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[Submitted in Fulfillment 0f the Requirement 0f Paper N0, LM-1014, C0rp0rate

Management, LL.M Vth term, 2018].

Submitted by:-

Rishabh Choraria

LL.M , University of Delhi

Corporate Social Responsibility – Striking corporate conscience


Goodness is the only investment that never fails – Henry David Thoreau, American writer

Introduction

Corporations can be broadly understood as a collection of capital by like-minded people under a


distinct legal entity for carrying out business or trade. The Industrial revolution of the 7th Century
expanded the scope and scale of business. Manufacturing and merchant shipping entities needed
large capital resources that were not possible within an individual’s capacity. The need for large
capital from various sources gave rise to Joint stock companies.

The scale of operations that corporations undertake is Gargantuan. The entry or exit of a
corporation in a business ecosystem not just affects the business but the local communities, and
even Nations for example the Enron scandal in USA. Some corporations even achieve GDPs that
are more than a nation’s economy companies like Wal-Mart, Shell Oil are some of the examples.
Such a potential and impactful nature of corporations has often caused negative impact in the
world economy. Thus prudence requires that corporations are prevented from becoming
uncontrolled chariots by way of proper legal and regulatory provisions that make responsible and
not a reckless adventure.

CSR – origins

The terms CSR is not of very recent origin especially in the Indian context India has one of the
world’s richest traditions of CSR. Much before the modern day CSR concept came into being,
Indian business had been following the principle of ‘giving back to the society’ 1 . Ancient
philosophical and religious texts have clear reference to practice of CSR2. There were directions
to the house holds to donate 1/10th of his earning back to the society in form of daan , seva or
zakat.

In the 1950s the primary focus was on businesses' responsibilities to society and doing good
deeds for society. In the 1960s key events, people and ideas were instrumental in characterizing
the social changes ushered in during this decade. In the 1970s business managers applied the
traditional management functions when dealing with CSR issues, while, in the 1980s, business
and social interest came closer and firms became more responsive to their stakeholders. During
the 1990s the idea of CSR became almost universally approved, also CSR was coupled with
strategy literature and finally, in the 2000s, CSR became definitively an important strategic
issue3.
The 1950s saw the start of the modern era of CSR when it was more commonly known as SR or
social responsibility. In 1953, Howard Bowen published his book, Social Responsibilities of the
Businessman, and is largely credited with coining the phrase ‘corporate social responsibility’ and

1
Corporate Social Responsibility an Indian perspective Petrotech Journal October 2010 Issue Piyush Choudhary
Indian Institute of Technology (Banaras Hindu University) Varanasi
2
Corporate Social Responsibility: a philosophical approach from an ancient Indian perspective, Int. J. Indian
Culture and Business Management, Vol. 1, No. 4, 2008 , Balakrishnan Muniapan, Mohan Dass

3
Rosamaria C. Moura‐Leite, Robert C. Padgett, (2011) "Historical background of corporate social responsibility",
Social Responsibility Journal, Vol. 7 Issue: 4, pp.528-539,
is perhaps the Father of CSR. Bowen asked: “what responsibilities to society can business people
be reasonably expected to assume?” Bowen also provided a preliminary definition of CSR: “it
refers to the obligations of businessmen to pursue those policies, to make those decisions, or to
follow those lines of action which are desirable in terms of the objectives and values of our
society“.4
United Nations Industrial Development Organization (UNIDO), termed CSR as a concept of
management whereby companies integrate social and environmental concerns in their business
operations and interactions with their stakeholders.5

In wake of incidents like Bhopal Gas tragedy, shri ram gas leak case the need to have and make
existing corporations socially responsible was felt ever increasing. The idea to have CSR
practice in corporate business started formally in 2009 when the ministry of corporate affairs laid
down non-binding guidelines for encouraging Private Corporations to contribute in CSR funds6.
In 2014 India became the first and the only country in the world to have a legislated CSR in its
New Companies Act 20137.
Law mandates that all companies, including foreign firms, with a minimum net worth of
Rs 500 cr, turnover of Rs 1,000 cr and net profit of at least Rs 5 cr, spend at least 2% of their
profit on CSR8.
The exercises specified in Schedule VII of the 2013 Act qualify as CSR activities and are
recorded underneath:9

Step 1: The Company ought to set up a CSR Committee of the Board of Executives. The
Committee must prescribe the sum to be spent on CSR.

Step 2: The Company ought to make a CSR Policy.

