Anup P. Shahbangaloreicai.org/images/icons/2015/Backgroundmaterial/15_04_Apr… · S.135 of...

- Anup P. Shah 24th April, 2015

Workshop on Companies Act

Bangalore Branch of SIRC of ICAI

S.135 of Companies Act, 2013 notified

◦ Wef 1-4-2014

◦ 1st Section which had Rules Notified under Cos Act’ 13

Companies (Corporate Social Responsibility Policy) Rules,

2014 notified – Effective from 1-4-2014

PRAVIN P. SHAH & CO. 2


Company 2% CSR of 3

Yrs Avg.PBT

Actual CSR

for 2013

(Deficit) /

Surplus

Deficit %

Reliance 532 712 180 NA

TCS 351 88 (263) 75%

Infosys 253 10 (243) 96%

ITC 215 106 (109) 51%

Bharti 145 40 (105) 72%


Estimates Rs. 5,000 – 10,000 cr. / year

◦ 2013 NPAT of Top 1,000 Listed Cos * 2% = Rs. 6,826 cr.

◦ 2013 NPAT of Top 200 Unlisted Cos * 2% = Rs. 720 cr.

◦ Total CSR based on this = Rs. 7,546 cr.

◦ Add CSR from Private Cos.

◦ CSR is 2% of Avg. NPBT

Rs. 10,000 cr. / year likely provided Cos. spend it

MCA’s estimate for FY 2015: Rs. 5,000 cr.


Expected to rise from Rs. 2500 cr to 8000 cr over 2 yrs

◦ Analysis of Top 100 IT Cos

52% spend via Own Trusts / NGOs

36% spend via NGOs only

12% spend via Own Trusts only

Promoting Educational & Vocational skills is the #1 Cause –

90% of all IT Companies

Followed by Healthcare, Sanitation, Drinking Water



If 1 of 3

Conditions

Met

Unlisted

Public

Listed

Co.

Private

Co.

Of the Top 1000 Listed

Companies, 874 Covered

Of the Top 300

Unlisted Cos., 296

covered

CSR Criteria

Turnover>

Rs 1000 cr.

Net worth >

Rs. 500 cr.

Net Profit >

Rs. 5 cr.


Any one Condition during any Financial Year

Net Worth - 500 Turnover -1000 Net Profit - 5

• Sh Cap + Reserves

from Profits + Sec.

Premium (-) Dr Bal in

P&L (-) Def. Exp (-)

Misc. Exp.

• Excludes Revaluation

Reserves /

Amalgamation

Reserves / Depn.

writeback Reserve

• Aggregate Realisation

made from sale, supply

of Goods / Services /

both in a FY

• Adjustments for

Discounts / Bad Debts

/ Excise / VAT?

• NPBT or NPAT?

• NP computed as per

Financial Statements but

excludes

• Profits of Foreign

Branches; and

• Dividend from IndCo.

to which CSR

applies

• ICAI: NP as per s.198


NP Turnover Net Worth CSR Yes / No

Co 1 6 60 500 Yes

Co 2 4 900 GR 400, Reval

Res 300

No – Net Worth excludes

Reval Res

Co 3

(Realty)

Nil Nil– per

2012 GN

250 No – As per 2012 GN Inc. not

realised till 3 Conditions met –

can defer Realisation of

Revenue & Income.

Co 4 PBT 5

PAT 4

950 450 ? - Consider PAT or PBT?


Only Entry but No Exit?

◦ Once 1/3 conditions met is CSR Applicable forever?

If Threshold breached during any FY

CSR applicable forever – No Exit

◦ Gateway Only if either of Two Conditions

Once covered –Relaxation if does not meet criteria for 3

consecutive FYs; OR

Even if covered not applicable Avg NP for 3 years is a Loss

Else CSR even if Loss in Current Year?



Year PBT Turnover Networth 3 Yrs Avg. Covered?

