CHANAKYA NATIONAL LAW

UNIVERSITY

PROJECT ON

CORPORATE SOCIAL RESPONSIBILITY AND THE

FUNDAMENTALS OF COMPANY LAW

SUBMITTED TO: SUBMITTED BY:

MRS. NANDITA S. JHA PARIJAT

(FACULTY, CORPORATE LAW) ROLL NO.769

7TH SEMESTER

1 |P age
 ACKNOLEDGEMENT

The present project has been able to get its final shape with the support and help of people from various
quarters. My sincere thanks go to all the members without whom the study could not have come to its
present state. I am proud to acknowledge gratitude to the individuals during my study and without whom
the study may not be completed. I have taken this opportunity to thank those who genuinely helped me.

With immense pleasure, I express my deepest sense of gratitude to Mrs. Nandita Jha faculty for Corporate
Law, Chanakya National Law University for helping me in my project. I am also thankful to the whole
Chanakya National Law University family that provided me all the material I required for the project.

I have made every effort to acknowledge credits, but I apologies in advance for any omission that may
have inadvertently taken place. I would like to thank my parents and especially my elder sister without the
blessing and co-operation of which the completion of the project would not have been possible.

Last but not least I would like to thank Almighty whose blessing helped me to complete the project

-Parijat

2 |P age
 TABLE OF CONTENTS

Statutory Mandates for Corporate Social Responsibilty and the Companies Act 2013 ............ 6

2. Nature and scope of Corporate Social Responsiblity ......................................................... 9

3. Critical analysis and ambiguities ..................................................................................... 15

4. Conclusion: views and suggestions .................................................................................. 21

Bibliography............................................................................................................................. 23

3 |P age
 LIST OF ABBREVIATIONS

MCA..Ministry of Corporate Affairs

MHA..Ministry of Home Affairs

CSRCorporate Social Responsibility

CSR Rules..Companies (Corporate Social Responsibility) Rules, 2014

IT Act.Income Tax Act, 1961

FCRA.Foreign Contribution Regulation Act, 2010

4 |P age
 RES EARCH M ETHODOLOGY

SCOPE

The scope of this project has been limited to the Companies Act, 2013, Income Tax Act, 1961,
Finance Act of 2014 and judicial decisions of courts and tax tribunals in India.

OBJECTIVE

The Companies Act, 2013 substantially changed a number of provisions of company law and
introduced new provisions regulating various company law matters. The provisions regarding the
regulation of CSR activities are a part of the same. In India, business activities are charged to
taxation according to the nature of the activity. With the introduction of CSR in the new
Companies Act, understanding the nature of CSR activitie s is a prerequisite to ascertain the tax
treatment of these activities.

Therefore, the broad objectives of this project are as follows:

1. To understand the nature and scope of CSR activities, and their classification so as to
ascertain their tax treatment.
2. To appreciate how the statutory introduction of CSR activities in the Companies Act
affects its tax treatment by comparing and contrasting the same with the decisions which
were given by courts and tribunals before the enactment of the provision.
3. To highlight the ambiguities in the current provisions due to lack of clarifications
regarding the same and the effects of the non- clarification.

5 |P age
 CHAPTER I: STATUTORY MANDATES FOR CORPORATE SOCIAL RESPONSIBILITY
AND COMPANIES ACT 2013

Section 135 and Schedule VII of the Companies Act of 2013 along with the Companies
(Corporate Social Responsibility) Rules, 2014 (CSR Rules hereinafter) which together lay down
provisions regarding CSR activities were notified by the Ministry of Corporate Affairs (MCA
hereinafter) on 27 February 2014 and came into effect from 1 April 2014. Although many
companies have been traditionally engaged in undertaking CSR initiatives voluntarily, the new
CSR provisions put formal and greater responsibility on business companies in India to set out
clear framework and processes to ensure strict compliance.

STATUTORY MANDATES FOR CSR

Corporate Social Responsibility consists of activities undertaken by a company for the public
good by adopting certain strategies and business plans. Section 135 of the Companies Act, 2013
makes it mandatory for companies covered under the Act to set up a Corporate Social
Responsibility Committee subject to certain qualifications, which are as follows:

Net worth of the company is rupees five hundred crore or above,

Turnover of the company was one thousand crore or more, or
Net profit of the company was rupees five crore or more.

