Section 135 Corporate Social Responsibility (CSR) Guide

Executive Overview

The institutionalization of mandatory Corporate Social Responsibility (CSR) under Section 135 of the Companies Act, 2013, read with the Companies (Corporate Social Responsibility Policy) Rules, 2014, established India as the first jurisdiction globally to transform corporate philanthropy from a voluntary ethical gesture into an enforceable statutory mandate. Enacted to ensure that corporate enterprises contribute directly to national socio-economic priorities, Section 135 compels eligible companies to allocate and spend at least two per cent (2%) of their average net profits earned during the three immediately preceding financial years on approved social, developmental, and environmental projects enumerated in Schedule VII of the Act.

Over the past decade, the CSR regulatory regime underwent a profound transformation from a lenient "comply-or-explain" disclosure model into a strict, highly penal compliance framework. Following major amendments introduced by the Companies (Amendment) Act, 2019 and the Companies (Amendment) Act, 2020, unspent CSR obligations can no longer be merely explained away in the Directors' Report. Corporate boards face rigid statutory mechanisms governing unspent funds: unspent amounts relating to ongoing multi-year projects must be transferred to a dedicated "Unspent Corporate Social Responsibility Account" within thirty (30) days of the fiscal year close, while unspent funds relating to general activities must be transferred to a central Government fund specified in Schedule VII (such as the PM CARES Fund) within six (6) months. Defaulting on these transfers attracts severe civil penalties under Section 135(7) on both the corporate entity and every defaulting officer.

For company secretaries, corporate legal counsels, statutory auditors, and board members, managing CSR requires multi-dimensional diligence: calculating net profits strictly in accordance with Section 198, vetting implementing agencies through mandatory Form CSR-1 registration, commissioning independent third-party impact assessments for large outlays under Rule 8(3), and filing the comprehensive electronic return in Form CSR-2 with the Registrar of Companies (ROC). Modern compliance departments deploy specialized governance platforms like assureOffice to automate these workflows. Modules such as assurePractice manage CSR Committee agendas, track multi-year ongoing project milestones, and compile Form CSR-2 dockets, while assureFinancials guarantees precise Section 198 net profit derivations and oversees unspent escrow accounts. This guide delivers an exhaustive, practitioner-grade exploration of Section 135, detailing statutory thresholds, Section 198 profit formulas, ongoing project governance, and secretarial audit defenses.

Comparative Framework: Ongoing Projects vs Non-Ongoing CSR Activities

Understanding the statutory distinction between an "ongoing project" and a "non-ongoing activity" is the single most critical factor determining the legal treatment of unspent CSR funds at year-end. The comparative table below outlines the core legal, banking, and operational differences between both project types under the Companies (CSR Policy) Rules, 2014.

Statutory Dimension	Ongoing Projects (Rule 2(1)(i))	Non-Ongoing / General CSR Projects
Statutory Definition	Multi-year project undertaken in fulfillment of CSR obligation having timelines ≤ 3 years.	Annual, one-off, immediate, or single-year CSR initiatives completed within the FY.
Minimum / Maximum Tenure	Multi-year duration not exceeding three (3) years excluding the financial year of inception.	Must be fully executed and disbursed within the relevant financial year (12 months).
Board Approval Requirement	Must be approved as an ongoing project by the Board based on reasonable justification.	Approved as part of the annual CSR action plan for the single financial year.
Unspent Funds Treatment	Must be transferred to a special Unspent CSR Account in a scheduled bank.	Must be transferred to a Fund specified in Schedule VII (PM CARES Fund).
Banking Transfer Timeline	Within thirty (30) days from the end of the financial year (by 30th April).	Within six (6) months from the end of the financial year (by 30th September).
Permissible Utilization Window	Can be spent on the specific ongoing project within three (3) financial years.	No subsequent spending permitted by company; money permanently vests in Government.
Failure to Spend at Horizon	Any unspent sum at end of 3 years transferred to Schedule VII fund within 30 days.	Not applicable (already transferred to Schedule VII fund by 30th September).
Impact Assessment Mandate	Mandatory if project outlay ≥ ₹1 Crore and company's CSR budget ≥ ₹10 Crore (Rule 8(3)).	Mandatory if project outlay ≥ ₹1 Crore and company's CSR budget ≥ ₹10 Crore.
Modifications during Tenure	Board may extend duration within 3-year limit or alter project milestones with justification.	Cannot be carried over or converted retrospectively into ongoing projects after year-end.

