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Published on 6 April 2025

Understanding Corporate Social Responsibility Under the Companies Act, 2013

Overview of Corporate Social Responsibility (CSR) under the Companies Act, 2013

Corporate Social Responsibility (CSR) is governed by the Companies Act, 2013, which necessitates certain companies to undertake activities that benefit society. Companies that meet any of the following criteria for the preceding financial year must comply with the CSR provisions:

  • Net Worth: ₹500 crore or more
  • Turnover: ₹1,000 crore or more
  • Net Profit: ₹5 crore or more

CSR activities must conform to Schedule VII of the Act, engaging in initiatives aimed at eradicating hunger, promoting education, and ensuring environmental sustainability among others. It's important to note that expenses incurred for CSR activities are not deductible as business expenditures under the Income Tax Act, 1961, with exceptions for contributions to specified funds such as the Prime Minister’s National Relief Fund and PM CARES Fund, which qualify for deductions under Section 80G. Companies need to ensure that CSR initiatives are not designed solely for employee benefit or marketing purposes.

Qualifications for CSR Compliance

1. Eligible Companies for CSR

Under Section 135(1) of the Companies Act, 2013, companies are required to engage in CSR activities if they meet the following criteria in the preceding financial year:

  • Net worth: ₹500 crore or more
  • Turnover: ₹1,000 crore or more
  • Net Profit: ₹5 crore or more

2. Holding and Subsidiary Compliance

A holding or subsidiary company is exempt from CSR provisions unless it independently meets the eligibility criteria specified in Section 135(1).

3. Applicability to Section 8 Companies

CSR provisions apply to Section 8 companies, as Section 135(1) broadly states “Every company…”.

4. Newly Incorporated Companies

Companies that have not yet completed three financial years since incorporation must still comply with CSR obligations if they satisfy the established criteria. For instance, a company incorporated in FY 2018-19 that qualifies in FY 2020-21 should spend at least 2% of the average net profits from FY 2018-19 and FY 2019-20.

Qualifying CSR Activities

5. Eligible CSR Activities

As defined in Schedule VII of the Companies Act, CSR activities may include but are not limited to:

  • Eradicating hunger and promoting health, sanitation, and safe drinking water.
  • Promoting education and enhancing vocational skills, particularly among vulnerable groups.
  • Empowering women and ensuring gender equality.
  • Environmental sustainability and conservation efforts, such as contributions to the Clean Ganga Fund.
  • Preserving national heritage and supporting cultural initiatives.
  • Supporting armed forces veterans and their families.
  • Contributions towards disaster management efforts.
  • Supporting scientific research and development initiatives.

6. Non-Qualifying CSR Activities

According to Rule 2(1)(d) of the Companies (CSR Policy) Rules, 2014, the following do not qualify as eligible CSR activities:

  • Activities performed as part of normal business operations.
  • Activities outside India, except for training Indian sports personnel.
  • Donations to political parties under Section 182.
  • Activities benefiting only the company's employees and their families.
  • Sponsorship activities for marketing benefits.

7. Employee-Focused CSR Activities

Any activities exclusively designed to benefit employees are not considered eligible CSR activity, though initiatives benefiting the general public that incidentally involve employees may qualify.

8. CSR Activities Outside India

Generally, CSR activities conducted outside India are excluded unless they involve training for Indian sports personnel at national or international competitions.

CSR Implementation Methods

9. Implementation Modes

Companies may implement CSR through:

  • Direct implementation by the company.
  • Eligible implementing agencies as defined in Rule 4.
  • Collaborative efforts with other companies.

10. Eligible Agencies

To qualify as implementing agencies for CSR activities, entities must be:

  • Section 8 companies.
  • Registered public trusts or societies under the Income Tax Act, 1961.
  • Established by the Central or State Government or statutory bodies.

11. Tax Registration for Agencies

All eligible implementing agencies must possess income-tax registrations under Sections 12A and 80G unless they are government-established entities.

12. Carry Forward of Excess Spending

Excess amounts spent on CSR can be carried forward for up to three financial years. If not utilized within this period, these amounts will lapse.

13. CSR Expenditure as Business Expense

CSR expenditures cannot be claimed as business expenses as clarified by Explanation 2 to Section 37(1) of the Income Tax Act, 1961.

14. Tax Benefits Related to CSR

No specific tax exemptions for CSR expenditures exist; however, contributions made to certain funds may be eligible for deductions under Section 80G.

15. Activities Beyond Schedule VII

CSR expenditures must be related to activities outlined in Schedule VII of the Companies Act, ensuring compliance with legislative intent.

16. Approved Funds for CSR Contributions

Companies can make CSR contributions to the following funds:

  • Swachh Bharat Kosh
  • Clean Ganga Fund
  • Prime Minister’s National Relief Fund
  • PM CARES Fund
  • Other funds identified by the Ministry of Corporate Affairs for socio-economic relief.

17. Claiming CSR Expenditure Under Section 80G

Contributions made under Section 135(5) may be deducted under Section 80G, provided the necessary conditions are met.

18. Deductibility of CSR Expenditure under Sections 30-36

CSR expenditures generally do not qualify for deductions under Sections 30-36, focusing on business-related expenses, although some activities may qualify under specific conditions.

19. Summary of Deductibility

  • CSR Expenditures: Generally not allowable as business deductions.
  • Scientific Research Activities: May be considered under Section 35 if they meet criteria.
  • General Expenditures: Typically not considered deductible under Section 37.
  • Charitable Donations: Eligible donations can be claimed under Section 80G.

Conclusion

Companies subject to the CSR mandate under the Companies Act, 2013 must navigate the legal framework carefully to ensure compliance. Through a well-defined CSR strategy aligned with Schedule VII, businesses may significantly contribute to societal development while effectively managing their compliance responsibilities.

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