Can CSR Expenses Claimed for Deduction under Section 80G of Income Tax Act?

Under the Indian Income Tax Act, Corporate Social Responsibility ( CSR ) expenses are generally not allowed as a business deduction. This policy is rooted in Section 37(1) of the Income Tax Act, which disallows CSR expenses as they are not considered expenses incurred wholly and exclusively for the purpose of business or profession.

Read More: All You want to Know about Companies (CSR Policy) Amendment Rules, 2021

Who can avail CSR Deduction?

Corporate Social Responsibility ( CSR ) expenditures can be deducted by companies in India under certain conditions. The concept of CSR in India is governed by Section 135 of the Companies Act, 2013, along with the Companies ( Corporate Social Responsibility Policy ) Rules, 2014.

• Companies Covered Under Section 135: Every company having a net worth of ₹500 crore or more, or A turnover of ₹1,000 crore or more, or A net profit of ₹5 crore or more during the immediately preceding financial year. These companies are required to spend at least 2% of the average net profits of the company made during the three immediately preceding financial years on CSR activities.
• Deductibility of CSR Expenditure: Initially, CSR expenditures were not deductible under the Income Tax Act, 1961. However, with the introduction of Section 80G, certain CSR expenditures can be deducted, provided they meet specific conditions.

Eligible CSR Activities:

Donations to certain funds and charitable institutions are eligible for deduction under Section 80G of the Income Tax Act. This includes donations to the Prime Minister’s National Relief Fund, Swachh Bharat Kosh, Clean Ganga Fund, and other specified funds. Contributions to scientific research or rural development projects may also be eligible for deductions under Sections 35 and 35AC of the Income Tax Act.

Non-Eligible CSR Activities:

Expenditures that are mandatory under the CSR policy but do not fall under the eligible deductions specified in the Income Tax Act are not deductible. This includes general CSR expenditures that do not meet the criteria for deductions under Section 80G or other applicable sections.

Exceptions  in Availing CSR Expenditure

Corporate Social Responsibility ( CSR ) expenditures in India have certain exceptions and exclusions under the Companies Act, 2013, and the Companies ( Corporate Social Responsibility Policy ) Rules, 2014. While CSR is mandatory for eligible companies, not all expenses qualify as CSR activities.

• Expenditures that are part of the company’s regular business activities are not considered CSR activities. For example, expenses incurred on activities that benefit only the company’s employees or their families do not qualify as CSR.
• CSR activities that directly or indirectly benefit the company’s employees or their families are excluded. This ensures that CSR efforts are directed towards broader community welfare rather than employee welfare.
• Contributions made to political parties are not considered CSR expenditures. Such contributions are covered under a different provision of the Companies Act and are not included in CSR activities.
• CSR activities must be conducted within India. Any expenditure on activities outside India is not considered as CSR, except for contributions to training of Indian sports personnel representing any State or Union territory at national or international level.
• Expenditures that are part of the company’s statutory obligations under any law in force in India are not counted as CSR. For example, expenses related to environmental clearances or regulatory compliance do not qualify as CSR.
• Expenses incurred on sponsorships that promote the company’s brand or product are not considered CSR. CSR activities should be philanthropic and not aimed at marketing the company’s business.
• Contributions to political parties or individuals engaged in political activities do not qualify as CSR expenditure.

General Rule of Deduction of CSR Expenses

The general rule regarding the deduction of Corporate Social Responsibility ( CSR ) expenses under the Indian tax regime is governed by the Income Tax Act, 1961, and the Companies Act, 2013.

Income Tax Act, 1961

• Section 37(1): Under this section, any expenditure (not being capital expenditure or personal expenses) laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed as a deduction in computing the income chargeable under the head “Profits and gains of business or profession”.

Read More : CSR Expenditure Deductible u/s 37(1) of Income Tax Act: Delhi HC

Explanation 2 to Section 37(1): Specifically states that any expenditure incurred by an assessee on the activities relating to CSR referred to in Section 135 of the Companies Act, 2013, shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. Consequently, CSR expenditures are not allowed as a general business deduction.

• Section 80G: Donations made to specified funds, charitable institutions, etc., qualify for deduction. If CSR expenditures include donations to these specified entities, they can be claimed as a deduction. Read More: CSR Expenses Allowable as Deduction u/s 80G of Income Tax Act: ITAT

• Section 35: Expenditure on scientific research can be claimed as a deduction. If CSR expenditures are made towards approved scientific research projects or institutions, they can qualify for deductions.

• Section 35AC: (Note: This section was omitted by the Finance Act, 2016, w.e.f. April 1, 2017) Earlier, it provided deductions for expenditures on eligible projects or schemes for social and economic welfare.

Important Documents For Claiming CSR Expenditure

Proper documentation is crucial for CSR ( Corporate Social Responsibility ) expenditures to ensure compliance with legal requirements, to maintain transparency, and to substantiate claims for any potential tax benefits.

