CSR Compliances – Permitted areas of intervention & Computation under The Companies Act

Although there has been a mass emergence of NGOs and charitable institutions over the past few years, India continues to be veiled by socio-economic issues that are detrimental to its progress.

The government sees this as a major challenge and has introduced policies to eradicate it completely. The main objective—social, economic, and environmental development to pave the way for self-sufficiency and sustainability.

One of the biggest steps towards securing a better future for the company came in the form of the Corporate Social Responsibility mandate.

Section 135 of the Companies Act, 2013 defines CSR as “a way of conducting business by which corporate entities visibly contribute to the social good.” In other words, socially responsible companies do not use resources and engage in activities to increase their profits but to blend economic, social, and environmental objectives with their own operations and growth.

Does Your Company Make The CSR Cut?

Until the Companies Act stepped in to make CSR mandatory for corporations, it was merely a voluntary step. Well, the times have changed. According to the Act, every private or public company in India, with a net worth of INR 500 crore, a turnover of INR 1,000 crore, or a net profit of INR 5 crore needs to contribute a minimum of 2% of its average net profit in the past 3 financial years to CSR activities.

However, failure to make the required disclosure in the Board report results in the following penalties under Section 134 of the Companies Act:

  • A minimum fine of INR 50,000, which can go upto INR 25 lakh
  • Imprisonment for a term extending up to 3 years with a minimum fine of INR 50,000 that can go upto INR 5 lakh

Areas Of Focus Under CSR

Under Schedule VII of the Companies Act, the CSR activities practised by corporations should focus on certain areas. However, note that the areas, mentioned below, are open to interpretation as per the company’s discretion as long as they encapsulate the essence of the subjects .

  • Efforts to terminate hunger, poverty, and malnutrition, in addition to, focus on health care , preventive health care, and making safe drinking water accessible to the public
  • Promotion of proper sanitation practices including contribution towards Swachh Bharat Kosh devised by the Central Government
  • Construction of shelters for women, elderly, and orphans; encouraging gender equality, women empowerment, and curbing discrimination of the economically and socially backward masses
  • Endorsing education and paying extra attention towards education and training of children, elderly, women, and differently abled in order to increase employment opportunities and provide quality livelihood
  • Respecting the ecology, environment, and wildlife through sustainable approaches and nurture practices to maintain air, soil, and water health besides contribution to the Clean Ganga Fund advocated by the Central Government in order to reverse the damages done to the River Ganga
  • Promotion and training of athletes participating in rural, paralympic, national, and Olympic events
  • Safeguarding national heritage, art, and culture; restore monuments holding historical significance; configuring the setup of public libraries; and developing traditional arts and handicrafts
  • Adopting measures to protect the interest of war veterans, widows, and their dependents
  • Contribution towards Prime Minister’s National Relief Fund, Emergency Fund, or any other funds set up by the Central Government for relief, socio-economic development, and welfare of SC, ST, OBCs, minorities, and women
  • Financial aid to technology incubators situated within academic institutions, approved by the Central Government
  • Slum area and rural development

Activities Not Considered As CSR

As per the Companies Act (2013), CSR activities should be implemented as a project or a programme. However, they should not include the following:

  • CSR activities practised outside India
  • Practices focused on employees and their immediate dependents
  • Events such as advertisements, marathons, sponsorships, television programmes, awards, and charitable contributions
  • Contributions made towards political figures/parties
  • Expenses incurred as a result of any act/laws such as Land Acquisition Act or Labour Laws.

Computation Of CSR Expenditure

As mentioned earlier, companies need to spend at least 2% of their net profit of the past 3 financial year on CSR activities. It’s the duty of the Board of Directors to ensure that the stipulated amount is being spent on CSR initiatives.

However, it’s important to note that if profit computation has been done under the Companies Act (1956), they needn’t be recomputed under the 2013 Act. Given below are the particulars as per Section 198:

In the process of computation, credit shall not be awarded for the following amounts:

  • Excessive surplus in profit and loss account upon enumeration of asset or liability at fair value
  • Profits obtained through premiums on shares and debentures that are issued or sold by the company
  • Profits fetched on the sale of any undertakings of the company or its subsidiaries, and profits of capital nature
  • Profits made on the sale of forfeited shares by the company
  • Variation of carrying amounts for an asset or liability identified in equity reserves
  • Gains made on the sale of any fixed assets under the company’s undertaking(s), unless the company’s business itself deals with the sale or purchase of the aforementioned assets. However, if the sale amount of the asset exceeds the written down value, credit shall be awarded for the excess as long as it doesn’t exceed the difference between the original cost of the fixed asset and its written down value

The listed sums below shall not be deducted whilst making the computations:

  • Variation in the carrying amount of an asset/liability under equity reserves, or excess in profit or loss account during unbiased, potential market price approximation of the asset/liability
  • Super tax and income tax to be paid by the company under the Income Tax Act (1961) or any other tax levied on the company’s income that is not a part of the tax imposed by the Central Government on excess, abnormal profits, or special circumstances
  • Loss of capital nature or undertaking(s) of a company without the inclusion of the excess on the written down value of any asset that is demolished, discarded, or sold over its scrap value or sale proceeds
  • Voluntary compensations, payments, and damages made otherwise in the case of a liability originating from a breach of contract

The fact that CSR initiatives brought about by the Companies Act will transform corporations and the lives of people is undeniable. Of course, there are political setbacks and loopholes to deal with. However, it must be seen as the right thing to do whilst keeping the nation’s progress in mind.


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