As per section 135 of Companies Act, 2013 (“Companies Act”), every company having net worth of INR 500 crore or more, or turnover of INR 1000 crore or more or net profit of INR 5 crore or more during the immediately preceding financial Year (FY) shall spend at least 2% of its average net profits as Corporate Social Responsibility (CSR).
Further, as per 2nd proviso to sub-section 5 of section 135, “if a company fails to spend CSR amount, the Board shall, in its report, specify reasons for not spending the amount.
In a recent communication to NASSCOM, Ministry of Corporate Affairs (MCA) has clarified that in order to comply with this mandate, companies need to compulsorily spend the entire CSR amount (i.e. 2% of the net profits of the company). Accordingly, even if the Director’s Report specifies valid reasons for not spending CSR amount, failure to spend the stipulated 2% amount will still be considered as non-compliance. This is on account of the term “shall” used in Section 135(5) of the Companies Act.
Accordingly, in the event of non-compliance in a particular FY, CSR obligation will get carried forward until it is fulfilled.
Companies should bear in mind that non-compliance of CSR provisions would attract penal provisions (which are yet to be notified by the Ministry).
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