Corporate Social Responsibilities

By: Vikas Gupta Date: 18th August 2014

Corporate Social Responsibilities


• Decisions – To spend or not

– What to spend

– Where to spend

– When to spend

– What is there in it for me

Voluntary

Managing Externalities

Multiple Stakeholder Orientation

Social and Economic alignment

Practices and Values

Beyond Philanthropy

CSR Pyramid

Structure

1.

Dimensions of CSR 2.

Historical perspective of CSR 3.

Arguments for and Against CSR 4.

Myths surrounding CSR 5.

Benefits of CSR 6.

CSR Management 7.

CSR Implementation Framework 8.

CSR under Companies Act 2013 9.

What is CSR

What is CSR “Corporate Social Responsibility is a concept whereby companies integrate social and environmental concerns in their business operations and in their interactions with their stakeholders on a voluntary basis” Source: European Commission

“Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large” Source: World Business Council for Sustainable Development

What is CSR Freidman Versus Russell

Milton Friedman indicated that the one and only one social responsibility of a business is to use its resources and engage in activities designed to increase its profits, as long as it stays with the rules of the game, which is to say, engages in open and free competition without deception or fraud.

Kirk Russell insisted that every right is married to a duty, every freedom owns a corresponding responsibility. Hence, there cannot be genuine freedom unless there exists also genuine order in the moral realm and in the social realm.

What is CSR

CSR is about building Trust • Trust in the brand

• Trust in performance of the product

• Trust in the company to “do the right thing”

• Trust in you as an employer

Dimensions of CSR • Internal Dimension: This focuses on

organisational practices with respect to internal stakeholders that should be aligned to corporate social responsibility standards.

• External Dimension: This focuses on an organisations practices towards external stakeholders which should be in accordance with international standards of business practices.

Internal Dimensions

Human Resource Management

Corporate Agility to Change

Environmental Impact

Management

Safety and Health

External Dimensions

Business Partners

Human Rights Local Communities

From the 1950’s to the present the concept of CSR has gained considerable acceptance and the meaning has been broadened to include additional components:

• Economic model – the invisible hand of the marketplace protected societal interest

• Legal model – laws protected societal interests

• Modified the economic model

– Philanthropy

– Community obligations

– Paternalism

Historical Perspective of CSR

CSR encompasses the economic, legal, ethical and discretionary (philanthropic) expectations that society has of organizations at a given point in time

Responsibility Societal Expectation

Examples

Economical Required Be profitable. Maximize sales, minimize costs, etc.

Legal Required Obey laws and regulations

Ethical Expected Do what is right, fair and just

Discretionary

(Philanthropic) Desired / Expected

Be a good corporate citizen


Pyramid of CSR


Business Responsibilities in the 21st Century

• Demonstrate a commitment to society’s values and contribute to society’s social, environmental, and economic goals through action.

• Insulate society from the negative impacts of company operations, products and services.

• Share benefits of company activities with key stakeholders as well as with shareholders.

• Demonstrate that the company can make more money by doing the right thing.


Argument for and Against CSR

• Addresses social issues business caused and allows business to be part of the solution

• Protects business self-interest

• Limits future government intervention

• Addresses issues by using business resources and expertise

• Addresses issues by being proactive

Arguments For

Argument for and Against CSR

• Restricts the free market goal of profit maximization • Business is not equipped to handle social activities • Dilutes the primary aim of business • Increase business power

• Limits the ability to compete in a global marketplace

Arguments Against

Myths surrounding CSR

CSR is not for small businesses

It is too complicated and technical

It is too expensive

It is a market gimmick

It is a separate corporate initiative

CSR

Benefits of CSR

Benefits of CSR

Winning new businesses

Attracting, R

etaining and M

aintaining a happy w

orkforce

Access to funding opportunities

Plan • Consult stakeholders

• Establish code of conduct

• Set targets

Do • Establish management systems and personnel

• Promote code compliance

Check • Measure progress

• Audit

• Report

Act • Corrective action

• Reform of systems

CSR Management: Plan, Do, Check, Act method

Plan

Do

Check

Improve

CSR Implementation framework


under Companies Act, 2013

Introduction Corporate Social Responsibility is a new mandate introduced by the Companies Act, 2013 and is aimed at ensuring that corporate houses return some benefit to the society from which they draw all their resources. It is aimed at maintaining equilibrium between the corporate sector and the society in general for the mutual development of both.

