FAQs on Corporate Social Responsibility Team Vinod Kothari and Company corplaw@vinodkothari.com Original: February 28, 2014 Version: November 10, 2019

Contents General background: ...................................................................................................................... 4

1. Is it common to have Corporate Social Responsibility rules in other countries in the

world? ................................................................................................................................................. 4

Scope of applicability: ........................................................................................................................ 4

2. Which all companies are covered by the provisions of CSR? ................................................. 4

3. Is it applicable to private companies? ..................................................................................... 4

4. Is it applicable to government companies? ............................................................................. 4

5. Company X is covered by the CSR Rules. Company Y is holding company of company X. Y

by itself does not satisfy any of the 3 triggers referred to above. Will Company Y be covered

by the CSR Rules? .............................................................................................................................. 5

6. Which year’s profits, turnover and net worth will be reckoned for applying the CSR

triggers? ............................................................................................................................................. 5

7. A company has been incorporated less than 3 years ago. However, the company meets

the turnover trigger. Is the company required to comply with the CSR provisions? .................. 5

8. A company satisfies the turnover/net worth trigger but the company does not have

average profits over last 3 years. Does the company have to comply with the CSR Committee

requirements, though it does not have profits? .............................................................................. 6

9. Can the company collaborate with other companies to undertake a CSR project? ............. 6

CSR committee: ...................................................................................................................................... 6

10. What are the composition requirements of the committee? ............................................. 6

11. Will a deemed public company require to have an independent director in its CSR

committee? ......................................................................................................................................... 7

12. When should the CSR Committee hold its first meeting? ................................................... 7

13. How often does the CSR Committee have to meet? ............................................................ 7

14. What is the quorum for the committee meeting? ............................................................... 7

15. Is the CSR committee required to be constituted every year? ........................................... 7

16. Can there be a centralized CSR committee for a company having several group

companies? ........................................................................................................................................ 8

CSR policy: ........................................................................................................................................ 8

17. By when does the Committee have to frame a CSR Policy? ............................................... 8

18. What are the contents of the CSR policy? ............................................................................ 8

19. Does the policy have to be approved by the Board? ........................................................... 8

20. Whether any time limit has been specified when exactly we need to spend on CSR, like

before holding the BM for approval of accounts, or 3 months from the closure of the FY or we

can spend anytime throughout the FY? ........................................................................................... 9

21. Is there any format of CSR report? ....................................................................................... 9

CSR spending: ....................................................................................................................................... 9

22. Who takes a view on whether the proposed spending is eligible for CSR or not? ........... 9

23. Is there a need to take anyone’s approval as to whether the project qualifies for CSR or

not? 9

24. What is the meaning of “spend”? Is it revenue expenditure or does it include capital

expenditure as well? ......................................................................................................................... 9

25. Will CSR spend be an appropriation or a charge on P&L? ............................................... 10

26. Whether contribution to corpus of the trust made by the company amounts to

spending? ......................................................................................................................................... 10

27. Is CSR activity outside India also considered? .................................................................. 11

28. What is the meaning of capacity building spending referred to in Rule 4 (6)? .............. 11

29. CSR activities shall not include activities exclusively for the benefit of employees and

their families but can employees not at all benefit from the company’s CSR activities? ........... 11

30. What are the implications of not spending? ...................................................................... 11

31. How will a company make disclosure of CSR spending?.................................................. 12

32. Whether CSR spending are to be shown in books of accounts under a separate CSR

head or are they to be included under the normal heads of accounts or are they to be shown

in the notes to accounts?................................................................................................................. 12

33. Can CSR spending be carried back, that is, to fulfil the unspent amount in any year? .. 12

34. Can CSR spending be in kind? ............................................................................................. 12

35. Can a company undertake CSR activity by using some of its fixed assets, say those

assets which are not in use? ........................................................................................................... 13

36. How would average net profit be computed for the purpose of CSR under the Act,

2013? 14

37. Whether the proposed budget for a long term CSR project whose cash flow is spread

over a long period, is required to be approved by CSR Committee on yearly basis?................. 15

38. Whether the attachment "Details of other entity(ies)" is mandatory in e-Form AOC-4 in

case any amount of CSR is not spent directly by the company? .................................................. 15

39. If current Financial Year’s net profits are less than 5 crore, whether company will be

required to make CSR expenditure for next Financial Year? ....................................................... 15

FAQs on proposed changes to CSR provisions under the Companies (Amendment) Act, 2019 ....... 16

40. What is the change brought about under the Companies (Amendment) Act, 2019? .... 16

41. Does the implementing agencies or trusts need to open ‘Unspent CSR Account’ in case

there is any unspent amount left with it in relation to an ongoing project? .............................. 16

42. Is the unspent amount to be carried forward? ................................................................. 17

43. If the total cash outflow by the Company for the long term CSR projects is spread over

a long period, say 3 years, will it be in compliance with the provisions of the Act, 2013, if the

proposed budget is lying unspent as on Financial Year end? ...................................................... 18

