ABSTRACT
This research paper aims to educate on the role of the judiciary in fostering Corporate social responsibility mechanisms. In this research paper, I have tried to briefly discuss what is CSR and how the interference of the judiciary is required. What are the main reasons why CSR is failing on the ground level? In the end, I have also suggested a few things for better CSR implementation. The Indian judiciary, through its interpretative and adjudicative functions, has contributed significantly to defining the scope and obligations of CSR for corporations operating within the country. Judicial interventions have not only clarified the legal framework surrounding CSR but have also provided impetus for its implementation and enforcement. This paper seeks to examine the multifaceted role of the judiciary in fostering CSR mechanisms in India, shedding light on its impact on corporate behaviour, legal compliance, and societal welfare.
KEYWORDS: CSR, corporate behaviour, Article 21, societal welfare
INTRODUCTION
As we already know, Corporate Social Responsibility (CSR) has emerged as a significant aspect of corporate governance worldwide, reflecting a broader recognition of businesses’ responsibility towards society and the environment. In India, the evolution of CSR has been marked by legislative mandates, judicial pronouncements, and corporate initiatives aimed at integrating social and environmental concerns into business operations. Central to this development is the role of the judiciary, which has played a pivotal role in shaping CSR mechanisms and ensuring corporate accountability.
Drawing upon legal precedents, legislative enactments, and scholarly discourse, this research endeavours to elucidate the evolution of CSR jurisprudence in India and its implications for corporate governance. By analyzing landmark court decisions, legislative amendments, and corporate practices, the study aims to unravel the dynamics between the judiciary, legislature, and corporate sector in advancing the CSR agenda. Furthermore, it seeks to identify challenges, opportunities, and future directions in the judicial enforcement of CSR obligations, thereby contributing to the ongoing discourse on sustainable business practices and social responsibility.
Through a comprehensive examination of the judicial landscape and its interaction with CSR mechanisms, this research endeavours to provide insights into the evolving role of the judiciary as a catalyst for corporate accountability and societal development. By critically assessing the impact of judicial interventions on CSR practices, this study aims to offer valuable perspectives for policymakers, corporate leaders, legal practitioners, and scholars interested in the intersection of law, business, and social welfare in India.
Research Question:
- How would you define Corporate Social Responsibility (CSR)? What does CSR entail?
- What activities can be considered as part of CSR?
- How has the judiciary in India contributed to the development and enforcement of Corporate Social Responsibility (CSR) mechanisms, and what are the implications for corporate behaviour and societal welfare?”
RESEARCH METHODOLOGY:
The project topic has been properly analyses with the help of doctrinal method of research. This is a library-based research methodology which focuses on the analysis and reading of primary and secondary data. This method of research gathers its content from traditional and modern sources of written text like journals, books, articles, newspapers, etc.
The method is both analytical and descriptive. The pertinent issues in the project have been properly examined by applying an intensive literature review. The researcher has put rigorous efforts in order to critically examine all the available sources to ensure a thorough and perspicacious analysis of the microfinancing industry. The research has not been able to reach its full capacity because of being time-bound and paucity of adequate non-electronic resources. All the used material has been cited in the footnotes with proper citations to ensure acknowledgement of all the sources.
CSR LAW IN INDIA
Corporate Social Responsibility (CSR) has become an integral part of business operations globally, recognizing the role of corporations beyond profit-making. In India, the evolution of CSR laws has been significant, reflecting a growing commitment towards sustainable development. This essay delves into the landscape of CSR laws in India, examining their origins, objectives, implementation, and impact.
The roots of CSR in India can be traced back to ancient traditions of philanthropy and community service ingrained in the socio-cultural fabric. However, the formal integration of CSR into corporate governance emerged with the enactment of the Companies Act, 2013. Section 135 of the Act mandated certain qualifying companies to spend a specified percentage of their profits on CSR activities.
The primary objectives of CSR laws in India are twofold: to promote inclusive growth and sustainable development, and to encourage corporate accountability and transparency. By institutionalizing CSR, the government aimed to leverage the resources and capabilities of corporations to address pressing social and environmental challenges.
The implementation framework of CSR laws in India is delineated through statutory provisions, guidelines, and regulatory oversight. Key components include:
- Qualifying Criteria: Companies meeting specific financial thresholds are obligated to comply with CSR provisions.
