CSR Expenses: A Comprehensive Analysis of Tax Deductibility

Summary: Corporate Social Responsibility (CSR) under the Companies Act, 2013 mandates qualifying companies to engage in activities that contribute to societal welfare. Companies with a net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or a net profit of ₹5 crore or more in the preceding financial year are required to comply with CSR provisions. CSR activities must align with Schedule VII of the Act, encompassing initiatives like eradicating hunger, promoting education, ensuring environmental sustainability, and more. Notably, expenses incurred for CSR cannot be claimed as business expenditures under the Income Tax Act, 1961. While CSR spending is mandatory, it does not attract specific tax exemptions, except for contributions to funds like the Prime Minister’s National Relief Fund and the PM CARES Fund, which qualify for deductions under Section 80G. Companies must ensure that CSR activities do not solely benefit employees or serve marketing purposes, as these do not qualify as eligible CSR expenditures. CSR can be implemented directly by the company, through eligible agencies, or in collaboration with other companies, provided the entities involved meet specific criteria, including registration under relevant income tax provisions. The essence of CSR is to promote inclusive and sustainable development, benefiting the larger public.

Qualifications for CSR

1. Which companies qualify for CSR under the Companies Act, 2013?

A company satisfying any of the following criteria during the immediately preceding financial year is required to comply with CSR provisions specified under section 135(1) of the Companies Act, 2013 read with the Companies (CSR Policy) Rules, 2014 made there under:

(i) net worth of rupees five hundred crore or more, or

(ii) turnover of rupees one thousand crore or more, or

(iii) Net profit of rupees five crore or more.

2. Whether a holding or subsidiary of a company fulfilling the criteria under section 135(1) has to comply with the provisions of section 135, even if the holding or subsidiary itself does not fulfill the criteria?

No, the compliance with CSR requirements is specific to each company.

A holding or subsidiary of a company is not required to comply with the CSR provisions unless the holding or subsidiary itself fulfils the eligibility criteria prescribed under section 135(1) stated above.

3. Whether provisions of CSR are applicable to a section 8 Company?

Yes, section 135(1) of the Act commences with the words “Every company……..” and thus applies to section 8 companies as well.

4. Whether CSR provisions apply to a company that has not completed the period of three financial years since its incorporation?

• If the company has not completed three financial years since its incorporation, but it satisfies any of the criteria mentioned in section 135(1),
• The CSR provisions including spending of at least two per cent of the average net profits made during immediately preceding financial year(s) are applicable.

Example: Company A is incorporated during FY 2018-19, and as per eligibility criteria the company is covered under section 135(1) for FY 2020-21. The CSR spending obligation under section 135(5) for Company A would be at least two per cent of the average net profits of the company made during FY 2018-19 and FY 2019-20.

CSR Activities

5. Which activities qualify as eligible CSR activity (schedule VII section 135)?

SCHEDULE VII (See Section 135) Activities which may be included by companies in their Corporate Social Responsibility Policies Activities relating to:—

1 [(i) Eradicating hunger, poverty and malnutrition,

2 [‘‘promoting health care including preventive health care’’] and sanitation [including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation] and making available safe drinking water.

(ii) Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects.

(iii) Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.

(iv) Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro forestry, conservation of natural resources and maintaining quality of soil, air and [including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga].

(v) protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional art and handicrafts;

(vi) measures for the benefit of armed forces veterans, war widows and their dependents, 9[ Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans, and their dependents including widows];

(vii) Training to promote rural sports, nationally recognized sports, Paralympics sports and Olympic sports

(viii) contribution to the prime minister’s national relief fund 8[or Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund)] or any other fund set up by the central govt. for socio economic development and relief and welfare of the schedule caste, tribes, other backward classes, minorities and women; 10

[(ix) (a) Contribution to incubators or research and development projects in the field of science, technology, engineering and medicine, funded by the Central Government or State Government or Public Sector Undertaking or any agency of the Central Government or State Government; and

(b) Contributions to public funded Universities; Indian Institute of Technology (IITs); National Laboratories and autonomous bodies established under Department of Atomic Energy (DAE); Department of Biotechnology (DBT); Department of Science and Technology (DST); Department of Pharmaceuticals; Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy (AYUSH); Ministry of Electronics and Information Technology and other bodies, namely Defense Research and Development Organization (DRDO); 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 (SDGs).]