Companies which satisfy these conditions are supposed to constitute a CSR Committee
constituting of three directors or more, of which one should be an independent director. The
duties of the Committee include recommending the amount of expenditure on CSR activities and
regulating the way they are being conducted by the company. Further, companies are required to
allocate at least 2% of the average net profits made in the three immediately preceding financial
years to the activities mentioned in Schedule VII of the Companies Act.

The list in Schedule VII is broad based and needs to be liberally interpreted. Companies are
allowed to allot their funds to activities not mentioned in the list, as long as they are able to
capture the essence of the activities mentioned. Activities enlisted by the Ministry of Corporate

6 |P age
Affairs include promoting education, improving healthcare, developing vocational skills,
eradicating hunger and poverty, and contributing to the conservation of the environment. Unlike
a one-off event like a marathon or advertisement, CSR is a programme which requires the
sustained attention of the company. Only such CSR activities are considered which are
undertaken in India.

The Report of the Board of Directors, attached to the financial statements of the company,
should include an annual report on the CSR activities undertaken by the company as per the
format mentioned in the Corporate Social Responsibility Rules, 2014. Further, if the company
has been unable to reach the minimum threshold of expenditure it is supposed to furnish the
reasons for the same in the report. Even though the Companies Act and the CSR Rules provided
by the MCA provide a level of clarity regarding such activities, there still exists some ambiguity
regarding the tax treatment of such activities.

The CSR Policy subject to rule 6 of CSR Rules should state the activities to be undertaken by the
company as specified in Schedule VII, recommend the amount of expenditure to be incurred on
the activities and monitor the Corporate Social Responsibility Policy of the company from time
to time. Subject to the provisions of rule 5(2) of the CSR Rules, the CSR Committee shall
institute a transparent monitoring mechanism for imple mentation of the CSR projects or
programs or activities undertaken by the company. Every Indian company and foreign company
having a branch office or project office in India and satisfying the aforesaid thresholds are
required to comply with the CSR requirements. Both holding and subsidiary companies have to
fulfill section 135 meeting the thresholds.

SCOPE OF SECTION 135, COMPANIES ACT, 2013

Section 135 brings within its ambit every company which is incorporated in India. The CSR
Rules released by the MCA sought to increase the ambit of the provision to include companies
which had a branch or project office in India. There is a logical incoherence between the Act and
the Rules, and the rules which were purely meant to be supplementary in nature now have an
overreaching effect. Further, foreign companies may view this as having to pay additional tax
even for businesses they have not set up in India.

MODALITIES FOR CONDUCTING CSR ACTIVITIES

7 |P age
The modes for a company to conduct CSR activities, other than by itself are as follows:

Third Party: The CSR Rules allow companies to conduct CSR activities with the help of
registered trusts as per Section 8 companies act. 1 Such third party involvement is allowed as long
as the trusts have a three year record of conducting CSR activities. The rules or guidelines
regarding monitoring or regulating CSR activities need to be provided by the company.

Group Entities: Companies may allow their subsidiary companies to carry out CSR activities on
their behalf.

Collaboration: Two or more companies may collaborate with each other for carrying out CSR
activities. In such circumstances, they are supposed to independently prepare reports as per the
reporting requirements set forth in the Act.

1 Section 8, Format ion of companies with charitable objects -Where it is proved to the satisfaction of the Central
Govern ment that a person or an association of persons proposed to be registered under this Act as a limited
company
(a) has in its objects the promotion of co mmerce, art, science, sports, education, research, social welfare, relig ion,
charity, protection of environ ment or any such other object;
(b) intends to apply its profits, if any, or other inco me in pro moting its objects; and
(c) intends to prohibit the payment of any dividend to its members, the Central Govern ment may, by licence issued
in such manner as may be prescribed, and on such conditions as it deems fit, allow that person or association of
persons to be registered as a limited company under this section without the addition to its name of the word
Limited, or as the case may be, the words Private Limited , and thereupon the Regist rar shall, on application, in
the prescribed form, register such person or association of persons as a company under this section.
8 |P age
CHAPTER II: NATURE AND SCOPE OF CORPORATE SOCIAL RESPONSIBILITY

