THE COMPANIES ACT, 2013

Corporate Social Responsibility

Governance & Compliance — Section 135

— Mandatory corporate social responsibility in Indian law —

Corporate Social Responsibility — Section 135, Schedule VII, and the CSR Rules

Introduction

India holds the distinction of being the first country in the world to make Corporate Social Responsibility (CSR) a mandatory statutory obligation for large companies. Through Section 135 of the Companies Act, 2013, supplemented by Schedule VII (which prescribes permissible CSR activities) and the Companies (Corporate Social Responsibility Policy) Rules, 2014, India transformed CSR from a voluntary corporate practice into a binding legal duty. The transformation reflects a profound policy choice — that the social legitimacy of corporate enterprise depends on tangible contribution to social welfare, environmental sustainability, education, healthcare, and other developmental priorities, and that this contribution should not be left to corporate discretion alone.

Section 135 establishes a framework that affects the largest segment of Indian corporate India — every company meeting prescribed financial thresholds (net worth ≥ ₹500 crore, OR turnover ≥ ₹1000 crore, OR net profit ≥ ₹5 crore) must spend at least 2% of average net profits of the immediately preceding three financial years on CSR activities. The framework includes a CSR Committee for governance, mandatory policies, transparent reporting, and (after the 2020 amendment) penal consequences for non-compliance. Schedule VII enumerates the permitted CSR activities — covering education, health, environment, gender equality, vocational skills, rural development, and various other development priorities.

This article examines the CSR framework in comprehensive detail — the applicability triggers under Section 135(1), the constitution and functions of the CSR Committee, the 2% mandatory spend obligation, the unspent CSR account framework introduced in 2020, the impact assessment requirement for projects ≥ ₹1 crore, the implementation through registered Section 8 companies and trusts, the penalty regime under Section 135(7), and the case law including various NCLT proceedings on Tech Mahindra Foundation and similar entities. The article is essential reading for judicial aspirants because CSR has become a focal point of governance disputes, NCLT proceedings, regulatory investigations, and tax disputes.

Figure 1 — Section 135 — three applicability triggers and the 2% mandatory CSR spend on the average net profit of the preceding three financial years.

Part I — Conceptual Foundation

What Is Corporate Social Responsibility?

CSR refers to a company's commitment to operating in an ethical, sustainable, and socially-responsible manner, going beyond profit maximisation to consider its impact on stakeholders, environment, and society. Common CSR dimensions include:

• Social welfare — education, healthcare, sanitation, poverty alleviation;
• Environmental sustainability — clean energy, water conservation, biodiversity;
• Community development — rural infrastructure, skill development, livelihood support;
• Diversity and inclusion — gender equality, marginalised groups, accessibility;
• Employee welfare — beyond statutory minimum, family support, wellbeing;
• Ethical business — anti-corruption, fair-trade practices, supply-chain responsibility.

Why Mandatory CSR?

The Indian decision to mandate CSR rests on several considerations:

• Social-legitimacy imperative — corporate wealth depends on social infrastructure (education, health, security) that the state provides;
• Distributive justice — large profits create obligations to broader society;
• Filling state-capacity gaps — corporate resources can supplement government welfare initiatives;
• Stakeholder governance — moving beyond shareholder primacy;
• Long-term value creation — sustainable communities support sustainable corporations;
• Global competitiveness — alignment with international ESG and SDG frameworks.

The Indian Approach — Statutory Mandate with Flexibility

India's CSR framework reflects a distinctive balance:

• Mandate the spend — 2% of average net profits — but not specific projects;
• Specify permitted activities — Schedule VII — but allow company-specific policy choices;
• Require governance — CSR Committee — but enable customised implementation;
• Enforce through penalties — Section 135(7) — but allow self-regulation through reporting and accountability.

Part II — Section 135(1) — Applicability Triggers

The Three Threshold Tests

Section 135(1) provides that every company having:

• Net worth of ₹500 crore or more, OR
• Turnover of ₹1000 crore or more, OR
• Net profit of ₹5 crore or more,

during the immediately preceding financial year, shall constitute a Corporate Social Responsibility Committee.

