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Tanishq Components Ltd, incorporated 18 months ago, became subject to section 135 because its net profit for the immediately preceding financial year was Rs 6 crore. It has completed only one full financial year, with net profit of Rs 6 crore (computed under section 198). On what base must the Board ensure the 2% minimum CSR spend is calculated?

The base is the net profit of the immediately preceding financial year or years since incorporation. Section 135(5) provides that where a company has not completed three financial years, the average is taken over the years available, not three years with nil values. Net worth and turnover are not the base.

  1. AAverage net profits of the three immediately preceding financial years, treating missing years as nil
  2. BNet profit of the immediately preceding financial year(s) since incorporation, as it has not completed three financial yearsCorrect
  3. CNet worth of the company at the end of the preceding financial year
  4. DTurnover of the immediately preceding financial year

Explanation

Section 135(5) requires 2% of the average net profits of the three immediately preceding financial years, or, where the company has not completed three financial years since incorporation, of such immediately preceding financial years. Tanishq therefore uses the profit of its completed year, Rs 6 crore, giving Rs 12 lakh. Treating missing years as nil would wrongly dilute the average.

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