CHANAKYA NATIONAL 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)
R OLL OLL NO.769 TH
7
SEMESTER
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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. state. I am a m prou proud d to acknowl acknowledge edge gratitude gratitude to the individuals individuals during during my study study and without without whom the study may not be completed. I have taken this opportunity opportunity to thank those who w ho genuinely genuinely helped helped me. With With imm i mmense ense plea pleasure, sure, I express e xpress my deepest sense of gratitude gratitude to Mrs. Nandita Nandita Jha J ha faculty for 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 inadverte inadvertently ntly taken place. I would would like to thank my parents and espe es pecially cially my elder elder sister wi w ithout the blessing blessing and co-operation co-operation of of which which the completio completion n of of the project project would not not have been been possible. possible. Last but not least I would like to thank Almighty whose blessing helped me to complete the project -Parijat
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TABLE OF CONTENTS
Statutory Mandates for Corporate Soc ial Responsibilty a nd the Companies Act 2013 ............ 6 2.
Nature and scope of Corporate Social Responsiblity ........................................... .............. 9
3.
Critica l analysis and ambiguities ............................................ ......................................... 15
4.
Conclusion: views and suggestions ....................................... ........................................... 21
Bibliography............................................................................................................................. 23
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LIST OF ABBREVIATIONS
MCA……………………………..Ministry of Corporate Affairs MHA……………………………..Ministry of Home Affairs CSR………………………………Corporate Social Responsibility CSR Rules………………………..Companies (Corporate Social Responsibility) Rules, 2014 IT Act…………………………….Income Tax Act, 1961 FCRA…………………………….Foreign Contribution Regulation Act, 2010
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R ES EARCH M ETHODOLOGY
S COPE
The scope of this project has been limited to the Companies Act, 2013, Income Tax Act, 1961, Finance Act of 2014 a nd judicial decisions of courts and tax tribunals in India. O B JECTIVE
The Companies Act, 2013 substantially changed a number of provisions of company law and introduced new provisions re gulating various compa ny 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 activities 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 a nd the e ffects of the non- clarification.
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CHAPTER I: S TATUTORY MANDATES AND
Section 135 and Schedule VII
FOR
CORPORATE SOCIAL R ESPONSIBILITY
COMPANIES ACT 2013
of the Co mpanies 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 comp liance. S T ATUTORY M A NDATE S 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 Co mmittee subject to certa in qualifications, w hich 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 co mpany 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 a ge
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 le vel o f clarity regarding such ac tivities, there still exists some amb iguity regarding the tax treatment o f such activities. The CSR Policy s ubject to rule 6 of CSR Rules should state the activities to be undertake n 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 implementation of the CSR projects or programs o r activities undertaken by the co mpany. Every Indian company a nd 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. S C OPE OF S E CTION 135, C O MPANIES A CT , 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. O DALI TI ES F OR CONDUCTI NG CSR ACTIVI TIES M
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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 pro vided 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, Formation o f companies with charitable objects -Where it is proved to th e satisfaction o f the Central Government 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 commerce, art, science, sports, education, research, social welfare, religion, charity, protection of env iron ment or any such other object; (b) intends to app ly its p rofits, if any, or other income in promoting its objects; an d (c) intend s to prohibit th e payment o f any d ividend to its members, th e Central Govern ment may, by licence issu ed in such manner as may be prescribed, and on such conditions as it deems fit, allow that person or association of pers ons to be registered as a limited company und er this section witho ut the add ition 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 s uch person or association of perso ns as a company und er this sect ion.
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CHAPTER II:
NATURE AND S COPE OF CORPORATE SOCIAL R ESPONSIBILITY
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 a n 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 co ncern 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 belo nging 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 concer n primarily or only of those who invest the ir 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
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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 H AT I S CSR? W
The Companies Act, 2013 does not define Corporate Social Responsibility. However, the CSR
3
M B Anand “Environmental Accounting - An Essential Tool for Long Run Survival” Int. Journal of Current
Research and Academic Review, 2014 2(3) : P 34 4 (1975) GLR 942.
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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 t he companies has been further clarified. The definition of CSR assumes significance as it allows companies to engage in projects or programs relating to activities e nlisted under Schedule VII o f the Companies Act, 2013. It also permits flexibility to compa nies by allowing them to choose their preferred CSR engagements that are in conformity with the CSR policy. I NSTITUTIONAL C O VERAGE 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 fore ign 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’ b y the CSR seems to have overreaching effect well beyond t he scope of Section 135 as originally contemplated. This is a clear discordance which may be opened to judic ial 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/CSRRules_2014_MCA.pdf 6 Section 2(42) of the Companies Act, 2013 defines a “foreign company”. A “foreign company” means any company o r body corporate incorporated outside India whichi. has a place of bu siness in India whether by itself or through an agen t, physically or through electronic mode; and ii. condu cts any business activity in India in an y other manner.
