K.

VAITHEESWARAN
ADVOCATE & TAX CONSULTANT
Mobile: 98400-96876 E-mail : askvaithi@yahoo.co.uk, vaithilegal@yahoo.co.in
Flat No.3, First Floor, No.9, Thanikachalam Road, T. Nagar, Chennai - 600 017, India Tel.: 044 + 2433 1029 / 4048 402, Front Wing, House of Lords, 15/16, St. Marks Road, Bangalore 560 001, India Tel : 080 22244854/ 41120804

A number of corporates spend significant amounts of money on social and charitable projects. Many companies have contributed to the development of the area in which they are located through non-mandated CSR spending. Under Article 38(2) of the Constitution dealing with Directive Principles of State Policy, the State has to strive to minimize inequalities of income and eliminate inequalities in status, facilities, opportunities amongst individuals as well as groups of people.

Section 135 is yet to be officially notified even though there is a unnumbered scanned notification dated 27.02.2014 in the website specifying 01.04.2014 as the date on which Section 135 and Schedule VII shall come into force. Section 467 enables the Government to alter any Schedules, Regulations through Notification and Section 467 has come into force vide SO No.2754(E) dated 12.09.2013. An un-numbered Notification dated 27.02.2014 is available in the website which has substituted Schedule VII. The Companies (Corporate Social Responsibility Policy) Rules, 2014 have been notified vide Notification dated 27.02.2014, in exercise of powers conferred under Section 135(1) and Section 469 (un-numbered). The Rules are effected from 01.04.2014.

Every company having :

Net worth of Rs. 500 crores or more, or Turnover of Rs. 1000 crores or more; or Net profit of Rs. 5 crores or more during any financial year, shall constitute a

Corporate Social Responsibility (CSR) Committee of the Board consisting of 3 or more directors, out of which at least one director shall be an independent director.

Board report to disclose composition of CSR Committee.

The CSR Committee shall have the following functions: (a) Formulate and recommend to the Board, a CSR Policy indicating the activities to be undertaken by the company as specified in Schedule VII; (b) Recommend expenditure to be incurred on the activities referred to in clause (a); and (c) Monitor CSR Policy of the company from time to time.

The Board has to consider recommendations of the CSR Committee; approve the CSR Policy; The Board has to disclose the contents of the Policy in its report and also place it in the Companys website if any, in such manner as may be prescribed. Rule 8 of the CSR Rules, 2014 provides that the Boards report of a Company covered under the Rule pertaining to the financial year on or after 01.04.2014 shall include an annual report on CSR containing the particulars specified in the annexure. In respect of foreign companies, the balance sheet filed under Section 381(1)(d) should contain the annexure. Board has to ensure that the activities are undertaken by the Company

Board has to ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the 3 immediately preceding financial years, in pursuance of its CSR Policy. The company can give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities. In case of failure to spend such amount, the Board shall in its report made under Section 134(3)(o) specify the reasons for not spending the amount.

Activities relating to:i. Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available drinking water; ii. Promoting education, including special education and employment and enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects; iii. Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;

iv.

v.

vi.
vii.

Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water. Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts; Measures for the benefit of armed forces veterans, war widows and their dependents; Training to promote rural sports, nationally recognized sports, paralympic sports and Olympic sports;

viii.

ix.

x.

Contribution to the Prime Ministers National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government; Rural development projects.

Rule 2(c) of the CSR Rules, 2014 defines CSR as under:CSR means and includes but is not limited to (i) Projects and programmes relating to activities specified in Schedule-VII; or (ii) Projects or programmes relating to activities undertaken by the Board as per recommendations of CSR Committee as per CSR Policy subject to the condition that such policy will cover the subjects enumerated in Schedule-VII.

The Supreme Court in the case of P.Kasilingam & Others Vs. PSG College of Technology has held that the words means and includes indicate an exhaustive explanation of the meaning which for the purpose of this act must invariably be attached to those words or expressions. The Rule has not expanded the ambit of activities and is in fact not specified any other activity.

