Bharat PaudelBharat  Paudel

Introduction

As per The Companies (CSR policy) Rules, 2014 “Corporate Social Responsibility (CSR)“means and includes but is not limited to:

1) Projects or programs relating to activities specified in Schedule VII to the Act or

2) Projects or programs relating to activities undertaken by the Board in pursuance of recommendations of the CSR Committee as per declared CSR policy subject to the condition that such policy covers subjects enumerated in Schedule VII of the Act.

Applicability of Section 135(1)

Every Company whether Private Limited or Public Limited, including its holding or subsidiary, & a foreign company having, during any financial year (any of the three proceeding financial year):

  • Net worth of` 500 crore or
  • Turnover of` 1,000 crore or
  • Net Profit of` 5 crore,

Amount to be Expended on CSR Activities

1) The company shall spend at least 2% of its average net profit for the immediately preceding three financial years on corporate social responsibility activities

2) CSR expenditure shall include all expenditure including contribution to corpus but does not include any expenditure on an item not in conformity or not in line with activities which fall within the purview of Schedule VII of the Act

3) The list of activities in Schedule is illustrative and not exhaustive

4) CSR Committee with a view to discharge its CSR obligation as arising under section 135 of the Act in the following three ways:

a. making a contribution to the funds as specified in Schedule VII to the Act; or

b. through ( NGO) a registered trust or a registered society or a company established under section 8 of the Act by the company, either singly or along with its holding or subsidiary or associate company or along with any other company or holding or subsidiary or associate company of such other company, or otherwise ; or

c. in any other way in accordance with the Companies (Corporate Social Responsibility Policy) Rules, 2014, e.g. on its own

5) First preference shall be given to Local Area & Area around it, where company operates;

6) In case of failure to expend the amount on CSR Activities, the Board of Directors shall specify the reason for non-expenditure in the Board’s Report.

Which Activities shall not be considered as CSR Activities

1) CSR projects or programs or activities undertaken in pursuance of its ‘normal course of business’

2) CSR projects or programs or activities

  • 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

(these activities regarded as normal course of business)

3) CSR projects or programs or activities

  • Undertaken outside India;
  • That benefit only the employees of the company & their families

4) Contribution of any amount directly or indirectly to any Political Party.(sec 182)

Composition of CSR Committee

1) Minimum 3 including 1 Independent Director except

  • Private Company or
  • The company which is not required to appoint Independent Director or
  • Foreign Company

In that Case 2 Director

Types of Company Composition
Foreign Company At least 2 Person , one of them must be Company’s Representative
Private Company (Having 2 Director) 2 Director
Mandatorily not requiring Independent Director 2 Director
Any other Company

(Mandatorily requiring Independent Director)

Either listed or not

Minimum 3 including one of them Independent Director

Consequences of Non Compliance of Provision

1. If a company contravenes the provision , shall be punishable with fine which

  • shall not be less than 50 Thousands
  • but which may extend to 25 Lakhs , And

2. Every officers of the Company who is in Default , shall be punishable with

  • Imprisonment for a Term which may extend to three year or
  • Fine which
    • shall not be less than 50Thaousand
    • But Which may extend to 5 Lakhs,   or
  • Both

Disclosure of CSR

Every company, except foreign company shall disclose the Annual report on CSR, containing particulars specified in the Annexure, in its Board Report and publish in website as well.

In case of Foreign Company, the Balance Sheet file under Section 381(1) (b) shall contain an annexure regarding reporting on CSR

FORMAT FOR THE ANNUAL REPORT ON CSR ACTIVITIES TO BE INCLUDED IN THE BOARD’S REPORT

S No.
CSR Project or Activity Identified
Sector in Which the Project Covered
Projects/
programme location
(Specify the State and district where projects or programs was
Undertaken)
Amount
Outlay (budget) project or programs Wise
Spent on the project or programs
Cumulative Expenditure up to the reporting period
Amount Spent : Direct or Through implementing agency
Local
Other
Direct Expenditure
Through Overhead
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Meaning of Average Net Profit

Average Net Profit shall be calculated in accordance with Section 198 of the Companies Act, 2013.Following elements shall not be included while calculating Average Net profit :-

  • Profit of Overseas Branch or Branches of the company,
  • Any dividend received from the companies in India, which are covered under & Complying with the provisions of the Section 135 of the Act.

Table To Compute Net Profit for CSR Contribution As Per Section 198 of Companies Act, 2013

Particulars Amt
Net profit after tax.
Net profit after tax is taken as base and accordingly the adjustments need to be considered
Add : Allowed Credits
1 Bounties and Subsidies received

(from any Government, or any public authority constituted or authorised in this behalf, by any Government, unless and except in so far as the Central Government otherwise directs.)

