CORPORATE SOCIAL RESPONSIBILITY - Section 135 - (CSR Policy) Rules, 2014

 The Companies Act, 2013 lays down the provisions requiring corporates to mandatorily spend a
prescribed percentage of their profits on certain specified areas of social upliftment in discharge of their
social responsibilities.
 The Companies CSR Rule 2(1)(c)] provides the exhaustive definition of CSR which provides that the CSR
means and includes but is not limited to:
Projects or programs relating to activities undertaken by the board of directors of a company on
recommendations of the CSR Committee with respect to areas specified in Schedule VII of the Act.
Explanation: Schedule VII of the Act provides for the list of activities which may be included by
Companies in their CSR Policies.
 According to section 135 of the Companies Act, 2013 read with the Companies (Corporate Social
Responsibility) Rules, 2014

1) DEFINITIONS:

a) "CSR Policy" means a statement containing the approach and direction given by the board of a
company, taking into account the recommendations of its CSR Committee, and includes guiding
principles for selection, implementation and monitoring of activities as well as formulation of the
annual action plan;
b) “Administrative overheads” means the expenses incurred by the company for ‘general
management and administration’ of CSR functions in the company but shall not include the
expenses directly incurred for the designing, implementation, monitoring, and evaluation of a
particular CSR project or programme;
c) “Ongoing Project” means a multi-year project undertaken by a Company in fulfilment of its CSR
obligation having timelines not exceeding three years excluding the financial year in which it was
commenced, and shall include such project that was initially not approved as a multi-year project
but whose duration has been extended beyond one year by the board based on reasonable
justification; [Rule 2(i)]

2) APPLICABILITY

According to section 135(1), every company having

(1) net worth of rupees 500 crore or more, or
(2) turnover of rupees 1000 crore or more or
(3) a net profit of rupees 5 crore or more
during the immediately preceding financial year shall constitute a Corporate Social Responsibility
Committee.

Note: Every company including its holding or subsidiary, and a foreign company defined under clause
(42) of section 2 of the Act having its branch office or project office in India, which fulfills the criteria
 specified in sub-section (I) of section 135 of the Act shall comply with the provisions of section 135 of
the Act and these rules.

#Definition
“Net worth” [As per Section 2(57)] means
paid-up share capital
+ all reserves created out of the profits and
+ Securities premium account and
+/- debit or credit balance of the profit and loss account,
-- accumulated losses,
-- deferred expenditure and
-- miscellaneous expenditure not written off,
but does not include reserves created out of revaluation of assets, write-back of depreciation and
amalgamation.

Example: The statutory auditors of a company were required to issue a certificate on the net worth of
the company as per the requirement of the management as on 30th September 2018 computed as per
the provision of section 2(57) of the Companies Act, 2013.

The company had fair valued its property, plant and equipment in the current year which was mistakenly
taken into retained earnings of the company in its books of accounts. Please advise whether this fair
valuation would be covered in the net worth of the company as per the legal requirements.

Answer: As per sec 2(57) of the Companies Act 2013, any reserves created out of revaluation of assets
doesn’t form part of net worth. The company fair valued its property, plant and equipment and took that
to retained earnings.

Even if the company has taken the fair valuation to the retained earnings in its books of accounts, the
resultant credit in reserves (by whatever name called) would be in the category of ‘reserves created out of
revaluation of assets’ which is specifically excluded in the definition of ‘net worth’ in section 2 (57) and
hence should be excluded by the company.

Further the auditors should also consider the matter related to accounting of this reserve separately at the
time of audit of books of accounts of the company.

Example: ABC Ltd is a company with a turnover of more than Rs.1000 crores and having incurred a loss
in one of the preceding three financial years. Will it be required to comply with CSR?

Answer: As per section 135(1) of the Act, if any one of the three criteria (whether net worth, or turnover
or net profit) gets satisfied then the company is mandatorily required to comply with the CSR provisions.
Hence ABC Ltd. will be required to comply with CSR based on its turnover. The mere fact that company has
incurred loss in one of the preceding three financial years will not be considered for determining the
applicability of CSR to the companies.
3) COMPOSITION OF CSR COMMITTEE:

(1) The CSR Committee of the Board shall be consisting of 3 or more directors, out of which at least one
shall be an independent director.

#Questionable point:

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.

(2) The companies mentioned in the rule 3 shall constitute CSR Committee as under.-

(i) an unlisted public company or a private company covered under subsection (1) of section 135 which is
not required to appoint an independent director, shall have its CSR Committee without such director;

(ii) a private company having only 2 directors on its Board shall constitute its CSR Committee with 2 such
directors;

(iii) a foreign company, the CSR Committee shall comprise of at least 2 persons of which one shall be Indian
resident.

