17

CORPORATE SOCIAL
RESPONSIBILITY
LEARNING OUTCOMES

After studying this chapter, you would be able to

 Comprehend corporate social responsibility (CSR).

 Examine the various terminologies used in applying the provisions of
CSR

 Analyse the various situations under which CSR shall be implemented

as per the statute.

 Deal with the Accounting and Reporting aspects of CSR

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 17.2 FINANCIAL REPORTING

CHAPTER OVERVIEW

As per section 135 of

Important Definitions the Companies Act
2013

Company performing The Companies Act, Role of CSR

CSR 2013 Committee

Calculation of “Net
Statutory Provisions Role of Board
Profit”

Important Points on
CSR Activities

Permissible Activities
under CSR Policies

Revenue Expenditure made in the current

financial year

Whether Provision for Unspent Amount

required to be created?

Corporate Whether the Excess Amount spent is allowed

Social to be carried forward to next year?
Reponsibitlity
(CSR)
Accounting for CSR Expenditure made in Kind

CSR expenditure in Other Considerations in Recognition and

the Income tax
Measurement
scenario

Recognition of Income Earned from CSR

Projects

Accounting Entreies for CSR

Expenditure

Presentation
Reporting of CSR
Disclosure
Cessation from
compliance of CSR

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 CORPORATE SOCIAL RESPONSIBILITY 17.3

1. INTRODUCTION
Corporate Social Responsibility (‘CSR’) is corporate initiative to assess and take responsibility
for the company's effects on the environment and its impact on social welfare. It can be
conceptualized as the corporations’ obligation to take necessary action to reduce the negative
externalities and enhance the positive externalities associated with their business. In doing so,
the corporations could protect and promote the interests of their stakeholders and society as a
whole.
The origin of CSR can be traced to philanthropic activities of corporations, viz., donations and
charity. Over the years, the concept of CSR has evolved and it now includes within its scope,
triple bottom line approach (achieving a balance of economic, environmental and social
imperatives), corporate sustainability, improving and developing skills for sustainability, to name
a few.
CSR is the process by which an organization thinks about and evolves its relationships with
stakeholders for the common good, and demonstrates its commitment in this regard by adoption
of appropriate business processes and strategies. Thus, CSR is not charity or mere donations.
CSR is a way of conducting business, by which corporate entities visibly contribute to the social
good.
Socially responsible companies do not limit themselves to using resources to engage in
activities that increase only their profits. They use CSR to integrate economic, environmental
and social objectives with the company's operations and growth.

Philanthropy
Triple
Corporate
Bottom
Sustaina-
Line
bility
Approch

CSR

Improving and
Corporate developing
Citizenship skills for
sustainability
Response to
demographic
change

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 17.4 FINANCIAL REPORTING

2. CORPORATE SOCIAL RESPONSIBILITY (CSR)

"Corporate Social Responsibility (CSR)" means and includes but is not limited to:
(1) Projects or programs relating to activities specified in Schedule VII or
(2) 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

3. WHICH COMPANY TO PERFORM CORPORATE SOCIAL

RESPONSIBILITY?
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 (l) of section 135 of the Act shall comply with the provisions of
section 135 of the Act and these Rules:
Provided that net worth, turnover or net profit of a foreign company of the Act 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 and section 198 of
the Act.
Illustration 1
ABC Ltd. is a company which is formed with charitable objects under Section 8 of the
Companies Act, 2013. As a result, the management of the company believes that as all the
activities of the company will be with the intent of charity, the CSR provisions are not applicable
to ABC Ltd. as these activities are activities in normal course of business.
Whether the provisions of CSR are applicable to ABC Ltd. provided it fulfils the criteria of
Section 135 of the Act?
Solution
Section 135 of the Companies Act is applicable to every company meeting the specified criteria.
As per section 2(20) of the Companies Act, ‘company’ means a company incorporated under the
Companies Act or under any other previous company law. This would imply that companies set
up for the purposes of CSR/public welfare are also required to comply with the provisions of
CSR.
*****

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 CORPORATE SOCIAL RESPONSIBILITY 17.5

4. STATUTORY PROVISIONS
In India, the Companies Act, 2013 has statutorily recognised the concept of CSR. Section 135
of the Companies Act, 2013 read with Schedule VII thereto and Companies (Corporate Social
Responsibility Policy) Rules, 2014 are the special provisions under the new company law regime
imposing mandatory CSR obligations.