2014-15 5 50 100 4 Yes 8 Lakhs

2015-16 (4) 20 101 4.66 Yes 9 Lakhs

2016-17 (3) 20 98 2.00 Yes 4 Lakhs

2017-18 (2) 10 96 (0.66) No – 3 FY

2018-19 (1) 9 95 (3.00) No- 3 FY

2019-20 6 50 101 (2.00) No – Avg loss

2020-21 7 60 108 1.00 Yes 2 Lakhs


BOD

•CSR Committee to be constituted

•Out of Board of Directors

1 ID

•1 Independent Director a must on CSR

Committee

Report

•Report of Board of Directors must disclose

composition of CSR Committee


What if Unlisted / Pvt Co. and No ID?

◦ Can have CSR Committee without ID

What if Pvt Co. which has only 2 Directors?

◦ Can have a CSR Committee with only 2 Directors

CSR Committee only of IDs?

◦ Possible but better to have at least 1 WTD


Formulate

~ CSR Policy out of

Specified Activities

Recommend

~ Expense on CSR

Activities

Monitor

~ CSR Policy of Co.


◦ Relates to activities in Schedule

◦ Exp. on the same

◦ Must Include the following

List of CSR Projects / Programmes proposed to be

undertaken during Year falling within Sch. VII

Modalities of execution in areas / sectors chosen

Implementation Schedule for same

Monitoring Process of such Projects / Programmes

Specify that any Surplus will not be Profits of the Co.



Schedule VII lays down Specified CSR Activities

◦ Schedule states “Activities which may be included in CSR

Policy”

◦ Activities Mandatory or Illustrative?

Spending on Activities not under Sch. VII not CSR Exp.

Clarification:

Sch. Must be liberally interpreted

Capture the essence of subjects in the Sch.

Items in Sch. Are broad-based to cover wide range of

activities


Schedule VII lays down Specified CSR Activities

Spending on Activities not under Sch. VII not CSR Exp.

MCA’s Clarification:

Sch. Must be liberally interpreted

Capture the essence of subjects in the Sch.

Items in Sch. Are broad-based to cover wide range of

activities which are illustrative in nature

Hence, Schedule is not water-tight – Flexibility allowed

to Cos.



New Schedule Remarks

Eradicating Hunger Poverty, Malnutrition;

Promoting Preventive Healthcare and

sanitation; Safe Drinking Water

Good Move to include

sanitation, water. Promoting

Preventive Healthcare imp. for

Pharma Cos.

MCA Official Speak: Wide

enough to include Disaster /

Flood Relief work for J&K –

Food & Water

Mid-day meal Scheme


New

Sch.

Remarks

-- Old Schedule’s Reducing Child Mortality deleted - UNICEF-India #1:

Higher than Next 4 Together

-- Preventive Healthcare covered but Combating deleted

India is Disease Capital

#3 in AIDS /HIV

#1 in Malaria in South East Asia

#1 in Heart / Lung Disease

What were they thinking?


◦ MCA Clarification:

Provisions for aids & appliances to the differently abled –

Promoting Healthcare & Preventive Healthcare

Interpret liberally

Hence, Statement + Clarification – Can donate for

combating ailments also and not just for prevention



Promotion of Education / Special

Education / Vocational Skills among

children, women, elderly, differently

abled; Promoting livelihood Projects

Road Safety Awareness – Education

Drivers Training / Agri Labourers /

Farmers’ best practices – Vocational

Edn.

Promoting Gender Equality /

empowering women; Setting up homes

for women / orphans, old age homes

and Measures to reduce income

inequalities

Good move. Realty Cos. can

contribute



Promotion of

Education

Donations to IIM B for renovating classrooms,

conservation of Bldg, etc

Consumer Protection Redressal . Consumer Awareness

programmes

Technoparks approved by Dept. of Science

Research & Studies on all areas specified in the Schedule

VII

Contribution to

Technology

Incubators in CG

approved Academic

Institutes



Ensuring Environmental sustainability:

Welfare of Ecological balance / Flora &

Fauna / Animals / Agroforestry / natural

resources and Quality of soil, water, air

R&D for cost optimum /

ecological friendly practices /

Water Mgmt / Soil conservation

Renewable Energy

Rural Development Projects Meaning – Any project for

devlpmt of rural India

Contribution to PM’s National Relief Fund /

Fund of CG for development of SC/ST,

minorities and Women

Funds by SG deleted



Protection of National Heritage / Art /

Culture / Restoring Buildings, Historic sites,

Art; Setting up of Libraries; Promoting

Traditional Arts & Handicraft

Good Move. Media &

Entertainment Cos.