2 Profit on sale of immovable property

( Original Cost – WDV )

 
Less : Credits Disallowed  
1 Premium on shares or debentures
2 Profit on sale of forfeited shares
3 Profits of a capital nature including profits from the sale of the undertaking
4 Profit on sale of immovable property

(Sale Value of Immovable Property – Original Cost )

5 Surplus in P&L on measurement of asset or liability at fair value
Less : Expenses Allowed  
1 All the usual Working Charges
2 Director’s Remuneration
3 Bonus or Commission paid to Staff
4 Tax on excess or abnormal profits
5 Tax on business profits imposed for special reasons
6 Interest on Debentures
7 Interest on Mortgage & Secured Loan
8 Interest on Unsecured Loan
9 Expenses on repairs ( other than Capital Expenditure )
10 Outgoings inclusive of Contributions made under section 181

( Bonafide Charitable Trusts )

11 Depreciation extent to section 123
12 Prior period items
13 Legal liability for compensation or damages
14 Insurance Expenses
15 Bad Debt Written off
Add : Expenses Disallowed  
1 Income Tax
2 Compensations, damages or payments made voluntarily
3 Capital Loss on sale of undertaking or part thereof

( Not include losses on sale of asset )

4 Expenditure in P&L on measurement of asset or liability at fair value

A) Accounting Treatment

  • CSR Expenditure includes Spending as well as Contribution
  • CSR is not Charity or mere Donation
  • Calculation of CSR spend limit:

Average profit calculated u/s 198 for last 3 year X 2 % = CSR spend

  • Amount unspent or any surplus arising of the CSR activity will not be part of the business profits of company.
  • No provision for unspent amount, only disclosure in Board report.
  • The excess amount cannot be carried forward for set off against the CSR expenditure required to be spent in future
  • If CSR activities has been taken up (in progress) & liability has been incurred (due to contractual obligation), then provisions should be made for such obligation.
  • Where a company receives a grant from others for carrying out CSR activities, the CSR expenditure should be measured net of the grant.
  • Any surplus arising out of CSR project or programme or activities shall be recognised in the statement of profit and loss and since this surplus can not be a part of business profits of the company, the same should immediately be recognised as liability for CSR expenditure in the balance sheet and recognised as a charge to the statement of profit and loss and such surplus is not form part for calculating limit.

CSR Activities under taken following ways:

a) Making contribution: Treated as an expense for the year and charged to the statement of profit and loss.

b) Through others’: Treated as an expense for the year and charged to the statement of profit and loss.

c) Any other way on its own:

  • In nature of Capital Expenditure

CSR is a Capital Expenditure if such expenditure meets the definition of an Assets According to present Accounting Standard, an asset is a resource controlled by enterprises as a result of past events, and from which future economic benefits are expected to flow to enterprises. Depreciation of such an asset can be claimed as CSR expenditure only if the expenses incurred on creation of assets are not claimed as CSR expenditure.

(i) in cases where the control of the ‘asset’ is transferred by the company, e.g., a school building is transferred to a Gram Panchayat for running and maintaining the school, it should not be recognised as ‘asset’ in its books and such expenditure would need to be charged to the statement of profit and loss as and when incurred

(ii) In other cases, where the company retains the control of the ‘asset’ then it would need to be examined whether any future economic benefits accrue to the company. Invariably future economic benefits from a ‘CSR asset’ would not flow to the company as any surplus from CSR cannot be included by the company in business profits.

  • In nature of Revenue Expenditure

CSR is revenue expenditure if company has incurred expenditure on the activities specified under Schedule VII of Companies Act, 2013. If CSR expenditure related to business of the entity then such expenditure should be treated as an expense in the statement of profit and loss. Where a company receives a grant from others for carrying out CSR activities, the CSR expenditure should be measured net of the grant.

company may supply goods manufactured by it or render services as

a) the expenditure incurred should be recognised when the control on the goods manufactured by it is transferred or the allowable services are rendered by the employees.

b) The goods manufactured by the company should be valued in accordance with the principles prescribed in Accounting Standard.

c) The services rendered should be measured at cost.

d) Indirect taxes on the goods and services so contributed will also form part of the CSR expenditure

  • In nature of Appropriation

CSR expenditure is not related to the business of the entity then such an expenditure should be treated as an appropriation of profit.

