CORPORATE SOCIAL CONTRIBUTION [CSR} – must be allowed in interest of business and society. Proposed amendment in section 37 deserves to be deleted.

[CA DEV KUMAR KOTHARI]

From budget speech of FM:

71. I also propose to add inclusion of slum development in the list of Corporate

Social Responsibility (CSR) activities to encourage the private sector to contribute more towards this activity.

The above statement of the honorable Finance Minister in budget speech shows the importance of expenditure by companies towards CSR and emphasized importance about slum development. Though the matter relating to CSR is under the ministry of Corporate Affairs, however, one can expect that the honorable Finance Minister can influence such decision by MCA for inclusion of Slum development in the Schedule VII to the Companies act, 2013 which enlist various activities eligible for SCR.

Contributions by corporate and philanthropists add to public welfare and in a way reduces burden of government in providing welfare measures to general public.

Contributions towards local institutions has a commercial expediency:

Contributions made by businessman, corporate business houses for making some infrastructure and facilities for local people of area in which business operates is with a view of commercial expediency by way of maintaining good relations, seeking co-operative attitude of local people, improve goodwill, have more eligible work force available, reducing disturbances in local and nearby area etc.

Particularly slum development in nearby area can provide major relief by way of reduction of disturbance in local area. Slum development can also lead to education and training of poor children livings in slums. Slum development will also reduce exodus of poor people from such slums. All these will  increase in availability of semi-skilled and skilled workforce from nearby area.  People living in a slum developed by a business house will also have greater loyalty to the business house.

Therefore, there is well linked commercial expediency in such expenditure. Such expenditure incurred by a business house is allowed as a revenue business expenditure. There should not be a bar on allowability of such expenditure.

How an expenditure, which is incurred for the purpose of business and which has commercial expediency can be disallowed? Disallowing such expenditure by a specific provision is not justified.

   Proposed amendment in section 37:

Vide clause 13 of the Bill it is proposed to amend section 37 by insertion of explanation as follows:

13. In section 37 of the Income-tax Act, in sub-section (1), the Explanation shall be numbered as

Explanation 1 thereof and after Explanation 1 as so numbered, the following Explanation shall be

inserted with effect from the 1st day of April, 2015, namely:—

“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.”.

Thus in view of the proposed amendment, if it is not withdrawn, the expenditure incurred by companies towards CSR which are covered by S. 135 of the Companies Act, 2013 will not be allowed. The amendment is inserted by way of an Explanation and for removal of doubts, therefore revenue authorities are likely to apply the provision retrospectively, though it has been stated to be with effect from  the 1st day of April, 2015. Thus there is likely to be creation of job for tax litigation experts.

 Any expenditure on other activities towards social obligations which are not covered by S. 135 of the said Act, may still be allowable if such activities satisfy commercial expediency test.

It is worth to mention that even  if such amendment is made, then also similar contributions and expenditure towards social obligation of business by other type of businessman like individuals, partnership firms, AOP, BOI will continue to be allowed. This will lead to discrimination also.

Thrust and preference on SCR activities in area of operation:

We find that the provisions of section 135 of the Companies Act, 2013 clearly place thrust on SCR activities in local are of operations of companies. This is vide  a specific proviso in the section. The proviso reads as follows:

Provided that the 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.

Therefore, we find that under law also provision for  discharge of social responsibilities is considered with a view of commercial expediency and preferable activity.

We also find that in the prescribed activities for SCR also liberal views have been taken and the new Schedule VII is more wider and liberal than the old Schedule VII to the Companies Act, 2013. Both schedules are reproduced after this write-up WITH HIGHLIGHTS AND CATCH WORD. The activities prescribed are such which improve good relations, goodwill of business, living standard, health, education, training, improvement in infrastructure for people who are a source of support to the business in different manner- as work force of present and future, may also be a consumer of products of  companies. Healthy, educated and trained people will provide human resources to the corporate world and other businessmen.Furthermore, in long-term, improvement of local societies, and societies anywhere in our country which can be uplifted will be beneficial to the interest of corporate, therefore, such expenses should be considered as normal business expenses allowable. Such expenditure have been allowed by courts and department has accepted such judgments. Therefore, there is no reason to disallow such expenses by way of a specific provision in section 37.

A provision to disallow such expenses is neither in the interest of business, corporate world, and the society.

If such expenses are not allowed by specific provisions, it is likely that the validity of CSR and amendment in section 37 may be challenged as unconstitutional, arbitrary, and discriminatory.

From the Companies Act ,2013:

Now let us have a look on the provisions of the Companies act, 2013 regarding CSR. The provisions of section 135, new Schedule VII and old Schedule VII are reproduced below with  important and catch words highlighted by author for an easy analysis:

Corporate Social Responsibility

     135. (1) Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

     (2) The Board's report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.

     (3) The Corporate Social Responsibility Committee shall,—

          (a)  formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII;

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

          (c)  monitor the Corporate Social Responsibility Policy of the company from time to time.

     (4) The Board of every company referred to in sub-section (1) shall,—

          (a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company's website, if any, in such manner as may be prescribed; and

          (b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.

     (5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:

     Provided that the 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:

     Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.

     Explanation.—For the purposes of this section "average net profit" shall be calculated in accordance with the provisions of section 198.

 

SCHEDULE VII

(See section 135)

ACTIVITIES WHICH MAY BE INCLUDED BY COMPANIES IN THEIR CORPORATE SOCIAL RESPONSIBILITY POLICIES

Activities relating to:—

¹[(i) eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water;

(ii)  promoting education, including special education and employment enhancing vocation 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 centres 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, agroforestry, conservation of natural resources and maintaining quality of soil, air and water;

(v) protection of national 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 benefit of armed forces veterans, war widows and their dependents;

(vii) training to promote rural sports, nationally recognised sports, paralympic 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;

(ix) contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;

(x) rural development projects] 

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Notes:-

1. Substituted vide Notification 1/15/2013-CL-V - Dated 27-2-2014 - Companies Law, before it  the old Schedule VII  read as follows:

    "(i) eradicating extreme hunger and poverty;

     (ii) promotion of education;

     (iii) promoting gender equality and empowering women;

     (iv) reducing child mortality and improving maternal health;

     (v) combating human immuno-deficiency virus, acquired immuno-deficiency syndrome, malaria and other diseases;

     (vi) ensuring environmental sustainability;

     (vii) employment enhancing vocational skills;

     (viii) social business projects;

     (ix) contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and

    (x) such other matters as may be prescribed."