(x) Rural development projects

[(xi) Slum area development. Explanation.- For the purposes of this item, the term `slum area’ shall mean any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force.] 5

[(xii) Disaster management, including relief, rehabilitation and reconstruction activities.]

6. Which activities do not qualify as eligible CSR activity?

Rule 2(1) (d) of the Companies (CSR Policy) Rules, 2014 defines CSR and the following activities are specifically excluded from being considered as eligible CSR activity:

• Activities undertaken in pursuance of normal course of business of the company.
• However, exemption is provided for three financial years, till FY 2022-23, to companies engaged in R&D activities for new vaccines, drugs, and medical devices in their normal course of business, related to COVID 19.
• This exclusion is allowed only in case the companies are engaged in R&D in collaboration with organizations as mentioned in item (ix) of Schedule VII and disclose the same in their Board reports.
• Activities undertaken outside India, except for training of Indian sports personnel representing any State or Union Territory at national level or India at international level;
• Contribution of any amount, directly or indirectly, to any political party under section 182 of the Act;
• Activities benefitting employees of the company as defined in section 2(k) of the Code on Wages, 2019;
• Sponsorship activities for deriving marketing benefits for products/services; Activities for fulfilling statutory obligations under any law in force in India.

7. Whether the companies can undertake any CSR activity mentioned under Schedule VII of the Act for the exclusive benefit of their employees, workers and their family members?

• Rule 2(1)(d)(iv) of the Companies (CSR Policy) Rules, 2014 states that any activity benefitting employees of the company shall not be considered as eligible CSR activity.
• As per the rule, any activity designed exclusively for the benefit of employees shall be considered as an “activity benefitting employees” and will not qualify as permissible CSR expenditure.
• The spirit behind any CSR activity is to benefit the public at large and the activity should be non discriminatory to any class of beneficiaries.
• However, any activity which is not designed to benefit employees solely, but the public at large, and if the employees and their family members are incidental beneficiaries, then, such activity would not be considered as “activity benefitting employees” and will qualify as eligible CSR activity.

8. Are activities undertaken by companies outside India for the benefit of resident Indians, permitted as eligible CSR activity?

• Rule 2(1)(d)(ii) of the Companies (CSR Policy) Rules, 2014 clearly states that any activity undertaken by the company outside India shall not be an eligible CSR activity.
• The only exception is training of Indian sports personnel representing any State or Union Territory at national or international level.

CSR Implementation

9. What are the different modes of implementation of CSR activities?

Pursuant to rule 4 of the Companies (CSR Policy) Rules, 2014 a company may undertake CSR activities through following three modes of implementation:

a. Implementation by the company itself

b. Implementation through eligible implementing agencies as prescribed under sub-rule (1) of rule 4.

c. Implementation in collaboration with one or more companies as prescribed under sub-rule (4) of rule 4.

10. Which entities are eligible to act as an implementing agency for undertaking CSR activities?

Rule 4(1) of the Companies (CSR Policy) Rules, 2014 provides the eligible entities which can act as an implementing agency for undertaking CSR activities. These are:

• Entity established by the company itself or along with any other company – a company established under section 8 of the Act,
• or a registered public trust or
• A registered society, registered under section 12A and 80G of the Income Tax Act, 1961.
• Entity established by the Central Government or State Government
• Statutory bodies – any entity established under an Act of Parliament or a State legislature.
• Other bodies – a company established under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80G of the Income Tax Act, 1961, and having an established track record of at least three years in undertaking similar activities.

