Author in this article discusses the probable reasons that spending of Corporate Social Responsibility expenses is not mandatory in nature.
The article gives authors own analysis. This article is based on a judicial pronouncement and is divided into following parts.
|1||Objective||4||Broad characteristics of CSR||7||Whether CSR is a tax / duty / cess or not?|
|2||Structure||5||Take away points||8||Whether CSR spending is a fee?|
|3||Background||6||Author’s personal Opinion||9||Further Readings|
While many corporate houses have been traditionally engaged in doing CSR activities voluntarily, the new CSR provisions, vide the Companies Act, 2013 [the Co Act], put formal and greater responsibility on companies in India to set out clear framework and processes to ensure strict compliance.
Broad characteristics of CSR
In general, big companies should spend 2% of average net profit for philanthropical purposes. Such obligations, whether contractual or legislative, which otherwise also are binding on the company cannot be covered under CSR expenditure.
The relevant section is section 135(5) of the Companies Act, 2013 which has come into effect from 1-April-2014 which reads as follows;
(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, 1[or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years,] in pursuance of its Corporate Social Responsibility Policy:
1 – Inserted by the Companies (Amendment) Act, 2019, with effect from a date yet to be notified.
Take away points
As of today, CSR is neither a tax / duty / cess nor a fee as per constitutional framework. Thus, it cannot be recovered like land revenue.
If one observes various orders of National Company Law Tribunal in this regard, there is no order forcing a company to spend what is it required to spend u/s 135 of the Co Act. There are orders of following nature.
Author’s personal Opinion
Some of the undisputed facts are as follows;
Impact of CSR
Whether CSR is a tax/duty/cess or not
Any tax /duty / cess by whatever name called is a compulsory contribution to exchequer levied by the government. The Government is under no obligation to prove specific correlation in the taxes collected vis-à-vis utilisation of those funds. The power to tax arises from sovereignty of the state.
The freedom given to the corporates to spend the specified amount by itself will not change the character of CSR being a tax /duty / cess or otherwise.
To levy a tax /duty / cess it is necessary for Parliament / legislative assembly to pass the legislative enactment as a money Bill.
The requirement of money bill is important because it is closely interwoven with the Consolidated Fund of India and public accounts of India.
Characteristics of a “Money Bill” are defined in Article 110 of the Constitution of India. Part I chapter II of the Constitution of India elaborates the procedure for making a legislative enactment with specific requirements regarding a money bill and other bills [for brevity, non-money bill].
Text of the relevant articles is re-produced hereinbelow.
109. Special procedure in respect of Money Bills-:
(1) A Money Bill shall not be introduced in the Council of States.
(2) After a Money Bill has been passed by the House of the People it shall be transmitted to the Council of States for its recommendations and the Council of States shall within a period of fourteen days from the date of its receipt of the Bill return the Bill to the House of the People with its recommendations and the House of the People may thereupon either accept or reject all or any of the recommendations of the Council of States.
(3) If the House of the People accepts any of the recommendations of the Council of States, the Money Bill shall be deemed to have been passed by both Houses with the amendments recommended by the Council of States and accepted by the House of the People.
(4) If the House of the People does not accept any of the recommendations of the Council of States, the Money Bill shall be deemed to have been passed by both Houses in the form in which it was passed by the House of the People without any of the amendments recommended by the Council of States.
(5) If a Money Bill passed by the House of the People and transmitted to the Council of States for its recommendations is not returned to the House of the People within the said period of fourteen days, it shall be deemed to have been passed by both Houses at the expiration of the said period in the form in which it was passed by the House of the People.
110. Definition of Money Bill
(1) For the purposes of this Chapter, a Bill shall be deemed to be a Money Bill if it contains only provisions dealing with all or any of the following matters, namely;
(a) the imposition, abolition, remission, alteration or regulation of any tax;
(b) the regulation of the borrowing of money or the giving of any guarantee by the Government of India, or the amendment of the law with respect to any financial obligations undertaken or to be undertaken by the Government of India;
(c) the custody of the consolidated Fund or the Contingency Fund of India, the payment of moneys into or the withdrawal of moneys from any such Fund;
(d) the appropriation of moneys out of the consolidated Fund of India;
(e) the declaring of any expenditure to be expenditure charged on the Consolidated Fund of India or the increasing of the amount of any such expenditure;
(f) the receipt of money on account of the Consolidated Fund of India or the public account of India or the custody or issue of such money or the audit of the accounts of the Union or of a State; or
(g) any matter incidental to any of the matters specified in sub clause (a) to (f)
(2) A Bill shall not be deemed to be a Money Bill by reason only that it provides for the imposition of fines or other pecuniary penalties, or for the demand or payment of fees for licences or fees for services rendered, or by reason that it provides for the imposition, abolition, remission, alteration or regulation of any tax by any local authority or body for local purposes.
113. Procedure in Parliament with respect to estimates—
(1) So much of the estimates as relates to expenditure charged upon the Consolidated Fund of India shall not be submitted to the vote of Parliament, but nothing in this clause shall be construed as preventing the discussion in either House of Parliament of any of those estimates.
(2) So much of the said estimates as relates to other expenditure shall be submitted in the form of demands for grants to the House of the People, and the House of the People shall have power to assent, or to refuse to assent, to any demand, or to assent to any demand subject to a reduction of the amount specified therein.
(3) No demand for a grant shall be made except on the recommendation of the President.
117. Special provisions as to financial Bills-:
(1) A Bill or amendment making provision for any of the matters specified in sub-clauses (a) to (f) of clause of article 110(1) shall not be introduced or moved except on the recommendation of the President and a Bill making such provision shall not be introduced in the Council of States:
Provided that no recommendation shall be required under this clause for the moving of an amendment making provision for the reduction or abolition of any tax.
