According to the Companies (Corporate Social Responsibility Policy) Rules, 2014 ( hereinafter referred to as the Rules.) Net profit for the purpose of calculating 2% not to include
Profit arising from any overseas branch or branches of the Company whether operated as a separate Company or otherwise.
Any Dividend received from other Companies in India covered & complying with the Provisions of section 135. – Rule 2 (f)

Registered Trust, Registered Society or a Company Registered u/s. 8 of the Act established by the company either singly or with its holding or subsidiary or associate etc. can carry out C.S.R. Activities. – Rule 4(2)

Trusts etc not established by the Company or its holding, subsidiary or associate should have an established track record of at least 3 years in undertaking similar programmes or projects specified by the Company. The modalities of utilisation of funds monitoring & reporting mechanism to be specified by the Company. - Rule 4(2)

Collaboration with other Companies by a Company for CSR permitted. - Rule 4(3)

CSR expenditure to be incurred in India only. - Rule 4(4)

CSR programme benefitting only the employees and their families shall not be considered as C.S.R activity under the Act. - Rule 4(5)

Political contribution not to be considered as C.S.R. Expenditure. - Rule 4(7)

C.S.R. policy to include
a) List of CSR projects or programmes which a company plans to undertake falling within the purview of Schedule VII specifying modalities of execution & implementation Schedules.
b) Monitoring progress of such projects or programmes.- Rule 6

Board’s Report relating to F.Y. commencing on or after 01-04-2014 shall include an Annual Report on C.S.R. containing particulars specified in the Annexure. - Rule 8(1)

According to Section 135, companies to whom C.S.R. provisions are applicable need to form C.S.R. Committee of the Board consisting of three or more directors out of which at least one director shall be an Independent Director in the case of companies where independent directors are required to be appointed . Private companies having only 2 directors shall constitute CSR Committee with two such directors. In case of a covered foreign company the C.S.R committee shall comprise of at least two persons out of which one person shall be as specified under section 380 (1) (d) another person to be nominated by the foreign company. The Board’s Report is required to disclose the Composition of the aforesaid Committee. The C.S.R. Committee shall
a) Formulate and Recommend to the Board a C.S.R. Policy
b) Recommend the amount of Expenditure to be incurred on C.S.R.
C) Monitor the C.S.R. Policy

According to Section 135, companies to whom C.S.R. provisions are applicable need to form C.S.R. Committee of the Board consisting of three or more directors out of which at least one director shall be an Independent Director in the case of companies where independent directors are required to be appointed . Private companies having only 2 directors shall constitute CSR Committee with two such directors. In case of a covered foreign company the C.S.R committee shall comprise of at least two persons out of which one person shall be as specified under section 380 (1) (d) another person to be nominated by the foreign company. The Board’s Report is required to disclose the Composition of the aforesaid Committee. The C.S.R. Committee shall
a) Formulate and Recommend to the Board a C.S.R. Policy
b) Recommend the amount of Expenditure to be incurred on C.S.R.
C) Monitor the C.S.R. Policy

The Boards of the aforesaid companies are required to
a) Approve the C.S.R. Policy of the Company
b) Disclose such Policy in the Director’s Report & also place the same on the Website, if any, in such manner as may be prescribed
c) Ensure that the activities as laid down in the C.S.R. Policy are actually undertaken.

What is the meaning of the words ‘During any Financial Year’ as contained in section 135?

Reply:
Vide Circular No: 21/2014 dated 18-06-2014 MCA has clarified that ‘Any Financial Year’ referred under section 135(1) of the Act read with Rule 3(2) of the Rules means any of the three preceding financial years. Hence if a company does not meet the financial criteria in any of three years viz 2011-12, 2012-13, 2013-14 then C.S.R. provisions are not applicable to it for financial year 2014-15.

How to Account for C.S.R. Expenditure in the Accounts?

According to the Guidance Note on Accounting for Corporate Social Responsibility Activities issued by ICAI in case contribution made to a fund specified in Schedule VII to the Act the same should be charged to the statement of Profit & Loss. Similar will be the Treatment if C.S.R. Expenditure is made through Registered Trust, Society or Section 8 company. C.S.R. Expenditure of Revenue nature incurred on any activity as contained in Schedule VII by a company on its own needs to be charged as an expense in the Statement of Profit & Loss. In case of C.S.R. Expenditure, incurred by a company which gives rise to an ‘asset’ which is transferred by the company to the beneficiary, the same should not be recognized in the books of the company as an asset but instead should be charged to the Statement of Profit & Loss.

Whether Income Earned from C.S.R. Projects/ Programmes from C.S.R. Activities needs to be recognised.

Reply:
According to the aforesaid Guidance Note, since surplus arising from CSR activities is not arising from a transaction with the owner it would be considered as income for accounting purposes but since the surplus cannot be a part of business profits of the company, the same should immediately be recognized as liability for C.S.R. Expenses in the Balance Sheet by way of a charge to the Statement of Profit & Loss. Such surplus will not from part of the minimum 2% of the average net profits made during the three immediately preceding financial years.

Whether Provision for Unspent Amount can be created?

Reply:
The aforesaid Guidance Note lays down that no provision for amount which is not spent i.e. any shortfall vis–a-vis 2 % can be made in the Accounts. But if the Company has already undertaken a C.S.R. activity for which a liability has been incurred then a provision for the amount representing the extent to which the C.S.R. Activity was completed during the year needs to be recognized.

Is it mandatory to spend 2% of average net profits on C.S.R. activity considering the fact the words used in section 135 (5) are ‘shall ensure’.

Reply
Second proviso to section 135 (5) lays down that if a company fails to spend the prescribed amount the Board shall in its Report under clause (o) of sub-section (3) of section 134 specify the reasons for not spending the amount Neither the Act nor the Rules prescribes any penal provision if a company fails to spend the amount. Also there is no explicit legal provisions which requires a company to make good short spend of one year in the subsequent years. Hence if a company fails to spend the prescribed amount of 2 % the reasons are to be stated in the Board’s Report.

Whether C.S.R. contribution to a Trust controlled by a Company is possible.

Reply
There is no bar to such contribution as per the provisions of the Act & the Rules thereunder. But disclosures are required as per Accounting Standard AS 18 – Related Party Disclosures.

Please note that definitions of Related Party & Related Party Transactions differ between Accounting Standard 18 and the Act, hence disclosure under AS-18 is required.

Whether C.S.R. Expenditure is Tax Deductible.

Reply
According to Explanation 2 to section 37(1) of the Income Tax Act, 1961, any expenditure incurred by an assessee on the activities relating to Corporate Social Responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession thus the expenditure on C.S.R. activities is non-deductable unless falling within section 30 to 36 of the Income Tax Act, 1961. Primarily the allowable expenditure relate to section 35 of the Income-tax Act, 1961.