11. Whether all three types of entities – a company established under section 8 of the Act, or a registered public trust, or a registered society, are required to have income-tax registration u/s 12A as well as 80G of the Income Tax Act, 1961?

• Yes, as per rule 4(1) all three types of entities – a company established under section 8 of the Act, or a registered public trust, or a registered society are required to have income-tax registration u/s 12A as well as 80G of the Income Tax Act, 1961 to act as implementing agency,
• Except for any entities established by Central or State Government.

12. If a company cannot take the benefit of set off of excess amount spent in the previous financial year because of non applicability of CSR provisions, will the excess amount lapse?

• Yes, the law states that the excess CSR amount spent can be carried forward up to immediately succeeding three financial years; thus, in case any excess amount is left for set off, it will lapse at the end of the said period.

Example: In FY 2020-21 a company had spent Rs. 2 crore in excess. In FY 2021-22, it sets-off Rs. 50 lakh from such excess. However, from FY 2022-23, the company is no longer subject to CSR provisions under section 135(1). In such case, the company may continue to retain the remaining excess CSR of Rs. 1.50 crore up to FY 2023-24, and thereafter the same shall lapse.

13. Whether CSR expenditure of a company can be claimed as business expenditure?

• No, the amount spent by a company towards CSR cannot be claimed as business expenditure. Explanation 2 to section 37(1) of the Income Tax Act, 1961 which was inserted through the Finance Act, 2014 provides that any expenditure incurred by an assessee on the activities relating to CSR 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.

14. What tax benefits can be availed under CSR?

• No specific tax exemptions have been extended to CSR expenditure. The Finance Act, 2014 also clarifies that expenditure on CSR does not form part of business expenditure.

15. Can CSR expenditure be incurred on activities beyond Schedule VII?

• No, CSR expenditure cannot be incurred on activities beyond Schedule VII of the Act. The activities undertaken in pursuance of the CSR policy must be relatable to Schedule VII of the Companies Act, 2013.
• The items enlisted in Schedule VII of the Act are broad-based and are intended to cover a wide range of activities. The entries in the said Schedule VII must be interpreted liberally to capture the essence of the subjects enumerated in the said Schedule.

16. Which are the funds specified in Schedule VII of the Act for the purpose of CSR contribution?

Contributions to the following funds shall be admissible as CSR expenditure:

(i) Swachh Bharat Kosh

(ii) Clean Ganga Fund

(iii) Prime Minister’s National Relief Fund (PMNRF)

(iv) Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund)

(v) Any other fund set up by the Central Government and notified by the Ministry of Corporate Affairs, for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women.

17. Whether CSR expenditure are allowable u/s 80G of the Income Tax Act?

Contributions to the following funds shall be admissible as CSR expenditure:

(i) Swachh Bharat Kosh disallowed as per Clauses (iiihk) of sub-section 2 of Section 80G

(ii) Clean Ganga Fund disallowed as per Clauses ( (iiihl) of sub-section 2 of Section 80G

(iii) Prime Minister’s National Relief Fund (PMNRF)

(iv) Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund)

(v) Any other fund set up by the Central Government and notified by the Ministry of Corporate Affairs, for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women.

If we refer to the Clauses (iiihk) & (iiihl) of sub-section 2 of Section 80G of the Act which are read as under:

• “(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 (18 of 2013); or
• (iiihl) the Clean Ganga Fund, set up 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) (18 of 2013).”
• Given the exceptions outlined in Section 80G of the Act, it can be inferred that contributions made under Section 135(5) of the Companies Act are also eligible for deduction under Section 80G of the Income Tax Act, provided that the assessee meets all the necessary conditions specified for such a deduction.

18. Whether CSR expenditure are allowable u/s 30 to 36 of the Income Tax Act

Under the Income Tax Act, 1961, Corporate Social Responsibility (CSR) expenditures are generally not directly deductible under sections 30 to 36, which primarily address deductions related to business expenses. However, the treatment of CSR expenditures depends on the nature of the expense and whether it qualifies under other provisions of the Act.