It is now accepted on all hands, even in predominantly capitalist countries, that a company is not
property. The traditional view that the company is the property of the shareholders is now an
exploded myth. There was a time when a group controlling the majority of shares in a company
used to say: "This is our concern. We can do what we like with it." The ownership of the concern
was identified with those who brought in capital. That was the outcome of the property- minded
capitalistic society in which the concept of company originated. But this view can no longer be
regarded as valid in the light of the changing socio-economic concepts and values. Today social
scientists and thinkers regard a company as a living, vital and dynamic, social organism with
firm and deep rooted affiliations with the rest of the community in which it functions. It would
be wrong to look upon it as something belonging to the shareholders. It is true that the
shareholders bring capital, but capital is not enough. It is only one of the factors which
contributes to the production of national wealth. There is another equally, if not more, important
factor of production and that is labour. Then there are the financial institutions and depositors,
who provide the additional finance required for production and lastly, there are the consumers
and the rest of the members of the community who are vitally interested in the product
manufactured in the concern. Then how can it be said that capital, which is only one of the
factors of production, should be regarded as owner having an exclusive dominion over the
concern, as if the concern belongs to it? A company, according to the new socio-enconomic
thinking, is a social institution having duties and responsibilities towards the community in
which it functions. The Supreme Court pointed out as far back as 1950 in Chiranjeetlal v. Union
of India:"We should bear in mind that a corporation, which is engaged in production of
commodities vitally essential to the community, has a social character of its own and it must not
be regarded as the concern primarily or only of those who invest their money in it." 2

Pt. Govind Ballabh Pant also pointed out in one of his speeches:"...industry is not an isolated
concern of the shareholders or the managing agents alone. It reacts on the entire people in the

2
1951 AIR 41
9 |P age
country, on their economic conditions, on employment or standard of living, on everything that
conduces to the material well being." 3

That is why we find that in recent times there is considerable thinking on the subject of social
responsibilities of corporate management and it is now acknowledged even in highly developed
countries like the United States and England that maximisation of social welfare should be the
legitimate goal of a company and shareholders should be regarded not as proprietors of the
company, but merely as suppliers of capital entitled to no more than reasonable return and the
company should be responsible not only to shareholders but also to workers, consumers and the
other members of the Community and should be guided by considerations of national economy
and progress.

This new concept of a Company was felicitously expressed by Desai, J sitting as a Judge of the
Gujarat High Court in Panchmahal Steel Ltd. v. Universal Steel Traders as- "Time-honoured
approach that the company law must safeguard the interest of investors and shareholders of the
company would be too rigid a framework in which it can now operate. New prob lems call for a
fresh approach. And in ascertaining and devising this fresh approach, the objective for which the
company is formed may provide a guide line for the direction to be taken. As Prof. De Wool of
Belgium puts it, the company has a three- fold reality economic, human and public-each with its
own internal logic. The reality of the company is much broader than that of an association of
capital; it is a human working community that performs a collective action for the common good.
In recent years a debate is going on in the world at large on the functions and foundations of
corporate enterprise. The "preservationists" and the "reformers" are vigorously propounding their
views on the possible reform of company, the modern trend emphasising the public interest in
corporate enterprise."4

WHAT IS CSR?

The Companies Act, 2013 does not define Corporate Social Responsibility. However, the CSR

3
M B Anand Environ mental Accounting - An Essential Tool for Long Run Surv ival Int. Journal of Current
Research and Academic Review, 2014 2(3): P 34
4
(1975) GLR 942.
10 | P a g e
Rules have defined the term CSR 5 to mean and include but not limited to:

i. projects or programs relating to activities specified in the Schedule; or

ii. projects or programs relating to activities undertaken by the Board in pursuance of

recommendations of the CSR Committee as per the declared CSR policy subject to the
condition that such policy covers subjects enumerated in the Schedule.