4.1 Important Definitions

(a) Average Net Profit: “Average Net Profit” is the amount as calculated in accordance with the
provisions of Section 198 of the Companies Act, 2013.
(b) Financial Year: “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.
If a holding company or a subsidiary of a company incorporated outside India follows a
different financial year for consolidation of its accounts outside India, the Tribunal may allow
(on application) any period as its financial year, whether or not that period is a year, provided
it align its financial year as per the Act, within a period of two years.
(c) Net Profit: “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:

(d) Net worth: “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.

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 17.6 FINANCIAL REPORTING

(e) Turnover: “Turnover" means the gross amount of revenue recognised in the profit and loss
account from the sale, supply, or distribution of goods or on account of services rendered, or
both, by a company during a financial year;
(f) Spend: The term ‘spend’ in accounting parlance generally means the liabilities incurred
during the relevant accounting period.

4.2 The Companies Act, 2013

A. As per section 135 of the Companies Act 2013
Every company having either
 net worth of ` 500 crore or more, or
 turnover of ` 1,000 crore or more or
 a net profit of ` 5 crore or more
during the immediate preceding financial year

shall constitute a Corporate Social Responsibility (CSR) Committee of the Board consisting of
three or more directors (including at least one independent director). However, if a company
is not required to appoint an independent director under section 149(4) of the Companies Act,
then its CSR Committee shall be formed with 2 or more directors.
Illustration 2
ABC Ltd. is a company which has a net worth of ` 200 crore, it manufactures rubber parts for
automobiles. The sales of the company are affected due to low demand of its products.
Required financial details of the following financial years are as follows ( ` in crore)

March 31, 20X4 March March 31, March

(Current year) projected 31, 20X3 20X2 31, 20X1

Net Profit 3.00 8.50 4.00 3.00

Sales (turnover) 850 950 900 800

Does ABC Ltd. has an obligation to form a CSR committee since the applicability criteria is
not satisfied in the current financial year?

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 CORPORATE SOCIAL RESPONSIBILITY 17.7

Solution
A company which meets the net worth, turnover or net profits criteria in immediate
preceding financial year will need to constitute a CSR Committee and comply with
provisions of sections 135(2) to (5) read with the CSR Rules.
As per the criteria to constitute CSR committee -

1) Net worth greater than or equal to ` 500 Crore: This criterion is not satisfied.
2) Sales greater than or equal to ` 1000 Crore: This criterion is not satisfied.
3) Net profit greater than or equal to ` 5 crore: This criterion is satisfied in financial year
ended March 31, 20X3 ie immediate preceding financial year.
Hence, the Company will be required to form a CSR committee.
*****

B. Role of Corporate Social Responsibility (CSR) Committee

The CSR Committee shall—
(a) formulate and recommend to Board-
a. a CSR Policy indicating the activities to be undertaken by the company in the
areas or subject specified in Schedule VII;
b. the amount of expenditure to be incurred on the above activities and
(b) monitor the CSR Policy of the company from time to time.
C. Role of Board
Board shall disclose-
(a) The composition of CSR Committee in its report
(b) Approve the recommended CSR Policy for the company
(c) Disclose the contents of such Policy in its report and place it on the company's website

(d) Ensure that the activities included in CSR Policy of the company are duly executed by
the company
(e) Ensure that the company spends, in every financial year, at least two per cent of the
average net profits of the company made during the three immediately preceding
financial years [or where the company has not completed the period of three financial

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 17.8 FINANCIAL REPORTING

years since its incorporation, during such immediately preceding financial years], by
giving preference to the local area and areas around it where it operates
(f) If the company spends an amount in excess of the requirements then it may set
off such excess amount against the requirement to spend for such number of
succeeding financial years and in such manner, as may be prescribed
(g) Any amount remaining unspent, pursuant to any ongoing project, undertaken by a
company in pursuance of its Corporate Social Responsibility Policy, shall be transferred
by the company within thirty days from the end of the financial year to a special account
(opened by the company in that behalf for that financial year in any scheduled bank) to
be called the Unspent Corporate Social Responsibility Account.
Such amount shall be spent by the company in pursuance of its obligation towards the
Corporate Social Responsibility Policy within three financial years from the date of such
transfer, failing which, the company shall transfer the same to a Fund specified in
Schedule VII, within thirty days from the date of completion of the third financial year.

