CSR - Section 135 of the Companies Act 2013

Corporate Social Responsibility (CSR) is nowhere defined in Companies Act, 2013, but as per Rule 2(1) (d) of the CSR Rules “Corporate Social Responsibility” means the activities undertaken by a Company in pursuance of its statutory obligation laid down in section 135 of the Act in accordance with the provisions contained in these rules, but shall not include the following, namely:-

1. Activities undertaken in pursuance of normal course of business of the company;
2. 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;
3. contribution of any amount directly or indirectly to any political party under section 182 of the Act;
4. activities benefitting employees of the company as defined in clause (k) of section 2 of the Code on Wages, 2019 (29 of 2019);
5. activities supported by the companies on sponsorship basis for deriving marketing benefits for its products or services;
6. activities carried out for fulfillment of any other statutory obligations under any law in force in India;

Applicability of CSR Provisions

According to the provisions of section 135 (1) of the Companies Act, 2013 Corporate Social Responsibility provisions shall be applicable to every company having:

• Net worth of Rs. 500 Crore or more, or
• Turnover of Rs. 1000 Crore or more, or
• Net profit of Rs. 5 Crore (Profit Before Tax calculated in accordance with section 198)

during immediately preceding financial year and shall also be required to constitute a Corporate Social Responsibility Committee.

Such companies shall continue to comply with CSR provisions unless they cease to meet the criteria for 3 consecutive financial years.

Further provisions of section 135 are also applicable to Section 8 Company and Foreign Company having its branch office or project office in India, if they fulfill the criteria specified in section 135(1) of the Act.

Note : Companies covered by CSR provisions must spend at least 2% of their average net profits from the preceding three financial years, or, if they haven't completed three years since incorporation, from the immediately preceding financial years, as per their CSR policy. The Board of Directors is responsible for ensuring compliance with these CSR spending requirements.

Composition of CSR Committee

However as per section 135(9) if the amount to be spend by a company does not exceed Rs. 50 Lakh, then the requirement of under section 135(1) with respect to constitution of Corporate Social Responsibility Committee shall not be applicable and CSR functions shall be discharged by Board of Directors.

Functions of CSR Committee

As per the provisions of section 135(3) the CSR Committee shall:

• Formulate a CSR Policy and recommend it to the Board, which shall indicate the CSR activities to be undertaken by the company;
• Recommend the amount of expenditure to be incurred on the CSR activities;
• Monitor the CSR Policy of the Company from time to time.

CSR Policy

CSR Committee shall prepare CSR Policy with respect to activities as mentioned in Schedule VII of the Act. CSR policy shall also disclose list of CSR projects or programs which the company wish to implement.

The board needs to consider and approve CSR Policy and the same shall be disclosed in board’s report in accordance with the provisions of Rule 8(1) of the Act.

Further board should also ensure that activities specified in the CSR Policy are carried out by the Company.

Manner of implementation of CSR Projects

A Company may undertake to implement its CSR Projects through:

• Undertaking CSR Activities by company itself.
• Section 8 company/registered public trust/ registered society, registered under section 12A and 80G of the Income Tax Act, 1961, established by the company, either singly or along with any other company.
• Section 8 company/registered trust/ registered society, established by the Central Government or State Government.
• Any entity established under an Act of Parliament or a State legislature.
• Section 8 company/ registered public trust/ registered society, registered under section 12A and 80G of the Income Tax Act, 1961, and having an established track record of at least 3 years in undertaking similar activities.

CSR Spending

Pursuant to the provisions of section 135(5) the board has to ensure that the company spends in every financial year at least 2% of the average net profits made during 3 immediately preceding financial years towards CSR activities as per its CSR Policy.

Here the net profit means the profit calculated as per the provisions of section 198 of the Act and in case of foreign company net profit means the net profit as per profit and loss account prepared in accordance with the provisions of section 381(1)(a) read with section 198 of the Act.

Further if a company spends an amount in excess of what is required under the Act, then the company may set off such excess amount against the future requirements up to immediately succeeding 3 financial years.

CSR Expenditure

CSR Expenditure will cover all the expenditures including capital expenditure incurred in connection with CSR activities as per CSR Policy approved by the board, but will not include any such expenditure which are not in guidelines with Schedule VII of the Act.

Further expenses incurred by the companies as required any Act/Statute or regulations such as labour law, land acquisition laws etc will not be considered as CSR expenditure, but any administrative overhead in building CSR capacities may considered as CSR expenditure provided that such expenditure shall not exceed 5% of total CSR expenditure of company in 1 financial year.

Treatment for unspent CSR amount

Any amount (in respect of ongoing projects) remaining unspent shall be transferred to a special account opened by the company to be called as “Unspent Corporate Social Responsibility Account” within a period of 30 days from the end of the financial year.

Further such unspent amount shall be spent by the company within a period of 3 years from the date of such transfer and if the company fails to do so, then the same shall be transferred to Fund specified in Schedule VII within a period of 30 days from the date of completion of the 3 years.

If the company has unspent CSR amount for the financial years 2014-15, 2015-16, 2016-17, 2017-18, 2018-19 and 2019-20 as outstanding on 31^st March, 2021, then within 6 months of the expiry of the said financial year, such amount shall be transferred to separate bank account or fund specified in schedule VII (Excluding the amount with respect to ongoing projects)

When the company fails to spend the required amount, the board shall specify the reason for not spending in board’s report.

Mandatory CSR Impact Assessment

• As per the provisions of Rule 8(3) (a) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 every company having average CSR obligation of Rs. 10 crore or more in the 3 immediately preceding financial years, shall undertake impact assessment, through an independent agency, of their CSR projects having outlays of 1 crore rupees or more, and which have been completed not less than one year before undertaking the impact study.
• The impact assessment report shall be placed before board and also be annexed to CSR Annual Report.
• CSR Expenditure on impact assessment in a financial year shall not exceed 5% of the total CSR expenditure for that financial year or Rs. 50 Lakh, whichever is less.

Penalty for non-compliance

Penalty for non-complying with the provisions of section 135:

The author can also be reached at csneharedekar@gmail.com

Disclaimer: Please note that the above article is based on the interpretation of related laws, which may differ from person to person and is not legal advice.