Threshold Determination

Important interpretive points:

• 'Or' connector — meeting any one threshold triggers applicability;
• Reference is to the 'immediately preceding financial year' — applicability determined annually;
• Net worth as defined in Section 2(57): paid-up share capital + reserves and surplus excluding revaluation reserve, less accumulated losses;
• Turnover as per audited financial statements;
• Net profit calculated per Section 198 (same as for managerial remuneration);
• Once applicable, CSR obligations continue until applicability ceases.

'Cessation' Provision — 3-Year Rule

Section 135(1) — second proviso — provides that where a company ceases to satisfy the threshold tests for three consecutive financial years, it is no longer required to constitute a CSR Committee. Until such cessation, the obligations continue.

Coverage of Indian Corporate Sector

As of recent estimates, approximately 23,000 companies satisfy Section 135 thresholds. The aggregate CSR spend is approximately ₹25,000–30,000 crores annually, making the Indian CSR framework one of the largest mandatory corporate-philanthropic regimes globally.

Part III — CSR Committee — Composition and Functions

Section 135(1) — Composition Requirement

The CSR Committee must consist of:

• Three or more directors;
• Out of which at least one shall be an independent director;
• For unlisted public companies and private companies (not required to have independent directors), the requirement is two or more directors;
• For foreign companies — comprising at least two persons of which one is the person specified under Section 380(1)(d) and the other is the person nominated by the foreign company.

Section 135(2) — Disclosure of Composition

Section 135(2) requires the Board's report to include the composition of the CSR Committee.

Section 135(3) — Functions of CSR Committee

The CSR Committee shall:

1. Formulate and recommend to the Board a Corporate Social Responsibility Policy that indicates the activities to be undertaken by the company in areas or subjects specified in Schedule VII;Recommend the amount of expenditure to be incurred on the activities;Monitor the Corporate Social Responsibility Policy of the company from time to time.

Section 135(4) — Board's Responsibilities

Section 135(4) requires the Board to:

• Approve the Corporate Social Responsibility Policy after considering the recommendations of the CSR Committee;
• Disclose contents of the policy in its report;
• Place it on the company's website (if any).

Part IV — Section 135(5) — The 2% Mandatory Spend

Statutory Mandate

Section 135(5) — the operative provision — requires:

• Every company referred to in Section 135(1) shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years;
• In pursuance of its Corporate Social Responsibility Policy.

Calculation of '2% of Average Net Profits'

The calculation involves:

• Take net profit (per Section 198) for each of the three preceding financial years;
• Average them;
• Calculate 2% of the average.

Note: Net profit per Section 198 differs from accounting profit — it excludes capital profits and certain other items. This is the same calculation as for managerial-remuneration purposes under Section 197.

Local Area Preference — Proviso to Section 135(5)

The proviso to Section 135(5) requires:

• The company shall give preference to the local area and areas around it where the company operates for spending the amount earmarked for CSR;
• This recognises the natural connection between corporate operations and surrounding communities;
• Provides a geographic anchor for CSR spending.

Failure to Spend — Reasons in Board's Report

Section 135(5) — second proviso — requires that if the company fails to spend the prescribed amount, the Board shall:

• Specify the reasons for not spending the amount in its Board's Report;
• Transfer the unspent amount to a Schedule VII fund within six months of expiry of the financial year (subject to ongoing project framework — see below);
• After the 2020 amendment, this is no longer voluntary — failure to comply attracts penalty under Section 135(7).

Part V — Schedule VII — Permitted Activities

Permitted CSR Activities

Schedule VII enumerates activities that may be included in CSR Policy. The current list (as amended periodically) includes:

