Companies Act 2013 and CSR

Companies acquit 2013 and CSRCorporate Social state (CSR) has become an important part of comp eithers functioning. With companies having a judicial entity and existence in the eyes of law are required to contribute towards the society that they operate in. This has given emergence to CSR activities being evolved over a gunpoint of time. Corporate Social Responsibility (CSR) refers to various activities being securen with the aim of social welfare and welfare of the canaille at large and includes various activities like Healthcare facilities, education, women empowerment, sanitation and hygiene etc.Though white plagues are incurred by the companies with regard to CSR activities since long ago, but the evolution of CSR activities can be broadly classified into Pre Companies trifle 2013 and post Companies exercise 2013 era. Further there are various income revenue implications which are associated with CSR activities some(prenominal) in pre and post Companies moment 2013. Discussing the same in detail as followsPrior to Companies do work, 2013Prior to Companies do work 2013, the regulations as per Companies form 1956 were applicable wherein there was no mandatory requirement on behalf of the companies to lowtake CSR activities. It was on the comp eithers option to decide whether to accept CSR activities or not. There were m either companies who did to a lower place(a)take CSR activities but not step up of legal compulsion but to enhance their goodwill and set up better wageworks etc. taxation hintThus, as the CSR activities was voluntary for companies there was no separate provision mentioned in this regard in the Income appraise Act, 1961 and various amendments thereon until 2013. any(prenominal) expenditure incurred by companies as part of their CSR programmes was treated in the identical fashion and were guided by the other provisions of the Income tax Act. Thus, such expenditures were get hold ofed as entailment for companies to issue forth at their taxable income as per voices like 35(2AA), 35(AC), 80G etc. Furthermore, such CSR activities colligate expenditure was generally necessitateed as a general conditional relation as per section 37(1) of Income revenue enhancement Act, 1961 rather than under sections 30 to 36 dealing with specific expense related deductive reasonings. This was the treatment for CSR activities and their tax implications.Post Companies Act 2013With the advent of Companies Act, 2013 devising several amendments to the original Companies Act of 1956, there was an important amendment with regard to the Corporate Social Responsibility. With Companies Act, 2013 section 135(1) was introduced which do CSR activities mandatory for companies to be incur under certain application criteria. Thus companies with certain level of derangement or earnings (mentioned further) would be compulsorily required to spend a certain percentage of their wins as CSR activities. Definition for the s ame is also mentioned in the act.ApplicabilityThe section 135(1) as per Companies Act 2013is applicable to all the companies whether they are domestic smart set or foreign keep company, holding or subsidiary company, human beings or private company, if during any of the three preceding financial yearTurnover of the company is super acid cr. or more.profit worth of the company is 500 cr. or more.Net profit of the company is 5 cr. or more.On fulfilling any of the above three mentioned criteria, CSR obligations arise for the company.Quantum of Money to be Spent on CSR ActivitiesAs per the mandate of the Companies Act 2013 u/s 135(1), the company which fulfils the above mentioned criteria is required to spend nominal of 2% of medium Net profit of the company for immediately three preceding financial historic period as CSR activities.Further, such amount should be spent in accordance with the items falling within the regulations of enrolment 7 of the Companies Act, 2013. This li st of activities which are regarded as the broad spectrum of social welfare activities is not considered an exhaustive list. Thus, any expenditure for social welfare as approved by the companys board and CSR committee would be considered as CSR related expense provided it should not be with regards to the demarcation and its operations in any way and should generally focus upon