Calculation of CSR Funds

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PARDEEP KAPIL (Querist)
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22 April 2024 Dear Sirs : One of my clients is a Private Limited Company which has net profit of RS.5.50 crores before tax for year ending 31-03-2024 with turnover of 38.87 crores, whereas in previous years the profit was below Rs.Five crores. Kindly guide me, how to calculate CSR fund for period ending 31-03-2024 . Do the company has to open a new Trust for CSR funds spending or can donate outside as well. Please also guide me for Debit / Credit accounting entry for same. Kind Regards

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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12 July 2024 Calculating CSR (Corporate Social Responsibility) expenditure for a Private Limited Company involves several steps and considerations. Here’s a detailed guide on how to approach this:

### Calculation of CSR Expenditure:

1. **Eligibility Criteria:**
- The company falls under the criteria specified in Section 135 of the Companies Act, 2013, which mandates CSR spending if:
- Net profit of the company during any financial year is Rs. 5 crore or more.
- Turnover of the company is Rs. 1,000 crore or more.
- Net worth of the company is Rs. 500 crore or more.

Since your client’s net profit is Rs. 5.50 crores and turnover is Rs. 38.87 crores, it meets the criteria for CSR spending.

2. **Mandatory Spending:**
- As per the Companies Act, 2013, companies meeting the criteria must spend at least 2% of the average net profits of the preceding three financial years on CSR activities.

3. **Calculation:**
- Average net profit for CSR calculation = (Net profit for FY 2023-24 + Net profit for FY 2022-23 + Net profit for FY 2021-22) / 3
- CSR expenditure = 2% of average net profit

Example:
- Average net profit = (5.50 + Previous year profits) / 3
- CSR expenditure = 2% of average net profit

### CSR Expenditure Options:

1. **Spending Options:**
- CSR activities can be undertaken by the company directly or through:
- A registered trust or society set up by the company (typically called a CSR Trust).
- Companies can also collaborate with other companies for CSR activities.
- Direct funding to eligible institutions or organizations.

2. **Trust for CSR Spending:**
- Companies can set up a separate CSR Trust if they wish to channel CSR funds through a structured entity. This trust should be registered under Section 12A and Section 80G of the Income Tax Act, 1961.

3. **Donations Outside the Trust:**
- CSR funds can also be donated directly to eligible institutions, societies, or organizations. However, ensure that such organizations are eligible under Schedule VII of the Companies Act, 2013.

### Accounting Treatment:

1. **Debit Entry:**
- When CSR expenditure is incurred:
- Debit the CSR expenditure account (e.g., "CSR Expenses").
- Credit the bank account or payable account (depending on the mode of payment).

2. **Disclosure:**
- CSR expenditure should be disclosed separately in the financial statements under the head "Corporate Social Responsibility Expenditure."

### Steps:

1. **Calculate the exact CSR amount based on the average net profit for the last three financial years.
2. Determine whether to set up a new CSR trust or donate directly.
3. Ensure compliance with all statutory requirements and regulations.
4. Execute CSR activities and maintain proper records of expenditure.
5. Prepare financial statements reflecting CSR expenditure separately.

Consult with a qualified Chartered Accountant or CSR consultant to ensure compliance and proper implementation of CSR activities according to the Companies Act, 2013 and related regulations.

PARDEEP KAPIL

PARDEEP KAPIL (Querist)
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12 July 2024 Dear Sir : A very detailed knowledgeable reply.... Thank you very much... Kind regards

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