• (i) Eradicating hunger, poverty, and malnutrition; promoting healthcare including preventive healthcare and sanitation; making available safe drinking water;
• (ii) Promoting education, including special education and employment-enhancing vocational skills, especially among children, women, elderly, and the differently abled, and livelihood enhancement projects;
• (iii) Promoting gender equality, empowering women, setting up homes and hostels for women and orphans, setting up old age homes, day care centres, and such other facilities; reducing inequalities faced by socially and economically backward groups;
• (iv) Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources, and maintaining quality of soil, air, and water; including contribution to the Clean Ganga Fund;
• (v) Protection of national heritage, art, and culture; restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;
• (vi) Measures for the benefit of armed forces veterans, war widows, and their dependents; CAPF, paramilitary, and police personnel; widows, dependents;
• (vii) Training to promote rural sports, nationally recognised sports, Paralympic sports, and Olympic sports;
• (viii) Contribution to the Prime Minister's National Relief Fund or PM CARES Fund or any other fund set up by the Central Government for socio-economic development and relief, and welfare of the SC, ST, and minorities;
• (ix) Contribution to incubators, scientific research, technology incubators, R&D projects in the field of science, technology, engineering, and medicine, funded by the Central or State Government or any agency thereof;
• (x) Rural development projects;
• (xi) Slum area development;
• (xii) Disaster management — including relief, rehabilitation, and reconstruction activities;
• Such other activities as the Central Government may notify.

COVID-19 Inclusions

In response to COVID-19, the Government clarified/expanded permissible CSR activities:

• Contribution to PM CARES Fund (recognised as Schedule VII);
• Activities related to COVID-19 prevention, response, and treatment;
• Vaccination drives;
• Healthcare infrastructure;
• Awareness campaigns.

Activities NOT Considered as CSR

Per CSR Rules 2014, the following are not considered CSR activities:

• Activities undertaken in pursuance of normal course of business;
• Activities undertaken outside India (with limited exceptions for training of Indian sports personnel);
• Contribution to political parties under Section 182;
• Activities benefiting employees (definition of 'employees' as per Section 2(46) of the Code on Wages, 2019);
• Activities supported by sponsorship for marketing benefit;
• Activities carried out for fulfilling any other statutory obligation.

Part VI — Section 135(6) — Unspent CSR Account

Genesis — Companies (Amendment) Act, 2019

Section 135(6) was substantially overhauled through the Companies (Amendment) Act, 2019 (effective January 2021), to address concerns that companies were not spending allocated CSR amounts. The amendment introduced the 'unspent CSR account' framework:

Two Categories of Unspent CSR

The framework distinguishes between two situations:

• Unspent amount relating to ongoing projects — must be transferred to a 'Unspent Corporate Social Responsibility Account' within 30 days of FY end; spent within next three FYs;
• Unspent amount NOT relating to ongoing projects — must be transferred to a Schedule VII fund within six months of FY end.

Ongoing Project Definition

Per CSR Rules 2014 (as amended), an 'ongoing project' is defined as:

• A multi-year CSR project undertaken by a company in fulfillment of its CSR obligation;
• Having timelines not exceeding 3 years (excluding the FY in which it was commenced);
• Including such project that was initially not approved as a multi-year project but the duration of which has been extended beyond 1 year by the Board (subject to specific procedural conditions).

Procedure for Unspent CSR Account

Section 135(6) prescribes the procedure:

1. If unspent amount relates to ongoing projects, transfer the unspent amount to 'Unspent Corporate Social Responsibility Account' opened with a scheduled bank;Transfer must be within 30 days of expiry of FY;Spend on the ongoing project within the next three FYs;If still unspent, transfer to a Schedule VII fund within 30 days from completion of three-year period.

Implementing Agency Framework

CSR activities can be implemented through:

• Section 8 companies, registered public trusts, or registered societies — established by the company itself or its holding/subsidiary/associate company;
• Section 8 companies, registered trusts, or registered societies established by Central Government or State Government or any entity established by Central or State Government with track record of at least 3 years;
• Any entity registered under Section 12A and 80G of the Income Tax Act, 1961, with track record of at least 3 years;
• Such other entity as may be prescribed.

Part VII — Section 135(5) (Proviso) — Impact Assessment

Mandatory Impact Assessment

Section 135(5) — through the third proviso added in 2020 — requires:

• Companies with average CSR obligation of ₹10 crore or more in the three immediately preceding FYs must undertake impact assessment;
• Of every CSR project having outlay of ₹1 crore or more, AND that has been completed not less than one year before undertaking the impact study;
• Through an independent agency.

