CSR Funds utilizations and Its Tax Implication

[PRIYAM KHAMBHATA]

Respected Sir

During the FY 2024-25, one of my Client, Charitable Institutions, registered Under Section 8 Company, who is received CSR Funds from another Charitable Institution A. My client has been utilized such CSR Funds as per the objects and given Utilization Certificates.

My Client has received Notice 133(6) from Income tax Department, in connection with scrutiny assessment u/s. 143(3) of the another Charitable Institution A, Now my question is that is there any violation to receive CSR Funds from another Charitable Institution or sub letting CSR funds to another charitable Institution for utilization

Please guide me.

[Sanjeev Agarwal]

For FY 2024-25, mere receipt of CSR funds by a Section 8 company from another eligible company is not, by itself, a violation. A Section 8 company can act as an eligible CSR implementing agency, subject to the conditions prescribed under Section 135 of the Companies Act, 2013 and Rule 4 of the Companies (CSR Policy) Rules, 2014, including applicable CSR-1 requirements.

The key distinction is between:

1. Receipt and direct utilisation by your client - generally permissible, provided the CSR project is duly approved, falls within Schedule VII, is within the client's charitable objects, and actual utilisation is properly evidenced.
2. Onward transfer to another charitable institution - this requires greater caution. It should not simply be described as "sub-letting" or a pass-through of CSR funds. If another institution is involved in implementation, there should be a documented project arrangement, eligibility of the implementing/partner institution, proper monitoring, actual project execution, and complete utilisation evidence. The donor company's approved CSR framework/MOU should support the arrangement.

Therefore, both the tax and Companies Act positions depend on the actual substance and documentation. The fact that both entities are charitable does not, by itself, establish CSR compliance.

For the section 133(6) notice, its issuance does not itself establish any violation. The Income-tax Department is likely verifying the genuineness and utilisation of the payment made by Institution A during its section 143(3) assessment. Your client should establish the complete trail:

Institution A's CSR approval MOU/sanction receipt by your client project expenditure beneficiaries utilisation certificate/report.

If funds were subsequently transferred to another institution, additionally establish the authority for such transfer, CSR-1/eligibility of the recipient, agreement, actual utilisation and monitoring.

From the Income-tax perspective, CSR receipts should also be examined under sections 11, 12 and 13; they should not automatically be treated either as taxable income or as corpus merely because they are called CSR funds.

Preliminary risk assessment:

• Receipt of CSR funds: Strong / generally permissible
• Direct utilisation: Strong, if documented
• Onward transfer: Reasonably Defensible, subject to the precise CSR arrangement and evidence
• 133(6) notice: Information gathering, not an adverse finding by itself.

AI Summary

CSR fund utilisation by charitable institutions raises questions about inter-institutional transfers and income-tax scrutiny compliance.
CSR fund utilisation by a charitable institution organised as a Section 8 company raises questions on receiving CSR funds from another charitable institution and applying them towards its stated objects. The recipient has issued utilisation certificates. Income-tax scrutiny of the donor has resulted in an information notice to the recipient, raising the compliance issue of whether inter-institutional receipt or onward transfer of CSR funds for utilisation constitutes a regulatory or tax violation.