Also consider the case of Corporate Social Responsibility (CSR) spendings under section 135(1) of the Companies Act, 2013. CSR spendings mean that companies, whose net worth is Rs. 500 crore or more, or a turnover of Rs. 1000 crore or more or a net profit of Rs. 5 crore or more during a financial year, must spend atleast 2% of their average net profit of the immediately preceding three financial years on CSR activities which are enumerated under Schedule VII of the Companies Act, 2013. It is to be noted that one of the CSR activities enumerated thereunder is “ensure environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining of quality of soil, air and water including contribution to Clean Ganga Fund set up by the Central Government for rejuvenation of river Ganga”. But, to what extent is a company incentivised to spend on environmental concerns out of all the other provisions mentioned in Schedule VII of the Act?

Till the enactment of the Finance Act, 2014, CSR spendings was allowed as business expenses under section 37(1) of the Income Tax Act, 1961. It provides that,

“Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”  

For e.g., in CIT v.  Madras Refineries Ltd., (5) the Madras High Court upheld the order of the  Income Tax Appellate Tribunal allowing the expense of Rs. 15,32,000 towards establishing drinking water facility near its refinery as a deduction, stating that “monies spent for bringing drinking water… in which the business is situated cannot be regarded as being wholly outside the ambit of the business concerns of the assessee, especially where the undertaking owned by the assessee is one which is to some extent a polluting industry”. (6)

However, an explanation added to section 37(1) by the Finance Act, 2014 clarified 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 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession” (7) reasoning (8) that CSR expenditure is not incurred wholly and exclusively for the purposes of carrying on business; it is an application of income, and, hence, is not allowed as deduction while computing the taxable income of the company. Nevertheless, sections 30-36 and section 80G provide for tax exemptions under CSR expenses. It is these sections that one needs to analyse to understand the extent of incentive provided for environment protection.

Earlier, section 35AC provided for claiming for deduction when the “assessee incurs any expenditure by way of payment of any sum to a public sector company or a local authority or to an association or institution approved by the National Committee for any eligible project or scheme”. Such projects also included pollution control, conservation of natural resources or of afforestation, establishment and running of renewable sources of energy systems etc. (9) However, section 35(7) provides that no deduction shall be allowed under this section in respect of any assessment year from 2018. Thus, deductions cannot be availed of by investing in eligible environment friendly projects. Similarly, section 35CCB had provided for deduction on expenditure incurred for carrying out programmes of conservation of natural resources, but it is limited to those incurred on or before the 31st day of March, 2002.