CSR and its important definitions - Dr S. Chandrasekaran

Volume XVI Part 4 August 25, 2016 10 Business Advisor
CSR and its important definitions
Dr S. Chandrasekaran
Introduction
The Ministry of Corporate Affairs (MCA) has notified
separate section and a Schedule in the Companies Act,
2013 (the Act) for corporate social responsibility (CSR)
as well as the provisions of the Companies (Corporate
Social Responsibility Policy) Rules, 2014 (CSR Rules)
which has come into effect from 1 April 2014.
The purpose of introducing the concept of CSR is to
align company‘s social and environmental activities with its business
purpose and it was based on the idea that corporate success and social
welfare are interdependent as the company uses the resources from the
society itself.
Earlier too companies were making contribution towards social activities as
a charity or philanthropy. CSR is different from charity or philanthropy.
When a company intends to donate a portion of its profits for charity, that
measure turns to be charitable or philanthropic act. It may be either one-
time donation or an on-going commitment for donation of money to a
charitable trust or organisation which utilises the money for its own motive.
Philanthropy has thus limited scope whereas CSR has a much wider scope
since it is based on the idea that corporate success and social welfare are
interdependent.
The Act mandates that every Company having net worth of Rs 500 crore or
more, or turnover of Rs 1,000 crore or more or net profit of Rs 5 crore or
more during any financial year shall constitute a CSR committee of the
Board consisting of three or more directors out of which at least one director
shall be an independent director (ID). However, where a company is not
required to appoint an ID, such company‘s CSR committee need not have an
ID. The Board of such companies shall ensure that the company spends, in
every financial year, at least 2% of the average net profits of the company
made during the three immediately preceding financial years on CSR
activities, in pursuance of its CSR policy.
The CSR committee of the Board shall be responsible for formulating and
recommending to the Board a CSR policy indicating the CSR activities to be
undertaken by the company as specified in Schedule VII of the Act,

recommend the amount of expenditure to be incurred on the activities, and
monitor the CSR policy of the company from time to time.
A brief discussion of definitions construed to be important for CSR
compliance is outlined below:
Relevant definitions under corporate social responsibility
1. Corporate social responsibility: As defined under rule 2(1) (c) of the
CSR Rules 2014, corporate social responsibility means and includes but not
limited to:-
i) Projects or programs relating to activities specified in Schedule VII to the
Act; or
ii) Projects or programs relating to activities undertaken by the Board of
directors of a company (Board) in pursuance of recommendations of the
CSR committee of the Board as per declared CSR policy of the company
subject to the condition that such policy will cover subjects enumerated
in Schedule VII of the Act.
2. Company: As per section 2(20) of the Companies Act 2013, company
means a company incorporated under this Act or under any previous
company law.
As per Rule 3 of the Companies (Corporate Social Responsibility) Rules,
2014, it also covers foreign company having branch office or project office in
India. Rule 3(1) is briefed discussed below:
Rule 3(1) of the Companies (Corporate Social Responsibility) Rules, 2014:
Every company including its holding or subsidiary, and a foreign company
defined under clause (42) of section 2 of the Act having its branch office or
project office in India, which fulfils the criteria specified in sub-section (1) of
135 of the Act, shall comply with the provisions of section 135 of the Act
and these Rules.
Further as per MCA General Circular No. 01/2016 dated 12th January 2016,
the clarification was issued that holding or subsidiary of a company does not
have to comply with section 135 (1) unless the holding or subsidiary itself
fulfils the criteria.
Further, through the same circular, it was clarified that section 8 companies
are also required to follow CSR provisions as section 135 of the Act reads
‘every company’ and no exemption is given to section 8 companies.
3. Foreign company: As per section 2(42) of the Companies Act 2013,
foreign company means any company or body corporate incorporated
outside India which --

