Corporate Social Responsibilities

By: Vikas Gupta
Date: 18th August 2014
Corporate Social Responsibilities

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

Structure
1.
Dimensions of CSR2.
Historical perspective of CSR3.
Arguments for and Against CSR4.
Myths surrounding CSR5.
Benefits of CSR6.
CSR Management7.
CSR Implementation Framework8.
CSR under Companies Act 20139.
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
FreidmanVersus 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 buildingTrust
• 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 RightsLocal 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,
Retainingand
Maintainingahappy
workforce
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

Corporate Social
Responsibilities
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
ScheduleVII 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 ScheduleVII 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:
NetWorth of Rs.
500 Crores of
More
Turnover of Rs.
1000 Crores of
More
Net Profit of Rs.
5 Crores of MoreOr 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 theAct, 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 theAct
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.

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:

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.

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;

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;

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.

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.

Particulars* Amount
Profits as per Profit & LossAccount 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:
UsualWorking Charges- revenue expenditures, bonus or commission
Abnormal or SpecialTax
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 IncomeTax 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 ScheduleVII 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 ScheduleVII 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
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 ScheduleVII of theAct.

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

• 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
• 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
• 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 ScheduleVII)
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.

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;

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
Cumula
tive
expendi
ture up
to the
Reporti
ng date
Amount
spent –
whether
direct or
through
implemen
ting
agency *
1
2
3
4
Total
* Details of ImplementingAgency

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 ScheduleVII 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
IncomeTaxAct, 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

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

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

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