Corporate Social Responsibility (Section 135) →

Section 135 of the Companies Act, 2013 made India one of the first countries in the world to put corporate philanthropy on a statutory footing. It compels every sufficiently large company to constitute a Corporate Social Responsibility Committee, frame a CSR policy, and spend at least two per cent of its average net profits on the activities listed in Schedule VII. What began in 2013 as a "comply or explain" obligation — spend, or disclose why you did not — was rebuilt by the Companies (Amendment) Acts of 2019 and 2020 into a "comply or be penalised" regime, complete with mandatory transfer of unspent money and a graded monetary penalty. This chapter sets out the threshold test, the committee machinery, the two per cent computation, the Schedule VII menu, the Unspent CSR Account, the penalty under 135(7) and the tax treatment, with the statutory text and the tribunal decisions that have construed it.

For the judiciary and CLAT-PG aspirant, CSR is a high-yield topic precisely because it is self-contained: a single section, a single schedule and one set of rules, all amended in living memory, generate a dense cluster of testable distinctions. Before reading further it helps to be comfortable with the basic scheme of the Act and the core definitions of company, director and member, because Section 135 borrows the concepts of "net worth", "turnover", "net profit", "Board of Directors" and "independent director" wholesale from elsewhere in the Act.

Statutory anchor and the shift to mandatory CSR

Section 135 sits in Chapter IX of the Companies Act, 2013, alongside the provisions on accounts and audit, and is read with Schedule VII and the Companies (Corporate Social Responsibility Policy) Rules, 2014. It came into force on 1 April 2014. The provision was novel: the Companies Act, 1956 contained nothing comparable, and the idea of legislatively compelling private companies to spend on social objectives was, at the time, almost without precedent in the common-law world.

As originally enacted, Section 135(5) carried a now-famous proviso. If the company failed to spend the two per cent, the Board was required only to "specify the reasons for not spending the amount" in its report under Section 134(3)(o). There was no obligation to actually part with the money and no penalty for under-spending. This was the "comply or explain" model, and in practice a large number of companies chose to explain rather than comply. The High Level Committee on CSR chaired by Injeti Srinivas, reporting in 2018-19, recommended tightening the regime, and Parliament obliged.

The Companies (Amendment) Act, 2019 first inserted the machinery for transfer of unspent amounts and introduced a penalty. That penalty was initially framed as a fine backed by imprisonment for officers in default — an unusually harsh criminal sanction for a spending shortfall, which drew immediate criticism. Before the 2019 penalty was ever notified, the Companies (Amendment) Act, 2020 substituted Section 135(7) afresh, decriminalising the default and converting it into a purely civil penalty, and inserted Section 135(9). The substituted sub-section (7) and the related provisions were brought into force on 22 January 2021. The net effect is that CSR today is genuinely mandatory: a qualifying company must either spend the money or transfer it, and a shortfall is sanctioned, but the sanction is monetary rather than penal.

Applicability — the three thresholds under 135(1)

Section 135(1) fixes the gateway. Every company that, during the immediately preceding financial year, has a net worth of rupees five hundred crore or more, or a turnover of rupees one thousand crore or more, or a net profit of rupees five crore or more, must constitute a CSR Committee and comply with the section. The three limbs are alternatives — satisfying any one of them brings the company within the net.

The temporal anchor matters. As first enacted, the trigger was the company's position "during any financial year", which created uncertainty about which year's figures were decisive. The Companies (Amendment) Act, 2017, with effect from 19 September 2018, replaced "any financial year" with "the immediately preceding financial year", so that eligibility is tested on the most recent completed year's accounts. A company that crosses a threshold in one year and falls below it in subsequent years is, under the CSR Policy Rules, relieved of the obligation once it ceases to meet the thresholds for three consecutive financial years.

"Net worth", "turnover" and "net profit" are not defined afresh in Section 135; they take their meaning from Section 2(57), Section 2(91) and Section 198 respectively. Because the thresholds turn on these defined figures, the applicability question is ultimately an accounting one, decided on the audited financial statements rather than on any subjective assessment of the company's size. The tribunal in M/s Hira Power and Steels Limited underscored exactly this point — the quantum of the CSR obligation can be determined only after the accounts for the relevant year have been finalised, because both the trigger and the two per cent computation depend on figures that crystallise only on finalisation.

The reach of the section is wide. It applies to private companies and public companies alike, and the CSR Policy Rules extend it to a foreign company having a branch office or project office in India where the foreign company crosses the thresholds, computed on the financials of its Indian operations. The incorporation route by which the company came into being — discussed in our chapter on the procedure for incorporation of a company — is irrelevant; what matters is size, not form.

