CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business. As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR cannot be allowed as deduction for computing the taxable income of the company. Moreover, the objective of CSR is to share burden of the Government in providing social services by companies having net worth/turnover/profit above a threshold. If such expenses are allowed as 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) provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36, 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, Explanation 2 has been inserted to section 37 to clarify that for the purposes of section 37(1) any expenditure incurred by an assessee on the activities relating to corporate social responsibility 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(1).
However, the memorandum to the Finance (No. 2) Act, 2014 provides that the CSR expenditure which is of the nature described in section 30 to section 36 shall be allowed deduction under those sections subject to fulfillment of conditions, if any, specified therein.back