CSR Overview: Corporate Social Responsibility Under the Companies Act
Section 135 Applicability, the 2% Spend & CSR-2 Reporting

Corporate social responsibility is the idea that a company owes a duty not only to its shareholders but to the wider society and environment in which it operates. In most of the world, CSR is voluntary — a matter of corporate conscience and reputation. In India, for companies of a certain size, it is a legal obligation. Section 135 of the Companies Act requires covered companies to spend a defined portion of their profits on prescribed social activities, to govern that spending through a policy and, usually, a committee, and to report it to the Registrar of Companies.

This is a structured, ongoing obligation, not a one-off donation. It has its own definition of who is covered, its own measure of how much must be spent, its own list of what the money can be spent on, and its own consequences for falling short. Understanding CSR means understanding each of these, because a company that is covered cannot opt out of it.

N D Savla & Associates is a firm of Chartered Accountants and Company Secretaries in Mumbai that helps companies meet their CSR obligations as part of our company compliance and compliance services. The focus is practical: knowing whether CSR applies to your company, how much must be spent, on what, and how the obligation is reported and enforced.

A company that meets any one of these must comply, and this includes companies registered for charitable purposes under Section 8, and applies whether the company is private or public. Once covered, the company remains subject to CSR unless it ceases to meet any of the thresholds for a period the law specifies.

A covered company must spend, in every financial year, at least 2 percent of the average net profits it made during the three immediately preceding financial years on CSR. The net profit for this purpose is computed under Section 198 of the Act, which is a specific calculation, not simply the profit shown in the accounts. Where a company has not completed three financial years, the average is taken over the years it has been in existence. The company is also expected to give preference to the local areas around where it operates when spending the amount.

Certain things are specifically not CSR: activities carried out in the normal course of business, activities that benefit only the company's own employees, contributions to political parties, and, generally, activities outside India. CSR must also be spent as money, not given in kind.

The consequences of not complying are worth knowing. Failure to spend the CSR amount, or to transfer the unspent amount as required, now attracts a monetary penalty rather than a criminal one: a penalty on the company of twice the amount that should have been transferred, or one crore rupees, whichever is less, and a penalty on the defaulting officers of one-tenth of that amount, or two lakh rupees, whichever is less.

Two further points often surprise companies. First, CSR expenditure is not allowed as a business deduction under the Income Tax Act, so the 2 percent is a genuine cost, not a tax-saving one. Second, administrative overheads on CSR are capped at 5 percent of the total CSR spend, so the money must largely reach the activities themselves.

CSR looks simple — spend 2 percent — but the detail is where companies come unstuck: the profit has to be computed the statutory way, the spending has to fall within Schedule VII, unspent amounts have to be transferred on a strict timeline, implementing agencies have to be registered, and the whole thing has to be reported in CSR-2 and disclosed. We handle it end to end: we confirm applicability, compute the obligation, help frame the policy and constitute the committee, structure the spending, manage any unspent amount within the deadline, and file the report, keeping the company on the right side of a regime that now carries real penalties.

Because we handle CSR alongside your annual filings and wider compliance, it is managed as part of the company's overall obligations rather than scrambled together at year end. For a company within CSR, this means the obligation met properly, on time, and on the record.