Indetail Inbrief FAQswithregardtoCSRundersection135oftheCompaniesAct,2013 TaxInsightsfromIndiaTax&RegulatoryServices

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FAQs with regard to CSR under section 135 of the Companies Act, 2013

January 18, 2016

In brief

The Companies Act, 2013 (Companies Act) along with the Companies (Corporate Social

Responsibility Policy) Rules, 2014 (CSR Rules) mandate and regulate social spending by companies.

The Ministry of Corporate Affairs (MCA) had previously issued General Circular No. 21/2014 dated 18 June 2014 to provide clarifications on the provisions of CSR under section 135 of the Companies Act, CSR Rules, and the activities to be undertaken as per Schedule VII of the Companies Act. In response to further queries received, the MCA has recently issued General Circular No. 01/2016 to provide clarity on various issues pertaining to the CSR provisions.

In detail

Frequently Asked Questions (FAQs) and Our Comments:

FAQs Clarification provided by MCA Our Comments What is the meaning

of ‘any financial year’ as mentioned in section 135(1) of the Companies Act?

[corresponding to FAQ No. 2]

It has been clarified that ‘any financial year’ referred to under sub-section (1) of section 135 of the Act read with Rule 3(2) of Companies CSR Rule, 2014, implies ‘any of the three preceding financial years’.

A company which meets the net worth, turnover or net profits criteria in any of the preceding three financial years, but which does not meet the criteria in the relevant financial year, will still need to constitute a CSR Committee and comply with provisions of sections 135 (2) to (5) read with the CSR Rules.

Can the CSR expenditure be claimed as a business expenditure?

[corresponding to FAQ No. 3]

It has been clarified that the amount spent by a Company towards CSR cannot be claimed as business

expenditure. The Finance (No. 2) Act, 2014 [Income-tax Act, 1961 (Act)]

provides that expenditure incurred by the assessee on activities relating to CSR referred to in section 135 of the Companies Act shall not be deemed to be the expenditure incurred for the purpose of business or profession.

What remains to be clarified is whether provisions of

Explanation 2 to section 37(1) are applicable where an assessee incurs amounts in excess of the limits specified, or in cases where section 135 does not apply, to expenses incurred on activities covered in Schedule VII of the Companies Act.

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PwC Page 3 FAQs Clarification provided by MCA Our Comments

What tax benefits can be availed under CSR provisions?

[corresponding to FAQ No. 6]

It has been clarified again that no specific tax exemptions have been extended for CSR expenditure.

However, it has been highlighted that spending on activities like

contributions to Prime Minister’s Relief Fund, scientific research, rural development projects, skill

development projects, agricultural extension projects as enlisted in Schedule VII enjoy exemptions under different sections of the Act.

Memorandum to Finance (No. 2) Bill, 2014 provides that CSR expenditure which is of the nature described in sections 30 to 36 of the Act shall be allowed deduction under those

sections, subject to fulfilment of the specified conditions. It is to be noted that 100% of the contribution to the Prime Minister’s Fund is eligible for deduction under section 80G of the Act. For other contributions to approved institutions, deduction may be claimed under sections 80G and 80 GGA to the extent allowable.

‘Average net profit’

criterion for section 135(5) – does it mean net profit before tax or net profit after tax?

MCA has clarified that computation of net profits for section 135 is as per section 198 of the Companies Act, which primarily considersprofit before taxes.

Explanation to section 135(5) itself states that

“average net profit” shall be calculated in accordance with section 198 of the Companies Act. In terms of section 198(5)(a) of the Companies Act, in computing net profits, income-tax and super-tax payable by the company under the Act shall not be deducted.

Therefore, the net profit criterion in section 135(5) is net profit before taxes.

Can CSR expenditure be spent on activities beyond Schedule VII?

MCA has reiterated the clarifications provided in this regard in the General Circular No. 21/2014. The activities undertaken in pursuance of the CSR policy must be relatable to Schedule VII of the Companies Act, and the entries in the Schedule may be liberally construed, as the items enlisted are broad-based and are intended to cover a wide range of activities. It is clarified that the General Circular No. 21/2014 provides an illustrative list of activities that can be covered under CSR, and similarly, many more activities could be covered. The Board of the company should take a call on this.

It has been emphasised that companies developing programs as part of their CSR efforts can interpret Schedule VII of the Companies Act 2013 liberally. It is to be noted that Circular No. 21/2014 also contains specimen illustrative of items covered under Schedule VII. However, the clarification should not be construed to give permission to travel beyond Schedule VII - the activities should come under the broad purview of Schedule VII.

Which activities do not qualify as CSR activities?

It has been clarified that the following activities would not clarify as CSR –

 CSR projects benefiting only the employees of the companies

 One-off events

 Expenses incurred for fulfilment of regulations of any other Act

 Direct/ indirect contribution to political parties

 Activities undertaken by companies in pursuance of its course of normal business

 Projects undertaken outside India

It needs to be clarified whether CSR activities which also benefit the specified company indirectly or incidentally can be considered as eligible CSR activities. The emphasis appears to be on the benefits given to external

stakeholders, and does not specifically prohibit incidental benefit to internal stakeholders, or to the business of the company.

Does a holding company or subsidiary of a company which fulfils the criteria under section 135(1) have to comply with section 135, even if

It has been clarified that holding company or subsidiary of a company do not have to comply with section 135(1) unless the holding company or subsidiary itself fulfils the criteria.

