Chapter – 3

Legislative provision and judicial initiatives towards

CSR and Corporate governance in India

3.1 Introduction

The term Corporate Social Responsibility (“CSR”) can be referred as corporate initiative to
assess and take responsibility for the company's effects on the environment and impact on social
welfare. Thus in Indian context it is not just a legal obligation, it is an idea of social development
and welfare of the society at large.1The term generally applies to companies efforts that go
beyond what may be required by regulators or environmental protection group.2 Corporate social
responsibility may also be referred to as "corporate citizenship" and can involve incurring short-
term costs that do not provide an immediate financial benefit to the company, but instead
promote positive social and environmental change. In Indian scenario CSR is increasing rapidly
as companies had realized that, only enhancing the business and maximizing profit is not
enough. Companies must do something to develop and build a healthy trustworthy relation with
the community. For promoting CSR mandate in India, Ministry of Corporate Affairs has issued
guidelines pertaining to Voluntary CSR activities in the year 2009.3 This was later on redefined
and concluded as National Voluntary Guidelines on Social, Environmental and Economical
Responsibilities of Business.4 This voluntary guideline later on evolved as an amendment in the
Companies Bill, 2011.5While certain Indian companies (like the Aditya Birla Group and the Tata
Group) have always contributed to the society, the concept has been introduced in the form of a
1
NIRBHAYLUMDE, CORPORATE SOCIAL RESPONSIBILITY IN INDIA: A PRACTITIONER’S PERSPECTIVE (Notion Press,
2018).
2
Megha Kapoor, Corporate Social Responsibility: Mandating Companies to Contribute Towards Society, MONDAQ
(2014), available at
http://www.mondaq.com/india/x/305620/Corporate+Commercial+Law/Corporate+Social+Responsibility+Mandatin
g+Companies+To+Contribute+Towards+Society
3
NAYANMITRA& RENE SCHMIDPETER, CORPORATE SOCIAL RESPONSIBILITY IN INDIA” CASES AND DEVELOPMENT
AFTER THE LEGAL MANDATE, 3 (2016).
4
Id.
5
Id.
statutory requirement only on April 1, 2014 by virtue of Section 135 of the Act read with the
Companies (Corporate Social Responsibility) Rules, 2014 (“CSR Rules”).

3.2 CSR as per the Act

Applicability: As per sub-section (1) of Section 135 of the Act, companies which have

(a) net worth of at least INR 500 crore; or

(b) turnover of at least INR 1000 crore; or
(c) net profit of INR 5 Crore or more.

during immediately preceding financial year6 are required to comply with the
requirements set out in Section 135.

Requirements: In accordance with Section 135(4) and (5) of the Act, companies meeting these
thresholds are required to:

(a) develop and adopt a CSR policy on the recommendation of the CSR committee;
(b) spend a minimum amount (2% of the average net profit7 for the last 3
immediately financial years) on CSR activities as mentioned in the CSR Rules;
and
(c) include details of the policy developed and implemented by the company on CSR
initiatives in the report of the board of directors of the company and also display
it on the company’s website.
 The CSR Rules mandate that if a foreign company, having a branch or project office in
India, fulfils the criteria mentioned under Section 135 of the Act, it must also comply
with the requirements in relation to CSR. Further, even the holding company and the

6
As per “financial year”, in relation to any company or body corporate, means the period ending on the 31st day of
March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending
on the 31st day of March of the following year, in respect whereof financial statement of the company or body
corporate is made up;
Provided that on an application made by a company or body corporate, which is a holding company or a subsidiary
of a company incorporated outside India and is required to follow a different financial year for consolidation of its
accounts outside India, the Tribunal may, if it is satisfied, allow any period as its financial year, whether or not that
period is a year;
Provided further that a company or body corporate, existing on the commencement of this Act, shall, within a period
of two years from such commencement, align its financial year as per the provisions of this clause;
7
Average net profit shall be calculated in accordance with the provisions of Section 198 of the Act.
 subsidiary of a company which fulfils the CSR criteria must comply with the
requirements in relation to CSR.
 Additionally, the CSR Rules states that if a company ceases to fulfil the criteria
mentioned in Section 135 of the Act for 3 consecutive financial years, it shall not be
required to abide by the mandates of the Act in relation to CSR.