Therefore, the definition of CSR is an inclusive one. By providing the definition of CSR, the
scope and application of CSR that can be undertaken by the companies has been further clarified.
The definition of CSR assumes significance as it allows companies to engage in projects or
programs relating to activities enlisted under Schedule VII of the Companies Act, 2013. It also
permits flexibility to companies by allowing them to choose their preferred CSR engagements
that are in conformity with the CSR policy.

INSTITUTIONAL COVERAGE OF CSR

Every company which is incorporated in India has been brought under the purview of Section
135 (1) of Companies Act. The application of the CSR Rules over companies has been
broadened by the inclusion of a foreign company6 having a branch or project office of a foreign
company under the definition of the term company. This gives an expansionist scope under the
CSR Rules to regulate such companies which prima facie are not included under Section 135.
Thus, though the CSR Rules are supposed to supplement the main provision, the broadening of
the definition of company by the CSR seems to have overreaching effect well beyond the scope
of Section 135 as originally contemplated. This is a clear discordance whic h may be opened to
judicial scrutiny as MCA has gone beyond its legislative mandate.

Further, the inclusion of foreign companies under the definition of company has been criticised
on the grounds that it is an overarching provision and its applicability may be perceived by the
foreign companies as an additional tax, over and above their corporate taxes for doing business

5 Rule 2(c), CSR Rules, Available at: http://responsiblebusinessindia.com/wp -content/uploads/2014/ 05/ CSR-
Rules_2014_MCA.pdf
6 Section 2(42) of the Co mpanies Act, 2013 defines a foreign co mpany. A foreign co mpany means any
company or body corporate incorporated outside India wh ich -
i. has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
ii. conducts any business activity in India in any other manner.
11 | P a g e
in India.

COMPUTATION OF A COMPANYS N ET PROFIT

According to the CSR Provisions, every company will have to report its standalone net profit
during a financial year for the purpose of determining whether or not it triggers the threshold
criteria as prescribed under Section 135(1) of the Companies Act. Therefore, it is important to
understand the manner in which the companys net profit will be calculated. The CSR Rules
bring under its ambit both Indian as well as foreign companies. However, the computation of the
net profit of both these types of companies varies:

Indian Company

The CSR Rules have clarified the manner in which a companys net worth will be computed to
determine if it fits into the spending norm. In order to determine the net profit, dividend
income received from another Indian company or profits made by the company from its overseas
branches have been excluded. Moreover, the 2% CSR is computed as 2% of the average net
profits made by the company during the preceding three financial years.

Foreign Company

If a foreign company has its branch or a project office in India, provisions regarding CSR will be
applicable to such offices, according to the CSR Rules. It has been further prescribed that the
balance sheet and profit and loss account of a foreign company will be prepared in accordance
with Section 381(1)(a) and net profit shall be computed as per Section 198 of the Companies
Act.

However, it is unclear as to how the computation of net worth or turnover would be arrived at in
case of a branch or project office of a foreign company. Expenditure which is incurred by a
foreign holding company over the activities carried out under CSR will qualify as CSR spend of
the Indian subsidiary if, the CSR expenditures are routed through Indian subsidiaries and if the
Indian subsidiary is required to do so as per section 135 of the Companies Act.

GUIDING PRINCIPLES OF CSR

The intention of the legislature in regard to CSR activities has been clarified through the MCAs
list of the following guiding principles concerning CSR:

12 | P a g e
 The companies which undertake CSR initiatives view it as a process by which they can
think about and evolve their relationships with stakeholders for the common good, and
demonstrate their commitment in this regard by adoption of appropriate business
processes and strategies;

Activities carried out under CSR are not a charity or mere donation;

It is a business model wherein corporate entities visibly contribute to the social good;

CSR is a tool to merge the companys operations and growth with its integrated
economic, environmental and social objectives; and

CSR projects/ programs of a company may also focus on integrating business models of a
company with social and environmental priorities and processes in order to create shared
value.

