CSR, Tax Audit & Income-tax Treatment for AY 2025–26

A Complete Guide with Law, Interpretation, Judicial Support & Professional Insights

CSR Applicability – Companies Act, 2013

CSR obligations under Section 135 of Companies Act, 2013 apply if, in the preceding FY, a company has:

• Net worth ≥ ₹500 crore, OR

• Turnover ≥ ₹1,000 crore, OR

• Net profit ≥ ₹5 crore.

CSR Requirements

• Minimum spend: 2% of average net profits of last 3 years.

• Board must disclose CSR policy, spends, and unspent amounts.

• CSR-2 filing with MCA mandatory.

• Unspent CSR:

  • Ongoing projects → to “Unspent CSR A/c” within 30 days.

  • Other cases → transfer to notified funds within 6 months.

CSR and Income Tax – Allowability of Deduction

1 Section 37(1)

CSR is not deductible as business expense (Explanation 2).

2 When Deduction Allowed

• Section 80G: Donations to specified funds (e.g., PM CARES).

• Section 35 / 35CCA: Research, rural development, approved projects.

Allowed only under Old Regime – under Sec. 115BAC(1A) (new regime), most deductions including 80G are not available.

Illustration

CSR spend = ₹50 lakhs

• ₹20 lakhs → PM CARES (deductible u/s 80G, Old Regime only).

• ₹30 lakhs → School building (disallowed u/s 37(1)).

CSR in Tax Audit (Form 3CD)

1 Relevant Clauses

• Clause 21(a) – CSR spend disallowed u/s 37(1).

• Clause 34A – TDS compliance on CSR vendor/service contracts.

• Clause 40(a)(ia) – Disallowance for non-deduction of TDS.

• Clause 27 – If CSR involves large cash payments (>₹10,000), Sec. 40A(3) disallowance.

2 Auditor’s Responsibility

• Match CSR spend with Board Report disclosures & CSR-2 MCA filing.

• Verify unspent transfers as per Companies Act.

• Ensure correct reporting of allowable vs. disallowable portions.

Related Party CSR Expenditure – Precautions

This is a sensitive area:

• MCA Clarification (2020) – CSR to group trusts/societies allowed only if such entity is registered u/s 12AB and CSR-1 filed with MCA.

• CSR cannot be routed to related parties for business promotion, brand building, or benefit to directors’ relatives.

• Income-tax Angle:

  • If paid to related party trusts → check Section 40A(2)(b) (excessive/unreasonable payments).

  • Donations to related trusts only deductible u/s 80G if trust is registered & eligible.

✅ Professional Advice: Always prefer spending directly on approved projects or registered third-party NGOs instead of related entities, to avoid litigation.

Tax Audit Applicability – AY 2025–26

Thresholds under Section 44AB

• Business:

  • Turnover > ₹1 crore → Audit required.

  • Turnover ≤ ₹10 crore → Audit not required if cash receipts/payments ≤ 5%.

• Profession: Gross receipts > ₹50 lakh.

• Presumptive Taxpayers (44AD/44ADA/44AE): Audit required if opting out or declaring below presumptive income.

Continuation Once Applicable?

• Tax audit is not a continuing obligation – fresh check each year.

• CIT v. Suresh Chand Jain (2010) – audit liability is year-specific.

Due Dates – AY 2025–26

Compliance	Due Date
CSR-2 filing with MCA (FY 2024–25)	31st March 2026
Transfer of unspent CSR (non-ongoing)	30th Sept 2025
Transfer to Unspent CSR A/c (ongoing)	30th Apr 2025
Tax Audit Report (Form 3CD)	30th Sept 2025
ITR – Audit Cases	31st Oct 2025
ITR – Non-Audit Cases	31st July 2025

Practical Illustration

XYZ Ltd (FY 2024–25, AY 2025–26)

• Turnover: ₹12 crore (digital >95%, cash <5%).

• CSR obligation: ₹60 lakhs.

• CSR spend:

  • ₹25 lakhs to PM CARES (80G eligible).

  • ₹20 lakhs to related trust (registered u/s 12AB, CSR-1 filed).

  • ₹15 lakhs for school building.

Tax Treatment

• CSR debited = ₹60 lakhs.

• Old Regime:

  • 25 lakhs deductible u/s 80G.

  • 20 lakhs (trust) → deductible only if trust qualifies under 80G; else disallowed.

  • 15 lakhs (school) → disallowed u/s 37(1).

• New Regime:

  • Entire 60 lakhs disallowed.

Tax Audit Applicability

• Turnover > ₹10 crore → Tax Audit mandatory.

• Auditor disclosures:

  • ₹35–55 lakhs disallowable u/s 37(1) depending on 80G claim.

  • Related party payment disclosed separately.

Caution Points for Professionals

1. CSR cannot be claimed u/s 37(1) – only check 80G (Old Regime).

2. Regime planning critical – New Regime denies 80G.

3. CSR through related parties – ensure trust has valid CSR-1 & 12AB/80G registration.

4. Cross-verification – Books, CSR-2 (MCA), Board Report, and Tax Audit must align.

5. TDS on CSR spends – mandatory on contracts/services.

6. Cash restrictions – no CSR in cash >₹10,000.

7. Avoid indirect brand promotion – disallowed by MCA & IT.

8. Audit liability – year-specific, not perpetual.

 Final Takeaways

• CSR is a statutory duty, not a tax-saving tool.

• Income-tax law disallows CSR u/s 37(1); deductions only possible via 80G / 35-type spends, and only in Old Regime.

• Tax Audit Form 3CD clauses must properly capture CSR spends, disallowances, TDS, and related party disclosures.

• MCA compliance (CSR-2, unspent transfers, Board Report) must be consistent with Income-tax reporting.

• Related party CSR transactions demand heightened caution to avoid scrutiny under both MCA and Income-tax.