- Expenditure Requirements: Mandated companies are required to allocate at least 2% of their average net profits over the preceding three financial years towards CSR activities.
- Activities Eligible for CSR: The Act specifies a range of activities across sectors such as education, healthcare, environmental sustainability, and rural development, among others.
- Reporting and Disclosure: Companies are mandated to report their CSR activities in their annual reports, outlining the initiatives undertaken, funds allocated, and outcomes achieved.
- Oversight Mechanisms: Regulatory bodies such as the Ministry of Corporate Affairs monitor compliance and may impose penalties for non-compliance.
The impact of CSR laws in India has been multifaceted:
- Social Development: CSR initiatives have catalyzed social development by enhancing access to education, healthcare, and livelihood opportunities for marginalized communities.
- Environmental Conservation: Companies have undertaken initiatives to mitigate environmental degradation through afforestation, waste management, and renewable energy projects.
- Stakeholder Engagement: CSR activities have fostered stronger relationships between corporations and stakeholders, including employees, communities, and government agencies.
- Business Reputation: Companies demonstrating a strong commitment to CSR have enhanced their reputation and brand value, thereby gaining a competitive edge in the market.
- Policy Advocacy: CSR initiatives have contributed to policy advocacy and the formulation of inclusive and sustainable development agendas at both national and regional levels.
WHAT IS THE PRESENT CSR MECHANISM IN INDIA
The concept of corporate social responsibility (CSR) traces back to Albion Swarthmore, an American sociologist, who highlighted in 1895 that not only government agencies but also entrepreneurs are accountable to public expectations. Today, the evaluation of CSR mainly revolves around observing the behavior of corporations regarding their social responsibilities.
There are notable discrepancies in CSR behavior among different enterprises, stemming from various factors. Central to understanding these differences is grasping the mechanism through which corporations realize CSR behavior, or how they decide which social responsibilities to undertake. To delve into this, we must first explore the driving forces behind CSR. These forces primarily include voluntary, compulsory, and comprehensive aspects. Voluntary CSR suggests that companies have an inherent inclination to fulfill their social responsibilities, viewing CSR as integral to their business strategy rather than externally imposed. Conversely, the compulsory perspective posits that companies engage in CSR due to external pressures, often complying with minimum legal requirements. The comprehensive view combines both internal and external factors, recognizing a synergy between internal motivations and external obligations that drive CSR behavior. Scholars generally concur that a combination of constraints and incentives shapes CSR actions.
Empirical studies reveal that corporate governance structure, stakeholder pressure, regulatory frameworks, ethical leadership, as well as industry characteristics, resource availability, and market dynamics influence CSR fulfillment.
CSR behavior is closely linked to corporate awareness of social responsibility. While most enterprises acknowledge the importance of social responsibility, there’s variability in understanding the specific content and value thereof. Nevertheless, environmental protection is universally recognized as a fundamental social responsibility for every enterprise.
Furthermore, determining how to fulfill social responsibilities involves integrating them with corporate strategy, emphasizing alignment between corporate and stakeholder interests. This integration manifests in strategic CSR and responsive CSR. Strategic CSR entails undertaking social responsibilities in line with profit maximization goals, thereby contributing to sustainable competitive advantage. Conversely, responsive CSR involves fulfilling social responsibilities mandated by regulations or societal expectations, often disconnected from strategic objectives.
The choice of CSR strategy shapes the scope and objectives of CSR, but its implementation relies on the resources and activities of the enterprise. Notably, social responsibility investment has emerged as a trend, wherein investors consider social, environmental, and ethical factors alongside economic returns. Social responsibility investment strategies encompass screening, shareholder activism, and community investment, each influencing the selection and execution of CSR initiatives in distinct ways.
CSR FAILURE IN INDIA
Corporate Social Responsibility (CSR) involves how companies manage their operations to create a positive impact on society, encompassing sustainability, social impact, and ethical business practices. Over time, CSR has evolved from a mere slogan to an essential aspect of corporate functioning.
Businesses must address two key aspects: the quality of their management and the extent of their societal impact. In today’s era, with various global challenges, corporations have a significant responsibility to contribute to the well-being of mankind and society.