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in India. ’
C OM PUTATI ON OF A C O MPANY S N E T P R OFIT
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 company’s net profit will be calculated. The CSR Rules bring under its ambit bot h Indian as well as foreign companies. However, the computation of the net profit of both these types o f companies var ies: I ndi an Company
The CSR Rules have clarified the manner in which a company’s 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 compa ny or profits made by the co mpany from its overseas branches have been excluded. Moreover, the 2% CSR is computed as 2% of the average net profits made by t he company during the preceding three financial years. F orei gn Company
If a foreign company has its branch or a project office in India, provisio ns 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 acco unt o f a foreign co mpany 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 subsidiar y is required to do so as per section 135 of the Co mpanies Act. G U IDING P R INCI PLE S OF CSR
The intention of the legislature in regard to CSR activities has been clarified through the MCA’s 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 o ut under CSR are not a c harity or mere do nation;
It is a business model wherein corporate entities visibly contribute to the social good;
CSR is a tool to merge the company’s 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 company’s 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 po licies developed a nd implemented as part of the Director’s 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 Director’s annual report. There is no penal provision regarding noncompliance of the said provisions in means of spending or in reporting part. However, there are clear penal consequences if a company fa ils to even set up the CSR committee or fails to create a policy etc. If a co mpany 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 Board‘s report, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which ma y extend to twent y-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.
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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 complete ly disregarded and emphasis placed on the corporation’s f uture. 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 breac h of directors’ duties. 10
In the U.K., the 2003 Corporate Responsibility Bill, whose adoption is almost certain, is in some sense a respo nse to the British government’s perceived failure in its W hite Paper on Modernising Company Law11
to spec ify transparenc y rules or hold corporations accountab le 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’ duties and cor porate 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, T rade Pract ices Act which pro motes competition and fair trading to protect con sumers. 11
MODERNISIN G C OMPANY LAW, 200 2, Cm. 555 3, h ttp://www.dti.gov.ukcompaniesbill/part2.pdf (last visited October 13, 2015)
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all major CSR areas of concern, demanding that corporations consult with stakeholders,12 further imposing a duty to prepare and publish reports. 13
While Artic les 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 se lection, retention and implementation of investments.14 In France, the newly amended Nouv elles 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 disc losure requirements upon corporations.
This trend is in line with and closely
connected to recent litigation concerning CSR issues, thus opening the way for further 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 eq uity, use a nd conserve natural resource, polluter pays principle, etc. In the Bhopal Gas tragedy, several guidelines have been laid down by the Hon’ble Supreme Court of India regarding the responsibilities of the companies for the adverse effect of their acts 12
Corporate Resp onsibility Bill, 2003, § 4, avai lable at
http://www.publications.parliament.uk/pa/c m200203/c mbills/1 29/ 2003129.pdf (last acces sed on 10th Oct., 2015). 13 Ibid. § 3. 14
Policies
in
the
European
Union
20,
available
at
http://europa.eu.int/comm/employment_social/soc-
dial/csr/nat ional_cs r_policies_ en.pdf. (last accessed on 10th Oct., 2 015). 15 See summary of Law No. 2001-240 of 2001, art. 116, in Corporate Social Respons ibility, National Public Policies in the European Union, supra not e 77, at 19. 16
S. Naha l, Mandat ory CSR Reporting: France’s Bold P lan, in RESPONSIBILITY, at p.182.
ICC GUIDE TO GLOBA L CORPORAT E
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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. Hon’ble 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 K umar vs. Stat e. of Bi har 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 o f the Constitution for removing the pollution of water or air w hich may be det rimental to life. In Vell ore Ci tizens Wel fare F orum vs. Uni on of I ndi a , 19 the Supreme Court held that industries are vital for the country’s development, but having regard to pollution caused by them, principle of ‘Sustainable Development’ has to be adopted as the bala ncing concept. ‘Precautionary Principle’ and ‘Polluter Pays Principle’ has been accepted as a part of the law of the country. E GARDING T AX D E DUCTIBI LI TY ON CSR E X PENDITURE U NCERTAINTIES R
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 AIR 1996 SC 2715,
19
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A LL OWABI LI TY OF EXPENDI TURE ON CSR ACTIVITI ES UNDER S EC . 37, I T A CT :
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 amendme nts are produced here for disc ussion: 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 o f CSR activities. F OREIGN C ONTRIB UTION I N R E L ATION 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 Companies A ct, 2013. 21 Muhammad Yunus , Building Social Business (Public Affairs, Ne w Yo rk, 2010).
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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 o f Home Affairs. Allowability o f 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 co ntribution regime in India. N ON - C L A RITY ON C OM PUTATION OF F I NANCIAL A CCOUNTS OF F OREIGN C O MPANIES
No clarity under the Co mpanies Act is provided towards any mechanism that allows computation of accounts o f a foreign company in order to deter mine the net worth or turnover of a branch or a project o ffice. Ascertaining the incidence of CSR exposure in the absence o f any c lear provision for financial computation of branch or project offices of foreign companies may prove problematic and create practical difficulties.
O T H ER ISSUES
The ambiguity with respect to CSR activities lies in the inability to classify them as either business processes or char itable 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 activities, 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 activities: Government, The Times of India, (Dec. 5, 2014), http://timeso findia.indiatimes.co m/bus iness/india-bus iness/No-specific-tax-exe mpt ion-for-companies-CSR- xpens esGovernment/articleshow/45387201.cms. 23 Sudipto Dey, Hazy CSR tax laws make companies jittery, Business Standard, (Mar. 2, 2014), http://www.business -standard.com/article/opinion/h azy-csr-tax-laws- make-co mpanies-jittery114030200706_1.html.
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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 o n the nature o f 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 o f whether such expenditure is deductible under Section 37 of the IT Act.
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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 of 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 participatio n 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 fore ign companies, its impact on such companies may be manifold. In light o f 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 fore ign 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 and various other issues which we hope that government would be cov ering in the next Budget of 2016.
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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-20131704-1.html 3. http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Corporate _Social_Responsibility___Soc ial_Business_Models_ in_India.
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