3.3 Computation of the net profit

 The net worth, turnover and net profits are to be computed in terms of Section 198 of the
Act as per the profit and loss statement prepared by the company in terms of Clause (a) of
Sub-Section (1) of Section 381 and Section 198 of the 2013 Act.
 The CSR Rules provide that if the net profits are computed under the Companies Act,
1956 it is not necessary to recomputed the same under the Act.
 In accordance with the definition of “net profits” under the CSR Rules, profits from any
overseas branch of the company, including those branches that are operated as a separate
company would not be included in the computation of net profits of a company. Besides,
dividends received from other companies in India that has itself met its CSR
requirements would not be included in the computation of net profits of a company.

3.4 CSR Committee

3.4.1 Composition:

(a) Every company required to comply with the mandate in relation to CSR shall, in
accordance with Rule 5 of the CSR Rules, constitute a CSR Committee of the
board of directors consisting of three or more directors including an independent
director8.

8
An independent director in relation to a company, means a director other than a managing director or a whole-time
director or a nominee director,—
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;
(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;
(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or
their promoters, or directors, during the two immediately preceding financial years or during the current financial
year;
(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its holding,
 (b) Every unlisted public company or every private company, which is required to
constitute a CSR Committee but is not mandatorily required to appoint an
independent director under Sub-Section 4 of Section 149 of the Act shall
constitute its CSR Committee two or more directors.

(c) In case of private companies having only 2 (two) directors, the company shall
constitute its CSR Committee with such 2 (two) directors.
(d) In case of a foreign company, the CSR Committee shall comprise at least 2
persons out of which 1 person shall be a person resident in India according to
clause (d) of Sub-Section (1) of Section 380 and another person shall be
nominated by the foreign company.

3.4.2 Functions of the committee:

(a) Formulation of CSR Policy:

i. The CSR Rules provide the manner in which CSR Committee shall formulate and
recommend to the board of directors a formal CSR Policy which consists of the
activities which are to be undertaken by the company, such activities must be
relatable to the areas or subjects as specified in Schedule VII of the Act.

subsidiary or associate company, or their promoters, or directors, amounting to two per cent. or more of its gross
turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower,
during the two immediately preceding financial years or during the current financial year;
(e) who, neither himself nor any of his relatives—
(i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its
holding, subsidiary or associate company in any of the three financial years immediately preceding the financial
year in which he is proposed to be appointed;
(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding
the financial year in which he is proposed to be appointed, of—
(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or
associate company; or
(B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or
associate company amounting to ten per cent. or more of the gross turnover of such firm;
(iii) holds together with his relatives two per cent. or more of the total voting power of the company; or
(iv) is a Chief Executive or director, by whatever name called, of any nonprofit organisation that receives twenty-
five per cent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or
associate company or that holds two per cent. or more of the total voting power of the company; or
(f) who possesses such other qualifications as may be prescribed.
 ii. Schedule VII of the Act (set out in Annexure 1 herein) sets out the areas towards
which the company may contribute to meet the requirement under the statute, any
activity undertaken by a company in relation to CSR must be relatable to such
activities.
iii. The CSR policy must include the monitoring mechanism for such projects or
programs.
iv. The CSR Policy shall not include any activities undertaken in pursuance of
normal course of business of the company, for example a publishing company
cannot claim that publishing educational books shall form part of its CSR
activities.
v. The CSR Policy shall specify that the surplus arising out of the activities stated in
the policy shall not form part of the business profit of a company.

(b) Management of CSR Expenditure:

i. The CSR Rules state that all the expenditure for the activities including
contribution to corpus for projects or programs mentioned in the CSR Policy,
which are approved by the board of directors on the recommendation of the CSR
Committee, constitute the CSR Expenditure.
ii. The Ministry of Corporate Affairs has clarified vide a circular dated June 18,
2014 (“Clarification”) that CSR Expenditure does not include any expenditure on
an item not in conformity or not relatable to the activities that fall within the
purview of Schedule VII of the Act. Any ‘one-off events’ such as marathons and
sponsorships of television programmes would not be considered as CSR expense.
iii. Pursuant to Section 135(3)(b) of the Act, the CSR Committee shall recommend
the amount to be spent on the activities to be undertaken and any project or
programs in relation to such activities that are to be undertaken in compliance
with the CSR Policy. The CSR Rules provide that the company should give
preferences to the local area in which it operates for CSR spending.
iv. The company may build CSR capacities of their own personnel as well as of their
implementing agencies provided that the expenditure incurred for such capacity
building shall not exceed 5% of the total CSR expenditure in one financial year (a
 minimum amount of 2% of its average net profit for its preceding three financial
years). The CSR Committee shall ensure that the expenditure does not exceed the
prescribed limit.
v. As per the Clarification, expenditure incurred by Foreign Holding Company for
CSR activities in India will qualify as CSR spend of the Indian subsidiary if, the
CSR expenditure are routed through Indian subsidiaries and if the Indian
subsidiary is required to do so as per Section 135 of the Act.
vi. Only the CSR activities and projects or programs relating to such activities
undertaken in India shall amount to CSR Expenditure (and shall be taken into
account while calculating whether the company has spent a minimum amount of
2% of its average net profit for its preceding three financial years) and shall be
reported accordingly.
(c) Monitor CSR Policy:
i. Section 135(3)(c) of the Act states that the CSR Committee has to monitor from
time to time if the activities undertaken by the Company under the CSR Policy are
in compliance with, and are relatable to Schedule VII of the Act.