Provisions regarding Corporate Social Responsibility (CSR) are contained in Section 135 of the Companies Act, 2013 read with the Companies (Corporate Social Responsibility Policy) Rules, 2014. This Section and the Rules have been notified vide MCA circular dated 27.02.2014 to become applicable from 01.04.2014

Meaning of CSR

Corporate Social Responsibility (CSR) means and includes but not limited to:

i. Projects or programs relating to activities specified in Schedule VII to the Act; or

ii. Projects or programs relating to activities undertaken by the Board of Directors of a Company (Board) in pursuance of recommendations of the CSR committee of the Board as per declared CSR policy of the company subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act

Applicability of CSR Every company including its Holding or Subsidiary company and a Foreign company having branch or project office in India which has in any of the three preceding financial years:

Net Worth of Rs. 500 Crores of

More

Turnover of Rs. 1000 Crores of

More

Net Profit of Rs. 5 Crores of More Or Or

Every company which ceases to be covered by the above criteria for 3 consecutive financial years shall not be required to comply with the CSR provisions till such time it again falls within the above threshold limits

• Add Share Capital

• Add Reserves created out of Profit and Securities Premium Account

• Subtract Accumulated Losses

• Subtract Deferred Expenditure

• Subtract Miscellaneous Expenditure not written off

• Reserves created out of Revaluation of Assets, write-back of depreciation and amalgamation should not be included

All figures to be as per the Audited Balance Sheet

Calculation of Net Worth

Example: A company was incorporated ten years ago with a paid-up capital of Rs. Two Lakhs. The company bought 50 acres of urban land at Rs. 3000 per acre. The company did nothing else in the past fifty years. The land is valued now at about Rs. 20 Crores per acre. The company has done revaluation of the land in its balance sheet. For CSR purposes, the net worth of the company is about Rs. 1.5 Lakhs (2 Lakhs minus losses till date) and not Rs. 1000 Crores.

• Include realization from sale, supply or distribution of goods

• Include realization on account of services rendered

• Other income may not need to be included

• To be calculated for a financial year

Calculation of Turnover

"Net profit" means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include the following, namely:

i. any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and

ii. Any dividend received from other companies in India, which are covered under and complying with provisions of Section 135 of the Act

Average net profit shall be calculated in accordance with provision of Section 198

Net Profit for the purpose of CSR

Section 198 1) In computing the net profits of a company in

any financial year for the purpose of section 197,—

a) credit shall be given for the sums specified in sub-section (2), and credit shall not be given for those specified in sub-section (3); and

b) the sums specified in sub-section (4) shall be deducted, and those specified in sub-section (5) shall not be deducted.

Calculation of Net Profit

Section 198 {Subsection (2)} Subsection (2) : In making the computation aforesaid, credit shall be given for the: 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.


Section 198 {Subsection (3)} Subsection (3) : In making the computation aforesaid, credit shall not be given for the following sums: a) profits, by way of premium on shares or debentures of the

company, which are issued or sold by the company; b) profits on sales by the company of forfeited shares; c) profits of a capital nature including profits from the sale of

the undertaking or any of the undertakings of the company or of any part thereof;

d) profits from the sale of any immovable property or fixed assets of a capital nature comprised in the undertaking or any of the undertakings of the company, unless the business of the company consists, whether wholly or partly, of buying and selling any such property or assets:


Section 198 {Subsection (3)} Provided that where the amount for which any fixed asset is sold exceeds the written-down value thereof, credit shall be given for so much of the excess as is not higher than the difference between the original cost of that fixed asset and its written down value; e) any change in carrying amount of an asset or of a

liability recognised in equity reserves including surplus in profit and loss account on measurement of the asset or the liability at fair value.


Section 198 {Subsection (4)} Subsection (4) : In making the computation aforesaid, the following sums shall be deducted: a) all the usual working charges ; b) director‘s remuneration ; c) bonus or commission paid or payable to any member of the

company’s staff, or to any engineer, technician or person employed or engaged by the company, whether on a whole-time or on a part-time basis;

d) any tax notified by the Central Government as being in the nature of a tax on excess or abnormal profits;

e) any tax on business profits imposed for special reasons or in special circumstances and notified by the Central Government in this behalf;


Section 198 {Subsection (4)} f) interest on debentures issued by the company; g) interest on mortgages executed by the company and on loans

and advances secured by a charge on its fixed or floating assets;

h) interest on unsecured loans and advances; i) expenses on repairs, whether to immovable or to movable

property, provided the repairs are not of a capital nature; j) outgoings inclusive of contributions made under section 181; k) depreciation to the extent specified in section 123; l) any compensation or damages to be paid in virtue of any legal

liability including a liability arising from a breach of contract;


Section 198 {Subsection (4)} m) the excess of expenditure over income, which had arisen

in computing the net profits in accordance with this section in any year which begins at or after the commencement of this Act, in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained;

n) any sum paid by way of insurance against the risk of meeting any liability such as is referred to in clause (l);

o) debts considered bad and written off or adjusted during the year of account.


