CSR Under Section 135: Applicability, Spending & Reporting

1. Legislative Framework Governing CSR in India

India became one of the first countries in the world to mandate corporate social responsibility through legislation. The Companies Act, 2013 introduced Section 135, which came into effect on 1 April 2014. The provision was further strengthened by the Companies (CSR Policy) Amendment Rules, 2021, which brought in significant changes including mandatory registration of implementing agencies, impact assessment requirements, and stricter transfer provisions for unspent CSR amounts.

The key statutory provisions governing CSR include:

• Section 135 — Principal provision dealing with CSR applicability, committee constitution, spending obligation, and penalties
• Schedule VII — Exhaustive list of permissible CSR activities
• Companies (CSR Policy) Rules, 2014 — Detailed procedural rules, as amended from time to time
• Various MCA Circulars & FAQs — Clarifications issued by the Ministry of Corporate Affairs

Companies must also be mindful of the interplay between CSR obligations and provisions relating to company secretarial compliance, as the CSR Committee’s constitution, meetings, and reporting intersect with broader board governance requirements.

2. Applicability Thresholds Under Section 135(1)

Section 135(1) prescribes three alternative thresholds. A company triggers CSR obligations if, during the immediately preceding financial year, it meets any one of the following criteria:

It is important to note that these thresholds are tested on the basis of the immediately preceding financial year only. If a company ceases to meet the thresholds for three consecutive financial years, it is no longer required to comply with CSR provisions from the financial year in which it ceases to qualify. However, any obligation relating to unspent CSR amounts from previous years must still be fulfilled.

2.1 Computation of Net Profit for CSR Purposes

The net profit for CSR is computed under Section 198 of the Companies Act, 2013, which differs from the accounting profit or the profit computed under the Income Tax Act, 1961. Key adjustments include:

• Exclusion of profits arising from overseas branches (unless the company elects to include them for CSR spending abroad)
• Exclusion of dividend income from other Indian companies subject to CSR
• Deduction of sums paid as tax, surcharges, and cess under the Income Tax Act
• Adjustments for any amount set aside to reserves as required by any specific statute

The 2% spending obligation is calculated on the average net profits of the three immediately preceding financial years. For companies that have not completed three financial years since incorporation, the average is computed over the years since incorporation.

3. CSR Committee — Composition & Functions

Every company meeting the applicability thresholds must constitute a CSR Committee of the Board. The composition requirements are as follows:

• The committee must consist of three or more directors, of whom at least one shall be an independent director
• For unlisted public companies and private companies not required to appoint an independent director, the committee may comprise two or more directors
• If a company has only two directors on its Board, both shall constitute the CSR Committee

3.1 Exemption from CSR Committee

The 2021 Amendment Rules provide that where the CSR obligation of a company does not exceed ₹50 lakh, the requirement to constitute a CSR Committee is dispensed with. In such cases, the functions of the CSR Committee shall be discharged by the Board of Directors directly.

3.2 Functions of the CSR Committee

The CSR Committee is responsible for:

1. Formulating and recommending the CSR policy to the Board, indicating the activities to be undertaken
2. Recommending the amount of expenditure to be incurred on CSR activities
3. Monitoring the CSR policy from time to time
4. Formulating an annual action plan in pursuance of the CSR policy

Proper documentation of CSR Committee meetings is essential and falls within the purview of secretarial compliance services that ensure minutes, resolutions, and records are maintained in accordance with Secretarial Standards.

4. Schedule VII — Permissible CSR Activities

CSR expenditure must be directed towards activities falling within the ambit of Schedule VII of the Companies Act, 2013. The Schedule provides a broad framework, and companies have flexibility in choosing specific projects within these categories:

1. Eradicating hunger, poverty & malnutrition — Promoting health care, sanitation, and making available safe drinking water
2. Promoting education — Including special education, employment-enhancing vocation skills, and livelihood enhancement projects
3. Gender equality & women empowerment — Setting up homes, hostels, and day-care facilities for women and orphans; reducing inequalities
4. Environmental sustainability — Ensuring ecological balance, protection of flora and fauna, animal welfare, agro-forestry, conservation of natural resources, and maintaining quality of soil, air, and water
5. Protection of national heritage, art & culture — Including restoration of buildings, sites of historical importance, and works of art; setting up public libraries; and promoting traditional arts and handicrafts
6. Benefits to armed forces veterans, war widows & their dependants
7. Training to promote rural, nationally recognised, Paralympic, and Olympic sports
8. Contribution to PM CARES Fund, PM National Relief Fund, and other Central/State Government funds
9. Contributions to incubators, funded by Central/State Government, and contributions to public-funded universities & research bodies
10. Rural development projects and slum area development
11. Disaster management including relief, rehabilitation, and reconstruction activities