• CSR Policy: The company’s CSR policy should clearly outline the objectives, areas of focus, budget allocation, and implementation strategy for CSR activities. This policy must be approved by the Board of Directors.
• Annual CSR Plan: This includes the detailed plan for CSR activities for the financial year, specifying the projects, estimated budget, and timelines.
• Board Resolutions and Minutes of Meetings: Resolutions passed by the Board approving the CSR policy, annual plan, and specific CSR projects. Detailed minutes of Board and CSR Committee meetings where CSR activities are discussed, approved, and monitored.
• Project Proposals: Detailed proposals for each CSR project, including objectives, beneficiaries, implementation strategies, timelines, and budgets.
• Expense Vouchers and Bills: Invoices, receipts, and bills for all expenses incurred on CSR activities.
• Bank Statements: Bank statements showing transactions related to CSR expenditures.
• Payment Records: Proof of payments made to vendors, implementing agencies, and other partners.
• Annual Report Disclosures: Detailed disclosure of CSR activities in the company’s annual report, as required under Section 135 of the Companies Act, 2013. This includes the composition of the CSR Committee, the CSR policy, details of projects, and the amount spent.
• Form CSR-1: Registration form for entities undertaking CSR activities on behalf of companies, filed with the Ministry of Corporate Affairs (MCA).
• Impact Assessment Reports: For companies with an average CSR obligation of ₹10 crore or more in the three immediately preceding financial years, impact assessment reports for CSR projects must be conducted and documented.

Specific Allowance under CSR Expenditure

• Eligible Donations Under Section 80G of the Income Tax Act, 1961:Contributions to certain approved funds, charitable institutions, and trusts can qualify for deductions under Section 80G of the Income Tax Act, 1961. These donations must be made to entities specified under Section 80G, and appropriate receipts and documentation must be maintained to claim the deduction.

Read More: COVID-19: MCA issues Office Memorandum to clarify contribution to PM-CARES Funds as eligible CSR activity

• Expenditure on Scientific Research Under Section 35: Contributions or donations to approved scientific research associations, universities, colleges, or other institutions for scientific research can be claimed as deductions under Section 35 of the Income Tax Act. This includes, Donation to approved scientific research associations, universities, or other institutions for scientific research, Donation to approved universities or institutions for research in social sciences or statistical research.
• Skill Development Projects Under Section 35CCD: Expenditures on skill development projects notified by the Central Government in the Official Gazette can be claimed as a deduction under Section 35CCD. Companies involved in these projects should ensure they meet the criteria set by the government and maintain proper documentation.
• Promoting Sports and Games: Contributions to organizations involved in the promotion of sports and games, including rural and Olympic sports, can qualify for deductions under Section 80G. Companies can support activities and events that promote sports and maintain records to substantiate their claims.

To claim these specific allowances for CSR expenditures, companies must adhere to the following Compliance with Schedule VII of the Companies Act, 2013. CSR activities must align with the activities listed in Schedule VII, which include areas such as education, healthcare, poverty eradication, gender equality, environmental sustainability, and more.

Case Laws

CSR Expenditure shall be allowed as Business Expenditure: ITAT : The Income Tax Appellate Tribunal ( ITAT ), Bangalore bench has held that the expenditure allowed for corporate social responsibility ( CSR ) of the assessee shall be allowed as business expenditure under section 37(1) of the Income Tax Act, 1961. The AO raised the issue of CSR expenditure of Rs.3,20,79,967 and disallowed the same by holding that it cannot be treated as business expenditure. The bench further relied on the decision of High Court of Karnataka in the case of CIT v. Infosys Technologies Ltd., wherein it was held that, where assessee incurred expenditure on installation of traffic signals at various parts of city in order to secure free movement of its employees so that they reached office in time, amount so spent being a part of its corporate responsibility, was to be allowed as business expenditure as under section 37(1).

Deduction u/s 80G of Income Tax Act Allowable on CSR Expenditure: ITAT

The Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ) has held that the deduction under Section 80G of the Income Tax Act, 1961 is allowable on the expenditure in respect of corporate social responsibility ( CSR ). The tribunal held that the assessee is entitled to the deduction claimed under S. 80G of the Act towards the CSR expenditure incurred by it.

The two-member bench of Kavitha Rajagopal (Judicial Member) and Om Prakash Kant (Accountant Member) has observed that the amendment brought about by the Finance Act, 2015, to Section 80G of the Act, which inserted the subclauses (iiihk) and (iiihl) to be the exception for qualifying a donation for claiming under Section 80G of the Income Tax Act, could also be an evidencing factor to substantiate that CSR expenditures that fall under the nature specified in Sections 30 to 36 of the Income Tax Act are allowable deductions under Section 80G.

ITAT allows CSR Expenditure on Community Development, and Environment, Health and Safety Expenses

The Mumbai Bench of the Income Tax Appellate Tribunal ( ITAT ), allowed Corporate Social Responsibility ( CSR ) Expenditure on community development, and environment, health and safety expenses.

Conclusion

CSR expenditures are generally not deductible under the broad provision of Section 37(1) of the Income Tax Act, specific allowances under Sections 80G, 35, and 35CCD provide opportunities for deductions if the expenditures meet the prescribed criteria. Companies must ensure compliance with the relevant provisions, maintain proper documentation, and disclose their CSR activities transparently to claim these specific allowances. Proper documentation of CSR expenditures is essential for compliance, transparency, and accountability.

While CSR expenditures are mandatory for certain companies, not all CSR expenses are deductible. Only specific contributions to eligible funds and institutions qualify for deductions under the Income Tax Act, and companies must comply with the relevant provisions to avail of these deductions.

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