While CSR was once considered a good practice, it is now seen as indispensable for firms, driven by consumer expectations. A growing number of consumers expect businesses to operate responsibly and seek out products from ethical companies.
Embracing sustainable and ethical practices offers numerous benefits for companies, including increased customer engagement and loyalty. Businesses that prioritize societal well-being also foster professionalism and dedication among employees, leading to greater efficiency and effectiveness. Furthermore, a positive and altruistic approach toward society helps companies build a strong reputation and gain a competitive advantage over rivals. Overall, CSR has become essential for business success, shaping consumer preferences and corporate culture alike. Mandating CSR for businesses won’t yield positive outcomes without proper enforcement mechanisms in place. A significant challenge lies in identifying credible projects for corporate support. Larger charities receive an influx of funds, leaving smaller ones struggling to secure resources to meet corporate demands. Additionally, companies tend to favor projects geographically closer to their bases, neglecting underdeveloped areas in greater need.
Concerns about companies circumventing CSR obligations are justified. A survey revealed that over half of the top 100 firms failed to meet the required 2% expenditure. Some allegedly exploit loopholes by donating to charitable foundations that return funds minus a commission. Lack of transparency further complicates matters, making it difficult for the government to ascertain actual spending.
Even when considering reported CSR expenditure, significant issues persist. Many firms view CSR as a tax, given India’s high corporate tax rate. Moreover, spending often aligns with corporate priorities rather than democratically determined needs. For instance, a substantial portion goes to combating diseases and promoting education, while crucial areas like reducing child mortality and eradicating extreme poverty receive minimal funding.
The government’s role in fulfilling societal needs through public funds is paramount. However, the CSR law has fallen short in this regard. Geographic disparities in CSR spending further underscore the need for government intervention. States like Maharashtra and Gujarat receive more funding compared to those in the Northeast, reflecting business interests rather than equitable distribution.
In short, effective CSR implementation requires stringent enforcement, transparent reporting, and a shift towards addressing genuine societal needs rather than corporate interests.
JUDICIAL INVOLVEMENT IN CSR ACTIVITIES
Following Independence, the Indian State assumed a dominant role in development, while the corporate sector played a secondary part. However, the State’s inability to alleviate poverty and foster economic growth led to discontent. The liberalization of the Indian economy in 1991 marked a shift towards globalization, resulting in rapid wealth accumulation alongside increased inequality.
While some Indian companies had previously engaged in social development, the Companies Act of 2013 made it mandatory for certain companies to establish CSR committees. This legal obligation stemmed from the recognition of corporations as entities with rights and responsibilities, evolving from a voluntary practice to a legal requirement.
The judiciary, particularly the Supreme Court, emphasized the importance of CSR in advancing fundamental rights, particularly under Article 21 of the Constitution, which includes the right to a healthy environment. The court’s rulings expanded environmental protection, sometimes prioritizing it over economic concerns. National Company Law Tribunals have also enforced CSR policies, with numerous cases prosecuted for non-compliance under the Companies Act. The determination of CSR obligations is tied to financial accountability, with penalties for non-adherence.
Amendments to CSR rules in 2022 addressed issues such as social impact assessment costs and unspent CSR funds. These amendments stipulated that companies must comply with CSR obligations as long as unspent amounts exist. Additionally, a cap on impact assessment expenses was introduced to allow for comprehensive assessments.
The government introduced a new format for annual CSR reports, emphasizing transparency and accountability. CSR in India has evolved through various phases, benefiting companies through publicity and increased brand value. Collaboration between the courts and legislature has ensured the success of CSR policies for both companies and society.
The argument presented is that the expenditures incurred by the assessed for the welfare of employees and nearby villages are part of the company’s corporate social responsibility (CSR) expenditure. It is asserted that these expenditures are necessary for retaining employees from the nearby villages and motivating them to work with the company in the long term by providing essential amenities. The expenses are claimed to be essential for smooth business operations and are incurred wholly and exclusively for business purposes. Additionally, it is stated that proper bills and documentation have been maintained to support these expenditures, and the assessing officer (AO) incorrectly disregarded sample voucher copies submitted.
