Corporate Social Responsibility in Commercial Jurisprudence

17 June, 2018

Economics and Trade


Let’s begin this study with the famous saying of Mahatma Gandhi, which goes like this: “Earth provide enough to satisfy every man’s need, not every man’s greed.” JRD Tata, a recipient of Bharat Ratna (the highest civilian award) in India, also says that: “We generate wealth for the people. What comes from the people must, to the extent possible, therefore get back to the people.” The concept of Corporate Social Responsibility (CSR) has matured over the years in a fashion that has made a remarkable imprint in academia as well as corporate world which cannot be explained within a particular framework. The acclaimed American economist Howard Rothmann Bowen (1908-1989) is chiefly remembered for his popular work Social Responsibility of Businessmen (1953) where he pioneered the concept of ‘Corporate Social Responsibility’ which is considered as a mandatory philanthropy in contemporary days. He was of the view that Corporate Social Responsibility is an obligation of businessmen to pursue those policies, to make those decisions or to follow those lines of actions which are desirable in terms of the objectives and values of our society. Yet, there can be no exhaustive definition till date which specifically defines Corporate Social Responsibility in a straight-jacket formula. Still, remarkable attempts have been made so far by various economists who defined this term in a comprehensive way.


Corporate Social Responsibility policies have left a deep imprint in the field of Indian Commercial Jurisprudence along with International norms and guidelines. In order to safeguard the interest of the society and to ensure that society as a whole enjoys the fruit of industrialization and development in India there are constitutional provisions and even the Government of India has enacted many legislations.


I. Constitutional Provisions Supporting Corporate Social Responsibility Mechanism

The Constitution of India provides for separation of powers between executive, legislature and Judiciary. It is the supreme law of the land and acts as a custodian of democracy.


Preamble vis-à-vis Corporate Social Responsibility

The Constitution of India begins with the Preamble, which contains the vision of the founding fathers. The Preamble of the Constitution of India declares India to be Sovereign, Socialist, Secular, Republic and Democratic. It affirms the sovereignty of “We the people,” who are committed “to fulfill the aspirations for perpetual peace, good governance, development and prosperity through the medium of democratic republican system of governance” and thus “thereby promulgate this Constitution through the Constituent Assembly.” The concluding part seeks to unite the citizens in an enduring sense of duty to uphold the Constitutional norms, not just paying lip service to it. It casts an obligation on the state and society to ensure justice along the lines of social, economic and political. And, social justice could only be achieved when public interest prevails over the private interests. Bentham was right in saying that a just society should ensure greatest number of happiness to greatest number of people. Still, the noble thought of Bentham could be realized only when our society succeeds to secure the larger interest. These days its often seen the governmental bodies are prioritizing the interests of a handful number of persons, who are enlisted under billionaire or millionaire. The researchers humbly submits that the breeds of socialism or the vision of a welfare state cannot be realized in a true and material sense unless our Republic tends to knock down all the boundaries resting upon the economic disparities. To put it simply, a just society ought to secure the rights and concerns of the every section of society, including people who are left behind the mainstream. The objective of socialism, from the very inception of this concept, is to cure the divisions and inequalities in the society. “The socialist divide concerning the manner of achieving change was one of the reasons as to why socialism did not expressly find place under the Indian Constitution until 1976.”[i]From the observation of Rylands v. Fletcher[ii], it becomes clear that any individual or corporations is liable to face the liability – be it strict or absolute – when anything entrenches the field assigned to it and causes injury to others. So, in one way or some other, even the corporations have to bear the loss caused due to their negligence. Thus, this verdict sets an example that the corporations are not immune from the obligations. Now, it can be concluded that the corporations are created in society and it cannot run away from their societal obligations. Even on non-fulfillment of Corporate Social Responsibility obligations, the companies could be merited with legal slap or penalties by the Court of Justice. The Supreme Court in D.S. Nakara v. Union of India[iii], observed that the basic framework of socialism is to provide a descent standard of life to the working people, particularly security from cradle to grave; the object is to achieve economic equality and distribution of income. Thus, it is a blend of Marxism and Gandhism leaning towards Gandhian Socialism. Likewise, in Excel Wear v. Union of India[iv], the topmost court reiterated that introduction of word socialism might enable the courts to lean more in favour of nationalism and state ownership of industry. The apex Court in case of NandiniSundar v. State of Chattishgarh[v]laid emphasis on social justice so as to attain substantial degree of social, economic and political equality. Liberalization and privatization should not result in contravention of economic resources into few hands rather they should be distributed in such a manner as to result in inclusive growth/development. The highest Court of appeal in India has arrived at a conclusion that the fundamental rights and directive principles constitute the conscience of Constitution.[vi] The learned judges, jurists, and academicians argue that the directive principles are the litmus to test the prosperity of state. Indeed, the prosperity of a state cannot be maintained in a subtle form unless the corporate houses, who earn money out of proportions, are made bound to obey the societal obligations which are expressed in the form of CSR over the years.


