FAQs on Corporate Social Responsibility
As per Section 135 of the Companies Act, 2013, it is a mandatory requirement for Companies to spend at least 2% of the average net profits of the preceding three years towards ‘CSR Expenditure’ as per the CSR policy and annual action plan once it meets the criteria specified in sub-section 1 of section 135 of Companies Act, 2013 and Rule 3 of Companies (CSR Policy) Rules, 2014.
In this article, we have tried answering some frequently asked questions on section 135.
- Section 135 is applicable to Foreign company?
Yes, as section 135(1) of the Act and Rule 3 of Companies (CSR Policy) Rules, 2014 commences with the words “Every company….” thus the provisions apply to Foreign Company as well.
- To check applicability of CSR obligation, need to check immediately preceding financial year only or three immediately preceding financial years?
For checking the applicability of section 135, only immediately preceding financial year’s net profit, net worth and turnover are required to be checked as per section 135 (1) of the act. While calculating the CSR obligation, net profits of the company made during the three immediately preceding financial years require to be checked as per Section 135 (5) of the act. Profits for this purpose shall be calculated in accordance with the provisions of section 198 of the Act
- Ongoing project to be considered financial year wise or Calendar year wise?
As per definition given under section 2 (41) of the Act, the term ‘year’ refers to financial year. Hence, ongoing projects to be considered financial year wise.
- In case of ongoing project if any balance remains in unspent account, can it be used for any other project?
No, it cannot be used for any other projects. As per section 135(6) of the Act, such unspent amount shall be spent by the company according to its Corporate Social Responsibility Policy within a period of three financial years from the date of transferring to Unspent Corporate Social Responsibility Account. Any amount remaining unspent after three financial years, 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.
- Whether company can collaborate with another company for CSR activity and project?
Yes, as per sub-rule 4 of Rule 4 of Companies (CSR Policy) Rules, 2014 a company may collaborate with other companies for undertaking projects or programmes or CSR activities in such a manner that the CSR committees of respective companies are able to report separately on such projects or programmes.
- Can the company claim expenses incurred by implementing agencies for project implementation as administrative overheads?
No, expenses incurred by implementing agencies for project implementation, cannot be claimed by company as administrative overheads.
As per definition given under rule 2(1)(b) of the Companies (CSR Policy) Rules, 2014, “Administrative Overheads” mean the expenses incurred by the company in the general management and administration of CSR functions in the company. It shall not include the expenses directly incurred for the designing, implementation, monitoring, and evaluation of a particular Corporate Social Responsibility project or programme.
- Whether profit arises from surplus of CSR activity form part of profit of the company?
No, the surplus arising out of CSR activities shall be utilized only for CSR purposes.
As per sub-rule 2 of Rule 7 of Companies (CSR Policy) Rules, 2014, any surplus arising out of the CSR activities shall not form part of the business profit of a company. Surplus shall be ploughed back into the same project or shall be transferred to the Unspent CSR Account and spent according to the CSR policy and annual action plan of the company or to be transferred to a Fund specified in Schedule VII within a period of six months of the expiry of the financial year.
- Do Company require to open a separate ’Unspent CSR Account’ for each of the ongoing project?
No, a company can open a single special account, called ‘Unspent Corporate Social Responsibility Account’, for a financial year. A company only requires opening a separate ’Unspent CSR Account’ for each financial year. It is not required to open a separate account for each ongoing project.
- Section 135 is applicable to the holding company, is it automatically applicable to its subsidiary company/ies or vice-versa?
No, as per sub-section 1 of section 135 of Companies Act, 2013 and Rule 3 of Companies (CSR Policy) Rules, 2014, CSR Compliance is appliable to every company which fulfills the criteria specified. The compliance with CSR requirements is specific to each company.
Every company irrespective of whether it’s a holding or subsidiary to another company requires to check for criteria of applicability of CSR obligation & comply with section 135 accordingly.
- Which Penal Section is applicable for non-compliance by a small company?
Sec 135 (7) has introduced monetary penalties for the company and every officer of the company who is in default for non-compliance with the provisions relating to undertaking of CSR expenditure and transfer to Unspent CSR Account/Schedule VII fund (as applicable). This section is applicable to all companies irrespective of type or structure of the company.
Further, readers are advised to go through,
-General Circular- FAQs on CSR issued by MCA dated 25th August, 2021 https://www.mca.gov.in/bin/ebook/dms/getdocument?doc=MzU0NzM=&docCategory=Circulars&type=open
-National CSR Exchange Portal- FAQs on CSR https://www.csrxchange.gov.in/Frontend/faq
-FAQs on CSR by The Institute of Company Secretaries of India https://www.icsi.edu/media/webmodules/FAQs_on_CSR_28-4-2021.pdf