(3) The Board’s report under sub-section (3) of section 134 shall disclose the composition of the CSR
Committee[Section 135(2)]

Where the amount to be spent by a company under Section 135(5) of the Companies Act, 2013 does
not exceed Rs. 50 Lakh, the requirement for constitution of the CSR Committee shall not be
applicable and the functions of such Committee provided under this section shall, in such cases, be
discharged by the Board of Directors of such company.
-Amendment:

4) EXCLUSION OF COMPANIES [RULE 3(2) OF THE COMPANIES (CSR) RULES, 2014]

Every company which ceases to be a company covered under subsection (1) of section 135 of the Act for 3
consecutive financial years shall not be required to constitute a CSR Committee; till such time it meets
the criteria specified in sub-section (1) of section 135.

5) CSR EXPENDITURE

a) 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 [or where the company has not completed the period of three financial years since
its incorporation, during such immediately preceding financial years. 135(5)
b) If the company fails to spend such amount, the Board shall, in its report specify the reasons for
not spending the amount [and unless the unspent amount relates to any ongoing project referred
to in sub- section (6) of Section 135 of Companies Act, 2013, transfer such unspent amount to a
Fund specified in Schedule VII, within a period of 6 months of the expiry of the financial year-
Inserted by The Companies (Amendment) Act,2019.
c) Any amount remaining unspent under sub-section (5) of Section 135 of Companies Act, 2013,
 pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a
company in pursuance of its CSR Policy, shall be transferred by the company within a period of
30 days from the end of the financial year to a special account to be called the Unspent Corporate
Social Responsibility Account, and such amount shall be spent by the company in pursuance of its
obligation towards the Corporate Social Responsibility Policy within a period of 3 financial years
from the date of such transfer, failing which, the company shall transfer the same to a Fund
specified in Schedule VII, within a period of 30 days from the date of completion of the third
financial year - Inserted by the Companies (Amendment) Act,2019.
d) If the company spends an amount in excess of the requirements, such company may set off such
excess amount against the requirement to spend for such number of succeeding financial years.
e) Expenditure incurred on specified activities that are carried out in India only will qualify as CSR
expenditure.
f) Expenditure incurred in undertaking normal course of business will not form a part of the CSR
expenditure.
Note: Provided by the CSR activities does not include the activities undertaken in pursuance of
normal course of business of a company *[Omitted by the Companies (Corporate Social
Responsibility Policy) Amendment Rules, 2020, dated 24th August, 2020]
g) Any surplus arising out of CSR activities will not be considered as business profit.
h) Expenditure incurred by foreign holding company for CSR activities in India will qualify as CSR
spend of the Indian subsidiary if, the CSR expenditures are routed through Indian subsidiaries and
if the Indian subsidiary is required to do so as per section 135 of the Act.

6) DUTIES OF CSR COMMITTEE [Section 135(3)]:

The CSR Committee shall-

(a) 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;

(b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and

(c) monitor the CSR Policy of the company from time to time.

7) IMPLEMENTATION OF CSR

The Board of a company may decide to undertake its CSR activities approved by the CSR Committee,
through

(a) section 8 Company or a registered trust or a registered society, established by the company, either
singly or along with any other company, or
(b) section 8 Company or a registered trust or a registered society, established by the Central Government
or State Government or
(c) any entity established under an Act of Parliament or a State legislature
(d) section 8 Company or a registered trust or a registered society, other than those specified in this sub-
rule, such company or trust or society shall have an established track record of 3 years in undertaking
similar programs or projects; and the company has specified the projects or programs to be undertaken.
(e) A company may also collaborate with other companies for undertaking CSR activities in such manner
 that the CSR Committees of respective companies are in a position to report separately on such
projects or programs in accordance with these rules.

Registration:
 Every entity, covered under sub-rule (1), who intends to undertake any CSR activity, shall register
itself with the Central Government by filing the form CSR-1 electronically with the Registrar, with
effect from the 01st day of April 2021:
 Unique Registration Number: On the submission of the Form CSR-1 on the portal, a unique CSR
Registration Number shall be generated by the system automatically
-Amended

8) ACTIVITIES SPECIFIED UNDER SCHEDULE VII

(1) eradicating hunger, poverty and malnutrition, promoting health care including preventive health care
and sanitation including contribution to the Swach 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 arts and
handicrafts;

(6) measures for the benefit of armed forces veterans, war widows and their dependents Central Armed
Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans, and their dependents including
widows;

(7) training to promote rural sports, nationally recognised sports, paralympic sports and Olympic sports;

(8) contribution to the Prime Minister’s National Relief Fund or Prime Minister’s Citizen Assistance and
Relief in Emergency Situations Fund (PM Cares 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;

(9)

(a) Contribution to incubators or research and development projects in the field of science,
technology, engineering and medicine, funded by the Central Government or State Government or
Public Sector Undertaking or any agency of the Central Government or State Government; and
 (b) Contributions to public funded Universities; Indian Institute of Technology (IITs); National
Laboratories and autonomous bodies established under Department of Atomic Energy (DAE);
Department of Biotechnology (DBT); Department of Science and Technology (DST); Department of
Pharmaceuticals; Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy
(AYUSH); Ministry of Electronics and Information Technology and other bodies, namely Defence
Research and Development Organisation (DRDO); Indian Council of Agricultural Research (ICAR);
Indian Council of Medical Research (ICMR) and Council of Scientific and Industrial Research (CSIR),
engaged in conducting research in science, technology, engineering and medicine aimed at promoting
Sustainable Development Goals (SDGs)”.