Here’s a breakdown:

1. Section 30: This section covers deductions related to rent, rates, taxes, repairs, and insurance for buildings used in business. CSR expenses typically do not fall under this section.

2. Section 31: This section pertains to repairs and insurance for machinery, plant, and furniture. CSR expenditures do not fit within this category.

3. Section 32: This section allows depreciation on assets. CSR expenses are not related to asset depreciation.

4. Section 33: This section deals with deductions for development of certain assets. CSR expenditures are not applicable here.

5. Section 34: This section addresses deductions for amortization of certain intangible assets. CSR expenses do not fall under this category.

6. Section 35: This section covers deductions for scientific research and development. Certain CSR activities related to research could potentially qualify if they are directly related to scientific research and meet the specific criteria under Section 35, though this is a more indirect connection.

7. Section 36: This section includes various deductions, including those for bad debts, provisions for bad debts, and donations to charitable institutions. Specifically, CSR expenditures themselves are not directly deductible here, but donations made to charities recognized under Section 80G can be deducted as per the provisions of that section.

19. GIST of Deductibility

1. General Deductibility

• CSR Expenditures: Direct CSR expenditures (e.g., donations to charitable organizations) are generally not allowable as deductions under sections 30 to 36 of the Income Tax Act, 1961. These sections focus on business-related expenses rather than philanthropic activities.

2. Section 35 – Scientific Research

• Scientific Research: If a CSR activity is directed towards scientific research and development, it might be eligible for a deduction under Section 35. This section provides deductions for expenditures on scientific research related to the business. However, this is a narrow application and would require the CSR activity to meet specific criteria related to scientific research.

3. Section 37 – General Deductions

• General Business Expenses: Section 37 allows deductions for any expense that is wholly and exclusively incurred for the purpose of business, subject to it not being covered under other specific sections. In practice, CSR expenditures are often considered as not directly related to the primary business operations and are generally not deductible under this section.

4. Section 80G – Charitable Donations

• Charitable Contributions: Donations made under CSR activities to organizations recognized under Section 80G can be claimed as a deduction under that section. Section 80G provides for deductions of donations to specific funds and charitable institutions. For a CSR expense to be deductible under Section 80G, it must be made to entities that are eligible and registered under this section.

5. Tax Treatment of CSR Expenditures

• Direct CSR Spend: Expenditures directly related to CSR activities (e.g., community development, education, and healthcare) typically do not fall under the scope of business expense deductions.
• Recognition under Section 80G: If the CSR contributions are made to organizations or funds that qualify under Section 80G, the donations can be claimed as deductions, provided all necessary documentation and compliance requirements are met.

20. Practical Questions:

Question1 :

Company X, a publicly listed company, has allocated a significant portion of its annual profits towards various CSR activities as mandated under Section 135(5) of the Companies Act, 2013. In the current financial year, the company made the following CSR-related expenditures:

1. Donation of ₹5,00,000 to a hospital that is registered under Section 80G of the Income Tax Act.

2. ₹3,00,000 spent on organizing health camps in rural areas, managed by a charitable trust that is not registered under Section 80G.

3. ₹2,00,000 spent on educational programs for underprivileged children, which were organized by a foundation recognized under Section 80G.

Company X seeks to determine the tax deductibility of these CSR expenditures under the Income Tax Act, 1961.

1. How should Company X account for the ₹5,00,000 donation to the hospital in its tax returns?

2. What is the tax treatment of the ₹3,00,000 spent on health camps?

3. How should the ₹2,00,000 spent on educational programs be treated for tax purposes?

Answer 1:

1. Donation to the Hospital (₹5,00,000): The donation to the hospital, which is registered under Section 80G, is eligible for a tax deduction under Section 80G of the Income Tax Act. Company X can claim this donation as a deduction while calculating its taxable income; provided it complies with all documentation requirements and the hospital’s registration status under Section 80G is valid.