(g) If a company defaults in complying with section 135(5) and 135(6), the company
shall be liable to a penalty of twice the amount required to be transferred by the
company to the Fund specified in Schedule VII or the Unspent Corporate Social
Responsibility Account, as the case may be, or one crore rupees, whichever is
less.
In addition to it, every officer of the company who is in default shall be liable to a
penalty of one-tenth of the amount required to be transferred by the company to
such Fund specified in Schedule VII, or the Unspent Corporate Social
Responsibility Account, as the case may be, or two lakh rupees, whichever is less.

Note: Where the amount to be spent by a company under sub-section (5) does not exceed
fifty lakh rupees, the requirement for constitution of the Corporate Social Responsibility
Committee shall not be applicable and the functions of such Committee be discharged by
the Board of Directors of such company.

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Section 135

During immediate preceding financial year

No No Is Net profit ≥ ` 5
Is Net worth ≥ ` 500 Is Turnover ≥ ` 1000
crore? crore? Crore?

Yes Yes Yes No

Form a CSR Committee and
Report to Board* Do not form a CSR Committee

Role of Board
Formulate & Recommend
CSR Policy to Board
Approve & Disclose CSR Policy

Recommend amount of
expenditure for CSR
Ensure undertaking of CSR
activities
activities and spending of amount

Monitor CSR Policy

Transfer unspent amount within 30 days from
the end of the financial year to ‘Unspent
Corporate Social Responsibility Account’ -
opened for that financial year.

• Spent such amount within 3 financial years from the date of such transfer.
• If not spent then transfer the same to a Fund specified in Schedule VII, within
30 days from the date of completion of the 3rd financial year.

*Note: Where the amount to be spent by a company under sub-section (5) does not exceed fifty lakh rupees, the
requirement for constitution of the Corporate Social Responsibility Committee shall not be applicable and the functions
of such Committee be discharged by the Board of Directors of such company.

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 17.10 FINANCIAL REPORTING

Illustration 3
ABC Ltd. manufactures consumable goods like bath soap, tooth brushes, soap cases etc. As
part of its CSR policy, it has decided that for every pack of these goods sold, ` 0.80 will go
towards the ‘Save Trees Foundation’ which will qualify as a CSR spend as per Schedule VII.
Consequently, at the year end, the company sold 25,000 such packs and a total of ` 20,000 was
recognised as CSR expenditure. However, this amount was not paid to the Foundation at the
end of the financial year.
Will the amount of ` 20,000 qualify to be a CSR expenditure?
Solution
By earmarking the amount from such sale for CSR expenditure, the company cannot show it as
CSR expenditure. To qualify the amount to be CSR expenditure, it has to be spent. Hence,
` 20,000 will not be automatically considered as CSR expenditure until and unless it is spent on
CSR activities.
*****

4.3 Calculation of “Net Profit” as per Section 198

(1) In computing the net profits of a company in any financial year,
(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 [unless the company is an investment 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:

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 CORPORATE SOCIAL RESPONSIBILITY 17.11

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;
(f) any amount representing unrealised gains, notional gains or revaluation of assets.
(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, in so far 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 in 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.

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(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, 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.

4.4 Important Points on CSR Activities

1. The CSR activities shall be undertaken by the company, as per its stated CSR Policy, as
projects or programs or activities (either new or ongoing),
2. The Board may decide to undertake its CSR activities through
(a) a company established under section 8 of the Act or a registered trust or a registered
society, established by the company, either singly or alongwith any other company, or
(b) a company established under section 8 of the Act or a registered trust or a registered
society, established by the Central Government or State Government or any entity
established under an Act of Parliament or a State legislature
3. A company may also collaborate with other companies for undertaking projects or programs
or CSR activities in such a manner that the CSR Committees of respective companies are in
a position to report separately on such projects or programs in accordance with these rules.
4. The CSR projects or programs or activities undertaken in India only shall amount to CSR
expenditure.

Illustration 4
Due to immense loss to Nepal in the recent earthquake, one FMCG Company undertakes
various commercial activities with considerable discounts and concessions at the related
affected areas of Nepal for a continuous period of 3 months after earthquake. In the Financial
Statements for the year 20X1-X2, the Management has shown the expenditure incurred on
such activity as expenditure incurred to discharge Corporate Social Responsibility.
State whether the treatment done by the management of management is correct. Explain
with reasons.

