Corporate Social Responsibility (CSR) under Section 135 of the Companies Act, 2013

Corporate Social Responsibility (CSR) under Section 135 of the Companies Act, 2013

The Companies Act, 2013 made India a global pioneer by turning corporate social responsibility from a voluntary, goodwill gesture into a mandatory statutory obligation for qualifying companies. Section 135 requires eligible companies to plan, spend, and report on CSR activities each year, with the CSR Rules laying down detailed requirements for what counts, how it must be governed, and how it must be disclosed.

CSR provisions apply to every company (including its holding or subsidiary, and a foreign company having a branch or project office in India) that, during the immediately preceding financial year, meets any one of the following:

•      Net worth of ₹500 crore or more, or

•      Turnover of ₹1,000 crore or more, or

•      Net profit of ₹5 crore or more.

A qualifying company must constitute a CSR Committee of the Board consisting of 3 or more directors, at least 1 of whom must be an independent director (where applicable). Companies with a CSR obligation not exceeding ₹50 lakh are not required to constitute a separate CSR Committee — the functions can be discharged by the Board directly.

A qualifying company must spend, in every financial year, at least 2% of the average net profits made during the 3 immediately preceding financial years (or such shorter period if the company has not completed 3 financial years since incorporation), calculated as per Section 198 of the Act.

•      Eradicating hunger, poverty and malnutrition, promoting health care and sanitation.

•      Promoting education, including special education and employment-enhancing vocational skills.

•      Promoting gender equality and empowering women.

•      Ensuring environmental sustainability and ecological balance.

•      Protection of national heritage, art and culture.

•      Measures for the benefit of armed forces veterans, war widows and dependents.

•      Rural development projects, slum area development, and disaster management (including contribution to specified relief funds).

Any amount that remains unspent for CSR (other than amounts relating to an ongoing project) must be transferred to a specified Fund (such as the PM CARES Fund) within 6 months of the end of the financial year. Amounts relating to an ongoing project must instead be transferred to a separate 'Unspent CSR Account' within 30 days of the end of the financial year and utilised within 3 financial years, failing which the unspent balance must be transferred to a specified Fund.

•      Deciding on CSR projects only in the last quarter, leading to rushed spending or under-utilisation.

•      Failing to distinguish 'ongoing project' spend from regular spend, resulting in incorrect unspent-amount treatment.

•      Spending on activities that benefit only the company's own employees, which do not qualify as CSR.

•      Missing the 6-month (or 30-day, for ongoing projects) transfer deadlines for unspent CSR amounts.

Q1. Is CSR spending mandatory even in a loss-making year?

If a company meets the net worth or turnover thresholds but has no net profit (or the average net profit for the preceding 3 years is nil or negative), there is generally no mandatory CSR spend for that year, since the obligation is calculated as a percentage of net profit.

Q2. Can CSR spend include employee welfare activities?

No, activities benefiting only the company's own employees and their families are specifically excluded from qualifying as CSR expenditure under the Rules.

Q3. Can a company carry forward excess CSR spend to future years?

Yes, if a company spends an amount in excess of the requirement in a particular financial year, the excess can be set off against the CSR obligation for up to the immediate succeeding 3 financial years, subject to conditions.

Q4. Is CSR-2 a separate filing from AOC-4?

Yes, Form CSR-2 is a report on CSR filed separately (though linked to AOC-4 filing) capturing detailed information on CSR obligation, spending, and unspent amounts for the year.

Q5. Can CSR funds be routed through the company's own foundation or trust?

Yes, provided the implementing entity is registered as required under the CSR Rules (registered under Section 12A and 80G of the Income-tax Act, and registered with MCA in Form CSR-1), companies can implement CSR through their own foundation, trust, or Section 8 company.

Q6. Is CSR expenditure tax-deductible?

Generally, CSR expenditure is not allowed as a business deduction under the Income-tax Act, though specific CSR spends on notified schemes (like certain scientific research or rural development projects) may separately qualify for deduction under other provisions.

Q7. Can a company that newly crosses the CSR threshold spread its first year's obligation over a longer period?

No, the obligation for a given financial year (once the applicability conditions are met based on the preceding year's figures) is generally required to be spent within that year itself, subject to the unspent-amount transfer mechanism for shortfalls.

CSR under the Companies Act, 2013 has matured from an experimental provision into a well-defined compliance and governance area, with strict rules on committee composition, permissible activities, and treatment of unspent amounts. Companies should build CSR planning into their annual budgeting cycle rather than treating it as a year-end afterthought.