Who must comply with CSR under section 135?

Who does section 135 apply to?

Section 135(1) of the Companies Act, 2013 catches a company that, in the immediately preceding financial year, had any one of the following:

• net worth of Rs 500 crore or more, or
• turnover of Rs 1,000 crore or more, or
• net profit of Rs 5 crore or more.

The three tests are alternatives, not cumulative. A company with modest profit but turnover above Rs 1,000 crore is covered. The trigger year matters: the provision as amended looks at the immediately preceding financial year, whereas the earlier wording referred to "any financial year", which MCA's FAQ circular read as any of the three preceding financial years. If you are working with older guidance or an older internal note, check which formulation it was written against.

How is the CSR spend computed?

A covered company must spend, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, on activities in Schedule VII of the Act, in pursuance of its CSR policy.

"Net profit" here is not the accounting bottom line and not profit after tax. It is computed under section 198, which MCA's FAQ circular describes as primarily profit before tax, with the adjustments the CSR Rules specify. Using PAT, or using the statement of profit and loss figure without the section 198 adjustments, is the most common computation error in this area.

What if the company is under three years old?

Where the company has not completed three financial years since incorporation, the average is taken over the financial years it has completed. A company in its second year therefore averages two years of section 198 net profit, and the two per cent applies to that average.

Can a nil spend arise while CSR still applies?

Yes. Applicability turns on the preceding year alone, so turnover of Rs 1,000 crore pulls a company in even if the three-year average net profit under section 198 is nil or negative. The committee, policy, board oversight and annual report disclosure still apply; only the spend figure is nil. For the computation on its own, see the CSR 2 per cent spend rule.

When is a CSR Committee required?

The default position under section 135(1) is a CSR Committee of the Board with three or more directors, of which at least one is an independent director. Two carve-outs matter in practice.

The Rs 50 lakh relief in section 135(9) is not unconditional. The CSR Rules were amended so that a company with any amount outstanding in its Unspent CSR Account is expected to constitute a Committee, even where the current year's obligation is below the threshold. Check the current text of the CSR Policy Rules before relying on the relief.

Where do unspent CSR amounts go?

Underspend is not simply carried forward. The Act splits the treatment by whether the money was committed to an ongoing project.

The distinction turns on whether a project qualifies as "ongoing" under the conditions prescribed in the CSR Rules. A project labelled ongoing in the board minutes but not meeting those conditions falls into the six-month Schedule VII route instead, which is a much shorter runway than a team expecting the three-year window would plan for.

What must the Board do under section 135?

The Board, not the Committee, carries the statutory obligation. Its work under section 135 runs through the year rather than at year end.

1. Approve the CSR policy and disclose its contents as required.
2. Ensure activities are undertaken in accordance with the policy and Schedule VII.
3. Ensure the amount is spent, and where it is not, record the reasons in the Board's report.
4. Satisfy itself on utilisation of funds disbursed for the purposes and in the manner approved.
5. Make the CSR disclosures in the annual report format prescribed under the CSR Rules.

The reasons-for-shortfall disclosure is a substantive requirement, not boilerplate. It is the record against which a shortfall is later assessed, and a generic sentence is a weak position to be in if the shortfall is questioned.

What is the penalty under section 135(7)?

Non-compliance with the transfer obligations in sub-sections (5) and (6) attracts a penalty. It is framed as a civil penalty, computed by reference to the unspent amount and capped.

Note what the penalty attaches to. It is keyed to the failure to transfer the unspent amount, which is why the 30-day and six-month transfer dates deserve a place in the compliance calendar in their own right rather than being treated as a follow-on to the spend decision.

What does not count as CSR spend?

• Not a business expense.MCA's FAQ circular records that CSR expenditure cannot be claimed as business expenditure, because the Finance Act, 2014 provided that expenditure on CSR activities referred to in section 135 is not deemed to be incurred for the purposes of the business or profession.
• Not free-form philanthropy.The activity has to sit within Schedule VII and the company's own CSR policy.
• Not a marketing line.Activity undertaken for the company's own benefit or in the normal course of business does not become CSR by being reported as CSR.
• Not discharged by a board resolution alone. The obligation is to spend, and where the money is not spent, to transfer it on time.

How do I verify the current CSR rules?

1. Read the current text of section 135 on India Code, including the provisos and sub-sections (5) to (9).
2. Read section 198 for the net profit computation, and the CSR Policy Rules for the ongoing-project conditions and the annual report format.
3. Read MCA's CSR FAQ circular for the department's stated position, keeping in mind that a circular clarifies and does not amend.
4. Check for later MCA notifications amending the CSR Rules, since the Committee, unspent account and reporting requirements have been amended more than once.

Where an older note conflicts with the current text, the current section and Rules govern. CSR has been amended enough times that internal checklists written a few years ago are a common source of stale positions.

Why do CSR computations go wrong?

• Computing the two per cent on profit after tax instead of net profit under section 198.
• Using the preceding-year threshold figures to compute the spend, or the three-year average to test applicability.
• Assuming section 135(9) removes the Committee permanently, without checking the Unspent CSR Account condition in the Rules.
• Treating a project as ongoing without meeting the prescribed conditions, and so missing the six-month Schedule VII transfer.
• Missing the 30-day transfer to the Unspent CSR Account, which is the failure the section 135(7) penalty is keyed to.
• Writing a generic shortfall reason in the Board's report instead of the actual reason.
• Claiming CSR spend as business expenditure in the tax computation.

Where are CSR Rules amendments published?

CSR is a provision that has moved repeatedly through rule amendments rather than through changes to the section alone. Complied AI keeps MCA updates linked to the notification or circular behind each change, so a CSR Rules amendment can be read against the section text instead of a summary written before the amendment.