Analysis of Corporate Social Responsibility under Companies Act

Ruchi Goel and Divya Gupta ((Students of Law, Campus Law Centre, Faculty of Law, University of Delhi)).


Corporate Social Responsibility has become a business agenda these days. Companies not only look at CSR from the traditional perspective of reputation or brand value but also as an opportunity to provide sustainability in environment, economic and social value to the stakeholders. It helps to create a positive impact on business. In this paper, authors try to analyse the status of CSR in India, starting from its evolution to the current status. They also seek to study why companies should initiate CSR activities with focus on its legal impact under the Companies Act 2013. CSR has now been accorded a statutory status under section 135 of the Companies Act 2013. Therefore, there has been greater responsibility on companies to set out clear framework and processes to ensure strict compliance. However, there are certain areas such as taxation issues, their impact on SMEs amongst others which need to be discussed.


In a developing economy like India, Corporate Social Responsibility (CSR) plays an important role. The concept of CSR has evolved, ranging from philanthropy to a more comprehensive concept that now inculcate within its ambit the environment, employee relations, corporate governance and society at large. The concept got popular in India in 20th century and business houses realized that they need to plough back certain percentage of their profits due to pressure built by stakeholders. Realization dawned upon the companies that they owe responsibility to society and environment.

An ideal CSR has both ethical and philosophical dimensions, particularly in India where there exists a wide gap between sections of people in terms of income and standards as well as socio-economic status ((Bajpai, G.N. , Corporate Social Responsibility in India and Europe: Cross Cultural Perspective, 2001)).

It may appear easy to define CSR but there is no single universally accepted definition of CSR. The concept has evolved over the years and therefore it has been defined in myriad number of ways:

A widely cited definition of CSR has been given by the European Union (EU). It describes CSR as “the concept that an enterprise is accountable for its impact on all relevant stakeholders. It is the continuing commitment by business to behave fairly and responsibly, and contribute to economic development while improving the quality of life of the work force and their families as well as of the local community and society at large ((A renewed EU strategy 2011-14 for Corporate Social Responsibility,”European Commission press release, (October 2011)…”

The World Business Council for Sustainable Development (WBCSD) defines CSR as “the continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families as well as of the community and society at large ((WBCSD’S CSR definition,”

According to the United Nation Industrial Development Organization (UNIDO), “Corporate social responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives (Triple-Bottom-Line Approach), while at the same time addressing the expectations of shareholders and stakeholders. In this sense it is important to draw a distinction between CSR, which can be a strategic business management concept, and charity, sponsorships or philanthropy. Even though the latter can also make a valuable contribution to poverty reduction, will directly enhance the reputation of a company and strengthen its brand, the concept of CSR clearly goes beyond that ((UNIDO’S CSR Definition,”

CSR is a win -win situation whereby contributing towards sustainable development, companies can address their stakeholder expectations and meet their objectives at the same time.

Evolution in India

India has a long tradition of philanthropy. In the Pre- industrialized period philanthropy, religion and charity were the key principles of CSR, where industrial families established temples, schools, hospitals and other infrastructure of public utilities with the sole aim of social consideration. In the post industrialization period companies became conscious of the fact that they need to pay heed to societal and environmental concerns in addition to profit maximization. Therefore, the Indian companies have started focusing on areas such as public health, education, livelihood, water conservation and natural resource management.

Clearly, evolution of CSR in India has followed a chronological evolution of 4 thinking approaches:

  • Ethical Model (1930 –1950): This model focused on the promotion of “trusteeship”. Under this notion the businesses were motivated to manage their business entity as a trust held in the interest of the community. The efforts of Tata group directed towards the well being of the society are also worth mentioning in this model.
  • Statist Model (1950 –1970s): This post independence era model was driven by a mixed and socialist kind of economy. The important feature of this model was that the state ownership and legal requirements decided the corporate responsibilities.
  • Liberal Model (1970s –1990s): As per this model, corporate responsibility is confined to its economic bottom line. This implies that it is sufficient for business to obey the law and generate wealth, which through taxation and private charitable choices can be directed to social ends.
  • Stakeholder Model (1990s – Present): The model came into existence during 1990s as a consequence of realization that with growing economic profits, businesses also have certain societal roles to fulfill. Priority of business got widened from 1 P to 3Ps by inclusion of people and planet in profit, also popularly known as “Triple Bottom Line.” Today, businesses focus on accountability and transparency through several mechanisms ((Corporate Social Responsibility – Towards a Sustainable future,

Therefore, CSR comprises philanthropic, corporate ethical, environmental and legal as well as economic responsibility.