The CSR Committee and its functions

The CSR Committee is the institutional heart of the section. Under Section 135(1), it must consist of three or more directors, of whom at least one must be an independent director. The independent director requirement aligns CSR governance with the broader scheme of board accountability — the independent director, by definition under Section 149(6), is free of pecuniary entanglement with the company and so brings disinterested oversight to a discretionary spending power that could otherwise be abused.

Two relaxations soften this. First, the first proviso to Section 135(1) provides that a company which is not required to appoint an independent director under Section 149(4) may constitute its CSR Committee with two or more directors. Second, and more significantly, Section 135(9) — inserted by the 2020 Amendment — provides that where the amount required to be spent does not exceed fifty lakh rupees, the requirement to constitute a CSR Committee falls away altogether, and the functions of the Committee are then discharged by the Board itself. This is a deliberate easing of the compliance burden for smaller qualifying companies whose two per cent works out to a modest sum.

The functions of the Committee are spelt out in Section 135(3). It must formulate and recommend to the Board a Corporate Social Responsibility Policy indicating the activities to be undertaken in areas or subjects specified in Schedule VII; recommend the amount of expenditure to be incurred on those activities; and monitor the CSR Policy of the company from time to time. The Committee is thus a recommending and monitoring body — it proposes; the Board disposes.

The Board's duties under 135(2) to 135(4)

Section 135(2) requires the Board's report under Section 134(3) to disclose the composition of the CSR Committee. This dovetails with the transparency philosophy that runs through the Act — the same philosophy that requires the articles of association and other constitutional documents to be on the public record.

Section 135(4) is where the Board's substantive obligations crystallise. After taking into account the Committee's recommendations, the Board must approve the CSR Policy and disclose its contents in its report and on the company's website. It must further ensure that the activities included in the CSR Policy are actually undertaken. The phrasing "shall ensure" converts what might otherwise be aspirational into a positive duty owed by the directors, breach of which feeds into the penalty machinery and, potentially, into questions of directors' liability for default.

The two per cent obligation and net profit under 198

The financial core of Section 135 is the obligation in sub-section (5): the Board must ensure that the company spends, in every financial year, at least two per cent of the average net profits made during the three immediately preceding financial years. Three features of this formula repay attention.

First, the base is an average, not a single year's profit. By smoothing over three years, the section insulates the obligation from the volatility of any one year and prevents a company from escaping the spend simply by booking a loss in the year of computation. Second, the relevant "net profit" is the figure computed in accordance with Section 198, not the profit shown for tax or even the bare accounting profit. Section 198 strips out certain items — notably, profits from overseas branches and any dividend received from other companies that are themselves covered by Section 135 — so that the same rupees are not taxed for CSR twice across a group. The Companies (CSR Policy) Rules, 2014 make this explicit in their definition of "net profit".

Third, the first proviso to Section 135(5) directs the company to give preference to the local area and areas around it where it operates for spending the amount earmarked for CSR. This is a soft geographical steer rather than a hard mandate; the Ministry of Corporate Affairs has clarified through circulars that it is directory, not mandatory, and a company may spend outside its local area where its CSR objectives so require.

The second proviso to Section 135(5), inserted in 2019, is the pivot of the modern regime. If the company fails to spend the required amount, the Board must, in its report, specify the reasons for not spending and — unless the unspent amount relates to an ongoing project — transfer the unspent amount to a fund specified in Schedule VII within six months of the expiry of the financial year. The old "explain" obligation survives, but it is now bolted onto a hard "transfer" obligation. A company can no longer simply sit on the money.

Schedule VII — what counts as CSR

Schedule VII is the closed list of permissible CSR activities. Expenditure qualifies as CSR only if it falls within one of the heads enumerated there. The heads are broad and have been progressively expanded by notification, and now include: eradicating hunger, poverty and malnutrition and promoting health care including preventive health care and sanitation, and contribution to the Swachh Bharat Kosh; promoting education, including special education and employment-enhancing vocation skills; promoting gender equality and empowering women; ensuring environmental sustainability and ecological balance, and contribution to the Clean Ganga Fund; protection of national heritage, art and culture; measures for the benefit of armed forces veterans, war widows and their dependents; training to promote rural, nationally recognised, Paralympic or Olympic sports; contribution to the Prime Minister's National Relief Fund or the PM CARES Fund; and rural and slum area development, among others.