Detailed Statutory Architecture & Procedural Mechanics

1. Statutory Applicability Thresholds under Section 135(1)

Under Section 135(1) of the Companies Act, 2013, every company—including its holding company, subsidiary company, and a foreign company having a branch office or project office in India under Section 2(42)—must comply with the CSR mandate if it satisfies any ONE of the following three criteria during the immediately preceding financial year:

Net Worth Threshold: Net Worth of five hundred crore rupees (₹500 Crore) or more; OR
Turnover Threshold: Turnover of one thousand crore rupees (₹1,000 Crore) or more; OR
Net Profit Threshold: Net Profit of five crore rupees (₹5 Crore) or more.

Preceding Financial Year Rule: Following amendments to Section 135(1), applicability is determined strictly with reference to the "immediately preceding financial year", replacing the legacy ambiguity of looking at the preceding three financial years. If a company satisfies any one criterion on 31st March 2024, it is statutorily covered for FY 2024-25.

2. The CSR Committee and the Section 135(9) Small Obligation Exemption

Under Section 135(1), an eligible company must constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director must be an Independent Director. Where an unlisted public or private company is not required to appoint an independent director under Section 149(4), its committee can comprise two or more directors.

However, to reduce governance burdens on smaller corporate entities, Parliament inserted Section 135(9) via the Companies (Amendment) Act, 2020:

"Where the amount to be spent by a company under sub-section (5) does not exceed fifty lakh rupees, the requirement under sub-section (1) for constitution of the Corporate Social Responsibility Committee shall not apply and the functions of such Committee provided under this section shall, in such cases, be discharged by the Board of Directors of such company."

Where a company's statutory 2% CSR obligation is fifty lakh rupees (₹50,00,000) or less, constituting a formal CSR Committee is completely waived. The full Board of Directors directly approves the CSR policy, annual action plan, and project disbursements.

3. Deriving the 2% Mandate: Section 198 Net Profit Mechanics

Section 135(5) mandates spending at least two per cent (2%) of the average net profits of the company made during the three immediately preceding financial years. The computation of "Net Profit" is strictly governed by Section 198 of the Companies Act, 2013 read with Rule 2(1)(h) of the CSR Rules. Section 198 establishes a standardized economic profit metric that differs substantially from accounting Profit Before Tax (PBT):

Mandatory Additions: Add back any expenditure not allowable under Section 198, including income tax charges, voluntary compensation, and book depreciation differences.
Mandatory Deductions / Exclusions:
1. Dividend Income: Any dividend received from other companies in India (to eliminate cascading taxation of corporate profits);
2. Overseas Profits: Any profit generated by the company from its overseas branch or branches, whether operated as a separate company or otherwise;
3. Capital Gains & Capital Profits: Any profit of a capital nature, including profits from the sale of an undertaking, premium on issue of shares or debentures, and profits from forfeiture of shares;
4. Unrealized Revaluation Gains: Any change in carrying amount of an asset or liability recognized in equity reserves or OCI, including fair value gains under Ind AS.

4. Permissible Activities under Schedule VII vs Prohibited CSR Items

Section 135(3) mandates that CSR funds must be deployed exclusively in activities specified in Schedule VII of the Act. Eligible areas include: eradicating extreme hunger, poverty, and malnutrition; promoting healthcare, sanitation, and drinking water; education and vocational skills; gender equality and women's empowerment; environmental sustainability, biodiversity, and animal welfare; protection of national heritage, art, and culture; measures for the benefit of armed forces veterans and war widows; technology incubators approved by the Central Government; rural development projects; slum area development; and disaster management.

Conversely, Rule 2(1)(d) contains an explicit list of Prohibited CSR Activities:

Activities undertaken in pursuance of the normal course of business of the company;
Any activity undertaken by the company outside India (except training of Indian sports personnel);
Contribution of any amount directly or indirectly to any political party under Section 182;
Activities benefitting employees of the company as defined in Section 2(k) of the Code on Wages, 2019;
Activities supported by the company on a sponsorship basis for deriving marketing benefits for its products or services; and
Activities carried out for fulfillment of any other statutory obligations under Indian law (e.g., mandatory labor safety compliance).

