Taxation Aspects of Corporate Social Responsibility (“CSR”)

Section 135 of the Companies Act, 2013

Every company having

• net worth of Rs. 500 crore or more, or
• turnover of Rs. 1000 crore or more, or
• a net profit of Rs. 5 crore or more

during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more Directors, out of which at least one director shall be an independent director.

The Board of Director shall ensure that the company spends, in every financial year, at least 2%. of the average net profits of the company made during the three immediately preceding financial years or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years.

As per Section 37(1) of the Income Tax Act, 1969

Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession.

Explanation 2. For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assesse for the purposes of the business or profession.

As per the plain reading of Explanation to 2 to section 37(1) of the ITA, any expenditure incurred towards CSR activities as referred to in section 135 of the Companies Act, 2013 is not allowed as ‘business expenditure’ and is deemed to have not been incurred for purpose of business.

Explanation 2 to section 37(1) of the ITA which denies deduction for CSR expenses by way of business expenditure is applicable only to the extent of computing ‘Business Income’ under Chapter IV-D of the ITA. It could not be extended or imported to CSR contribution which was otherwise eligible for deduction under any other provision or Chapter.

However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed as deduction under those sections subject to fulfilment of conditions, if any, specified therein

Schedule VII- Activities

1. Contributions to Indian Council of Agricultural Research (ICAR); Indian Council of Medical Research (ICMR) and Council of Scientific and Industrial Research (CSIR), engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals.
2. Rural development projects.
3. Promoting education, including special education and employment enhancing vocation
   skills especially among children, women, elderly and the differently abled and livelihood
   enhancement projects.

Section 35 of the Income Tax Act, 1969

 Section 35 – Scientific Research
 Section 35 C – Agriculture Development Allowance
 Section 35 CC – Rural Development Allowance
 Section 35CCD – Expenditure on Skill Development Project

These activities align with the activities mentioned in Section 35 of the Income Tax Act, 1969. Will deduction be allowed?
Section 37 (1) states “Any expenditure (not being expenditure of the nature described in sections 30 to 36” Hence, it may be interpreted that deduction will be available.

Memorandum to Finance Bill, 2014

Under the existing provisions of the Act expenditure incurred wholly and exclusively for the purposes of the business is only allowed as a deduction for computing taxable business income.

CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business. As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR cannot be allowed as deduction for computing the taxable income of the company.

The objective of CSR is to share burden of the Government in providing social services by companies having net worth/turnover/profit above a threshold. If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure.

In order to provide certainty on this issue, it is proposed to clarify that for the purposes of section 37(1) any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and hence shall not be allowed as deduction under section 37

Section 80G of the Income Tax Act, 1969: Deduction in respect of donations to certain funds, charitable institutions, etc

Section 80G (1) of the Income Tax Act, 1969

In computing the total income of an assessee, there shall be deducted, in accordance with and subject to the provisions of this section, —

(ii) in any other case, an amount equal to fifty per cent (50%) of the aggregate of the sums specified in subsection (2)

Section 80G (2) of the Income Tax Act, 1969

The sums referred to in sub-section (1) shall be the following, namely-

(a) any sums paid by the assessee in the previous year as donations to

Section 80G(2)(a)(iiihk) the Swachh Bharat Kosh, set up by the Central Government, other than the sum spent by the assessee in pursuance of Corporate Social Responsibility under sub-section (5) of section 135 of the Companies Act, 2013 ; or

 Section 80G(2)(a)(iiihl) the Clean Ganga Fund, set up by the Central Government, where such assessee is a resident and such sum is other than the sum spent by the assessee in pursuance of Corporate Social Responsibility under sub-section (5) of
section 135 of the Companies Act, 2013.

 80G(2)(a)(iv) Any other fund or any institution to which section applies;

Section 80G (5) of the Income Tax Act, 1969

This Section applies to donations to any institution or fund referred to in Sub clause (iv) of clause (a) of Sub-section (2), only if it is established in India for a charitable purpose and if it fulfils the following condition namely:……”

• As per section 80G of the ITA, deduction has to be made in accordance with and subject to the provisions of the said section i.e. section 80G of the ITA
• Further, an amount of 50% of the aggregate of the sums specified in section 80G(2)(a)(iv) read with section 80G(1)(ii) of the ITA is allowed as expenditure even if the taxpayer includes the expenditure as CSR expenditure. This is because there is no prohibition or restriction placed by the Parliament on such a donation even if shown as CSR expenditure.
• As per section 80G(2)(a)(iv) read with section 80G(1)(ii) of the ITA 50% of the donation given to any other fund or any institution to which section 80G of the ITA applies and if it satisfies the requirement of section 80G (5) of the ITA is allowed as expenditure.
• The same was because there are certain restrictions expressed in section 80G of the ITA for deduction in respect of two donations i.e. CSR expenditure related to Swachh Bharat Kosh and Clean Ganga Fund
• If a taxpayer made some donation to these projects and includes/classifies it as CSR expenditure while claiming deduction under section 80G of the ITA then, it would be allowed only on the amount that was other than the sums spent by the taxpayer in pursuance of CSR under section 135 of the Companies Act.
• In other words, if a taxpayer company spends only the mandatory CSR expenditure, which includes the amount of donation to Swacch Bharat Kosh and Clean Ganga Fund (referred to in section 80G(2)(a)(iiihk) and (iiihl) of the ITA, then deduction under section 80G of the ITA was not allowable.

Conclusion

• The restriction in respect of expenditure made by the taxpayer to any other fund or institution as referred to in section 80G(2)(a)(iv) of the ITA had not been placed by the legislature. And if the Parliament desired, it could have made such kind of / any restriction like in the case of donation to Swach Bharat Kosh and Clean Ganga Fund.

 

• When something is mentioned expressly in a statute, it leads to the presumption that the things not mentioned are excluded.

 

• Since the legislature provides for specific exceptions in section 80G(2)(a)(iiihk) and (iiihl) of the ITA, then it is the implied intent of the legislature to permit deduction under section 80G of the ITA in respect of CSR contributions made to funds / organisations referred to in all other subclauses of section 80G of the ITA.

MCA FAQs

1. Whether CSR expenditure of a Company can be claimed as Business Expenditure?

The amount spent by a company towards CSR cannot be claimed as business expenditure. The Finance Act, 2014 provides that any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.

      2. What tax benefit can be availed under CSR?

No specific tax exemptions have been extended to CSR expenditure per se. Finance Act, 2014 also clarifies that expenditure on CSR does not form part of business expenditure. While no specific tax exemption has been extended to expenditure incurred on CSR, spending on several activities like contributions to Prime Minister’s Relief Fund, scientific research, rural development projects, skill development projects, agricultural extension projects, etc., which find place in Schedule VII, already enjoy exemptions under different sections of the Income Tax Act, 1961

CASE LAWS

In Goldman Sachs Services Pvt. Ltd. Vs JCIT (ITAT Bangalore) – the ITAT allowed the deduction.

In National Seeds Corporation Ltd. v. ACIT, CIT(A) had held that the expenditure in the nature of CSR expense should be allowable as deduction under sections 35AC and 80G of the IT Act.

TEAM RAMAKANT PATHAK & CO. 

Written By:

CS NISHANT SINGH