Donation to PM CARES FUND and CM Relief Fund qualifies for CSR Expenditure amid COVID-19

donation-to-pm-cares-fund-and-cm-relief-fund-qualifies-for-csr-expenditure-amid-covid-19


Enactment of Companies Act, 2013 by the Ministry of Corporate Affairs, Government of India was one of the world's largest experiments of introducing the Corporate Social Responsibility (CSR) as a mandatory provision by imposing a statutory obligation on Companies to take up CSR projects towards social welfare activities.


    For the government which has been scrambling for funds to tackle the COVID-19 crisis, allowing CSR expenditure for COVID-19 can come as a blessing.

    As per industry reports, total (CSR) spending by the top 500 companies in the country since the applicability of mandatory CSR in 2014 is likely to cross Rs. 60,000 crore by the end of the month. Even if half of these funds come through, India would have a lot of funds to handle the deadly pandemic.

    Provisions of Corporate Social Responsibility (CSR) Expenditure in the Companies Act, 2013

    Section 135 of the Companies Act, 2013 and Schedule VII thereto contain the provisions related to the expenditure on Corporate Social Responsibility (CSR) activities by certain corporates.

    Section 135 of the Companies Act, 2013, inter alia, provides for companies having-
    > net worth of Rs. 500 crore or more, or
    > turnover of Rs. 1,000 crore or more, or 
    > a net profit of Rs. 5 crore or more in a financial year
    has to spend at least 2% of the average net profits of the last 3 years for the company’s Corporate Social Responsibility (CSR) policy.

    In case the said amount is not spent, the reasons for not doing so are to be disclosed in the Board’s Report. Activities that may be included in the CSR policy by the companies are specified in schedule VII of the Companies Act, 2013.

    The mandatory provisions of CSR as envisaged in section 135 along with Schedule VII and corresponding Corporate Social Responsibility Policy Rules have been notified on 27.02.2014, as amended from time to time,  and have come into effect from 1st April 2014.

    Schedule VII of the Companies Act, 2013 prescribes the following activities as CSR activities-


    SCHEDULE VII
    (See Section 135)

    Activities which may be included by companies in their Corporate Social Responsibility Policies Activities relating to:—

    (i) Eradicating hunger, poverty and malnutrition, promoting health care including preventinve health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water. 

    (ii) promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects.

    (iii) 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.

    (iv) ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga.

    (v) 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 art and handicrafts; 

    (vi) measures for the benefit of armed forces veterans, war widows and their dependents;

    (vii) training to promote rural sports, nationally recognised sports, paralympic sports and Olympic sports

    (viii) 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 Caste, the Scheduled Tribes, other backward classes, minorities and women;

    (ix) Contribution to incubators funded by Central Government or State Government or any agency or Public Sector Undertaking of Central Government or State Government, and contributions to public funded Universities, Indian Institute of Technology (IITs), National Laboratories and Autonomous Bodies (established under the auspices of Indian Council of Agricultural Research (ICAR), Indian Council of Medical Research (ICMR), Council of Scientific and Industrial Research (CSIR), Department of Atomic Energy (DAE), Defence Research and Development Organisation (DRDO), Department of Science and Technology (DST), Ministry of Electronics and Information Technology) engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs).

    (x) rural development projects

    (xi) slum area development.

    Explanation.- For the purposes of this item, the term `slum area' shall mean any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force.

    (xii) disaster management, including relief, rehabilitation and reconstruction activities.


    Amount spent in the above activities is qualified as CSR activities. The interpretation of Schedule VII is broad and open and its scope is wide to help the Corporates.

    Under the Companies (Corporate Social Responsibility Policy) Rules, 2014, the CSR activities may be undertaken by the company itself or may undertake the charitable activities through a registered trust or a registered society or a company established by it or its holding or subsidiary or associate company under section 8 of the Act.

    CSR Rules 2014 explicitly provides for the money to be spent. This means that if a company manufacturer masks, they cannot simply donate masks and count towards their CSR expenses.

    Any contribution of any amount directly or indirectly to any political party under section 182 of the Act, shall not be considered as CSR activity.

    Further,  the CSR projects or programs or activities undertaken in India only shall amount to CSR Expenditure. The CSR projects or programs or activities that benefit only the employees of the company and their families shall not be considered as CSR activities in accordance with section 135 of the Act.