5. Unspent CSR Funds: The Rigorous Transfer Mechanisms

Under Section 135(5) and Section 135(6), unspent CSR balances at the close of the financial year are subject to strict, time-bound transfer mandates:

For Non-Ongoing / General CSR Activities (Section 135(5)):
If a company fails to spend its 2% CSR obligation on general projects, the unspent amount must be transferred to a Fund specified in Schedule VII (such as the Prime Minister's National Relief Fund, Clean Ganga Fund, or PM CARES Fund) within a period of six (6) months of the expiry of the financial year (i.e., on or before 30th September).
For Ongoing Projects (Section 135(6)):
Any amount remaining unspent pursuant to an ongoing project must be transferred by the company within a period of thirty (30) days from the end of the financial year (i.e., on or before 30th April) to a special bank account opened in any scheduled bank, to be called the "Unspent Corporate Social Responsibility Account".
The funds deposited in this account must be spent by the company in pursuance of its obligation towards the ongoing project within a period of three (3) financial years from the date of such transfer. If the company fails to spend the money within three financial years, the remaining unspent balance must be transferred to a Schedule VII fund within thirty (30) days from the completion of the third financial year (i.e., on or before 30th April of the fourth year).

6. Set-Off of Excess CSR Spend under Rule 7(3)

Where a company spends an amount in excess of its statutory 2% requirement, the excess expenditure can be carried forward and set off against the CSR obligation of immediate succeeding financial years:

The excess amount can be set off against the CSR spending requirement up to the immediate succeeding three (3) financial years.
The excess amount available for set-off must strictly exclude any surplus arising out of CSR activities (e.g., fees or revenues generated from CSR assets).
The Board of Directors must pass a specific resolution approving the carry-forward and set-off of excess CSR expenditure.

7. Civil Penalties under Section 135(7) and Mandatory Form CSR-2

Decriminalized by the Companies (Amendment) Act, 2020, defaults under Section 135 are subject to severe civil monetary penalties adjudicated by the ROC under Section 454:

Penalty on Company: Liable to a penalty of twice the amount required to be transferred to the Schedule VII Fund or the Unspent CSR Account, or one crore rupees (₹1,00,00,000), whichever is less.
Penalty on Every Defaulting Officer: Every officer of the company who is in default is liable to a penalty of one-tenth of the amount required to be transferred, or two lakh rupees (₹2,00,000), whichever is less.
Mandatory Electronic Return in Form CSR-2: Notified via the Companies (Accounts) Amendment Rules, 2022, every company covered under Section 135 must file an annual web-based return in Form CSR-2 for the preceding financial year as an addendum to Form AOC-4 / AOC-4 XBRL, detailing project codes, implementing agency CSR-1 registration numbers, and unspent balances.

7 In-Depth Practical Case Studies & Numerical Illustrations

Case Study 1: Section 198 Net Profit Derivation & 2% Obligation Computation

Context & Facts: Bharat Heavy Engineering Ltd's audited financial statements disclose the following Profit Before Tax (PBT) figures: FY 2021-22: ₹80,00,00,000 (₹80 Crore); FY 2022-23: ₹120,00,00,000 (₹120 Crore); FY 2023-24: ₹150,00,00,000 (₹150 Crore). Corporate accounting ledgers reveal the following specific items credited to PBT:

Dividend received from Indian operating subsidiaries: FY 2021-22: ₹5 Crore; FY 2022-23: ₹8 Crore; FY 2023-24: ₹10 Crore.
Net profit from overseas branch office in Dubai: FY 2021-22: ₹10 Crore; FY 2022-23: ₹12 Crore; FY 2023-24: ₹15 Crore.
Capital profit on sale of surplus industrial factory land: FY 2023-24: ₹25 Crore.

The finance director proposes calculating the 2% CSR obligation directly on average accounting PBT.

Step-by-Step Derivation of Section 198 Net Profits:

Financial Year	Reported Accounting PBT	Less: Indian Dividend Income	Less: Dubai Branch Profits	Less: Capital Land Profit	Net Profit u/s 198
FY 2021-22	₹80,00,00,000	(₹5,00,00,000)	(₹10,00,00,000)	₹0	₹65,00,00,000
FY 2022-23	₹120,00,00,000	(₹8,00,00,000)	(₹12,00,00,000)	₹0	₹100,00,00,000
FY 2023-24	₹150,00,00,000	(₹10,00,00,000)	(₹15,00,00,000)	(₹25,00,00,000)	₹100,00,00,000
3-Year Total	—	—	—	—	₹265,00,00,000
Average Net Profit	₹350 Cr / 3 = ₹116.67 Cr	—	—	—	₹265 Cr / 3 = ₹88,33,33,333
Mandatory 2% CSR	Unadjusted: ₹2.33 Crore	—	—	—	2% of ₹88.33 Cr = ₹1,76,66,667

By executing Section 198 statutory adjustments, the company establishes its true CSR liability at ₹1,76,66,667 (₹1.77 Crore) rather than the inflated figure of ₹2.33 Crore, saving ₹56.67 Lakh in misallocated corporate resources. Bharat Heavy models these computations using assureFinancials.