The reliance is placed on judicial precedents, particularly CIT Vs. Madras Refineries Ltd. (266 ITR 170, Madras) and CIT Vs. Jayendra Kumar Hiralal (327 ITR 147, Gujarat HC), wherein it has been held that expenditure incurred on various corporate social responsibility activities is allowed as business expenditure.
In essence, the argument is that the expenditures in question are essential for business operations and are in line with corporate social responsibility initiatives, thus qualifying as deductible business expenses.
In commissioner of According to the observations made, it is evident that CSR (Corporate Social Responsibility) activities have become an integral part of business operations for companies. The essence of CSR is not merely charity but a strategic initiative that addresses the well-being of all stakeholders, beyond just shareholders. CSR activities are intertwined with the core business strategy and have a direct impact on various aspects of business sustainability, including manufacturing activities, supply chain management, credit rating, and corporate reputation.
The judgments cited from the Hon’ble CESTAT Mumbai and the Hon’ble High Court of Karnataka emphasize that CSR is not an optional endeavor but a statutory obligation for both public and private sector companies. Failure to comply with CSR provisions can disrupt business operations and jeopardize the sustainability of the company itself. Therefore, CSR activities are deemed essential for the smooth functioning and longevity of a company.
Regarding the question of whether the free supply of goods as part of CSR activities is restricted under Section 17(5)(h) of the CGST Act, 2017, it would depend on the specific circumstances and nature of the supply. However, considering the observations made regarding the integral nature of CSR activities to business operations, it can be inferred that such supplies are likely to be considered as incurred “in the course of business” and may not be restricted under Section 17(5)(h) of the CGST Act, 2017.
In Moli ltd vs commissioner of income tax-II it was cleared that what are the responsibility that were broadly as follows: (I) Environment Protection (ii) Education (iii) Healthcare (iv) Rural Development (v) Slum Area Development (vi) Women Empowerment (vii) Social Business. The asses submitted that the expenses claimed under the aforesaid heads were in compliance with the provisions of Section 135 of the Companies Act, 2013 and rules framed thereunder.
- It was the case of the assessed that the expenditure towards Corporate Social Responsibility was allowable as business expenditure under Section 37 of the Act. The Assessing Officer, however, did not allow the expenditure towards Corporate Social Responsibility for the reason that the same were capital in nature. It is a matter of record that the Assessing Officer had disallowed the expenditure towards Corporate Social Responsibility amounting to Rs. 6.01 crores.
- In the appeal filed by the assessed before the Commissioner of Income Tax (Appeals), the Commissioner (Appeals) accepted the claim of the assessed and directed the Assessing Officer to allow the expenditure towards Corporate Social Responsibility as business expenditure under Section 37 of the Act. It is the said order passed by the Commissioner (Appeals) that has been set aside by the Tribunal.
- The learned Tribunal has held that the expenditure towards Corporate Social Responsibility was not allowable as a deduction under Section 37 of the Act. The learned Tribunal has found that the expenditure towards Corporate Social Responsibility was capital in nature and, accordingly, not allowable as deduction under Section 37 of the Act.
- It is pertinent to note that Section 37 of the Act provides for deduction of 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 assessed) laid out or expended wholly and exclusively for the purposes of the business or profession. The said section is a residuary provision and allows deduction of any expenditure which is not allowable under Sections 30 to 36 of the Act. The requirement for allowance of any expenditure under Section 37 of the Act is that the expenditure should be laid out or expended wholly and exclusively for the purposes of the business or profession.
- In the present case, the learned Tribunal has found that the expenditure towards Corporate Social Responsibility was capital in nature. The learned Tribunal has held that the expenditure towards Corporate Social Responsibility was capital in nature primarily for the reason that the expenditure was incurred for the expansion of the business of the assessed. The learned Tribunal has found that the expenditure towards Corporate Social Responsibility was incurred for the expansion of the business of the assessed as the expenditure had been incurred to enhance the brand image of the assessed and to improve the goodwill and reputation of the assessed in the market.
- It is a settled legal position that expenditure incurred for the expansion of the business or for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business is capital in nature. The expenditure towards Corporate Social Responsibility was incurred for enhancing the brand image of the assessed and for improving the goodwill and reputation of the assessed in the market. The expenditure towards Corporate Social Responsibility, therefore, cannot be said to have been laid out or expended wholly and exclusively for the purposes of the business or profession of the assessed.
