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CSR Expenses which are allowed to be claimed as a Deduction

CSR Expenses which are allowed to be claimed as a Deduction

The Ministry of Corporate Affairs, Government of India has notified a list of sections which will be applicable W.e.f 1-04-2014 i.e. for the F.Y. 2014-15. This list contains total of 464 sections and corresponding rules. However, the most pressing issue is the Corporate Social Responsibility (hereinafter referred to as CSR) which is causing a great deal of concern for the management.

CSR contains a range of activities from eradicating poverty and hunger to environmental sustainability and include projects related to social businesses.(Details regarding activities can be taken up under CSR is provided in Schedule VII of The Companies Act, 2013)

Recently enacted Finance Act, 2014 has made it very clear that the expenditure by company on CSR activities under section 135 of The Companies Act, 2013 (hereinafter referred as The Act) would not be eligible for deduction under section 37 of The Income Tax Act, 1961. This has further enhanced the burden on the companies which were expecting to get benefit of at least 30 percent of the CSR expenses by way of claiming it as business expense under section 37 of the I.T. Act, 1961.

There is a popular saying that every problem contains opportunity in itself and this complexity of CSR liability also gives us professionals an ample scope of work, if we realised it in time. We first need to understand the different ways which are available for the companies to get the tax benefits of the CSR expenses and this article contains all of them in the easiest possible way to comprehend.

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CSR & Companies Act, 2013

First of all, let us refresh our memory with the provisions of CSR under section 135 of The Act. Section 135 has provided that any company (public or private limited) falling under any of the following eligibility criteria during any financial year (the financial year under consideration i.e. for which we are computing tax liability for the company) would have to spend specified amount on CSR activities:

  • Having Net worth of Rs. 500 cr. or more; or
  • Having turnover of Rs. 1000 cr. or more; or
  • Net profits of Rs. 5 cr. or more.

According to the provisions of the section 135 of The Act, the eligible company has to spend minimum 2 percent of its average net profits of preceding three years on CSR activities.

Now let us understand this with an example. Suppose that X Ltd. has profits of Rs. 5 crore during the previous year 2014-15 and the average net profits of last three years preceding the previous year ( i.e. years 2011-12,2012-13,2013-14) is also Rs. 5 crore. Now, as per the provisions the minimum amount to be expanded by the X. Ltd. would be Rs. 10 lacs.

Now we will examine the various alternatives available to X. Ltd for getting deduction under the I.T. Act, 1961.

Alternative- 1 (Section 80G)

The Assessee company can make contribution to various national funds (such as Prime Minister National Relief Fund, Chief Minister’s relief Fund or any other fund set up by Central or State Government for Socio-economic development etc.) under section 80G which gives deduction of 100 percent of the contribution without any maximum limit.

Here, let us suppose that X Ltd. pays Rs. 10 lacs in the Prime Minister National Relief fund and get deduction of Rs. 10 lacs u/s 80G. Now, the corresponding tax benefit, in this case, would be Rs. 3 Lacs (30% of Rs.10 lacs).

Alternative – 2 (Section 35AC)

X Ltd. may take benefit of section 35AC of the I.T.Act, 1961 which provides for:

  • Either to make payment to a public sector company (ex:- Coal India Ltd., NTPC..etc.) or a local authority or an institution or association( usually trusts or societies) for carrying out eligible project or scheme; OR
  • Company (here X Ltd.) itself spend the sum on the eligible project or scheme.

Option-1: If the company decides to make payment to any company /institution /association referred in point no. a, then this payment would be eligible for deduction u/s 35AC and the corresponding tax benefit would be Rs. 3 lacs (30% of Rs. 10 lacs) to the Assessee.

Option-2: If the company has decided to spend the amount by itself, it has to do the following things:

  • Draft a scheme which is eligible u/s 35AC; and
  • Get the approval for the scheme by the Secretary to the National Committee for Promotion of Social and Economic Welfare, Department of Revenue, Government of India

(Detailed provisions and procedure regarding above scheme or project are contained under rule no. 11L to 11 OA of the Income Tax rules,1962.)

The whole expenditure of Rs. 10 lacs would be allowed in both of the above options and likewise X Ltd. would get tax benefit of Rs. 3 Lacs. (Here is an opportunity for practicing Chartered Accountants to Draft a good scheme for his Assessee and get it approved from the proper authority)

Alternative – 3 (Section 35CCA)

Make payment of Rs. 10 lacs to:

  • Associations or institutions(must be approved before 01-03-1983) for carrying out programme of rural development
  • National Fund for rural development (though it is being provided under the Act, but this has been wound up by the Govt. of India in the year 2010 itself, so practically this alternative is not available now for investment.)

Payment to any of the above mentioned institutions would be eligible for deduction u/s 35CCA of the I.T. Act, 1961 and the corresponding tax benefits in this case would be Rs. 3 Lacs

Alternative – 4 (gives maximum benefit) (Section 35CCC; 35CCD)

Make payment of Rs. 10 lacs towards either:

  • Notified agriculture extension project u/s 35CCC; or
  • Notified Skill development project u/s 35CCD (other than for buying land or building), this option however, is available to only eligible companies which are engaged in production /manufacturing of specified products or engaged in providing specified services only. (details regarding this can be found in notification No. 54/2013, dated 15-July, 2013 on the website of Income Tax Department)

Here the company would be eligible for weighted deduction of Rs. 15 lacs (150% of the sum expended) and the resultant tax benefits would be amounted to Rs. 4.5 lacs.

It is to be noted here that for getting deduction under the abovementioned sections the Assessee has to get approval for the projects from the concerned authorities. The details regarding the forms of approval and eligibility are provided under rule 6AAD and 6AAE (for 35CCC) and under rule 6AAF and 6AAG (for 35CCD) of the Income Tax Rules, 1962.

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