44. What are the implications of not spending post the amendments coming into effect? . 19

45. Will the unspent amount of previous year also needs to be transferred to the Fund?.. 19

46. Which projects will be considered as an on-going project? ............................................. 19

47. As per provisions of section 135, the Board has to report the amount not spent on CSR.

Is non-expenditure considered as non-compliance? What will be the role of auditor on non-

compliance? Will he qualify his report? ........................................................................................ 19

48. What will be the accounting implications w.r.t. transfer of funds to the unspent CSR

account? ........................................................................................................................................... 20

49. Can the funds lying unutilized in the unspent CSR account be used for making

investment such as Fixed Deposit? If yes, whether the income/interest generated from such

investment be used for any other business use? .......................................................................... 20

50. Whether a committed disbursement would mean the project is ‘on-going’? ................. 21

51. Since the company is required to spend the unspent amount in next three financial

years, does that mean that the maximum period for an on-going project can be 3 financial

years upon which the amount will be transferred to the Fund? ................................................. 21

52. Whether a company is required to open “Unspent Corporate Social Responsibility

Account” project-wise or whether there will be a single account managed for all on-going

projects? ........................................................................................................................................... 21

Taxation aspects:............................................................................................................................... 22

53. What will be tax implications on the CSR spending by the Company? ........................... 22

General background:

1. Is it common to have Corporate Social Responsibility rules in other countries

in the world?

Some sort of Corporate Social Responsibility (“CSR”) rules exist in nearly 70 countries in the world – however, the rules are mostly in form of making companies responsible for sustainable development. Hence, particularly if the business operations of the company cause any damage to the environment, companies are made responsible for the same. Spending-based measures are not there in most countries. In addition, India is the only country in the world which has made CSR mandatory.

Scope of applicability:

2. Which all companies are covered by the provisions of CSR?

Section 135 (1) of the Companies Act, 2013 (“Act/ Act, 2013”) provides the threshold to constitute the CSR Committee. The companies, in order to be covered by the provisions under the aforesaid section are required to satisfy any of the following criteria during the immediately preceding financial year –

a. Net worth of Rs 500 crores or more; or b. Turnover of Rs. 1000 crores or more; or c. Net Profit of Rs. 5 crores or more

Further, the section uses the language that the same is applicable to “all” companies. This means that public, private, holding, subsidiary and foreign companies as defined under the Act 2013 will fall within the ambit of CSR.

3. Is it applicable to private companies?

Yes, as discussed above, the CSR provisions as well as the Rules will apply to the private companies in case it meets any of the threshold as given under section 135 (1) of the Act.

4. Is it applicable to government companies?

Yes, as discussed above, the CSR provisions as well as the Rules will apply to the private companies in case it meets any of the threshold as given under section 135 (1) of the Act.

5. Company X is covered by the CSR Rules. Company Y is holding company of

company X. Y by itself does not satisfy any of the 3 triggers referred to above.

Will Company Y be covered by the CSR Rules?

No. The applicability of CSR requirements comes by way of section 135 of the Act. The section is quite clear – if the company by itself fulfils the conditions, it will be covered by the CSR provisions. There is an apparently confusing reference in Rule 3 (1) to holding and subsidiary companies – that does not anyway expand the applicability of Section 135 to such companies who are otherwise not included in Section 135. The interpretation therefore is – if the company is otherwise covered by Section 135 on standalone basis, the mere fact that the holding or subsidiary company is also covered by the section does not give it any relief from the section. That is, the section will have to be complied with by every company on standalone basis.

6. Which year’s profits, turnover and net worth will be reckoned for applying

the CSR triggers?

Unlike lots of other provisions of the Act, the triggers for applying Section 135 are a part of the law itself rather than laid in the Rules, thereby going against one of the basic recommendations of the Irani Committee that monetary limits are dynamic and should be kept in the rules, rather than in the law. Section 135 (1) defines the trigger limits. As per the erstwhile provisions of Section 135 of the Act, 2013, the law was not so clear on the base year to be considered while evaluating the applicability of the CSR provisions. However, as per the latest amendment made by Companies (Amendment) Act, 2017, the provisions have been substituted to clarify that the net profit, turnover and net worth for the CSR applicability shall be taken as per the immediately preceding financial year.

The aforesaid amendment has been made effective from 19th September, 20181. Accordingly, as on 1st April 2019, the reference of turnover, net profits and net worth shall be as per the financial statements for FY 18-19.

7. A company has been incorporated less than 3 years ago. However, the

company meets the turnover trigger. Is the company required to comply

with the CSR provisions?

As per the amended provisions of Section 135(1) of the Act, 2013, the triggers for evaluating CSR applicability has been shifted from “any financial year” to “immediately preceding financial year”. Accordingly, even if the Company has been incorporated for less than 3 years ago, however, it fulfils the criteria mentioned in sub-section (1), it has to comply with CSR provisions. Here, another point to be noted is that, though the Company will be required to constitute a CSR

1 http://www.mca.gov.in/Ministry/pdf/CompaniesAmendAct2017_19092018.pdf

committee, however, there may not be any CSR spending, considering the Company has been incorporated less than 3 years ago. The Companies (Amendment) Act 20192 specifically provides that if the company has not completed a period of 3 financial years, net profit made during such immediately previous years shall be considered. However, this amendment has not yet come into effect.