Why Companies should embrace CSR?

CSR has helped companies to grow socially, economically and financially. The concept which was once based on charity approach is now willingly adopted by companies for their own good as well as to win over consumers by giving back to the society.

Enhances brand image & reputation: CSR enables the firms to take on the triple bottom line approach considering environment, society as well as the economic aspect of the business. These actions by firms can create positive impact on the thinking of its consumers which helps in creating a positive picture of the company and improves its brand image and reputation.

Increases sales and customer’s loyalty: It is being observed that people nowadays prefer to buy products based on criteria, such as “eco friendly”, “child labor-free”, “renewable packaging”, “primary education “and others.

Increased ability to attract and retain employees: By working in a company which is involved in CSR activities, employees get a sense of fulfillment as they are able to contribute back to the society. This results in increase in contentment among them leading to higher retention level. On the whole, it affects training costs and turnover of the company.

Stance in India

CSR under Companies Act 1956:

There was no provision for corporate social responsibility in the Companies Act 1956. However, companies used to make contribution towards charitable and other funds under section 293(1)(e) of the said act. These were not to be directly related to the business of the company or for the welfare of its employee. It provided that contribution can be made by a public company or a private company, being a subsidiary of a public company , for an aggregate amount up to Rs 50,000 or five per cent of its average net profit determined under sections 349 and 350 of said Act during the three financial years immediately preceding – whichever is greater. Consent of shareholders in general meeting was required for the contribution exceeding the limit. However, private companies which were not subsidiary of public company were free to contribute as per their own will.

Statutory Introduction:

The new Companies Act, 2013 introduces the provision of CSR under section 135.The Ministry of Corporate Affairs (MCA) has vide its notification dated 27 February 2014, notified 1 April 2014 as the date on which the provisions of section 135 and Schedule VII of the Act shall come into force.

ELIGIBILITY: The section states that every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute Corporate Social Responsibility Committee.

CSR COMMITTEE: The Section states that committee is to consist of three or more directors, out of which at least one director shall be an independent director. However, the CSR Rules have relaxed the requirement regarding the presence of three or more directors on the CSR Committee of the Board. A private company or unlisted public company, which is otherwise not required to have an independent director, is exempted from the requirement of having an independent director on their CSR committee. It also provides that where a private company has only two directors on the Board, the CSR Committee can be constituted with these two directors. The CSR Committee of a foreign company shall comprise of at least two persons wherein one or more persons should be resident of India and the other person nominated by the foreign company.

DUTY OF THE COMMITTEE: This committee is required to formulate CSR policy which shall refer the activities to be undertaken by the company as specified under schedule VII. It shall recommend the policy and amount of expenditure to be incurred on the same. The Board after taking into account the recommendations of the committee must approve the CSR policy and disclose the same in director’s report. Further, they are bound to display it on the website.

MANDATORY SPEND ON CSR: The Board of every company has been given responsibility to ensure that at least 2% of the average net profits of the company made during immediately preceding three financial years are spent to discharge their corporate social responsibility. Rule 2(e) of CSR rules provides that “Net profit” means net profit as per the financial statements of the Company and excludes profits generated outside India through overseas branches or subsidiaries and any dividend received from other companies in India that are complying with the CSR provisions.

The Government of India has also focused on persuading companies to participate in addressing social and developmental issues, not only as part of their social responsibility but also their business practices. Setting an example for the private sector, guidelines regarding expenditure on CSR activities for Central Public Sector enterprise (CPSE) were issued by Department of Public Enterprise which came into effect on 1st April 2013. It is provided that every year, each Central Public Sector Enterprise shall with approval of its directors shall make budgetary allocation for CSR and Sustainability activities / projects for the year. These guidelines would supplement CSR Rules notified by Ministry of Corporate Affairs (MCA). The budgetary allocation will be based on the profitability of the company. More specifically, it will be determined by the Profit After Tax (PAT) of the company in the previous year as shown here under ((Guidelines on Corporate Social Responsibility and Sustainability for Central Public Sector Enterprise (April 2013),

[table id=8 /]

CSR ACTIVITIES: Schedule VII prescribes activities which may be undertaken by company in pursuance of their corporate social responsibility. CSR Rules have essentially brought change in the schedule. Some of the activities permitted as per the earlier schedule have been elaborated and widened in scope, a few activities have been added and some have been deleted.

