Corporate Social Responsibility (CSR)

Opportunities and Challenges- Tax Perspective

Agenda

Applicability of CSR

Permissible CSR activities

Computation of CSR expenditure Draft CSR Rules

Computation of Net Profits

Tax issues on CSR

Specific provisions of ITA to improve prospects of deductibility of CSR

Alternative forms of business

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:

Donation to PMs 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

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

CSR spending = 2% of the average net profits made by the company during every block of three
years

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?

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?

Does it make any difference to the proposition if expenditure is perceived to be

a capital expenditure?

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

Denial of CSR expenditure

Legal
obligation

Appropriation
v/s
charge to
profit

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

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

Possible defenses

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 taxpayers 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)

Construction of fountain near traffic island

Expenditure incurred on garden in factory premises and labour quarters

to maintain ecological balance

Denial of CSR expenditure

CSR expense which is capital in nature - not tax deductible

Possible defenses

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

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

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

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

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

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

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

35CCC

Expenditure on
agricultural extension
project

Any expenditure on agricultural extension project

notified by CBDT

1.5 Times of
sums paid

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

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 companys 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

sunil.kapadia@in.ey.com

Riad Joseph, Partner

riad.joseph@in.ey.com

Vidya Nagarajan, Partner

vidya.nagarajan@in.ey.com

Dhinal Shah, Partner

dhinal.shah@in.ey.com

Deepa Bhatia Chirayath,

Associate Director
deepa.bhatia@in.ey.com

Pradeep Narayanan,
Associate Director
pradeep.narayanan@in.ey.com

Delhi

Hyderabad

Kolkata

Rajiv Chugh, Partner

rajiv.chugh@in.ey.com

Jayesh Sanghvi, Partner

jayesh.sanghvi@in.ey.com

Dinesh Agarwal, Partner

dinesh.agarwal@in.ey.com

Aditya Bajoria, Senior Manager

aditya.bajoria@in.ey.com

Rohit Bothra, Senior Manager

rohit.bothra@in.ey.com

Mumbai

Mumbai

Pune

Jaideep Kulkarni, Partner

jaideep.kulkarni@in.ey.com

Tejas Desai Partner

tejas.desai@in.ey.com

Pramod Achuthan, Partner

pramod.achuthan@in.ey.com

Sheetal Shah, Associate Director

sheetal.shah@in.ey.com

Mitesh Gada, Associate Director

mitesh.gada@in.ey.com

Chetan Kakariya, Senior Manager

chetan.kakariya@in.ey.com

Prashant Khatore, Partner

prashant.khatore@in.ey.com
Ritika Loganey Gupta, Associate Director
riitka.gupta@in.ey.com

Page 16

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.

ERNST & YOUNG LLP

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2013 Ernst & Young
All Rights Reserved.
EY is a registered trademark

Detailed List as per Section 198

Deductions to be made

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

Page 18

Annexure 1

Deductions not to be made

Income tax and super tax paid by the

company under the Income Tax Act, 1961 or
any other tax not covered in other category

Any compensation, damages or payments

made voluntarily otherwise than in virtue of
a liability

Loss of capital nature including loss on sale

of undertaking not including any excess of
Written Down Value over the Sale Price/
Scrap Value

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 taxpayers manufacturing unit2.
Installation of traffic lights in the vicinity of taxpayers 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 sponsors 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