ii. Further, the CSR Rules mandate that the report by the board of directors of a
company must also include a statement from the CSR committee that the
implementation and monitoring of the board's CSR activities is, in letter and
spirit, in compliance with its CSR objectives and CSR Policy of the company.
iii. Clause (2) of Rule 5 of the CSR Rules provides that the CSR Committee shall
institute a transparent monitoring mechanism for implementation of the CSR
activities undertaken by the company under the CSR Policy.

3.5 Responsibility of Boar of Directors

3.5.1 Approval of CSR Policy:

 (a) The board of directors after taking into account the recommendations of the CSR
Committee is required to approve the CSR Policy of the company and disclose the
contents thereof in its report9. The report shall also include the composition of the
CSR Committee. This report shall be displayed on the company’s website as per the
particulars specified in the CSR Rules and shall also be included in the annual
report.

3.5.2 Administration of CSR Activities:

(a) Rule 4(2) of the CSR Rules state that the board of directors may undertake the
activities prescribed in the CSR policy through a registered trust or registered
society or company established by the company, its holding or subsidiary company
under Section 8 of the Act. In such case, the company must specify the CSR
activities to be undertaken through these entities, the utilization of funds and the
monitoring and reporting mechanism.
(b) Rule 4(2) of the CSR Rules also requires that if such an entity is not created or
incorporated by the company, then the entity must have a track record of 3 years in
undertaking similar activities in order to carry out the CSR activities prescribed
under the CSR Policy.
(c) Rule 4(3) of the CSR Rules provides that the company can also undertake the CSR
activities in collaboration with other companies in such a manner that the CSR
Committee of the respective companies are in position to individually report on
such projects or programs relating to the CSR activities in accordance with the CSR
Rules.

3.5.3 Compliance with Minimum Amount of CSR Spending:

(a) A company meeting the specified threshold under Section 135 of the Act must
spend on CSR activities a minimum amount of 2% of its average net profit for its
preceding three financial years.

9
The format of the report is annexed to the CSR Rules.
 (b) In case of failure to spend minimum CSR amount, the board of directors is required
to disclose such failure to comply and the reasons therefore in its annual report to
the shareholders.

3.6 Penal provisions of non-compliance

 An intentional non-disclosure of the fact that a company has failed to spend the minimum
CSR amount and the reasons for such failure, by the board of directors shall be
punishable under Section 447 of the Act10. Every director of such company shall be liable
to be punished with imprisonment which shall not be less than 6 months but which may
extend to 10 years and shall also be liable to fine which shall not be less than the amount
involved in the fraud, but which may extend to 3 times the amount involved in the fraud.
 If a company fails to comply with any other CSR mandate the company and every officer
in default shall be punishable with fine under Section 450 of the Act. Since Section 135
does not prescribe any specific punishment but makes CSR mandatory for certain
companies, any company which is required to but fails to comply with the mandate of
Section 135 and the rules and clarifications there under shall be punishable under Section
450, which prescribes the punishment where no specific penalty or punishment is
provided.

3.7 Industry impact and responses

 With CSR spending becoming mandatory for prescribed class of companies, there is
bound to be increased engagement of companies with social and development projects.
So far, there were only voluntary guidelines for companies to follow. The rationale for
CSR activity is that corporate earns their profit by exploiting different resources of the
society, and so a portion of the benefit derived by them should be channelled for the
betterment of society.
 Though compulsory CSR spending may seem burdensome for some class of companies,
it will create of a sense of responsibility among corporate, especially when they see
benefits in the long term. While it is still premature to judge the long-term impact of this
10
Section 447 of the Act is the punishment for fraud and under the said Section fraud includes any act, omission,
concealment of any fact with an intention to deceive.
 mandate, with CSR becoming compulsory there is bound to be increased engagement of
corporate resources towards social issues.