Fundamental Rights vis-à-vis Corporate Social Responsibility

It is to be noted that fundamental rights and Corporate Social Responsibility both are made to protect the interest of people living in the society. “The right to form associations is the very lifeblood of democracy. Without such right, political parties cannot be formed, and without such parties a democratic form of government, especially that of parliamentary type, cannot be run properly.”[vii] Hence the Constitution guarantees the right to form associations subject to some restrictions. In M.H. Devendrappa v. Karnataka State Small Industries Development Corp.[viii],the apex court was of the opinion that legitimate action discreetly and properly was taken by the government servants with a sense of responsibility and at the proper level to remedy any malfunction in the organization, may not be barred. Article 21 assures every person right to life and personal liberty, which was dormant for nearly three decades and was revived by the famous verdict of Supreme Court in Maneka Gandhi case[ix]. In Peoples Union for Democratic Rights v. Union of India[x], Supreme Court observed that non-payment of minimum wages to the workers is simply a denial to them of their right to live with basic human dignity and violative of article 21. In Chameli Singh v. State of Uttar Pradesh[xi], the highest court inserted the right to shelter as a fundamental right under article 21. The Supreme Court observed the right to education[xii] as fundamental right which cannot be denied to the citizens by charging higher fee known as capitation fee. The issue regarding rehabilitation of the prostitutes and their children was brought before the Supreme Court in Gaurav Jain v. Union of India[xiii], through a PIL under article 32. The court laid down the guidelines for the establishment of juvenile homes for them in the country.


Directive Principles of State Policy vis-à-vis Corporate Social Responsibility

Notably, the Directive Principles of State Policy and Corporate Social Responsibility both operate for the society. In fact, the goals of directive principles and Section 135 of Companies Act, 2013 can be championed only when the socialistic objectives (Directive Principles of State Policy) and the corporate philanthropies (Corporate Social Responsibility) are paid a heed in a true and material sense. In Air India Statutory Corporation v. United Labour Union[xiv], Supreme Court explained the concept of social justice, which consists of diverse principles essential for the orderly growth and development of personality of every citizen. Justice is the genus, of which social justice is one of its species. In H.M. Hoskot v. State of Maharashtra[xv], the apex court was of the opinion that ‘legal aid’ and ‘speedy trial’ have now been held as a fundamental right under article 21. The Supreme Court observed in GrihKalyan Kendra v. Union of India[xvi], that the word ‘socialist’ in the Preamble must at least mean “equal pay for equal work”. The state is the ultimate care-taker of the future of India and its people, and so is it legitimate for the state to undertake various patterns of planning and governance under the guidance of the Constitution. In the context of India, there is a need to understand the level of compatibility between socialism and democracy.


