Monday, 1 May 2017

CSR = Completely Senseless Requirement (for Section 8 Companies)

Ministry of Corporate Affairs insists charitable organizations registered u/s 8 should comply with CSR requirements u/s 135 of the Indian Companies Act 2013

Even if one has worked in the nonprofit sector for just over the last three years, one would agree that there is never a dull moment, with the government of India continuing to spring new surprises all the time, be it under FCRA, the Income Tax Act or the Lokpal Act. The latest comes from a rather unexpected source – The Ministry of Corporate Affairs.

As we all know Section 135 of the Indian Companies Act 2013 requires, every company having Net Worth of Rs. 500/- crore (Rs. 5 Billion) or more, or Turnover of Rs. 1,000/-  crore (Rs. 10 Billion) or more, or Net Profit of Rs. 5 crore (Rs. 50 Million) or more, to constitute a Corporate Social Responsibility (CSR) Committee of the Board and disclose the composition of the CSR Committee in the Board’s Report, formulate a CSR Policy and ensure that the company spends, in every financial year, at last two per cent of the average net profit of the company during the three immediately preceding financial years.
According to the Indian Companies Act 2013, “every company” includes every company registered under this Act, including a Private, Public or Foreign Company or its subsidiary and includes a Company registered u/s 8 (former Section 25) of the Act.

Accordingly, quite a few not-for-profit Section 8 Companies have been served with a Show Cause Notice u/s 134(8) for violation of Section 134(3)(O) read with Section 135 of the Indian Companies Act 2013. One such organisation that we know, runs centers in major cities of India where children afflicted with cancer and their families receive shelter, healthcare and nutritional support. Almost all the income of this organization and which exceeds Rs. 5 crores, comprises voluntary donations and grants. However, the Ministry of Corporate Affairs has viewed this income as “net profit before tax for the company” and therefore qualified this nonprofit company as one required u/s 135 to form a CSR Committee, have a CSR Policy, spend on CSR related activities and disclose the same in the Board’s report.

Although registered u/s 8 as a non-profit company, this organization as also many others are established for "charitable purpose" as can be ascertained from their tax-exempt status u/s 12AA of Income tax act and donations qualifying for 50% tax deduction u/s 80G of Income tax. The income of many of these nonprofit companies is largely grants and donations.

The organizations which we know are not Industry or Business Associations, nor do they exist for business or commercial purposes. They exist for 'charitable purpose' (relief of poverty, education, medical relief etc.) as defined under various laws regulating these nonprofit companies, including the companies act, income tax and FCRA 2010.

Even from an accounting perspective these Section 8 Companies, as per Accounting Standards, file Income & Expenditure Statements and not Profit & Loss Statements and they do not have any business or commercial income nor do they have a "turn over" or "net profit".

In reality these Section 8 Companies, as per CSR Rules, qualifies as an "implementing agency" for CSR and are eligible as per CSR Rules to receive grants from companies to implement CSR related projects and programs. In fact, the very purpose for which some of these organizations registered u/s 8 of the Companies Act are established and function, are for activities which relate to programs and projects enumerated under Schedule VII.

Further, most companies which are required to comply u/s 135 of the Indian Companies Act have their own foundations through which they carry out their CSR related activities. Many of these foundations are registered as companies under Section 8. By MCA's logic must these corporate foundations registered u/s 8 of the companies act again have a CSR Policy, CSR Committee and CSR Report for receiving CSR funds from the parent company?

Section 8 companies which are registered as tax exempt organizations u/s 12AA of the Income Tax Act 1961 are required under the latter to spend at least 85% of their total income in every financial year. What then is MCA’s logic in insisting that such organizations should spend a mere 2% on CSR activities?

We urge the Ministry of Corporate Affairs to study this issue objectively and rationally and review their stand.

Noshir H. Dadrawala

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