Impact Assessment Report

The impact assessment report:

• Must be placed before the Board;
• Annexed to the annual report on CSR;
• Cost of impact assessment can be booked towards CSR expenditure (up to 5% of total CSR or ₹50 lakhs, whichever is lower).

Importance of Impact Assessment

Impact assessment serves several functions:

• Accountability — verifies that CSR funds are achieving stated objectives;
• Quality improvement — feedback for refining CSR strategies;
• Public reporting — enhances transparency for stakeholders;
• Regulatory oversight — provides data for MCA monitoring.

Part VIII — Section 135(7) — Penalty for Non-Compliance

Penalty Regime — Companies (Amendment) Act, 2020

Section 135(7) — added through the Companies (Amendment) Act, 2020 — provides specific penalty provisions for failure to comply with CSR obligations:

Penalty on the Company

If a company is in default in complying with the CSR provisions:

• Penalty: twice the amount required to be transferred to the Unspent CSR Account or Schedule VII fund;
• OR ₹1 crore, whichever is less.

Penalty on Officers

Every officer of the company who is in default shall be liable to a penalty:

• One-tenth of the amount required to be transferred to the Unspent CSR Account or Schedule VII fund;
• OR ₹2 lakhs, whichever is less.

Migration from Imprisonment to Penalty

The 2020 amendment migrated CSR non-compliance from imprisonment-based criminal offences to monetary-penalty-based civil offences. This was part of a broader decriminalisation initiative. The current penalty regime emphasises monetary deterrence through proportionate fines.

Part IX — CSR Rules, 2014 — Procedural Framework

Companies (CSR Policy) Rules, 2014

Notified February 2014 (effective from 1 April 2014), the Companies (Corporate Social Responsibility Policy) Rules, 2014, prescribe the procedural framework. Key features:

• Definition of CSR activities and exclusions;
• CSR Committee composition and meeting requirements;
• Implementation through registered entities;
• Annual CSR Report format;
• Disclosure requirements;
• CSR Policy contents.

Major Amendments — 2021 and 2022

Significant amendments through the Companies (CSR Policy) Amendment Rules, 2021 (effective 22 January 2021) and 2022 (effective 20 September 2022):

• Mandatory registration of implementing agencies through Form CSR-1;
• Annual disclosure of CSR projects through Form CSR-2;
• Strengthening of impact assessment requirements;
• Enhanced ongoing project framework;
• Detailed reporting on CSR activities;
• Audit/internal control requirements for CSR spending.

Form CSR-1 — Registration of Implementing Agencies

Form CSR-1 requires:

• Section 8 companies, registered public trusts, registered societies, or entities under Section 12A/80G to register;
• Filed with the MCA;
• Effective for engagements with companies for CSR implementation;
• Provides accountability and verification of implementing entities.

Form CSR-2 — Annual CSR Disclosure

Form CSR-2 requires:

• Annual filing by every company subject to Section 135;
• Detailed disclosure of CSR activities, expenditure, and outcomes;
• Filed with the MCA along with Form AOC-4 (financial statements);
• Public information for transparency and accountability.

Part X — Notable Case Law

CSR Compliance and Application

Disclosure and Reporting Failures

CSR and Constitutional/Public-Interest Considerations

Tax Treatment of CSR Expenditure

Part XI — Practical Issues and Compliance

Determining CSR Applicability

Practical compliance steps:

• Annually review whether thresholds are met;
• Calculate net worth, turnover, and net profit per Section 198 carefully;
• Document the determination;
• Apply the 'cessation' test — three consecutive FYs of non-applicability.

CSR Policy Formulation

Key considerations:

• Align with company's business and operational areas;
• Ensure activities fall within Schedule VII;
• Consider local area preference;
• Plan multi-year ongoing projects with clear timelines;
• Build in measurable outcomes and indicators;
• Engage with stakeholders — communities, beneficiaries, implementing agencies;
• Include impact assessment for projects ≥ ₹1 crore.

Implementing Agency Selection

Best practices:

• Verify Form CSR-1 registration;
• Check Section 12A/80G registration where applicable;
• Track record of at least 3 years (where required);
• Assess organisational capacity for project execution;
• Review past project outcomes;
• Ensure governance and reporting structures.