Section 198 {Subsection (5)} Subsection (5) : In making the computation aforesaid, the following sums shall not be deducted: a) income-tax and super-tax payable by the company under the Income-

tax Act, 1961, or any other tax on the income of the company not falling under clauses (d) and (e) of sub-section (4);

b) any compensation, damages or payments made voluntarily, that is to say, otherwise than in virtue of a liability such as is referred to in clause (l) of sub-section (4);

c) loss of a capital nature including loss on sale of the undertaking or any of the undertakings of the company or of any part thereof not including any excess of the written-down value of any asset which is sold, discarded, demolished or destroyed over its sale proceeds or its scrap value; any change in carrying amount of an asset or of a liability recognised in equity reserves including surplus in profit and loss account on measurement of the asset or the liability at fair value.


Calculation of Net Profit Particulars* Amount

Profits as per Profit & Loss Account XXX

Credit to be provided for

Bounties and subsidies received from Government

Credit not to be provided for

Premium/ Profit on sale of shares Profits of Capital Nature – including profits on sale of undertakings Profits from sale of immovable property/ fixed assets – unless undertaken

Permissible Deductions:

Usual Working Charges- revenue expenditures, bonus or commission Abnormal or Special Tax Interest on debentures, loans or advances Compensations/ damages in virtue of legal liability, bad debts written off…

(XXX) (XXX) (XXX) (XXX)

Non Permissible Deductions:

Income tax paid under Income Tax Act, 1961 Loss of Capital Nature Compensations/ Damages paid voluntarily

(XXX) (XXX) (XXX)

Profits as per Section 198 XXX

* Illustrative list only

i. To constitute a CSR committee of the Board

ii. To approve the CSR policy framed by the CSR committee after considering recommendations of the Committee

iii. To ensure that activities included by a company in its Corporate Social Responsibility Policy are related to the activities included in Schedule VII of the Act

iv. To ensure that at least 2% of the Average Net profits of three immediately preceding financial year is spent every financial year in pursuance of CSR policy.

Responsibility of the Company and Board of Directors

v. To disclose CSR policy and initiatives in Board’s Report and Company’s website.

vi. To ensure that activities reflected in CSR policy are actually undertaken by the company.

vii. To include in the Board’s report, annual report on CSR in the manner prescribed in the Rules.

viii.If the company doesn’t spend 2% of the net profits as required, then Board has to report the reason for it in Board’s report.

Responsibility of the Company and Board of Directors

CSR Committee should consist of at least 3 directors out of which at least 1 director should be independent director

Explanations: i. an unlisted public company or a private company covered under

subsection (1) of section 135 which is not required to appoint an independent director pursuant to sub-section (4) of section 149 of the Act, shall have its CSR Committee without such director.

ii. a private company having only two directors on its Board shall constitute its CSR Committee with two such directors;

iii. with respect to a foreign company covered under CSR rules, the CSR Committee shall comprise of at least two persons of which one person shall be as specified under Section 380 (1) (d) of the Act and another person shall be nominated by the foreign company.

iv. Board’s Report to disclose composition of CSR Committee.

Composition & Function of CSR Committee

CSR Committee Meeting: • Law is silent w.r.t. number of CSR Committee meetings in a year.

So it is dependent on the requirement of the Company. However there is no restriction if CSR Committee meeting conduct business by circulation.

• For CSR Committee Quorum Law is silent again. It is recommended to apply same quorum provisions as are applicable to board meetings under section 174 of the Companies Act, 2013.

• No time limit prescribed for constitution of CSR Committee. However keeping in view the fact that CSR Section and rules become effective w.e.f. April 01, 2014, it is advisable to do it in the first board meeting after April 01, 2014.


Functions of CSR Committee: • Formulate & recommend to the Board, a Corporate Social

Responsibility Policy which shall indicate the activities to be undertaken by company as specified in Schedule VII of the Act.

• Recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and

• Monitor the Corporate Social Responsibility Policy of the company from time to time.

• Prepare a transparent monitoring mechanism for ensuring implementation of the projects / programmes / activities proposed to be undertaken by the company.


'CSR Policy" relates to the activities to be undertaken by the company as specified in Schedule VII to the Act and the expenditure thereon, excluding activities undertaken in pursuance of normal course of business of a company. The CSR Policy of the company shall, inter-alia, include the following, namely:-

• a list of CSR projects or programs which a company plans to undertake falling within the purview of the Schedule VII of the Act, specifying modalities of execution of such project or programs and

• monitoring process of such projects or programs

CSR Policy and Expenditure

• The CSR Policy of the company shall specify that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company.

• CSR expenditure shall include all expenditure including contribution to corpus, or on projects or programs relating to CSR activities approved by the Board on the recommendation of its CSR Committee, 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.


The Board of a company may decide to undertake its CSR activities approved by the CSR Committee, through a registered trust or a registered society or a company established by the company or its holding or subsidiary or associate company under section 8 of the Act or otherwise, provided that –

i. if such trust, society or company is not established by the company or its holding or subsidiary or associate company, it shall have an established track record of three years in undertaking similar programs or projects;

ii. the company has specified the project or programs to be undertaken through these entities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism.


• A company may also collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR Committees of respective companies are in a position to report separately on such projects or programs in accordance with these rules.

• Only such CSR activities will be taken into consideration as are undertaken within India.

• Only activities which are not exclusively for the benefit of employees of the company and their family members shall be considered as CSR activity.

• Company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities


• A company may also collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR Committees of respective companies are in a position to report separately on such projects or programs in accordance with these rules.

• Only such CSR activities will be taken into consideration as are undertaken within India.

• Only activities which are not exclusively for the benefit of employees of the company and their family members shall be considered as CSR activity.

• Company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities.


• Companies may build CSR capacities of their own personnel as well as those of their Implementing agencies through Institutions with established track records of at least three financial years but such expenditure shall not exceed 5% of total CSR expenditure of the company in one financial year.

• Contribution of any amount directly or indirectly to any political party under section 182 of the Act, shall not be considered as CSR activity.

• In case of a foreign company, the balance sheet filed under sub-clause (b) of sub-section (1) of section 381 shall contain an Annexure regarding report on CSR.


Prescribed CSR Activities Activities which may be included by companies in their CSR Policies (Amended Schedule VII)

i. Eradicating hunger and poverty and malnutrition, promoting preventive healthcare and sanitation and making available safe drinking water;

ii. Promoting education including special education and employment enhancing vocational skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects;

iii. Promoting gender equality, empowering women, setting up homes and hostels for women and orphans, setting up old age homes, day care centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.

Prescribed CSR Activities

iv. Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro forestry, conservation of natural resources and maintaining quality of soil, air and water;

v. Protection of natural heritage, art 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

vi. Measures for the benefits of armed forces veterans, war widows and their dependents

vii. Training to promote rural sports, nationally recognised sports, para-olympic sports and Olympic sports;

Prescribed CSR Activities

viii.Contribution to the Prime Minister's National Relief Fund or any other fund set 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; and

ix. Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government.

x. Rural development projects.

xi. Slum area development.

CSR Reporting Disclosures to be made in Board’s Report: The Board’s report of the company covered under these rules pertaining to a financial year commencing on or after the 1st day of April, 2014 shall include an Annual Report on CSR containing particulars as specified below:

• Composition of CSR committee

• CSR policy and Initiatives

• If the stated CSR expenditure is not made by the company, then the reason for the same has to be disclosed

• In the case of foreign company, the Balance sheet filed under section 381(1)(b) shall contain an Annexure regarding report on CSR

Following disclosures to be made in Board’s Report:

1. Brief outline of the Company’s CSR policy, including overview of projects or programs proposed to be undertaken and a reference to the web-link to the CSR Policy and projects or programs

2. The composition of CSR committee

3. Average net profit of the company for last three financial years

4. Prescribed CSR expenditure (2% of the amount as in Sl. No. 3)

5. Details of CSR spent during the financial year 1. Total amount to be spent for the financial year

2. Amount unspent, if any

3. Manner in which the amount spent during the financial year as per template on next slide

Format of CSR Annual Reporting


(1) (2) (3) (4) (5) (6) (7) (8)

