CSR Expenditure and its deductions under Income Tax Act,1961

What is Corporate Social Responsibility?-Recently, CSR Expenditure has turned into a vital note much relative to Companies and big business houses. The term, in its broader manner, elaborates as Corporate Social Responsibility. But what actually does it mean? Well, different establishments have different understandings about it.

As per the United Nations Industrial Development Organization (UNIDO), CSR is a concept of management whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders.

In other words, Corporate Social Responsibility, CSR is a manner in which a company can operate balancing all the causes of social and environmental developments with its economic and business operations.

Situation in India- However, in India, CSR was previously managed just as a mere responsibility but it was not obligatory. Therefore, alongside the superlative flow in revenue generation, the importance of social causes was somewhat lacking behind.

And so, to make CSR as mandatory expense item, the central government, with the help of the Ministry of Corporate Affairs, notified Section 135 and Schedule VII of the Companies Act 2013 as well as the provisions of the Companies (Corporate Social Responsibility Policy) Rules, 2014.

For whom is CSR a mandatory Expense?- According to the provision, firstly, each and every company having net worth of rupees five hundred crores or more, or companies having a turnover of rupees one thousand crores or more or entities having a net profit of rupees five crore or more has to spend 2% of its net profit in any financial year on CSR activities and this needs to be carried forward for the next three years.

The companies were required to disclose all the expenditure spend in CSR during the year in its Board’s final report. So, with this requirement and certain other closely related amendments, the corporate spendings on CSR activities started registering big jump. There were initially some confusions related to this about which Corporate Social Responsibility expenditure to be treated as tax-free or not.

Presently Corporate Social responsibility (CSR) provisions in Income Tax Act and as Per Companies Act have some ambiguities that need to be resolved. Further the grey areas of expenditure whether bordering as Charitable Activity or as CSR need to be clarified

CSR and its position in Income Tax Act-Section 37 of income Tax Act, 1961 performs the residuary role which in a deduction of business expenditures not covered specifically under sections 30 to 36. Since CSR expenditure’s admissibility as business expenses were not clear under section 37, a further Explanation 2 was added to it.

Definition of CSR as per Income Tax Act and as per Companies Act conflicted- The explanation briefed that any expenditure incurred by an assessee on the CSR activities referred to in section 135 shall not be deemed or considered to be an expenditure incurred for any such business purposes. But this point was conflicting somewhat with Companies (Corporate Social Responsibility Policy) Rules, 2014’s rule 4(1) which says that Corporate Social Activities exclude normal business activities undertaken by the company.

So, to clarify this more clearly, apart from u/s 37 only, CSR Expenditure was also allowed on certain sections from 30 to 36 of the Income-tax Act, 1961 to provide for specific deductions in respect of certain CSR spendings which are not really business expenditures.

Some ambiguities still remain- Some of the options available in this manner to claim benefits under the provisions of Income-tax Act, 1961 are Section 80G, Section 35AC, Section 35CCD etc. Whereas spendings u/s 35CCD may still be controversial, as these are not clarified by the Ministry of Corporate Affairs to be considered as  or not.

There are also many legal and other regulatory hassles attributed to the spending on CSR tasks u/s 35CCC and 35 CCD and tax deduction under these two as well as of 80G. Unless a company has very clear and elaborate plan to spend the amount mandatory to be spent for CSR, contribution to the Prime Minister’s National Relief Fund is one of the safe option

Although corporates may get the relieved from their CSR Expenditure compliance obligations but the real essence of Corporate’s Social responsibility actually remains unfulfilled. To ensure that the Social tasks are taken up in proper spirit, the CSR provisions in Income Tax Act need to be reframed after clearly defining the activities to remove any grey areas. These provisions may be clarified and objectified by the government in coming future days to provide the proper independence for CSR activities.