Under the Companies Act, 2013, CSR (Corporate Social Responsibility) expenditure must be incurred on activities specified in Schedule VII. Whether an event qualifies as CSR expenditure depends on its primary purpose and alignment with the approved social objectives.

Key Points to Consider:

• Qualifying CSR Activities:
  The activities eligible for CSR spending are clearly outlined in Schedule VII. They typically include initiatives related to education, health, rural development, environmental sustainability, and other social welfare projects.

• Purpose of the Event:

  • Marathons:
    If organized to promote community health, fitness, or environmental awareness, a marathon may be considered CSR expenditure. However, if it’s mainly used as a promotional or branding event, it may not qualify.
  • Awards Ceremonies:
    Awards given to recognize contributions toward social causes can be included, provided the primary objective is to further a social welfare activity.
  • Advertisements and TV Sponsorships:
    These expenditures are generally seen as marketing or promotional expenses. Unless they are directly linked to a social initiative outlined in Schedule VII (for example, creating awareness about a social cause), they would not be considered CSR expenditure.

• Documentation and Approval:
  Any expenditure claimed under CSR must be supported by proper documentation and approved by the Board and the CSR Committee, ensuring that it aligns with the company’s CSR policy and the guidelines in Schedule VII.

Conclusion:

• Eligible as CSR:
  An event like a marathon or an awards ceremony can qualify as CSR expenditure if its primary aim is to promote social welfare (e.g., public health, education, or environmental sustainability).
• Not Eligible as CSR:
  Expenditures that are primarily promotional or used for brand building—such as general advertisements or sponsorship of TV programmes without a direct social objective—do not qualify as CSR expenditure.

By ensuring that the primary objective of the event aligns with the social causes specified under Schedule VII, a company can justify it as CSR expenditure. Otherwise, if the intent is mainly promotional, it should be treated as a marketing expense.

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.