Corporate Social Responsibility (CSR)
Opportunities and Challenges- Tax Perspective
Agenda
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Applicability of CSR
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Permissible CSR activities
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Computation of CSR expenditure – Draft CSR Rules
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Computation of Net Profits
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Tax issues on CSR
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Specific provisions of ITA to improve prospects of deductibility of CSR
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Alternative forms of business
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Key Takeaways
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CSR - Opportunities and Challenges- Tax Perspective
Applicability of CSR
Applicable to all companies incorporated in India and having either of the
following in any financial year – Section 135(1)
1. Net Worth of INR 500 crore or more; OR
2. Turnover of INR 1000 crore or more; OR
3. Net Profit of INR 5 crore or more
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CSR - Opportunities and Challenges- Tax Perspective
Permissible CSR activities
Under the Companies Act, 2013 (Schedule VII)
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 immunodeficiency virus,
acquired immune 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 socioeconomic
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
(i)
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Under the Income-tax Act, 1961 (Section 80G)
I. Following donation allowed subject to a maximum
of 10% of the Adjusted Gross Total Income:
A. Donations to Government for promoting family
planning etc – 100% allowed
B. Eligible for 50% deduction:
•
Donations to Government for other charitable
purpose
•
Donation for housing accommodation/ improvement
of cities, towns or villages etc.
II. Eligible for 100% deduction w/o maximum limit:
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Donation to PM’s National Relief Fund
Donation to State Government Fund for Medical
Relief to the Poor
National Illness Assistance Fund
Chief Minister's or Lt. Governor's Relief Fund
Approved university or educational institution of
national eminence, etc.
CSR - Opportunities and Challenges- Tax Perspective
Computation of CSR expenditure – Draft CSR Rules
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‘Net Profit’ means net profit before tax as per books of accounts, computed as per section 198 of the
Companies Act, 2013 and shall not include profits arising from branches outside India
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CSR spending = 2% of the average net profits made by the company during every block of three
years
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CSR is applicable from FY 2014-15. For the purpose of First CSR reporting the Net Profit shall mean
average of the annual net profit of the preceding three financial years.
Particulars
Amounts
(in INR)
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Net Profit before tax as per books of FY 2013-14
2,500
Net Profit before tax as per books of FY 2012-13
1,700
Net Profit before tax as per books of FY 2011-12
1,000
Total (A)
5,200
Average of annual net profit of the preceding three financial years B (A/3)
1,733
CSR expenditure for the FY 2014-15 (B*2%)
34.67
CSR - Opportunities and Challenges- Tax Perspective
Computation of Net Profit – Section 198
Particulars
Amount
Profit before tax as per Profit & Loss Account
XXX
Credit to be provided for:
Bounties and subsidies received from Government
XXX
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
Any change in carrying amount of an asset or liability recognized in Equity Reserves as business activity
XXX
(Provided when the asset is sold for a consideration higher than WDV, income will be considered for the
amount in excess of WDV but limited to difference between WDV and Original Cost)
*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
Net Profits as per Section 198
XXX
*Illustrative list. For details, please refer Annexure 1
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CSR - Opportunities and Challenges- Tax Perspective
CSR and Tax
Benefits to the Society
CSR eligibility
Meeting
Point?
Tax deductibility
Benefits to the Business
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CSR - Opportunities and Challenges- Tax Perspective
Tax issues on CSR
Tax issues on CSR
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Whether CSR is charge or appropriation of profits?
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In the absence of specific provision for deductibility of CSR expenditure,
whether the deduction can be allowed under Section 37 of the Income-tax Act,
1961?
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Does it make any difference to the proposition if expenditure is perceived to be
a capital expenditure?
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If considered to be deductible, in which year would the expense be
deductible? Can deduction be claimed on the basis of provision towards this
expenditure, without having actually incurred the expenditure?
