CSR (Corporate Social Responsibility) activities are primarily undertaken for social welfare rather than for profit-making. However, in some cases, a CSR initiative might generate a surplus or profit. Here’s how such profits should be treated:

1. Separation from CSR Mandated Spend

• CSR Obligation Remains Unchanged:
  Even if a CSR project generates a profit, the company’s obligation to spend at least 2% of its average net profit on CSR (as per Section 135) remains unaffected.
• No Set-Off:
  The profits earned from CSR activities cannot be set off against the mandated CSR expenditure.

2. Treatment as Business Income

• Ordinary Business Income:
  Any profit arising from a CSR activity is treated as ordinary business income of the company.
• Taxation:
  Such profits are subject to tax in the usual manner, just like income from any other business venture.

3. Reinvestment Option

• Reinvestment in CSR:
  Although the profits must be taxed as business income, companies may choose to reinvest these funds in further CSR initiatives.
• No Special Tax Benefit:
  Reinvesting the profit does not provide an additional tax deduction specifically for the fact that it originated from a CSR activity.

Key Takeaways

• Mandatory CSR Spend Unaffected:
  Even if a CSR project is profitable, the company must still meet the prescribed CSR spending obligation.
• Separate Accounting:
  Profits from CSR activities should be accounted for as part of the company’s overall business income.
• Taxation as Usual:
  These profits are taxed at the applicable corporate tax rates.