Section 135 Corporate Social Responsibility – Companies Act 2013

CSR Committee: Meaning, members, composition, function, role of Corporate Social Responsibility Committee as per section 135 of Companies Act 2013.

Amended and updated notes on section 135 of Companies Act 2013. Detail discussion on provisions and rules related to Corporate Social Responsibility (CSR).

Chapter IX (Sections 128–138) of the Companies Act, 2013 (CA 2013) deals with the provisions related to accounts of companies. Section 135 of CA 2013 provides for Corporate Social Responsibility.

Recently, we have discussed in detail section 134 (Financial statement, Board’s report, etc.) of CA 2013. Today, we learn the provisions of section 135 of Companies Act 2013 read with the Companies (Accounts) Rules, 2014 and the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

Section 135 of the Companies Act, 2013 has been notified by the Ministry of Corporate Affairs (MCA) vide Notification No. S.O. 582(E) issued dated 27.02.2014. This notification shall come into force from 1st April, 2014 i.e. the commencement date of section 135 is 01-04-2014.

What is CSR? Corporate Social Responsibility (CSR) is the initiatives taken by a company to create social awareness or encourage a positive impact on the environment and stakeholders including customers, consumers, communities, suppliers, employees and investors etc. We have already discussed various FAQs on CSR Policy.

Actually, the concept of Corporate Social Responsibility is governed by the provisions of section 135 of the Companies Act, 2013 read with CSR Policy Rules 2014. Section 135, Schedule-VII and CSR Policy Rules, 2014 has been effective from the first day of April, 2014 vide Notification No. S.O. 582(E) dated 27th February, 2014.

Name of Act	The Companies Act 2013
Enacted by	Parliament of India
Administered by	Ministry of Corporate Affairs (MCA)
Number of Chapters	29
Number of Sections	484 (470-43+57)
Number of Schedules	7
You are reading:
Chapter No.	IX
Chapter Name	Accounts of Companies
Section No.	135
Section Name	Corporate Social Responsibility
Monthly Updated Edition	Company Law PDF

Section 135 of Companies Act 2013: Corporate Social Responsibility

(The amended provisions of section 135 shall come into force on 22nd January, 2021 vide S.O. 325(E) dated 22.01.2021)

Section 135(1) of Companies Act

Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

Provided that where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.

Section 135(2) of Companies Act

The Board’s report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.

Section 135(3) of Companies Act

The Corporate Social Responsibility Committee shall, —

• (a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company in areas or subject, specified in Schedule VII;
• (b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
• (c) monitor the Corporate Social Responsibility Policy of the company from time to time.

Section 135(4) of Companies Act

The Board of every company referred to in sub-section (1) shall, —

• (a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any, in such manner as may be prescribed; and
• (b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.

Section 135(5) of Companies Act

The Board of every company referred to in sub-section (1), shall 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 years since its incorporation, during such immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:

Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities:

Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount and, unless the unspent amount relates to any ongoing project referred to in sub-section (6), transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.

[Sub-section(5) including second proviso of section 135 has been amended w.e.f. 22.01.2021 by the Companies (Amendment) Act, 2019 vide S.O. 324(E) dated the 22nd January, 2021.]

Provided also that if the company spends an amount in excess of the requirements provided under this sub-section, such company may set off such excess amount against the requirement to spend under this sub-section for such number of succeeding financial years and in such manner, as may be prescribed.

[Third proviso of sub-section(5) of section 135 has been inserted w.e.f. 22.01.2021 by the Companies (Amendment) Act, 2020 vide S.O. 325(E) dated the 22nd January, 2021.]

Section 135(6) of Companies Act

Any amount remaining unspent under sub-section (5), pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in persuance 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.

[Sub-sections (6) of section 135 has been newly inserted w.e.f. 22.01.2021 by the Companies (Amendment) Act, 2019 vide S.O. 324(E) dated the 22nd January, 2021.]

Section 135(7) of Companies Act

If a company is in default in complying with the provisions of sub-section (5) or sub-section (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, and 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.