the welfare of the society or masses at large.In lesson the company is not able to spend the required amount and fulfil its CSR obligation, they are required to disclose the same in their Annual reports.Computation of ordinary Net utilityThe computation of Average net profit which brings the lay down for determining the borderline amount to be spent on CSR activities is discussed in the section 198 As per companies Act 2013. This should not include the following any profits or gains of any overseas branch of the company.Any dividends received from any Indian company which is already in compliance with the incision 135 of the Companies Act 2013 i.e. it already complies with the CSR related obligation and thus dividend would have been distributed after complying with CSR obligation.The computation of the Average net profit can be summarised as followsParticulars measuring rodNet profit After taxXXX minimal brain damageAllowed CreditsSubsidies received from any government or public authorityXX profits on sale of any immovable property (original cost WDV)XXless(prenominal)Credits disallowedProfit of great(p) nature like sale of any undertaking or unitXXProfit clear on sale of forfeited sharesXXPremium received on debentures or sharesXXGain on sale of any immovable property (sales consideration original cost)XXSurplus on revaluing asset or financial obligation at fair rank (routed through P/L)XXLessExpenses AllowedDirectors RemunerationXXBonus/ commission salaried to staffXXInterest on debenturesXXUsual working ChargesXXInterest on loans (secured or unsecured)XXTax on channe l profits (for any special reason)XXTax on abnormal profits of the businessXXDepreciation extent to branch123XXInsurance expensesXXBad debts written mangleXXRepairs (other than include in capital expenditures)XXPrior period itemsXXContributions to charitable trustsXXLegal liability for any form of damages or compensationsXXAddExpenses DisallowedIncome taxXX upper- effect letter exit on any sale of undertakingXXExpenses on revaluing asset and liabilities on fair valueXXCompensations damages or any voluntary paymentsXXRESULTING AMOUNT- NET PROFIT FOR CSRXXXAverage of such net profit for immediately preceding three financial years would be the Average Net profit for CSR obligation. 2% of such Average Net Profit amount would be the minimum CSR expenditure to be incurred. Activities not falling under the purview of CSR activities. All expenses cannot be considered as CSR expense. As state earlier, they should be in conformity with the activities mentioned in the list / schedule sept et of the Companies Act. Any natural action undertaken by the company which is in conformity with the normal course of travel rapidly the companys business would not be regarded as CSR activity. The activities which are regarded to be in the normal course of running the companys business arePre-condition of incorporating or running a businessAny contractual obligation on part of the company requiring to undertake such activitiesIf such activity falls under the legal obligation for the company as per any other law ir statutory provision governing the company.Further any activity conducted away(p) the geographical boundary of India or benefiting only the employees of the company or any contribution made to semipolitical parties would not fall under the purview of CSR activities. Discharge of CSR Related ObligationThe companies can carry out their CSR expenses in the following three waysFulfilling the CSR related obligation by making any form of contribution to specified funds as p er the list included in the Schedule seven-spot.By style of any registered NGO, society, trust etc.In other ways as mandated in the Companies (Corporate Social Responsibility) tackles 2014.Penalties with think to Non-ComplianceAny non-compliance on part of the company in fulfilling their CSR obligation would get in penalties as followsFine for the company of not less than 50,000 Rs. which whitethorn deform up to Rs. 25 lakhs.Officers of the company which are convicted of default would attract imprisonment of up to 3 years or Fine of not less than Rs. 50,000 which may extend up to Rs. 5 Lakhs.Both the penalties (for the company and the officers in default) may be attracted as the case may be.Other RegulationsFollowing other attributes and regulations regarding