Step 3: Preparation of Annual Report on CSR exercises and incorporation of the CSR
arrangement.10

Step 4: The CSR arrangement (and exercises) of the organization ought to be unveiled on
the site.

The governing body ought to assume liability for oversight of usage of monetary, social
and natural duties and ought to get normal reports on advancement.11

4
Corporate Social Responsibility
Evolution of a Definitional Construct
ARCHIE B. CARROLL
University of Georgia
5
Also available at www.unido.org/our-focus/advancing-economic-competitiveness/competitive-trade-capacities-
and-corporate-responsibility/corporate-social-responsibility-market-integration/what-csr. Last visited on 29th
October 2018
6
CORPORATE SOCIAL RESPONSIBILITY VOLUNTARY GUIDELINES 2009, Published by Ministry of
Corporate Affairs, Government of India, New Delhi
7
India now only country with legislated CSR, First Published: Thu, April 03 2014. 17:50 IST, last visited on 5 th Nov
2018
8
Sec 135 of the Companies Act 2013.
9
ibid
10
ibid
11
ibid
The term Corporate social Responsibility (CSR) has been defined under the CSR Rules
2014. "Corporate Social Responsibility (CSR)" means and includes but is not limited to
(i) Projects or programs relating to activities specified in Schedule VII to the Act or
(ii) Projects or programs relating to activities undertaken by the board of directors of a
company (Board) in pursuance of recommendations of the CSR Committee of the Board as Per
declared CSR Policy of the company subject to the condition that such policy will cover subjects
enumerated in Schedule Vll of the Act.12.

Is CSR a Forced Philanthropy or An alternative brand Building exercise?

Technically speaking CSR is not a forced philanthropy because there are no penal provisions for
not following the CSR practice. Though CSR is a mandatory provision and corporations must
oblige to it but they cannot be penalized under the Section 135 of the act for non-fulfillment of
the provisions. But in the September 2018, the Central Government Constituted a High Level
Committee on Corporate Social Responsibility to review existing CSR framework 13. And in the
March 2017 199 companies faced penalty for non-compliance of CSR norms14. The Government
has been resorting to general provisions under sec 134(8) of the Companies Act 2013 to penalize
companies for not following CSR guidelines; this provision has a scant penalty of rs.50000 up to
25 lakhs. But till date no amendment or sub-legislation had been exacted that levies specific
penal provisions on companies for failure to comply with CSR guidelines.

Calling CSR as an advertisement wouldn’t be an apt approach because Advertising is a


marketing communication that employs an openly sponsored, non-personal message to promote
or sell a product, service or idea15 whereas CSR is giving back to the society ,a socio legal
obligation on corporations. Advertisement is a part of profit maximization approach unlike the
Wealth maximization approach16 of the CSR. Advertisement is done in the normal course of
business, whereas Corporate Social Responsibility Policy) Rules, 2014 it has been clarified in
rule 4(1) that CSR spends excludes “activities undertaken in pursuance of the normal course of
business of the company

The corporation have to first do good to look good where as an advertisement is published to
look good and get customers. Moreover CSR activity is under checks and scrutiny by auditors,
CSR boards, Regulatory bodies, State and National Governments17

CSR and Tax Sops.

Any Contributions made to certain relief funds and charitable institutions can be claimed tax
payer -individuals, company, firm or any other person as a deduction under Section 80G of the
Income Tax Act. 18.

12
Corporate Social Responsibility Rules 2014.
13
Press Information Bureau ,Government of India,Ministry of Corporate Affairs,28-September-2018 15:01
IST,High Level Committee Constituted on Corporate Social Responsibility
14
199 companies faced penalty for non-compliance of CSR norms Press Information Bureau
Government of India Ministry of Corporate Affairs 06 MAR 2018 5:44PM
15
William J. Stanton. Fundamentals of Marketing. McGraw-Hill (1984)
16
Landsg, S (2002). Price Theory and Applications (fifth ed.). South-Western.
17
Report of Sub legal Committee, Government of India Ministry of Corporate Affairs, 26 th April 2018
18
Income tax act 1961
Before Companies Act, 2013 & Finance Act, 2014
The expenditure on CSR was not mandatory and there was no direct provision under Income Tax
Act dealing with CSR expenditure. Therefore all the voluntary expenditures incurred on CSR
were claimed either u/s. 35(2AA) or 35AC or under Section 80G of the Income Tax Act and in
most of the cases the CSR expenditures were claimed to be allowed u/s. 37(1) of the Income Tax
Act, 1961.