8. A company satisfies the turnover/net worth trigger but the company does

not have average profits over last 3 years. Does the company have to comply

with the CSR Committee requirements, though it does not have profits?

Once any of the triggers are met as per the immediately preceding financial year, a company is required to constitute a CSR committee. In case, the company does not average net profits over the last 3 years, the Company would not be required to do the necessary CSR spending.

9. Can the company collaborate with other companies to undertake a CSR

project?

Rule 4 (3) states that a company may collaborate with other companies for

undertaking projects or programs or CSR activities in such a manner that the CSR

committees of respective companies are in a position to report separately on such

projects or programs in accordance with the rules.

CSR committee:

10. What are the composition requirements of the committee?

a) Listed companies – Three or more directors, out of which at least one should be independent.

b) Private companies having debt securities listed –

Three or more directors, out of which at least one should be independent.

c) Unlisted private companies having more than 2 directors –

2 https://www.mca.gov.in/Ministry/pdf/AMENDMENTACT_01082019.pdf

Three or more directors, out of which at least one should be independent, however if there is no requirement of having independent directors in the company, then any 2 or more directors.

d) Unlisted private companies having only 2 directors – The rules explicitly permit both the directors to be on the Committee.

11. Will a deemed public company require to have an independent director in

its CSR committee?

No. Structure of a deemed public company remains unchanged, so they need not appoint an independent director. However they shall be liable to comply all the disclosure requirements that applies on a public company.

12. When should the CSR Committee hold its first meeting?

This is not laid by the law; however, since the first task of the Committee is to frame the policy, the Committee should hold its meeting soon after it is constituted.

13. How often does the CSR Committee have to meet?

There is no prescribed number of meetings under the Act. However, considering the major agenda being fixation and allocation of budget and monitoring the CSR activities on which the company has spent funds, the number of meetings should be such so as to allow the fulfilment of the basic agenda of the committee.

14. What is the quorum for the committee meeting?

There is no quorum rule; however in our view, the general quorum rule for board meetings under section 174 of the Act, 2013 should apply here as well.

15. Is the CSR committee required to be constituted every year?

There is no question of any committee being constituted/appointed or reappointed every year. The Committee is required to be constituted only once when the threshold under sub-section (1) of section 135 of the Act is met. However, in case of any company ceasing to fulfil the conditions for three consecutive financial years, the CSR committee of such company may be dissolved and re-constituted on subsequent fulfilment of the said conditions.

16. Can there be a centralized CSR committee for a company having several

group companies?

Based on the same principle as stated in question no. 5, every company shall have to form its own CSR committee, if it hits the applicability of Section 135(1). Although the company can collaborate with its group company to make CSR spending but the question of having centralized CSR committee may not be advocated for reasons like priority projects, budget allocation, monitoring mechanism, etc.

CSR policy:

17. By when does the Committee have to frame a CSR Policy?

Once again, there is no time limit laid by law, but in view of the target for spending during the year, we are of the view that the Committee should move expeditiously to frame the policy in the first quarter itself from the date of formation of the CSR committee.

18. What are the contents of the CSR policy?

The following is our compilation based on CSR Rules and also best practices:

a. A list of CSR projects or programs that the company plans to undertake falling within the purview of Schedule VII of the Act, specifying the process of execution of such project or project and the implementation schedule of the same.

b. Process of monitoring the projects or programs listed down.

c. That the surplus arising out of the CSR projects or programs shall not form part of the business profit.

19. Does the policy have to be approved by the Board?

Section 135(4) of the Act, 2013 says that the Board of Directors shall approve the CSR policy after considering the recommendations of the CSR committee and record the same in its report and publish the same in its website, in case the company has one. Further, rule 9 of the CSR Rules also prescribe that the Board should approve the CSR Policy.

20. Whether any time limit has been specified when exactly we need to spend

on CSR, like before holding the BM for approval of accounts, or 3 months

from the closure of the FY or we can spend anytime throughout the FY?

Though nothing has been expressly mentioned in the Act or in the CSR rules, but in our view the policy should be approved expeditiously and the amount can be spent anytime throughout the F.Y.

21. Is there any format of CSR report?

The Ministry has laid down the format vide the CSR Rules, in which the company is required to report the CSR expenditure.

CSR spending:

22. Who takes a view on whether the proposed spending is eligible for CSR or

not?

While the CSR committee recommends the budget for spending on CSR activities to the board, it generally takes into consideration the complete description of the activity proposed to be undertaken and the CSR budget is allocated only if the proposed activity is well covered under Schedule VII.

23. Is there a need to take anyone’s approval as to whether the project qualifies

for CSR or not?

No, there is no such approval needed. As the matter is in public domain, the board/company may have to face questions from shareholders, public or regulators if the spending is not for an eligible project.