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 CORPORATE SOCIAL RESPONSIBILITY 17.13

Solution
The statutory guidelines relating to CSR require the deployment of funds for the benefit of the
local area of the Company. Since Nepal is another country the expenditure done there i.e. in
Nepal shall not qualify to be accounted as CSR expenditure.
Further, it is presumed that the commercial activities performed at concessional rates are not
permissible as CSR activities. Therefore, the treatment done by the Management by showing
the expenditure incurred on such commercial activities in its financial statements as the
expenditure incurred on activities undertaken to discharge CSR, is not correct.
*****
5. 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.
6. Companies may build CSR capacities of their own personnel as well as those of their
Implementing agencies through Institutions with established track records of at least three
financial years but such expenditure (including expenditure on administrative overheads)
shall not exceed five percent of total CSR expenditure of the company in one financial year.
7. Contribution of any amount directly or indirectly to any political party, shall not be considered
as CSR activity.

4.5 Permissible Activities under Corporate Social Responsibility

Policies: Schedule VII
As per Schedule VII of Companies Act 2013, following activities may be included by companies
in their Corporate Social Responsibility Policies Activities relating to:
1. eradicating hunger, poverty and malnutrition, promoting health care including preventive
health care and sanitation including contribution to the Swach Bharat Kosh set-up by the
Central Government for the promotion of sanitation and making available safe drinking water.
2. promoting education, including special education and employment enhancing vocation skills
especially among children, women, elderly and the differently abled and livelihood
enhancement projects.
3. promoting gender equality, empowering women, setting up homes and hostels for women and
orphans; setting up old age homes, day care centres and such other facilities for senior citizens
and measures for reducing inequalities faced by socially and economically backward groups;
4. ensuring environmental sustainability, ecological balance, protection of flora and fauna,
animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil,
air and water including contribution to the Clean Ganga Fund set-up by the Central
Government for rejuvenation of river Ganga;

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5. protection of national heritage, art and culture including restoration of buildings and sites of
historical importance and works of art; setting up public libraries; promotion and
development of traditional arts and handicrafts;
6. measures for the benefit of armed forces veteran, war widows and their dependents,
Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF)
veterans, and their dependents including widows;
7. training to promote rural sports nationally recognized sports and Olympic sports;
8. contribution to the Prime Minister's National Relief Fund or Prime Minister’s Citizen
Assistance and Relief in Emergency Situations Fund (PM CARES Fund) or any other
fund set up by the Central Government for socio-economic development and relief and
welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities
and women; and
9. (a) Contribution to incubators or research and development projects in the field of science,
technology, engineering and medicine, funded by the Central Government or State
Government or Public Sector Undertaking or any agency of the Central Government or
State Government; and
(b) Contributions to public funded Universities; Indian Institute of Technology (IITs);National
Laboratories and autonomous bodies established under Department of Atomic Energy
(DAE); Department of Biotechnology (DBT); Department of Science and Technology
(DST); Department of Pharmaceuticals; Ministry of Ayurveda, Yoga and Naturopathy,
Unani, Siddha and Homoeopathy (AYUSH); Ministry of Electronics and Information
Technology and other bodies, namely Defense Research and Development Organisation
(DRDO); Indian Council of Agricultural Research (ICAR); Indian Council of Medical
Research (ICMR) and Council of Scientific and Industrial Research (CSIR), engaged in
conducting research in science, technology, engineering and medicine aimed at
promoting Sustainable Development Goals (SDGs).]
10. rural development projects.
11. slum area development.
12. disaster management, including relief, rehabilitation and reconstruction activities.

5. ACCOUNTING FOR CSR TRANSACTIONS

5.1 Revenue Expenditure made in the Current Financial Year

CSR Expenditure is an item of profit and loss statement.
Item 5 (A)(k) of the General Instructions for Preparation of Statement of Profit and Loss under

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Schedule III to the Companies Act, 2013, requires that in case of companies covered under
Section 135, the amount of expenditure incurred on ‘Corporate Social Responsibility Activities’
shall be disclosed by way of a note to the statement of profit and loss.
The treatment of revenue expenditure will be the same under AS and Ind AS.

5.2 Whether Provision for Unspent Amount required to be created?

5.2.1 Other than ongoing project

Sub-section (5) of section 135 of the Act has been amended by Companies (Amendment) Act,
2019 whereby, any amount remaining unspent under sub-section (5), pursuant to an activity
other than any ongoing project as per section 135(6) has to transfer such unspent amount to a
Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.
As per the said amendment, the company have an obligation to transfer the unspent amount of
“other than relating to an ongoing project” to a specified fund.
Accordingly, a provision for liability for the amount representing the extent to which the amount
is to be transferred, needs to be recognised in the financial statements.