CSR activities include:

  1. Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water;
  2. Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects;
  • Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;
  1. Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro forestry, conservation of natural resources and maintaining quality of soil, air and water;
  2. Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;
  3. Measures for the benefit of armed forces veterans, war widows and their dependents;
  • Training to promote rural sports, nationally recognized sports, Paralympics sports and Olympic sports;
  • Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women;
  1. Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;
  2. Rural development projects.

‘Social business projects’ and residual clause giving power to the government to prescribe other matters on CSR related activities amongst others have been deleted through the notification. It is nowhere expressly permitted that companies may undertake activities outside the Schedule. Therefore, whether or not CSR activity is exhaustive remains uncertain.

Penalty for violation of CSR provisions:

Section 134(3)(o) provides that Board of Directors have to disclose the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during an year. Section 134(8) states that if company contravenes the provision as laid down under this section, it shall be punishable with fine not less than Rs.50,000 but may extend up to Rs. 25,00,000. Similarly, every officer in default shall be punishable with an imprisonment for a term which may extend to three years or with a fine not less than Rs.50,000 and may extend upto Rs.5,00,000 or both.

Tax Implications

Indian courts have in catena of cases discussed whether expenditure incurred as a CSR activity would be allowable as deduction under section 37(1) of the Income tax act 1961.Although different in factual situations, it has been held that if the expenditure is incurred in advancement of taxpayer’s business, the same is allowable as business expenditure under Section 37 of the Act.

CIT v Madras Refineries Ltd ((266 ITR 170 [Mad])):

Facts: The assessee, Madras Refineries Limited provided funds for establishing drinking water facilities to the residents in the vicinity of the refinery and also provided aid to the school run for the benefit of the children of those local residents. The question arose whether this expenditure was disallowed u/s 37 (1).

The Madras HC opined:

“The concept of business is not static. It has evolved over a period of time to include within its fold the concrete expression of care and concern for the society at large and the people of the locality in which the business is located in particular. Being known as a good corporate citizen brings goodwill of the local community, as also with the regulatory agencies and the society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill. Monies spent for bringing drinking water as also for establishing or improving the school meant for the residents of the locality in which the business is situated cannot be regarded as being wholly outside the ambit of the business concerns of the assessee, especially where the undertaking owned by the assessee is one which is to some extent a polluting industry.”

Therefore, funds provided for establishing drinking water facilities and providing aid to school meant for residents of the locality in which the taxpayer operated were allowed as deduction.

CIT v. Infosys Technologies Ltd (([2014] 360 ITR 714)):

Facts: There was severe traffic congestion near the establishment of the assessee and it seriously affected the free movement of public including employees of Infosys. Infosys as a CSR initiative installed traffic signal near the establishment which otherwise was responsibility of the State. The question arose whether said expenditure was allowable u/s. 37(1) of the Income Tax Act.

Karnataka High Court held:

The said expenditure facilitates the employees of Infosys for free movement and allows them to reach the office in time, which otherwise was affecting the business of Infosys on account of delay in reaching office and thereby resulting in delay in completing projects; just because the general public other than Infosys was also benefited by the said expenditure, it does not imply that the said expenditure would not be allowed as deduction u/s 37(1) of the Act.

In view of the above decision, one may find that the if the CSR activity is undertaken in advancement of business of the assessee, then the said expenditure could be allowed u/s 37(1) of the Act.

Section 135 of the Act provides that corporate need to spend at least 2% of the average net profits of the company made during immediately preceding three financial years to discharge their corporate social responsibility. It does not indicate that it is a statutory charge against the gross income. On the contrary, CSR expenditure is also treated as an appropriation of net income. Therefore, there is lack of clarity on the same.

As discussed above there have been court decisions that have examined the nature of CSR expenses and ruled them as deductible on case to case basis.

Finance (No.2) Act of 2014 appended new Explanation to Section 37(1) clarifying that any expenditure incurred by an assessee on the activities relating to CSR referred to in S.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. This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16.

This amendment poses serious concerns and defeats the objective for which CSR was statutorily incorporated .i.e., for the overall development of the society and environment. The tax disallowance on CSR expenditure motivates corporate to undertake activities for which they can get maximum tax benefits in form of deductions or exemptions.

For instance: Schedule VII prescribes activities that may be undertaken by corporates as a part of their corporate social responsibility and one such activity is contribution to Prime Minister’s National Relief Fund. Section 80G of I-T Act provides that contribution to Prime Minister’s National Relief Fund shall be eligible to 100 % deduction and thereby making other activities prescribed therein irrelevant.

