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Allowability of CSR Expenditure Under Income Tax Act, 1961


Allowability of CSR Expenditure Under Income Tax Act, 1961

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Allowability of CSR Expenditure Under Income Tax Act, 1961

CORPORATE SOCIAL RESPONSIBILITY (CSR) is a self-regulating process, through which corporates link their activities with common public. The Corporates generally using resources, whether it is natural or human to amass big profits and through Corporate Social responsibility, they will take social responsibility to develop local area and people living in that area. The Corporates through Social Responsibility shall be accountable to the itself, country and the public. The Corporate Social Responsibility also called as Corporate Responsibility, Corporate Citizenship. Through CSR, Corporates consider the interest of society by taking responsibility of impact of their activities on the various stakeholders.

The provisions of Section 135 of the Companies Act, 2013 mandates  that; Every company having net worth of rupees five hundred crores or more or turnover of rupees one thousand crores or more or a net profit of five crore or more during any financial year shall ensure that the Company spends, in every financial year , at lease two percent  of the average net profits of the company made during the three immediately preceding financial years.

As we know the expenditure by corporates on CSR activities are not allowed as deduction from the profit of the company. The expenditure on CSR is considered as appropriation of profit.

The Central Government has inserted an Explanation 2 in Section 37(1) of the Income Tax Act, 1961 as follows;

“Explanation 2- it is declared that for the purpose of subsection (1) any expenditure incurred aby an assessee on the activities relating to corporate social responsibility referred to section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession”

Extract from Budget Memorandum.

----CSR expenditure, being an application of income is not incurred wholly and exclusively for the purpose of carrying on business--- if such expenses are allowed as tax deduction, this would result in subsidizing of around one third of such expenses by Government by way of tax expenditure----

---it is proposed to clarify that for the purpose of section 37(1) any expenditure -----in section 135 of the Companies Act, 2013 shall not be---- allowed as deduction under section 37.However ,the CSR expenditure which is of the nature described in Sections 30 to 36 of the Income Tax Act, 1961 shall be allowed deduction under section----.

NOTE: ANY EXPENDITURE QUALIFYING AS CSR EXPENDITURE UNDER PROVISIONS OF SECTION 135 OF THE COMPANIES ACT, 2013, WHICH OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 OF THE INCOME TAX ACT, 1961 SHALL BE ALLOWED AS DEDUCTION.

THE ABOVE AMENDMENT SHALL BE APPLICABLE FROM 1ST APRIL, 2015

 

Thus, the expenditure on CSR activities is non-deductible for tax purposes unless falling within provisions of Sections 30 to 36 of the Income Tax Act, 1961.

Following are the examples of CSR expenditure which are deductible expenses under provisions of Section 35 of the Income Tax Act, 1961.

Section under Income Tax Act, 1961

Areas of Expenditure

Section 35

·         35(1)(i) and 35(1)(iv)-Any expenditure laid out or expended on Scientific Research related to its own business;

Deduction allowed -100% of the sum paid.

 

·         35(1)(ii)-Any sums to an approved research association which has as its object the undertaking of scientific research or to an approved university, college or other institution to be used for Scientific research;

Deduction allowed -175% of the sum paid.

 

·         35(1) (iia)- Any sum paid to an approved company having its main object of carrying out scientific research and expenditure;

Deduction allowed -125% of the sum paid.

 

·         35(1)(iii)-Any sums paid to an approved research association which has as its object the undertaking research in social science or statical research or to an approved university, college or other institution to be used for research in social science or statistical research.

Deduction allowed -125% of the sum paid.

 

Section 35(2A)

·         Any sum paid (not being used for the acquisition of land or building or construction of building) to an approved scientific research association or university or college or a public sector company or any other institution;

·         To be used for scientific research undertaken under a programme approved by prescribed authority;

·         Deduction allowed -130% of the sum paid.

Section 35(2AA)

·         Any sum to a National Laboratory, University or an IIT or a specified person;

·         Sum to be used for scientific research undertaken an approved programme approved by the prescribed authority;

·         Deduction allowed -200% of the sum paid.

 

 

 

Section 35(2B)

 

·         Any expenditure incurred (not being used for the acquisition of land or building or construction of building) on a scientific research undertaken under a programme approved by a prescribed authority;

·         Deduction allowed -125% of the sum paid.

35AC

·         Any sum paid to a public sector company or a local authority or to an association or institution approved by the National Committee for carrying out any eligible project or scheme mainly concerning the upliftment of rural areas;

·         Deduction allowed -100% of the sum paid.

35CCA

·         Any sum paid to an association or institution, which has as its object of undertaking any programme of rural development or training of persons for implementing programmes of rural development as approved by the prescribed authority;

·         Any sum paid to the prescribed funds as notified by the Central Government;

·         Deduction allowed -100% of the sum paid.

35CCB

·         Any sum paid to an association or institution, which has as its object of undertaking programme of conservation of natural resources or of afforestation as approved by the prescribed authority;

·         Sum paid to such fund for afforestation as may be notified by the Central Government;

·         Deduction allowed -100% of the sum paid.

35CCC

·         Any expenditure incurred on agricultural extension project notified by the Board

·         Deduction allowed -150% of the sum paid.

35CCD

·         Any expenditure incurred (not being used for the acquisition of land or building or construction of building) on any skill development project notified by the Board;

·         Deduction allowed -150% of the sum paid.

 

The Government has amended provision of Section 135 of the Companies Act, 2013 through Companies ( Amendment ) Act, 2019 by inserting penalty provisions for companies as well as officers in default as follows;

  1. a) For Companies: The company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees, and

(b) For Officer in default: Every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.

 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any agency of the government. Examples of analysis performed within this article are only examples. They should not be utilized in real-world analytic products as they are based only on very limited and dated open source information.

 

ALLOWABILITY OF CSR EXPENDITURE UNDER PROVISIONS OF INCOME TAX ACT, 1961-20191008074549.docx

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