[Sub-section (7) of section 135 has been substituted w.e.f. 22.01.2021 by the Companies (Amendment) Act, 2020 vide S.O. 325(E) dated the 22nd January, 2021.]

Section 135(8) of Companies Act

The Central Government may give such general or special directions to a company or class of companies as it considers necessary to ensure compliance of provisions of this section and such company or class of companies shall comply with such directions.

[Sub-section (8) of section 135 has been newly inserted w.e.f. 22.01.2021 by the Companies (Amendment) Act, 2019 vide S.O. 324(E) dated the 22nd January, 2021.]

Section 135(9) of Companies Act

Where the amount to be spent by a company under sub-section (5) does not exceed fifty lakh rupees, the requirement under sub-section (1) for constitution of the Corporate Social Responsibility Committee shall not be applicable and the functions of such Committee provided under this section shall, in such cases, be discharged by the Board of Directors of such company.

[Sub-section (9) of section 135 has been newly inserted w.e.f. 22.01.2021 by the Companies (Amendment) Act, 2020 vide S.O. 325(E) dated the 22nd January, 2021.]

Explanation: For the purposes of this section “net profit” shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of section 198.

Exception/ Modification/ Adaptation:

1) Section 135 shall not apply for a period of five years from the commencement of business of a Specified IFSC public company. –Notification No. G.S.R. 08(E) dated 4th January, 2017.

2) Section 135 shall not apply for a period of five years from the commencement of business of a Specified IFSC private company. –Notification No. G.S.R. 09(E) dated 4th January, 2017.

Now, I am explaining below each provisions of section 135 of the Companies Act 2013.

Scope or Applicability Criteria for CSR Requirements

Constitution of CSR Committee

As per sub-section (1) of section 135 of Companies Act 2013, the following companies are required to constitute a Corporate Social Responsibility (CSR) Committee:

• Net Worth of ₹500 Crore or more; or
• Turnover of ₹1000 Crore or more; or
• Net Profit of ₹5 Crore or more.

CSR committee constitution depends on the above criteria. Constitution of CSR Committee is compulsory if any of the above three conditions are satisfied by a company. These criteria shall be checked by every company during the immediately preceding financial year.

Composition of CSR Committee

According to sub-section (1) of section 135, the required company constitute CSR committee of the Board consisting of three or more directors including at least one independent director.

However, the company may constitute CSR committee without independent director if appointment of independent director not required under section 149(4) of the Companies Act 2013. In this case, the required company may have CSR committee consisting of only two directors.

That means, the CSR committee may have either minimum 2 directors or at least 3 directors depending on the fact that whether the company requires to appoint any independent director.

There is no any provision under the Companies Act 2013 to limit the number of members in the Corporate Social Responsibility Committee.

Board’s Report and CSR Composition

A report of the Board of Directors (BOD) under section 134(3) shall disclose the composition of the Corporate Social Responsibility Committee.

Functions of CSR Committee

In accordance with the provisions of section 135(3), the CSR committee shall formulate CSR Policy, recommend the expenditures and monitor the same periodically.

Functions of CSR Committee

Following are the function of CSR Committee as mentioned in sub-section (3) of Section 135:

(a) CSR Policy Formulation: Committee shall formulate and recommend to BOD, a Corporate Social Responsibility (CSR) Policy. Such CSR Policy shall indicate the activities to be undertaken by the company in areas or subject, specified in Schedule VII.

(b) Budget for CSR Activities: CSR Committee recommend the amount of expenditure to be incurred on the CSR activities.

(c) Monitoring CSR Policy: Committee shall monitor the Corporate Social Responsibility Policy of the company from time to time.

Role of BOD regarding CSR

Role of BOD for CSR Policy

The Board of every company which constitute CSR committee shall have the specified responsibility or duty in accordance with section 135(4) of GST Act.

In compliance with the provisions of sub-section (4) of section 135 of the Companies Act 2013, the Board of the company do the following:

CSR Policy Approval:

BOD approve the CSR Policy for the company after taking into account the recommendations made by the Corporate Social Responsibility Committee.