a) has a place of business in India whether by itself or through an agent,
physically or through electronic mode; and
b) conducts any business activity in India in any other manner.
Rule 2(1)(h) of the Companies (Specification of Definitions Details) Rule,
2014, reads as under --
Electronic mode means carrying out electronically based, whether main
server is installed in India or not, including, but not limited to –
(i) Business to business and business to customer transactions, data
interchange and other digital supply transactions;
(ii) Offering to accept deposits or inviting deposits or accepting deposits or
subscriptions in securities, in India or from citizens of India;
(iii)Financial settlements, web based marketing, advisory and transactional
services, database Services and products and supply chain management;
(iv) Online services such as telemarketing, telecommunicating, telemedicine,
education and information research; and
(v) All related data communication services;
Whether conducted by e-mail, mobile devices, social media, cloud
computing, document management, voice or data transmission or
otherwise.
Rule 3 of Companies (Registration Offices and Fees) Rules, 2014, reads as
under:
Business Activity- Every Company including Foreign Company which
carries out business through electronic mode, whether its main server is
installed in India or outside India, which-
(i) Undertakes business to business and business to customer
transactions, data interchange and other digital supply transactions;
(ii) Offers to accept deposits or invites deposits or accepts deposits or
subscriptions in securities, in India or from citizens of India;
(iii)Undertakes financial settlements, web based marketing, advisory and
transactional services, database services and products and supply chain
management;
(iv) Offers online services such as telemarketing, telecommunicating,
telemedicine, education and information research; or
(v) Undertakes any other related data communication services,

4. Holding company: As per section 2(46) of the Act, holding company in
relation to one or more other companies, means a company of which such
companies are subsidiary companies.
5. Subsidiary company: As per section 2(87) of the Companies Act 2013,
subsidiary company in relation to any other company (that is to say the
holding company), means a company in which the holding company-
i) controls the composition of the Board of directors; or
ii) exercises or controls more than one-half of the total share capital either
on its own or together with one or more of its subsidiary companies.
Provided that such class or classes of holding companies as may be
prescribed shall not have layers of subsidiaries beyond such numbers as
may be prescribed.
Explanation: For the purposes of this clause -
a) a company shall be deemed to be a subsidiary company of the holding
company even if the control referred to in sub-clause (i) or sub-clause (ii)
is of another subsidiary company of the holding company;
b) the composition of a company‘s Board of directors shall be deemed to be
controlled by another company if that other company by exercise of some
power exercisable by it at its discretion can appoint or remove all or a
majority of the directors;
c) the expression ―company‖ includes any body corporate;
d) ―layer‖ in relation to a holding company means its subsidiary or
subsidiaries.
6. Net worth: As per section 2(57) of the Companies Act, 2013, net worth
means the aggregate value of the paid-up share capital and all reserves
created out of the profits and securities premium account, after deducting
the aggregate value of the accumulated losses, deferred expenditure and
miscellaneous expenditure not written off, as per the audited balance sheet,
but does not include reserves created out of revaluation of assets, write-
back of depreciation and amalgamation.
Further, net worth of the foreign company shall be computed in accordance
with balance sheet and profit and loss account of such company prepared in
accordance with the provisions of clause (a) of sub section (1) of section 381
read with section 198 of the Act.

7. Paid up share capital: As per section 2(64), paid up share capital or
share capital paid up means an aggregate amount of money credited as paid
up as is equivalent to the amount received as paid up in respect of shares
issued and also includes any amount credited as paid up in respect of
shares of the company, but doesn‘t include any other amount received in
respect of such shares, by whatever name called.
8. Free reserves: As per Section 2(43), free reserves means such reserves
which, as per the latest audited balance sheet of the company, are available
for distribution as dividend:
Provided that -
(i) Any amount representing unrealised gains, notional gains or revaluation
of assets, whether shown as a reserve or otherwise, or
(ii) Any change in carrying amount of an asset or of a liability recognised in
equity, including surplus in profit and loss account on measurement of
the asset and liability at fair value,
shall not be treated as free reserves.
9. Turnover: As per section 2(91) of the Companies Act, 2013, turnover
means the aggregate value of the realisation of amount made from the sale,
supply or distribution of goods or on account of services rendered, or both,
by the company during a financial year.
Further, turnover of the foreign company shall be computed in accordance
with balance sheet and profit and loss account of such company prepared in
accordance with the provisions of clause (a) of sub section (1) of section 381
read with section 198 of the Act.
10. Net profit: As per Rule 2(1)(f) of the Companies (Corporate Social
Responsibility) Rules 2014, net profit means the net profit of a company as
per its financial statement prepared in accordance with the applicable
provisions of the Act, but shall not include the following, namely:-
(i) Any profit arising from any overseas branch or branches of the company
whether operated as a separate company or otherwise; and
(ii) Any dividend received from other companies in India, which are covered
under and complying with the provisions of section 135 of the Act.
Provided that net profit in respect of a financial year for which the relevant
financial statements were prepared in accordance with the provisions of the

