CSR Activities fall under CA, 2013 as well as Income Tax Act, 1961

Navneet Singal

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:

1. Eradicating hunger, poverty and malnutrition, promoting 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,
2. Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects,
3. 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,
4. Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water,including contribution to the Clean Ganga Fund setup by the Central Government for rejuvenation of river Ganga,
5. protection of national heritage, alt and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts,
6. Measures for the benefit of armed forces veterans, war widows and their dependents,
7. Training to promote rural sports, nationally recognised sports, Paralympic sports and Olympic sports,
8. Contribution to the Prime Minister’s National Relief Fund or any other fund(s) up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women,
9. Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government,
10. Rural development projects.
11. Slum area development- `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. (Inserted vide Notification Number 1/18/2013-CL-V dated 06th August, 2014)

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

1. The CSR activities that shall be undertaken by the companies for the purpose of Section 135 of the Act shall exclude activities undertaken in pursuance of its ‘normal course of business’
2. The Rules also specify that CSR projects or programmes or activities that benefit only the employees of the company and their families shall not be considered as CSR activities in accordance with the requirements of the Act.
3. Such programmes or projects or activities, that are carried out as a pre-condition for setting up a business, or as part of a contractual obligation undertaken by the company or in accordance with any other Act, or as a part of the requirement in this regard by the relevant authorities cannot be considered as a CSR activity within the meaning of the Act.

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.

1. Sec 35AC: Expenditure incurred on project or scheme for promoting the social and economic welfare or up-liftment of the public as approve by the national committee set up for this purpose, 100% of such expenditure is admissible. But the activity of association whom the donation made should be stated under Schedule VII of Companies Act.

2. Sec 35CCD: Expenditure on skill development project as notified by the board is eligible with weighted deduction of 1.5 times of such expenses.

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:

1. The scope of CSR activity of schedule VII should be expanded so as it include other activity which can be considered as social activity and also related to business for getting benefit of sec 37; or
2. Amend the law and consider all CSR activity expenditure as allowable expenditure or exemption under Section 10 of Income Tax Act, 1961.
   

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.

(Author may be contacted at navneet.singal@gmail.com )

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