The list operates as both a permission and a limitation. Crucially, certain expenditures are expressly excluded from CSR by the CSR Policy Rules: activities undertaken in pursuance of the company's normal course of business; contributions to political parties under Section 182; activities benefiting only the company's own employees; and activities carried on outside India (except training of Indian sports personnel). The exclusion of political contributions is the cleanest line of all — money given to a party under Section 182 is a political contribution, not CSR, and the two regimes are mutually exclusive.

The Unspent CSR Account and ongoing projects

The 2019 and 2020 amendments built a two-track machinery for money that a company has not actually spent by the year-end. Which track applies depends on whether the unspent amount relates to an "ongoing project" — a multi-year project that the company has identified in advance, with a defined timeline not exceeding three years excluding the year of commencement.

Where the unspent amount does not relate to an ongoing project, the second proviso to Section 135(5) applies: the company must transfer it, within six months of the end of the financial year, to a fund specified in Schedule VII — for example, the PM CARES Fund or the Clean Ganga Fund. The money leaves the company permanently.

Where the unspent amount does relate to an ongoing project, Section 135(6) applies. The company must transfer the unspent amount, within thirty days of the end of the financial year, to a special account opened with a scheduled bank, to be called the "Unspent Corporate Social Responsibility Account". It must then spend that money on the project within a period of three financial years from the date of transfer. If it still fails to spend the money within those three years, it must transfer the residue to a Schedule VII fund within thirty days of the end of the third financial year.

The distinction between the six-month transfer (non-ongoing) and the thirty-day transfer (ongoing) is one of the most heavily tested points in the whole topic, and candidates routinely confuse the two windows. A clean mnemonic: ordinary unspent money goes out of the company in six months; ongoing-project money is parked inside a special account in thirty days and given three years to be deployed.

The penalty regime under 135(7)

Section 135(7), as substituted by the Companies (Amendment) Act, 2020 and in force from 22 January 2021, is the enforcement teeth of the section. A company that contravenes the spending or transfer obligations under sub-sections (5) or (6) is 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, whichever is less. 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, whichever is less.

Two structural features deserve emphasis. First, the sanction is a penalty, not a fine. The vocabulary is deliberate: a "penalty" under the Act is a civil monetary levy adjudicated administratively by the Registrar of Companies under the in-house adjudication machinery of Section 454, whereas a "fine" is imposed by a court on conviction for an offence. By substituting a penalty for the originally proposed fine-plus-imprisonment, the 2020 Amendment decriminalised the CSR default. There is no imprisonment for a CSR shortfall today.

Second, the penalty is capped and proportionate. Both the company's and the officer's exposure are pegged to the unspent amount — twice it (for the company) and one-tenth of it (for the officer) — but each is subject to an absolute ceiling. This keeps the sanction tethered to the magnitude of the default rather than allowing it to balloon, and reflects the legislative judgment that under-spending on CSR, while culpable, is not in the same moral category as fraud.

Section 135(8) is a residual saving: the Central Government may give such general or special directions to a company or class of companies as it considers necessary to ensure compliance with the section, and the company must comply. This is an administrative supervisory power rather than a penal one.

The CSR Policy Rules, 2014 machinery

The Companies (Corporate Social Responsibility Policy) Rules, 2014, extensively amended in 2021, supply the operational detail that the section leaves open. They define "CSR", "ongoing project", "net profit", "administrative overheads" and "CSR Policy". They cap administrative overheads at five per cent of total CSR expenditure for the financial year. They require that CSR activities be undertaken through the company itself or through an implementing agency that is registered with the Central Government by filing Form CSR-1 and obtaining a CSR Registration Number — a registration discipline introduced in 2021 to weed out shell entities posing as implementing agencies.

The Rules also introduced the concepts of impact assessment (mandatory for companies with average CSR obligation of ten crore rupees or more, in respect of projects of one crore rupees or more) and the set-off of excess CSR spending against the obligation of up to the three succeeding financial years. A company that over-spends in one year may now carry the excess forward and set it off against future obligations, subject to Board resolution and conditions — a flexibility entirely absent from the original 2014 scheme.

One frequently-tested clarification: the surplus arising out of CSR activities does not form part of the business profit of the company and must be ploughed back into the same project, or transferred to the Unspent CSR Account, or to a Schedule VII fund. CSR is conceived as a one-way flow out of the company's profits into social ends; the company cannot recycle CSR surpluses back into its own coffers.

Tribunal decisions and compounding

Because Section 135 defaults are, by design, regulatory rather than litigious, the case law is dominated not by the constitutional courts but by the National Company Law Tribunal exercising its compounding and adjudication jurisdiction. A handful of NCLT decisions illustrate how the provision works in practice.

