CSR is generally understood as being the way through which a company achieves a balance of economic, environmental, and social imperatives (“Triple-Bottom-Line- Approach”), while at the same time addressing the expectations of shareholders and stakeholders.
The introduction of Corporate Social Responsibility (CSR) through the Companies Act 2013 has established an obligation on companies in our nation to develop a well-defined CSR framework. CSR is all about corporate giving back to society. It’s a legal responsibility that casts upon a corporate body to address the socio-economic-environmental issues being faced by the nation.
Organizations must remain attentive to their corporate social responsibility obligations, as neglecting these duties may result in severe penalties and legal repercussions. Thus, a thorough understanding of legal principles, paired with a comprehensive CSR strategy, is vital
for maintaining effective corporate governance.
Let’s have a look at the some of the important provisions of section 135 as below-
- CSR Applicability (sub-section 1 of section 135) Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or net profit of rupees five crore or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more Directors, out of which at least one director shall be an independent director.
- CSR Obligation (sub-section 5 of section 135) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent 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, in pursuance of its Corporate Social Responsibility Policy. The company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities.
- If the company fails to spend such amount, the Board shall, in its report made under
- clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.
Transfer of Unspent Amount of other than ongoing project (sub-section 5 of section135)
Unspent amount pertaining to any project other than ongoing project, should be transferred to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.
As per General Circular No. 14 /2021 for FAQs on CSR, S. No. 3.15 –
Contributions to the following funds shall be admissible as CSR expenditure:
- Swachh Bharat Kosh
- Clean Ganga FundPrime Minister’s National Relief Fund (PMNRF)
- Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund)
- (v) Any other fund set up by the Central Government and notified by the Ministry of Corporate Affairs, for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women.
- Set off for excess amount spent (sub-section 5 of section 135 & sub-rule 3 of Rule 7) Where a company spends an amount in excess of requirement provided under sub-section (5) of section 135 , such excess amount may be set off against the requirement to spend under sub-section (5) of section 135 up to immediate succeeding three financial years subject to the conditions that –
- The excess amount available for set off shall not include the surplus arising out of the CSR activities, if any, in pursuance of sub-rule (2) of this rule.
- The Board of the company shall pass a resolution to that effect.
Transfer of Unspent Amount of ongoing project (sub-section (6) of section 135) Any amount remaining unspent pursuant to any ongoing project, undertaken by a company in pursuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account.
Such an amount shall be spent by the company within a period of three financial years from the
date of such transfer.
Remaining unspent amount, if any shall be transferred to the Fund specified in Schedule VII,
within a period of thirty days from the date of completion of the third financial year.
Penalty Provision (sub-section 7 of section 135)
The Companies (Amendment) Act, 2020 Notification dated 28th September 2020 substituted
sub-section 7 of section 135 as below and this amendment is effective from 22nd January 2021.
As per sub-section 7 of section 135 of companies act, 2013, If a company is in default in
complying with the provisions of sub-section (5) or sub-section (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, as the case may be, or one crore rupees,
whichever is less
and
Every officer of the company who is in default shall be liable to a penalty of one-tenth
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 two lakh rupees, whichever is less
Earlier If a company contravenes the provisions of sub-section (5) or sub-section (6),
the company shall be punishable with fine which shall not be less than fifty thousand rupees
but which may extend to twenty-five lakh rupees and every officer of such company who is 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.
- In case of non-compliance with any other provisions of the section or rules, the provisions of section 134(8) or general penalty under section 450 of the Act will be applicable.
- Further, in case of non-payment of penalty within the stipulated period, the provisions of section 454(8) will be applicable.
Section 134(8) specifies penalties for non-compliance, including a penalty of three lakh rupees
for the company and fifty thousand rupees for each officer of the company in default.
After 2021 amendments, there are several companies which had to pay hefty penalties for non-
compliance of section 135.
- In case of AECOM INDIA PRIVATE LIMITED, they spent Rs. 65,53,120/- on account of CSR during the F.Y. 2021-22. Subsequently they noticed a calculation error and as per the revised calculation the spending requirement was Rs. 71,88,446/- which resulted in an underspending of Rs.6,35,326/- towards its CSR obligation for F.Y. 2021-22. The company came to know about the unspent amount of Rs. 6,35,326/- after the expiry of time limit of 6 months from end of Financial Year, provided in the law for transfer of unspent amount to the funds specified in Schedule VII.
Subsequently, the company transferred Rs. 6,35,866 against unspent amount of Rs. 6,35,326/-
to "PM Cares Fund", a fund specified under Schedule VII of the Companies Act 2013 on December 09, 2022. Then, a show cause notice was issued by the Adjudicating Authority to the
Company and after hearing the party levied penalty. The Adjudicating officer has imposed a
penalty of Rs. 12,70,652/- on Company and Rs. 63,533/- each on the two Whole Time
Directors.
You may read full order here
https://www.mca.gov.in/bin/dms/getdocument?mds=vTNSuXkRRPdXOBDeFlQndw%253D%253
In another case, The Adjudication officer has imposed a penalty of Rs. 29,00,000/- on
Company and Rs. 1,45,000/- on each Directors and Company Secretary of the Company
in the matter of M/s. Takraf India Private Limited bearing order no. File No ROC/CHN/RAKRAF/ ADJ. Oder/ Sec.135(6)/2023 8/2023 on adjudication of penalty under section 454 of the Companies Act 2013 read with Rules 3 of the Companies (Adjudication of Penalties) Rules 2014 for violation of provisions of section 135(5) of the Companies Act 2013.
The company was required to spend Rs.16,33,276 during the financial year 2020-21 as part of
its corporate social responsibility requirements in compliance with the provisions of section 135
of the Companies Act 2013 relating to CSR provisions. But the Company had spent Rs.1,83,276
during the financial year 2020-21 on an ongoing project duly identified by the board of
directors of the company and could not spend the balance amount of Rs.14,50.000/- on or
before 31st March 2021.
The company had failed to comply with the requirements of opening a special bank account
and transferring the unspent CSR obligation amount of Rs. 14,50,000 within the timelines as
prescribed under the act.
In this case, the company, its managing director, three of the directors and the company
secretary of the company were penalised for not transferring the unspent CSR amount within
the prescribed time limit and utilizing the same in the subsequent year. Due to the non-transfer
of the unspent amount to the specified fund, the company, its directors along with the
company secretary were to face a penalty amounting to Rs. 36.25 lacs – two and a half times
the unspent amount which was not transferred.
You may read full order here
https://www.mca.gov.in/bin/dms/getdocument?mds=O4vm6k9UcXQZGTJNF7Hiqg%253D%253