Case Study 2: Operationalization of Section 135(9) Small Obligation Exemption

Context & Facts: Zenon Packaging Solutions Pvt Ltd has a net worth of ₹55 Crore and recorded a turnover of ₹95 Crore in FY 2023-24. Its net profit computed under Section 198 was: FY 2021-22: ₹1,50,00,000; FY 2022-23: ₹2,00,00,000; FY 2023-24: ₹2,50,00,000 (Average Net Profit = ₹2,00,00,000 / ₹2 Crore). Because net profit exceeded ₹5 Crore in FY 2020-21, the company was previously covered under Section 135. The 2% CSR obligation for FY 2024-25 is 2% of ₹2,00,00,000 = ₹4,00,000 (₹4 Lakh). The secretarial auditor inquires why the company has not constituted a CSR Committee consisting of independent directors.

Statutory Analysis under Section 135(9):

Under Section 135(9), where the amount required to be spent by a company does not exceed fifty lakh rupees (₹50,00,000), the requirement for constitution of the CSR Committee shall not apply.
Zenon's statutory obligation of ₹4,00,000 is well below the ₹50 Lakh threshold.
Corporate Governance Relief: The Board of Directors directly approves the CSR spending proposal (sponsoring girl child education in rural schools) and records the disbursement in the board minutes.
Secretarial Defense: Zenon provides a formal note citing Section 135(9) to the secretarial auditor. The audit qualification is avoided. The board resolution is managed via assurePractice.

Case Study 3: Ongoing Project Designation and Escrow Funding (Section 135(6))

Context & Facts: Matrix Pharmaceuticals Ltd undertook a multi-year project to construct a 50-bed charitable pediatric hospital wing in an aspirational district in Odisha. The project was approved by the Board as an Ongoing Project for an aggregate outlay of ₹6,00,00,000 (₹6 Crore) spanning FY 2023-24 to FY 2025-26. For FY 2023-24, Matrix allocated ₹2,00,00,000 from its annual 2% CSR budget. As on 31st March 2024, civil construction was partially completed, and ₹1,20,00,000 was disbursed to contractors against verified engineering milestones. An unspent balance of ₹80,00,000 remained.

Execution of Statutory Escrow Transfer under Section 135(6):

30-Day Mandatory Window: The unspent ongoing project fund of ₹80,00,000 must be transferred to a dedicated bank account on or before 30th April 2024.
Special Bank Account: On 22nd April 2024, Matrix opens a separate account with State Bank of India designated as "Matrix Pharmaceuticals Ltd - Unspent Corporate Social Responsibility Account" and transfers exactly ₹80,00,000.
Three-Year Utilization Window: Matrix has until 31st March 2027 (3 financial years) to spend the ₹80 Lakh on the hospital wing.
Subsequent Spending: In FY 2024-25, the remaining ₹80 Lakh is fully disbursed for medical equipment installation. Matrix reports the project completion in Form CSR-2, achieving 100% compliance without forfeiting funds to the Government treasury. Project milestones are tracked in assurePractice.

Case Study 4: Non-Ongoing Project Unspent Funds: Avoiding Section 135(7) Penalties

Context & Facts: SolarTech Equipment Ltd had a statutory CSR obligation of ₹50,00,000 for FY 2023-24. The company planned to distribute solar water pumps to farmers under a general annual program. Due to supply chain disruptions, only ₹30,00,000 was spent by 31st March 2024, leaving ₹20,00,000 unspent. The initiative was NOT approved as an ongoing multi-year project. The CFO proposes holding the ₹20 Lakh in the company's operational current account to spend on solar pumps in the subsequent winter.