The Companies (Corporate Social Responsibility) Rules, 2014 clarify that every company
including its holding or subsidiary, and a foreign company defined under of section 2(42) of the
Act having its branch office or project office in India which meets the threshold requirement
criteria specified in section 135(1) of the Act shall comply with the provisions of section 135 o f
the Act and these rules.

However, every company which ceases to be a company covered under of section 135(1) of the
Act for 3 consecutive financial years is not required to constitute a CSR Committee and to
comply with the provisions contained in section 135(2) to (5) till such time it meets the criteria
specified in sub- section 135(1). A foreign holding companys spend on CSR activities in India
can be counted as CSR spending of their Indian subsidiary. The circular however, does not lay
down any deadline for creation and posting of CSR policies by companies.

Mandatory reporting of CSR policies developed and implemented as part of the Directors report
is also provided for under Section 134 of the Companies Act 2013. If a company is unable to
spend the contribution amount in a year it should specify the reasons for not spending that

13 | P a g e
amount in its Board of Directors annual report. There is no penal provision regarding non-
compliance of the said provisions in means of spending or in reporting part. However, there are
clear penal consequences if a company fails to even set up the CSR committee or fails to create a
policy etc. If a company fails to spend the money, it only has to report this along with reasons.
Section 134(8) of the Act provides for such penal provision stating in case the company does not
disclose the reasons in the Boards report, 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 every
officer of the 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.

14 | P a g e
 CHAPTER III A CRITICAL ANALYSIS ON CORPORATE SOCIAL RESPONSIBILITY

In Dodge v Ford Motor Co7 the Michigan Supreme Court upheld the shareholders claim that a
corporation is carried on primarily for the profit of the shareholders and therefore the powers of
the directors are to be exercised on this basis. The decision of the directors not to declare a
dividend to facilitate the expansion of the business and increase the number of employees was
considered to be inappropriate. However, subsequent cases have taken a more flexible approach.
Decisions made to benefit consumers, the community, employees and the environment have been
considered as not breaching directors duties where shareholders interests have not been
completely disregarded and emphasis placed on the corporations future. 8

In Australia, the traditional view is that case law and corporations legislation does not extend a
directors obligation to consider stakeholders other than shareholders (other than in respect of
creditors when a company is or is likely to become insolvent) 9 .Acting in the best interest of the
company has generally been interpreted by the courts as acting in the best interest of
shareholders. However, laws relating to labour conditions, consumer protection and community
matters such as environmental protection apply to corporations and therefore any decision by
directors in breach of these requirements may potentially lead to a breach of directors duties. 10

In the U.K., the 2003 Corporate Responsibility Bill, whose adoption is almost certain, is in some
sense a response to the British governments perceived failure in its White Paper on Modernising
Company Law 11 to specify transparency rules or hold corporations accountable to their
stakeholders. In addition, Article 2 of the Bill provides for extraterritorial application regarding

7
170 NW 668 (1919)
8
Teck Corp v Millar,(1973) 33 DLR (3d) 28. Allens Arthur Robinson Corporate Governance Site, Directors
dutiesand corporate philanthropy
9
Allens Arthur Robinson, Corporate Governance Site, Directors dut ies and corporate philanthropy
10
Examples include: various state based environmental legislation, s 299(1)(ff) of the Corporations Act which
requires companies to report on environmental performance, regarding occupational health and safety as state and
federal level, Trade Pract ices Act which pro motes competition and fair trading to protect consumers.
11
MODERNISIN G C OMPAN Y LAW, 2002, Cm. 5553 , http://www.dti.gov.ukcompaniesbill/part2.pdf (last visited
October 13, 2015)
15 | P a g e
all major CSR areas of concern, demanding that corporations consult with stakeholders, 12
further imposing a duty to prepare and publish reports. 13 While Articles 7 and 8 stress the
environmental and social duties of directors as well as their responsibilities, Article 6 establishes
the liability of the parent company with regard to its subsidiaries, mergers, disposals,
acquisitions, and other restructurings, irrespective of whether the injury to persons or harm to
the environment occurred within the United Kingdom. The impact of this provision could
potentially revolutionize litigation claims against MNE operations abroad by a large range of
claimants. Similarly, British legislation requires that pension funds disclose, in their statements
of investment principles, the extent to which social, environmental, or ethical considerations are
taken into account in the selection, retention and implementation of investments. 14 In France, the
newly amended Nouvelles Regulations Economiques (NRE) 15 is a Law that imposes reporting
obligations (public disclosure) on all nationally listed companies, pertaining among others to the
environment, domestic and international labour relations, local community, and others. 16 There
is increasing pressure from society in all developed countries to impose legally enforceable
public disclosure requirements upon corporations. This trend is in line with and closely
connected to recent litigation concerning CSR issues, thus opening the way for furt her regulation
in the near future.