CSR - Opportunities and Challenges- Tax Perspective
Tax issues on CSR
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Denial of CSR expenditure
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Legal
obligation
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Appropriation
v/s
charge to
profit
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CSR to be incurred only by specified class of companies; hence
character of appropriation
No provision under Income-tax Act, 1961
No carry forward of unspent amount
No investigation into the books of the company
Possible defenses
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From financial reporting perspective, it will be treated as expense
and not distribution of profit (Relevant case laws – Annexure 2)
Disclosure requirement as additional information to P & L A/c as per
Part II of Schedule III and not appropriation from profits under
Reserves & Surplus
Courts in the past have allowed voluntary CSR expenses as tax
deductible under various situations
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Drinking water facilities to the residents in the vicinity of the refinery
Aid to the school run for the benefit of the children of those local
residents
CSR - Opportunities and Challenges- Tax Perspective
Tax issues on CSR
Deductibility
under Section
37 of the
Income-tax
Act, 1961
Denial of CSR expenditure
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+
Possible defenses
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Capital
expenditure
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Essence for deductibility under section 37 - Expenditure must be incurred
wholly and exclusively for the purpose of business of taxpayer
CSR expense which is not connected with taxpayer’s business would not meet
this condition
CSR improves environment in which business operates
Benefits the business in an indirect manner
Incurred as a good corporate citizen to earn goodwill and create an atmosphere
in which business can succeed in a greater measure (Relevant case laws – Annexure 2)
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Construction of fountain near traffic island
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Expenditure incurred on garden in factory premises and labour quarters
to maintain ecological balance
Denial of CSR expenditure
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CSR expense which is capital in nature - not tax deductible
Possible defenses
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Courts in the past have allowed the deduction if the same results in an asset
which is not of assessee but of the third party (such as contribution to housing
board for construction of tenements)
CSR - Opportunities and Challenges- Tax Perspective
Tax issues on CSR
Year of
deductibility ie
when actually
incurred or on
provision in
books
Denial of CSR expenditure
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+
Deduction may not be available if only provided in books of
accounts and not incurred
Courts in past have disallowed mere provision of expenses
Possible defenses
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If provision is made in books on reasonable, scientific basis and
approved by the statutory auditors, it can support that the taxpayer
is mandated to spend the statutorily qualified CSR expenditure
Tax treatment of CSR in accordance with IT Act expected to be notified by CBDT as
per draft CSR rules
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CSR - Opportunities and Challenges- Tax Perspective
Specific provisions of ITA to improve prospects of
deductibility of CSR
Sr.
No
Section
Whether donation
based or activity
Based
Deduction available for
Quantum of
deduction
1
35(1)(ii)
Donation based
Sum paid to research association university, college
or other institution to be used for scientific research
1.75 times of
sum paid
2
35(1)(iia)
Donation based
Sum paid to a scientific R&D company to be used by
it for scientific research
1.25 times of
sum paid
3
35(1)(iii)
Donation based
Sum paid to research association, university college
or other institution to be used in social science or
statistical research.
1.25 times of
sum paid
4
35(2AA)
Donation based
Any sum paid to National Laboratory or a University
or IIT or a specified person with a direction that such
sum is to be used for scientific research
2 times of sums
paid
5
35CCC
Expenditure on
agricultural extension
project
Any expenditure on agricultural extension project
notified by CBDT
1.5 Times of
sums paid
6
35CCD
Expenditure on skill
development
project
Any expenditure (not being expenditure in the nature
of cost of any land or building) on any skill
development project notified by CBDT
1.5 Times of
sums paid
7
35AC
Donation based
Sum paid to public sector company/local authority/etc
for carrying out any eligible notified project for
promoting social and economic welfare of the public
1Time of sums
paid
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CSR - Opportunities and Challenges- Tax Perspective
Alternative forms of business
Key parameters for evaluating alternative forms of legal presence:
• Minimal procedural/ compliance implications
• Other Commercial Drivers
Typical forms of legal presence in India for setting up a “Charitable/ Not-forProfit” institution:
1. Public Trust
2. Society
3. Section 8 Company
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CSR - Opportunities and Challenges- Tax Perspective
Alternative forms of business
Public Trust
Society
Section 8 Company
(Section 25 of Companies
Act, 1956)
Form of
entity
The concept of ‘trust’ flows from
the faith of one person in another
person. If a person, out of free will,
entrusts his property to the care of
another person for a specific
purpose or period, that other
person has to uphold the trust
reposed in him
An association of persons
united together by mutual
consent to deliberate,
determine and act jointly for
