CSR became mandatory in India a few years ago, and since then, companies have been trying to understand how to treat it for tax purposes. A lot of people assume that because CSR improves the company’s brand image & goodwill, it should be treated just like any other business expense. But the Income Tax Act looks at CSR differently.
So the common question is:
“CSR disallowed in income tax under which section?”
And thankfully, the answer is very direct.
CSR Is Disallowed Under Explanation 2 to Section 37(1)
The law clearly states that Corporate Social Responsibility (CSR) expenditure is not allowed as a general business deduction under Explanation 2 to Section 37(1).
To put it simply:
- A company must spend on CSR because the Companies Act asks it to.
- But that doesn’t mean the Income Tax Act will give a deduction for it.
- So CSR is treated as a mandatory obligation, not a business-related expense.
Explanation 2 was added specifically to remove any confusion about this.
Why Was CSR Disallowed Under Section 37(1)?
When CSR became compulsory under Section 135 of the Companies Act, many companies started claiming CSR expenses as deductions using the loophole in Section 37(1). The idea was simple:
“If it’s an expense & we are paying it from company funds, why can’t it reduce our taxable income?”
The government immediately realized this would defeat the purpose of CSR. If companies could claim a tax deduction, their actual CSR spending would shrink.
So Explanation 2 was added, which very bluntly says:
CSR expenses cannot be considered as expenses incurred “wholly & exclusively for the purpose of business.”
And that single line was enough to close the door.
Also Read: Section 12BA: The Form Every Employer Must File for Employee Perquisites
Section 37(1) in Plain Language
To really understand why CSR doesn’t fit, let’s look at what Section 37(1) means when written in normal English:
If you spend money only for your business, and it is not a capital or personal expense, & it’s not already covered under another deduction section, then you can claim it as a deduction.
CSR, however:
- is not for business
- is not voluntary
- is not done for profit
- is done because the law requires it
So naturally, it does not qualify.
CSR Under Section 135 — Why It Matters Here
CSR obligations come from Section 135 of the Companies Act. It lists:
- which companies must do CSR,
- how much they must spend, and
- the activities considered as CSR.
Because CSR is a statutory requirement, the Income Tax Act will not treat it as a normal business expense. This is the main reason Explanation 2 to Section 37(1) exists at all.
But Is CSR Always Disallowed? Not Exactly.
This is where most people get surprised.
CSR is disallowed only under Section 37(1).
But the Income Tax Act has many other sections.
So the real truth is:
✔️ CSR cannot be claimed as a business deduction under Section 37"
❌ But CSR can still be eligible under other sections, depending on the type of CSR
A few examples will make this crystal clear.
- CSR Given to Funds Eligible Under Section 80G
If your CSR contribution is made to an institution or relief fund approved under Section 80G, you may still claim the deduction.
But the deduction will follow Section 80G rules — not Section 37.
This is the important difference:
- It is disallowed as a business expense
- It may still be allowed as a donation deduction
- CSR Spending Related to Scientific Research
Sometimes companies contribute to scientific research as part of their CSR.
And the Income Tax Act allows deductions while computing taxes for expenses relating to scientific research.
But again:
- the deduction is allowed under scientific research sections,
- not under Section 37(1).
- CSR Contribution to Government-Notified Funds
If CSR money goes toward certain notified schemes or funds, they may fall under other deduction-based sections.
So CSR isn’t completely “non-deductible. It just depends on where the money is going & which section applies.
Also Read: Section 191 – Direct Payment of Income Tax by the Assessee
A Real-Life Example to Make Everything Extremely Clear
Let’s say a company spends ₹60 lakh on CSR in a financial year:
- ₹35 lakh on constructing a school building
- ₹10 lakh donated to an NGO with Section 80G approval
- ₹15 lakh contributed to a government relief fund
Here’s how income tax applies:
₹35 lakh — School project
❌ Not allowed under Section 37(1)
₹10 lakh — NGO donation (80G approved)
✔️ Allowed under Section 80G (50% or 100%, depending on NGO)
₹15 lakh — Relief fund (notified)
✔️ Fully or partially deductible (depending on the fund)
So income tax disallows CSR under Section 37 — but it doesn’t close the door on all tax benefits.
Why CSR Disallowance Is Actually a Good Thing
Although companies sometimes feel CSR disallowance is unfair, the logic behind it makes sense. CSR was introduced so that large companies actively participate in building the country — not as a tax planning tool.
If CSR became deductible:
• companies would inflate CSR spend to reduce tax
• social spending would decrease
• purpose of CSR would be lost
The intention is clear:
CSR is supposed to help society, not reduce taxes.
How Businesses Should Look at CSR Going Forward
Companies should treat CSR as:
- a legal obligation
- a social duty
- a budgeted cost
- a board-monitored activity"
- something separate from tax planning
CSR planning now has two branches:
- CSR for compliance & ethical responsibility
- Tax deduction planning under permitted sections
Once companies understand this difference, CSR accounting and tax filing become much easier.
Also Read: 100% Deduction on Capital Expenditure for Specified Businesses
Final Thoughts
CSR is disallowed in income tax under Explanation 2 to Section 37(1) of the Income Tax Act, 1961. It treats CSR as a mandatory social obligation, not a business expenditure. However, depending on where the CSR money goes, companies may still receive deductions under other sections like 80G or scientific research provisions.
CSR and income tax may look complicated at first, but once you understand the rule behind Section 37(1), everything becomes much more straightforward.
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