24. What is the meaning of “spend”? Is it revenue expenditure or does it include

capital expenditure as well?

The Act just provides for spending but spending here in our view can be both revenue and capital expenditure. Expenditure is what is paid out or away and is something which is gone irretrievably. So, it can be either revenue or capital in nature. Now nature of expenditure whether revenue or capital is circumstantial and depends upon the facts and circumstances of the case as per SC ruling in case of Bombay Steam Navigation Co. P. Ltd3.

3 https://indiankanoon.org/doc/1043522/

CSR spending can be in any form-either building up the infrastructure for the activity or incurring recurring expenditure for maintaining the project. Such expenditure towards a capital asset of the company shall provide enduring benefits to the Company and will be capital in nature. Whereas an amount spent by the assessee on acquisition of capital assets by a third party may be deductible as revenue expenditure. Reliance can be placed on Supreme Court’s decision in case of Associated Cement Companies Ltd4. So, as long as the company is incurring such expenditure in its own capacity it will be treated as capital expenditure, whereas, if such expenditure is made by the company on behalf of a third party the same would qualify to be revenue expenditure. Corporate Laws & Corporate Governance Committee, ICAI5 (‘ICAI FAQs on CSR’), has similar views wherein it has clarified that CSR spend can be both revenue and capital. It has explained when it can be considered capital and revenue. In case the expenditure incurred by the company is of such nature which may give rise to an ‘asset’, it should be recognised by the company in its balance sheet, provided the control over the asset is with the Company and future economic benefits are expected to flow to the company. Where any CSR asset is recognized in its balance sheet, the same may be classified under natural head (e.g. Building, Plant & Machinery etc.) with specific subhead of ‘CSR Asset’ if the expenditure satisfies the definition of ‘asset’. For example, a building used for CSR activities where the beneficial interest has not been relinquished for Lifetime by a company and from which any economic benefits flow to a company, may be recognised as ‘CSR Building’ for the purpose of reflecting the same in the balance sheet. If an amount spent on an asset has been shown as CSR spend, then the depreciation on such asset cannot be claimed as CSR spend again. Once cost of the asset is included for CSR spend, then the depreciation on such asset will not be included for CSR spend even if the asset is capitalized in the books of accounts and depreciation charged thereon. Where an expenditure does not give rise to an ‘asset’ as explained above, the same may be treated as expenditure of revenue nature. Therefore, CSR spend amount needs to be appropriated unless otherwise its incurred by the company as part of its normal business activity which also qualifies for CSR activity, in which case, it will continue to be charged to P&L in the normal course.

25. Will CSR spend be an appropriation or a charge on P&L?

According to ICAI FAQs on CSR, the amount spent on CSR needs to be appropriated unless otherwise it is incurred by the company as part of its normal business activity which also qualifies for CSR activity, in which case, it will continue to be charged to P&L in the normal course.

26. Whether contribution to corpus of the trust made by the company amounts

to spending?

4 https://indiankanoon.org/doc/911769/ 5 https://resource.cdn.icai.org/37177clcgc26616.pdf

Yes, it will amount to spending.

27. Is CSR activity outside India also considered?

No, the Rules specifically provide for CSR spending in India. Hence, CSR spending outside India is excluded from the spending limit.

28. What is the meaning of capacity building spending referred to in Rule 4 (6)?

The expenditure on training the CSR staff regarding the CSR project. However, such expenditure is not to exceed 5% of the total CSR expenditure of the Company in one financial year.

29. CSR activities shall not include activities exclusively for the benefit of

employees and their families but can employees not at all benefit from the

company’s CSR activities?

In our view this shall not be the case if employees participate in activities which are generally open for all they can also benefit themselves from such activity as it is not exclusively conducted for them only. ICAI FAQs on CSR further clarifies that projects or programmes or activities that benefit only the employees of the company and their families shall not be considered as CSR. However, programme or activities that are for the benefit of all, but, which also includes some employees or their families will still be considered as CSR as long as such benefits are not exclusively for the benefit of such employees. For example, recreational facilities provided for employees and their families in the employee quarters shall not be considered as CSR. However, if the Company maintains say a stadium for promotion of sports in a city used by residents of that place and not exclusively by its employees then such spending shall be still considered as a spending towards CSR.

30. What are the implications of not spending?

Second proviso to sub-section (5) provides that in case any amount as required is not spent in a particular year, the same is to be disclosed in the board’s report alongwith the reasons thereof. However, the Rules further prescribe that the board should also report the unspent amount. Hence, disclosure of the amount not spent and the reasons for the same are the implications.

31. How will a company make disclosure of CSR spending?

According to ICAI, item 5 (a) of the General Instructions for Preparation of Statement of Profit and Loss under Schedule III to the 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. The note should also disclose the details with regard to the expenditure incurred in construction of a capital asset under a CSR project.

32. Whether CSR spending are to be shown in books of accounts under a

separate CSR head or are they to be included under the normal heads of

accounts or are they to be shown in the notes to accounts?