CSR obligation are as followsCSR expenditure can be both in the form of spending or contribution made by the company.CSR expenditure is not regarded as a charity or donation made by the company in any form.Any form of sur plus or any amount unspent arising out of the concerned CSR activity would not be regarded as the business profits for the company.Further no provision for unspent amount to be made. Only disclosure in the board report is required.Any form of excess expenditure incurred beyond the concerned limit of 2 % of average net profit is voluntary and cannot be set off against future CSR obligations of the company.If any grant is received for undertaking any CSR expenditure, the amount spent should be considered net of grantsTax ImplicationsAfter the introduction of mandatory Corporate Social Responsibility (CSR) obligation as per the companies Act 2013, there was an explanation issued as per the pay Act, 2014. It stated that any form of CSR expenditure that is incurred by the company shall NOT be regarded as the expenditure incurred by the company for its business or profession. As a result, deductions with regard to CSR expenditure for reducing the corporate income are not justified and he nce cant be claimed. Thus, on one side it is compulsory to undertake CSR related expenditure as mandated by Companies Act, 2013 darn on the other hand Income Tax Act does disallow such expenditure to be claimed as deductions.General demonstrations under section 37(1)The income tax provisions as per partition 37(1) states that expenditure not falling under the section 30 to 36 of the income tax act would be allowed as general deduction under this section if the following conditions are satisfiedExpense is not in the form of Capital ExpenditureExpense is not a form of Personal ExpenseExpense is not related to any form of offense which is prohibited by any lawSuch expense should needs be undertaken for the conclusion of conducting the business or profession (wholly and exclusively).Thus, as per amendment made in the Finance Act 2014, any form of CSR expenditure which does fall under the provisions of section 30 to 36 and 80G of Income Tax Act, 1956, would be allowed as deduction to be claimed by the company. But any other form of CSR expenditure not falling under the above mentioned provisions cannot be claimed as general deduction under section 37 of the act. As a result, companies as a part of their tax planning measures should undertake CSR activities (as mentioned in schedule seven) which can also be claimed as deductions under section 30 to 36 and 80G of Income Tax Act 1961. This would help the companies to fulfil their CSR obligation requires as per Companies Act and also claim deduction in the Income tax act so that their taxable income can be subvertd. This would serve dual purpose for the companies.Concept of Application of IncomeAs per the Finance ministry and Income Tax governing, any form of Expenditure incurred for CSR activities are in the form of APPLICATION OF INCOME. This means that it is not an expense incurred to earn income rather it is the usage of already earn income towards the welfare of the society as their social responsibility. The Income Tax Act had been developed on the grounds that any form of expenditure which involves Application of Income would not be allowed to claim as a deduction as per the provisions. Thus, any form of CSR expenditure cannot be claimed as a deduction and thus would be disallowed in the hands of the company (for income tax purposes).Contrary to the above view there are certain nation who believe that CSR activities being mandatory for the company should be allowed as a deduction.Further it was argued by experts that Directors lucre is also computed as percentage of net profit which is allowed as a deduction in income tax act and so CSR related expenditure should have been allowed as deduction. It is opposed by income tax authorities on the ground that directors remuneration falls under the normal course of running the business and and then I allowed under section 37(1) as a general deduction which is not the case with CSR expenditure. The foundation of including any expenditure as related to CSR is that it should not fall under the normal course of running the business and thus does not adhere to the provisions of