Learning Series on CSR LAW
in India (2nd Issue)
Some Confusing & Debatable CSR Issues
1.1.1 The law relating to CSR in India is provided in Section 135 of the Companies Act, 2013 read with Schedule VII of the Act and The Companies (Corporate Social Responsibility Policy) Rules, 2014. The CSR laws are new and still evolving, therefore, there are many areas which lack clarity. In this issue some of the confusing and debatable issues have been discussed.
Independence of CSR Committee
& NPOs Promoted by Company
1.2.1 Under Rule 4(2) a Company can implement CSR activity through Trust or Society promoted by it. A Company can promote a Trust and immediately start working through such Trust. It may be noted that if a Company works through other Trust or Society (which are not promoted by the Company) then such Trust or Society should have at least 3 years existence and experience.
1.2.2 A Trust or Society promoted by the Company can be controlled by the Company. There is no requirement of having Independent management or Directors in such Trust or Society promoted by the Company, i.e. the Director or his relatives can be the Trustees in such Trusts or be a part of the Governing Bodiy of the Society. The formation of such Trust and Society promoted by the Company and other allied issues shall be dealt separately in future issues.
1.2.3 However, Section 135(1) requires that a CSR Committee should be formed. There should be at least one Independent Director in such CSR Committee. More importantly the CSR law does not address the independence of the NPO or Trust to be promoted by the Company, which is more important. In fact in the CSR committee also there is no scope of having external independent persons, only the independent director from the board of the company is required to be included.
1.2.4 It may further be noted that contribution towards corpus to a Trust or Society promoted by the Company is also permissible as CSR expenditure. Currently a Company can create a closely held Trust and transfer funds including corpus which is not required to be utilised immediately.
Illustration: Alpha Beta Ltd. promoted Alpha Beta Foundation, a Trust, to implement its CSR activity. Mr. A the Director of Aplpha Beta is the Trustee of this Trust. The other two Trustees are Wife and Son of Mr. A. The Company has transferred Rs.2 Crore towards the corpus of Alpha Beta Foundation as its CSR commitment. This is a permissible arrangement.
CSR Expenditure Whether Charge
Against Income or Appropriation
1.3.1 Whether CSR is a charge to the income or appropriation of income is an issue having different interpretation, particularly after the amendment to Section 37 of the Income Tax Act by Finance Act, 2015, where it was clarif ied that CSR expenditure will not be treated as a charge against income and shall not be allowed as expenditure under section 37.
1.3.2 Further, as per Companies Act, 2013 the expenditure on CSR is a charge against income as a separate line item. Part II of Schedule III requires a company to disclose by way of note additional information on CSR activities like –
• Gross amount required to be spent by the company during the year
• Amount spent during the year
The Guidance Note on Accounting for Expenditure on CSR Activities also confirms the above position.
1.3.3 As cited above, under Income Tax Act for the purpose of claiming expenditure of CSR u/s. 37 of the Income Tax Act, it is clarified that CSR expenses for the purpose of Section 37 is not a charged against income but it is mainly an application of income and therefore, CSR expenses are not allowed as deduction while computing the prof it & loss from Income from Business & Profession’. On the contrary there are other sections under the Income Tax Act such as Section 35 or 35AC which allow CSR expenditure as a expenditure.
1.3.4 If the CSR expenditure considered as a charge against income then it raises another confusion; whether the ‘average income’ for CSR should be determined before or after charging such expenditure. Such issues and the tax implications thereof, shall be taken up in forthcoming issues.
The Fundamental Difference
Between Section 181 and 135
1.4.1 Section 181 of the Companies Act, 2014 allows all the Companies to make voluntary contribution to bonaf ide charitable funds upto 5% of prof it even without the approval of the general body. In other words there is an overlap in the provisions of the Companies Act, 2013 with regard to voluntary contribution for charitable purposes. The fundamental difference between Section 181 and 135 has not been addressed and therefore, there is lack of clarity as far as Income Tax on CSR is concerned. It is not clear whether a contribution for charitable purposes will be permissible under Section 181 or 135 or both.
1.4.2 Ideally all application under Section 135 should have been treated as charge against the income. And all contribution under Section 181 should be treated as voluntary contribution which are appropriation of income.
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Tags :Corporate Law