Annual Compliance Calendar

Typical annual calendar:

• Q1 — Review of previous FY's CSR spend and unspent amounts;
• Q2 — CSR Committee meetings to recommend activities for current FY;
• Q3 — Implementation and monitoring;
• Q4 — Year-end review, impact assessment for completed projects;
• Year-end + 30 days — Transfer to Unspent CSR Account if ongoing projects;
• Year-end + 6 months — Transfer to Schedule VII fund for non-ongoing unspent;
• Annual report — Detailed CSR section, Form CSR-2 filing.

Part XII — Practical Illustrations

Illustration 1 — Applicability Determination

ABC Ltd has net worth of ₹450 crore, turnover of ₹800 crore, and net profit (Section 198) of ₹6 crore in the immediately preceding FY. Issue: Is CSR applicable? Held: Yes. Although net worth and turnover thresholds are not met, the net profit threshold (≥ ₹5 crore) IS met. CSR is applicable. ABC must constitute a CSR Committee, formulate a CSR Policy, and spend at least 2% of average net profits of the three preceding FYs.

Illustration 2 — CSR Spend Calculation

XYZ Ltd's net profits (Section 198) for the three preceding FYs are: FY1: ₹50 crore; FY2: ₹70 crore; FY3: ₹60 crore. Issue: What is the minimum CSR spend? Held: Average net profit = (50 + 70 + 60) / 3 = ₹60 crore. Minimum CSR spend = 2% of ₹60 crore = ₹1.2 crore. XYZ must spend at least ₹1.2 crore on CSR activities during the current FY.

Illustration 3 — Unspent Amount — Ongoing Project

LMN Ltd has ongoing CSR projects with allocated outlay of ₹3 crore. Of this, only ₹1.5 crore was spent during the FY. The rest is unspent and relates to multi-year ongoing projects. Issue: What must LMN do? Held: Per Section 135(6): (a) Transfer ₹1.5 crore to a 'Unspent Corporate Social Responsibility Account' within 30 days of FY end; (b) Spend on the ongoing projects within the next three FYs; (c) If still unspent after 3 years, transfer to Schedule VII fund within 30 days. (d) Disclose in Board's Report the reasons for not spending and the action taken.

Illustration 4 — Impact Assessment

PQR Ltd's average CSR obligation has been ₹15 crore over the past 3 FYs. It has just completed an education project with outlay ₹2 crore. Issue: Is impact assessment required? Held: Yes. Section 135(5) third proviso requires impact assessment for: (a) Companies with average CSR obligation ≥ ₹10 crore over preceding 3 FYs; (b) Projects with outlay ≥ ₹1 crore; (c) Completed at least one year ago. PQR meets all conditions. Must conduct impact assessment through an independent agency, place report before Board, and annex to annual CSR report. Cost can be booked as CSR (up to 5% of total CSR or ₹50 lakhs, whichever is lower).

Illustration 5 — Penalty Calculation

DEF Ltd was required to spend ₹4 crore on CSR but spent only ₹2 crore. The unspent ₹2 crore was not transferred to either the Unspent CSR Account or Schedule VII fund. Issue: What is the penalty? Held: Per Section 135(7): (a) Penalty on the company: 2 × ₹2 crore = ₹4 crore, OR ₹1 crore, whichever is less = ₹1 crore (since ₹4 crore > ₹1 crore cap). (b) Penalty on every officer in default: 1/10 × ₹2 crore = ₹20 lakhs, OR ₹2 lakhs, whichever is less = ₹2 lakhs (per officer in default). (c) Continued non-compliance may attract additional regulatory action.

Part XIII — Recent Developments

Companies (Amendment) Act, 2019 — Unspent CSR Framework

Effective January 2021:

• Introduced mandatory Unspent CSR Account framework;
• Three-year window for ongoing projects;
• Six-month window for non-ongoing unspent transfer to Schedule VII fund;
• Replaced the earlier 'comply or explain' approach with mandatory action.

Companies (Amendment) Act, 2020 — Penalty Regime

Effective January 2021:

• Introduced Section 135(7) penalty framework;
• Migrated from imprisonment to monetary penalties;
• Penalty caps at ₹1 crore (company) and ₹2 lakhs (officer);
• Strengthened deterrence through proportionate penalties.