Measures for benefit of Armed forces

veterans, war widows, dependents

Excellent. Defence Industries

Training to promote Rural Sports /

Nationally recognised Sports / Olympic &

Paralympic sports

Many want to promote sports but

what is Training to Promote

Sports? Interpret liberally


New Sch. Remarks

Slum Area

Development

Slum Area must be so declared by CG / SG / Competent

Authority e.g., SRA

Swach Bharat Kosh Pet project of Government

Clean Ganga Fund Pet project of Government

-- Social Business Projects deleted

-- Such Other Matters as may be prescribed - Power removed

Which Activities are Excluded?

◦ Activities abroad – Charity begins and ends at home

◦ That benefit only employees & families –Never ever mix

charity & commerce – ICAI: Eees can be co-beneficiaries

◦ Amt. paid (directly / indirectly) to a Political party –

Politics is considered to be uncharitable

◦ Activities in normal course of business of Co. –

Be charitable and indulge to everyone, but thyself



◦ One-off events: Marathons / Awards / Ads /

Sponsorships of TV Programmes / Events

Must be a Project or a Programme

◦ CSR for fulfilling Statutory obligations / Labour Law

compliances

E.g., : CSR under Environmental Act for a Power Co.

Not treated as CSR u/s. 135

Hence, two CSRs



◦ Establishment functions of CG / SG

E.g.,: Expenditure on Training of Police

◦ Capacity Building of Govt. officials

Both in PPPs & Urban Infrastructure

◦ Sustainable Urban Development

◦ Urban Public Transport Systems


◦ Cos. can spend CSR on Own CSR staff + staff of

implementing agencies

◦ Including on Admin Overheads

◦ Max. 5% of CSR Exp. in One FY = 2%*5% = 0.1% CSR

◦ Companies are feeling 5% cap very restrictive

Infrastructure / Personnel / Training Programmes

Costs much more than 5%

Thumb Rule – 10% of total CSR Expenditure

Cannot deploy Top Management for CSR due to Cap


Where to spend?

◦ Within India only

◦ Preference to local area and areas around which it

operates

Local area of Co’s registered office or each of the

operational units of a multi-location company?



◦ CSR Spending @ 2% of Average Net Profits of Co. in

Preceding 3 FYs

Even if no Profits in Current Year?

For FY 2015-16: Block is 2012-2015

◦ Manner of computing Avg. NP specified

Here NP is NPBT

◦ Q. For Shortfall in CSR –Provision in A/cs?

ICAI: No


Deduct / Exclude Deduct / Exclude

Foreign Branch’s Profit Dividend from Co. covered by CSR

Share Premium / Profit on Forfeited Sh. Interest on debentures issued

Capital Gains from Sale of

Undertakings

Interest on Mortgages created / Loans

Gains from sale of Imm. Prop / Fixed

Assets (except if held as SIT)

Depreciation / Bad Debts

Profit on measurement of Asset /

Liability @ Fair Value

Excess of Expense over Income to the

extent not set-off in past

Working Charges / Director’s Remn./

Bonus / Commission to any Employee

Damages payable for Breach of

Contract PRAVIN P. SHAH & CO. 36

Include / Don’t Exclude Include / Don’t Exclude

Normal Income-tax, Cess, Surcharge

= Start with PBT

Subsidy received from CG / SG / Public

Authority

Damages paid voluntarily Loss on remeasurement of Asset /

Liability @ Fair Value

Capital Losses on sale / demolition of

undertakings of the Co.


◦ Yes. 2% is Floor – No ceiling on spending

◦ Excess would be treated as Charity

Would limits u/s. 181 of Companies Act

Excess over 5% of Avg NP for 3 FY = GM Permission

Contribution to Charitable & Other Funds

CSR Activity not always by contributing to a Fund

Can be Directly undertaken also

ICAI: Excess Spent cannot be c/f to Subsequent Years

Can disclose excess with reasons for not spending

If liability incurred provision to be made



Donate to PM / Other CG Funds

Donate to any NGO

Collaborate with Other

Cos.