2. Health Camps Expenditure (₹3,00,000): The expenditure on health camps organized by a charitable trust that is not registered under Section 80G is generally not deductible under the Income Tax Act. Since the CSR expenditure does not fall under any other specific deductible category and does not meet the criteria under Section 80G, it cannot be claimed as a deduction for tax purposes.

3. Educational Programs (₹2,00,000): Similar to the donation to the hospital, if the foundation managing the educational programs is recognized under Section 80G, then the ₹2,00,000 expenditure can be claimed as a deduction under Section 80G. Proper receipts and documentation must be maintained to claim this deduction.

Question 2:

Company Y has made the following CSR contributions during the financial year:

1. ₹4,00,000 donation to a non-governmental organization (NGO) focused on environmental conservation, which is registered under Section 80G of the Income Tax Act.

2. ₹2,50,000 for organizing a workshop on vocational training for underprivileged youth, conducted by a local charitable organization that is not registered under Section 80G.

3. ₹1,00,000 for providing disaster relief aid, donated to a relief fund recognized by the government but not registered under Section 80G.

Company Y is looking to understand how these expenditures should be treated for tax purposes.

1. Can Company Y claim a deduction for the ₹4,00,000 donation to the NGO?

2. Is the ₹2,50,000 spent on vocational training deductible?

3. How should the ₹1,00,000 for disaster relief be accounted for in terms of tax benefits?

Answer 2:

1. ₹4,00,000 donation to the NGO: Yes, Company Y can claim a deduction under Section 80G, provided the NGO is registered under Section 80G and all documentation is in order.

2. ₹2,50,000 for vocational training: No, the expenditure is not deductible under the Income Tax Act as it does not meet the criteria for deduction under Section 80G or any other section.

3. ₹1,00,000 for disaster relief: Typically, donations to recognized disaster relief funds are not deductible under Section 80G unless the fund is also approved under that section. If not, the expenditure may not be deductible.

Question 3:

Company Z, a medium-sized enterprise, has incurred the following CSR expenses:

1. ₹6,00,000 to a foundation involved in health care, which is registered under Section 80G.

2. ₹1,50,000 on an educational scholarship program organized by a trust that is not registered under Section 80G.

3. ₹3,00,000 for building a community center in a rural area, which is managed by a local non-profit organization that is recognized by the Ministry of Rural Development but is not registered under Section 80G.

Company Z wants to ensure they maximize their tax deductions related to these CSR activities.

1. What is the tax treatment of the ₹6,00,000 donation to the health care foundation?

2. Can Company Z claim a deduction for the ₹1,50,000 spent on the scholarship program?

3. How should the ₹3,00,000 spent on building a community center be treated for tax purposes?

Answer 3:

• ₹6,00,000 donation to the health care foundation: Yes, Company Z can claim a deduction under Section 80G if the foundation is registered under Section 80G.
• ₹1,50,000 for the scholarship program: No, if the trust is not registered under Section 80G, this expenditure is not eligible for a tax deduction under Section 80G or any other section.
• ₹3,00,000 for building a community center: Typically, this expense is not deductible unless the organization managing the project is recognized under Section 80G.

These questions and answers can help illustrate how various CSR expenditures are treated under different sections of the Income Tax Act.

Conclusion

CSR expenditures are not directly deductible under sections 30 to 36 of the Income Tax Act (except for section 35). However, they may be eligible for deductions under Section 80G if they are made to approved charitable institutions. It’s crucial to understand the specific requirements and ensure proper documentation to take advantage of available tax benefits.

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Imp note: Always consult with a tax advisor or financial expert to ensure compliance with the latest tax regulations and to receive personalized advice based on your specific situationTop of Fo.Bottom of Form

The author is a Lucknow based Chartered Accountant and can be reached at [email protected]