While concluding my previous article on CSR – Interplay between Companies Act, 2013 and Income Tax Act, 1961, I have mentioned that the CSR policy should be formulated by the CSR Committee in such a manner as to require CSR expenditure to be incurred on such activities as laid down in Schedule VII that are also eligible for deduction under sections 30 to 36 of the IT Act, it would facilitate companies in complying with the CSR obligations under the Companies Act, 2013 as well as in availing of the tax benefit under the Income Tax Act, 1961.
I have got a lot of queries in respect of the activities which can come under this scenario. By insertion of Explanation 2 to Section 37(1) it has been explained by the CBDT that any expenditure on CSR shall not be deemed to be an expenditure incurred by the assessee for the purpose of the business or profession. Further while clarifying the provision it has further explained that the CSR expenditure which is of the nature described in section 30 to section 36 of the Income-tax Act shall be allowed as deduction under those sections subject to fulfillment of conditions, if any, specified therein.
So, hereby we have to find out those activities which falls under the activities defined in the Companies Act, 1961 as well as described in section 30 to 36 of the Income-Tax Act, 1961. Activities which are eligible for CSR expenditure in pursuance of Schedule VII of the Companies Act 2013 are as follows:
Further it has also been mentioned that this list is illustrative and not exhaustive and it should be read in its liberal sense so that the intent behind CSR stipulation can be duly given effect.
Further, Rule 4 of the Companies (Corporate Social Responsibility Policy) Rules, 2014, requires that
So, ultimately it looks that even though it has been explained that the CSR expenditure which is of the nature described in section 30 to section 36 of the Income-tax Act shall be allowed as deduction, there is rarely any such activity. However, following activities can be considered as those activities in which a company can claim the expenditure deduction which relate to CSR activity which mentioned under schedule VII of company act 2013.
Further u/s 80G, the expenditure on CSR can also be claimed as deduction subject to donation is directly or to registered NGO or to PM national relief fund, or for promoting family planning etc. 100% (50% in some cases) of such deduction is allowed.
The expenditure on staff welfare is even though allowable as business expenditure but it can’t be considered as CSR activity as mentioned above in rule 4. There are some case laws where expenditure done under social initiatives has been allowed u/s 37(1).
In the case of CIT Vs. Infosys Technologies Ltd (2014) (360 ITR 714) the Karnataka high court allowed the expenditure incurred for installing traffic signal by company under social initiative. Court said the traffic signal used by its employee so it relate to business activity hence allowed u/s 37(1).
But in the case of CIT Vs. Wipro Ltd (360 ITR 658) (Karnataka) expenditure for community development near its factory ,court does not find any nexus for its business activity hence disallowed such expenditure u/s 37(1).
Further explanation 2 to section 37(1) cause further hurdles in claiming the expenditure on CSR as business expenditure. To come out of this problem only the following solution can be suggested:
CBDT has allowed companies to merely make payment through funds and claim deductions instead of carrying CSR activities on the ground by including PM relief fund in the Schedule where deduction as well as CSR expenditure can be claimed at the same time. If present tax treatment of CSR continue, then it result as companies only inclined to give funds to those organization under sec 35 or sec 80 where they get maximum tax benefit and the purpose of CSR will not be served full as corporates will avoid to spend in inadmissible category of expenditure.
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