According to ICAI, all expenditure on CSR activities that qualifies to be recognized as expense may either be recognized as a separate line item as ‘CSR expenditure’ or under natural heads of expenses in the statement of profit and loss with disclosure of the break-up and the total amount spent on CSR activities during the year. Some of the items which are charged to the profit & loss account in the normal course, meeting the criteria for CSR expenditure, would also be eligible to be considered as a CSR expenditure. Disclosure of CSR spend is already covered above.

33. Can CSR spending be carried back, that is, to fulfil the unspent amount in any

year?

In case a company spends any amount in excess of its CSR budget for any financial year and takes the credit for such excess expenditure in the next financial year in such a way so as to allow it to spend lesser amount in such subsequent financial year to the extent of credit taken for the excess expenditure made is regarded as carrying forward of CSR spending. The FAQs issued by MCA on 12th January, 2016 have clearly stated that a company cannot carry forward any excess expenditure made by it in one financial year for the CSR obligations to be delivered by it in the next financial year (refer Q 16). The excess spending has to be over and above the CSR budget for that financial year. As regards carrying backward of CSR, the same implies taking credit of the excess expenditure in subsequent year with that of the less amount not spent by the company for the previous financial year with respect to its CSR budget. In our view, CSR spending cannot be carried back.

34. Can CSR spending be in kind?

It is to be noted that the CSR provisions require the companies to spend on CSR activities. The law is silent in the manner of spending, i.e. spending cash or giving

in kind. However, spending in kind cannot be taken to mean that a company makes use of its own stock (whether or not in use) kept in its godown or its own products for delivering its CSR obligations. Further, please note that in case of any spending in kind, the amount spent should be based on the cost of the material and not selling price.

35. Can a company undertake CSR activity by using some of its fixed assets, say

those assets which are not in use?

There may be interesting instances of use of the company’s fixed assets – say, old office furniture or computers/laptops that the company does not intend to use, if the company runs educational programs for rural development. There are two situations under the same.

a) When the fixed assets are manufactured by the Company itself. For example, a

company engaged in making of laptops/ electronics. As per Rule 2 (1) (e), a company cannot pursue a CSR activity which is in its normal course of business. Hence, the in the above scenario, donation of laptops/electronics by the company manufacturing will not be a CSR activity if it considers the price at which it sells such fixed asset as the CSR expenditure. Cases where a company takes the cost incurred by it to manufacture such asset while it distributes it during its CSR programme, the same should be included in CSR.

b) In case it is not in normal course of business, then of course the same may be a

CSR spending.

c) In either case, the cost for the purpose of computing the spending should be the WDV of the asset.

ICAI FAQs on CSR also clarified that CSR activities shall exclude activities

undertaken in pursuance of its ‘normal course of business’. For example, an

electricity distribution company connecting the last house in a village cannot

classify such expense as CSR. Similarly a tea plantation company planting trees

and shrubs in close proximity to such tea plantations cannot be classified as CSR

spending since they are in the ordinary course of business of such businesses.

Similarly, programmes or projects or activities that are carried out as a pre-

condition for setting up a business or as part of a contractual obligation

undertaken by the company or in accordance with any other law, should not be

considered as CSR.

Further, ICAI is of the view that if any company supplying its goods or services manufactured/ provided by it free of cost or at a concessional rate to people affected by natural calamities like flood, earthquake etc., it will qualify as a CSR expenditure if it is within the areas covered by Schedule VII and is as per CSR policy approved by the Board of Directors.

36. How would average net profit be computed for the purpose of CSR under the

Act, 2013?

Explanation to Section 135 states that – “For the purposes of this section “average net profit” shall be calculated in accordance with the provisions of section 198.” Further, as per Rule 2(f) of the Companies (Corporate Social Responsibility Policy) Rules 2014, "Net profit" means - “the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include the following, namely :- (i) any profit arising from any overseas branch or branches of the company whether operated as a separate company or otherwise; and (ii) any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act” Therefore, while computing average net profits under section 198, the Company also has to ensure compliance with Rule 2(f), as stated above. First proviso to this Rule renders – “Provided that net profit in respect of a financial year for which the relevant financial statements were prepared in accordance with the provisions of the Companies Act, 1956, (1 of 1956) shall not be required to be re-calculated in accordance with the provisions of the Act:” A combined reading of the two explains that the average net profit for the purpose of determining the spending on CSR activities is to be computed in accordance with the provisions of Section 198 and will also be exclusive of the items given under Rule 2(f) of the CSR Rules. Where the net profits have been calculated in compliance with the provisions of Companies Act, 1956 (under section 349) the same need not be re-calculated in accordance with the provisions of the Act, 2013, i.e. as per section 198 of the Act, 2013. ICAI further clarified that Net Profit for the purpose of calculating CSR spend shall not include any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise. In addition any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act as well as any dividend received from a company incorporated outside India shall also be excluded from the Net Profit. This is built on the rationale that CSR spend outside India does not qualify as CSR spend under Section 135 of the Act, 2013. As a corollary, income earned outside India shall also not be considered for determining CSR spend in India.

