Section 135 of the Companies Act,
2013 (the Act), requires the Board of Directors of every company having
a:-
·
net
worth 3 below of Rupees 500 crore or
more, or
·
turnover
of Rupees 1,000 crore or more or
·
a
net profit of Rupees 5 crore or more,
during any
financial year1 below,
to ensure that the company spends4 below in every financial year atleast 2% of the average
net profits2 below of the company
made during the three immediately preceding financial years on Corporate
Social Responsibility (CSR) in pursuance of its policy in this regard.
The Act requires such companies to constitute a Corporate Social Responsibility Committee. which shall formulate and recommend to the Board a Corporate Social Responsibility Policy which shall indicate the CSR activities to be undertaken by the company as specified in Schedule VII5 below to the Act.
5.
Schedule
VII
v Activities
which may be included by companies in their Corporate Social Responsibility
Policies
Ø
Activities relating to:—
§ eradicating
extreme hunger and poverty;
§ promotion
of education;
§ promoting
gender equality and empowering women;
§ reducing
child mortlity and improving maternal health;
§ combating
human immunodeficiency virus, acquired immune deficiency
§ syndrome,
malaria and other diseases;
§ ensuring
environmental sustainability;
§ employment
enhancing vocational skills;
§ social
business projects;
§ contribution
to the Prime Minister's National Relief Fund or any other
§ fund
set up by the Central Government or the State Governments for socio-economic
development and relief and funds for the welfare of the Scheduled Castes, the
Scheduled Tribes, other backward classes, minorities and women; and
§ Such
other matters as may be prescribed.
v
Disclosure In financials
Ø
Way
of Disclosure
From the
perspective of better financial reporting and in line with the requirements of
Schedule III in this regard, it is recommended that all expenditure on CSR
activities, that qualify to be recognised as expense in accordance with
paragraphs 10-14 above should be recognised as a separate line item as ‘CSR
expenditure’ in the statement of profit and loss.
Further, the
relevant note should disclose the break-up of various heads of expenses
included in the line item ‘CSR expenditure’.
The notes to
accounts relating to CSR expenditure should also contain the following:
(a) Gross
amount required to be spent by the company during the year.
(b) Amount
spent during the year on:
(c) Details
of related party transactions, e.g., contribution to a trust controlled by the
company in relation to CSR expenditure as per Accounting Standard (AS) 18,
Related Party Disclosures
(d) Where a
provision is made in accordance with paragraph 8 above the same should be
presented as per the requirements of Schedule III to the Companies Act, 2013.
Further, movements in the provision during the year should be shown separately.
Ø
Amount
of Disclosure
Section 135
(5) of the Companies Act, 2013, requires that the Board of every eligible
company, “shall ensure that the company spends, in every financial year, at
least 2% of the average net profits of the company made during the three
immediately preceding financial years, in pursuance of its Corporate Social
Responsibility Policy”.
However, if a
company has already undertaken certain CSR activity for which a liability has
been incurred by entering into a contractual obligation, then in accordance
with the generally accepted principles of accounting, a provision for the
amount representing the extent to which the CSR activity was completed during
the year, needs to be recognised in the financial statements.
Excess Amount:- Since ‘2% of average net
profits of immediately preceding three years’ is the minimum amount which is
required to be spent under section 135 (5) of the Act, the excess amount can
not be carried forward for set off against the CSR expenditure required to be
spent in future.
v
Disclosure
In Directors Report
Section 135
(5) of the Companies Act, 2013, requires that the Board of every eligible
company, “shall ensure that the company spends, in every financial year, at
least 2% of the average net profits of the company made during the three
immediately preceding financial years, in pursuance of its Corporate Social
Responsibility Policy”. A proviso to this Section states that “if the company
fails to spend such amount, the Board shall, in its report … specify the
reasons for not spending the amount”.
The above
provisions of the Act clearly lay down that the expenditure on CSR activities
is to be disclosed only in the Board’s Report in accordance with the Rules made
thereunder.