S. No.

CSR project

or Activity identifie

d

Sector in which the project is covered

Projects or Programs

1. Local area or other

2. Specify the State and District where

projects or programs were

undertaken

Amount outlay

(Budget) – Project

wise / Program

wise

Amount spent on the projects or Programs sub-heads 1. Direct

expenditure on projects or

programs

Cumulative

expenditure up to the

Reporting date

Amount spent –

whether direct or through

implementing

agency *

1

2

3

4

Total

* Details of Implementing Agency

Following disclosures to be made in Board’s Report:

6. In case the company has failed to spend the Prescribed CSR expenditure (i.e. 2% of average net profit of last three financial years), the company shall provide the reasons for not spending the amount in its Directors Report

7. A responsibility statement of the CSR Committee that the implementation and monitoring of CSR policy is in accordance and compliance with CSR objectives and Policy of the company.


Sd/- Chief Executive Officer or

Managing Director or Manager

Sd/- Chairman CSR Committee

Sd/- Person specified under

Section 380(1)(d) of the Act (Wherever applicable)

1. Any Financial Year: This circular has clarified that “Any Financial Year” referred under sub section (1) of Section 135 of the Act read with Rule 3(2) of Companies CSR Rule, 2014, implies ‘any of the three financial years prior to FY2014-15’.

2. Liberal interpretation’ means a wider range of activities can now be taken up: The circular mentions that companies developing programs as part of their CSR efforts can interpret Schedule VII of the Companies Act 2013 liberally; while some activities being undertaken or currently being planned may not exactly match with the wording of Schedule VII, these could be taken up if they capture the essence of the subjects mentioned.

Clarifications issued by MCA vide General Circular 21 of 2014 Dated 18th June 14

MCA has explicitly mentioned that:

• Programs around road safety, creating consumer awareness, support to technology incubators not located within academic institutions (provided they are approved by the Department of Science & Technology) can be considered as CSR programs

• Awareness programs such as financial literacy will be included as CSR activities. For the safety awareness program that the MCA has illustrated, expenditure on awareness building through print and AV electronic media is included

• Expenses on research and studies on all areas covered under Schedule VII will also be included as CSR expenditure

• Rural development has been defined as ‘any project meant for development of rural India’. Hence, a wide range of projects could be classified under this category.


Additional details, including cases where expenditure will not be permitted to be accounted for as CSR spend, are provided in this Circular by the Ministry of Corporate Affairs, Government of India. Some notable exclusions are:

• Sustainable urban development and urban transport systems

• Capacity development of government officials and elected representatives

• Professional exchange programs between countries

• Any development expenditure mandated by state/local government regulations


3. One-off events will not be considered as CSR activities: The circular states that CSR activities have to be in the nature of projects/programs rather than one-off events such as marathons, awards, charitable contributions and advertisements and sponsorships given to TV programs. Such events shall not qualify as CSR expenditure

4. CSR employees’ salaries and monetary value of employee volunteering can be considered as CSR spend: The circular mentions that the CSR expenditure will include the CSR employees’ salaries. Also, recognition of the monetary value of employee volunteering as CSR expenditure is a welcome step for companies which have a huge and/or high cost employee base and especially those that have no identifiable local community as stakeholders (IT companies, investment banks etc). This expenditure will be calculated in proportion to employees’ time/ hours spent specifically on CSR activities


5. A foreign holding company’s spend on CSR activities in India can be counted as CSR spending of their Indian subsidiary: This will be valid only if the CSR expenditure is routed through the Indian subsidiary. This will be beneficial for many Indian subsidiaries of foreign companies that are required to undertake CSR expenditure according to the Act, since some large global companies also directly fund social development programs in India.

6. Corpus expenditure can be included as CSR expenditure: The circular states that contribution to corpus of a trust/society/section 8 company will qualify as CSR expenditure, as long as it is created exclusively for a purpose that is directly relatable to a cause covered in Schedule VII of the Act.


7. Registered Trust: Registered Trust as referred in Rule 4(2) of Companies CSR Rule, 2014 would include Trusts registered under Income Tax Act 1956, for those states where registration of trust is not mandatory.

8. Expense incurred for fulfillment of any Act / Statute: Expenses incurred by the company for the purpose of fulfillment of any requirement of any Act or Statute of Regulations such as Labour Laws, Land acquisition etc. would not be counted as CSR expenditure under the Companies Act


Corporate Social Responsibilities – Treatment under

Income Tax Act, 1961

Finance Bill, 2014 proposed that CSR expenditure shall not be allowed as expenditure under section 37.

