As the financial year 2014- 15 draws to a close, the true ramifications of mandating CSR through legislation are sure to come under the microscope, in as much as the numbers should be able to provide much needed clarity with regard to the approach that needs to be adopted by companies which trigger the application of Section 135 of the Companies Act, 2013.

The provision applies to companies having a net worth of Rs 500 crore or more, or a turnover of Rs 1,000 crore or more or a net profit of Rs 5 crore or more, during any financial year. A company falling under any of the three classes is mandated to spend two percent of its average net profit accumulated during a block of three preceding years. For this purpose, the net profit is to be calculated before tax.

While the CSR norms came into effect at the beginning of 2014- 15, it is expected that the details regarding expenditure incurred by companies will be available to the government only after September 2015.

This is because the mandatory disclosures of CSR expenditure would become due six months after the completion of the financial year. Once the data has been collated and analyzed, it will be interesting to see whether there is a considerable number of defaulters, and what action awaits them, especially in the absence of any clear penal provision. However, companies that are looking for incentives over and above community development and social synergy, have some cause for encouragement as the government&’s stance with regard to tax breaks, without being generous, is definitely accommodative.

The subject of taxation with regard to CSR expenditure has attracted substantial debate, largely because of the magnitude of potential expenditure by an elite set of corporate giants. These companies are rather skeptical regarding the extent to which expenditure would be deemed deductible under the Income Tax Act, while calculating the profits and gains of businesses, and rightly so.

While the more optimistic had expected expenditure to be covered under Section 37 of the Income Tax Act by rendering the same as an expense exclusively for the purposes of business, it seems that they are in for a disappointment. The only clarification thus far emanating from the Central Board of Direct Taxes ( CBDT) is in the form of a statement by Mr. R. K. Tiwari ( Chairman) post the declaration of the Union budget. He stated that money spent on all CSR works is unlikely to be treated as business expenditure, even though certain social welfare activities could be considered for tax benefits.

Such an opinion is in keeping with the official stance of the legislature, as embodied in the Companies ( Corporate Social Responsibility Policy) Rules, 2014. The Rules state that CSR activities are to be strictly exclusive of all activities undertaken in the normal course of business. The rationale behind such a stance is that CSR expenditure, being derived from the net profit of any qualifying company, constitutes an “ application of income”. Further, as far as the taxable income of a company is concerned, any such application of income is not allowed as a deduction.

Therefore, the logical conclusion renders the expense undertaken in furtherance of the respective CSR policy as nondeductible.

Where there is a possible overlap between CSR activities under Schedule VII of the Companies Act and certain expenditure allowable as deductions under the Income Tax Act though, the stance of the government seems to be much more favorable. Essentially, subject to fulfillment of all conditions laid down therein, CSR expenditure, which is consistent with Sections 30 to Section 36 of the Income tax Act, shall be deducted, while computing the profits and gains of business.

However, reiterating its position on the inapplicability of Section 37 of the Income Tax Act, the government through the Finance Bill of 2014 has brought about an explicit amendment to Section 37 of the Income Tax Act by introducing an explanation to the same. The additional explanation clarifies 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 business or profession. The amendment will take effect from 1 April 2015 and will apply to the assessment year 2015- 16. It can be seen as an effort on part of the government to ensure that the primary objective behind legislating CSR comes to the fore.

Basically, by way of CSR, a select class of companies is expected to share the burden of the Government in order to facilitate holistic development of society, by focusing on community interest at the very basic level. Offering a tax break however, in a manner desired by India Inc., will effectively subsidize this expenditure and would hence be a major hindrance in realizing the full potential of the mechanism as envisaged by the legislature.

The companies are viewing mandated CSR spending almost as an additional tax on the profits accumulated by them and are therefore, seeking incentives in the form of deductions in order to indulge in the CSR activities listed under Schedule VII of the Companies Act.

However, a key point to be noted herein is that the Ministry of Corporate Affairs has not stipulated any penal provisions in the event of a company not spending the mandated amount during a financial year, with the only requirement to be fulfilled in such a case being a formal explanation under the Committee&’s report.

Furthermore, CSR is more than capable of being utilized as an attractive tool by a select class of companies, in order to raise their commercial profile by strengthening the brand, while at the same time achieving synergy with organizations and institutions already operating in fields that run parallel to the principles of a company.

Therefore, while some companies would be disappointed to an extent, from the sentiment emanating from the Centre as far as taxation with regard to CSR activities is concerned, it would behoove them to make the most of the options made available to them, in terms of activities listed under Schedule VII as well as deductions allowed under the Income Tax Act, so that the objective of CSR as a concept is achieved in its entirety.

The writer is a fourth year student of the West Bengal National University for judicial sciences Kolkata