Previous Year Question
With reference to Corporate Social Responsibility (CSR) rules in India, consider the following statements:
CSR rules specify that expenditures that benefit the company directly or its employees will not be considered as CSR activities.
CSR rules do not specify minimum spending on CSR activities.
Which of the statements given above is/are correct?
Only 1
Only 2
Both 1 and 2
Neither 1 nor 2
Correct Answer: A
Detailed Solution
The principal statutory basis of Corporate Social Responsibility in India is Section 135 of the Companies Act, 2013, Schedule VII of the Act and the Companies (Corporate Social Responsibility Policy) Rules, 2014.
Statement 1 is correct. Activities that exclusively benefit the employees of a company and their families are generally not recognised as CSR activities. Similarly, activities undertaken on a sponsorship basis for deriving marketing benefits for the company’s products or services are excluded from CSR.
The benefits of CSR must extend to the wider public or advance the social objectives specified in Schedule VII of the Companies Act. Expenditure incurred solely for the commercial or private benefit of the company or its employees is not treated as CSR expenditure.
Major activities excluded from the definition of CSR include:
Activities undertaken in the normal course of the company’s business;
Activities undertaken outside India, subject to the prescribed exception relating to the training of Indian sportspersons;
Direct or indirect contributions to a political party;
Activities exclusively benefiting the company’s employees;
Sponsorship activities undertaken for deriving marketing benefits;
Expenditure incurred to fulfil statutory obligations under other laws.
Statement 2 is incorrect. Section 135 of the Companies Act prescribes minimum CSR expenditure. The Board of an eligible company must ensure that it spends at least 2% of the average net profits made during the three immediately preceding financial years on CSR activities in every financial year.
Section 135 generally applies to a company having, during the immediately preceding financial year:
A net worth of at least ₹500 crore; or
A turnover of at least ₹1,000 crore; or
A net profit of at least ₹5 crore.
Where a company has not completed three financial years, the 2% requirement is calculated using the average net profit of the immediately preceding financial years available.
An unspent amount relating to an ongoing CSR project must be transferred to an Unspent CSR Account within 30 days from the end of the financial year. It must be spent on the project within the next three financial years. An unspent amount unrelated to an ongoing project must generally be transferred to a fund specified in Schedule VII within six months from the end of the financial year.