    Section 135 of the 2013 Act, mandating CSR activities to corporates, is a new section and introduced for the time in India in the law itself. There was no corresponding provision in the Companies Act, 1956.


    MCA Circulars on CSR Expenditure

    Ministry of Corporate Affairs (MCA) has issued a General Circular No. 21/2014 dated 18.06.2014 to clarify with regard to provisions of Corporate Social Responsibility under section 135 of the Companies Act, 2013.

    It is clarified that the entries or CSR activities in the Schedule VII must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule. The items enlisted in the amended Schedule VII of the Act, are broad-based and are intended to cover a wide range of activities.

    One-off events such as marathons/ awards/ charitable contribution/ advertisement/ sponsorships of TV programmes etc. would not be qualified as part of CSR expenditure.

    Expenses incurred by companies for the fulfilment of any Act/Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as CSR expenditure under the Companies Act. In other words, the CSR spending must be voluntary and for the development of the community or society at large.

    Salaries paid by the companies to regular CSR staff as well as to volunteers of the companies (in proportion to company’s time/hours spent specifically on CSR) can be factored into CSR project cost as part of the CSR expenditure.

    Contribution to Corpus of a Trust or society or section 8 companies etc. will qualify as CSR expenditure as long as (a) the Trust/ society/ section 8 companies etc. is created exclusively for undertaking CSR activities or (b) where the corpus is created exclusively for a purpose directly relatable to a subject covered in Schedule VII of the Act.

    Expenditure for combatting COVID-19 to qualify for CSR Expenditure


    Presently, disruptions are going on all over the world including India due to the COVID-19 outbreak. In an order issued on 14.03.2020, the government has decided to treat COVID-19 as a “notified disaster” for the purpose of providing assistance under the State Disaster Response Fund (SDRF). Ministry of Home Affairs, Government of India vide Letter No. 33-4/2020-NDM-I dated 14.03.2020 declared COVID-19 Novel Virus as Notified Disaster.

    The SDRF is the primary fund available with the State governments for responses to notified disasters to meet expenditure for providing immediate relief to the victims. The Centre contributes 75% of the SDRF allocation for general category States and Union Territories and 90% for special category States (northeast, Uttarakhand, Himachal Pradesh, Jammu and Kashmir).

    The items that would be included for assistance under the SDRF are measures for quarantine, sample collection, screening and procurement of essential equipment/laboratories in response to COVID-19.

    The COVID-19 virus was declared as a pandemic by the World Health Organisation (WHO) on March 11, 2020. Subsequently, on 24.03.2020, Government of India issued Order prescribing lockdown for containment of COVID-19 epidemic in the country.

    The Country needs a huge additional amount of money to combat COVID-19. Funds are required for setting up quarantine facilities, sample collection and screening; setting up additional testing laboratories, cost of consumables; purchase of personal protection equipment (PPE) for healthcare, municipal, police and fire authorities; purchase of thermal scanners, ventilators, air purifiers, and consumables for Government hospitals.

    Besides, providing food and shelter to homeless people including migrant labourers, who are stranded due to lockdown measures also needs money. 

    Therefore, support from all the citizens and institutions including corporates of the country is the need of the hour to deal with an unprecedented global crisis which is declared to be a “pandemic” by the World Health Organization (WHO).

    In this backdrop, the government has clarified that spending of CSR funds for COVID-19 is eligible CSR Activity. It was earlier in Circular of 2014 clarified that the CSR activities specified in Schedule VII are broad-based and may be interpreted liberally

    Based on this, the MCA has issued a General Circular No. 10/2020 dated 23.03.2020 to clarify that in view of the spread of novel CoronaVirus (COVID-19) in India, its declaration as a pandemic by the World Health Organisation (WHO), and, the decision of Government of India to treat this as a notified disaster, it is hereby clarified that spending of CSR funds for COVID-19 is eligible CSR activity

    The Circular further states funds may be spent for various activities related to COVID-19 under item nos. (i) and (xii) of Schedule VII relating to the promotion of health care, including preventive health care and sanitation, and disaster management

    Reference to the Circular of 2014 is also made. As per General Circular No. 21/2014 dated 18.06.2014, items in Schedule VII are broad-based and may be interpreted liberally for this purpose, the Circular added.

    Contribution to PMNRF to qualify for CSR Expenditure


    In this respect, it is to be noted that contribution or donation to the Prime Minister National Relief Fund (PMNRF) is already covered as spending for CSR activities in the Schedule VII.

