One of the biggest confusion, or we can say error of judgment, among companies is the calculation of “Net Profit” as put forward in the Companies Act, 2013 for calculating the prescribed amount of CSR spending. There should not be any confusion as the Act is quite clear regarding this. The Act clearly says that in pursuance of its Corporate Social Responsibility (CSR) Policy, “The Board of every company covered under Section 135, shall ensure that the company spends, in every financial year, at least two per cent (2%) of the average ‘Net Profits’ of the company made during the three immediately preceding financial years”.
The Act uses the term ‘Net Profits’ in the provision and this can mean that PAT or Profit After Tax may be used for calculating CSR amount. But it is the other way round and PBT or Profit Before Tax has to be taken into account for calculation of CSR amount. The Act clearly explains that the “average net profit” shall be calculated in accordance with the provisions of Section 198. As per Section 198 (5) (a), income-tax and super-tax payable by the company under the Income Tax Act, 1961, “shall not” be deducted while arriving at net profit under the section. Thus, Net Profit is Profit Before Tax (PBT) of the company. Considering this, it is of prime importance for the finance department of any company to consider PBT for calculating the prescribed amount of mandatory CSR spending for the company.
Act Silent On Penalty, So Government Has To Give Clarity
Chartered Accountant and Expert in Companies Law and Tax Laws
The previous soft approach was suggested by Baijal Committee which allowed firms to get away with prosecutions if they explained in the annual report the reason for not spending on CSR. Actually, the companies were in dilemma regarding the penalty to be imposed on the organisation which failed to spend the mandatory CSR amount. If we see the provision of the Act, it is silent on penalty in case of default. Section 135 (5) clearly provides 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.” Thus, a company may face court action only if fails to justify nil or inadequate spending on CSR. As many as 254 such companies are facing prosecution for violations during 2014-15.
Further, “No penalty or action has been prescribed under Section 135 of the Companies Act, 2013 against the Board of the companies which fail to spend the CSR amount.” Interestingly, there is only the provision for reporting the unspent amount in the Board report in the section covering CSR. Considering that there is no provision of penalty or punishment against the company which does not comply with the provision of mandatory CSR spending and that the Registrar of Companies can only issue show cause notice to the defaulter company, the government’s intentions become quite clear. The government wants companies to be more socially responsible on their own. If they fail to comply with the CSR spending provision, they have to report it in the Board report. Being a responsible institution, this itself brings a bad name to the company, which surely works as a deterrent for the company.
Considering this stipulation, it is a positive move by the government to change its approach towards the defaulters and implement stringent penalty on habitual offenders. Making them deposit the unspent amount in Central welfare funds is also a positive step in the right direction.
This article is part of 2nd Annual Issue of GDP Magazine on CSR. Governance Democracy& Politics (GDP) Magazine’s Special Issue on #CSR Takes A Deep Dive on the state of CSR Spending. It has a regressive database of 6000+ companies on CSR Spending.
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