It is also to be noted that section 35AC of I-T Act provides that where expenditure is incurred on project or scheme for promoting the social and economic welfare or upliftment of the public as approved by the national committee set up for this purpose, 100% of such expenditure is admissible. However, the activity of association to which the donation is made should be connected to corporate social responsibility of the company to get deduction of expenditure incurred towards the CSR activity.


Section 7 of Micro, Small and Medium Enterprises Development (MSMED) ACT, 2006 defines small and medium enterprises as under:

7(a) Enterprise engaged in the manufacture or production, processing or preservation of goods as specified below:

  1. ii) A Small Enterprise is an enterprise where the investment in plant and machinery is more than Rs 25 Lakh but does not exceed Rs 5 Crore;

iii) A Medium Enterprise is an enterprise where the investment in plant and machinery is more than Rs 5 Crore but does not exceed Rs 10 Crore.

In case of the above enterprises, investment in plant and machinery is the original cost excluding land and building and the items specified by the Ministry of Small Scale Industries.

(b) Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006 are specified below.

  1. ii) A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crore; and

iii) A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore.

By requiring companies, with a minimum net profit of 5 crore INR, to spend on CSR activities, the Companies Act, 2013 is likely to bring in many SMEs into the CSR fold.

Hurdles for SMEs for getting involved in CSR:

  1. These companies have to remain competitive in terms of price and quality, therefore, cost of implementing CSR activities creates gordian knot when survival is often the greatest economic imperative;
  2. It is being perceived that CSR activities do not yield benefits in the short run as there is lack of awareness of the business benefits.
  3. The fact that existing CSR tools and guidelines are mainly focussed towards large business;
  4. The most cited obstacle for SMEs is bureaucratic burden and red tapism.

Rule 4(3) of CSR Rules provides: A company may also collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR committees of respective companies are in a position to report separately on such projects or programs in accordance with these rules.

Therefore, by introducing the concept of collaboration for undertaking CSR activities, government has made it easier for SMEs to overcome the problem. SMEs can get the following advantages:

Reduction in operational cost: The quantum of revenue available for CSR with individual SMEs is expected to be small. By constituting a common organisation, operational cost of management will reduce as the number of companies carries out their activities collectively.

Undertake long-term projects: By collaborating, SMEs can overcome uncertainty in the CSR budget, can pool their resources to create a sizeable CSR fund and invest in long term projects, which leads to better community relations.

Collaboration among the SMEs in a cluster also provides an opportunity to manage social and environmental issues and respond better to the pressure from buyers, who are trying to establish ethical supply chains and gain appreciation from the international community ((Handbook on Corporate Social Responsibility in India,

Author’s View

While Government of India deserves an applause for the introduction of CSR in the companies act 2013 but at the same time it is fraught with certain infirmities.

It is worth mentioning that corporate pay tax on 1/3 of their profits every year. Apart from this, companies also pay wealth tax of 1% of their taxable net wealth. This doesn’t end here; there are certain big business houses such as TATA, ITC, Bajaj, Infosys, Wipro, Reliance etc. which keep contributing towards the welfare of the society. However, by making spending 2% of average profits made during immediately preceding three financial years on CSR activity a mandate, there may be reluctance in compliance, especially in case of companies which are not profitable, but fall under the category due to triggering net worth or turnover criteria.

World Bank Group issues a report on “ease of doing business” every year. India’s rank was 132 as per 2013 report. Current 2014 report places India at 142nd Position suggesting that conducting business in India has become more difficult than it was before. Now, by forcing companies into CSR activities has further made it a worse place for business

By disallowing expenditure incurred towards CSR activities u/s 37 of I-T Act, there is differential tax treatment and now companies prefer to spend earmarked CSR amount on areas where tax exemptions are available. Omission of Explanation (2) to Section 37 of the act can help to resolve this issue.

Schedule VII provides specific activities without giving any freedom to companies to choose their CSR activities and therefore, they may have to undertake an activity which may not yield the desired outcome.

Some Indian NGOs lack formal organized framework. Thus, it is difficult to monitor how they spend the CSR funds. It is also to be noted that funds made to political parties do not amount to CSR expenditure and therefore, companies in veil of conducting their CSR activity through an NGO may contribute to political parties and may receive benefits from the same and this may lead to misappropriation of CSR funds

In order to meet the objectives of the new CSR law, clarifications on certain issues is the need of the hour. It cannot be denied that Company Act 2013 has given a new dimension to CSR by making it mandatory for the companies falling under designated category to comply with CSR policy, but the same mandate has created burden on certain enterprises which still cannot undertake it due to financial constraints.