(10) rural development projects;

(11) slum area development. [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.]

(12) Disaster management, including relief, rehabilitation and reconstruction activities.

Note:

1. MCA has issued clarification on spending of CSR funds for COVID-19, dated 23.03.2020 and confirmed
that spending of CSR funds for COVID-19 is eligible CSR activity.
Funds may be spent for various activities related to COVID-19 under item no.s (i) and (xii) of Schedule
VII relating to promotion of health care including preventive health care and sanitation and disaster
management.

2. Provided that any company engaged in research and development activity of new vaccine, drugs and
medical devices in their normal course of business may undertake research and development activity
of new vaccine, drugs and medical devices related to COVID-19 for financial years 2020-21, 2021-22
and 2022-23 subject to the conditions that-
(i) such research and development activities shall be carried out in collaboration with any of the
institutes or organisations mentioned in item (ix) of Schedule VII to the Act.
(ii) details of such activity shall be disclosed separately in the Annual Report on CSR included in the
Board’s Report. [Inserted by the Companies (Corporate Social Responsibility Policy) Amendment
Rules, 2020, dated 24th August, 2020]}*

Note: Further as per general circular no. 21/2014 dated 18.06.2014, items in Schedule VII are broad based
and may be interpreted liberally for this purpose.

9) ACTIVITIES NOT CONSIDERED AS CSR

(i) Activities undertaken in pursuance of normal course of business of the company.

Provided that any company engaged in research and development activity of new vaccine, drugs
and medical devices in their normal course of business may undertake research and development
activity of new vaccine, drugs and medical devices related to COVID-19 for financial years 2020- 21,
2021-22, 2022-23 subject to the conditions that-

(a) such research and development activities shall be carried out in collaboration with any of the
 institutesor organisations mentioned in item (ix) of Schedule VII to the Act;

(b) details of such activity shall be disclosed separately in the Annual report on CSR included in the
Board’s Report;

- Amended

(ii) 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;

(iii) contribution of any amount to any political party under section 182

(iv) activities benefitting employees of the company

(v) activities supported by the companies on sponsorship basis for deriving marketing benefits for
its products or services;

(vi) activities carried out for fulfilment of any other statutory obligations under any law in force in
India;

Note:

1) Salaries paid by the companies to regular CSR staff as well as to volunteers of the companies (in
proportion to company’s time/hours spent specifically on CSR) can be factored into CSR project cost as
part of the CSR expenditure.

10) NON-COMPLIANCE

 IF A COMPANY IS IN DEFAULT in complying with the provisions of sub-section (5) or (6), the company
shall be liable to a penalty of
- twice the amount required to be transferred by the company to the Fund specified in Schedule VII
or the Unspent Corporate Social Responsibility Account, or
- 1 crore rupees, whichever is less,
 and EVERY OFFICER of the company who is in default shall be liable to a penalty of
- 1/10th of the amount required to be transferred by the company to such Fund specified in Schedule
VII, or
- the Unspent Corporate Social Responsibility Account, as the case may be, or
- 2 lakh rupees, whichever is less.

Example: ADV Ltd. is engaged in the business of construction and has various projects which are under
execution in Delhi-NCR region. The company is also looking for new projects, particularly in Southern
part of India based on an understanding that the margins are very high over there.

During the year ended 31st March 2018, the company got covered within the requirements of CSR.
Considering the nature of its business, company has a large employee base and it decided to spend CSR
on some activity related to construction which would benefit its employees and would indirectly also
help the business of the company. Please advise on this.
Answer: As per the requirements of CSR, the projects or programs or activities that benefit only the
employees of the company and their families shall not be considered as CSR activities in accordance with
section 135 of the Act. Accordingly, in the given case, the activity planned by the company is related to its
business only and that too only for the benefit of its employees would not be considered as part of CSR
requirements.

11) CSR REPORTING - Impact Assessment

 Every company having average CSR obligation of 10 crore rupees or more in pursuance of
subsection (5) of section 135 of the Act, in the 3 immediately preceding financial years, shall
undertake impact assessment, through an independent agency, of their CSR projects having
outlays of one crore rupees or more, and which have been completed not less than one year
before undertaking the impact study.
 The impact assessment reports shall be placed before the Board and shall be annexed to the annual
report on CSR.
 A Company undertaking impact assessment may book the expenditure towards CSR for that
financial year, which shall not exceed 5% of the total CSR expenditure for that financial year or 50
lakh rupees, whichever is less.