(2) A Bill or amendment shall not be deemed to make provision for any of the matters aforesaid by reason only that it provides for the imposition of fines or other pecuniary penalties, or for the demand or payment of fees for licences or fees for services rendered, or by reason that it provides for the imposition, abolition, remission, alteration or regulation of any tax by any local authority or body for local purposes.
(3) A Bill which, if enacted and brought into operation, would involve expenditure from the Consolidated Fund of India shall not be passed by either House of Parliament unless the President has recommended to that House the consideration of the Bill.
265. Taxes not to be imposed save by authority of law.—
No tax shall be levied or collected except by authority of law.
266. Consolidated Funds and public accounts of India and of the States.—
(1) Subject to the provisions of article 267 and to the provisions of this Chapter with respect to the assignment of the whole or part of the net proceeds of certain taxes and duties to States, all revenues received by the Government of India, all loans raised by that Government by the issue of treasury bills, loans or ways and means advances and all moneys received by that Government in repayment of loans shall form one consolidated fund to be entitled “the Consolidated Fund of India”, and all revenues received by the Government of a State, all loans raised by that Government by the issue of treasury bills, loans or ways and means advances and all moneys received by that Government in repayment of loans shall form one consolidated fund to be entitled “the Consolidated Fund of the State”.
(2) All other public moneys received by or on behalf of the Government of India or the Government of a State shall be credited to the public account of India or the public account of the State, as the case may be.
(3) No moneys out of the Consolidated Fund of India or the Consolidated Fund of a State shall be appropriated except in accordance with law and for the purposes and in the manner provided in this Constitution.
The Companies (Amendment) Act, 2019 came into existence after receiving President’s assent on 31st July 2019. Few of the sections of this amendment act shall deemed to have come into force from November 2018 itself. However, some of the provisions including Section 21 (Amendment to Section 135 of Principal Act) has yet to be notified.
(1) The first amendment is given in Sub-Section (5) of Section 135, explaining that, if the company has not completed the period of 3 financial years since its incorporation, and still satisfies any of the given CSR applicability requirements, then here, the average net profit of immediate preceding financial years must be taken. For contemplating average net profit, this provision shall be r/w Section 198 of the Act.
(2) The next amendment plays vital role in computing the budget plan required to be spent towards the affairs of CSR since, it specifically talks about the treatment of unspent targeted CSR amount. If the company is unable to spend the reserved amount for CSR project, as decided, then along with the reasonable explanation in the board report, following steps are required to be taken by the company –
Case 1: Company is having any ongoing CSR projects –
> Any unspent amount by the company, despite of having any ongoing CSR project, shall be transferred to any scheduled bank under a special account in the name of “Unspent Corporate Social Responsibility Account” within a period of 30 days from the end of financial year.
> Such transferred amount essentially needs to be spent by the company for the due compliance of CSR policies within a period of next 3 financial years from the date of such transfer.
> Even after 3 years, if the company fails to disburse such balance amount, then, that shall be transferred to any of the funds specified in Schedule VII of the Act within a period of 30 days from the date of completion of 3rd financial year.
Case 2: Company is not having any ongoing CSR projects –
> If the company is not currently engaged in any of the ongoing CSR projects, then the aimed unspent sum of CSR money straight away shall move to any of the funds specified in Schedule VII of the Act within a period of 6 months from the expiry of financial year.
(3) The former “comply or express” (CorEx) provision of CSR has now become a punishable offence with the launch of following amendment. The defaulting company as well as their respective officers shall attract a penalty in case of violation of above terms. The sanction structure for the same has been provided as follows
> Fine Amount for Defaulting Company: Starting from Rs. 50,000/- extending upto Rs. 25,00,000/- AND
There is a possibility that the provisions relating to transfer of unspent amount to “Unspent CSR Account” and those which legally enforce spending of CSR of the Companies (Amendment) Act, 2019 may get challenged for its validity for not being a money bill and not falling within the meaning of the term “fee”.
In view of the manner in which the Companies Act, 2013 or the Companies (Amendment) Act, 2019 has been passed, none is a Money Bill.
Whether CSR spending is a fee?
After we have dealt with the question as to whether CSR is a tax / duty / cess or otherwise, let’s discuss whether it is a fee charged by Government. It is so because a Fee can be collected by a legislative enactment which may be a non-money bill.
A mention of the same is made in article 110(2) as fees for license or fees for services rendered.
Supreme Court has given a twin test to be fulfilled for something to be categorised as “Fees”, namely;
It is not necessary that the fee collected must have exact co-relation with the service rendered but a quid pro quo is necessary.
In respect of CSR expenditure, Government is not rendering any service to the company. Thus, it is not a fee.
Decision of Constitution bench of Supreme Court
Among other issues, the main issue was Whether the ‘Finance Act, 2017’ insofar as it amends certain other enactments and alters conditions of service of persons manning different Tribunals can be termed as a ‘money bill’ under Article 110 and consequently is validly enacted?
If the answer to the above is in the affirmative then Whether Section 184 of the Finance Act, 2017 is unconstitutional on account of Excessive Delegation?
It is interesting to read the judgement and more particularly the one of Dr. Justice Dhananjay Chandrachud who has elaborately dealt with characteristics of Money bill and its importance.
Relevant provisions of the Companies Act, 2013
Chapter IX Accounts and Companies of the Co. Act.
Following articles of the Constitution Of India 1949.
Article 107 to 122 relating legislation to be passed by Parliament.
Article 196 to 212 relating legislation to be passed by State Assembly.