Impact of Budget 2014 on the amount spent towards Corporate Social Responsibility

The Companies Act, 2013 imposes a liability upon some companies having net profit amounting to Rs. 500 crore or more or an annual turnover of Rs.1000 crore or more, to spend part of their profit on activities in connection with Corporate Social Responsibility (CSR) as per section 135 of the Act.
Under the existing Act expenses incurred for the purposes of the business is only allowed as a deduction for the purposes of income tax.

Proposal to disallow CSR expenses:

The Finance Bill, 2014 has proposed to introduce a new Explanation in section 37(1) of the Income Tax Act, 1961. It provides that CSR expenses being an application of income are not incurred totally for the purposes of carrying on business. The change states that as the application of income cannot be allowed as deduction for computing taxable income of a company, the amount spent on CSR cannot be allowed as deduction for the purpose of computing the taxable income of the company.

The object of CSR:

CSR expenses are borne by companies to lower the burden of the Government in providing social services having profits over a threshold. If such expenditures are allowed as deduction, this would subsidize a considerable amount of expenses by the Government through tax expenditure.
CSR is the process by which a corporate entity maintains its relationships with stakeholders for public welfare and makes commitment by adoption of necessary business strategies.
CSR cannot be considered as charity or simple donations. It is a way of conducting business through which corporate bodies contribute to the social welfare. Responsible companies utilize CSR to promote economic and social objectives with the development of the company.

Provisions contained in Section 37(1) of the Income Tax Act:

Section 37(1) of the Income Tax Act provides that an expense that is not mentioned in section 30 to section 36 of the Act shall be allowed as deduction if it is incurred exclusively for carrying on business or profession. According to the Memorandum to the Bill, CSR expenditure is an application of income and they are not incurred for the purposes of carrying on business, as such those expenses cannot be allowed as deduction under section 37 of the Act.
To provide certainty on this issue, it has been proposed in the new Bill to clarify that for the purposes of section 37(1) any expenditure incurred for the activities in connection with corporate social responsibility as per section 135 of the Companies Act, 2013 shall not be allowed as deduction under section 37.
The amendment will take effect on and from 1.4.2015 and will be applicable for the assessment year 2015 -16 and subsequent years.

Exceptions to the prohibition:

However, the CSR expenditure which does not come within the purview of section 30 to section 36 of the Act shall be allowed as deduction subject to fulfillment of conditions which are specified therein. Any sum not stated in sections 30 to 36 of the Act, spent exclusively for the purposes of running of the business shall be allowed in computing the income under the head “Profits and gains of business or profession’.
Though CSR expenses cannot be claimed as deduction for the purposes of income tax, if the activities which coincide with Section 30 to 36 of Act are chosen, the company has to spend towards the same activities in the succeeding years for availing deduction.

List of Activities:

1. Donation for Development Fund including Rural Development program, eradication fund of National urban poverty, etc. as per Section 35CCA of the Act.
2. Expenses towards skill development program as per Section 35CCD of the Act.
3. Any project notified by CG for the purpose of promoting gender equality as per Section 35AC of the Act.
The list of activities is not exhaustive and there are many other activities included in the category.