[Opinion] Delay in Transfer of Unspent CSR Funds Results in Penalties for Company & its Directors

Prof R Balakrishnan – [2023] 151 taxmann.com 7 (Article)

1. Corporate Social Responsibility

Effective from 1st of April 2014, our country became the first one in the world to legally mandate corporate social responsibility. The rules in section 135 of the Companies Act 2013 make it mandatory for companies of a certain turnover and profitability to spend 2% of their average net profit for the past three years on corporate social responsibility activities.

2. Unspent CSR amount an ongoing project at the end of financial year

Under the provisions of corporate social responsibility rules, amounts remaining unspent in a financial year relating to an ongoing project as well as any unutilised surplus arising from the CSR activities are required to be deposited by the company in a special bank account called the ‘Unspent Corporate Social Responsibility Account’. The transfer of the amount is required to be done by the company within a period of thirty days from the end of the financial year to the 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.

3. Provisions under Companies Act 2013 relating to this case

Provisions of sub-section (6) of section135 of the Companies Act,2013 states 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 pursuance 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.

4. Penal action for non-compliance/default if any

Sub-section (7) of section 135 of the Companies Act 2013 is the relevant provisions which spells out the penalty for any default under this section. The sub–section (7) of section 135 states that if a company is in default in complying with the provisions of sub section (5) of 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 the Schedule VII, or the unspent Corporate Social Responsibility Account, as the case may be, or to two lakh rupees, whichever is less.

5. Consequences of any default

To understand the impact of non-compliance/default committed in respect of delayed transfer of the unspent CSR amount to the specified CSR account as required under section 135 (6) of the Companies Act 2013, let us go through go through a decided case law on this matter by the Registrar of Companies of Hyderabad on 22nd February 2023 and understand the impact

Click Here To Read The Full Article