    Provisions of CSR Expenditure in Income Tax Act, 1961


    Section 135 of the Companies Act, 2013 requiring certain companies to mandatorily spend on CSR activities was made effective from 01.04.2014 which corresponds to FY 2014-15. The relevant assessment year is 2015-16.

    Hence, necessary amendments in the Income Tax Act, 1961 was made through the Finance (No.2) Act, 2014. Due to 16th General Lok Sabha Election that happened in 2014, the full-fledged Union Budget 2014 was presented on July 10, 2014, by the then Finance Minister Shri Arun Jaitley.

    It is the settled principles of law that in case a person is under a legal or contractual obligation to incur any expenditure then such expenditure is taken as expenditure incurred wholly and exclusively for the purpose of the business of the assessee. Hence, such expenditure is always allowed as business expenditure.

    If such expenditure does not fall under any of the specific provisions then the same is allowed as expenditure under the residual section 37 of the Income Tax Act, 1961.

    Prior to the amendment by the 2014 Act, it was the common apprehension that the CSR expenditure as envisaged in the Companies Act, 2013 will be allowed as allowable expenditure or deduction under the income tax law. This was because there was no specific provision in the Income Tax Act to disallow such a mandatory incurring of expenditure.

    However, to a surprise to all, the Finance (No. 2) Act, 2014 has amended section 37 of the Income Tax Act, 1961 to contain a provision to expressly disallow the deduction for CSR expenditure.


    For this purpose, an explanation was added in section 37(1) to clarify that any corporate social responsibility (CSR) expenditure incurred by an assessee on the CSR activities as per 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.

    The intention of the government behind disallowing the expenditure as business expenditure was narrated in the 'Notes on clauses' appended in the Finance (No. 2) Bill, 2014.

    It was stated that under the Companies Act, 2013 certain companies are required to spend a certain percentage of their profit on activities relating to Corporate Social Responsibility (CSR). The Income Tax Act, under the existing provisions, expenditure incurred wholly and exclusively for the purposes of the business is only allowed as a deduction for computing taxable business income.

    The contention behind such a disallowance for deduction of CSR expenditure was that CSR expenditure is an application of income and thus is not incurred wholly and exclusively for the purposes of carrying on business.

    It was further stated that as the application of income is not allowed as a deduction for the purposes of computing taxable income of a company, any amount spent on CSR cannot be allowed as a deduction for computing the taxable income of the company.

    The objective behind such a disallowance of CSR expenditure was that the objective of introducing the mandatory CSR activities by the corporates was to share the burden of the Government in providing social services by wealthy companies having net worth or turnover or net profit above a threshold which the government did not want to subsidize by giving tax benefits on such CSR expenditure.

    If such expenses are allowed as a tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure.

    The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession.

    As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditures cannot be allowed under the existing provisions of section 37 of the Income-tax Act.

    Therefore, in order to provide certainty on this issue, it is proposed to clarify that for the purposes of section 37(1) any expenditure incurred by an assessee on the activities relating to corporate social responsibility  (CSR) referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and hence shall not be allowed as deduction under section 37.

    However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed a deduction under those sections subject to fulfilment of conditions, if any, specified therein. The reason was that such an allowance or tax benefits are already there in the statute even before the introduction of section 135 of the Companies Act, 2013.

    CBDT Circular on CSR Expenditure

    Thereafter, on January 21, 2015, the CBDT has issued a Circular No 01/2015 dated 21-01-2015 to clarify the amendments introduced by the Finance (No. 2) Act, 2014. The para 13 of the Circular reiterated the intentions of the government and the applicability of the amendment to the provisions of the Act for disallowance of the CSR expenditure under section 37(1).

    Can CSR expenditure be claimed as business expenses

    The answer is 'No'. There is a misconception among the assessee as well as tax officers that any CSR expenditure incurred by a company pursuant to compliance of section 135 of the Companies Act, 2013 is a disallowed expenditure and can't be allowed as an expenditure under the Income Tax Act, 1961.

    This is not true. It may be noted that CSR expenditure can be disallowed if the same falls under the provisions of section 37(1). If any CSR expenditure falls within the provisions of sections 30 to 36 then such CSR expenditures cannot be disallowed under section 37(1). In other words, such CSR expenditure cannot be disallowed in general.