ingredient 37(1).Differential Form of Tax preaching Pre and Post Companies Act, 2013The major form of difference in tax treatment pre and post introduction of Companies Act 2013 is that deduction for CSR expenditure was allowed also as a general deduction under section 37(1) on with deduction claim under sec 30 to 36 or 80G for CSR activities, prior to introduction of companies Act 2013. This changed post introduction of Companies Act 2013 whereby the CSR expenditure could not be claimed as a general deduction under section 37(1) but could be claimed as deduction if it falls under the purview of section 30 to 36 and section 80G of the Income Tax Act.Details of CSR consumption of CompaniesITC LIMITEDNet Average Profit for the furthermost 3 years = Rs. 12338.22 croresCSR Expenditure according to rules = Rs. 246.76 croresActual CSR expending = Rs. 247.50 croresAmount unspent = postal codeActivities conducted in CSR which can be claimed as deduction in Income TaxActivities chthonian Companys Act 2013Deduction under Income Tax Act, 1961Promoting Preventive Healthcare, Sanitation Poverty Alleviation (Schedule VII (i))Section 35AC r.w. design 11k(i)(a),(f),(j) of the 1962 Rules80G(2)(iiihk) documentation enhancement (Schedule VII (ii))Section 35AC r.w. 11K(i)(c),(i),(o),(p),(s) of the 1962 RulesEconomic Empowerment of Women (Schedule VII (iii))Section 35AC r.w. Rule 11K(i)(n),(i) of the 1962 RulesEnsuring Environmental Sustainability (Schedule VII (iv))Section 35AC r.w. Rule 11K(i)(d),(h),(l),(q),(r) of the 1962 Rule 80G(2)(iiihl)Protection of National Heritage, artistry Culture (Schedule VII (v))Section 35AC r.w. Rule 11KRural Development (Schedule VII (x))Section 35AC and Section 35CCATATA MOTORSNet Average Profit for the last 3 years = Loss of Rs. 2034 croresCSR Expenditure according to rules = Not Applicabl e due to lossActual CSR Spending = Rs. 20.57 croresAmount Unspent = ZeroActivities conducted in CSR which can be claimed as deduction in Income TaxActivities Under Companys Act 2013Deduction under Income Tax Act, 1961Promoting Preventive Healthcare, Sanitation Poverty Alleviation (Schedule VII (i))Section 35AC r.w. Rule 11k(i)(a),(f),(j) of the 1962 Rules80G(2)(iiihk)Livelihood Enhancement (Schedule VII (ii))Section 35AC r.w. 11K(i)(c),(i),(o),(p),(s) of the 1962 RulesEconomic Empowerment of Women (Schedule VII (iii))Section 35AC r.w. Rule 11K(i)(n),(i) of the 1962 RulesEnsuring Environmental Sustainability (Schedule VII (iv))Section 35AC r.w. Rule 11K(i)(d),(h),(l),(q),(r) of the 1962 Rule 80G(2)(iiihl)INFOSYSNet Average Profit for the last 3 years = Rs. 12,800 croresCSR Expenditure according to rules = Rs. 256.01 croresActual CSR Spending = Rs. 202.30 croresAmount Unspent = Rs. 53.71 crores (some of the projects undertaken are multi year)Activities conducted in CSR which ca n be claimed as deduction in Income TaxActivities Under Companys Act 2013Deduction under Income Tax Act, 1961Promoting Preventive Healthcare, Sanitation Poverty Alleviation (Schedule VII (i))Section 35AC r.w. Rule 11k(i)(a),(f),(j) of the 1962 Rules80G(2)(iiihk)Livelihood Enhancement (Schedule VII (ii))Section 35AC r.w. 11K(i)(c),(i),(o),(p),(s) of the 1962 RulesEnsuring Environmental Sustainability (Schedule VII (iv))Section 35AC r.w. Rule 11K(i)(d),(h),(l),(q),(r) of the 1962 Rule 80G(2)(iiihl)Protection of National Heritage, Art Culture (Schedule VII (v))Section 35AC r.w. Rule 11KRural Development (Schedule VII (x))Section 35AC and Section 35CCABRITANNIANet Average Profit for the last 3 years = Rs. 523.00 croresCSR Expenditure according to rules = Rs. 10.46 croresActual CSR Spending = Rs. 10.46 croresAmount Unspent = ZeroActivities conducted in CSR which can be claimed as deduction in Income TaxActivities Under Companys Act 2013Deduction under Income Tax Act, 1961Promotin g Preventive Healthcare, Sanitation Poverty Alleviation (Schedule VII (i))Section 35AC r.w. Rule 11k(i)(a),(f),(j) of the 1962 Rules80G(2)(iiihk)Livelihood Enhancement (Schedule VII (ii))Section 35AC r.w. 11K(i)(c),(i),(o),(p),(s) of the 1962 RulesRural Development (Schedule VII (x))Section 35AC and Section 35CCAWIPRONet Average Profit for the last 3 years = Rs. 7800.2 croresCSR Expenditure according to rules = Rs. 159.82 croresActual CSR Spending = Rs. 159.82 croresAmount Unspent = ZeroActivities conducted in CSR which can be