Set up own Foundation

Carry out Activities

on its Own


Easiest way of doing CSR

◦ No responsibility on Co.

◦ Simply contribute to PMNRF

◦ Other CG Fund for socio-economic development and

relief of SC / ST / OBC / Minorities / Women

◦ No State Funds – CM’s Earthquake Relief Fund

Tax benefit u/s. 80G for PMNRF



COMPANY

TRUST

Donate

CHARITABLE ACTIVITIES

(Covered u/s. 135)

Set up Company itself or an External NGO

Can donate to Regd. Trust / Regd. Society / S.25 Co.

◦ Set up by Co./ Holdco / Sub /Associate / Any Co.

◦ External entity / Trust set up by Promoters / Individuals

Such Trust must have established track record of 3 years

in undertaking similar Projects / Programmes

Experience in similar programmes / projects

Thus, if spending on Education then NGO must have

track record in Educational Activities


Different Cos. collaborate for CSR activities

◦ CSR Committee of each Co. must be able to report

separately on such Programme / Project

Role of each Co. should be laid down – Inter se allocation



Definition

◦ ForCo is a body corporate / company

◦ Incorporated abroad

◦ Has a Place of Business in India

Either by itself; or

Through Agent physically / electronically; and

Conducts any Business in India in any other mode


CSR Applicability

◦ ForCo which has a Branch Office or Project Office in

India; and

◦ Fulfills criteria laid down u/s. 135(1)

◦ Branch Office

Establishment described as such by the Co.

◦ Project Office – not defined

◦ Which definitions should be considered?


◦ CSR Activities must be carried on only in India

ForCo cannot spend abroad

CSR Committee of Branch / Project Office in India

2 Persons

One the Resident in India authorised to accept Notices /

Documents on behalf of ForCo

Other any Nominee of ForCo

Report filed by ForCo u/s. 381 to include CSR Report also



Would CSR spending be allowed as a Deduction?

◦ Is Appropriation of profit and hence, not allowable?

◦ FA 2014: No Deduction allowable u/s 37(1)

◦ However, Deduction under Other Provisions allowable


If Co. contributes to an Eligible Project or Scheme

◦ So Notified by CG u/s. 35AC of ITA & R.11K

Approved by National Committee for Promotion of Social &

Economic Welfare

For promoting Social & Economic Welfare / Uplift of Public

◦ Deduction available against Business Income u/s. 35AC

Examples: Lupin Human Welfare & Research Foundation /

Isckon Food Relief / Helpage / Dignity Foundation


Eligible Project u/R11K CSR Activity under Sch. VII

Schools for Weaker Sections Promoting Edn . / Reducing Inequalities

Road safety / Traffic awareness Promoting Education

Education For Women & Minor Kids

in Rural areas

Promoting Edn . / Gender Inequalities /

Rural Devlp.

Vocational education in Rural area Promoting Education / Rural Develp.

Construction of Roads, Bridges Rural Devlp. / But not if in Urban Area

Upliftment of Rural poor / Urban

Slum Dwellers

Rural Devlp. / Reducing inequalities /

Slum Area Devlp.

Hostel for Women/Sr./ Disabled Reducing Income / Gender Inequalities

Dwelling for the Weaker Sections Reducing inequalities


Eligible Project u/R11K CSR Activity under Sch. VII

Plating softwood on non-forest land

Environmental Sustainability

Conservation of natural resources

Bacteria induced Fertilizers

Pollution Control

Renewable Energy Systems

Promotion of Sports Promoting Sports

Drinking Water Projects Safe Drinking Water

Relief of the Handicapped Livelihood Enhancement of Differently

abled


Exp. on Agricultural Extension Project

◦ 1.5 time Deduction on Notified Projects

◦ For training, education & guidance of farmers

Exp. on Skill Development Project

◦ 1.5 time Deduction on Notified Projects

◦ Co in Mfg / Specified Services

◦ Training in a separate facilities in Institute

◦ Approved by National Skill Development Agency

◦ For new Ees or within 6 mts of recruitment


S.80G available only to Trusts / Co.