However, any CSR expenditure which is allowed as deduction under other sections such as section 35 is permissible.

The Finance Bill, 2014 insert a new Explanation in sub-section (1) of section 37 so as to clarify that any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years.

Tax implications

Amendments in Finance Bill, 2014 are as below:

"Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.".

Implications: A corporate can implement a CSR program by contributing to the various development program. It can also comply with CSR provision by contributing to funds like National Defence Funds or other funds where 100% tax exemptions are available. After the proposed amendments the companies would be motivated to spent CSR money only on those areas where tax exemptions are available. In other words all other areas will virtually become redundant. There is a strong need to revisit this provision and the companies should be allowed to deduct CSR expenses under Section 37.

Tax implications

CSR laws permit expenditure on capacity building of employees & on local area development. Such expenditures, could earlier be directly claimed as CSR expenditures under section 37(1) of the Income Tax Act. However, with the proposed amendments any expenditure under CSR will not be allowed as deduction under section 37.

There were many case laws where it was held that such expenditures should be treated as admissible expenditure. Now all such judicial precedence will be nullified from a CSR prospective. For instance a company can claim expenditure towards local area development as CSR expenditure. Now with the proposed amendments the company will be motivated to claim such expenditure as normal business expenditures and not CSR expenditures.

Tax implications

Case Laws which have become null now: Afforestation expenses: In the case Orissa Forest Development Corp. Ltd. v. Jt. CIT [2002] 80 ITD 300 (Cuttack), it was held that expenses incurred by the corporation in plantation of new trees was a revenue expenditure, even though there was no statutory obligation on the part of the assessee to incur such an expenditure.

Donation can also be claimed under section 37(1): If the contribution made by an assessee is in the form of donations of the category specified under section 80G, but it could also be termed as an expenditure of the category falling under section 37(1), then the right of the assessee to claim the whole of it as allowance under section 37(1) cannot be denied - Mysore Kirloskar Ltd. v. CIT [1987] 166 ITR 836/30 taxman 467 (Kar.).

Tax implications

Case Laws which have become null now: Drinking water facilities to local residents: In the case CIT v. Madras Refineries Ltd. [2004], 266 ITR 170/138 Taxman 261 (Mad.) it was held that development of local and establishing drinking water facility for local area people was a valid expenditure. It was observed that the monies spent for bringing drinking water, as also for establishing or improving the schools meant for the residents of the locality in which the business is situated cannot be regarded as actually outside the ambit of the business concerns of the assessee, especially when the undertaking owned by the assessee is one which is to some extent a polluting industry. Hence, expenditure incurred by the assessee for establishing drinking water facilities for the residents in the vicinity of its refinery and for providing aid to the schools run for the benefit of the children of those residents was allowable as deduction.

Tax implications

Case Laws which have become null now: Admissibility of donation if proved as relatable to carrying on of business : In the case CIT v. Industrial Development Corp of Orissa Ltd. [2001] 249 ITR 401/115 Taxman 626 (Orissa) the Hon'ble Odisha High Court held that even donation can be treated as business expenditures, provided such donation can be related with the business of the assessee. In this case the donation was disallowed as there was nothing on record to establish that the donation made by the assessee to the Chief Minister's Relief Fund was directly connected with and related to the carrying on of the assessee's business. However, this case provides a landmark ratio of allowing donation as business expenditure. In the case of mining Companies as the funds are specifically for the local area development under CSR, there is no reason why such expenditures should not be allowed under section 37(1).

Tax implications

Concluding Remarks: Overall the proposed Finance Bill, 2014 has created a fix with regard to the admissibility of the CSR expenditures. It is the job of the government to align various legislations. The Companies Act mandates various types of CSR expenditures. As discussed above, giving grant to Prime Minister Relief Fund, National Defence Fund is a CSR expenditure at the same time there is a list of priority activities, which the companies should do under CSR, however, differential tax treatment of the legally permissible CSR expenditure will defeat the very purpose of enacting CSR. Why should a company incur CSR expenditure on priority areas without having any tax benefit, when it can incur the same expenditure with 100% tax deductions. The Government should provide a level playing ground for all kind of CSR expenditure.

Tax implications

QUESTIONS?

Economy & Finance

Corporate Social Responsibilities