In this blog post, Pramit Bhattacharya, student, Damodaram Sanivayya National Law University, writes about the concept of Corporate Social Responsibility. The article looks into the CSR Rules and Section 135 of the Companies Act, 2013, which obligates CSR for Corporates in case they fulfill certain conditions. The post also highlights the advantage of following CSR obligation for the companies.

Corporate Social Responsibility rests on the theory that since corporates are using the valuable resources provided by the Society for its operations, the corporates should act as trustees towards the society and ensure the welfare of the society. Companies must understand that their business operations affect not only the shareholders but other parties also. This theory is known as the stakeholder’s interest theory.

In the Indian context, there is no fixed definition of the term CSR, but to understand the meaning of it in simple words, one might go through the definition which has been given by the European Commission. The definition states that “CSR is the responsibility of the enterprises for their impact on the society…Enterprises should have in place a system to integrate ethical, social, environmental and consumer concerns in their business and core strategy, in close collaboration with their stakeholders.[1]

CSR cannot be considered as an alternative to legislation towards protection of the environment and the society, but it is supplementary to the legislations. It has been proved that CSR helps the enterprises in the long run. Investing into technology which is environment-friendly reduces the cost of operation for the company. Also promoting basic obligations in the social area like better-working conditions, training of the working personnel, better management of the relationship with the customers have a positive effect on the productivity of the company.

 

 

CSR under the Companies Act, 2013

CSR has been a point of debate for a long time between the corporate sector. CSR is widely regarded as the responsibility of an enterprise towards its proximate society. Before the Companies Act, 2013 was introduced, there were two views regarding CSR, that whether the expenditure on CSR should be mandatory or voluntary. However, after the introduction of the Companies Act, 2013, these questions were put to rest as the Act laid down specific provisions with relation to the Corporate Social Responsibilities of the enterprise towards the society.

Schedule VII to the 2013 Act, as well as Section 135 of the Companies Act, 2013 operate, govern and decide the CSR initiative for the corporate houses.

The Ministry of Corporate Affairs laid down the following guiding principles concerning CSR in the Preamble to the CSR rules: [2]

• CSR is not any donation or charity.
• CSR is a way of carrying business operations, by which enterprises contributes towards the good of the society.
• CSR is a process through which an organization develops its relationship with the stakeholders, in such a way that it is for the common good of everybody.
• CSR should be used to integrate the business operations and goals with social, environmental and economic objectives.

CSR under Section 135 of the Companies Act, 2013

The applicability of mandatory CSR is restricted to the following companies by way of Section 135,[3] Companies Act, 2013 –

• Any company which is having a net worth of Rs 500 crore of more in a financial year;
• Any company which is having a turnover of Rs 1, 000 crores or more in a financial year;
• Any company having a net profit of Rs 5 crore or more during a financial year.

If all or any of the following condition is satisfied by a company, then the CSR provisions will apply to such companies mandatorily. The CSR provisions apply to a company on year to year basis. However, the rules given under Section 135 is relaxed if a company does not fulfill any of the above-stated conditions for the period of three consecutive financial years.  The conditions under Section 135 will start applying again when the company subsequently fulfills any of the stayed stipulation.[4]

Under these provisions, the Board of Directors has to ensure that at least two percent (2%) of the average net profit of the enterprise (average of profit during the previous three financial years) is being spent towards CSR as per the plan which has been adopted by the company.

Scope of CSR under the CSR Rules

1. CSR activities do not include those activities which are undertaken in the normal course of business.[5]
2. CSR activities should be undertaken by the company in the area which it operates or the local area which is in proximity to the company.
3. CSR projects or programs undertaken by the enterprise should include activities as mentioned in Schedule VII to the 2013 Act.[6]
4. Only those activities which do not exclusively for the benefit of the company or its employees will be considered as CSR activities.
5. The company can undertake CSR activities themselves or any registered body or society which has been established under Section 8 of the Companies Act, 2013, or through its holding or subsidiary company or otherwise subject to compliance of conditions mentioned therein and a cap of maximum 5 % of total CSR expenditure of the company in a financial year.[7]
6. An enterprise can also undertake CSR activities in collaboration with other enterprises.
7. Any surplus which arises out of CSR activities wouldn’t be considered as profits from business operations.[8]

CSR Expenditure and the Income Tax Act, 1961

Before the introduction of Sec 135 of the Companies Act, 2013 and the CSR Rules, the expenditures made for carrying out CSR Activities were considered to be business expenditures under Section 37 (1) of the Income Tax Act, 1961.[9] Section 37 (1) states that any expenditure which does not qualify as revenue expenditure under Section 30-36, or is a capital expenditure or personal expenses of the assessee, if used wholly and exclusively for the purpose of business activities will be considered as business expenditure and shall be deducted from the total income, and can be used to claim an exemption.