Legal Analysis under Section 135(5) and Penalty Exposure:

Because the activity was not formally approved as an Ongoing Project prior to year-end, the company cannot open an Unspent CSR Account or carry forward the balance.
Mandatory Transfer to Schedule VII Fund: Under Section 135(5), the unspent sum of ₹20,00,000 must be transferred to a Schedule VII fund (e.g., PM CARES Fund) on or before 30th September 2024 (6 months from financial year close).
Cost of Default under Section 135(7): If SolarTech fails to transfer the ₹20 Lakh by 30th September 2024:
Penalty on Company = Twice the unspent amount = 2 * ₹20,00,000 = ₹40,00,000 (or ₹1 Crore, whichever is less).
Penalty on Every Defaulting Officer = 10% of ₹20,00,000 = ₹2,00,000 (or ₹2 Lakh).
Remediation: SolarTech's legal team intervenes, remitting ₹20,00,000 via RTGS to the PM CARES Fund on 15th September 2024, securing an official donation receipt and eliminating ₹42 Lakh in potential penalties. The transaction receipt is uploaded in Form CSR-2 via assurePractice.

Case Study 5: Set-Off of Excess CSR Spending under Rule 7(3)

Context & Facts: During FY 2023-24, Apex InfraTech Ltd had an average net profit under Section 198 of ₹50,00,00,000, creating a 2% CSR obligation of ₹1,00,00,000 (₹1 Crore). In response to an emergency state flood disaster, the Board approved a total CSR contribution of ₹1,60,00,000 (₹1.60 Crore) to disaster relief funds. The company overspent its statutory obligation by ₹60,00,000. In FY 2024-25, Apex's 2% CSR obligation is calculated at ₹1,10,00,000 (₹1.10 Crore).

Set-Off Mechanism under Rule 7(3):

Financial Year	Statutory 2% Obligation	Actual CSR Spent	Surplus / (Deficit)	Set-Off Applied	Net Cash Required
FY 2023-24	₹1,00,00,000	₹1,60,00,000	Excess: +₹60,00,000	Nil (Year of overspend)	Disbursed in full
FY 2024-25	₹1,10,00,000	—	—	Set-off: (₹60,00,000)	₹50,00,000 Cash Spend

On 15th May 2024, the Board of Directors passes a formal resolution approving the set-off of the ₹60 Lakh surplus against the FY 2024-25 obligation. Apex spends only ₹50,00,000 in FY 2024-25, satisfying its full statutory duty. The set-off resolution is archived in assurePractice.

Case Study 6: Capital Asset Acquisition using CSR Funds under Rule 8

Context & Facts: Global Steel & Power Ltd spent ₹3,50,00,000 from its CSR budget to construct a vocational skills training center and purchased state-of-the-art robotic welding machinery for local youth. The CFO capitalized the training building and machinery on the company's corporate balance sheet under Property, Plant and Equipment (PPE), intending to claim tax depreciation under Section 32.

Statutory Analysis of Rule 8(5) (Holding of Capital Assets):

Strict Prohibition on Corporate Ownership: Under Rule 8(5) of the CSR Rules, any capital asset created or acquired out of CSR funds shall be held ONLY by:
- A company established under Section 8 of the Act, or a Registered Public Trust or Registered Society having charitable objects and CSR-1 registration; OR
- Beneficiaries of the said CSR project, in the form of self-help groups, collectives, or entities; OR
- A public authority.
Illegal Capitalization: The company cannot hold the title or capitalize the asset on its own balance sheet. Capitalizing the asset violates Rule 8(5) and constitutes an illegal appropriation of CSR funds for corporate ownership.
Remediation: Global Steel transfers the legal title and ownership of the vocational training facility to an independent Section 8 foundation (holding Form CSR-1). The asset is derecognized from Global Steel's balance sheet, satisfying statutory secretarial audit rules. Accounting adjustments are executed via assureFinancials.

Case Study 7: Impact Assessment Mandate under Rule 8(3) for Large Budgets

Context & Facts: Radiant Energy Corp had an average CSR obligation of ₹14,00,00,000 (₹14 Crore) in FY 2023-24 (exceeding the ₹10 Crore threshold). During the year, it completed a ₹2,50,00,000 (₹2.50 Crore) community solar drinking water purification project that had been operational for over one year. The company filed Form CSR-2 without commissioning an independent impact assessment, stating that internal monitoring was sufficient.

