In a welcome move that resolves long-standing ambiguity, the Central Board of Direct Taxes (CBDT) has clarified the tax treatment of Corporate Social Responsibility (CSR) expenditure under the Income Tax Act, 1961. This clarification comes as part of Circular No. 15/2023, issued on August 1, 2023, and it provides much-needed relief and clarity to corporates navigating the complex intersection of tax compliance and CSR obligations under the Companies Act, 2013.

Let’s explore what this clarification means for Indian companies, how CSR expenses are treated under the law, and what impact it has on tax computation.

Understanding the Background: CSR & Taxation

As per Section 135 of the Companies Act, 2013, companies meeting certain financial thresholds are mandatorily required to spend at least 2% of their average net profits from the previous three financial years on CSR activities. These activities may include contributions to education, environmental sustainability, health, gender equality, and rural development.

However, the confusion began with the introduction of Finance Act, 2014, which inserted Explanation 2 to Section 37(1) of the Income Tax Act. It explicitly disallowed the deduction of CSR expenditure as a business expense, stating:

"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 expenditure incurred by the assessee for the purposes of the business or profession."

This created widespread uncertainty on whether CSR contributions—including donations to trusts, Section 8 companies, or payments made for Schedule VII activities—could be claimed under other sections like 80G, 35, or 35AC.

CBDT’s Latest Clarification: What It Says

In its circular, the CBDT has now confirmed the following:

✅ 1. CSR Expenditure Not Deductible Under Section 37(1)

CSR expenditure mandated under the Companies Act is not deductible under the general business expense clause Section 37(1). This is consistent with the earlier explanation introduced in 2014.

✅ 2. Permissible Deduction Under Other Specific Sections

The circular importantly states that CSR expenditure will be allowed as a deduction if it falls under other specific provisions of the Income Tax Act, such as:

• Section 80G – Contributions to specified funds and charitable institutions

• Section 35(1)(ii), 35(1)(iii), and 35(2AA) – Contributions to scientific research institutions, universities, or research organizations

• Section 35AC (now withdrawn but was applicable till March 2017)

This means if a company contributes CSR funds to eligible NGOs or research organizations, it may still claim deductions provided the donee qualifies under the relevant section.

Impact on Corporate Tax Planning

The clarification is expected to impact the way corporates plan and execute their CSR obligations:

🧾 Better Planning of CSR Activities

Companies can now channel their CSR funds strategically to eligible entities or programs that allow them to claim deductions under other specific provisions.

⚖️ Reduction in Tax Liability (Where Eligible)

By leveraging Sections like 80G and 35, businesses can reduce their overall tax burden without violating the disallowance under Section 37(1).

📄 Record-keeping and Documentation

Corporates will now need to maintain proper documentation proving that the donation was made to a qualifying institution or for a deductible purpose to support claims under other sections.

Examples of Allowable and Disallowable CSR Deductions