Presentation in Financial Statement

a) All expenditure on CSR activities, that qualify to be recognised as expense should be recognised as a separate line (Separate Ledger Head) item as ‘CSR expenditure’ in the statement of profit and loss. Further, the relevant note should disclose the break-up of various heads (Functional Head) of expenses included in the line item ‘CSR expenditure’

b) The notes to accounts relating to CSR expenditure should also contain the following:

a. Gross amount required to be spent by the company during the year.

b. Amount spent during the year on:

S No. Particular In cash Yet to be paid in cash Total
(i) Construction/acquisition of any asset
(ii) On purposes other than (i) above

The above disclosure, to the extent relevant, may also be made in the notes to the cash flow statement, where applicable.

c) Details of related party transactions, e.g., contribution to a trust controlled by the company in relation to CSR expenditure

d) Where a provision is made same should be presented as per the requirements & movements in the provision during the year should be shown separately.

B) . Taxation Matter

MCA does not come out with the clear guideline regarding tax treatment of CSR expenditure but there may be one possible solution for tax incentive of CSR expenditure is with the compliance of scope of CSR activity of schedule VII should be expanded so as it include activity which consider as social activity & also related to business for getting Best benefit to Income tax.

According to Explanation 2 of the Finance (No.2) Act, 2014.

any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.

One side it is mandatory to spend money on CSR as per Companies Act,2013 and on the other side the same is disallowed under the Income Tax Act, 1961, 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.

Following are summary of the present admissible tax exemption/deduction that can be avail regarding CSR spending.

S No Specific CSR Activities referred under Schedule VII to the 2013 Act
Expenditure allowed under the relevant provisions of the Income-tax Act, 1961
I Activities concerning Basic necessities of Life More than prescribed layers of subsidiaries
– Eradication of poverty, hunger and malnutrition Section 35AC read with Rule 11K(i)(f) of Income-tax Rules, 1962 (‘the 1962 Rules’)
– 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 Section 35AC r.w. Rule 11k(i)(a),(f),(j) of the 1962 Rules

80G(2)(iiihk)

II Activities concerning Education  
– Promoting Education, including special education and employment enhancing vocational skills especially among children, women and elderly and the differently able Section 35AC r.w. 11K(i)(c),(i),(o),(p),(s) of the 1962 Rules
– Livelihood enhancement programs Section 35AC r.w. 11K(i)(j),(s) of the 1962 Rules
III Activities addressing inequality and gender discrimination Section 35AC r.w. Rule 11K(i)(n),(i) of the 1962 Rules
– Promoting gender equality
– Empowering women
– Setting up of homes and hostels for women and orphans
– Setting up old age homes, day care centre and such other facilities for senior citizens and
– Measures for reducing inequalities faced by socially and economically backward groups;  
IV Activities concerning Care for environment Section 35AC r.w. Rule 11K(i)(d),(h),(l),(q),(r) of the 1962 Rule & 80G(2)(iiihl)
– Ensuring environmental sustainability and ecological balance
– Protection of flora and fauna, animal welfare, agro forestry
– Conservation of natural resources and maintaining quality of soil, air and water including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga.
V Activities concerning protection of National Heritage, Art and Culture Section 35AC r.w. Rule 11K (The notification issued under the Act in the past have accepted the said activities for deduction u/s. 35AC [except with no precedent available for protection of national heritage u/s. 35AC, but deduction could be claimed in Section80G(2)(b)
– Protection of national heritage, art and culture including restoration of building and sites of historical importance and works of art
– Setting up public libraries
– Promotion & Development of traditional arts and handicrafts
VI Activities concerning benefit to Armed Forces, veterans, war widows and their dependants  
– Measures for the benefit of armed forces, veterans, war widows and their dependents Section 80G(2)(a)(i) and 80G(2)(a)(iii)(h)(c)
VII Activities concerning Sports  
– Training to promote rural sports, nationally recognised sports, Paralympics sports and Olympic sports Section 35AC r.w. Rule 11K(i)(g)
VIII Activities concerning national relief and welfare of Economically backward class of Society  
– Contribution to PM National relief fund or any other fund set up by the Central Government for socio-economic development Section 80G(2)(a)(iiia)
– Relief and welfare of the Schedules Casts, Schedules Tribes, Other backward castes, minorities and women Section 35AC r.w. Rule 11K(i)(b),(c) and Rule 11K(ii) of the Income-tax Rules
IX Activities concerning Technology incubators  
– Contributions or funds provided to technology incubators located within academic institutions which are approved by Central Government Section 35(2AA) and Section 80G(2)(iihi) [considering limited information available and provided on the subject, it will have to be determined as to whether the aforesaid section shall be able to provide deduction to the activities concerned]
X Activities concerning Rural Development  
– Rural Development Projects Section 35AC and Section 35CCA [with limited information available and provided on the term referred to as ‘rural development projects’ therefore, either of the provisions may be considered for allowability of expenditure]
XI Activities concerning Slum Area Development  
– 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.