Evaluation under Rule 8(3) of the CSR Rules:

Under Rule 8(3), every company having an average CSR obligation of ten crore rupees (₹10,00,000) or more in the three immediately preceding financial years must undertake an independent impact assessment through an independent agency for all projects having outlays of one crore rupees (₹1,00,000) or more that have been completed not less than one year prior.
Radiant Energy satisfies both criteria: total CSR budget ≥ ₹10 Crore, and project outlay = ₹2.5 Crore (which is ≥ ₹1 Crore).
Statutory Mandate: The impact assessment report must be placed before the Board and annexed to the annual report on CSR in the Directors' Report. Radiant may book administrative impact assessment expenses up to 2% of total CSR expenditure or ₹50 Lakh, whichever is less.
Outcome: Radiant engages an accredited academic institute to conduct the independent impact assessment, annexes the executive report to its Board's Report, and updates Form CSR-2, avoiding ROC regulatory scrutiny. Impact assessment dockets are managed via assurePractice.

10-Step CSR Secretarial & Audit Verification Framework

To withstand rigorous Secretarial Audits under Section 204 and prevent heavy civil penalties under Section 135(7), company secretaries and corporate controllers must implement the following 10-step verification protocol.

Stage	Procedural Mandate	Statutory Citation	Critical Operational Risk / Secretarial Trap	assureOffice Workflow Integration
Step 1	Section 135(1) Applicability Screening	Section 135(1)	Evaluating 3-year averages instead of immediately preceding financial year figures.	Verify Net Worth, Turnover, and Profit thresholds via assureFinancials.
Step 2	Section 198 Net Profit Derivation	Section 198 & CSR Rules	Failing to exclude inter-corporate dividends, overseas branch profits, or capital gains.	Auto-compute Section 198 adjusted net profit schedules in assureFinancials.
Step 3	Section 135(9) Committee Exemption	Section 135(9)	Constituting burdensome committees when annual CSR spend ≤ ₹50 Lakh.	Manage Board direct approvals and exemptions in assurePractice.
Step 4	Annual CSR Action Plan Approval	Rule 5(2) CSR Rules	Disbursing funds without prior Board approval of detailed annual action plan.	Draft compliant annual action plans via assurePractice.
Step 5	Implementing Agency CSR-1 Verification	Rule 4(2) CSR Rules	Disbursing funds to NGOs lacking active Form CSR-1 registration on MCA portal.	Verify NGO Form CSR-1 registration numbers in assurePractice.
Step 6	Ongoing Project 30-Day Escrow Move	Section 135(6)	Failing to transfer unspent ongoing funds to Unspent CSR Account by 30th April.	Set automated 30th April escrow transfer alerts in assureNotice.
Step 7	Non-Ongoing Fund Transfer	Section 135(5)	Missing 30th September deadline to transfer general unspent funds to PM CARES.	Monitor Schedule VII fund transfer countdowns in assureNotice.
Step 8	Excess Spend Set-Off Board Resolution	Rule 7(3) CSR Rules	Applying excess spend set-off without passing formal Board resolution in new FY.	Draft Rule 7(3) set-off board resolutions in assurePractice.
Step 9	Rule 8(3) Impact Assessment Audit	Rule 8(3) CSR Rules	Failing to commission independent impact studies for outlays ≥ ₹1 Cr (budget ≥ ₹10 Cr).	Track impact assessment schedules and budgets in assurePractice.
Step 10	Form CSR-2 Web-Based E-Filing	Companies Accounts Rules	Filing Form AOC-4 without attaching or completing standalone Form CSR-2.	Generate pre-validated Form CSR-2 XML/PDF dockets via assurePractice.

Integrating assureOffice Ecosystem for Corporate Social Responsibility

Orchestrating lawful CSR governance across multi-tier corporate subsidiaries, non-profit implementing partners, and regulatory portals demands integrated secretarial, treasury, and accounting workflows. The assureOffice suite equips corporate sustainability and compliance teams with purpose-built automation:

assurePractice: Operates as the central corporate secretarial CSR platform. It automates Section 135(1) applicability testing, manages CSR Committee meeting dockets, drafts annual action plans, verifies implementing agency Form CSR-1 registrations, tracks 30-day (30th April) and 6-month (30th September) unspent fund transfer windows, and prepares audit-ready Form CSR-2 filings.
assureFinancials: Automates financial statement engineering, executing Section 198 net profit derivations with automated exclusion of inter-corporate dividends and capital gains, tracking multi-year Unspent CSR Account ledgers, and modeling Rule 7(3) excess spend carry-forwards.
assureNotice: Centralizes regulatory correspondence from the Ministry of Corporate Affairs, Registrar of Companies, and Regional Directors, tracking Section 206 inquiry notices and Section 454 adjudication orders regarding CSR defaults.
assureTax: Harmonizes CSR expenditure accounting with corporate tax filings, ensuring that CSR expenses are added back under Explanation 2 to Section 37(1) in Tax Audit Form 3CD Clause 21, while tracking allowable deductions under Section 80G where applicable.