5.2.2 Ongoing project

In case of any amount remaining unspent under section 135(5) pursuant to any ongoing project,
undertaken by a company in pursuance of its Corporate Social Responsibility Policy, shall be
transferred by the company within a period of thirty days from the end of the financial year to a
special account to be opened by the company in that behalf for that financial year in any
scheduled bank to be called the Unspent Corporate Social Responsibility Account, and such
amount shall be spent by the company in pursuance of its obligation towards the Corporate
Social Responsibility Policy within a period of three financial years from the date of such
transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII,
within a period of thirty days from the date of completion of the third financial year.
As there is an obligation to transfer the unspent amount to a separate bank account within 30
days of the end of Financial year and eventually any unspent amount out of that to a Fund
specified in Schedule VII, a provision for liability for the amount representing the extent to which
the amount is to be transferred within 30 days of the end of the financial year needs to be
recognised in the financial statements.
In respect of both “ongoing projects” and “other than ongoing projects” if a company has already
undertaken certain CSR activity for which a liability has been incurred by entering into a
contractual obligation, a provision for liability for the amount representing the extent to which the
CSR activity was completed during the year needs to be recognised in the financial statements
even though the payment for the same has not been made during the year.

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For the above purpose, the amount transferred to separate bank account will be the full amount,
but provision created under it will be after deducting the provision created for liability already
incurred, if applicable, and as provided.

5.3 Whether the Excess Amount spent is allowed to be carried forward

to next year?
As per 3rd Proviso to Sub-section (5) of section 135 of the Act, the excess amount spent would
be allowed to be carried forward to next year.
If the company decides to adjust such excess against future obligation, then to the extent of
such excess, an asset will have to be recognized for the amount which is spent in excess of 2%.
If the company decides not to carry forward such excess spend in full or in part, the same to the
extent not carried forward is to be recognized as expense.
Illustration 5
ABC Ltd. is a company which is covered under the ambit of CSR rules. As part of its CSR
contribution an amount of ` 15,00,000 was spent as CSR expense towards the education of girl
child. The average net profit of the company for the past three years was ` 7 crore. As the
company incurred a CSR expense in excess of what is required by the rules, it decided to utilise
this expense as a carry forward to the next year and reduce next year’s CSR spend by
` 1,00,000.
Can the excess expenditure towards CSR be carried forward to next financial year?
Solution
As per the current law of land, carry forward of excess amount over 2% of average profits, will
be allowed, if the company decides to adjust such excess against future obligation.
If the company decides not to carry forward such excess spend in full or in part, the same to the
extent not carried forward is to be recognized as expense.
*****

5.4 Expenditure made in Kind

A Company may spend under the law in kind too. However, it is important to find out whether
spending in kind may be covered under CSR or not. Few examples could be:
(a) A company acquires / purchases goods, etc. and distributes / uses the same in its CSR
project, which is allowed under current CSR provisions as CSR spend.
(b) A company manufacturing / dealing in goods or services distributes those goods / services
itself free of charge as CSR spend, which may not be covered in CSR spend in view of

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 CORPORATE SOCIAL RESPONSIBILITY 17.17

Rule 4(1) of the Companies (CSR Policy) Rules 2014. However, in Mohd. Ahmed (Minor)
vs. UOI & Ors dt 17.4.2014, MCA gave an affidavit that a pharmaceutical company
donating medicines / drugs within section 135 read with schedule VII of the Act is a CSR
activity, as it is relatable to health care or any other entry in Schedule VII.
(c) A hospital rendering free medical services to 25% patients as per local government
guidelines may not be considered as CSR spend; however free medical services rendered
beyond 25% may be considered as CSR spend.
(d) A company manufacturing goods distributes / sells goods other than those which it
manufactures in the normal course of business. For example, a manufacturer of steel rods,
manufactures steel medical beds. If these beds are sold (irrespective of cost incurred),
then it is not a CSR spend.
However, giving it free of charge would be a CSR spend as it would not be an activity
undertaken in the normal course of business.

