Introduction
Today, the corporate world is not only working with the objective of earning profits but, are also working for the benefit of society. The objective of serving society has been now a day a strategy for the corporates and this strategy is known as "Corporate Social Responsibility" (hereinafter referred to as 'CSR'). For Example, ITC Group started e-choupal program for the benefit of four million farmers by providing them social and farm forestry programs. Section 135 of The Companies Act, 2013 along with Companies (Corporate Social Responsibility) Rules, 2014, are the provisions that need to be fulfilled by the companies.
Analysis of Significant Shift in CSR Provisions
Before 22nd January 2021, Section 135 of The Companies Act, 2013 followed the rule of "Comply or Explain". The companies under Section 135(5) of The Companies Act, 2013 were required to spend on average 2% of their net profit towards the CSR. The "Comply or explain" policy means that if, the corporate doesn't comply with the provisions of CSR they can abscond by giving reasonable explanation beyond a reasonable doubt. But, as per the latest amendments of 2021 in CSR rules, there has been a shift from "comply or explain" to "comply" policy. In the latest amendment as per section 135(7) of The Companies Act, 2013, if any corporate doesn't comply with the provisions of CSR, they will be charged with complex monetary penalties. The new amendment has also made it compulsory to make disclosure of CSR Committee, policy, and plans on the official website of the company.
The new amendment has also brought the provisions of the "Unspent CSR Account" under Section 135(6) of The Companies Act, 2013. As per the provision, the remaining balance from the collected CSR funds for the ongoing CSR project in the current financial year should be transferred to the "Unspent CSR Account". Further, this account can't be maintained by the partners. The motive behind the amendment may be to keep an eye on the expenditure done by the partners in the pursuance of the CSR. The unspent amount shall be transferred to Schedule VII with six months of the closing of the financial year. But, these provisions affect the company, as the company has to ask partners to return the unspent money. For the company, collecting unspent money is a difficult task.
In the company, the burden of CSR is on the shoulders of the partners of the company. The partners mat further delegate the task to sub-associates or sub-partners which may be further delegated to lower levels. As per Rule 4(5), the Chief Financial officer of the company must approve the expenditure for the particular CSR activity. It is the due diligence of the CFO, to keep an eye on and give approval for the CSR activities. But, due to delegation in the company, it may become difficult for the CFO to ensure the proper utilization of the funds.
Also, through amendment in item 7 of a Schedule 7 of The Companies Act, 2013, the expenditure in relation to the pandemic of COVID-19 has been notified. This amendment is also part of the change in the definition of CSR. As per the amendment if any of the corporate contributes to the central government funds for the social and economic cause, then it is part of corporate social responsibility. The expenditure did for coronavirus awareness, vaccination campaigns, promoting education, health care, and sanitization, etc. such activities are also being notified as part of CSR by corporates. Also, the contribution of corporates to undertake medical research and development for devices and medicines used for fighting coronavirus are also considered part of CSR. For instance, ACC cement has donated to NGOs a total of Rs. 3.3 crores amid Covid-19, Personal protective Equipment's and N-95 masks worth Rs. 46 crores were donated by Walmart and Flipkart.
Tax Implications
The Expenditure done by the corporates in pursuance of CSR is not considered as tax-deductible as provided under section 37(1) of The Income Tax Act. The second explanation to the provision claiming the same was inserted by the Finance Act, 2014. In the year 2015, the central board of direct taxes also clarified that expenditure done for serving the society can't be part of expenditure done for the ongoing business. It meant that the expenditure not done for the pursuance of the business, can't be allowed as deduction. But, the deduction of expenditure on CSR can be allowed if the activity done falls within the ambit of Section 30-36 of the Income-tax Act. Few Activities which qualify as corporate social responsibility and are allowed as deduction are agriculture extension projects under Section 35CCC and donations to the national children fund under Section 80G. But, since after the recent amendment of 2021, CSR has been mandatory for every corporate. So, the MCA in consultation with income tax authorities should allow a certain amount of deductions from the expenditure done for the CSR.
Conclusion
From the introduction of CSR in 2013 till 2021, there have been significant changes in the CSR policy brought by the Ministry of Corporate Affairs. Regardless of a public or private company but, subject to certain conditions every company has to be engaged in CSR compulsory. No, the explanation aiding in absconding from the CSR has been removed by including the provision for a monetary penalty. The authorities are day by day becoming more stringent with the implementation of CSR in the corporate world. Not only the government authorities but also the corporate themselves are working with due diligence for CSR.
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