CSR Compliance and Audit: Section 135, Unspent Funds and Ongoing Projects

Applicability and governance

Under section 135 of the Companies Act, 2013, apply the test to each company for the immediately preceding financial year. Any one trigger is sufficient: net worth of at least ₹500 crore, turnover of at least ₹1,000 crore or net profit of at least ₹5 crore. Use the statutory definitions and applicable CSR Rules. A holding or subsidiary company is not automatically covered merely because another member of its group is covered. Rule 3 can also apply to a foreign company with a branch or project office in India; use its Indian financial statements prepared under the relevant provisions.

The ordinary rule is a CSR committee of at least three directors, including at least one independent director. Where the company is not required to appoint an independent director, section 135 permits two or more directors. Rule 5 also addresses a private company with only two directors and specifies composition for a covered foreign company. Under section 135(9), where the amount to be spent does not exceed ₹50 lakh, the Board ordinarily discharges the committee functions. Separately, the second proviso to rule 3(1), inserted in 2022, requires a company with any amount in its Unspent CSR Account under section 135(6) to constitute a CSR committee and comply with section 135(2)–(6). Check this balance before relying on the small-obligation rule.

Compute the 2% spending obligation

Compute at least 2% of average qualifying net profits for the three immediately preceding financial years. For a company that has not completed three financial years since incorporation, use the immediately preceding financial years available under section 135(5). Reconcile audited profit to section 198 and the CSR Rules. The calculation is not necessarily equal to profit before tax or profit after tax.

• Section 198 generally excludes capital profits and unrealised, notional or revaluation gains. On sale of a fixed asset, check the proviso that can credit part of the excess over written-down value up to the difference between original cost and that value. Income tax is not generally deducted under section 198; apply the statutory treatment for other adjustments.
• For the CSR net profit definition, exclude profit from overseas branches and dividends received from Indian companies covered by and complying with section 135 as provided in the rules. Do not automatically subtract all profits of a foreign subsidiary; establish which entity's profit and which dividend enter the statutory base.

Classify projects and transfer unspent amounts

Classification	Action
Ongoing project	A qualifying multi-year project can run for up to three years excluding the financial year in which it commenced. A project initially not planned as multi-year can qualify where the Board extends it beyond one year on reasonable justification. Transfer the relevant unspent amount within 30 days of year end to the Unspent Corporate Social Responsibility Account opened with a scheduled bank for that financial year. Spend it on the CSR obligation within three financial years from the transfer date; if still unspent, transfer it to a Schedule VII fund within 30 days of completion of the third financial year.
Other unspent amount	Transfer it to a fund specified in Schedule VII within six months of year end. Explain underspending in the Board's report. Planning a later project does not by itself permit retention past that deadline.

For a 31 March year end, the ordinary dates are 30 April for the ongoing-project account and 30 September for the Schedule VII transfer. The Board should approve and monitor the annual action plan, project timelines and use of funds; obtain the required utilisation certification from the chief financial officer or other person responsible for financial management. A bank transfer is not proof that the project expenditure has been incurred.

Excess spending, capital assets and impact assessment

• Excess spend: Rule 7(3) permits eligible excess spend to be set off over the next three financial years, subject to Board resolution and exclusion of surplus arising from CSR activities. Handle project surplus under the separate rule; it is not business profit. Track balances and report applicable disclosures.
• Capital assets: Rule 7(4) permits creation or acquisition, but the asset must be held by an eligible section 8 company, registered public trust or registered society with charitable objects and a CSR registration number, by qualifying beneficiaries in the specified form, or by a public authority. Check title, project terms and any relevant implementation agency and registration requirements under rule 4 and the applicable CSR-1 form. An eligible asset holder and an eligible implementing agency are distinct tests.
• Impact assessment: Under rule 8(3), a company with an average CSR obligation of at least ₹10 crore in the three immediately preceding financial years must use an independent agency to assess projects with outlay of at least ₹1 crore that were completed at least one year before assessment. Place the reports before the Board and annex them to the annual CSR report. Under the 2022 amendment, eligible assessment costs may be booked as CSR spending up to the higher of 2% of total CSR expenditure for that financial year and ₹50 lakh. This is separate from the administrative overhead cap.

Audit, filings and sanctions

CARO 2020 paragraph 3(xx)(a) covers other-than-ongoing amounts and paragraph 3(xx)(b) covers ongoing-project transfers, where CARO applies. Check year-end project schedules, actual transfer dates, bank records, recipient evidence and Board disclosures. Under rule 12(1B) of the Companies (Accounts) Rules, prepare CSR-2 with the applicable financial statement filing, subject to specific year and transition directions. Use the notified e-Form and current MCA workflow; do not assume CSR-2 is always a standalone return or that the impact assessment report is invariably attached to that e-Form.

For default under section 135(5) or (6), section 135(7) provides a company penalty equal to the lower of twice the amount required to be transferred and ₹1 crore. For each officer in default, the lower of one-tenth of that amount and ₹2 lakh applies. Determine the facts, parties and adjudication separately; paying a penalty does not discharge the transfer obligation.