In India companies have to follow the CSR in order to escape the liability under various
Environmental Acts. In other words, if any company harm or pollute the environment than liable
under Indian law and have to pay damages.
In order to safeguard the CSR, Indian law has adopted the various principles like precautionary
principle, inter generation equity, use and conserve natural resource, polluter pays principle, etc.
In the Bhopal Gas tragedy, several guidelines have been laid down by the Honble Supreme
Court of India regarding the responsibilities of the companies for the adverse effect of their acts

12
Corporate Responsibility Bill, 2003, 4, available at
http://www.publications.parliament.uk/pa/cm200203/cmbills/129/ 2003129.pdf (last accessed on 10th Oct., 2015).
13
Ibid. 3.
14
Policies in the European Un ion 20, availab le at http://europa.eu.int/comm/employ ment_social/soc-
dial/csr/national_csr_policies_en.pdf. (last accessed on 10th Oct., 2015).
15
See summary of Law No. 2001-240 of 2001, art. 116, in Corporate Social Responsibility, National Public
Policies in the European Union, supra note 77, at 19.
16
S. Nahal, Mandatory CSR Reporting: Frances Bold Plan, in ICC GUIDE TOGLOBA L CORPORATE
RESPONSIBILITY, at p.182.
16 | P a g e
and also of the damage and loss that has been caused due to their harmful acts. Court evolve the
principle of the Absolute Responsibility, under which no defences has been granted to the
companies and if any damage is caused due to their act they will be held liable without any
excuse.
Honble Supreme Court have widened the scope of Article 21 of the Constitution of India, 1950
laid down that The right to healthy environment has been incorporated, directly or indirectly, into
the judgments of the court. Link between environmental quality and the right to life was first
addressed by a constitutional bench of the Supreme Court in the Charan Lal Sahu Case 17 In
1991, the Supreme Court interpreted the right to life guaranteed by article 21 of the Constitution
to include the right to a wholesome environment. In Subhash Kumar vs. State. of Bihar 18 , the
Supreme Court held that right to life is a fundamental right under Art. 21 of the Constitution and
it include the right to enjoyment of pollution free water and air for full enjoyment of life. If
anything endangers or impairs that quality of life in derogation of laws a citizen has recourse to
Art.32 of the Constitution for removing the pollution of water or air which may be detrimental to
19
life. In Vellore Citizens Welfare Forum vs. Union of India, the Supreme Court held that
industries are vital for the countrys development, but having regard to pollution caused by them,
principle of Sustainable Development has to be adopted as the balancing concept.
Precautionary Principle and Polluter Pays Principle has been accepted as a part of the law of
the country.

UNCERTAINTIES REGARDING TAX DEDUCTIBILITY ON CSR EXPENDITURE

Although the inclusion of CSR in the Companies Act is a much- awaited and welcome move, the
statutes are yet not clear on many aspects related to CSR. The non- clarity on tax treatment for
undertaking CSR activities is discussed as hereunder.

17
(1990) 1 SCC 613
18
(1991) 1 SCC 598
19
AIR 1996 SC 2715,
17 | P a g e
ALLOWABILITY OF EXPENDITURE ON CSR ACTIVITIES UNDER SEC. 37, IT ACT:
In the context of tax deductibility for companies spending on CSR activities by way of creating
capital assets, certain amendments have been proposed in the Income Tax Act, 1961. Some of
the amendments are produced here for discussion:

i. CSR expenditure will not be allowed deductibility as the CSR expenditure- being an
application of money- is not incurred for the purposes of carrying on business, cannot be
allowed under the existing provisions of Section 37 of the ITA.

ii. The CSR expenditure for certain activities (which are of the nature of activities described
under Section 30 to Section 36 of ITA) shall be allowed deduction under those sections
subject to fulfilment of conditions, as specified.