4.1 Activities NOT Qualifying as CSR

The following activities are expressly excluded from qualifying as CSR expenditure:

• Activities undertaken in the normal course of business of the company
• Activities benefiting only the employees of the company and their families
• Contributions to political parties under Section 182
• Activities undertaken outside India (except for training of Indian sportspersons and disaster relief)
• Sponsorship activities deriving marketing benefits
• One-off events such as marathons, awards, charitable contributions, sponsorships, and advertisements

5. CSR-1 Registration of Implementing Agencies

A landmark change introduced by the 2021 Amendment Rules is the requirement for mandatory registration of entities undertaking CSR activities on behalf of companies. Every entity (other than the company itself) that intends to undertake CSR activities must file Form CSR-1 electronically with the Ministry of Corporate Affairs and obtain a unique CSR Registration Number.

5.1 Entities Required to Register

• A company established under Section 8 of the Companies Act, 2013 (or Section 25 of the Companies Act, 1956)
• A registered public trust
• A registered society under the Societies Registration Act, 1860
• Any entity established by an Act of Parliament or a State Legislature

The entity must have an established track record of at least three years in undertaking similar activities, unless it has been set up by the company itself or its holding, subsidiary, or associate company.

5.2 CSR-1 Filing Process

The entity must file Form CSR-1 on the MCA portal, providing details of its registration, activities, geographic areas of operation, and governing body. Upon verification, the MCA issues a unique CSR Registration Number, which must be quoted by the company in its CSR-2 annual report.

6. CSR Spending & the 2% Mandate

The Board of Directors, after considering the recommendations of the CSR Committee, must ensure that the company spends at least 2% of the average net profits of the three immediately preceding financial years on CSR activities approved in the annual action plan.

6.1 Treatment of Excess CSR Spending

If a company spends more than the prescribed 2% in a financial year, the excess amount may be set off against the CSR obligation in the immediately succeeding three financial years, subject to conditions prescribed under Rule 7(3). The Board must pass a resolution approving the set-off, and the details must be disclosed in the Board’s Report.

6.2 Administrative Overheads

Administrative overheads incurred in planning, implementation, monitoring, and evaluation of CSR projects shall not exceed 5% of the total CSR expenditure of the company for that financial year. This cap ensures that the majority of CSR funds reach the intended beneficiaries.

6.3 Capital Asset Created Through CSR

Any capital asset created or acquired through CSR spending shall be held by a Section 8 company, a registered public trust, a registered society, the beneficiaries of the project, or a public authority. It shall not be held by the company or its employees. This ensures that the assets serve the community and are not appropriated for private benefit.

7. Unspent CSR Amount — Transfer Provisions

One of the most significant provisions introduced by the Companies (Amendment) Act, 2019 and the 2021 Rules relates to the mandatory transfer of unspent CSR amounts:

7.1 Ongoing Projects

If the unspent amount relates to an ongoing project (a multi-year project not exceeding three financial years, excluding the financial year of commencement), the company must transfer the unspent amount to a special bank account called the Unspent Corporate Social Responsibility Account within 30 days from the end of the financial year. This amount must be spent within three financial years from the date of transfer, failing which it must be transferred to a Fund specified in Schedule VII.

7.2 Other Than Ongoing Projects

If the unspent amount does not relate to any ongoing project, the company must transfer such amount to a Fund specified in Schedule VII within six months from the end of the financial year. Specified Funds include the Prime Minister’s National Relief Fund, PM CARES Fund, and other funds notified by the Central Government.

