CSR under Section 135: A Complete Guide to Applicability and Reporting

CSR under Section 135: A Complete Guide to Applicability and Reporting#

Corporate Social Responsibility (CSR) in India transitioned from a voluntary philanthropic gesture to a strict statutory obligation with the enactment of Section 135 of the Companies Act, 2013. Today, CSR compliance is closely monitored by the Ministry of Corporate Affairs, and deviations invite harsh penalties.

Here is a complete guide to understanding your CSR obligations.

1. Applicability: Are you in the net?#

CSR provisions apply to every company (private or public) that meets any one of the following thresholds during the immediately preceding financial year:

• Net Worth: ₹500 Crore or more
• Turnover: ₹1000 Crore or more
• Net Profit: ₹5 Crore or more (Note: The 2026 Amendment Bill proposes hiking this to ₹10 Crore).

If your company hits any of these marks, you must constitute a CSR Committee (unless the CSR obligation is less than ₹50 Lakhs, in which case the Board can handle it directly) and spend at least 2% of the average net profits made during the three immediately preceding financial years.

2. Where Can You Spend the Money?#

You cannot spend CSR funds on anything that benefits only your employees or normal business operations. The spending must align with the activities listed in Schedule VII of the Companies Act.

Popular avenues include:

• Eradicating hunger, poverty, and malnutrition.
• Promoting education and vocational skills.
• Promoting gender equality and empowering women.
• Ensuring environmental sustainability.
• Contributions to the PM CARES Fund or specified incubators/research institutions.

3. The Implementation Dilemma: Form CSR-1#

Companies can execute CSR projects themselves or through implementing agencies (like registered trusts, societies, or Section 8 companies).

The CSR-1 Mandate: From April 2021, any NGO or implementing agency seeking CSR funding must register with the Central Government by filing Form CSR-1. The MCA generates a unique CSR Registration Number. A company cannot give its CSR funds to an NGO that does not hold this registration number.

4. Reporting: Form CSR-2 and the Board Report#

• The Board Report Annexure: Your annual Board Report must include a detailed annexure on CSR, outlining the policy, committee members, project-wise spending, and reasons for any unspent amounts.
• Form CSR-2: To enhance data mining and regulatory oversight, the MCA introduced Form CSR-2 (a comprehensive web-based report). Companies must file this detailed CSR report to the Registrar of Companies as an addendum to their AOC-4 financial filings.

Conclusion#

CSR is a board-level responsibility. Treat your CSR budget with the same rigorous financial oversight and reporting discipline as any major capital expenditure project. Non-compliance is no longer an option.

How the Applicability Test Works in Practice#

The three thresholds are alternatives, and they are tested on the immediately preceding financial year. Two illustrative companies (round numbers, made up for explanation):

• Company A: net worth well below ₹500 Crore, turnover below ₹1000 Crore, but net profit of ₹6 Crore. It is covered, because the net profit test alone is met.
• Company B: net profit below ₹5 Crore, but turnover of ₹1100 Crore. It is also covered, because the turnover test alone is met.

Note the mismatch in periods: coverage is decided by the preceding year, while the spending amount is based on the average of three years. A company that has just crossed a threshold may therefore find the two figures behave differently. The proposed change to the net profit limit mentioned above is only a proposal in this article, so confirm the position in force for your year before relying on either figure.

Board or Committee: Who Decides What#

The article above notes that a smaller CSR obligation can be handled directly by the Board. Whichever body is responsible, the same decisions have to be made and recorded:

1. What the CSR policy says, including the focus areas drawn from Schedule VII.
2. Which projects will be funded in the year and how much each will receive.
3. How progress will be monitored and who reports on it.
4. How any shortfall at year end will be handled (see our companion article on CSR compliance and impact assessment for the unspent-fund treatment, which we do not repeat here).

What Counts and What Does Not#

A quick test before approving any spend: does the activity fall within Schedule VII, and does it benefit the wider community rather than the company or its employees?

• Usually qualifies: a scholarship programme for underprivileged students (education), a nutrition programme in a village (hunger and malnutrition), a skills course for women (vocational skills and empowerment).
• Usually does not qualify: sponsoring a company event, a staff welfare scheme, or marketing spend presented as a donation.
• Needs advice: mixed-benefit projects, for example a facility that serves both the community and the company's own workforce. Where the boundary is unclear, get a professional opinion before committing funds rather than after.

Choosing and Monitoring an Implementing Agency#

Because the funds may only go to a registered agency, the process starts with verification.

1. Ask for the CSR Registration Number and confirm it against the MCA record.
2. Review the agency's track record, governance and financial statements.
3. Sign a written agreement setting out the project, budget, milestones and reporting.
4. Release money against progress, not all upfront.
5. Collect utilisation reports, invoices and photographs or other evidence.
6. Visit or arrange an independent check on larger projects.

Records the Board Report Needs#

The CSR annexure to the Board Report draws on the records above. If the file for each project already holds the approval, agreement, payment proof and utilisation evidence, the annexure becomes a matter of compiling rather than reconstructing. Reconstructing months later is where inconsistencies creep in.

Common Mistakes to Avoid#

• Assuming a company is out of scope without testing all three thresholds.
• Funding an NGO before checking its registration.
• Treating CSR as a year-end cheque-writing exercise instead of a planned programme.
• Spending on activities that are not clearly within Schedule VII.
• Failing to keep project-wise evidence.
• Not filing Form CSR-2 with the annual filings where it applies.

Practical Checklist#

• Thresholds tested for the year.
• Committee or Board responsibility recorded.
• CSR policy approved.
• Projects mapped to Schedule VII.
• Implementing agencies verified and under written agreement.
• Utilisation evidence collected.
• Board Report annexure and Form CSR-2 prepared.

This article is general information. CSR rules have been amended and further changes are proposed, so consult a qualified professional to confirm the position for your company.