CSR 34.

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1. APPLICABILITY

 As Per Section 135 of the Companies Act 2013, CSR is applicable to every company

(including Section 8 companies i.e. NPOs) having either:

Net worth of ₹ 500 crore or more, OR

During the immediate

Turnover of ₹ 1,000 crore or more OR
preceding financial year

Net profit* of ₹ 5 crore or more.

*Net Profit will be computed as per section 198 of the Companies Act, 2013

 If CSR is applicable then:

 It shall incur expenditure on CSR activities, &

 It shall constitute a CSR Committee.

2. AMOUNT OF CSR EXPENDITURE

 At least 2% of the average net profits during the 3 immediately Preceding F.Y. (shall be

spent on permissible activities given in Schedule VII)

 Where the company has not completed the period of 3 F.Y. since its incorporation, then

during such immediately Preceding F.Y. as applicable.

 Whether the Excess Amount can be Carry Forward to set off against Future CSR

Expenditure?

 YES.

If the company decides to adjust such excess against future obligation, then to the extent of

such excess, an asset will have to be recognized for the amount which is spent in excess of

2%.

If the company decides not to carry forward such excess spend in full or in part, the same

to the extent not carried forward is to be recognized as expense

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3. CSR COMMITTEE

 CSR Committee shall consist of 3 or more directors (including at least one independent

director).

 However, if a company is not required to appoint an independent director under section

149(4) of the Companies Act, then its CSR Committee shall be formed with 2 or more

directors.

3.1 ROLE OF CSR COMMITTEE

a) Formulate and recommend to Board, i) CSR Policy indicating the activities to be

undertaken specified in Schedule VII; ii) Amount of expenditure to be incurred.

b) Monitor the CSR Policy of the company from time to time.

3.2 ROLE OF BOARD OF DIRECTORS

a) The composition of CSR Committee in its report

b) Approve & Disclose the CSR Policy in its report and on company's website

c) Ensure that activities of CSR are duly executed and that company spends at least 2% of the

average net profits made during the 3 immediately preceding F.Y.

 WHAT IF THE COMPANY FAILS TO SPEND THE AMOUNT?

WHETHER UNSPENT AMOUNT

RELATES TO ANY ONGOING PROJECT

YES NO

Transfer such amount within 30 Days from the Transfer such unspent
end of F.Y. to a special account (opened by the amount to a Fund
company in any scheduled bank) to be called the specified in Schedule
Unspent CSR Account. VII, within 6 months
from the end of F.Y.
Such amount shall be spent towards CSR Policy within 3 F.Y.
from the date of such transfer, failing which, the company
shall transfer the same to a Fund specified in Schedule VII,
within 30 Days from the date of completion of the 3rd F.Y.

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 CSR 34.3

NOTE:

 IF A COMPANY CONTRAVENES THE ABOVE PROVISIONS:

 If a company defaults in complying with section 135(5) and 135(6), it shall be liable

to a penalty of twice the amount required to be transferred or one crore rupees,

whichever is less.

 In addition to it, every officer in default shall be liable to a penalty of one-tenth of

the amount required to be transferred by the company to such Fund or two lakh

rupees, whichever is less.

NOTE:

Where the amount to be spent by a company under sub-section (5) does not exceed fifty

lakh rupees, the requirement for constitution of CSR Committee shall not be applicable and

the functions of such Committee be discharged by the Board of Directors of such company.

4. PERMISSIBLE ACTIVITIES UNDER CSR POLICIES: SCHEDULE VII

a) Eradicating hunger, poverty and malnutrition, promoting healthcare

b) Promoting education, including enhancing vocation skills and livelihood enhancement

projects.

c) Promoting gender equality, empowering women, setting up homes and hostels for women

and orphans; setting up old age homes for senior citizens and measures for reducing

inequalities faced by socially and economically backward groups;

d) Ensuring environmental sustainability, ecological balance, protection of flora and fauna,

animal welfare, agroforestry, 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;

e) 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 arts and handicrafts;

f) Measures for the benefit of armed forces veteran, war widows and their dependents;

g) Training to promote rural sports nationally recognized sports and Olympic sports;

h) Contribution to the Prime Minister's National Relief Fund or any other fund set up by the

Central Government for socio-economic development and relief and welfare of the

Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women;

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 CSR 34.4

i) Contributions or funds provided to technology incubators located within academic

institutions which are approved by the Central Government;

j) Rural development projects.

k) Slum area development.

l) Disaster management, including relief, rehabilitation and reconstruction activities.

4.1 AMOUNT SPENT ON FOLLOWING ACTIVITIES WILL NOT QUALIFY FOR CSR EXPENDITURE

 CSR activities that benefit only the employees of the company and their Families;

 CSR activities undertaken outside India;

 Contribution to any political party directly or indirectly;

 CSR activities undertaken in its normal course of business.

5. ACCOUNTING FOR CSR TRANSACTIONS

5.1 REVENUE EXPENDITURE

 CSR Expenditure is an item of profit and loss statement.

 Schedule III to the Companies Act, 2013, requires that in case of companies covered under

Section 135, the amount of expenditure incurred on ‘Corporate Social Responsibility

Activities’ shall be disclosed by way of a note to the statement of profit and loss.