claimed as deduction in Income TaxActivities Under Companys Act 2013Deduction under Income Tax Act, 1961Promoting Preventive Healthcare, Sanitation Poverty Alleviation (Schedule VII (i))Section 35AC r.w. Rule 11k(i)(a),(f),(j) of the 1962 Rules80G(2)(iiihk)Livelihood Enhancement (Schedule VII (ii))Section 35AC r.w. 11K(i)(c),(i),(o),(p),(s) of the 1962 RulesEnsuring Environmental Sustainability (Schedule VII (iv))Section 35AC r.w. Rule 11K(i)(d),(h),(l ),(q),(r) of the 1962 Rule 80G(2)(iiihl)Rural Development (Schedule VII (x))Section 35AC and Section 35CCACASE LAWSP. Balakrishnan, Commissioner Of vs Travancore Cochin Chemicals Ltd. on 25 October, 1999In this case law, the assesse had paid an amount to the FACT school and wanted to claim it as a deduction under the welfare expenditure. The AO denied the assessees claim and denied the deduction. The matter then went on the tourist court where the assessee argued that the amount was not a donation but was paid as part of an expenditure to the school, as the children of most of its employees examine there. The assesse wanted to claim the deduction under Section 40A(9) but since, it was for the welfare of business and not in the form of capital expenditure, so it was allowed as a deduction under Section 37(1) and Section 40A(10).ACIT v Jindal Power Limited (IT APPEAL NO. (BLPR) OF 2012) In this case law, the assessee had claimed a certain amount paid for the CSR activity as deduc tion. But the AO, had rejected the claim based on the concomitant that it was not a statutory but a voluntary expenditure and not for the purpose of business. In this case, since it was a case before the amendments were brought up in Section 37(1). The Tribunal allowed the voluntary CSR to be treated as business expenditure. The Tribunal based its decision on that the Explanation 2 of the Act, which states for disallowance only on statutory expenditures. Since, it was not triggered, so it was allowed as a deduction.The Commr Of Income Tax vs M/S Infosys Technologies Ltd on 22 April, 2013In this case law, the assessee had installed a traffic signal near to his office and claimed it under deduction under Section 37(1). The AO denied the claim of the assessee describing that it was not for the purpose of business. It has to be treated as a donation and cannot be claimed as a deduction. But, based on the claims of the assessee that the traffic signal would help its employees as it woul d help them to save time and reduce stress. The Tribunal than granted the company a deduction under Section 37(1).Mysore Kirloskar Ltd. vs Commissioner Of Income-Tax on 8 September, 1986In this case, the assessee had a plant in a remote location and to attract best talents it had built a school for their children and donated it to a trust. The assessee had claimed it as a deduction under Section 37(1) stating that it was for the welfare of the business. The AO rejected the claim stating that it cannot be claimed as an expenditure. In this case the amount was paid to a trust which comes under Section 80G and the assessee can claim deduction under that. And also, only 61% students were the children of the assessees employees and so it can be stated that it was not fully for the welfare of the business.Commissioner Of Income Tax vs Rajasthan Spg. And Wvg. Mills Ltd. on 17 September, 2004In this case, the assessee had given a bus to a school and claimed the expenditure as a deduction un der Section 37(1), considering the fact that most of its employees children study in that school and the bus would benefit them as the school didnt have bountiful buses. The AO rejected the claim of the assessee terming the expenditure as a donation to the school and not for the welfare of the business. The Tribunal however ruled in the favour of assessee based on the several old cases which allowed such deductions under Section 37(1).Synopsis of Case LawsIn the case laws studied above, it has been made clear that prior to the Companies Act, 2013 and the Finance Amendment Bill, 2014, the companies had been claiming any sort of donation under the Section 37(1). The AOs rejected the Companys claims but they were randomly rejected by the Tribunals based on the several old judgements. The new amendment has brought about clarity as to what can be claimed as a deduction under CSR and what not can be.