Companies Act’s tax conundrum

Mar 27 2014, 15:23 IST
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SummaryIn the full budget, the I-T Act needs to be aligned with the provisions of the new Companies Act

The recently enacted

Companies Act 2013 is a landmark legislation and is likely to have far-reaching consequences on all companies operating in India. The new Act, which has been in the making for 10 years, has been enacted by the government in parts with few sections already effective and balance yet to be notified. The draft rules are in the midst of a consultation process.

At first glance, it seems that the Companies Act 2013 aligns with the tax laws since it mandates that every company would follow the year ending on March 31 as its financial year. However, a closer look at the Act throws up various inconsistencies with the Income Tax Act 1961.

Tax deductibility of CSR expenditure

The hotly-debated and actively-publicised corporate social responsibility provisions have been recently notified to be effective from April 1, 2014. The law as notified provides that companies that exceed a specified net worth/turnover or net profit are required to mandatorily spend 2% of their average net profit towards specified CSR activities. With the net profit threshold limit at R5 crore, a large chunk of companies are likely to come under the CSR net.

However, a key issue that is troubling the tax manager at every large corporate is the absence of any specific provision for deductibility of such CSR expenditure under the income tax laws. Under section 37 of the

Income Tax Act, expenditure incurred exclusively for the purpose of business is allowed as a deduction. Relying on few judicial precedents, it may be argued that the expenditure incurred on account of a statutory obligation ought to be deductible; however, the fate of this argument may be uncertain without clear provisions in the law.

Under the CSR rules, a company can undertake CSR activities through a registered trust, registered society or a company established under section 8 of the new Companies Act. Further, the specified CSR activities are defined in schedule VII of the new Companies Act. However, such specified activities currently do not align with the definition of ‘charitable purpose’ under the Income Tax Act. As an example, though the issue of promotion of gender equality and empowerment of women which is a growing trend in India now finds a mention in the Companies Act; however, the same is not covered under the provisions of the Income Tax Act.

Tax implications of revision of accounts

Under section 130 of the new Act, the central government, income

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