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9th April 2019

Eligibility of ITC on Corporate Social Responsibility (CSR) expenses

 The Companies Act, 2013 has mandated for companies (subject to some conditions) to incur expenses in respect of corporate social responsibility vide section 135 of the Companies Act, 2013. As per section 135 of the Companies Act, 2013, companies with an annual turnover of at least Rs.1,000 crore, or a net worth of minimum Rs.500 crore, or a net profit of Rs.5 crore and above shall constitute a CSR panel of the Board. Companies (including foreign companies in India) are required to mandatorily spend 2% of their average net profit towards specified CSR activities during the year.

Let us now analyze how CSR expenses are treated in Income tax laws. Residuary section 37 of the Income-tax Act, 1961 allows deduction of business expenditures not covered. The Finance (No. 2) Act, 2014 has inserted an Explanation to section 37 to clarify that 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 be an allowable expenditure incurred by the assessee for the purposes of the business or profession. Thus, CSR expenses are not allowable as a deduction while computing the taxable income of the Company which is incurring such expenses.

Here as discussed in preceding paragraphs, incurring of CSR expenses is a requirement that a Company is required to fulfil as per Companies Act, 2013. Accordingly, we may contend that as incurring of CSR expenses is mandatory and thus a statutory requirement. Here, one view is that as CSR expenses is interconnected with business (therefore, in the course of furtherance of business) and therefore, ITC should be allowed under CGST law.

Recently, M/s Polycab Wires Pvt. Ltd. has filed an application for advance ruling (AAR No. KER/30/2019 (2019) 104 taxmann.com 36 (AAR-KERALA) to know the eligibility of ITC on supply of material free of cost as a CSR activity.

The applicant was a dealer in electrical goods, cables of all kinds including winding wires, pipes etc. It had supplied electrical items to Kerala State Electricity Board (KSEB) through its distributors spread across the State in connection with reinstating connectivity in the flood ridden areas as part of the 'mission reconnect'. For the purpose of levy of GST, the distributors billed the goods to Kerala State electricity Board and paid GST to Government. In the invoices so issued, the distributor has valued the goods for the purpose of tax and value was shown as discount.

The materials were supplied free of cost by the applicant as a CSR activity. The Authority for advance ruling has disallowed the benefit of ITC on supply of materials which are supplied as free of cost as a part of CSR activity.