CORPORATE SOCIAL RESPONSIBILITY (CSR) is a self-regulating process, through which corporate link their activities with common public. The Corporate generally using resources, whether it is natural or human to amass big profits and through Corporate Social responsibility, they will take social responsibility to develop local area and people living in that area. The Corporate through Social Responsibility shall be accountable to the itself, country and the public. The Corporate Social Responsibility also called as Corporate Responsibility, Corporate Citizenship. Through CSR, Corporate consider the interest of society by taking responsibility of impact of their activities on the various stakeholders.
The provisions of Section 135 of the Companies Act, 2013 mandates that; Every company having net worth of rupees five hundred crores or more or turnover of rupees one thousand crores or more or a net profit of five crore or more during any financial year shall ensure that the Company spends, in every financial year , at lease two percent of the average net profits of the company made during the three immediately preceding financial years.
As we know the expenditure by corporate on CSR activities are not allowed as deduction from the profit of the company. The expenditure on CSR is considered as appropriation of profit.
The Central Government has inserted an Explanation 2 in Section 37(1) of the Income Tax Act, 1961 as follows;
“Explanation 2- it is declared that for the purpose of subsection (1) any expenditure incurred aby an assessee on the activities relating to corporate social responsibility referred to section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession”
Extract from Budget Memorandum.
—-CSR expenditure, being an application of income is not incurred wholly and exclusively for the purpose of carrying on business— if such expenses are allowed as tax deduction, this would result in subsidizing of around one third of such expenses by Government by way of tax expenditure—-
—it is proposed to clarify that for the purpose of section 37(1) any expenditure —–in section 135 of the Companies Act, 2013 shall not be—- allowed as deduction under section 37.However ,the CSR expenditure which is of the nature described in Sections 30 to 36 of the Income Tax Act, 1961 shall be allowed deduction under section—-.
NOTE: ANY EXPENDITURE QUALIFYING AS CSR EXPENDITURE UNDER PROVISIONS OF SECTION 135 OF THE COMPANIES ACT, 2013, WHICH OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 OF THE INCOME TAX ACT, 1961 SHALL BE ALLOWED AS DEDUCTION.
THE ABOVE AMENDMENT SHALL BE APPLICABLE FROM 1ST APRIL, 2015
Thus, the expenditure on CSR activities is non-deductible for tax purposes unless falling within provisions of Sections 30 to 36 of the Income Tax Act, 1961.
Following are the examples of CSR expenditure which are deductible expenses under provisions of Section 35 of the Income Tax Act, 1961.
|Section under Income Tax Act, 1961||Areas of Expenditure|
Deduction allowed -100% of the sum paid.
Deduction allowed -175% of the sum paid.
Deduction allowed -125% of the sum paid.
Deduction allowed -125% of the sum paid.
The Government has amended provision of Section 135 of the Companies Act, 2013 through Companies ( Amendment ) Act, 2019 by inserting penalty provisions for companies as well as officers in default as follows;
a) For Companies: The company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees, and
(b) For Officer in default: Every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any agency of the government. Examples of analysis performed within this article are only examples. They should not be utilized in real-world analytic products as they are based only on very limited and dated open source information.