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Meghdoot Textiles Ltd had average net profit of Rs 40 crore over its three immediately preceding financial years. In the current year it spent Rs 60 lakh on CSR activities in line with its policy, all on completed projects. What is the position under section 135(5)?

The company must spend at least two per cent of the average net profit of the three preceding years, which is Rs 80 lakh. Spending only Rs 60 lakh is a shortfall, so the Board must state reasons in its report and deal with the unspent Rs 20 lakh as the Act requires.

  1. AIt has spent less than the required amount and must explain the reasons in the Board's reportCorrect
  2. BIt has met the requirement because the minimum spend is 1% of average net profit
  3. CIt has spent more than required and can carry the excess forward automatically
  4. DIt must transfer Rs 60 lakh to a Schedule VII Fund

Explanation

The minimum is 2% of the average net profit of the three preceding years: 2% of Rs 40 crore = Rs 80 lakh. Spending Rs 60 lakh leaves Rs 20 lakh short. Since the projects are not ongoing, the Board must give reasons in its report and transfer the Rs 20 lakh shortfall to a Schedule VII Fund. The 1% option uses a wrong rate.

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