5.5 Other Considerations in Recognition and Measurement

A company may decide to undertake its CSR activities approved by the CSR Committee with a
view to discharging its CSR obligation as arising under section 135 of the Act in the following
three ways:
(a) making a contribution to the funds as specified in Schedule VII to the Act; or
(b) through a registered trust or a registered society or a company established under section 8
of the Act (or section 25 of the Companies Act, 1956) by the company, either singly or
along with its holding or subsidiary or associate company or along with any other company
or holding or subsidiary or associate company of such other company, or otherwise ; or
(c) in any other way in accordance with the Companies (Corporate Social Responsibility
Policy) Rules, 2014, e.g. on its own.
In case a contribution is made to a fund specified in Schedule VII to the Act, the same would be
treated as an expense for the year and charged to the statement of profit and loss. In case the
amount is spent in the manner as specified in paragraph (b) above the same will also be
recognized as an expense in the statement of profit and loss. The accounting for expenditure
incurred by the company otherwise e.g. on its own would be recognized as explained hereinafter.
CSR activities carried out by the company covered under paragraph (c) above
In cases where an expenditure of revenue nature is incurred on any of the activities mentioned
in Schedule VII to the Act by the company on its own, the same should be charged as an
expense to the statement of profit and loss. In case the expenditure incurred by the company is
of such nature which may give rise to an ‘asset’, a question may arise as to whether such an
‘asset’ should be recognised by the company in its balance sheet.

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 17.18 FINANCIAL REPORTING

In this context, it would be relevant to note the definition of the term ‘asset’ as per the
Framework for Preparation and Presentation of Financial Statements issued by the Institute of
Chartered Accountants of India. As per the Framework, an ‘asset’ is a “resource controlled by
an enterprise as a result of past events from which future economic benefits are expected to
flow to the enterprise”. Hence, in cases where the control of the ‘asset’ is transferred by the
company, e.g., a school building is transferred to a Gram Panchayat for running and maintaining
the school, it should not be recognised as ‘asset’ in its books and such expenditure would need
to be recognized as an expense in the statement of profit and loss as and when incurred.
In other cases, where the company retains the control of the ‘asset’ then it would need to be
examined whether any future economic benefits accrue to the company. Invariably future
economic benefits from a ‘CSR asset’ would not flow to the company as any surplus from CSR
cannot be included by the company in business profits in view of Rule 6(2) of the Companies
(Corporate Social Responsibility Policy) Rules, 2014.
In some cases, a company may supply goods manufactured by it or render services as CSR
activities. In such cases, the expenditure incurred should be recognised when the control on the
goods manufactured by it is transferred or the allowable services are rendered by the
employees. The goods manufactured by the company should be valued in accordance with the
principles prescribed in Accounting Standard (AS) 2 / Ind AS 2, Valuation of Inventories. The
services rendered should be measured at cost. Indirect taxes (like GST, excise duty, VAT or
other applicable taxes) on the goods and services so contributed will also form part of the CSR
expenditure.
Where a company receives a grant from others for carrying out CSR activities, the CSR
expenditure should be measured net of the grant.

Illustration 6
After the havoc caused by flood in Jammu and Kashmir, a group of companies undertakes during
the period from October, 20X1 to December, 20X1 various commercial activities, with considerable
concessions/discounts, along the related affected areas. The management intends to highlight the
expenditure incurred on such activities as expenditure incurred on activities undertaken to
discharge corporate social responsibility, while publishing its financial statements for the year
20X1-20X2.
State whether the management’s intention is correct or not and why?

Solution
Corporate Social Responsibility (CSR) Reporting is an information communiqué with respect to
discharge of social responsibilities of corporate entity. Through ‘CSR Report’ the corporate
enterprises disclose the manner in which they are discharging their social responsibilities. More
specifically, it is addressed to the public or society at large, although it can be squarely used by
other user groups also.

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 CORPORATE SOCIAL RESPONSIBILITY 17.19

Section 135 of the Companies Act, 2013 mandated the companies fulfilling the criteria mentioned
in the said section to spend certain amount of their profit on activities as specified in the
Schedule VII to the Act. Companies not falling within that criteria can also spend on CSR activities
voluntarily. However, besides the requirements of constitution of a CSR committee and a CSR
policy, the corporate entities should also take care that expenditure incurred for CSR should not be
the expenditure incurred for the activities in the ordinary course of business. If expenditure
incurred is for the activities in the ordinary course of business, then it will not be qualified as
expenditure incurred on CSR activities.
Here, it is assumed that the commercial activities performed at concessional rates are the
activities done in the ordinary course of business of the companies. Therefore, the intention of the
management to highlight the expenditure incurred on such commercial activities in its financial
statements as the expenditure incurred on activities undertaken to discharge CSR, is not correct.
*****