3.8 Issues affecting the business community

3.8.1 Low Threshold Coverage Level

(a) The current threshold of 5 Crore net profit for the applicability of the CSR mandate
is comparatively lower than the net worth and turnover thresholds (500 Crore and
1000 Crore, respectively). Such disparity results in bringing under the ambit of the
CSR mandate small companies that do not meet the net worth and turnover criteria
under Section 135 of the Act.

3.8.2 Non-clarity of Tax Treatment

(a) There is still no clarity provided in relation to whether CSR spending is deductible
when calculating the taxable income. The CSR Rules and Clarification are silent on
whether CSR spends will be considered as permissible business expenditure in
relation to tax.

3.8.3 Annexure-CSR Activities

Activities which may be included by companies in their CSR Policies

Activities relating to:—

(i) Eradicating extreme hunger and poverty;

(ii) Promotion of education;

(iii) Promoting gender equality and empowering women;

(iv) Reducing child mortality and improving maternal health;

(v) Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria
and other diseases;
(vi) Ensuring environmental sustainability;

(vii) Employment enhancing vocational skills;

(viii) Social business projects;

(ix) contribution to the Prime Minister's National Relief Fund or any other fund set up by the
Central Government or the State Governments for socio-economic development and relief and
funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes,
minorities and women; and

(x) such other matters as may be prescribed.

An efficient CSR mandatorily means a corporation good from its ethical perspective

3.9 International guidelines relating to CSR

CSR moved from a social practice to an effective business tool. There are several globally
recognized guidelines, frameworks; tools pertaining to CSR are available. Some of them are
discussed below, these relate to larger perspective of business responsibility and sustainability.

UN Guiding Principles on Business and Human Rights: Human rights are at the heart of the
debate, and so is the question of which tools can be deployed to make sure that they are
respected. In 2011, the Human Rights Council of the United Nations adopted concrete guidelines
for action, the Guiding Principles on Business and Human Rights, intended to move beyond the
debate on voluntary versus binding instruments in the area of human rights. The Guiding
Principles rest on three pillars:

 the state duty to protect

 the corporate responsibility to respect
 access to remedy
OECD Guidelines for Multinational Enterprises, they offer a comprehensive code of conduct
designed to provide multinational enterprises (MNEs) with guidance and support in their
interactions with trade unions and in the areas of environmental protection, the fight against
corruption and respect of the interests of consumers. The Guidelines also contain
recommendations on overseas investment and cooperation with foreign suppliers.

The International Labour Organization (ILO), which was founded in 1919, aims to introduce
minimum social standards around the world. The idea behind these efforts is to prevent
companies from gaining competitive advantages by violating workers' rights. The mission and
the actions of the ILO are based on four basic principles: • Freedom of association and the right
to collective bargaining

 Elimination of forced labour

 Abolition of child labour
 Elimination of discrimination in respect of employment and occupation

3.10 Analysis of CSR activities in some of the Indian Companies

The first company of good corporate governance is the Indian IT industry bellwether, Infosys.
Indeed, Infosys is one of the companies that has set benchmarks for other companies not only in
India but all over the world in the way corporate governance and social responsibility are
handled and projected to the outside world. The point here is that companies not only need to
walk the talk for CSR but also broadcast their achievements to the world at large. Another
company that has done an exceptional job of portraying itself as a good corporate citizen is the
TATA group in India. Four Tata Group companies have secured top 10 Rank in CSR for 2 nd
consecutive year in Economic Times Survey, report published on September 15, 2016. There are
four Tata group companies in the top 10 list. Tata Power retains its position. Compared to the
previous study, it has jumped two places. Mahindra & Mahindra the top ranked company in 2014
has dropped 3 ranks to be placed fourth. Ultratech Cement and Shree Cements are a surprise
entrant in the top 10. Interestingly no foreign players made it to the top 10 list – a trend that
follows from 2014. CSR activities of some Indian companies are as follows:
  Infosys: They established Infosys Foundation in 1996. The focus areas are to strive for
economic development, promoting education, to fight for hunger, poverty, malnutrition,
to strengthen rural areas, to promote gender equality and women empowerment and
environment sustainability.11
 Reliance Industries: To provide impetus to various philanthropic initiatives of RIL,
Reliance Foundation (RF) was set up in 2010 as an expression of its vision towards
sustainable growth in India. Reliance Foundation works for the people belonging to
marginalized community. It works to promote quality life among rural people, to provide
access to quality and affordable healthcare in India, work for urban renewal and provide
affordable education, to promote art and culture of India, also work to revolutionize
grassroots sports.12
 TATA: The group believes corporate social responsibility (CSR) is a critical mission that
is at the heart of everything that it does, how it thinks and what it is. The company uses
the power of business to solve social and environmental problems. Tata companies are
involved in a wide variety of community development and environment preservation
projects. The Tata group's social activities relate to health, primary education, skills
training and entrepreneurship, livelihoods, women empowerment and strengthening
services for the differently-abled.13
 Mahindra and Mahindra: The Company focuses on the constituencies of girls, youth, and
farmers, by supporting them in education, health and livelihood enhancement, with
innovative programmes that harness the leveling power of technology. Rise for Good also
entails running our business with integrity, responsibility and transparency, caring for the
well-being of the planet and striving for the welfare of our employees, customers and the
community.14

