When determining a company’s obligation for Corporate Social Responsibility (CSR) under Section 135(5) of the Companies Act, 2013, the “average net profit” is generally calculated on the basis of net profit before tax.

Key Points:

• Accepted Practice:
  Although the statute does not explicitly state “before tax” or “after tax,” the common interpretation—and the practice followed by most companies—is to use net profit before tax. This approach is supported by guidelines issued by the Ministry of Corporate Affairs.

• Rationale:
  Using net profit before tax provides a more consistent measure of a company’s performance because it is not affected by variations in tax rates or tax planning strategies. This ensures that the CSR obligation is based on the company’s true operating performance.

• Implication for CSR:
  The average net profit calculated over the preceding three financial years (using the before-tax figures) is compared against the prescribed threshold to determine if a company is required to spend on CSR activities.

Conclusion:

For CSR compliance under Section 135(5), companies use net profit before tax as the basis for calculating the average net profit. This is the prevailing interpretation and practice to ensure consistency and transparency in assessing CSR obligations.

When a company spends more on Corporate Social Responsibility (CSR) activities than the mandated amount, here’s how such additional expenses are treated for tax purposes:

1. CSR Expenditure is Non-Deductible

• Mandatory and Additional CSR Spending:
  Whether the CSR expenditure is exactly at the mandated level (as per Section 135 of the Companies Act, 2013) or exceeds it, the entire amount spent on CSR activities is not allowed as a deduction while computing taxable income under the Income Tax Act.

• Reasoning:
  The underlying principle is that CSR spending is intended to promote social welfare rather than to generate business income. As such, these expenditures do not qualify as business expenses incurred wholly and exclusively for earning revenue.

2. Additional CSR Spending

• Extra Spending Beyond the Mandate:
  Any extra amount spent on CSR activities—beyond the prescribed minimum requirement—is treated in the same way as the mandated CSR spend, meaning that it cannot be claimed as a tax deduction.

• Implication for Companies:
  While a company may choose to invest more in social initiatives to enhance its corporate image or for altruistic reasons, such additional expenditure will not reduce its taxable income. All CSR spending remains non-deductible, regardless of the amount.

3. Financial Reporting vs. Tax Reporting

• Financial Statements:
  Companies will record their CSR expenditure in their financial statements as part of their corporate social responsibility initiatives.

• Tax Computation:
  However, when preparing the tax return, the entire amount spent on CSR (including any additional spending beyond the mandated requirement) is treated as a non-deductible expense. This means it will not be subtracted from the company’s profits for tax purposes.

Under Section 135(1) of the Companies Act, 2013, any company that is required to form a Corporate Social Responsibility (CSR) Committee must include at least one independent director in that committee. This requirement applies regardless of whether the company is a public company or a private company.

Key Points to Understand:

• CSR Applicability:
  A company must form a CSR Committee if it meets the prescribed thresholds (net worth, turnover, or profit). Once a company falls under these criteria, forming a CSR Committee becomes mandatory.

• Independent Director Requirement:
  The law specifically mandates that the CSR Committee should have at least one independent director. This is to ensure transparency and unbiased decision-making in matters related to CSR.

• Private vs. Public Companies:
  While many private companies may not be required to have independent directors for their overall board (if they are smaller or do not meet certain criteria), if such a private company is subject to the CSR provisions, it must include at least one independent director on its CSR Committee.

Conclusion:

If your private company meets the CSR criteria under Section 135, you are required to form a CSR Committee that includes at least one independent director, even if you are not otherwise mandated to have independent directors on your board.

No, the phrase “any financial year” in Section 135(1) of the Companies Act, 2013 does not mean that the CSR obligation applies for every financial year throughout the entire history of the company. Instead, it means that the CSR provisions are applicable in any particular financial year during which the company meets the prescribed thresholds.

Key Points to Understand:

• Assessment Based on Specific Years:
  The CSR obligation is determined by checking whether the company satisfies certain criteria (such as net worth, turnover, or profit thresholds) in the immediately preceding financial year or on an average over the preceding three years. It’s not a lifetime condition based on one single financial year from the company’s inception.

• Yearly Evaluation:
  For each financial year, the company’s performance is evaluated. If in that financial year (or in any of the relevant preceding years) the thresholds are met, then the company is required to spend the prescribed percentage on CSR activities for that year.

• Not an “Evergreen” Obligation:
  If the company’s performance later falls below the thresholds, the CSR obligation may no longer apply for those subsequent financial years.

Conclusion:

The term “any financial year” refers to the fact that the CSR requirement is assessed on a year-by-year basis (or using the average of specific recent years), rather than implying that CSR spending is mandatory for every financial year in the entire history of the company.