Seven worked scenarios

1. Reconcile profits, then average: In the latest preceding year, PBT of ₹42 crore includes ₹12 crore of capital profit on non-depreciable land and ₹3 crore of dividends from an Indian subsidiary that was covered by and complied with section 135. With no other adjustments, qualifying profit is ₹27 crore. If qualifying profits for the two earlier years were ₹25 crore and ₹29 crore, the average is ₹27 crore, and 2% is ₹54 lakh. Two percent of the latest PBT would be ₹84 lakh, overstating the amount in this example by ₹30 lakh. The result depends on all three years.
2. Ongoing health project: Assume the Board approved an eligible project starting in FY 2023–24 and that the ₹3 crore allocated in that year was part of the statutory obligation. Actual eligible spend of ₹1.80 crore leaves ₹1.20 crore. The 30-day deadline after 31 March 2024 was 30 April 2024. Transfer on 22 April is on time, and spending that ₹1.20 crore in FY 2024–25 is within the statutory period. Verify CARO (xx)(b) if applicable.
3. Unspent scholarships: A ₹35 lakh statutory amount for non-ongoing activity, less ₹25 lakh eligible spend, leaves ₹10 lakh. If no transfer was made by 30 September following a 31 March year end, the section 135(7) calculation is ₹20 lakh for the company and ₹1 lakh for each officer found in default, assuming that entire ₹10 lakh was required to be transferred. The ₹10 lakh transfer remains due.
4. Set-off: For FY 2022–23, eligible expenditure of ₹105 lakh against ₹60 lakh due creates ₹45 lakh excess. Assume Board resolutions and no CSR surplus in the excess. Setting off ₹30 lakh against ₹70 lakh in FY 2023–24 leaves ₹40 lakh to spend and ₹15 lakh of excess. Applying that ₹15 lakh against ₹65 lakh in FY 2024–25 leaves ₹50 lakh to spend and uses the full excess within the three-year window.
5. Impact assessment: Assume a project of ₹4 crore serving 40 villages was completed on 30 November 2022 and independently assessed on 1 December 2023. The ₹14.50 crore average CSR obligation and the project outlay clear both thresholds and the one-year interval has elapsed. If total eligible CSR expenditure for the assessment year is ₹15 crore including an ₹8 lakh assessment, 2% is ₹30 lakh; the higher ₹50 lakh ceiling applies and ₹8 lakh is within it. Treat the assessment under rule 8(3), not as administrative overhead merely because it was external.
6. Training centre title: A company spends ₹80 lakh on a centre it holds in its own name. Examine title and control, assess rule 7(4) compliance and whether the amount qualifies as CSR spending, and arrange an eligible ownership structure where appropriate. A registered transfer can be relevant, but do not assume a later transfer retroactively cures a past reporting or transfer failure.
7. Foreign company branch: Assume an Indian branch's qualifying FY 2023–24 net profit is ₹6.20 crore, above the ₹5 crore trigger for FY 2024–25. If comparable qualifying Indian profits for the other two preceding years were ₹5.50 crore and ₹6 crore, the average is ₹5.90 crore and 2% is ₹11.80 lakh. Use the foreign company's applicable Indian financial statements, verify committee composition and report under the applicable provisions.

Frequently asked questions

Is statutory CSR an ordinary business expense deduction for income tax?

Explanation 2 to section 37(1) of the 1961 Act excludes section 135 CSR expenditure from that general deduction. The 2025 Act also excludes it from its general expenditure provision. Analyse any separately claimed deduction under its own requirements and the law for the relevant period; this restriction does not resolve every other statutory deduction.

Can a company keep unspent ongoing-project money in its operating account?

Only until the applicable statutory transfer deadline. Transfer the amount to the designated scheduled bank account within 30 days and track the subsequent spending period. A journal entry alone is not the transfer.

Can a company use excess spending without a Board resolution?

No. Document the resolution, origin of the excess, utilisation period and amounts used in each year under rule 7(3).

How should finance teams prepare for the audit?

Keep a year-by-year profit bridge, Board-approved project classification, action plan, utilisation evidence, unspent account reconciliations, proof of transfers and copies of the applicable disclosures and filings.

Sources

• Companies Act, 2013: section 135
• Companies Act, 2013: section 198
• MCA: Companies (CSR Policy) Amendment Rules, 2021
• Gazette: Companies (CSR Policy) Amendment Rules, 2022, G.S.R. 715(E)
• Gazette: Companies (CSR Policy) Amendment Rules, 2025
• Gazette: Companies (Accounts) Second Amendment Rules, 2025, including e-Form CSR-2
• Gazette: Companies (Accounts) Amendment Rules, 2022, rule 12(1B)
• MCA General Circular 14/2021: CSR FAQs; read with later amendments
• CARO 2020: paragraph 3(xx)
• Income Tax Department: Income-tax Act, 1961, section 37
• Income Tax Department: Income-tax Act, 2025, general expenditure provision