II. Statutory Legislations supporting Corporate Social Responsibility Mechanism

Statutory legislations are framed to protect the interest of the people in society in one or some other way. It imposes societal obligation on the state as well as corporate entities to be responsible towards the welfare of the society. India is the first country in the world to enshrine corporate giving into law. However, the Government of India and Ministry of Corporate Affairs has recently notified Section 135 of the Companies Act, 2013 along with Companies (Corporate Social Responsibility Policy) Rules, 2014 which makes it mandatory for the companies to contribute some percentage of their average net profits on some Corporate Social Responsibility activities in order to protect the interest of people in the society. United Nations Industrial Development Organizations (UNIDO) explains Corporate Social Responsibility, a mode through which a company achieves a Triple Bottom Line approach-- balance of economic, environmental and social imperatives, and at the same time addresses the expectations of shareholders and stakeholders. Section 135 provides threshold limit for the company falling under this scheme and fulfilling the threshold limit (as mentioned in figure 1[xvii]) has to spend at least 2% of its average net profit on the Corporate Social Responsibility activities of immediately preceding three financial years. Moreover, the company is required to form a Corporate Social Responsibility committee in order to monitor the policy and recommend the amount of expenditure incurred on such activities.[xviii] In case, the companies are not complying with the aspects of Corporate Social Responsibility, the reason for non-compliance has to be disclosed in the Board’s Report. The activities exercised by the companies on the name of Corporate Social Responsibility are specified in VII schedule of the Companies Act, 2013.


Figure 1: Threshold Limit


Securities Exchange Board of India (SEBI) vis-à-vis Corporate Social Responsibility

The capital markets watchdog, Securities Exchange Board of India (SEBI)has inserted a new clause i.e. Clause 55 in SEBI Act, 1992 which has made mandatory for the top 100 listed companies (on the basis of market capitalization) to report their certain vital information as a part of their business responsibility. The Business Responsibility Report (BRR) is mandatory for these top 100- listed companies at Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). With the passage of time, when the enterprises are increasingly seen as an acute component of the social system, they are accountable not merely to their shareholders from the revenue perspective but also to the larger society as their stakeholder. Moreover, the adoption of responsible business practices in the interest of society and environment are as vital as their financial performance. Ministry of Corporate Affairs, Government of India, on July 2011 in consonance with the circularCIR/CFD/DIL/8/2012 dated August 13, 2012, came out with the ‘National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business’.Circular provides the compulsory inclusion of Business Responsibility Reports (BR Reports) as a part of Annual Reports of listed companies, which are abide by the principles and guidelines and consider that public interest should be largely protected and secured.[xix]


Labour Laws vis-à-vis Corporate Social Responsibility

A new branch of jurisprudence known as Industrial Jurisprudence has been introduced in our country during twentieth century. The growth of Industrial Jurisprudence can significantly be noticed not only from increase in labour and industrial legislations but also from a large number of industrial law matters decided by the Judiciary in India. Labour legislation in any country should be based on the principles of social justice, social equity, international uniformity and national economy. It simply implies two things, first equitable distribution of profits and other benefits of industry between industry owner and workers. Secondly, protection should be provided to the workers against harmful effects to their health, safety and morality.[xx] The guiding principles of Industrial adjudication provides that since it aims at promoting social and economic justice and social and economic justice rests on serving the interest of society as a whole, therefore, industrial adjudication must also sub-serve the public interest. It is to be noted that many laws and legislations have been enacted and passed by the legislature to promote safety and security to the people of society. The main objective behind these legislations is to make industries concerned for the health of people and to establish a welfare society.


