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
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.
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.
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
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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