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Applicability of csr

Muralidharan (Self Employed) (1034 Points)

21 May 2016

21st May 2016

Dear Members

A Private Limited Company was earning rental income from its immovable property. During the financial year 2013-14 net profit before tax was Rs.7,80,300/- During the financial year 2014-15 the company had suffered loss and its net loss is Rs.22,54,756/-. During the financial year 2015-16 the immovable property has been sold. The net profit before tax for the year 2015-16 is Rs.18,61,26,842/-. It shall be noted that during 2015-16 the net profit is more than Rs.5.00 crores and this is due to sale of immovable property.

My query is whether corporate social resonposiblity (Section 135) is applicable to the company for the year 2015-16. Whether the company is required to compute average net profits for the last three years and make provisions in the books towards CSR liability.

with regards

Muralidharan

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3 Replies

Jatin Bajaj (CS) (2930 Points)
Replied 23 May 2016

According to section 135(1), Every Company having net Profit of Rupees 5 crore Rupees or more in any financial year shall Constitue CSR Commitee comprsise of Minimum 3 Director and one should be independent Director. As your Company is Private limited Company you can Constitute such committee without such independent Director.

And as per your query , according to Section 135(5), Board of every Company shall ensure that , The Company shall spend in each financial year at least 2% of Average net profits of the Company during the 3 immediately preeceding financial year.

i.e. Financial year 2015-16, 2015-14,2014-15 shall be considered. The law states immediately 3 preeceeding Financial year.

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Muralidharan (Self Employed) (1034 Points)
Replied 24 May 2016

Dear Mr.Jatin Bajaj

Thank your for your reply. After posting my query I went thro the Act and its related rules. My understanding of the Act is given below. Please correct me if I am wrong.

According to Section 135 and as clarified by MCA in General Circular dated 12th January 2016, we have to compute "net profit" as provided under Section 198 of the Act. As per Section 198(3)(d) profit from the sale of immovable property or fixed assets of capital nature need not be given credit (need not be considered). In view of the above CSR liability does not arise for the company.

with regards

Muralidharan

Jatin Bajaj (CS) (2930 Points)
Replied 24 May 2016

Yes, You are absolutely correct. Net Profit shall be calculated as per section 198. And as per section 135, company has to spend 2% of average net profit of the preeceding 3 years towards CSR activity.

And as per section 198 of Companies Act 2013, any net profit arrising from sale of imovable property shall not be considered.

For example : If average net profit of the Company for preeceding 3 years is 500 crore . but profit from sale of imovable property is 5 crore.

So for purpose of calculating net profit as per CSR IS 495 CRORE.. so we will calculate 2% of 495 crore.