 In Summary

S No. Section Nature
1 35 Deduction of Expenditure on Scientific Research

Capital as well as Revenue Exp.

2 35AC Expenditure on Eligible Projects or Schemes
3 35CCA Payments to Association & Institution for Carrying out Rural Development programmes
4 35CCD Expenditure on skill development project notified by the board
5 36(1)(ix) Applicable to Company who incurs expenditure on promotion of family planning amongst employees

Revenue as well as capital expenditure

6 80G Donation to certain Funds & Institutions
7 80GGA Deduction in respect of donation to scientific research or rural development section

 As per income tax ,Contribution to Swach Bharat Kosh 80G(2)(iiihk) & Clean Ganga Fund 80G(2)(iiihl) must be other than CSR u/s 135 of Companies act.

It has been explained by the CBDT in the circular no. 1/2015 Dated 21/1/2015:

CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business. As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR cannot be allowed as deduction for computing the taxable income of the company. Moreover, the objective of CSR is to share burden of the Government in providing social services by companies having net worth/turnover/profit above a threshold. If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure.”

General deduction section 37

In addition, expenditure deductible under above mention section the expenditure will be also allowed as deduction under section 37 with following condition:

  • Not being in the nature of capital expenditure
  • Not being personal expenses
  • Not being nature of offence or prohibited by Law.
  • If such expenditure incurred wholly & exclusively for the purpose of business or profession

Some Cases w. r. t. CSR

Any expenditure on public welfare or any contribution to public welfare fund which directly connected /related with the carrying on business or which results in benefit to the business allowable u/s 37(1)

  • Sri Venkata Satyanarana Rice Mills Contractors Co. v. CIT: Payment to welfare fund established by the district collector
  • Krishna Sahakari Sakhar Karkhana Ltd v CIT: Payment to an Education Fund of the State Federal Society as required u/s 68 of the Maharastra Co-operative Society Act
  • CIT v Madras Refineries: Provided funds for establishing drinking water facilities to residents in the vicinity of refinery and also provided aid to school run for benefit of children of those local resident.
  • CIT v Andra Bank: Spent on Andra Bank Rural Development Trust which is engaged in conducting several training for providing self employment to rural youth and after the training , the bank also provided finance to rural youth.
  • Other Similar Cases
    • CIT vs Rajastan Spinning & Weaving Ltd
    • CIT v Mehsana District Co-operative Milk Producer’s Union Ltd
    • Surat Electricity Co. Ltd v ACIT
    • CIT v Malayalam Plantations Ltd

Confusion & Vague Interpretation of Law

In the Case of CIT v. Infosys Technologies Ltd : Allowed the expenditure incurred for installing traffic signal by company under social initiative by the reason of the said signal used by its employee sp its relate to business activity hence allowed u/s 37(1)

However, in the Case of CIT v. Wipro Ltd : Expenditure for community development near its factory, the court does not find any nexus for its business activity hence disallowed such expenditure u/s 37(1)

NMDC Ltd v Joint CIT: Donation to a Medical College, though not related to business of the assessee, having been incurred in furtherance of a corporate responsibility and hence allowable as deduction

In the case of CIT v DTTDC ltd: Where the income is utilized for self-imposed obligation, it signifies “Application of Income” whereas obligation where money flows out of an independent title signifies “Diversion of Income.” However, Explanatory Memorandum to the Bill it is stated that CSR expenditure is an application of Income.

Here , one question raised, whether one can claim the deduction of CSR u/s 37(1) up to the amount which is necessarily required to expended u/s 135 of companies act, 2013, on the ground that it is diversion of income by successfully substantiating that the same has been expended because of mandate by the companies act,2013 and not because of self-imposed.

CIT v Imperical Chemical Industries Ltd : Held that burden of proofing[for relevance documentation in respect to allowable of deduction u/s 37(1)] that particular expenditure has been laid out or incurred wholly and exclusively for purpose of business is entirely on assessee.

MAT

While computing Book Profit u/s 115JB of the Income Tax Act relating to Minimum Alternative Tax (MAT) the CSR expenditure should not be considered as a below the line item meanwhile same would not be allowed under normal provision of income tax act. Hence, the Book Profit to be computed u/s 115JB of the Act should not be increased by the expenditure incurred on CSR i.e. No Adjustment for CSR u/s 115JB.

The author is the CA Final student who may be contacted at bharatpaudel47@gmail.com, +91-9871571335

Other article by same author: Understanding of Section 44AB Tax Audit

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0 responses to “Understanding Corporate Social Responsibility & Tax Implications”

  1. Ashish Joshi says:

    Under which section are the penal provisions prescribed?

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