37. Whether the proposed budget for a long term CSR project whose cash flow is

spread over a long period, is required to be approved by CSR Committee on

yearly basis?

The proper course of action would be to decide the annual fund outlay considering the various factors mentioned thereunder. The same can be achieved by bifurcating the total budget outlay of the project (for the entire life of the project) for each year of the life of the project at the time of according approval to the project by the Committee and the Board. In such a case, the disbursement made in a particular year would form part of the CSR budget for that particular year. However, if the Company chooses to approve the budget for the entire life of the project at the initial phase itself without allocating the actual disbursement in each year, the entire budget outlay of the project (for the entire life of the project) shall be considered as CSR budget for that year for which explanation in the Board’s Report will also be required. Further, even if the Company chooses to carry forward the unspent amount (which will be obvious considering it’s a long term project), the same will not be able to accommodate the next year’s liability as clarified by the Ministry through its General Circular dated 12th January, 2016.

38. Whether the attachment "Details of other entity(ies)" is mandatory in e-

Form AOC-4 in case any amount of CSR is not spent directly by the company?

As per the help kit for e-Form AOC-4, "Details of other entity(ies)" is an attachment mandatory in case any amount of CSR is spent not directly by the company. Along with the details of implementing agency(ies) under Point (5) - Segment III, a statement giving details of all such implementing agency(ies) is also required to be attached as a mandatory attachment. Since, no format is prescribed under Act, 2013, in our view, a statement indicating name, address and email address of the implementing agency (ies) should suffice.

39. If current Financial Year’s net profits are less than 5 crore, whether company

will be required to make CSR expenditure for next Financial Year?

Rule 3(2) of the Companies (CSR Policy) Rules, 2014 states that: "(2) Every company which ceases to be a company covered under subsection (1) of section 135 of the Act for three consecutive financial years shall not be required to - (a) constitute a CSR Committee; and (b) comply with the provisions contained in sub-section (2) to (5) of the said section,

till such time it meets the criteria specified in sub-section (1) of section 135."

Accordingly, applicability of CSR is not required to be checked every year except where the company ceases to be covered under section 135 (1) for 3 consecutive financial years. In the instant case, even though current Financial Year’s net profits are less than 5, the Company will still be covered under section 135 (1) of the Act,

2013 and hence be required to spend in accordance with section 135 (5) of the Act, 2013 provided it has a positive balance on the average to be spent.

FAQs on proposed changes to CSR provisions under the

Companies (Amendment) Act, 2019

40. What is the change brought about under the Companies (Amendment) Act,

2019?

The following amendments have been proposed under the Companies (Amendment) Act, 2019:

The calculation of the minimum spending under sub-section (5) now allows company in existence for less than three years also to compute their CSR budget.

In addition to explaining the reason for not being able to spend the CSR budget, the unspent amount has to be treated in the following manner:

o For ongoing projects – the unspent amount has to be transferred to a special account ‘Unspent Corporate Social Responsibility Account’ on fulfilment of certain conditions (to be brought through changes in the rules) within 30 days from the end of the financial year for which such unspent amount pertains and the same has to be utilised within a period of three years from such transfer. Any amount lying in such account at the end of the third year will be transferred to a Fund referred in Schedule VII.

o For non-ongoing projects – the unspent amount in relation to a project which is not ongoing in nature is required to be transferred to any Fund referred in Schedule VII.

Contravention shall attract a fine on the company which shall not be less

than INR 50 thousand but may extend to 25 lakhs. Also, the officer in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.

41. Does the implementing agencies or trusts need to open ‘Unspent CSR

Account’ in case there is any unspent amount left with it in relation to an

ongoing project?

Several companies have group-wide channelizing agencies where all the group companies transfer a lump-sum amount to the trust or other implementing agencies, which in turn, spend the amount to defined CSR activities as per

Schedule VII. In this regard, the question that arises is whether as per the latest amendment which requires companies to transfer unspent CSR into escrow account/ PM National Relief Fund, be applicable for implementing agencies or trusts/society incorporated for the purpose of CSR. In case of Trust/society/Section 8 companies incorporated for undertaking CSR activities by the Company or the group as a whole is nothing but a conduit for channelizing CSR contributions. This means that transferring funds to the trust/society is nothing but parking of CSR funds with a trust/society/section 8 company whether at own level or group level and still having full control over the money. However, going by the intent of law, it definitely does not intend simply to earmark the requisite amount towards CSR in a trust or society but to actually utilize it towards the objects as mentioned in Schedule VII. In case the Company executes its CSR expenditure through an in-house trust/society/section 8 company and any amount remains unspent during the year, the same shall be required to be transferred to unspent CSR account/fund as the case maybe. In this regard, the position will be clear, once the amended Rules are in place as

the provisions are yet to be made effective.