Point of Conflict Regarding CSR Expenditure

A point of conflict arises when CSR Expenditures are to be categorized. Expenditure in various forms has been allowed under the CSR. For example, these are a few kinds of expenditure allowed under the CSR-

1. Any Grant provided by the Company to a Society or a Trust.
2. Direct Expenditures on Charity (including expenditure in the local area).
3. Transfer to other enterprises for pooling of expenditures to carry out CSR activities.
4. Donation to any Government Recognized funds where tax exemption to the full extent is available.

The point to be considered here is that donation, grants, etc. are voluntary activities, and they can’t be charged as expenditures against the income earned. But the CSR Rules allow this kind of grants, and donations as expenditure. Also, interpretation of Sec 135 of the Companies Act, 2013 makes it kind of mandatory to spend money on CSR activities. Hence, these grants, donations, etc. can’t be termed as voluntary.

There are also some activities which result in the creation of new capital assets for the enterprise like the construction of a hospital, school, etc. The question here arises what kind of expenditures these will be?

• CSR in India has been considered as a benevolent and humanitarian activity. As a result, although, CSR activities have been carried out, they’ve never been deliberated much. In India, the CSR activities are still within the range of philanthropic activities (where building social institutions were prefer) like constructing hospitals and schools. But slowly, the activities are moving towards community development programs also.
• Due to trans-boundary business and globalization, CSR Activities are also going through a change. The community has become more demanding and active. While CSR is still largely restricted to the development of the community, it is becoming more and more strategic and is getting linked with the business.
• The idea of CSR has been introduced to the forefront with the introduction of the Companies Act, 2013. Giving a deeper thought to the concept of CSR, one should realize that CSR should go beyond the concept of community service and philanthropy only. Corporates are not doing a favor to the society by engaging in CSR Activities. It is their responsibility towards the society.

 

Benefits of engaging into productive CSR Activities[10]

• Society gives the License to Operate: Apart from internal factors like value and ethics, some other factors like the investors, government, and the customers also plays a large role in influencing corporate behavior. In recent times, the society or the community is also seen as a stakeholder. Many companies now accept the fact that the license to carry out business operations is not given legally only but is also given socially by the community. Engaging in strong CSR activities will meet the aspirations of the society and will provide the companies with a license to operate “socially.” 
• Communities as Suppliers: Many companies have started engaging in such CSR activities; wherein the companies are increasing the livelihood in the community by making them a part of the supply chain. This has benefited the community by increasing their income. This benefits the companies in the long run as they secure additional supply chains.
• Attracting and Retaining Employees: A company’s ability to draw out and retain employees also depends on their CSR Commitments. These commitments encourage the employees. They also increase the morale of the company and their sense of belonging to the company. They want to be associated with a company which is socially accepted.
• Enhances the Reputation of the Enterprise: Companies who engage in CSR activities, reap the traditional benefits of generating goodwill for themselves and creating a positive image in the eyes of the community. This allows the enterprise to present itself as a responsible body corporate.

 

Building a society which is accessible to all, and which negates disparities among people is a collective responsibility, and the corporate houses, enterprises, and companies should play their part in it as socially responsible entities.

 

 

 

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Footnotes:

[1]EC, Green Paper, Promoting a European Framework for Corporate Social Responsibility, COM (2001) 366 (18/07/2001), para 20, available at http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52001DC0366&from=EN

[2]Available at http://www.cuts-international.org/pdf/Draft-CSR_Rules_2013.pdf

[3]http://www.mca.gov.in/SearchableActs/Section135.htm

[4]Rule 3 (2), The Companies (Corporate Social Responsibility Policy) Rules, 2014 (“CSR Rules”).

[5]Rule 2 (e), The Companies (Corporate Social Responsibility Policy) Rules, 2014 (“CSR Rules”).

[6]http://www.mca.gov.in/Ministry/pdf/CompaniesActNotification3_2014.pdf

[7]rules 4 (2) and 4 (6), The Companies (Corporate Social Responsibility Policy) Rules, 2014 (“CSR Rules”).

[8] Rule 6 (2) , The Companies (Corporate Social Responsibility Policy) Rules, 2014 (“CSR Rules”).

[9]http://www.gnlu.ac.in/centredoc/gcbit/Income-Tax-Act-1961.pdf, 1.246

[10]https://www.pwc.in/assets/pdfs/publications/2013/handbook-on-corporate-social-responsibility-in-india.pdf