Treatment of unspent amount of CSR

Recently CSR Cell, Ministry of Corporate Affairs stared circulating notices to call for information u/s 206 of the Companies Act, 2013 regarding compliance of provisions of Corporate Social Responsibility (CSR) u/s 135 read with section 134(3)(o) of the Act and Rules made thereunder for the year 2015-16.

Key highlights of Section 135 of Companies:

• Every company having
• net worth of Rs. 500 crore or more, or turnover of Rs. 1000 crore or more or a net profit of Rs. 5 five crore or more during [the immediately preceding financial year] shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

[Provided that where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.]  "Applicable in case of Private Companies and Small Public Companies"

The Corporate Social Responsibility Committee shall,

1. formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be undertaken by the company [in areas or subject, specified in  Schedule VII];
2. recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
3. monitor the CSR Policy of the company from time to time.

The Board of every company shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its CSR.

Provided 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:

Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount..

SCHEDULE VII

Activities which may be included by companies in their Corporate Social Responsibility Policies Activities relating to:

1. Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation [including contribution to the Swacch Bharat Kosh set-up by the Central Government for the promotion of sanitation] and making available safe drinking water. 
2. promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects.
3. 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
4. ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro forestry, 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].
5. protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional art and handicrafts; 
6. measures for the benefit of armed forces veterans, war widows and their dependents;
7. training to promote rural sports, nationally recognised sports, Paralympics sports and Olympic sports
8. contribution to the prime minister's national relief fund or any other fund set up by the central govt. for socio economic development and relief and welfare of the schedule caste, tribes, other backward classes, minorities and women;
9. contributions or funds provided to technology incubators located within academic institutions which are approved by the central govt.
10. rural development projects
11. slum area development.

Explanation. - For the purposes of this item, the term 'slum area' shall mean any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force.

Treatment on unspent Amount:

According to Frequently Asked Questions (FAQs) with regard to Corporate Social Responsibility under section 135 of the Companies Act, 2013 issued by “Ministry of Corporate Affairs” vide General Circular No. 01/2016 dated 12th January 2016.

Quarry No 17: Can the unspent amount from out of the minimum required CSR expenditure be carried forward to the next year?

Explanation: 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.

Allowability of CSR expenditure for tax deduction post Union Budget 2014

Insertion of Explanation to s. 37(1) of the Income Tax Act, 1961. 

Explanation 2 - ......it is declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activity relating to CSR referred to in s. 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business and profession.”  

Extract from the Budget Memorandum.

.....CSR expenditure, being an application of income, is not incurred wholly or exclusively for the purpose of carrying on business..... If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of way of tax expenditure. .....

.....it propose to clarify that for the purpose of s. 37(1) any expenditure .. in s. 135 of the Companies Act, 2013 shall not be ..... allowed as deduction under s. 37. However, the CSR expenditure which is of the nature describe in s. 30 to s. 36 of the Act shall be allowed deduction under those sections .....

This amendment will take effect from 1st April, 2015.....

Thus, the expenditure on CSR activities is non-deductible for tax purpose unless falling within s. 30 to 36 of the Income Tax Act, 1961.   

Conclusion: Now their multiple questions arise........... what will happen? 

1. Can a Company carry forward its unspent amount.

Yes, as per the given explanation in FAQs issued by “Ministry of Corporate Affairs” vide General Circular No. 01/2016 dated 12th January, 2016, in Point No. 17, if a Company falls under the eligibility criteria to spend at least 2% of the average net profits of the company of the immediately preceding three years and the Company unfortunately fail / did not got the proper platform/ assignment to spend its 2% of its average net profit of the company of the immediately preceding three years for CSR, in that case the Company can carry forward the unspent amount for the subsequent years and need to mentioned in its Annual Report the quantum of unspent amount and in the subsequent years the company need to spend towards CSR the sum of previous unspent amount and the 2% average net profit of the company of the immediately preceding three years.

2. What if Company has made donation/spent through a trust/NGO and claimed deduction u/s 80G of the Income Tax Act, 1961.

If a company has made expenditure through a registered Trust/NGO and the said Trust/NGO engaged in the activities covered under Schedule VII of the Companies Act, 2013, that expenditure is treated as CSR made by the Company. Now the question is, what if the Company has claimed deduction u/s 80G of the Income Tax Act, 1961, if the Company has claimed for deduction check whether the Company has excluded that donation amount form companies profit and loss account or not, if that donation is not charged in profit and loss account of the company as expenditure, in that case the expenditure towards donation is treated as CSR and a company can parallelly claim deduction for it.  (Refer Section 37(1) of the Income Tax Act, 1961)

3. What if, Company forgot to mention CSR expenses in Directors Report (Assuming Company was not aware with Section 134(3)(o) of the Companies Act, 2013)

If a company has made CSR expenditure more or equal to required amount it is not mandatory to mention in the Director's Report/Board Report of the Company, only in case where a company has not made CSR expenditure equal to the prescribed limit, any unspent amount is in hand of the Company than it is mandatory to mention the quantum of unspent amount in the Director's Report/ Board Report under clause (o) of sub-section (3) of section 134, of Companies Act, 2013. If a company fails to declare unspent amount in its report then it's a contravention of the provisions of Section 134 of the Companies Act, 2013 attract penal provisions as per Section 134(8) of the Companies Act, 2013.

Sources:

• Companies Act, 2013
• Income Tax Act, 1961
• FAQs issued by MCA

Disclaimer: The information is provided purely for informational and educational purpose only and based on my understanding/knowledge. This does not constitute any legal advice or legal opinions. Therefore, I cannot take any responsibility for the result or consequences of any attempt to use or adopt any of the information presented in this article.