Companies Act, 1956 (1 of 1956) shall not be required to be recalculated in
accordance with the provisions of the Act:
Provided further that in the case of a foreign company covered under these
Rules, net profit means the net profit of such company as per profit and loss
account prepared in terms of clause (a) of sub section (1) of section 381 read
with section 198 of the Act.
Computation of average net profit as per section 198 of the Companies
Act, 2013
1) In computing the net profits of a company in any financial year for the
purpose of section 197,—
a) credit shall be given for the sums specified in sub-section (2), and credit
shall not be given for those specified in sub-section (3); and
b) the sums specified in sub-section (4) shall be deducted, and those
specified in sub-section (5) shall not be deducted.
(2) In making the computation aforesaid, credit shall be given for the
bounties and subsidies received from any Government, or any public
authority constituted or authorised in this behalf, by any Government,
unless and except in so far as the Central Government otherwise directs.
(3) In making the computation aforesaid, credit shall not be given for the
following sums, namely:—
a) profits, by way of premium on shares or debentures of the company,
which are issued or sold by the company;
b) profits on sales by the company of forfeited shares;
c) profits of a capital nature including profits from the sale of the
undertaking or any of the undertakings of the company or of any part
thereof;
d) profits from the sale of any immovable property or fixed assets of a capital
nature comprised in the undertaking or any of the undertakings of the
company, unless the business of the company consists, whether wholly or
partly, of buying and selling any such property or assets:
Provided that where the amount for which any fixed asset is sold exceeds
the written-down value thereof, credit shall be given for so much of the
excess as is not higher than the difference between the original cost of that
fixed asset and its written down value;

e) any change in carrying amount of an asset or of a liability recognised in
equity reserves including surplus in profit and loss account on
measurement of the asset or the liability at fair value.
(4) In making the computation aforesaid, the following sums shall be
deducted, namely:—
a) all the usual working charges;
b) directors‘ remuneration;
c) bonus or commission paid or payable to any member of the company‘s
staff, or to any engineer, technician or person employed or engaged by
the company, whether on a whole-time or on a part-time basis;
d) any tax notified by the Central Government as being in the nature of a
tax on excess or abnormal profits;
e) any tax on business profits imposed for special reasons or in special
circumstances and notified by the Central Government in this behalf;
f) interest on debentures issued by the company;
g) interest on mortgages executed by the company and on loans and
advances secured by a charge on its fixed or floating assets;
h) interest on unsecured loans and advances;
i) expenses on repairs, whether to immovable or to movable property,
provided the repairs are not of a capital nature;
j) outgoings inclusive of contributions made under section 181;
k) depreciation to the extent specified in section 123;
l) the excess of expenditure over income, which had arisen in computing
the net profits in accordance with this section in any year which begins
at or after the commencement of this Act, insofar as such excess has not
been deducted in any subsequent year preceding the year in respect of
which the net profits have to be ascertained;
m) any compensation or damages to be paid by virtue of any legal liability
including a liability arising from a breach of contract;
n) any sum paid by way of insurance against the risk of meeting any
liability such as is referred to in clause (m);
o) debts considered bad and written off or adjusted during the year of
account.
5) In making the computation aforesaid, the following sums shall not be
deducted, namely:—