5.6 Recognition of Income Earned from CSR Projects/ Programmes or

During the Course of Conduct of CSR Activities
Rule 6(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014, requires that
“the surplus arising out of the CSR projects or programs or activities shall not form part of the
business profit of a company”.
• The term ‘surplus’ ordinarily means excess of income over expenditure pertaining to an
entity or an activity. Thus, in respect of a CSR project or programme or activity, it needs to
be determined whether any surplus is arising therefrom.
• A question would arise as to whether such surplus should be recognised in the statement
of profit and loss of the company. It may be noted that paragraph 5 of AS 5, Net Profit or
Loss for the Period, Prior Period Items and Changes in Accounting Policies, inter alia,
requires that all items of income which are recognised in a period should be included in the
determination of net profit or loss for the period unless an Accounting Standard requires or
permits otherwise. As to whether the surplus from CSR activities can be considered as
‘income’, the Framework for Preparation and Presentation of Financial Statements issued
by the Institute of Chartered Accountants of India, defines ‘income’ as “increase in
economic benefits during the accounting period in the form of inflows or enhancements of
assets or decreases of liabilities that result in increases in equity, other than those relating
to contributions from equity participants”.
• Since the surplus arising from CSR activities is not arising from a transaction with the
owners, it would be considered as ‘income’ for accounting purposes.
• In view of the aforesaid requirement any surplus arising out of CSR project or programme
or activities shall be recognised in the statement of profit and loss and since this surplus

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 17.20 FINANCIAL REPORTING

cannot be a part of business profits of the company, the same should immediately be
recognised as liability for CSR expenditure in the balance sheet and recognised as a
charge to the statement of profit and loss.
• Accordingly, such surplus would not form part of the minimum ‘2% of the average net
profits of the company made during the three immediately preceding financial years in
pursuance of its Corporate Social Responsibility Policy’.

5.7 Accounting Entries of the CSR Expenditure

Accounting entries of the CSR Expenditure may be as under:
S. Particulars Dr. Cr.
No. Amount Amount
(in `) (in `)
1. CSR in Cash
CSR Expenditure A/c Dr.
To Cash / Bank
2. CSR in Kind
CSR Expenditure A/c Dr.
To Purchase /cost of goods consumed
3. CSR when not fully spent during the year as per proposed
amendment to S. 135 (5)
CSR Expenditure A/c Dr.
To Cash/Purchase/Cost of goods consumed (as applicable)
To CSR to be Deposited in Fund
4. CSR when not fully spent during the year as per proposed
amendment S. 135 (6)
CSR Expenditure A/c Dr.
To Cash/Purchase/Cost of goods consumed (as applicable)
To CSR to be Spent on Ongoing project
5. CSR when spent in excess as per proposed amendment to S. 135 (5)
CSR Expenditure A/c Dr.
CSR Pre-Spent A/c Dr.
(As per proposed amendment)
To Cash/Purchase/Cost of goods consumed (as applicable)

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 CORPORATE SOCIAL RESPONSIBILITY 17.21

6. CSR EXPENDITURE IN THE INCOME TAX SCENARIO

1. CSR expenditure, being an application of income, is not incurred wholly and exclusively for
the purposes of carrying on business. As the application of income is not allowed as
deduction for the purposes of computing taxable income of a company, amount spent on
CSR cannot be allowed as deduction for computing the taxable income of the company.
2. The CSR expenditure which is of the nature described in section 30 to section 36 of the
Income-tax Act shall be allowed as deduction under those sections subject to fulfilment of
conditions, if any, specified therein. If the nature of CSR expenditure incurred is not covered
under the aforesaid sections of the Act and is covered under section 37(1) of the Act, ie any
expenditure incurred by an assessee on the activities relating to corporate social
responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be
deemed to be an expenditure incurred by the assessee for the purposes of the business or
profession.

Illustration 7
ABC Ltd. carries out CSR activities from rented premises in Pune. The rent paid for such
premises is disclosed as CSR expenditure and subsequently ABC Ltd. also claimed deduction of
the same under the Income-tax Act. Is this permissible?

