Corporate Social Responsibility (CSR) in India

Every company which needs to comply with the CSR provisions have to spend 2% of the average net profits made during the preceding three years as per the CSR policy. The computation of net profit for CSR is as per Section 198 of the Companies Act, 2013.

Section 198 provides that while computing the net profits of a company a credit should be given for the subsidies and bounties received from any government, or public authority constituted or authorised on this behalf.

For computing net profits, credit cannot be given for the following sums:

• Profits, by way of premium on shares, unless the company is an investment company.
• Profits on sales of forfeited shares.
• Profits of a capital nature, including profits from the sale of the undertaking or any part thereof.
• Profits from the sale of any fixed assets or immovable property of a capital nature comprised in the undertaking, unless the company business consists of buying and selling any assets or property.
• Any change in the carrying amount of an asset or of a liability recognised in equity reserves, including surplus in profit and loss accounts for the measurement of the asset or the liability at fair value.
• Any amount representing notional gains, unrealised gains or revaluation of assets

In making the computation of net profits, the following sums should be deducted:

• Every usual working charge.
• Directors’ remuneration.
• Bonus or commission payable or paid to any member of the company’s staff, technician, engineer or person engaged or employed by the company, whether on a part-time or whole-time basis.
• Any tax notified by the Central Government as a tax on abnormal or excess profits.
• Any tax on business profits imposed for special reasons or special circumstances and notified by the Central Government.
• Interest on debenture issued by the company.
• Interest on mortgages executed by the company and on advances and loans secured by a charge on its floating or fixed assets.
• Interest on unsecured advances and loans.
• Expenses on repairs, whether to movable or immovable property, provided the repairs are not of a capital nature.
• Outgoings inclusive of contributions made under section 181.
• Depreciation to the extent specified in section 123.
• Excess of expenditure over income.
• Damages or compensation to be paid for any legal liability and any sum paid by way of insurance against the risk of meeting the such liability.
• Debts considered bad and adjusted or written off during the year of account.

In making the computation of net profits, the following sums cannot be deducted:

• Income-tax and super-tax payable by the company under the Income-tax Act, 1961.
• Any damages, compensation or payments made voluntarily.
• Loss of capital nature including loss on sale of the undertaking or of any part thereof not including any excess of the written-down value of any asset which is discarded, sold, discarded, destroyed or demolished over its sale proceeds or its scrap value.
• Any change in carrying amount of an asset or of a liability recognised in equity reserves, including surplus in profit and loss accounts for the measurement of the asset or the liability at fair value.

Transfer and Use of Unspent Amount

A company can transfer unspent CSR amount to the following specified funds:

• A contribution made to the Prime Minister’s National Relief Fund.
• Any other fund is initiated by the central government concerning socio-economic development, relief and welfare of the scheduled caste, minorities, tribes, women and other backward classes.
• A contribution made to an incubator is funded either by the central government, the state government, public sector undertaking of the state or central government, or any other agency.
• Contributions made to:
  • Public-funded universities
  • Indian Institute of Technology (IITs)
  • National Laboratories and Autonomous Bodies established under:
    • Indian Council of Agricultural Research (ICAR)
    • Council of Scientific and Industrial Research (CSIR)
    • Department of Atomic Energy (DAE)
    • Department of Biotechnology (DBT)
    • Department of Pharmaceuticals
    • Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy (AYUSH)
    • Ministry of Electronics and Information Technology 
    • Indian Council of Medical Research (ICMR)
    • Defence Research and Development Organisation (DRDO) 
    • Department of Science and Technology (DST) engaged in conducting research in technology, science, medicine, and engineering aimed at encouraging Sustainable Development Goals (SDGs).

In case of the unspent amount relating to an ongoing project under the company’s CSR policy, the company will transfer the unspent amount to an exclusive account to be opened by a company, known as ‘Unspent Corporate Social Responsibility Account’, in any scheduled bank within 30 days from the end of the financial year.

The company must use the funds in the ‘Unspent Corporate Social Responsibility Account’ towards its obligations under the CSR policy within a period of three financial years from the date of the transfer.

In a case where the company fails to utilise the funds at the end of the three financial years, the funds should be transferred to the specified fund mentioned above within a period of 30 days upon completion of the third financial year.