The proviso
to section 135 (5) of the Act, makes it clear that if the specified amount is
not spent by the company during the year, the Directors’ Report should disclose
the reasons for not spending the amount.
v
Section
198
Ø
(1) In computing the net profits of a company
in any financial year for the purpose of section 197,—
(a) credit shall be given for the sums
specified in sub-section (2), and credit shall not be given for those specified
in sub-section (3); and
(b) the sums specified in sub-section (4)
shall be deducted, and those specified in sub-section (5)
shall not be deducted.
Ø
(2) In making the computation aforesaid, credit
shall be given for the bounties and subsidies received from any Government, or
any public authority constituted or authorized in this behalf, by any
Government, unless and except in so far as the Central Government otherwise
directs.
Ø
(3) In making the computation aforesaid, credit
shall not be given for the following sums, namely:—
(a) profits, by way of premium on shares or
debentures of the company, which are issued or sold by the company;
(b) profits on sales by the company of
forfeited shares;
(c) profits of a capital nature including
profits from the sale of the undertaking
or any of the undertakings of the company or
of any part thereof;
(d) profits from the sale of any immovable
property or fixed assets of a capital nature comprised in the undertaking or
any of the undertakings of the company, unless the business of the company
consists, whether wholly or partly, of buying and selling any such property or
assets:
Provided that where the amount for which any
fixed asset is sold exceeds the written-down value thereof, credit shall be
given for so much of the excess as is not higher than the difference between
the original cost of that fixed asset and its written down value;
(e) any change in carrying amount of an asset
or of a liability recognised in equity reserves including surplus in profit and
loss account on measurement of the asset or the liability at fair value.
Ø
(4)
In making the computation aforesaid, the following sums shall be deducted,
namely:—
(a) all the usual working charges;
(b) directors’ remuneration;
(c) bonus or commission paid or payable to any
member of the company’s staff,
or to any engineer, technician or person
employed or engaged by the company, whether
on a whole-time or on a part-time basis;
(d) any tax notified by the Central Government
as being in the nature of a tax on
excess or abnormal profits;
(e) any tax on business profits imposed for
special reasons or in special
circumstances and notified by the Central
Government in this behalf;
(f) interest on debentures issued by the
company;
(g) interest on mortgages executed by the
company and on loans and advances
secured by a charge on its fixed or floating
assets;
(h) interest on unsecured loans and advances;
(i) expenses on repairs, whether to immovable
or to movable property, provided
the repairs are not of a capital nature;
(j) outgoings inclusive of contributions made
under section 181;
(k) depreciation to the extent specified in
section 123;
(l) the excess of expenditure over income,
which had arisen in computing the
net profits in accordance with this section
in any year which begins at or after the
commencement of this Act, in so far as such
excess has not been deducted in any
subsequent year preceding the year in respect
of which the net profits have to be
ascertained;
(m) any compensation or damages to be paid in
virtue of any legal liability
including a liability arising from a breach
of contract;
(n) any sum paid by way of insurance against
the risk of meeting any liability
such as is referred to in clause (m);
(o) debts considered bad and written off or
adjusted during the year of account.
Ø
(5) In making the computation aforesaid, the
following sums shall not be deducted, namely:—
(a) income-tax and super-tax payable by the
company under the Income-tax
Act, 1961, or any other tax on the income of
the company not falling under clauses (d)
and (e) of sub-section (4);
(b)
any compensation, damages or payments made voluntarily, that is to say,
otherwise than in virtue of a liability such
as is referred to in clause (m) of sub-section (4);
(c) loss of a capital nature including loss on
sale of the undertaking or any of the
undertakings of the company or of any part
thereof not including any excess of the
written-down value of any asset which is
sold, discarded, demolished or destroyed
over its sale proceeds or its scrap value;
(d) any change in carrying amount of an asset
or of a liability recognised in
equity reserves including surplus in profit
and loss account on measurement of the
asset or the liability at fair value.
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