◦ Set up for Charitable Purposes

Relief of poor, education, medical relief, preservation of

environment, preservation of monuments / art/history,

advancement of any object of general public utility

Control, supervision, regulation of Notified Games / Sports

◦ Not for benefit of particular religious community / caste

For benefit of SC /ST/OBC /Women / Children not deemed

to be for benefit of religious community / caste



Activity in Schedule Falls within s.80G?

Hunger, poverty, malnutrition Relief of Poor

Promoting education Education

Gender Equality, empowering

women

Expl. 1 - Benefit of women not

benefit of community?

Environmental sustainability Preservation of env. / wildlife

Protection of heritage / art/ culture Preservation of monuments, place

of Art / History

Benefit of Armed Forces No

Promote Rural Sports Expl .4 – Promotion of Notified

Games


Activity in Schedule Falls within s.80G?

Rural Development Projects If relief of poor, education, medical

relief

Preventive Healthcare Medical Relief

Sanitation / drinking water Relief of poor

Old age homes/ day care centres Helping Destitutes - General Public

Utility?

Public Libraries General Public Utility?

Sr. Mode of Spending Tax Treatment

1. Own Activities No deduction u/s. 37(1) but consider s.35AC

2. Contribution to PM’s Fund S.80G- 100% Deduction – No limit of 10% of

ATI applicable to Co.

3. Donation to NGO / S.8 Co. If S.80G obtained by entity - 50% Deduction +

Limit of 10% of ATI of Co.

4. Donation to Own Trust /

S.8 Co.

If S.80G obtained by entity - 50% Deduction +

Limit of 10% of ATI of Co.

5. Pooling of CSR No deduction u/s. 37(1) but consider s.35AC



CSR Committee in BoD Report

CSR Policy in BoD Report &

on Website

Ensure CSR Policy

implemented

Ensure CSR @ 2% of Avg. NP in 3 FYs

Give preference to

local areas

Reasons in Report if less

than 2%


7 Disclosures in BoD’s Report:

Outline of CSR Policy + Projects proposed

CSR Committee Composition

Avg. NP for Last 3 FYs

CSR Exp. @ 2% of Avg. NP

CSR Spent during FY (as per Table given)

If Failure – then why failed in BoD Report

Responsibility – Implementation per CSR Policy of Co.



P&L Statement – Sch. III

◦ Expenditure incurred on CSR Activities – Notes to A/c

◦ Nothing more to be disclosed in A/c

◦ Surplus not treated as Profits of Co.

◦ ICAI’s FAQs

If expense gives rise to Asset – show as CSR Asset

All CSR Expense – Separate line item or natural heads

CSR is an Appropriation of P&L


Annual Return

◦ CSR Disclosure

Amt Spent during FY

Amt Spent as % of Block of 3 FYs

Business Responsibility Report in Annual Report

Top 100 Listed Companies – Listing Agr.

CSR Spending as % of PAT

Activities on which CSR spending has been done



Failure to contribute / comply with s.135

◦ No specific Penalty provided

◦ Comply or Explain

◦ Could General Penalty under the Act be invoked?

On Company & Officers in Default

Fine up to Rs. 10,000

Continuing Offence: Up to Rs. 1,000 / day of continuing

default


◦ Press Reports

MCA in favour of making failure to contribute to CSR a

Punishable Offence with a specific penalty clause

Repeat Offenders should be penalised

Quantum and Nature of Penalty Clause not yet decided

Would have to amend Companies Act, 2013 for a Specific

Penalty Clause


Failure to report CSR Policy u/s. s.134(3)(o)

◦ Reasons for under spending, etc in BoD Report

◦ Would the explanation be scrutinised?

Would a reasonable explanation suffice?

Reporting Failure

◦ Fine on Company of Rs. 50,000 – 25 Lakhs

◦ Every Officer in Default: Term of up to 3 years AND / OR

Fine of Rs. 50,000 – 5 Lakhs


ET Ranking for Best Cos. for CSR – 2014

1) Tata Steel

2) Tata Chemicals

3) Mahindras

4) Maruti

5) Tata Motors

6) Siemens

7) L&T

8) Coca-Cola

9) SAIL

10) Infosys


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