The Board of directors of Well Ltd., wants to contribute ₹60,000 to a charitable trust during the financial year 2022-2023. During the financial year 2021-2022, the company suffered losses; however, during the financial

As per section 181 of the Companies Act, 2013, company can contribute to bona-fide charitable funds or other funds which are not directly connected to business of company upto 5% of its average net profits during the preceding three financial years. If the contribution is proposed for more than this limit, prior approval in General Meeting is required. In present case, we assume Well Ltd. has incurred Loss of ₹2,00,000 during the financial year 2021-22 Year Average Profits/Loss 2019-20 12,00,000 2020-21 5,00,000 2021-22 -2,00,000 Average net profits = (12,00,000 + 5,00,000 - 2,00,000) / 3 = ₹5,00,000 5% of Average Net Profits = 5% of 5,00,000 = ₹25,000 Pursuant to Section 181, if contribution to charitable trust is more than 5% of average net profits for three financial years, it requires prior approval in General Meeting. Hence, in the above case, where Well Ltd. wants to contribute more than ₹25,000 i.e. ₹60,000 (in the present case) to charitable fund, the directors have to ensure that: Prior approval by ordinary resolution in the general meeting is obtained to make contribution to charitable fund. The trust is bonafide. Contribution towards Gratuity Fund for employees of company cannot be considered as contribution towards charitable fund or trust. Gratuity Fund is directly related to business of company or welfare of employees.