If we see the case laws of past years it shows ambiguity, for example in the case of CIT Vs.
Infosys Technologies Ltd (2014) (360 ITR 714) the Karnataka high court allowed the
expenditure incurred for installing traffic signal by company under social initiative. Court said
the traffic signal used by its employee so it relates to business activity hence allowed u/s 37(1)

But in the case of CIT Vs. Wipro Ltd (360 ITR 658)(kar) expenditure for community
development near its factory ,court does not find any nexus for its business activity hence
disallowed such expenditure u/s 37(1).

Section 37 of income Tax Act, 1961 is a residuary section which allows deduction of
business expenditures not covered specifically under sections 30 to 36. Since the admissibility of
CSR expenditure as business expenditure under section 37 was not clear due to differing Court
rulings, the Budget proposals were expected to clarify the same, which it did, however not in the
interest of the corporate sector.

In order to clarify, the Finance (No.2) Act, 2014 has inserted an Explanation to section 37
which is reproduced as under:

“Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of
sub-section (1), any expenditure incurred by an assesse 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 assesse for the purposes of the business or profession.”

But as per the Companies (Corporate Social Responsibility Policy) Rules, 2014 it has
been clarified in rule 4(1)that CSR spends excludes “activities undertaken in pursuance of the
normal course of business of the company”
The memorandum explaining the provisions of the Finance (No.2) Bill, 2014 clearly provides
that:
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.19
Thus, CSR expenditure cannot be claimed as a tax benefit under the provisions of the Income tax
act as it is an application of Income.
It is often debated and argued that corporations which are setup for profit making and not charity
as their primary goal do not zealously take up the CSR expenditures as they do not find it

19
CBDT in the circular no. 1/2015 Dated 21/1/2015.
economically rewarding. The supporters of tax sops in CSR expenditure feel that tax benefits on
CSR should be allowed. This carrot and stick is very controversial as it hold potential to unleash
the Pandora’s Box of tax avoidance.
CSR and the Constitution of India.
Section 135 of the companies act 2013 requires companies meeting certain thresholds to spend a
part of their profits on corporate social responsibility (CSR) initiatives but any law if it violates
the constitution specifically article 14 or 19(1)g in this case will make it invalid.
It is now well-settled that the judiciary can strike down laws made by the State as being
unconstitutional only on two grounds viz.: (i) lack of legislative competence; and (ii) breach of
fundamental rights granted under the Constitution. Section 135 is intended to regulate the CSR
activities of companies and falls within the ambit of entries 43 and 44 of the Seventh Schedule to
the Constitution read with Article 246(1) thereof, whereby the Parliament has been granted
exclusive legislative power to make laws relating to, inter alia, incorporation, regulation and
winding up on companies. Accordingly, the ground of lack of legislative competence would not
be available in the case at hand.

Article 14 of the Constitution guarantees to every person, equality before law and equal
protection of law within the territory of India. Article 14 however allows reasonable
classification of the subjects of the legislation though it does not permit arbitrariness.

The Supreme Court has consistently ruled that classification is valid only if (i) it is founded
on an intelligible differentia and (ii) the differentia has a rational relation to the object
sought to be achieved by the statute in question20.

the mere classification of companies based on net worth, turnover and net profit for the purpose
of Section 135 cannot be said to be violative of Article 14. However, Section 135 treats
companies in different situations similarly, as follows:

As per Section 135(1), once a company has met any one of the thresholds relating to net worth,
turnover or net profits, it comes within the purview of Section 135 for all future points in time
(except to the extent exempted under rule 3(2) of the CSR Rules).Thus, a company which does
not meet the thresholds at a future point in time would nevertheless continue to be obliged to
spend on CSR activities.

A loss-making company's obligation to contribute to CSR is the same as that of a profit-making


company so long as the ‘average net profits' test is met.

Lastly, Section 135 also applies to companies registered under Section 8 of the Act, which are
statutorily obliged to apply their profits only for promoting their objects.

20
D.S.Nakara V. Union of India (AIR 1983 SC 130), Madhu Limaye v Superintendent, Tihar Jail, Delhi and Others
Writ Petition No. 318 of 1970
On a separate note, the legal validity of the exemptions granted by rule 3(2) of the CSR Rules as
above is doubtful since the CSR Rules have been framed under Section 469 of the Act which
does not authorize the executive, acting under a delegated power, to grant any exemption.

