INTRODUCTION

For many years, corporations have been criticised by many in society for turning a blind eye and not caring enough for the needs of the people and the environment. They have also been berated for damaging the environment while making little effort to replenish it. Not surprisingly, the people most affected by this are the downtrodden and the less privileged section of society. There has been a lot of debate about the role that should be played by corporations in responding to the needs of society. This leads us to the concept of Corporate Social Responsibility (CSR). It is a type of business model wherein the company can make itself socially accountable to all the stakeholders, people, and the environment and can help create a positive brand image for itself. By adopting the practice of CSR, a company can assess the impact it makes on society as a whole and it can come up with measures to reverse the negative impact. Initially, Corporate Social Responsibility began as a voluntary initiative of the companies to improve the well-being of the workers who were subjected to work under harsh conditions during the period of the Industrial Revolution. However, now CSR has become mandatory in certain jurisdictions, including India. In fact, India was the first country in the world to legally mandate CSR through the Companies Act 2013.

HISTORY OF CORPORATE SOCIAL RESPONSIBILITY

The earliest existence of a form of CSR could be traced to the 18th century when certain faith-based groups refused to invest in industries related to alcohol, tobacco, the slave trade, war-linked ventures, and other industries that were not aligned with their belief system. In the 19th century, the establishment of Carnegie Libraries took place by a wealthy businessman named Andrew Carnegie. The Carnegie Libraries provided the public with free access to books and other related educational content. By 1919, more than 2,500 libraries had opened across the world. Carnegie further argued for the wealthy to donate to social causes in his book The Gospel of Wealth.

John D. Rockefeller established the Rockefeller Foundation intending to promote medical research and public health. He had also donated half of his wealth to social causes. During World War I, there was a significant rise of ‘Community Chests’ with the aim of pooling resources and soliciting the wealthy in a centralized manner. The Pioneer Fund was the first mutual fund to use socially conscious criteria and refused to invest in companies linked to alcohol, tobacco, gambling, etc.

The most significant contribution to CSR was made by Howard Bowen, who is also known as the “Father of CSR”. He emphasized the role of corporations towards society and wrote a book named Social Responsibilities of the Businessman.

India also had a form of CSR in the ancient era, though it was not known by that name. For example, during the pre-industrial period, affluent merchants would distribute a portion of their wealth to society by establishing temples for religious purposes. Additionally, these merchants would provide food to underprivileged members of society during famines and other calamities. Later, in the 20th century, Mahatma Gandhi introduced the idea of “trusteeship“. According to this idea, wealthy industrialists were expected to manage their wealth in a manner that would benefit all members of society.

OBJECTIVES BEHIND IMPLEMENTING CSR PROVISIONS

The introduction of CSR in the Companies Act 2013 serves multiple purposes. First, CSR encourages companies to contribute to development and social welfare. Secondly, it ensures that there is corporate accountability by ensuring that businesses operate sustainably and ethically. Thirdly, CSR is a means by which economic disparities could be addressed by the funding of community-driven projects by the companies. Lastly, contributing to CSR plays a huge role in enhancing goodwill and boosting the brand value and reputation of the company.

CORPORATE SOCIAL RESPONSIBILITY UNDER THE COMPANIES ACT 2013

India became the first country to implement compulsory Corporate Social Responsibility (CSR) requirements for specific companies after the Companies Act 2013 was passed. Section 135 of this legislation focuses on Corporate Social Responsibility. As per Section 135, any company with a turnover of one thousand crore rupees, a net worth of five hundred crore rupees, or a net profit of five crore rupees is required to allocate at least two percent of its average net profits from the previous three financial years towards CSR initiatives. The activities eligible for CSR spending are outlined in the 7th Schedule of the Act. Additionally, Section 135 requires the establishment of a Corporate Social Responsibility Committee within the Board, consisting of three or more directors, with at least one being an independent director. The main responsibilities of this committee include the development, execution, and oversight of the company’s Corporate Social Responsibility Policy.

The computation of net profit for the purpose of CSR is given under Section 198 of the Companies Act 2013. Credit cannot be certain sums for computing the net profit. These include profits on the sale of forfeited shares, profits by way of premium on shares, and profits of a capital nature, among others. Further, certain sums could be deducted for calculating net profit. These include the director’s remuneration, tax notified by the Central Government, every usual working charge, interest on unsecured loans and debentures, etc. Certain sums, like income tax payable by the company under the Income Tax Act 1961 and damages paid by the company voluntarily, cannot be deducted for the calculation of profits.

After the Companies (Amendment) Act 2019 was enacted, if a company does not use its CSR funds during a given financial year for a CSR initiative, it is obligated to transfer the unutilized funds to a designated account within 30 days following the financial year’s conclusion. The company must establish an account with a Scheduled Bank, designated as the Unspent Corporate Social Responsibility Account. The company is required to distribute the funds in this account towards CSR activities within three financial years from the date of their transfer. If the company fails to use the funds in the Unspent CSR account within this three-year period, they must be redirected to a fund specified in the 7th Schedule of the Companies Act 2013 within six months following the conclusion of the financial year. One such fund mentioned in the 7th Schedule is the Prime Minister’s National Relief Fund.

As per the data from the National CSR Portal, in the Financial Year 2022-2023, an amount of ₹26,579 crores was spent on CSR activity by nearly 19,887 companies. Nearly 45,000 CSR projects also took place in this particular financial year. The Health and Sanitation and Education sectors received the highest CSR in this period. The top three companies that spent the most on CSR include Reliance Industries, HDFC Bank, and Tata Consultancy Services. The maximum amount of CSR funds was spent in the state of Maharashtra. This could be attributed to the fact that a large number of companies are located in Maharashtra.

Section 135(5) of the Companies Act states that companies should give preference to the local area around which they operate for the purpose of CSR. Other states with high CSR amounts include Karnataka, Gujarat, Tamil Nadu, Uttar Pradesh, Delhi, and Rajasthan, among others. However, the Northeastern states received just 0.91% of CSR as per FY 2020-2021. This could be attributed to the lack of companies operating in the region, along with poor infrastructure and resources for implementing CSR. An amendment could be made to Section 135(5) wherein it should state that preference for CSR should be given to the economically backward regions of the country along with the local areas in which the company operates. This would ensure that the benefits of CSR are borne equally by all regions.

Companies may have to bring in more staff to oversee CSR activities, leading to more expenses being borne by them. There isn’t much awareness among the public when it comes to CSR activities of companies. The onus of spreading awareness shall lie with the company.

CASE LAWS

• In the case of Re Indo Unique Flame Ltd (2023), the National Company Law Tribunal (NCLT) was dealing with an application under Section 441 of the Companies Act that dealt with the compounding of offenses related to non-compliance with CSR provisions. The tribunal had recognized the company’s efforts in correcting the non-compliance by contributing the unspent CSR amount to the Prime Minister’s National Relief Fund. The tribunal had emphasized the importance of CSR.

• In the case of Adani Power Limited v. Assistant Commissioner of Income Tax (2023), the Gujarat High Court held that expenses incurred on activities related to CSR as mandated under Section 135 will not be deemed to be incurred for business purposes and, therefore, are not allowable as deductions under Section 37(1) of the Income Tax Act.

CONCLUSION

The concept of CSR has been beneficial to both companies and society. The former could improve its brand image through CSR activities, while the latter would benefit from the social measures taken by the company. So far, the amounts being spent on CSR have contributed immensely to the education and health sectors of the country. As seen above, these were the two sectors that received the highest CSR funding. On the other hand, a major challenge associated with CSR is the need to manage the geographical imbalance in terms of receiving CSR in India.