Drinking water, eradication of poverty, education, vocational education, libraries, cultural activities, sanitation, etc. are all activities which fall in Schedule-XI of the Constitution of India Article 243G provides that the State may endow the Panchayat by law, the power and authority for implementation of schemes for economic development and social justice including those specified in Schedule-XI. Water supply, public health, urban poverty alleviation, cultural aspects, public amenities find place in Schedule-XII of the Constitution of India. Article 243W provides that the State may endow the Municipality by law, the power and authority for implementation of schemes for economic development and social justice including those specified in Schedule-XII.

Is the corporate sector being compelled to do what the State has to do? Can there be a law made by the Parliament mandating CSR activities in these segments when these activities are referred to in Article 243G and 243W?

Section 135 refers to net worth of Rs.500 crores Section 2(57) defines net worth to mean aggregate of paid up share capital; reserves out of profits and share premium account after deducting accumulated losses, deferred expenditure not written off as per audited balance sheet but does not include reserves created out of revaluation of assets write back of depreciation and amalgamation.

Section 135 refers to turnover of Rs.1000 crores Section 2(91) defines turnover to mean the aggregate value of the realisation of amount made from sale, supply or distribution of goods or on account of services rendered or both by a company during a financial year.

Section 135 refers to net profit of Rs.5 crores Section 135(5) provides that the Board shall ensure that every company spends in every financial year at least 2% of the average net profits of the company made during the 3 immediately preceding financial years.

Credits shall be given to

bounties

and subsidies received from any Government, or any public authority constituted or authorized in this behalf, by any Government

Credits shall not be given to

Profits by way of premium on shares or debentures of the

company, which are issued or sold by the company; Profits on sales of forfeited shares; Capital Profits including profits from sale of undertaking(s) of the company or of any part thereof;

Credits shall not be given to (Cont)

Profits from sale of any immovable property or fixed assets of a capital

nature comprised in the undertaking (s) 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 WDV 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 WDV ; Any change in carrying amount of an asset or of a liability recognized in equity reserves including surplus in P&L account on measurement of the asset or the liability at fair value

The following sums shall be deducted, namely:

All the usual working charges; Directors remuneration; Bonus or commission paid or payable to any member of the companys 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; Any tax notified by the Central Government as being in the nature of a tax on excess or abnormal profits; Any tax on business profits imposed for special reasons or in special circumstances and notified by the Central Government in this behalf; Interest on debentures issued by the company; mortgages executed by the company and on loans and advances secured by a charge on its fixed or floating assets; on unsecured loans and advances; Expenses on repairs, whether to immovable or to movable 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;

The following sums shall be deducted, namely (Cont):

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; Compensation or damages to be paid in virtue of any legal liability including a liability arising from a breach of contract; Sum paid by way of insurance against the risk of meeting any liability such as is referred to above; Debts considered bad and written off or adjusted during the year of account.

The following sums shall not be deducted:

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; any compensation, damages or payments made voluntarily; Capital loss including loss on sale of the undertaking (s) of the company or of any part thereof not including any excess of the WDV of any asset which is sold, discarded, demolished or destroyed 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 P&L account on measurement of the asset or the liability at fair value.

Sec. 198 refers to the calculation of net profit in any financial year. Company falling under CSR mandate is required to spent at least 2% of the average net profit of the company made during the three immediately preceding years in pursuance of its CSR Policy.

While Sec. 198 refers to calculation of net profit, Rule 2(f) also refers to net profit. Net profit means the profit of a company as per its financial statements prepared in accordance with applicable provisions of the Act but shall not include (i) Profit from any overseas branch or branches of the company whether operated as a separate company or otherwise; (ii) Any dividend received from other companies in India which are covered under and complying with the provisions of Sec. 135. If net profit for a financial year has been prepared as per 1956 Act the same is not required to be recalculated under the 2013 Act.

Every company including its holding company or subsidiary and a foreign company having its branch office or project office in India which fulfills the criteria specified in Sec. 135(1) shall company with the provisions of Section 135 and these Rules. If a company ceases to be covered under Sec.135(1) for three consecutive financial years, it shall not be required to constitute the CSR Committee or company with Sec.135 till it meets the criteria set out in Sec.135(1).