In short, Section 135 treats unequals as equals and is therefore violate of Article 14

The next question to be answered is whether the restrictions imposed by Section 135 are
unconstitutional. Article 19(1) (g) is subject to the provisions of Article 19(2) to 19(6) which
permit the state to make laws which impose reasonable restrictions on the exercise of the right
granted by Article 19(1)(g), inter alia, ‘in the interests of the general public'. The Supreme Court
has, by and large, given an expanded meaning to the language of Article 19(6). The fundamental
principle that the Supreme Court has enunciated in the matter of interpreting Article 19(6) is that
the reasonableness of restriction is to be determined in an objective manner and from the
standpoint of the interests of the general public and not from the standpoint of the persons upon
whom the restrictions are imposed21.

Article 19 (6) has been instrumental in saving several social welfare laws from being rendered
unconstitutional, such as Minimum Wages Act, 19483. In a recent case, the Supreme Court, by a
majority judgment, upheld the constitutional validity, in the face of Article 19 (1) (g), of the
provisions of the Right of Children to Free and Compulsory Education Act, 2009 which obliged
private unaided schools to reserve 25% seats for admitting students from scheduled castes,
scheduled tribes and other disadvantaged sections of the public.

The principal arguments,on merits, in favour of striking of Section 135 as unconstitutional vis-à-
vis Article 19(1) (g) would be as follows:-

(i) Section 135 is nothing but the outsourcing by the Government of its duty to provide its
citizens with health care, education, housing and other basic life-sustaining amenities. But the
government is not shedding its responsibility rather it has opened up another avenue of public
welfare without tax burden(ii) Section 135 is not intended to limit the adverse impact of business
on the public. It applies to companies carrying on all types of businesses and not necessarily
those which are harmful to the health and/or well-being of the society.(iii) Section 135 is not
intended to help achieve the fulfilment of fundamental rights of citizens which, in the absence of
it, would be defeated. (iv)There has been no study or empirical evidence to suggest that the
benefits of mandating a CSR spend as stipulated in Section 135 will outweigh the benefits of not
mandating such spend at all.

Conclusion

Has mandatory CSR policy failed its purpose?

CSR practice has been an age old Indian business practice. Much before the west
formalized the concept , Indian business whether large or small followed CSR in some form or
other like creating schools, hospitals, libraries in the interest of Public. Post Independence,
Indian business have shown commendable application of CSR even though it was not mandated

21
In Union of India v. International Trading Company (2003) 5 SCC 437
by law then like the water harvesting done at TISCO Plant at tatanagar, or the worlds largest
mango orchard at the worlds largest oil refinery in Jamnagar by Reliance.
Any policy to be judged defunct or unviable must show signs giving adverse results and
consequences. CSR has not shown any such signs till date, only drawback is that post mandatory
legislation of CSR there has been instances of corporations refraining from applying the same
and which can be dealt by proper legislative amendments. CSR in India is in very nascent stages
of formalization or simply put post-independence Indian corporations are yet to be sensitized on
the importance of having a functional CSR policy in their corporate governance structure which
will take time
It is necessary and prerogative on the large corporations to give back what they take from
the society and all the more important in the worlds largest growing economy in light of the
national sustainable development principles. Corporations are not merely liable to the society but
a stakeholder in the socio-economic fabric from where they draw the men, money, material and
market for their very existence and growth. Legal provisions of CSR are mere enablers and
reminders to the law makers and corporations respectively

CSR policy is now yielding results as companies are showing interest. However, it is
limited to the big players; and has to be spread to smaller players like MSMEs through proper
information for CSR to sustain in India. Social Consciousness is not, at present, the priority for
most corporates. To most organizations, it is a cosmetic tool to ward off regulatory scrutiny.
Organizations which believe in it however, will vouch that it has stood them in good stead. This
necessitates delinking CSR for altruism and linking with corporate vision. Organizations are
getting competitive in whatever they do. Moreover, companies are being closely monitored
under provisions like corporate governance and RTI Act which bind organizations towards ethics
and transparency. In such a scenario, future looks healthy and people in general can expect to
derive benefits out of it. . It is imperative on the executive agencies who must use their wit and
wisdom to tap the financial resources of the corporations in getting development works done and
its on the corporates conscience and sensitivity to show a social responsible attitude in their
business practice.. CSR can be said as a lost culture which has been attempted to be revived by
legislation.