In Technicolor India (P.) Ltd. v. Registrar of Companies (NCLT, Bengaluru Bench, 2020), the company had a CSR Committee and had spent below the two per cent threshold, supplying its reasons in the Director's Report as the law then required, but the CSR figures were captured incorrectly in that report. The Tribunal allowed the company's application to revise its Board's report to correct the disclosure and gave it liberty to file for compounding of the consequential default under Section 441. The decision is a useful illustration that disclosure defects under the CSR regime are curable and compoundable.

In Pan Asia Logistics India Private Limited (NCLT, Chennai Bench, 2018), the company had failed to constitute a CSR Committee at all. The Tribunal held that the offence of non-constitution of the Committee was compoundable under Section 441, and imposed a penalty on the company and its officers in default. Read together, Technicolor and Pan Asia mark out the two recurring CSR defaults — defective disclosure and non-constitution of the Committee — as compoundable rather than the subject of full-blown prosecution.

In Bilfinger Neo Structo Private Limited (NCLT, 2019), the Tribunal underscored the threshold logic from the other direction: a company that meets none of the three criteria in Section 135(1) is simply outside the section, and no CSR obligation arises however large or profitable it may appear in a colloquial sense. The applicability gateway is exhaustive; you are either through it on the figures or you are not.

CSR and income tax — the deduction bar

A persistent exam trap is the interaction between the Companies Act obligation and the Income-tax Act, 1961. One might assume that money a company is statutorily compelled to spend would be deductible as business expenditure. It is not. Explanation 2 to Section 37(1) of the Income-tax Act, inserted by the Finance (No. 2) Act, 2014 and effective from assessment year 2015-16, provides expressly that any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in Section 135 of the Companies Act, 2013 shall not be deemed to be expenditure incurred for the purposes of business or profession.

The rationale is that CSR is an application of income towards a social obligation rather than an outgoing laid out wholly and exclusively for earning profits, and so falls outside the general deduction in Section 37(1). The Delhi High Court has held that Explanation 2 is prospective — it bites only from assessment year 2015-16 onward and does not disallow CSR-type expenditure in earlier years. Certain CSR contributions may still find shelter under specific deduction provisions (for instance, donations qualifying under Section 80G), but the general business-expenditure route is closed. The point worth carrying into the exam hall is the headline rule: mandatory CSR spend under Section 135 is not deductible as business expenditure.

CSR distinguished from political contributions

Section 135 is best understood alongside its statutory neighbour, Section 182, which governs political contributions by companies. The two are deliberately walled off from each other. Under Section 182 a company (other than a Government company or one in existence for less than three financial years) may contribute to a political party, subject to a Board resolution and disclosure in its profit and loss account; the earlier seven-and-a-half-per-cent ceiling on such contributions was removed by the Finance Act, 2017. By contrast, Section 135 channels two per cent of average net profits into Schedule VII social activities.

The CSR Policy Rules close the loop by expressly excluding any contribution to a political party under Section 182 from counting as CSR. A company therefore cannot dress up a political donation as social responsibility, nor claim a CSR credit for it. The distinction is a favourite of examiners because it tests whether the candidate has understood that CSR is about social and developmental ends under a closed schedule, not about the company's broader public or political engagement.

Exam angle — the recurring distinctions

Five distinctions recur in objective papers and short-note questions on Section 135, and mastering them covers the overwhelming majority of what is asked.

First, the three thresholds: net worth five hundred crore, turnover one thousand crore, net profit five crore — alternatives, tested on the immediately preceding financial year. Candidates lose marks by treating them as cumulative or by misremembering a figure; the surest anchor is "500 / 1000 / 5" in crores.

Second, the two per cent of average net profits of three immediately preceding financial years, computed under Section 198 — not the latest year's profit, and not the tax profit.

Third, the two transfer windows: six months to a Schedule VII fund for ordinary unspent amounts under the second proviso to 135(5); thirty days to the Unspent CSR Account for ongoing-project amounts under 135(6), then three years to spend.

Fourth, the penalty under 135(7): company — twice the unspent amount or one crore, whichever is less; officer — one-tenth of the unspent amount or two lakh, whichever is less; civil penalty, no imprisonment, post-2021.

Fifth, the two exemptions: independent-director relaxation where Section 149(4) does not apply (two directors suffice), and the 135(9) dispensation where the spend does not exceed fifty lakh (no Committee; Board acts). Hold these five clusters and add the tax bar under Explanation 2 to Section 37(1), and the topic is, for examination purposes, fully covered. For the wider doctrinal context in which CSR sits, revisit the hub on the Companies Act, 2013.