Disclose CSR Policy in Board’s Report:

The board of directors shall disclose contents of approved CSR Policy in its report.

Disclose CSR Policy on Website:

If there is a website of the company then BOD also disclose the CSR Policy details on the company’s website in prescribed manner.

Note that the manner to display CSR activities on website has been prescribed in Rule 9 of the Companies (Corporate Social Responsibility Policy) Rules, 2014.

Accordingly, the format for the annual report on CSR activities to be included in the board’s report shall be:

1. A brief outline of CSR policy including overview/ web-link to projects or programs proposed to be undertaken.
2. Composition of the CSR Committee.
3. Average net profit of the company for last 3 FY.
4. Prescribed CSR Expenditure i.e. 2% of average net profit.
5. Details of amount spent/ unspent and manner of spending on CSR during FY.
6. Provide reasons in Board report for not spending 2% of average net profit (If any).
7. A responsibility statement of the CSR Committee that the implementation and monitoring of CSR Policy, is in compliance with CSR objectives and Policy of the company.

Ensure CSR Activities:

BOD shall ensure that the activities as are included in CSR Policy are undertaken by the company.

Required Amount for CSR activities

Earmarked Amount for CSR Activities

Minimum Amount for CSR Activity:

Every financial year, the company shall spend on CSR activities at least 2% of average net profit made during the 3 immediately preceding financial years.

Explanation given under sub-section (5) of section 135 states that “net profit” shall be calculated in accordance with the provisions of section 198 (Calculation of Profits).

Example-1: Net Profits during last 3 financial years are ₹8 Crore, ₹13 Crore and ₹15 Crore respectively. Thus, the minimum amount earmarked for CSR activities shall be ₹24 Lakhs [2% of average net profit ₹12 Crore (8+13+15)/3].

However, if the company has not completed the period of 3 FY since its incorporation then 2% of average net profit made during such immediately preceding financial years.

Example-2: Company incorporated in September, 2019 and its net profit during 2019-20 and 2020-21 are ₹2 Crore and ₹6 Crore respectively. Therefore, the amount to be kept for CSR activities should be at least ₹8 Lakhs [2% of average net profit of ₹4 Crore (2+6)/2].

CSR Activities to Local Area:

The company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities.

Disclose Unspent Amount:

If the company fails to spend amount kept for CSR activities then the Board shall specify reasons in its report made under section 134(3)(o).

Excess Amount Spends:

Transfer Unspent Amount:

Not Related to Ongoing Project:

Further, if the unspent amount not related to any ongoing project then such unspent amount must be transfer to a Fund specified in Schedule VII. Such transfer shall be made within a period of 6 months of the expiry of the financial year.

Related to Ongoing Project:

If unspent amount is related to ongoing project then such amount shall be transferred to special account called Unspent Corporate Social Responsibility Account. The company opens such special account in any scheduled bank. The transfer must be made within a period of 30 days from the end of the financial year.

Now, the company must spend amount of Unspent CSR Account within 3 financial years from the date of such transfer. Otherwise, the company shall transfer the same to a Fund specified in Schedule VII, within a period of 30 days from the date of completion of the third financial year.

Violation of CSR Norms

According to section 135(7), if a company contravenes the norms of Corporate Social Responsibility then:

Company: The company shall be liable to a penalty of:

• Twice the amount required to be transferred to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be; or
• ₹1 Crore,
  whichever is less.

Officer: 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
• ₹2,00,000,
  whichever is less.

CG Directions for CSR

As per sub-section (8) of section 135 of Companies Act 2013, the Central Government may give general or special directions for CSR to a company or class of companies. Such company or class of companies shall comply with such directions.

CSR Committee Not Required

If the amount to be spent on CSR activities required u/s 135(5) does not exceed ₹50 lakh, there is no need for constitution of CSR Committee and the functions of such Committee shall be discharged by the Board of Directors of such company.

Note that the provisions of section 135 shall not apply for a period of 5 years from the commencement of business of a specified IFSC (International Financial Services Centre) public/private company. – Notification No. G.S.R. 08(E) dated 4th January, 2017.