Key CSR issues in India are environmental management, eco-efficiencies, responsible sourcing,

11
Shveta Kapoor & H.S. Sandhu, Corporate Social Responsibility: A Case of Infosys Technology LTD. 6 ASIA –
PACIFIC BUSINESS REVIEW, 130-140 (2010).
12
NishaSubhashKhurana,Corporate Social Responsibility: Efforts of Reliance Industries Ltd., 3 IMPERIAL JOURNAL
OF INTERDISCIPLINARY RESEARCH, 832-842 (2017).
13
Amit Kumar Srivastava, GayatriNegi, Vipul Mishra, Shraddha Pandey, Corporate Social Responsibility: A Case
Study Of TATA Group, 3 IOSR JOURNAL OF BUSINESS AND MANAGEMENT, 17-27 (2012).
14
Kavita D. Chordiya,“Corporate Social Responsibilities of Mahindra & Mahindra,” 1 IOSR JOURNAL OF BUSINESS
AND MANAGEMENT, 14-20 (2016).
stakeholder engagement, labour standards and working conditions, employee and community
relations, social equity, human rights, good governance and anti-corruption measures. As CSR
becomes a priority (and the norm) for more and more businesses, we expect to see a surge of
innovative programs addressing sustainability over the long term.

3.11 Judicial views on CSR

The judicial view on such topic is necessary for better understanding such as Court has
recognized CSR in Smith v Barlow.15 In this case, House of Lords observed.

"... modern conditions require that corporation acknowledge and discharge social as well as
private responsibilities as member of the communities in which they operate... today it is
generally recognized that all corporations posses and elements of public interest. A director
must think not only of the shareholders, but also of the laborers, the suppliers, the purchaser and
the ultimate consumers"16

However, in Canada, Supreme Court established new ways of interpreting and conceiving
directors' duties that align with concept of CSR. The current, progressive interpretation of
Canada, in Peoples v Wise (2004)17:

"We accept as an accurate statement of law that in determining whether they are acting with a
view to the best interests of the corporation it may be legitimate, given all the circumstances of a
given case, for the board of directors to consider, inter alia, the interests of shareholders,
employees, suppliers, creditors, consumers, governments and the environment."18

It has also been said that the section poses an inherent challenge to economic freedom. In trying
to address the ignorance or negligence of companies towards giving back to society, it seems as
if the legislation ignores several market-related pressures and factors that result in low CSR

15
Smith v Barlow (1953) 98 AC 581.
16
Id.
17
2004 SCC 68.
18
Id.
projects across the nation.19 In that sense, it could raise apprehensions over the ‘liberal’ state of
the Indian economic environment.

Similarly in India early developments through case laws have led to acceptance of CSR in Indian
Corporate Scenario. In the case of Charanjit Lal v Union of India,20 Indian Supreme Court has
recognized the concept of CSR. In this case, the court held that, "a corporation which is engaged
in production of a commodity which is vitally essential to the community, has a social
characteristics of its own and it must not be regarded as the concern primarily or only of those
who invest their money in it for profiteering, capital creation and business expansion. It is
treated today as a vital nationally important and socio- economic institution. "21

Another important case, in which Indian Supreme Court has also described CSR, is Union
Carbide Corporation v Union of India.22 This case is known as Bhopal gas tragedy, poison gas
leak at plant in Bhopal where about 3000 people were killed and 30,000 were injured in Dec.
1984. In this incident, Supreme Court held that "it is compelling duty to both judicial and
humane, to secure immediate relief to Bhopal's victims. The court's further verdict was that,
"liability of multinational corporation is also absolute.