    The allowability of deduction for such CSR expenditure will be governed by the provisions of sections 30 to 36. If the company meets the conditions for claiming the expenditure as business expenses, under those sections then such CSR expenditure will be allowed as a deduction under the respective provisions. In case the company does not meet any condition(s) to claim such CSR expenditure as a business expense then such expenditure will be disallowed under those sections 30 to 36 but not under section 37.

    If any CSR expenditure fails to satisfy any of the conditions for availing business deduction under sections 30 to 36, then such expenditure cannot be allowed under section 37 due to specific restrictions on the allowability of CSR expenditures.

    Can CSR expenditure be claimed as deduction under section 80G


    The deduction under section 80G for making donations to charitable organizations is contained in Chapter VI-A of the Income Tax Act,1961 whereas the income under the head 'Income from business' is computed under sections 28 to 44 which falls under Chapter IV.

    In the entire income tax law, only the Explanation 2 to section 37 prohibits the allowance of CSR expenditure as business expenditure. None other provisions contain such restriction.

    Except section 37, no other provisions in the Income Tax Act, 1961 contain any provision to disallow or restrict or prohibit the claim of any deduction for CSR expenditure if the CSR expenditure is otherwise eligible for deduction.



    Further, section 37 is related to the computation of business income and its scope is limited to Chapter-IV only. The scope of the restriction imposed in section 37 does not extend to Chapter VI-A of the Act which is independent of section 37.

    Hence, it can be safely concluded that CSR expenditure is eligible for deduction under section 80G of the Income Tax Act, 1961 even if the expenditure was disallowed under section 37(1) by virtue of Explanation 2.

    Deduction u/s 80G is available from the Gross Total Income of the assessee which is the aggregate of all heads of income in contrast to section 37 which is applicable for computing the income under the head 'business income' only. Hence, the scope of section 37(1) is very limited so far as section 80G is concerned.

    CBDT's Circular No. 1/2015 dated 21-01-2015 also fortifies this view.

    Recently, section 80G has been amended by Taxation and other Laws (Relaxation of Certain Provisions) Ordinance, 2020 to provide for 100% deduction in case of donations made to the PM CARES Fund. A company contributing a donation to the PM CARES FUND will first face disallowance u/s 37(1) since the spending is expressly disallowed by the Explanation to section 37(1). However, the firm will be able to claim it as a deduction from its total income under section 80G. The tax deduction treatment given to the PM CARES Fund is at par with the PMNRF.

    PM CARES Fund to qualify for CSR Expenditure - MCA Circular


    Every company having the specified net worth or turnover or net profit is mandatorily required to spend 2 per cent of its average net profit of the last three years for CSR activities. There are prescribed rules and guidelines on which expenditure on which activities shall qualify as CSR expenditure.

    In this context, the government had earlier clarified that spending of CSR funds for fighting against the threat of COVID-19 is an eligible CSR activity.

    The Ministry of Company Affairs (MCA) has issued a General Circular 10/2020 dated 23.03.2020 to this effect. The Circular states that funds may be spent on various activities related to COVID-19 under item nos. (i) and (xii) of Schedule VII relating to the promotion of health care, including preventive health care and sanitation, and, disaster management. Further, as per General Circular No. 21/2014 dated 18.06.2014, items in Schedule VII are broad-based and may be interpreted liberally for this purpose.

    On March 29, 2020, Finance Minister Nirmala Sitaraman tweeted that CSR Funds can now donate to PM CARES Fund. Ministry of Corporate Affairs (MCA) notifies details. Any contribution made to the PM CARES Fund shall qualify as CSR expenditure.

    MCA issued an Office Memorandum dated 28.03.2020 to state that the Government of India had set up the Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund’ (PM CARES Fund) with the primary objective of dealing with any kind of emergency or distress situation such as that posed by COVID 19 pandemic. 

    It further stated that the PM-CARES Fund had been set up to provide relief to those affected by any kind of emergency or distress situation. Accordingly, it is clarified that any contribution made to the PM CARES Fund shall qualify as CSR expenditure under the Companies Act 2013.

    A doubt on Contribution to CM Relief Fund to qualify for CSR Expenditure


    Whether a donation to the Chief Minister Relief Fund qualifies as CSR expenditure is a matter of doubt.

    An expenditure is qualified as CSR expenditure if it adheres to the items mentioned in Schedule VII as stated above.

    When the Schedule VII was enacted, it allowed companies to contribute to the Chief Minister's Relief Fund and such contribution will be counted towards  CSR expenditure of the company.