NOTE: The treatment of revenue expenditure will be the same under AS and Ind AS

5.3 EXPENDITURE MADE IN KIND

 A Company may spend under the law in kind too. However, it is important to find out

whether spending in kind may be covered under CSR or not. Few examples could be:

a) A company acquires / purchases goods, etc. and distributes / uses the same in its CSR

project, which is allowed under current CSR provisions as CSR spend.

b) A company manufacturing / dealing in goods or services distributes those goods /

services itself free of charge as CSR spend, which may not be covered in CSR spend in

view of Rule 4(1) of the Companies (CSR Policy) Rules 2014. However, in Mohd.

Ahmed (Minor) vs. UOI & Ors dt 17.4.2014, MCA gave an affidavit that a

pharmaceutical company donating medicines / drugs within section 135 read with

schedule VII of the Act is a CSR activity, as it is relatable to health care or any other

entry in Schedule VII.

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 CSR 34.5

c) A hospital rendering free medical services to 25% patients as per local government

guidelines may not be considered as CSR spend; however free medical services rendered

beyond 25% may be considered as CSR spend.

d) A company manufacturing goods distributes / sells goods other than those which it

manufactures in the normal course of business. For example, a manufacturer of steel

rods, manufactures steel medical beds. If these beds are sold (irrespective of cost

incurred), then it is not a CSR spend.

 However, giving it free of charge would be a CSR spend as it would not be an activity

undertaken in the normal course of business.

5.2 CSR EXPENDITURE MADE TOWARDS A CAPITAL ASSET

 In cases where the control of the ‘asset’ is transferred by the company, e.g., a school

building is transferred to a Gram Panchayat for running and maintaining the school, it

should not be recognised as ‘asset’ in its books and such expenditure would need to be

recognized as an expense in the statement of profit and loss as and when incurred.

 In other cases, where the company retains the control of the ‘asset’ then it would need to

be examined whether any future economic benefits accrue to the company. Invariably future

economic benefits from a ‘CSR asset’ would not flow to the company as any surplus from

CSR cannot be included by the company in business profits in view of Rule 6(2) of the

Companies (Corporate Social Responsibility Policy) Rules, 2014.

 Accounting entries of the CSR Expenditure may be as under

a) CSR in Cash

CSR Expenditure A/c Dr.

To Cash / Bank

b) CSR in Kind

CSR Expenditure A/c Dr.

To Purchase /cost of goods consumed

c) CSR when not fully spent during the year as per proposed amendment to S. 135 (5)

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 CSR 34.6

CSR Expenditure A/c Dr.

To Cash/Purchase/Cost of goods consumed (as applicable)

To CSR to be Deposited in Fund

d) CSR when not fully spent during the year as per proposed amendment S. 135 (6)

CSR Expenditure A/c Dr.

To Cash/Purchase/Cost of goods consumed (as applicable)

To CSR to be Spent on Ongoing project

e) CSR when spent in excess as per proposed amendment to S. 135 (5)

CSR Expenditure A/c Dr.

CSR Pre-Spent A/c Dr.

(As per proposed amendment)

To Cash/Purchase/Cost of goods consumed (as applicable)

6. IMPORTANT POINTS ON CSR ACTIVITIES

6.1 CAN A COMPANY COLLABORATE WITH OTHER COMPANIES FOR UNDERTAKING CSR

PROJECTS?

 YES.

A company may collaborate with other companies for undertaking CSR projects in such a

manner that the CSR committees of respective companies are in a position to report

separately on such projects in accordance with these rules.

6.2 WILL EARMARKING AND NOT SPENDING THE AMOUNT TILL YEAR END BE CONSIDERED

AS CSR EXPENDITURE?

 NO

Just by Earmarking the amount, the company cannot show it as CSR Expenditure.

6.3 SUPPLY OF OWN MANUFACTURING GOODS OR SERVICES BY AN ENTITY

 In some cases, a company may supply goods manufactured by it or render services as CSR

activities. In such cases, the expenditure incurred should be recognised and allowed as CSR

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Expenditure when the control on the goods manufactured by it is transferred or the

allowable services are rendered by the employees.

 The goods manufactured by the company should be valued as per AS 2 (Valuation of

Inventories) & Services rendered should be measured at cost for determining the amount of

CSR Expenditure.

 Indirect taxes on the goods and services so contributed will also form part of the CSR

Expenditure.

NOTE: If goods and services are provided at discounted rate and discount & concession are

also given in normal course of business, then it would NOT qualify as CSR Expenditure.

6.4 TREATMENT OF GRANT RECEIVED FOR CONDUCTING CSR ACTIVITIES

 Where a company receives a grant from others for carrying out CSR activities, the CSR

expenditure should be measured net of the grant.

6.5 RECOGNITION OF INCOME EARNED DURING THE COURSE OF CONDUCT OF CSR

ACTIVITIES

 Surplus (Surplus ordinarily means excess of income over expenditure) arising out of the CSR

activities shall be recognised in the Statement of P&L but shall NOT form part of the

business profit of a company.

 Since this surplus cannot be a part of business profits of the company, the same should

immediately be recognised as liability for CSR expenditure in the B/S and recognised as a

charge to the Statement of P&L.

 Accordingly, such surplus would not form part of the minimum 2% of the average net

profits of the 3 immediately preceding F.Y. in pursuance of its CSR Policy.

6.6 CSR EXPENDITURE IN THE INCOME TAX SCENARIO

 Amount spent on CSR CANNOT be allowed as deduction for computing the taxable income

of the company.

 CSR expenditure which is of the nature described in section 30 to section 36 of the

Income-tax Act shall be allowed as deduction under those sections subject to fulfilment of

conditions, if any, specified therein.

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