure including expenditure made on administrative overheads shall not exceed five percent. of total CSR expenditure of the company in one financial year.

(xii) such other matters as may be prescribed.

The provisions may be interpreted and following expenses may be allowed as per experts

1. Rent expenses: If any CSR activities are carried out from the premises taken on rent, the rent expenses can be claimed under section 30 of the Act.

2. Depreciation:  Any capital assets used for the purpose of carrying out CSR activities, the assessee can claim applicable depreciation under section 32 of the Act.

3.Interest expenditure: If any amount is borrowed to carry out CSR activities, interest expenditure incurred on such borrowed funds shall be allowed under section 36(1)(iii) of the Act.  

4. If a company installs water filter in schools at various places, it could claim expenditure on repairs, maintenance, insurance, besides deduction towards depreciation if the asset is shown in its books of account,

5. Funds spent on skill development projects gives the assessee the benefit of claiming 150% deduction in their books. 

Note:

Activities undertaken in pursuance of the CSR policy must be relatable to Schedule VII of 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 …’ ( Circular 18th June 14

‘CSR activities should be undertaken by the companies in project/ programme mode [as referred in Rule 4 (1) of the CSR Rules]. One-off events such as marathons/ awards/ charitable contribution/ advertisement/ sponsorships of TV programmes etc. would not be qualified as part of CSR expenditure.’

‘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 under the Act’.  

Rule 4(5) of the CSR Rules states that the CSR projects that benefit only the employees of the company and their families shall not be considered as CSR activities in accordance with section 135 of the Act.

The Rules do not require any provision or transfer to a fund of the residual amount that a company was unable to spend as per the threshold requirements of 2% of its average net profit

In case the company has failed to spend 2% of the average net profit of the last three financial years, the company needs to provide the reasons for not spending the amount

A responsibility statement of the CSR Committee that the implementation and monitoring of the company policy is in compliance with the CSR objectives

Company should give Preference to local areas and areas around it where it operates. If company fails to spend then reason for not spending

Activities must be undertaken in India only.

Contribution to political party u/s 182 is not allowed.

Projects or programs benefitting employees and their families  shall not be considered for CSR.

Penalty

Sub section (8) of section 134 prescribes penalty for contravention of the provisions of section 134 which in case of such non-disclosure is a fine which shall not be less than Rs. 50000 but which may extend to 24 lacs for the company and for every officer of the company who is in default it is imprisonment for a term which may extend to three years or with fine which shall not be less than Rs. 50000 but which may extend to 50 lakh rupees, or with both.  There is no penalty for Non spending as of now but the govt is planning to introduce in near future on repeated non compliance.

Different way of Compliance

Company Not required to Comply

If it does not fulfil the criteria for 3 consecutive financial years till it meet such criteria.

Company may undertake activity through

(i) Registered Trust

(ii) Regd. Society

(iii) Non Profit making Company formed under Section 8 (erstwhile Sec 25)

Provided that -

If it is not established by the company then the Trust/Society/Sec 8 Comp must have track record of 3 yrs in undertaking similar projects or programs

The company has specified the projects of prog. To be undertaken through these entities , the modalities of Utilization of funds and monitoring and reporting mechanism

Company collaborating with other company

Company may collaborate with other company provided the CSR committee of respective companies are in a position to report separately on such projects or programs

FORMAT FOR THE ANNUAL REPORT ON CSR ACTIVITIES TO BE INCLUDED IN BOARD’S REPORT

1. A brief outline of the company's CSR policy, including overview of activities proposed to be undertaken and a reference to the web-link to the CSR policy & activities
2. The composition of the CSR Committee
3. Average net profit of the company for the last three financial years
4. Prescribed CSR Expenditure made by the company (2% of the amount as in item 3 above)
5. Details of CSR monies spent during the financial year
   1. Total amount to be spent for the financial year
   2. The amount unspent (if any)
   3. Manner in which the amount spent during the financial year is detailed below :