42. Is the unspent amount to be carried forward?

As per best practices, we will say yes. Further, the format for annual report on CSR activities requires the disclosure of cumulative expenditure to be disclosed. This means that the unspent amount on a particular project during a particular year will have to be carried forward so as to give the cumulative figure on the project. Further, as per the recent amendments introduced in the Companies (Amendment) Act, 2019, the provisions pertaining to CSR has been strengthen to ensure transparency where companies are not able to spend the targeted amount, which is then required to be either transferred to any fund mentioned in Schedule VII or set aside such unspent amount in a scheduled bank. Hence, now if there is any unspent amount of CSR with the Company or with any implementing agency, mere disclosure in the Board's Report shall not suffice. Accordingly, the following has to be ensured: 1. Unspent amount relates to an ongoing project- Transfer the unspent amount

within 30 days of the end of the FY to Unspent Corporate Social Responsibility

Account opened in a scheduled bank (Note: the said amount has to be spent within

3 years, failing which the amount will be transferred to funds specified in Schedule

VII) within next 30 days from the date of completion of the 3rd financial year.

2. Unspent amount does not relate to an ongoing project- Transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year

Though, the provisions are yet to be made effective, as per best practices, we will

suggest to transfer unspent amount to Unspent Corporate Social Responsibility

Account. Further, as per the format for annual report on CSR activities, disclosure

of cumulative expenditure has to be disclosed. This means that the unspent

amount on a particular project during a particular year will have to be carried

forward so as to give the cumulative figure on the project.

However, as per the guidance note by MCA as well as ICAI, any excess amount

spent (i.e., more than 2% as specified in Section 135) cannot be carried forward to

the subsequent years. However, the company is entitled to disclose in their Annual

Report of subsequent years any such excess spending of previous years while

giving reasons for not spending in those later years. Further, any shortfall in

spending in CSR shall be explained in the financial statements and the Board of

Directors shall state the amount unspent and reasons for not spending that

amount. Any such shortfall is not required to be provided for in the books of

accounts. However, if a company has already undertaken certain CSR activity for

which a contractual liability has been incurred then, a provision for the requisite

amount payable to record that liability needs to be recognized as per the

applicable Accounting Standards.

43. If the total cash outflow by the Company for the long term CSR projects is

spread over a long period, say 3 years, will it be in compliance with the

provisions of the Act, 2013, if the proposed budget is lying unspent as on

Financial Year end?

While the current set of provisions is based on the COREX principle, the Board will have to assign explanation/ reasons for the failure in spending the minimum allocated amount by the Company. Therefore, if the Board gives a proper explanation, the same will not be a non- compliance till the amendments are made effective. The existing provisions of sub-section (5) gives primacy to the CSR policy of the company – this is evident from the language of the provision which states that “the Board of every company shall ensure that the company spends at least two per cent. of the average net profits of the company in pursuance of its Corporate Social Responsibility Policy”. The CSR policy may provide for spending higher than 2 per cent of the average net profits; however, the policy cannot provide for spending less than 2% as above. If the CSR policy has voluntarily targeted spending a higher amount, the provisions of sub-section (5) will relate to such higher amount. Furthermore, the Board is responsible for ensuring spending of minimum

allocation of net profits by the company for CSR cause, any deviation from which

requires an explanation in the Board’s Report also.

However, if we go by the proposed amendments, if the unspent amount relates to

an ongoing project, the same has to be transferred to the Unspent Corporate Social

Responsibility Account within 30 days from the end of such financial year.

However, if the project is not an ongoing one, then the same shall be transferred

to any of the Funds referred to under Schedule VII of the Act, 2013.

44. What are the implications of not spending post the amendments coming into

effect?

The proposed amendments intend to switch the CSR provisions from COREX to a “comply or be penalized” provision. Any non-compliance with the new requirements of law may attract the following penal provisions:

i. Company to pay a fine of Rs. 50000- 25 lacs ii. Every officer to pay a fine of Rs. 50000- 5 lacs or imprisonment of upto 3

years, or both.

Further, as per the update on the implementation status of the amended

provisions, it has been clarified that CSR provisions will not carry criminal liability.

Hence, the final version of the amendments in this regard are yet to freeze.

45. Will the unspent amount of previous year also needs to be transferred to the

Fund?

Since the provisions that will be enacted prospectively, in our view, the unspent

amount of previous years should not be transferred. Further, clarity is awaited on

the same by MCA.

46. Which projects will be considered as an on-going project?

We assume that the amended Section/ Rules will prescribe the parameters to

determine whether a project is on-going or not. However, one will be able to

determine a project as an on-going project, only once the rules are in place.

47. As per provisions of section 135, the Board has to report the amount not

spent on CSR. Is non-expenditure considered as non-compliance? What will

be the role of auditor on non-compliance? Will he qualify his report?

The approach of CSR is clearly COREX i.e. based on the principle of comply or explain. The section and the rules nowhere describe the non-expenditure as non-compliance but simply require the reasons to be disclosed alongwith the amount unspent in the prescribed format as annexed to the Rules. Therefore, as long as the company explains the reason for not being able to spend on CSR in its board’s report, there is no question of any non-compliance and hence, no qualification remark by the auditor on the same should be given.

