Do-gooders need a tax break

The concept of corporate citizenship is not new in India. In recent years, corporate social responsibility (CSR), whereby companies integrate social and environmental concerns into business operations, has gained prominence.

Until recently, CSR was the prerogative of the company management. However, Companies Act 2013 mandates CSR for every company that has in a financial year a net worth of Rs 500 crore or more; or turnover of Rs 1,000 crore or more; or net profit of Rs 5 crore or more. Such a company should (i) constitute a CSR committee, which shall recommend the CSR policy to the board; and (ii) annually spend towards CSR at least 2 per cent of the average net profit of three immediately preceding financial years.

Schedule VII of the Act prescribes activities towards which CSR should be incurred, including eradicating extreme hunger and poverty, promoting education, ensuring environmental sustainability, social business projects, reducing child mortality and improving maternal health.

It would be noteworthy to analyse the allowability of such expenses under the Income Tax Act, 1961. Any expenditure laid out or expended wholly and exclusively for the business or profession shall be allowed as business expenditure, provided it is not in the nature of capital expenditure or personal expense of the taxpayer.

In this regard, it must be noted that the preamble to the draft CSR Rules under Companies Act indicates that the objective is to integrate the economic, environmental and social objectives with a company’s operations and growth. Further, it states that CSR is not charity or mere donations, but a way of conducting business through which corporate entities visibly contribute to social good. Thereby, CSR has been made an inclusive responsibility of a company, and this may be a good basis to argue “business purpose” as required under section 37(1) of income tax law.

In fact, even when Companies Act, 1956 did not prescribe any statutory requirement for CSR, there have been court decisions that examined the nature of CSR expenses and ruled them as deductible.

However, there are other decisions that have ruled against assessees.

Capital expenditure may be categorised under the respective block of assets and are entitled to depreciation under rates prescribed by the New Appendix I of the Income Tax Rules, 1962.

Another aspect to be considered is that the law provides for weighted deduction for a certain category of expenses incurred by a company. It needs to be seen whether certain eligible CSR expenses are also entitled to such weighted deduction.

Further, while the Companies Act stipulates CSR expense of at least 2 per cent of average net profit, there is no cap on the expense. It is a moot point whether any excess expenditure would be deductible.

The Ministry of Corporate Affairs has reportedly approached the Finance Ministry for clarifications, which would be greatly welcomed.

The author is Co-head of Tax, KPMG in India.

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