16 Practical Practitioner FAQs with Authoritative Answers

1. What are the applicability thresholds for Section 135?

A company must comply with Section 135 if in the immediately preceding financial year it had a Net Worth of ₹500 Crore or more, a Turnover of ₹1,000 Crore or more, or a Net Profit of ₹5 Crore or more.

2. What is the mandatory CSR spending percentage?

Under Section 135(5), an eligible company must spend at least two per cent (2%) of the average net profits made during the three immediately preceding financial years.

3. How is "Net Profit" calculated for CSR purposes?

Net profit must be calculated strictly in accordance with Section 198 of the Companies Act, 2013, excluding inter-corporate dividends from Indian companies, overseas branch profits, capital gains, and revaluation reserves.

4. Under what condition is a company exempt from constituting a CSR Committee?

Under Section 135(9), where the annual CSR obligation does not exceed fifty lakh rupees (₹50,00,000), the requirement to constitute a CSR Committee is waived, and its functions are discharged directly by the Board.

5. What is an "Ongoing Project" under the CSR Rules?

An ongoing project is a multi-year project undertaken in fulfillment of CSR obligations having timelines not exceeding three (3) years excluding the financial year of inception, approved by the Board based on reasonable justification.

6. What is the deadline for transferring unspent funds relating to ongoing projects?

Under Section 135(6), unspent ongoing project funds must be transferred within thirty (30) days of financial year close (on or before 30th April) to an "Unspent Corporate Social Responsibility Account".

7. What is the deadline for transferring unspent funds relating to non-ongoing activities?

Under Section 135(5), unspent funds for general CSR activities must be transferred to a Schedule VII fund (e.g., PM CARES Fund) within six (6) months of financial year close (on or before 30th September).

8. For how long can funds in the Unspent CSR Account be utilized?

Funds in the Unspent CSR Account must be spent on the designated ongoing project within three (3) financial years from the date of transfer. Any unspent balance remaining after 3 years must be transferred to a Schedule VII fund within 30 days.

9. Can excess CSR spending be carried forward and set off?

Yes. Under Rule 7(3), excess CSR expenditure can be carried forward and set off against the CSR obligation of the immediate succeeding three (3) financial years, subject to a formal Board resolution.

10. What is Form CSR-1?

Form CSR-1 is the electronic registration form filed on the MCA portal by implementing entities (Section 8 companies, registered trusts, or registered societies) to obtain a unique CSR Registration Number to receive corporate CSR funds.

11. Can a company spend CSR funds to benefit its own employees?

No. Under Rule 2(1)(d)(iv), activities undertaken exclusively for the benefit of the company's employees as defined in the Code on Wages, 2019 are prohibited and do not qualify as CSR expenditure.

12. What are the penalties under Section 135(7) for non-transfer of unspent CSR funds?

The company is liable to a penalty of twice the unspent amount or ₹1 Crore (whichever is less). Every defaulting officer is liable to one-tenth of the unspent amount or ₹2 Lakh (whichever is less).

13. When is an independent Impact Assessment mandatory under Rule 8(3)?

Impact assessment is mandatory if the company has an average CSR obligation of ₹10 Crore or more in the three preceding financial years, for projects having an outlay of ₹1 Crore or more completed at least one year prior.

14. Can a company hold title to capital assets created using CSR funds?

No. Under Rule 8(5), capital assets created using CSR funds must be held by a Section 8 company, registered public trust, public authority, or project beneficiaries. The commercial entity cannot capitalize the asset on its balance sheet.

15. What form is filed annually with the ROC reporting on CSR activities?

Every company covered under Section 135 must file the comprehensive annual return in Form CSR-2 electronically on the MCA portal as an addendum to Form AOC-4.

16. Are CSR expenditures tax-deductible under the Income-tax Act?

No. Under Explanation 2 to Section 37(1) of the Income-tax Act, 1961, expenditure incurred on CSR activities referred to in Section 135 of the Companies Act is explicitly non-deductible as business expenditure.