In another case, M.C. Mehta v. Union of India,23 Indian Supreme Court propounded the principle
of absolute liability. In this case, the court held that "the enterprise must be under an obligation
to provide compensation. Hazardous or inherently dangerous activity must be conducted with
the highest standards of safety. If any harm results from such activity, the enterprise must be
absolutely liable to compensate for such harm and it should be no answer to the enterprise to say
that it has taken all reasonable care and that the harm occurred by any negligence on its part."

It has not been much time since the new provisions entered into force. In its first few years, a
number of matters have come up before the NCLT with regard to these provisions, where it has
taken note of certain lacuna in the law while compounding certain offenses for the company.

19
SidharthKaushik and Stuti Bhatnagar, “Corporate Social Responsibility” in the New Companies Act: A Critical
Analysis’ 4 CNLU LJ 181 (2014).
20
CharanjitLal v. Union of India (1951) AIR SC 59.
21
Id.
22
Union Carbide Corporation v Union ofIndia (1992) AIR, SC, 1086.
23
M.C. Mehta v Union of India, AIR (1987), SC, 965.
In the matter of M/s. Chintamani Estates Pvt. Ltd.,24 there was a shortfall of expenditure that was
required to be made under these provisions. However, this shortfall was not disclosed in its
statements. The firm contended not to have any mala fide intention in doing so and did make a
revision in the Directors’ Report to accommodate the same. Hence, the Mumbai Bench took
several factors into consideration while compounding off the fine

“…this provision regarding CSR is newly incorporated in the Statute and thereafter numbers of
circulars were issued and as a result of those circulars no clear clarification regarding the
provision can be recorded by the Company or its Directors.”

“…the determination of the Quantum of the CSR responsibility can only be

ascertained/quantified after the finalization of accounts at the close of the Books of Accounts of a
particular financial year. As a result, the amount to be contributed for a charitable purpose as
CSR responsibility can be intimated to the concerned authorities thereafter only i.e. after the
finalization of accounts of a particular financial year.”25

The above findings were also considered and upheld in the matter of M/s. Eversmile
Construction Co. Pvt. Ltd.¸ while compounding the fine in a similar instance.26

The existence of too many circulars and notifications has led to a situation of overregulation in a
matter fairly simple (and previously voluntary) as Corporate Social Responsibility. Moreover,
there are other challenges which companies would have to tackle with respect to the
quantification of the amount spent by a company. Since a company could fall under the scope of
section 135 on the basis of its net worth/turnover too, it remains to be seen how a loss-making
firm would be able to spare funds for CSR, without the erosion of its share capital (especially in
cases of inadequate reserves).

Another grey area would be with respect to the status of surpluses earned as a result of CSR
initiatives. Since they involve both outflows as well as major inflows of funds as well, this might
lead to a situation where non-operating surpluses could well be ploughed back for business

24
In re: M/s, Chintamani Estates Pvt. Ltd. 2017 SCC OnLine NCLT 11240.
25
Id.
26
In re: M/s. Eversmile Construction Co. Pvt. Ltd. 2017 SCC OnLine NCLT 11276.
purposes without any disclosures, thereby remaining out of the tax net. Both the Act and the
Rules are silent on this matter.27

Ambiguities such as these lead many scholars to also doubt whether the law could possibly
reduce CSR to ‘tick the box’ compliance. The ‘cooking up’ of balance sheets could become a fad
in this aspect of accounting too, where companies find ways to discount the spending on CSR in
their accounting practices, despite having the capability to do so.

3.12 CONCLUSION

Corporate Social Responsibility is a way of getting companies to honor the expectations of the
very society that provide it with the means to conduct business operations in a fruitful manner.
The legislation and subsequent rules enacted, though good in intent, suffer from certain
shortcomings that could have widespread implications for the CSR scene in India. If a society is
to hold businesses accountable in a quid pro quo fashion (which is how CSR works), then
conditions must be made ambient for businesses to fulfill these responsibilities willingly, with a
sense of incentive and initiative for the same.

27
Debansu Das, ‘Corporate Social Responsibility in India: Legal Issues and Challenges’ 3 (11) GE-IJMR (2015).