TaxTMI 
TaxTMI 
GUIDANCE NOTE ON TREATMENT OF COSTS RELATING TO CORPORATE SOCIAL RESPONSIBILITY (CSR) ACTIVITIES
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....relating to CSR activities, as defined in the Companies Act 2013. Scope 4. What constitutes CSR activities is specified in Schedule VII to the Companies Act, 2013. Ministry of Corporate Affairs (MCA) has issued clarifications vide their general circular no. 21/2014 dated June 6, 2014 and amended Schedule VII vide Notification No. GSR 741(E) dated October 24, 2014. MCA vide Notification No. GSR 129(E) dated February 2, 2014 has notified the Companies (Corporate Social Responsibility Policy) Rules, 2014, that were twice amended vide notification no. GSR 644(E) dated September 12, 2014 and GSR 43(E) dated January 19, 2015. 5. Accordingly, this Guidance Note does not deal with identification of activities that constitute CSR activities but only provides guidance on recognition, measurement, presentation and disclosure of CSR expenses. Definitions 6. For the purpose of this Guidance Note, the definitions except at sl. nos. (g) to (i) are reproduced from the Companies Act, 2013, and the Companies (Corporate Social Responsibility Policy) Rules, 2014 and in the event of any change in the Act or the Rules made thereunder, these definitions shall stand automatically revised/mo....
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....ated information of an entity expressing his opinion thereon, including any qualifications, observations, or suggestions etc. (j) "Financial Year", in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up: Provided that on an application made by a company or body corporate, which is a holding company or a subsidiary of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Tribunal may, if it is satisfied, allow any period as its financial year, whether or not that period is a year: Provided further that a company or body corporate, existing on the commencement of this Act, shall, within a period of two years from such commencement, align its financial year as per the provisions of this clause; (k) "Net Profit" means the net profit of a company as per its financial statement prepared i....
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....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 VII to the Act. The requirement of the Companies Act 2013 that companies with a net profit of 5 crore INR or more shall spend on CSR activities, it is likely that section 135 of the Companies Act shall be applicable to many small and medium sized companies. This will pose a fresh set of challenges to a sector that is increasingly being asked by its stakeholders to comply with environmental and social standards, while remaining competitive. Thus, SMEs will have to quickly learn to be compliant with these diverse set of requirements. Companies (Corporate Social Responsibility Policy) Rules, 2014 8. Rule 4 requires that the CSR activities that shall be undertaken by the companies to comply with provisions of Section 135 of the Act shall exclude activities undertaken i....
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....re, in order to provide certainty on this issue, section 37 has been amended to clarify that for the purposes of sub-section (1) of section 37 any expenditure incurred by an assessee on the activities relating to CSR referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and hence shall not be allowed as deduction under said section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Income-tax Act shall be allowed as deduction under those sections subject to fulfilment of conditions, if any, specified therein. 12. CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business. As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR cannot be allowed as deduction for computing the taxable income of the company. Moreover, if CSR expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure. Reserve Bank of India 13. The Reser....
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....rred by a company under different scenarios. Accordingly, their principles of measurement are explained below: (a) Revenue expenditure by way of supply of goods manufactured or services provided by the company - actual cost of goods produced or services provided, including excise duty, service tax, cess, VAT or other applicable taxes paid. (b) Revenue expenditure by way of services provided by the employees of the company - actual cost of such employees, including direct expenses and proportionate share of overheads, if any. (c) As per sub-rule (6) of Rule 4 of the Companies (Corporate Social Responsibility Policy) Rules 2014, Companies may build CSR capacities of their own personnel as well as those of their Implementing agencies through Institutions with established track records of at least three financial years but such expenditure, including expenditure on administrative overheads,^[1] shall not exceed five percent of total CSR expenditure of the company in one financial year. (d) Revenue expenditure by way of extending economic benefits to the community at large - actual amount of expense made and charged to the statement of profit and loss....
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.... supplemented by the following legislative provisions. 20. Relevant extracts of the Companies (Corporate Social Responsibility Policy) Rules, 2014 are: (a) Rule 4(1): The CSR activities shall be undertaken by the company, as per its stated CSR Policy, as projects, programs or activities (either new or existing), excluding activities undertaken in pursuance of its normal course of business. (b) Rule 4(4): ............. the CSR projects or programs or activities undertaken in India only shall amount to CSR expenditure. (c) Rule 4(5): The CSR projects or programs or activities that benefit only the employees of the company and their families shall not be considered as CSR activities in accordance with section 135 of the Act. (d) Rule 4(7): Contributions of any amount directly or indirectly to any political party under section 182 of the Act shall not be considered as CSR activity. (e) Proviso below Rule 6(1) (b): Provided that the CSR activities does not include the activities undertaken in pursuance of normal course of business of a company. (f) Rule 6(2): The CSR Policy of the company shall specify that the surplus arising out....
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....future expenses incurred on such, assets created under CSR projects, programs and activities, whether recognised as revenue in the profit and loss statement or not, shall be treated as non-cost items and reflected separately in the profit reconciliation statement. Similar treatment shall be given in the cost statements of the company, if the control of such 'asset' is transferred to a third party, but the company has still made certain expenses thereon. Unspent CSR Amount 27. 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 two percent 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". 28. Further, Rule 8(1) of the Companies (Corporate Social Responsibility Policy) Rules, 2014, prescribes that the Board's Report of a company covered under these Rules shall include a....
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....f recommendations of the CSR Committee of the Board as per declared CSR policy of the company, then such expenses or incomes shall be recognised in cost statements in accordance with the cost accounting standards issued by the Institute. 35. Similarly, all such expenses incurred by the companies either in pursuance to the government directives or in compliance with any other law or regulation that do not relate to the projects or programs relating to activities specified in Schedule VII to the Act, shall be recognised either as part of the project/program cost or presented in the cost statements in accordance with the cost accounting standards issued by the Institute. CSR expenses wrongfully claimed as product/service costs and not shown separately as CSR 36. If a company falls under the category specified under section 135(1) of the Act, and incurs any expenditure or earns any income that clearly relate to the projects or programs relating to activities specified in Schedule VII to the Act, or projects or programs relating to activities undertaken by the Board of Directors of the company (Board) in pursuance of recommendations of the CSR Committee of the Board as per decl....
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....mpany. In this regard, Rule 6(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 says that the CSR Policy of the company shall specify that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company. Hence, all such capital expenditure cannot be recognised as 'asset' in the company's books and is therefore, required to be charged as an expense to the statement of profit and loss. Accordingly, all such expenses shall be treated as non-cost and form part of the reconciliation statement. Presentation and Disclosure of CSR expenses in Cost Statements 42. The presentation and disclosure of incomes and expenses relating to the CSR projects, programs and activities, in the cost statements shall be made as indicated below: (a) All expenses relating to the CSR projects, programs and activities, whether incurred upto the statutory limit of two percent of the average net profits of the company made during the three immediately preceding financial years or more, shall be treated as non-cost items and reflected separately in the profit reconciliation statement. (b) Simila....