Of Sections 30-36, the provisions most relevant are sections 35CCA-CCD which allow
deductibility for: (i) expenditure towards payments to institutions for carrying out programs of
rural development or conservation of natural resources or (ii) for expenditure on certain notified
agricultural extension projects or skill development projects. While the heads of CSR
expenditure are required to be interpreted liberally 20 , the tax deductible heads are narrow. This
limited convergence between the two legislations denies the benefit that may have been
otherwise available. It leads to a risk that CSR expenditure may get unduly concentrated in
specific activities. 21 It also leaves the door open for disputes arising from differences in
interpretation of the scope of CSR activities.

FOREIGN CONTRIBUTION IN RELATION TO CSR

It is important to see whether CSR Rules is positioned to allow convergence with foreign
contribution regime in India. Any foreign contribution received from any foreign source requires
approval under the Foreign Contribution Regulation Act, 2010 (hereinafter FCRA). It is
interesting to note that the definition of foreign source is wide enough to include a Indian
company wherein one-half or more nominal share capital is held by a citizen of a foreign country

20 General Circular No. 21/ 2014 dated 18th June, 2014 released by the Ministry of Corporate Affairs (MCA )
regarding clarification with regard to provisions of Corporate Social Responsibility under Section 135 of the
Co mpanies Act, 2013.
21 Muhammad Yunus, Building Social Business (Public Affairs, New Yo rk, 2010).
18 | P a g e
or a foreign corporation or a foreign company. Therefore any spending or contribution made by
the foreign source falling within the ambit of the CSR provision will come within the purview of
FCRA hence no spending/contribution can be made without the express approval or permission
by the Ministry of Home Affairs. Allowability of foreign as well as Indian companies to make
contributions through CSR provision may give rise to inter-regulatory fault- lines within the
broader context of CSR and foreign contribution regime in India.

NON- CLARITY ON COMPUTATION OF FINANCIAL ACCOUNTS OF FOREIGN COMPANIES

No clarity under the Companies Act is provided towards any mechanism that allows computation
of accounts of a foreign company in order to determine the net worth or turnover of a branch or a
project office. Ascertaining the incidence of CSR exposure in the absence of any clear provision
for financial computation of branch or project offices of foreign companies may prove
problematic and create practical difficulties.

OTHER ISSUES

The ambiguity with respect to CSR activities lies in the inability to classify them as either
business processes or charitable activities. The government has not declared any specific
exemption for CSR activities. 22 However some of these activities, which fall under the purview
of charitable activities, are subject to deductions under 80G of the Income Tax Act. Companies
have contended that they should be allowed deductions or exemptions on such act ivities, as it is
the part of a legislative mandate. 23 Further, in order to incentivize companies to carry out such
activities and prevent them from circumventing the law it is necessary that certain benefits be
extended to them.

a) Whether such expenditure can be deemed to be capital expenditure?

Section 37(1) of the Act allows deduction for expenditure which is not capital in nature. In cases

22 PTI, No specific tax exemption for companies CSR activit ies: Govern ment, The Times of India, (Dec. 5, 2014),
http://timesofindia.indiatimes.co m/business/india-business/No-specific-tax-exempt ion-for-co mpanies-CSR-xpenses-
Govern ment/articleshow/45387201.cms.
23 Sudipto Dey, Hazy CSR tax laws make co mpanies jittery, Business Standard, (Mar. 2, 2014),
http://www.business-standard.com/article/opinion/hazy-csr-tax-laws-make-co mpanies-jittery-
114030200706_1.html.
19 | P a g e
where the CSR spending of the company does not create capital assets, the expenditure incurred
will be deductible. Judicial decisions indicate that if the assets do not belong to the assessee, then
it cannot be considered to be capital expenditure.

b) Whether for tax purposes, the contribution to the trust be deductible wholly or restricted
to 50% under Section 80G?

