Accounting for Income Generated From CSR Projects

Facts of the case

XYZ Limited (hereinafter referred to as “the company”), a listed manufacturing company, undertook a large-scale CSR project in FY 2024–25 to promote skill development among rural youth. The company set up a training centre and spent ₹5 crore on the initiative.

During the year, the centre also received ₹80 lakh in training fees from certain candidates who were willing to pay for advanced modules, over and above the free basic training. The company recorded this ₹80 lakh as “Other Income” in its Statement of Profit and Loss, reasoning that:

(a) The fee was incidental to the CSR project but collected in the normal course of operations.

(b) Since the company had already spent much more than its mandated CSR obligation, it viewed this surplus as a legitimate income that could boost its profits.

At year end, the statutory auditor flagged this treatment and asked management to reconsider, citing the CSR Rules. However, management argued that the provision only applies to “surplus generated by CSR activities” in a narrow sense, and since this fee collection was more in the nature of business income, it need not be ploughed back.

State, whether₹80 lakh be recognised as business profit or mandatorily ploughed back into CSR activities/Unspent CSR Account/eligible funds under Schedule VII?

Relevant Provisions

Rule 7(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014, requires that “Any surplus arising out of the CSR activities shall not form part of the business profit of a company and shall be ploughed back into the same project or shall be transferred to the Unspent CSR Account and spent in pursuance of CSR policy and annual action plan of the company or transfer such surplus amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year. Surplus refers to income generated from the spend on CSR activities, e.g., interest income earned by the implementing agency on funds provided under CSR, revenue received from the CSR projects, disposal/sale of materials used in CSR projects, and other similar income sources.

Thus, in respect of a CSR project or programme or activity, it needs to be determined whether any surplus is arising therefrom. The surplus arising out of CSR activities shall be utilized only for CSR purposes. A question would arise as to whether such surplus should be recognised in the statement of profit and loss of the company. 27. As per above stated Rule 7(2), the surplus arising out of CSR activities does not form part of the business profit of a company and shall be ploughed back into the same project.

Moreover, enhancement in assets or inflows are accompanied by increase in liability, therefore, such surplus/inflows should not be recognized as income in the Statement of Profit and Loss. Surplus can be recognized as an income in the Statement of Profit and Loss only if it is generated out of the asset owned by the company. If the asset is held by the company in a fiduciary capacity, surplus generated out of such asset should not be recognised as an income of the company. Any such surplus arising out of CSR activities shall immediately be recognised as liability for CSR expenditure in the balance sheet.

Analysis

In the present case, the company established a training centre as part of its CSR initiative on skill development, incurring an expenditure of ₹5 crore. During the year, the centre collected ₹80 lakh as training fees from candidates who opted for advanced modules. The company recognised this amount as “Other Income” in its Statement of Profit and Loss, reasoning that the collection was incidental to operations and could legitimately augment its profits, since the mandated CSR obligation had already been exceeded. The statutory auditor, however, objected to this treatment, drawing attention to the requirements of the CSR Rules.

Rule 7(2) of the Companies (CSR Policy) Rules, 2014 explicitly provides that any surplus arising from CSR activities shall not form part of the business profit of a company. Such surplus is required to be ploughed back into the same project, transferred to the Unspent CSR Account for utilisation in accordance with the CSR policy and action plan, or transferred to a fund specified in Schedule VII within six months from the end of the financial year. The scope of “surplus” covers income generated from CSR expenditure, including revenue earned from CSR projects. As such, these inflows cannot be recognised as business income, since the underlying asset or activity is held in a fiduciary capacity for CSR purposes and not for commercial gain. Recognition in the Statement of Profit and Loss is permissible only if the asset generating the inflow belongs to the company in its own right, but in this case, the training centre does not belongs to the company in its own right.

Accordingly, the ₹80 lakh received by the company qualifies as surplus from CSR activities and cannot be recognised as “Other Income.” The amount must be recognised as a liability for CSR expenditure in the balance sheet and utilised strictly for CSR purposes by way of reinvestment in the project, transfer to the Unspent CSR Account, or contribution to a Schedule VII fund within the prescribed time limit.

Thus, the statutory auditor’s objection is, therefore, valid. Any failure to comply with the requirements of Rule 7(2) would result in non-compliance with CSR provisions under the Companies Act, 2013, attract penal consequences under this Act, and it could lead to reputational risk as well as a potential qualification in the audit report.

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