In the light of the aforesaid discussion, we do not find any error or infirmity in the order passed by the learned Tribunal. The appeal filed by the assessed is, accordingly, dismissed.
In the case of Charan Singh Meena vs. Union of India, the court held that the committee report is an essential part of Corporate Social Responsibility (CSR) compliance under Section 135(1) of the Companies Act. The directors are required to monitor the activities outlined in the CSR policy and report them in detail.
This implies that companies subject to the CSR provisions of Section 135(1) of the Companies Act are not only required to formulate a CSR policy but also to monitor and report on the implementation of this policy. The report from the committee overseeing CSR activities is crucial in demonstrating compliance with the CSR obligations mandated by law.
The directors of the company have a duty to ensure that the CSR activities are carried out as per the policy and that the committee overseeing CSR provides detailed reports on these activities. This monitoring and reporting mechanism are integral to fulfilling the CSR obligations imposed on companies under Section 135(1) of the Companies Act.
SUGGESTIONS:
Addressing challenges and obstacles is inherent to any project, including the successful implementation of Corporate Social Responsibility (CSR). However, it’s imperative to seek solutions to surmount these barriers. The following measures can be undertaken to overcome these challenges:
1. Collaboration among Businesses: Companies should unite to collaborate, establish clear guidelines, and ensure diligent adherence to them.
2. Embrace Transparency: An honest and transparent approach is essential. Establishing a system to account for and report on CSR methods is crucial in this regard.
3. Transparency about Impacts: Companies must be transparent about the social, environmental, and economic implications of their actions, as well as the measures taken to mitigate any negative effects.
4. Stakeholder Engagement: Businesses should actively engage with stakeholders, including communities, customers, employees, government entities, investors, suppliers, and shareholders, seeking their input and feedback.
5. Alignment with Stakeholder Priorities: Plans should be formulated in alignment with the objectives and priorities of key stakeholders.
6. Long-Term Partnerships with Stakeholders: Efforts should be made to engage stakeholders in long-term partnership goals, enhancing the company’s image and brand in society.
7. Pursuit of Sustainable Goals: Focus efforts on sustainable goals, prioritizing organizational learning and innovation to ensure sustainability in present and future endeavours.
8. Collaboration with NGOs: Companies should collaborate with non-governmental organizations (NGOs) with expertise in working with local communities, and addressing location-specific societal and environmental issues.
CONCLUSION:
The involvement of the judiciary in overseeing Corporate Social Responsibility (CSR) practices has had a positive impact on fostering accountability, transparency, and ethical conduct within the corporate sector. Through landmark judgments and legal interpretations, the judiciary has played a pivotal role in shaping the CSR landscape, ensuring that companies uphold their social and environmental responsibilities alongside their profit-making objectives.
Firstly, judicial intervention has provided clarity and guidance on the legal frameworks governing CSR, such as Section 135 of the Companies Act. By interpreting the law and setting precedents through judgments, the judiciary has helped companies understand their obligations and encouraged compliance with CSR regulations.
Secondly, the judiciary has acted as a check against corporate misconduct by holding companies accountable for non-compliance with CSR obligations. Through legal proceedings and enforcement actions, the judiciary has imposed penalties and corrective measures on companies that fail to fulfill their CSR commitments, thereby promoting a culture of corporate responsibility and integrity.
Moreover, judicial scrutiny has contributed to raising awareness and promoting best practices in CSR. Landmark rulings and court decisions have highlighted the importance of CSR in sustainable business practices, encouraging companies to integrate social and environmental considerations into their core operations.
Furthermore, judicial activism has empowered stakeholders, including shareholders, civil society organizations, and affected communities, to hold companies accountable for their CSR performance. By providing a platform for grievances and legal recourse, the judiciary has ensured that the voices of marginalized groups and environmental concerns are heard and addressed by corporations.
In conclusion, the involvement of the judiciary has been instrumental in driving positive change in CSR practices by promoting accountability, transparency, and ethical conduct within the corporate sector. Through legal interventions, the judiciary has provided guidance, enforced compliance, raised awareness, and empowered stakeholders, ultimately contributing to the advancement of sustainable and responsible business practices.
Kirti Singh
NLU Nagpur