Corporate Social Responsibility (CSR) – Applicability and allowability

Corporate Social Responsibility – CSR

The compliance of the provisions of CSR under the Companies Act, 2013 i.e. constitution of CSR Committee, formulation of CSR Policy, the spending of requisite amount on CSR activities came into force from April, 2014.


Applicability of CSR provisions

The provisions of Section 135 of the Companies Act, 2013 mandates  that; Every company having net worth of rupees five hundred crores or more or turnover of rupees one thousand crores or more or a net profit of five crore or more during any financial year shall ensure that the Company spends, in every financial year , at lease two percent  of the average net profits of the company made during the three immediately preceding financial years.


So from the above provision we can conclude that CSR provisions applies to:

  • Every company either domestic or foreign, including holding or subsidiary company if those companies are covered as per other criteria.
  • Having in the preceding financial year

      – Net Worth > 500 Crore

      – Turnover > 1000 Crore

      – Net Profit > 5 Crore


Modus operating for CSR

  • Every company to which CSR criteria is applicable shall constitute a CSR Committee.
  • Minimum 3 or more directors must be the members of the CSR Committee.
  • Out of above 3 or more directors one director must be an independent director (but private limited company of unlisted company are exempted from this requirement).
  • CSR Committee recommend the CSR policy of company, and board of directors approve the CSR policy for the Company.
  • Make sure that the company spends in every financial year, minimum 2% of the average net profits made during the 3 immediately preceding financial years as per CSR policy.
  • If company has not completed 3 financial years being newly incorporated, the average net profits shall be calculated for the financial years since its incorporation.

Computation of Net Profit for CSR contribution as per Section 198

Particulars FY
Net profit after tax*
Add : Allowed Credits  
1 Profit on sale of immovable property
( Original Cost – WDV )
Less : Credits Disallowed  
1 Premium on shares or debentures
2 Profit on sale of forfeited shares
3 Profit on sale of immovable property
(Sale Value of Immovable Property – Original Cost )
4 Surplus in P&L on measurement of asset or liability at fair value
Less : Expenses Allowed  
1 All the usual Working Charges
2 Director’s Remuneration
3 Bonus or Commission paid to Staff
4 Tax on escess or abnormal profits
5 Tax on business profits imposed for special reasons
6 Interest on Debentures
7 Interest on Loans
8 Expenses on repairs ( other than Capital Expenditure )
9 Contributions made under section 181 ( Bonafide Charitable Trusts )
10 Depreciation
11 Prior period items
12 Legal liability for compensation or damages
13 Insurance Expenses
Add : Expenses Disallowed  
1 Income Tax
2 Compensations, damages or payments made voluntarily
3 Capital Loss on sale of undertaking or part thereof ( Not include losses on sale of asset )
4 Expenditure in P&L on measurement of asset or liability at fair value
* Net profit after tax is taken as base and accordingly the adjustments need to be considered.



Important points related with CSR expenditure:

Salary paid by the companies to regular CSR staff as well as employees, who render their services for CSR will be part of Administrative overheads and should not exceed 5% of the total CSR expenditure as per rule 4(6) of CSR Policy, Rules 2014.


Contribution to Corpus of a Trust/ Society/ Section 8 companies etc. will qualify as CSR expenditure as long as :

(a) the Trust/ Society/ Section 8 company etc. is created exclusively for undertaking CSR activities or
(b) where the corpus is created exclusively for a purpose directly relatable to a subject covered in Schedule VII of the Act


Computation of net profit for section 135 is as per section 198 of the Companies Act, 2013 which primarily is NET PROFIT BEFORE TAX.


Expenses which are not covered as CSR

  • 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
  • One-off events such as marathons/ awards/ charitable contribution/ advertisement/sponsorships of TV programmes etc. would not be qualified as part of CSR expenditure. 
  • Expenses incurred by companies for the fulfilment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as CSR expenditure under the Companies Act. 
  • Contribution of any amount directly or indirectly to any political party shall not be considered as a CSR activity.
  • Activities undertaken by the company in pursuance of its normal course of business.


Deduction for CSR Expenses:

The amount spent by a company towards CSR cannot be claimed as business expenditure. The Finance Act, 2014 provides that 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.


“Explanation 2 to Section 135

 it is declared that for the purpose of subsection (1) any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession”



it is proposed to clarify that w.e.f. 01st April 2015 for the purpose of section 37(1) any expenditure – in section 135 of the Companies Act, 2013 shall not be—- allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in Sections 30 to 36 of the Income Tax Act, 1961 shall be allowed deduction under section.


Penalty for non-compliance of CSR provisions under Companies Act, 2013

  • Section 134(8):Penalties for not discharging the duty as mentioned above are:
  1. Fine of not less than Rs. 50,000/- which may extend to Rs. 25 lakh rupees; and
  2. Every officer of the company in default shall be punishable with imprisonmentfor a term which may extend to 3 years; or with fine which shall not be less Rs. 50,000/- but which may extend to Rs. 5 lakh, or with both.
  • Fine u/s 450 may extend to Rs. 10,000/-, and where the contravention is continuing one, a further fine to Rs. 1,000/- for every day after the first during which contravention continues.
  • As per Sec 451 the defaulter is punished either with fine or with imprisonment and where the same offence is committed for the second or subsequent occasions within a period of 3 years, then, that company and every officer thereof who is in default shall be punishable with twice the amount of fine for such offence in addition to any imprisonment provided for that offence.


Latest update as on 23rd March 2020

As per the latest amendments, the CSR activities include the following:

– Promotion of health care,

– Expenses towards preventive health care and sanitation, and

– Disaster management




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