CSR Rules Amendment 2021 and 2022

Major rule changes:

• Mandatory registration of implementing agencies (Form CSR-1);
• Annual disclosure (Form CSR-2);
• Strengthened impact assessment;
• Refined ongoing project definition;
• Enhanced reporting standards;
• Audit/internal control requirements for CSR.

PM CARES Fund Inclusion

During COVID-19 (2020), PM CARES Fund was specifically recognised as Schedule VII activity. Subsequently, various government-recognised funds have been added to Schedule VII, allowing companies to direct CSR spend to centralised relief and development efforts.

Integration with ESG and Sustainability

Recent trends:

• CSR increasingly integrated with broader ESG (Environmental, Social, Governance) frameworks;
• BRSR (Business Responsibility and Sustainability Report) for top 1000 listed entities — covers CSR plus broader sustainability;
• Climate-change-related CSR initiatives gaining prominence;
• SDG (Sustainable Development Goals) alignment becoming widely practiced.

Major Recent Cases

Notable trends:

• Increased ROC and MCA scrutiny of CSR compliance;
• Penalties imposed on companies for inadequate spending;
• Investigations into implementing-agency practices;
• Public-interest litigation on transparent CSR reporting;
• Tax disputes on CSR-related expenditure deductibility.

Part XIV — Critical Evaluation

Strengths of the Indian Framework

• First-of-its-kind mandatory regime — global pioneer;
• Substantial CSR spend (₹25,000-30,000 crore annually) directed to development priorities;
• Strong governance — CSR Committee, Board, Audit Committee involvement;
• Schedule VII enumeration provides clarity;
• Unspent CSR Account framework prevents 'announcement-only' commitments;
• Impact assessment for projects ≥ ₹1 crore enhances accountability;
• Penalty regime provides effective deterrence.

Areas of Concern

• 'Tick-box' compliance — many companies do minimum 2% without strategic alignment;
• Implementation quality varies significantly across companies and sectors;
• Implementing agency capacity limitations;
• Geographic concentration of CSR spend in certain regions;
• Limited evidence of measurable social impact in many cases;
• Tax-deductibility issues create complications;
• Schedule VII narrow interpretation can limit innovative CSR;
• Coordination with government welfare programmes can be inadequate.

Direction of Future Reform

• Better integration with national development priorities;
• Strengthening of impact-assessment standards and methodology;
• Capacity-building for implementing agencies;
• Standardisation of CSR reporting and metrics;
• Integration with ESG, BRSR, and SDG frameworks;
• Tax-treatment harmonisation;
• Public dashboards for transparent CSR performance tracking;
• Consideration of mandatory third-party audit for large CSR spenders.

Part XV — Exam-Focused Summary

Part XVI — Conclusion

The CSR framework under Section 135, Schedule VII, and the CSR Rules, 2014, represents a unique experiment in mandatory corporate philanthropy. By requiring large companies to spend a minimum of 2% of their average net profits on prescribed activities — with governance through the CSR Committee, transparency through annual disclosures, and accountability through penalties — the framework has fundamentally reshaped the relationship between corporate enterprise and Indian society.

The 2019-2021 amendments significantly strengthened the framework. The introduction of the Unspent CSR Account, the impact assessment requirement, the formal penalty regime, and the implementing-agency registration architecture address many of the early implementation gaps. The result is a more rigorous and accountable framework that aligns Indian CSR with global ESG and SDG imperatives.

For the judicial aspirant, mastery of the CSR framework is essential. The framework intersects with multiple substantive areas — corporate governance, tax law, public-interest law, environmental law, and constitutional accountability. Cases involving CSR Committee composition, Schedule VII interpretation, unspent-amount transfer, impact assessment, and the 2020 penalty regime provide rich doctrinal context. Key concepts — applicability triggers, 2% spend, Schedule VII activities, unspent CSR account, impact assessment, Section 135(7) penalties — are highly examinable. Combined with related thematic notes on Corporate Governance Framework, Disclosure Regime, and Director Duties, this article provides comprehensive coverage of contemporary CSR jurisprudence in India.