Solution
CSR expenditure which is of the nature described under the section 30 to 36 of the Income-tax
Act shall be allowed as a deduction. Rent expenses can be claimed under section 30 of the Act
and hence it can be claimed as a deduction.
*****

7. REPORTING OF CSR: PRESENTATION AND

DISCLOSURE IN THE FINANCIAL STATEMENTS
1. General Instructions for Preparation of Statement of Profit and Loss under Schedule III to
the Companies Act, 2013, requires that in case of companies covered under Section 135,
the amount of expenditure incurred on ‘Corporate Social Responsibility Activities’ shall be
disclosed by way of a note to the statement of profit and loss.
2. From the perspective of better financial reporting and still be in line with the requirements
of Schedule III in this regard, it is recommended that all expenditure on CSR activities, that
qualify to be recognised as expense in accordance with the relevant provisions as

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 17.22 FINANCIAL REPORTING

discussed above should be recognised as a separate line item as ‘CSR expenditure’ in the
statement of profit and loss.
3. Further, the relevant note should disclose the break-up of various heads of expenses
included in the line item ‘CSR expenditure’.
4. It may also happen that a Company is incurring losses but it may still satisfy other conditions
specified under Section 135 of the Act and becomes liable to comply with the provisions of
the Section 135 and Companies Rules, 2014 but since there are no profits, the company may
not spend any amount, and still it will have to disclose the reason for not spending any
amount in its Boards Report.
5. The notes to accounts relating to CSR expenditure should also contain the following:
a) Gross amount required to be spent by the company during the year.
b) Amount approved by the Board to be spent during the year
c) Amount spent during the year on:

In cash Yet to be paid in Total

cash
(i) Construction/acquisition of any
asset
(ii) On purposes other than (i) above

The above disclosure, to the extent relevant, may also be made in the notes to the cash
flow statement, where applicable.
d) Details of related party transactions, e.g., contribution to a trust controlled by the
company in relation to CSR expenditure as per Accounting Standard (AS) 18, Related
Party Disclosures.
e) When the amendments to Section 135(5) and 135(6) are made applicable, then the
following details in the notes should also be made:
In case of S. 135(5) unspent amount
Opening Amount deposited in Amount required Amount spent Closing
Balance Specified Fund of Sch. to be spent during the year Balance
VII within 6 months during the year

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 CORPORATE SOCIAL RESPONSIBILITY 17.23

In case of S. 135(5) unspent amount

Opening Amount required to be Amount spent during Closing Balance
Balance spent during the year the year

Details of ongoing projects along with

In case of S. 135(5) unspent amount
Opening Balance Amount Amount spent during Closing Balance
required the year
to be
spent
during the
year
With In Separate From From With In
company CSR Company’s Separate Company Separate
Unspent A/c bank A/c CSR CSR
Unspent Unspent
A/c A/c

f) Where a provision is made in accordance with paragraph 8 above the same should be
presented as per the requirements of Schedule III to the Companies Act, 2013. Further,
movements in the provision during the year should be shown separately.
g) Where the CSR expenditure being goods is incurred in kind, the same should be
measured as per Accounting Standard- 2 ‘Valuation of Inventories’ / Ind AS-2
‘Inventories’ at lower of cost and net realizable value. Where the CSR expenditure being
services is incurred in kind, the same should be measurable and recorded at cost i.e. no
profit / loss.

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 17.24 FINANCIAL REPORTING

TEST YOUR KNOWLEDGE

Questions
1. A property is being constructed to operate CSR activities by a company. At the balance
sheet date, the cost of construction is treated as revenue expenditure. Are there any
additional disclosures required in the financials regarding this?
2. In the year 20X1, XYZ Ltd. falls within the purview of CSR provisions as per the Companies
Act, 2013 since its net profit for the financial year exceeded ` 5 crore. The company
discharged CSR obligations in the year 20X2. However, the net profit of the year 20X2 was
less than ` 5 crores. Also, it was also not satisfying the other two criteria of the section 135
for CSR compliance. Therefore, the company stopped performing CSR activities from the
year 20X3 onwards. Comment on the company’s accountability for CSR.

Answers
1. General Instructions for Preparation of Statement of Profit and Loss under Schedule III to the
Companies Act, 2013, requires that in case of companies covered under Section 135, the
amount of expenditure incurred on ‘Corporate Social Responsibility Activities’ shall be
disclosed by way of a note to the statement of profit and loss. The note should also disclose
the details with regard to the expenditure incurred in construction of a capital asset under a
CSR project.
2. Once a company has fulfilled the net worth / turnover / net profit criterion for one year it has
to fulfil its CSR obligations for the subsequent three financial years, even if it does not fulfil
any of these criteria in those years.
In the given case, XYZ Ltd. falls in the ambit of CSR obligations by fulfilling the criteria of net
profit exceeding ` 5 crores in the year 20X1. So it has to discharge its CSR obligations by
spending two percent of its average profit every year starting from 20X2 till 20X4. It cannot
stop spending on CSR activities as per the Act after 20X2.

© The Institute of Chartered Accountants of India