Amendment in CSR rules
Sec. 135(1) was amended pursuant to Companies Amendment Act, 2017 with effect from 19th September 2018. Post this amendment, the criteria of net worth of Rs. 500 crores OR turnover of Rs. 1000 crores OR net profit of Rs. 5 crores for applicability of CSR provisions was limited only to the extent of immediately preceding financial year.
However, Rule 3(2) which, before this amendment, was the guiding provision as to the number of years for which a company needs to comply with CSR provisions was not amended. Rule 3(2) mentioned that every company which ceases to be a company covered under section 135(1) of the Act for three consecutive financial years shall not be required to comply with CSR related provisions. As the guiding provision was shifted to Section 135(1) itself but Rule 3(2) was not amended to that effect, there arose an ambiguity with regard to CSR applicability. In case of companies which did not have net worth of Rs. 500 crore or above, did not have turnover of Rs. 1000 crore or above and not even had the net profit of Rs. 5 crore or more in the immediately preceding financial year; but had net profit of Rs. 5 crore or more in any of the three preceding financial years,
On harmonious reading of Section 135(1) and rule 3(2), it appeared that:
The provisions of Section 135(1) will have to be read for the purpose of initiation of applicability of CSR provisions whereas Rule 3(2) will have to be read for the purpose of deciding till which financial year, the CSR provisions shall remain applicable, i.e., if in any immediately preceding financial year, the criteria under Section 135(1) are triggered, CSR provisions will become applicable. But just because in any one financial year, a Company did not meet the criteria specified under Section 135(1), it will not be allowed to discontinue the CSR activities. Only if a company did not meet the criteria specified under Section 135(1) for three consecutive financial years, then it can discontinue with CSR activities. But in this case, it meant that the amendment in section 135(1) done in 2018 could not be implemented at all.
To end this ambiguity, rule 3(2) has now been omitted w.e.f 20th September, 2022. The effect of this deletion will be that, if a Company does not fulfil criteria of net worth, turnover and net profit as on financials of FY 2021-22, but net profit was more than Rs. 5 crores in as per financials of 2020-21, then it need not comply with the CSR provisions during FY 2022-23. This means the applicability of CSR provisions may keep changing on yearly basis, depending on the financials of immediately preceding financial year only.