Environmental Laws vis-à-vis Corporate Social Responsibility

Various laws have been enacted by the legislature in order to protect the environment and provide measures to combat with the problem of environmental pollution. It is the basic right of all individuals to live in a healthy environment. The acute poverty in the country requires developmental process to be accelerated, but we cannot do so at the cost of environment thereby endangering not only the present generation but also the future generation. The crying need of the hour is the “Sustainable Development.” In order to achieve it, the environment protection constitutes an integral part of developmental process and it cannot be considered in isolation. In today’s world, we are confronted with a perpetuation of disparities between and within nations, a worsening of poverty, hunger, ill health and illiteracy and the continuing deterioration of the ecosystem on which we depend for our well-being. There exists a close and knitted relationship between a healthy environment and economic condition of community at large.[xxi] In Indian Council for Enviro-Legal action v. Union of India[xxii], Supreme Court held that violation of anti-pollution laws not only adversely affects the existing quality of life but the non-enforcement of the legal provisions often results in ecological imbalance and degradation of environment, the adverse effect of which has to be borne by the future generation. In Law Society of India v. Fertilizers and Chemicals Travancore Ltd.[xxiii], the apex court opined that the environmental imperative is ultimately a matter of public and private rights and duties and interests of future generations which are not available as negotiable commodities to be purchased at any ‘going rates’. Therefore, it is essential that the people should be aware of the adverse consequences of environmental pollution and they should not only protect and improve the environment but also ensure the compliance of anti-pollution laws and if need be, to take help of the judicial forum to enforce such laws to maintain the ecological balance.


The Competition Act, 2002 vis-à-vis Corporate Social Responsibility

The preamble of the Competition Act, 2002 revels that the law was enacted keeping in view the economic development that resulted in removal of controls and consequent economic liberalization which required the Indian economy be enabled to allow competition in the market from within the country and outside.[xxiv] The Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act) has become obsolete in certain respects in the light of international economic developments relating more particularly to competition laws and there is a need to shift our focus from curbing monopolies to promoting competition. The objective of the Act is to sustain free competition in the market and to protect the interests of consumers. The objective of economic policy is to sustain competition culture in the country for economic efficiency and maximization of public/consumer interest. Sustenance of competition culture could be ensured by free and fair competition amongst economic enterprises.[xxv]In India, every statute is presumed to be for achieving the ideals of the Constitution. Competition law is a part of socio economic justice as enunciated in the Constitution. The Competition Act, 2002 being a piece of socio-economic legislation should be liberally construed so as to advance the object of the Act and fulfills the aim to be achieved thereby.[xxvi]


Taxation Laws vis-à-vis Corporate Social Responsibility

Section 37 of the Income Tax, 1961, it has been provided that while allowing deduction for business expenditure, the law takes into account the purpose for which the expenses are incurred. The Judiciary in India has consistently taken the view that the reasonableness of any expenditure is to be considered from the viewpoint of normal and prudent man. In Commissioner of Income Tax v. Infosys Technologies Ltd.[xxvii], the Karnataka High Court held that the traffic signal will be used by its employees so it automatically relates to the business activity and thus, it is allowed under Section 37 (1) of Income Tax Act, 1961. Interestingly, all the Corporate Social Responsibility expenditures are incurred by the company during the year are subjected to the activities specified in Schedule VII of the Companies Act, 2013. These expenditures are required to be disclosed in the Board’s Report and once such expenditure are declared as Corporate Social Responsibility expenditure then such cannot be claimed as expenditure under Section 37 of the Income Tax Act, 1961. Thus, it will be apt in saying that the ‘Government wants to eat the cake and keep it too’.[xxviii] In Commissioner of Income Tax v. Madras Refineries Ltd.[xxix], the Madras High Court remarked that the concept ofbusiness is not static. It has evolved over a period of time to include in it the expression of care and concern for the society at large and people of the locality in which business is located, in particular. Thus, in fulfilling the role of good corporate citizen and to bring goodwill there arises a shift towards Corporate Social Responsibility. Notably, with the interpretation of Section 37 of the Act, Corporate Social Responsibility expenditures are even allowed within Sections 30 to 36 of the Act, 1961. These sections provide specific deductions in respect of certain expenditure which are not business expenditure in true sense. Further, the expenditure which are incurred in accordance with the provision of Section 135 of the Act, 2013 along with Schedule VII and fulfills the requirement of the sections of Act, 1961, they would automatically get a deduction for such expenditure under the provision of the Income Tax Act, 1961.