a) income-tax and super-tax payable by the company under the Income-tax
Act, 1961(43 of 1961), or any other tax on the income of the company not
falling under clauses (d) and (e) of sub-section (4);
b) any compensation, damages or payments made voluntarily, that is to say,
otherwise than in virtue of a liability such as is referred to in clause (m) of
sub-section (4);
c) loss of a capital nature including loss on sale of the undertaking or any of
the undertakings of the company or of any part thereof not including any
excess of the written-down value of any asset which is sold, discarded,
demolished or destroyed over its sale proceeds or its scrap value;
d) any change in carrying amount of an asset or of a liability recognised in
equity reserves including surplus in profit and loss account on
measurement of the asset or the liability at fair value.
Further, MCA through its General Circular No. 01/2016 has clarified that
computation of net profit for section 135 is as per section 198 of the
Companies Act 2013 which is primarily profit before tax.
11. Financial year: As per section 2(41) of the Companies Act 2013,
financial year in relation to any company or body corporate, means the
period ending on the 31st day of March every year, and where it has been
incorporated on or after the 1st day of January of a year, the period ending
on the 31st day of March of the following year, in respect whereof financial
statement of the company or body corporate is made up:
Provided that on an application made by a company or body corporate,
which is a holding company or a subsidiary of a company incorporated
outside India and is required to follow a different financial year for
consolidation of its accounts outside India, the Tribunal may, if it is
satisfied, allow any period as its financial year, whether or not that period is
a year:
Provided further that a company or body corporate, existing on the
commencement of this Act, shall, within a period of two years from such
commencement, align its financial year as per the provisions of this clause.
Further, the MCA through its General Circular No. 21/2014 and 01/2016
dated 18th June 2014 and 12th January 2016, has clarified that any
financial year referred under 135 (1) of the act read with rule 3(2) of the
CSR Rules, 2014 implies ‘any of the three preceding financial years’.

12. Directors: As per section 2(34) of the Companies Act 2013, director
means a director appointed to the Board of directors.
13. Registered trust: As per the Indian Trust Act ,1882, a ―trust‖ is an
obligation annexed to the ownership of property, and arising out of a
confidence reposed in and accepted by the owner, or declared and accepted
by him, for the benefit of another, or of another and the owner; the person
who reposes or declares the confidence is called the ―author of the trust‖;
the person who accepts the confidence is called the ―trustee‖; the person for
whose benefit the confidence is accepted is called the ―beneficiary‖; the
subject-matter of the trust is called ―trust-property‖ or ―trust-money‖; the
―beneficial interest‖ or ―interest‖ of the beneficiary is his right against the
trustee as owner of the trust-property; and the instrument, if any, by which
the trust is declared is called the ―instrument of trust.‖
Further MCA through its Circular no. 21/2014 dated 18th June 2014 has
clarified that registered trust (as referred in Rule 4(2) of the CSR Rules 2014)
would include trusts registered under Income Tax Act, 1956, for those states
where registration of trust is not mandatory.
14. Registered society: As per the Societies Act, 1989, society means a
society incorporated under the Societies Act, 1989, and includes an existing
society.
Conclusion
The MCA has, from time to time, provided more clarity on standardising the
meaning of CSR under the Companies Act, 2013, and strengthened the
initiatives towards the environmental and social welfare of the society by the
companies. As the Companies Act, 2013 is more focused on transparency
and good governance practices, companies are required to report the
activities undertaken under CSR and amount spent during the year in the
Board report of the company.
As far as possible, the CSR initiatives by the companies should be
constructed in a sustainable manner and should be scalable and result-
oriented. General Circular No. 1/2016 issued by the MCA, states the
activities which cannot be considered as CSR activities and also states the
scope of Schedule VII for the activities to be undertaken by the company.
The main thrust and spirit of law for the company is to spend the amount of
CSR activities which would benefit the society at large and the company has
to focus mainly in the local areas where the company is operating.
(Dr S. Chandrasekaran is Senior Partner, Chandrasekaran Associates, Delhi.)

CSR and its important definitions - Dr S. Chandrasekaran

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