CSR Activities should be undertaken as per the CSR Policy as projects or programs or activities (either new or ongoing) excluding activities undertaken in pursuance of its normal course of business. Board can decide to undertake the approved CSR activities through a registered trust or registered society or a company established by the Company or its holding or subsidiary or associate company under Sec.8 (Sec. 8 deals with companies formed with charitable objects) If Trust, etc. is not established by the Company, etc. it must have an established track record of three years in undertaking similar projects or programmes.

CSR projects or programs or activities undertaken in India alone shall amount to CSR expenditure. Activities that benefit only the employees of the company and their families shall not be considered as CSR activities. Contribution of amount directly or indirectly to any political party under Section 182 shall not be considered as CSR. Contribution through a political party pursuant to 293A of the 1956 Act was considered as an outgoing in computation of net profit under Section 349 of the 1956 Act vide Circular dated 08.01.1962. Section 198 refers to outgoings inclusive of contributions made under Section 181 and does not refer to 182.

An unlisted public company or a private company not required to appoint an independent director under Sec. 149(4) can have a CSR Committee without independent director. A private company having only two directors can constitute CSR Committee with two such directors. In respect of a foreign company, CSR Committee shall comprise of at least 2 persons of which one person shall be specified under Section 380(1)(d) and another nominated by the foreign company.

The report of the Board of Directors to be placed in the General Meeting to include the details about the policy developed and implemented by the company on CSR initiatives taken during the year. While preparing the Statement of Profit and Loss, A Company shall disclose by way of notes additional information amount of expenditure incurred on CSR activities

The new Schedule-VII is much wider and general compared to old Schedule-VII. Education, environmental sustainability, technology incubators, employment enhancing vocational skills are all good activities. Companies can focus on skill related activities and develop talent pool in their area. Poverty alleviation initiatives creates goodwill Current spends can also fit into CSR subject to meeting the requirements.

Impact on profit Calculation pains Additional compliance costs Bonafides of organizations receiving the money End-use misappropriations Vs. Increase in cost due to constant monitoring of end-use.

CSR has remained a controversial subject across the world Countries like Sweden, Norway, Netherlands, France and Australia mandated CSR reporting India has walked the extra mile and legislated mandatory CSR activities as well as reporting Looks like India is the first country to mandate CSR through legislation. This is the first step and it is likely that the law will develop further when CSR spend does not happen

Hard earned money goes for community development which is the responsibility of the State. Companies are already paying huge taxes by way of Income Tax, Excise, CST, VAT, Service Tax, Customs Duty, Entry Tax apart from various fees and levies.

What sort of explanations can be given in case the Company does not spend on CSR? What happens if there is a social cause which does not fit into Schedule-VII? Is training promotion of education?

Can the mandatory requirement of CSR expenditure be considered as a tax? Justice Holmes of the US Supreme Court said that tax is the price which we pay for a civilized society. Article 265 provides that no tax shall be levied or collected except by authority of law. Mandatory 2% to be spent on social welfare activities through law Can it be seen as a tax on profits and if so can it be through the Companies Act? Will this not amount to an increase in corporate tax rate indirectly? The profits of the Company suffer income tax; dividend distribution attracts DDT and these taxes are available to the Government for carrying out these activities. By making the companies incur CSR through law, can it be perceived as an indirect levy?

Corporates are already engaged in CSR. Mandated CSR creates issues of perfunctory compliance as against dedicated CSR. Controls and costs Judgmental errors Misuse by local groups Local politics Misuse by corporate sector

K.VAITHEESWARAN

ADVOCATE & TAX CONSULTANT

Mobile: 98400-96876 E-mail : askvaithi@yahoo.co.uk vaithilegal@yahoo.co.in
Flat No.3, First Floor, No.9, Thanikachalam Road, T. Nagar, Chennai - 600 017, India Tel.: 044 + 2433 1029 / 4048 402, Front Wing, House of Lords, 15/16, St. Marks Road, Bangalore 560 001, India Tel : 080 22244854/ 41120804