CSR activities are also charitable activities

Income Tax Appellate Tribunal (ITAT) in a recent order of 26th April 2019 has ruled that registration for tax exemption (u/s 12AA) and tax deduction (u/s 80G) cannot be denied to an institution established to comply with Corporate Social Responsibility (CSR) obligations, particularly since CSR activities are also charitable activities as defined under law.\

The case

Escorts Skill Development (ESD) is a not-for-profit company licensed under section 8 of the Indian Companies Act 2013. ESD was established in order to implement CSR activities and comply with CSR obligations of the parent for-profit company (i.e. Escorts Ltd.). This is common practice.

However, Commissioner of Income Tax (Exemptions), [CIT (E)] took the narrow view that the composition of ESD is restricted to CSR obligations of Escorts Ltd., and therefore does not meet the test of benefiting the general public.

CIT (E) also felt that since skill development activities undertaken by ESD are already subsidized by the Government of India no charitable purpose is served.

What’s worse, CIT (E) took the view that activities of training do not fall under the scope of charitable purpose u/s 2(15) of the Income tax Act (meaning: not even under the category, “any other object of general public utility”).

Consequently, CIT (E) denied ESD registration for tax exemption u/s 12AA as also for tax deduction u/s 80G.

ITAT’s view

ITAT observed that approval under sections 12AA and 80G were denied by CIT (E) on the grounds that ESD has been constituted as a Section 8 company by Escorts Limited only in order to fulfill CSR obligation and control the finances of ESD which would not have been otherwise deductible as expenditure.

As we all know CSR is not tax deductible as business expenditure u/s 37 of the Income tax Act 1961. However, if CSR is carried out through contribution made to the company’s foundation which has 80G certificate (or any other trust, society of Section 8 Company having 80G certificate in addition to track record of three years of service) the CSR contribution would be tax deductible.

ITAT took the view that applications made u/s 12A and 80G of Income tax were wrongly rejected by CIT (E), ignoring the fact that the main activity of ESD is providing vocational training in various fields under the “Skill Development Programme of Government of India” and that vocational training is part of CSR activities notified by the Government of India which can be carried out by the Section 8 Company established by Escorts Ltd., on its own or through a Trust/ Society/Company registered u/s 8 of the Companies Act, 2013.

According to ITAT it is now settled principle of law and a fact that CSR activities are public charitable activities.

Public benefit

ESD also brought on record before ITAT that it is affiliated to Infrastructure Equipment, Construction and Agriculture Sector Skill Councils and has set up training institute at Faridabad having quality workshops. ESD has also partnered with National Small Industry Corporation for imparting training on heavy equipment operators and for which they have trained and certified about 30 trainees as Backhoe loader and PNC crane operators who have been placed with its dealers.

ESD has candidate data base of about 1,000 candidates. However, the Revenue Department had not brought on record an iota of evidence to prove that the youths trained by ESD have not been employed elsewhere. Even otherwise, there cannot be any restrain on a trainee to get the placement as per his convenience.

In other words, even if trainees trained by ESD by free choice and on merit find employment with Escorts limited it would not make ESD private as opposed to public or a business instead of charitable.

ITAT’s verdict

ITAT held that CIT (E) had erred in rejecting the application for registration u/s 12A and 80G of the Income-tax Act, 1961 merely on assumptions, presumptions and apprehensions, without appreciating the factual, legal and statutory position for grant of registration.

CIT (E) failed to appreciate that activities of ESD, inter alia, include the main activity of ‘providing vocational training’ in various fields under the skill development programme of Government of India to create skilled manpower in the country and is covered under both ‘education’, & ‘advancement of any other object of general public utility’ as provided in Section 2(15) of Income Tax Act.

It is important to note that ITAT has not only reaffirmed that ‘providing vocational training’ is “charitable purpose” but, it is covered under the category “education” and “advancement of any other object of general public utility”.

ITAT also ruled that CIT (E) erred in rejecting the application u/s 12A on the ground that ESD has been formed specifically to carry out the CSR obligations of the parent company. CIT (E) failed to appreciate that ‘vocational training’ is a part of the permitted CSR activities notified by the Government of India which can be carried out by the company on its own or through a Trust / Society / Section 8 company.


ITAT concluded that CIT (E) had failed to carry out the mandatory requirement of simply satisfying himself about the “objects and genuineness of the activities” of ESD and, instead, going beyond his mandate, he went looking into the ‘purposes of creation’ of ESD and wrongly declining the registration u/s 12AA and 80G.

Other important take away

1. CSR activities are ‘charitable activities’. Many companies still engage with NGOs as vendors of service to the company and make NGOs sign vendor agreements and work contracts. Some of these companies also insist that TDS should be deducted and the NGO must register under GST as provider of service. This, in our opinion, should be strongly discouraged as it can have serious income tax implications and added GST compliance for the NGO.

2. Providing vocational training is not just “charitable purpose” but, covered under the category “education” and “advancement of any other object of general public utility”. If vocational training comes under the category of “education”, institutions running such training perhaps should not worry if their fee or business or commercial income goes over twenty per cent of their non-business or commercial income. However, this is merely an inference which we are drawing from this ruling and concede that whether vocational training falls under “education” or “advancement of any other object of general public utility” is still a grey area and subjective.

3. An institution cannot be deemed to have been established for ‘private benefit’ simply because persons who are trained at a vocational or skill building institution set up by the CSR foundation of a company secure out of free choice and on merit, a job in the same company.


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