    The relevant Item read as follows-

    contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and………………….

    However, by a Notification dated 27.02.2014, Schedule VII has been amended. In the amended Schedule VII item (viii) [as per above table] provides for the followings-

    “(viii) 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;”

    As can be seen, the amended item (viii) which corresponds to the pre-amended item of Schedule VII has omitted the expression ‘State Governments’. As a result, any contribution to the Chief Minister's Relief Fund does not qualify for CSR expenditure.

    There is another section which advocates that a Chief Minister's Relief Fund ultimately performs the activities which are otherwise listed in Schedule VII and hence any contribution to the Chief Minister's Relief Fund shall qualify for CSR expenditure. It is further clarified that the activities must be interpreted liberally and hence there is no justification to deny contribution to the Chief Minister's Relief Fund as eligible CSR expenditure. Further, there is no express restriction in any rule to disqualify contribution to the Chief Minister's Relief Fund as CSR expenditure. If the contribution does not fall under item (viii) it may fall under other item heads of Schedule VII. This does not hold strong contention.

    The infirmity in the new and old Schedule VII cannot be ruled out. However, the fact is that while contributions to the Prime Minister’s National Relief Fund (PMNRF) is mentioned as an eligible activity under the CSR in the 2013 Act, the same made to the Chief Minister's Relief Fund is not considered as an activity eligible for contribution under the CSR.

    In this context, many Chief Ministers have written to the Central Government to reconsider the restriction and urges to allow companies to contribute to the Chief Minister's Relief Fund as their CSR expenditure so that corporate social responsibility funds are available to the Chief Minister's Relief Fund.

    This issue surfaced in 2018 amid floods in Kerala as companies were unable to use their CSR funds to contribute to the Chief Minister's Relief Fund.

    However, it should be noted that contributions to the Chief Minister's Relief Fund amid COVID-19 pandemic will be allowed as CSR expenditure to the companies if the State Government appeals to that effect and the fund so received will be used exclusively for combating COVID-19 disaster. Since disaster management, including relief, rehabilitation and reconstruction activities are notified in Schedule VII and COVID-19 pandemic is treated as notified disaster by the central government, any contribution to the Chief Minister's Relief Fund for such cause will be allowed as CSR expenditure.

    In West Bengal, the State Government has established a separate fund called West Bengal State Emergency Relief Fund (WBSERF) to effectively combat unforeseen emergencies arising from COVID-19 disaster. It is clarified that the funds from the WBSERF will be used exclusively for the purpose of combating COVID-19. The government has clarified that this emergency relief fund will be under the overall umbrella of the Chief Minister’s Relief Fund. It is a temporary fund and will cease to operate after the emergency is over. 

    Hence, it can be seen that unless and until any fund is established wholly and exclusively to fight with COVID-19, contribution to such a fund will not qualify as CSR expenditure. In other words, the fund must be established to utilise the amount for combatting COVID-19 pandemic in the country.


    Other COVID-19 activities qualify for CSR Expenditure

    All the following COVID-19 activities can be treated as CSR expense, apart from contribution to PM CARES fund and/or CM Relief Fund-

    After the government announced that donations made by companies to the PM CARES Fund would be considered as expenditure on CSR, many companies came through with their donations.

    However, there are a lot of other ways that a company can use its CSR funds to help the country fight COVID-19. Activities related to COVID-19 like promotion of healthcare, preventive healthcare, sanitation, disaster management would qualify for treatment as CSR spending.

    Here is what else qualifies as CSR expenditure, if utilised for COVID-19 related activities:

    1.Scientific research for the development of drugs for COVID-19.

    2.Manufacture and/or distribution of kits for testing the disease.

    3. Providing quarantine facilities.

    4.Mass training of nurses and paramedical staff.

    5. Distribution of food and arrangement of shelter for doctors and paramedical staff.

    6. Opening of sanitation facilities.

    7. Distribution of food/medicine/financial support to the poor/daily wage earners who are forced to stay at home during the lockdown/curfew.

    8. Arrangement of ambulance.



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    3 Comments

    1. does state disaster relief fund forma a part of CM relief fund or Vice versa?

      ReplyDelete
      Replies
      1. No Both are different. SDRF is constituted under Disaster Management Act, 2005 and Central government also contributes to it.

        Delete
    2. does state disaster relief fund forma a part of CM relief fund or Vice versa?

      ReplyDelete