TREATMENT OF EXPENDITURE ON CORPORATE SOCIAL RESPONSIBILITY UNDER INCOME TAX ACT, 1961

Vide Section 135 of the Companies Act, 2013 spending amount on Corporate Social Responsibility is made mandatory.  In this regard the Ministry of Corporate Affairs framed ‘The Companies (Corporate Social Responsibility) Rules, 2014.  Schedule VII to the Act provides the list of activities
for CSR that may be included by Companies in their Corporate Social Responsibility policy.  There is no other way except to comply with Section 135 and the rules made there under by the eligible companies.   The next question arise is for the treatment of expenditure incurred towards CSR?

Before the enactment of Companies Act, 2013 spending on Corporate Social activities is not a mandate one.   Only disclosure is required if CSR amount is not spent. The Government itself was only encouraging voluntary adoption of corporation social responsibility and issued guidelines in this regard.  There was no specific provision under the Income Tax Act during that period for the treatment of expenditure in that aspect.  In the absence of the provision for disallowing the expenditure it may be argued that the expenditure on corporate social responsibility could be allowed.

In ‘Commissioner of Income Tax V. Madras Refineries’ – 2003 (11) TMI 47 - MADRAS High Court the High Court allowed the expenditure on CSR as revenue expenditure.  In ‘Commissioner of Income Tax V. Infosys Technologies Limited’ – 2013 (7) TMI 451 - KARNATAKA HIGH COURT the High Court held that where expenses incurred by Infosys on traffic signals have been allowed as essential CSR under Section 37 of the Income Tax Act, 1961.

We may analyze what Section 37 of the Income Tax Act, 1961 says about this.

Section 37(1) of the Income Tax Act, 1961 provides that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".   For the purpose the deductions allowed in sections 30 to 36 are indicated as below:

Section 30 – Deduction on rent, rates, taxes, repairs and insurance for buildings;
Section 31 – Deduction on repairs  and insurance of machinery, plant and furniture;
Section 32 – Deduction on depreciation;
Section 32A – Deduction on investment allowance;
Section 32AB – Deduction on investment deposit account;
Section 32AC – Deduction in new plant and machinery;
Section 33 – Deduction on Development Rebate;
Section 33A – Deduction of Development Allowance;
Section 33AB – Deduction on Tea Development Account, Coffee Development Account and Rubber Development Account;
Section 33ABA – Deduction on Site Restoration Fund;
Section 33AC – Deduction on Reserves for shipping business;
Section 33B – Deduction on rehabilitation allowance;
Section 34 deals with the conditions for depreciation allowance and development rebate;
Section 34A deals with the restriction on unabsorbed depreciation and unabsorbed investment allowance  for limited period in case of certain domestic companies;
Section 35 – Deduction on expenditure on scientific research;
Section 35A – Deduction on expenditure on acquisition of patents right or copy rights;
Section 35AB – Deduction on expenditure on know how;
Section 35ABB – Deduction on expenditure for obtaining licence to operate  telecommunication services;
Section 35AC – Deduction on expenditure on eligible projects or schemes;
Section 35AD – Deduction on expenditure of expenditure of specified business;
Section 35CCA – Deduction on expenditure by way of payment to associations and institutions for carrying out Rural Development Program;
Section 35CCB – Deduction on expenditure by way of payment to association or institutions for carrying out programs of conservation of natural resources;
Section 35CCC – Deduction on expenditure on Agricultural Extension Project;
Section 35CCD – Deduction on expenditure on Skill Development Project;
Section 35D – Deduction on amortization of certain preliminary expenses;
Section 35DD – Deduction on amortization of expenditure in case of amalgamation or demerger;
Section 35DDA – Deduction on amortization of expenditure incurred under voluntary retirement scheme;
Section 35E –Deduction for expenditure on prospecting etc., for certain minerals;
Section 36 – Other deductions
Explanation 2 to Section 37 of the Income Tax Act, which was inserted by Finance Act, 2014 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. This amendment shall be made effective from 01.04.2015.

By the explanation 2 inserted to Section 37 made the expenditure incurred towards CSR will not be allowed for deduction under Section 37 for the purposes of the business or profession.