Once the amendments brought in by the Companies (Amendment) Act, 2019 become effective, the unspent amount shall be treated as following:

a) Transfer of the unspent CSR amount to a Fund as mentioned in Schedule VII of the Act, 2013, where it does not relate to any on-going projects within 6 months from the end of the financial year.

b) Transfer of the unspent CSR amount to Unspent Corporate Social Responsibility Account where it belongs to an on-going project, within 30 days of the end of the financial year. Further, such amount is to be spent in the next 3 financial years, failing which the same shall be transferred to a Fund after the end of the 3 financial years.

48. What will be the accounting implications w.r.t. transfer of funds to the

unspent CSR account?

Section 135(6) requires companies to deposit unspent CSR funds in an escrow account to separate its CSR budget lying in its regular bank account so that the said money does not get co-mingled with the other funds and is parked and earmarked separately. Accordingly, the transfer of CSR funds from regular bank account of the company to another bank account (unspent CSR account) of the company is the only accounting implication.

49. Can the funds lying unutilized in the unspent CSR account be used for making

investment such as Fixed Deposit? If yes, whether the income/interest

generated from such investment be used for any other business use?

Law makes a distinction on the fund treatment for ongoing and not ongoing projects. For projects which are not ongoing, the unutilised part is to be transferred to the Fund referred to under Schedule VII, immediately within 30 of the end of the financial year, so there is no question of parking it in under an FD. For ongoing projects, the provision is to park it in a separate bank account in such a manner so as to allow usage of the funds within a period of 3 years. Accordingly, the unutilised part of the funds may be utilised for making investment. However, such an investment should allow the free and uninterrupted usage of the said amount during the period of 3 years. For example, parking in an FD with sweep-in and sweep-out facility which will allow the free and uninterrupted usage of said amount.

Further, the intent of law for separation of funds is not to create bankruptcy

remoteness or any liability for the company for which it has to create provision.

Hence, any interest income from such sweep FD may be used for any business

purpose.

50. Whether a committed disbursement would mean the project is ‘on-going’?

There might be situations where a company has agreed for a disbursement of

amount before the end of the financial year, however, due to some reasons the

actual disbursement has not been made or the project for which the disbursement

has been committed has not started. In a situation where the former is the case,

companies might be in a hassle-free situation where all they are required to do is

identify projects and fix up an amount for spending towards it. Further, where the

latter is the case, and the project has not started, it will not be correct to regard

the same as “on-going”.

However, the actual meaning of “on-going” will be clear only once the rules are in

place.

51. Since the company is required to spend the unspent amount in next three

financial years, does that mean that the maximum period for an on-going

project can be 3 financial years upon which the amount will be transferred

to the Fund?

This may not be the intent of the law, as the Act cannot force a Company to

complete a project within 3 years where the expected time of completion of the

project itself is 5 years. This is because the activities mentioned in Schedule VII

may have a longer gestation period. Therefore, it would be completely counter-

intuitive if at one hand, the provisions of law are prescribing companies to spend

on long term activities and on the other hand, restrict CSR spending to 3 years,

post which the funds will be transferred to the Fund (irrespective of whether the

project is completed or not).

In any event, clarity on the same is awaited from MCA.

52. Whether a company is required to open “Unspent Corporate Social

Responsibility Account” project-wise or whether there will be a single

account managed for all on-going projects?

The Companies (Amendment) Act, 2019 does not provide any clarity on this

matter, it will be clarified only when the rules are in place.

Taxation aspects:

53. What will be tax implications on the CSR spending by the Company?

MCA General Circular dated 12th January, 2016 does not provide any specific tax exemption. However, the language of the law seems to suggest that PM’s National Relief Fund, Rural Development Projects will qualify for deduction. In furtherance to this, section 80G of IT Act allows deductions to various funds which includes:

Funds Included Prime Minister's Armenia Earthquake Relief Fund

National Children's Fund

National Defence Fund set up by the Central Government

Indira Gandhi Memorial Trust

Prime Minister's National Relief Fund Rajiv Gandhi Foundation National Defence Fund National Blood Transfusion Council Jawaharlal Nehru Memorial Fund Army Central Welfare Fund Prime Minister's Drought Relief Fund National Illness Assistance Fund

As per the aforesaid table, Section 80G of the IT Act enlist funds where deduction from income tax shall be available. In case an activity is not covered u/s 80G, then if such an activity has capital expenditure which is deductible u/s 35 etc. then it is deductible expenditure otherwise no deduction or exemption for such capital expenditure will be available. Where it is revenue expenditure then it shall not be deductible u/s 37(1) as CSR Rules provides that expenditure in normal course of business is not to be considered and Section 37(1) allows expenditure which are wholly and exclusively for the purpose of business but cases in the past have shown that expenditure which is for commercial expediency of the assessee’s business may qualify for deduction u/s 37 of the IT Act. So until CBDT comes up with a notification and clears the position companies would expend on activities which are covered U/s 80G of the IT Act.

Note: The aforesaid FAQs are pro-bono and meant for academic understanding and not to be relied upon for legal opinions. Please approach your legal professional for professional advice.