Applicability has to be decidedqualegal entity.

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FAQs Clarification provided by MCA Our Comments the holding and

subsidiary companies themselves do not fulﬁl the criteria?

Whether provisions of CSR are applicable to a section 8 company, if it fulfils the criteria of section 135(1) of the Act?

No specific exemption is given to companies registered under section 8 of the Companies Act.

Section 135 of the Companies Act is applicable to every company meeting the specified criteria.

As per section 2(20) of the Companies Act,

‘company’ means a company incorporated under the Companies Act or under any other previous company law. This would imply that companies set up for the purposes of CSR/

public welfare are also required to comply with mandatory social spending.

Whether reporting of CSR is mandatory in the Board’s report?

It has been clarified that as per Rule 9 of the CSR Rules, the Board’s Report of a company qualifying under section 135 shall include an annual report on CSR, containing particulars specified in Annexure to CSR Rules.

Reporting of CSR policy of the company in the Board’s Report is a mandatory requirement. If the disclosure requirements are not fulfilled, penal consequences may be attracted under section 134(8) of the Companies Act.

Is it mandatory for a foreign company to give report on CSR activity?

In case of a foreign company, the balance sheet filed under section 381 (1) (b) shall contain an Annexure regarding report on CSR.

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Whether contribution in kind can be monetised to be shown as CSR

expenditure?

It has been clarified that the company has to spend the amount to classify the same as expenditure incurred towards CSR.

This appears to be a very strict and literal interpretation of a liberal provision. The clarification raises doubts on whether the amount spent on purchase of an equipment completely unrelated to the Company’s business, solely for the purposes of donation, would qualify as CSR.

lf a company spends in excess of 2% of its average net profits on CSR, can the excess amount spent be carried forward to the next year and be offset against the required 2% CSR expenditure of the next year?

It has been clarified that any excess amount spent cannot be carried forward to the subsequent years and adjusted against that year's CSR expenditure.

There is no provision for carrying forward the excess CSR expenditure spent in a particular year. Any expenditure over 2% could be considered as voluntary higher CSR spend for that year.

Can the amount unspent from the minimum required CSR

expenditure, be carried forward to the next year?

It has been clarified that the Board is free to decide whether any unspent amount is to be carried forward to the next year, and the same shall be over and above the next year’s CSR allocation equivalent to at least 2% of average net profits of the company.

Any shortfall in spending in CSR shall be explained in the directors’ report and the Board of Directors shall state the amount unspent and reasons for not spending that amount. Any shortfall is not required to be provided for in the books of accounts.

What is the role of Government in monitoring

implementation of CSR by companies?

It has been clarified that the government has no role to play in monitoring implementation of CSR by companies.

This leaves the monitoring and implementation responsibility to the Board of Directors.

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PwC Page 5 FAQs Clarification provided by MCA Our Comments

Whether government is proposing to establish any mechanism for third parties to monitor the quality and efficacy of CSR expenditure as well as to have an impact assessment of CSR by companies?

It has been clarified that the Government has no role to play in engaging external experts for

monitoring the quality and efficacy of CSR expenditure of companies.

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Can CSR funds be utilised to fund

Government Schemes?

CSR funds of the company should not be used as a source of funding

Government Schemes. It has,

however, been clarified that the Board of the eligible company is competent to take decisions on supplementing any government scheme permitting corporate participation, and if all provisions of section 135 and rules thereunder are complied with by the company.

It is to be noted that contributions for capacity building of government initiatives, both, in the area of PPPs and urban infrastructure, are not eligible items covered under Schedule VII of the Companies Act as illustrated in Circular No.

21/2014.

How can companies with small CSR funds take up CSR activities in a project/ program mode?

It has been clarified that companies can combine their CSR programs with other similar companies by pooling their CSR resources.

As per Rule 4 of the CSR Rules, a company may collaborate with other companies for

undertaking projects or for CSR activities in such a manner that the CSR committees of the relevant companies are in a position to report separately on such projects in accordance with the prescribed Rules.

Whether involvement of employees of the

company in CSR projects of a company can be monetised and accounted for under the head of

‘CSR expenditure’?

It has been clarified that though involvement of employees of the companies on CSR projects of the company must be encouraged, monetisation ofpro-bonoservices of employees would not be counted towards CSR expenditure.

Videnotification dated 12 September 2014, the MCA has clarified that clause (iv) of the Circular No. 21/2014 stands deleted, and thus salaries paid by companies to regular CSR staff as well as to volunteers of companies now do not qualify as CSR expenditure towards the cost of CSR project.

It is however pertinent to note that as per Rule 4(6) of the CSR Rules, companies may build CSR capacities of their own personnel, including expenditure on administrative overheads, but such expenditure shall not exceed 5% of the total CSR expenditure of the company in one financial year.

The takeaways

The CSR obligations of a corporate are continuing

obligations. With these FAQ’s the MCA has reiterated the intent and commitment of the Government

towards smooth implementation of the CSR provisions.

Let’s talk

For a deeper discussion of how this issue might affect your business, please contact:

Tax & Regulatory Services – Direct Tax

Gautam Mehra,Mumbai +91-22 6689 1154

[email protected] Rahul Garg,Gurgaon +91-124 330 6515 [email protected]

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