some common purpose
A company with limited
liability formed for
“promoting commerce, art,
science, religion, charity or
any other useful object,”
with no profits objective
Objective
Social Benefits and charitable
Literary, Charitable,
Scientific and resource
oriented
Non-profit Activities
Benefits
to Donor
Deduction of 50% of donation from
the taxable income
Deduction of 50% of donation
from the taxable income
Deduction of 50% of
donation from the taxable
income
Taxability
Income exempt under section 12 of
the Act- provided used for the
charitable purpose
Income of a society is
exempt under section 12 of
the Act- provided utilisation
for funds for the charitable
purpose
Section 8 company’s income
is exempt under the Act, if
the society is registered
under section 12AA
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CSR - Opportunities and Challenges- Tax Perspective
Key Takeaways
► There is a need to develop appropriate CSR policy
► Fulfillment of CSR is the need of the hour
► Deduction of CSR expenditure for tax purposes will be an important consideration
► Documentation to reflect some connection / benefit to business. Necessary to claim
deduction
► Current CSR programs need to be viewed and evaluated for compliance with CSR
guidelines
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CSR - Opportunities and Challenges- Tax Perspective
Key Tax Contacts
Ahmedabad
Bangalore
Chennai
Sunil Kapadia, Partner
[email protected]
Riad Joseph, Partner
[email protected]
Vidya Nagarajan, Partner
[email protected]
Dhinal Shah, Partner
[email protected]
Deepa Bhatia Chirayath,
Associate Director
[email protected]
Pradeep Narayanan,
Associate Director
[email protected]
Delhi
Hyderabad
Kolkata
Rajiv Chugh, Partner
[email protected]
Jayesh Sanghvi, Partner
[email protected]
Dinesh Agarwal, Partner
[email protected]
Aditya Bajoria, Senior Manager
[email protected]
Rohit Bothra, Senior Manager
[email protected]
Mumbai
Mumbai
Pune
Jaideep Kulkarni, Partner
[email protected]
Tejas Desai Partner
[email protected]
Pramod Achuthan, Partner
[email protected]
Sheetal Shah, Associate Director
[email protected]
Mitesh Gada, Associate Director
[email protected]
Chetan Kakariya, Senior Manager
[email protected]
Prashant Khatore, Partner
[email protected]
Ritika Loganey Gupta, Associate Director
[email protected]
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Thank You
This presentation provides general information existing at the time of preparation. The
presentation is meant for general guidance and no responsibility for loss arising to any
person acting or refraining from acting as a result of any material contained in this
presentation will be accepted by Ernst & Young.
It is recommended that professional advice be taken based on specific facts and
circumstances. This presentation does not substitute the need to refer to the original
pronouncements.
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© 2013 Ernst & Young
All Rights Reserved.
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Detailed List as per Section 198
Deductions to be made
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Usual working charges
Directors’ remuneration
Bonus or Commission
Any tax in the nature of a tax on abnormal or
excess profits
Any tax imposed for special reasons
Interest on debentures issued by Company
Interest on mortgages executed and on loans
secured by a charge
Interest on unsecured loans and advances
Revenue expenses on repairs
Outgoings inclusive of contributions under
section 181 i.e. to bona fide charitable and
other funds
Excess of expenditure over income in previous
years computed as per this section
Compensations/ damages paid in virtue of
legal liability
Insurance premium
Bad debts written off or adjusted
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Annexure 1
Deductions not to be made
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Income tax and super tax paid by the
company under the Income Tax Act, 1961 or
any other tax not covered in other category
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Any compensation, damages or payments
made voluntarily otherwise than in virtue of
a liability
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Loss of capital nature including loss on sale
of undertaking not including any excess of
Written Down Value over the Sale Price/
Scrap Value
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Any change in carrying amount of an asset/
liability recognized in equity reserves
CSR - Opportunities and Challenges- Tax Perspective
Deduction of CSR expenditure
Relevant case laws
Annexure 2
CSR expenditure was held deductible in the following cases:
Funds provided for establishing drinking water facilities and providing aid to school meant for
residents of the locality in which the taxpayer operated1.
 Expenditure on community assistance programmes and welfare measures undertaken in the
vicinity of taxpayer’s manufacturing unit2.
 Installation of traffic lights in the vicinity of taxpayer’s office to improve traffic situation, serving
dual purpose of benefitting the employees as also social commitment3.
 Trips to Bhuj and Jamnagar post earthquake for relief work4.
 Construction of hockey stadium for use of local residents5.
 Sponsorship of sports tournaments bearing the sponsor’s name on banners and association with
the trophy6.
 Contributions made by Pharma company to health care society and science foundation allowed as
it would bring Goodwill to the assessee7.

1 CIT v. Madras Refinery Ltd. [266 ITR 170](Mad)
2 CIT v. Madura Coats Ltd. [24 DTR 24](Mad)
3 Infosys Technologies v. JCIT [109 TTJ 631](Bang)
4 Jindal Steel and Power Ltd. [16 SOT 509](Delhi)
5 ITO v. VeluManickam Lodge (123 ITD 25)(Chennai)
6 CIT v. Lake Palace Hotels & Motels (P) Ltd. [293 ITR 281](Raj)
7 ACIT v. Ranbaxy Labs Ltd. (7 ITR (Trib) 161](Delhi)
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CSR - Opportunities and Challenges- Tax Perspective