8. CSR-2 Annual Reporting

Every company to which CSR provisions apply must file an annual report on CSR in Form CSR-2 as an addendum to Form AOC-4 or AOC-4 XBRL. The CSR-2 report contains comprehensive details including:

• Composition of the CSR Committee
• Average net profit of the three preceding financial years
• Prescribed CSR expenditure (2% of average net profit)
• Details of CSR spent and unspent amounts
• Manner in which CSR amount was spent — direct expenditure or through implementing agencies
• Details of ongoing projects and amounts transferred to the Unspent CSR Account
• Excess CSR amount available for set-off
• Details of capital assets created or acquired
• Reasons for not spending the prescribed amount, if applicable

In addition, the Board’s Report must contain an annual report on CSR as per the format prescribed in the Annexure to the CSR Rules. This is also attached to the annual return and compliance documents filed with the Registrar of Companies.

9. Impact Assessment for Major CSR Spenders

Companies with an average CSR obligation of ₹10 crore or more in the three immediately preceding financial years are required to undertake an impact assessment of their CSR projects. This requirement was introduced by the 2021 Amendment Rules and applies to CSR projects having an outlay of ₹1 crore or more that have been completed not less than one year before the assessment.

9.1 Conduct of Impact Assessment

• The impact assessment must be carried out by an independent agency
• The Board must place the impact assessment report before the CSR Committee for review
• The company may book expenditure towards impact assessment up to 5% of the total CSR expenditure for that financial year or ₹50 lakh, whichever is less
• The assessment must evaluate the social, economic, and environmental impact of the CSR projects

9.2 Significance of Impact Assessment

The impact assessment requirement ensures accountability and transparency in CSR spending. It shifts the focus from mere compliance (spending the requisite amount) to measuring actual outcomes and impact on beneficiaries. Companies are encouraged to adopt robust monitoring frameworks to track the progress of their CSR initiatives throughout the project lifecycle.

10. Penalties for Non-Compliance — Section 135(7)

The Companies (Amendment) Act, 2020 introduced stringent penalties for CSR non-compliance. Section 135(7) provides:

It is critical to note that the penalty is in addition to the obligation to transfer the unspent amount. The company must still transfer the unspent CSR amount to the Unspent CSR Account or the specified Fund, as applicable. The penalty regime shifted from the earlier “comply or explain” approach to a mandatory “comply or face penalty” framework.

10.1 Other Consequences of Non-Compliance

• Adverse remarks in the Board’s Report — The Board must explain the reasons for not spending the prescribed CSR amount
• Scrutiny by ROC/MCA — Persistent non-compliance may trigger inspection or investigation under Sections 206 and 210
• Reputational risk — CSR disclosures are public, and non-compliance is visible to shareholders, investors, and stakeholders
• Impact on ESG ratings — Institutional investors and rating agencies consider CSR compliance as part of Environmental, Social, and Governance (ESG) evaluations

11. CSR and Tax Implications

CSR expenditure does not automatically qualify for tax deduction under the Income Tax Act, 1961. Section 37(1) of the Income Tax Act specifically excludes CSR expenditure from the ambit of business expenditure deductions. However, if the CSR expenditure is of a nature that independently qualifies for deduction under specific provisions (such as contributions to the PM National Relief Fund under Section 80G), the deduction may be claimed to the extent permissible.

The Central Board of Direct Taxes has clarified that expenditure incurred on activities notified under Section 35(2AA) (scientific research) or Section 35AC (eligible projects) may continue to be claimed where the CSR activity independently satisfies those provisions.

12. Practical Compliance Checklist for Companies

1. Assess applicability — Verify whether the company meets any of the three thresholds at the end of each financial year
2. Constitute CSR Committee — Ensure proper composition and appoint a chairperson from among the members
3. Formulate CSR Policy — The CSR Committee must recommend a policy to the Board for approval and disclosure on the company’s website
4. Prepare Annual Action Plan — Include details of projects, implementation schedule, modalities of utilisation, and monitoring mechanisms
5. Verify implementing agencies — Ensure CSR-1 registration of all implementing entities
6. Spend 2% of average net profit — Ensure timely utilisation during the financial year
7. Transfer unspent amounts — To Unspent CSR Account (ongoing projects, within 30 days) or Schedule VII Fund (other cases, within 6 months)
8. File CSR-2 — Along with AOC-4 within the prescribed timeline
9. Include CSR annexure in Board’s Report — As per the prescribed format
10. Conduct impact assessment — If average CSR obligation exceeds ₹10 crore

Professional assistance from a practising company secretary ensures that CSR governance, documentation, and statutory filings are handled accurately and within prescribed timelines.

Frequently Asked Questions

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