The deductibility of contributions to trusts depends on the nature of the trust. Section 80G allows
100% deduction to certain trusts. Companies find favour in full allowance on such contributions
to trusts as it is commercially more beneficial for them. For example, where a company
contributes to a trust to undertake educational activities and is allowed 100% deduction on the
same, irrespective of whether such expenditure is deductible under Section 37 of the IT Act.

20 | P a g e
 CHAPTER V: CONCLUSION: VIEWS AND SUGGESTIONS

Amid various practical difficulties which may have to be encountered at least in the initial phases
of implementation of the new CSR provisions, the initiative of the government is no doubt
appreciable. The new provisions may be viewed as the result o f the changing corporate
philosophy in India and worldwide which entrusts the responsibilities on giant corporates
towards social welfare of the population which comprise of their present or prospective
employees, customers or other stakeholders in varied roles.

While the introduction of CSR provision in the Companies Act is a welcome step, however the
current discourse of corporate philanthropy without giving any express autonomy to companies
in choosing their CSR activities may not yield the desired outcome. By allowing only selected
list of activities within the Schedule in a sectional manner may end up encouraging only a
passive participation by corporates towards CSR activities. In order to enable corporates to
participate fully in the philanthropy space, the participation must start with a more inclusive
management of CSR policies where government and industry work side by side, which does not
assume that (social) business and CSR are incompatible.

Although Section 135 of the Companies Act did not contemplate enlarging the scope of
companies to cover foreign companies in the first place, the CSR Rules nonetheless included
foreign companies within its scope. It seems the central government is not opposed to the idea of
allowing excessive delegated powers to the executive to make such changes in the Companies
Act which cannot be brought unless an amendment to the original Act is proposed. The CSR
Rules, in essence, exceeds its legislative mandate; and this aspect needs to be considered by the
policy makers.

By expanding the scope of CSR to include foreign companies, its impact on such companies may
be manifold. In light of the ambiguity surrounding financial computation of foreign companies, it
needs to be seen how practical it would be for branch or project offices to participate in CSR
activities. In order to retain the advantage of having a CSR provision in the Companies Act,
MCA must also facilitate greater convergence with tax and foreign contribution laws in India.
21 | P a g e
Unless CSR spending is recognized as an additional amount eligible for deduction under the
income tax law, the spending may be nothing but a burden on profits of the enterprises. As
mentioned above, presently the Income Tax Law provides for deduction under section 80G for
donations to certain funds and institutions with maximum limit of 10% of the total income.
Deduction for CSR spending should preferably be over and above deduction under section 80G
to give a direct motivation to companies to spend for CSR activities. Alternatively CSR may be
declared as a business expense and deduction may be allowed under the Income Tax Law. Apart
from this capital and revenue expenditure on CSR activities require separate tax treatment to
avoid future litigations. The Income Tax Law has to address these a nd various other issues which
we hope that government would be covering in the next Budget of 2016.

22 | P a g e
 BIBLIOGRAPHY

BOOKS:

1. G. K. Kapoor, Sanjay Dhamija, Company Law, 19th Edition, Taxxman Publications

Private Ltd., Mumbai, 2015.
2. Singh, Avtar, Introduction to Company Law, Eastern Book Company, 11th Edition,
2014.
3. Lectures on Company Law: Covering Companies Act, 2013 and Limited Liability
Partnership Act, 12th Edition, LexisNexis, Delhi, 2015
4. Sumati Reddy,Corporate Social Responsibility: The Environmental aspects, The ICFAI
University Press, Hyderabad, 2004
5. Sumati Reddy, Corporate Citizenship: The Social Aspects, The ICFAI University
Press, Hyderabad, 2005

INTERNET SOURCES:

1. www.manupatra.org
2. http://www.legalservicesindia.com/article/article/csr-under-the-companies-act-2013-
1704-1.html
3. http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Corporate
_Social_Responsibility___Social_Business_Models_in_India.

23 | P a g e