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.

From Waste to Wealth in India: The Smart Refill Revolution India Cannot Afford to Miss

 How Chile’s Algramo Is Reinventing Sustainable Packaging—and Why Indian Businesses Should Pay Attention

India’s FMCG sector serves over a billion consumers with unmatched reach—but at a cost the environment can no longer bear. Single-use plastic sachets, pouches, and bottles fill landfills, choke urban drains, and burden municipalities. Yet the poorest consumers continue paying more per gram by buying products in micro-pack sizes.

Meanwhile, in another part of the world, a quiet revolution is underway.

Algramo, a Chilean startup, is challenging the economics and environmental impact of packaging itself—using smart technology, refillable containers, and mobile dispensing systems to bring everyday essentials to consumers without waste. The impact? Lower prices, zero disposable plastic, deeper brand loyalty—and a sustainable circular model that’s scalable in developing economies.

This is not a futuristic idea. It’s a working business model with proven traction. And India, more than any other country, stands to gain the most from replicating and localizing it.

What Is Algramo?

Founded in Santiago, Algramo (Spanish for “by the gram”) partners with global brands like Unilever and Nestlé to offer refill stations for products like shampoo, detergent, and cooking oil. But this isn’t just bulk-buying—it’s powered by smart RFID-embedded containers, mobile refilling vans, and a digital loyalty platform.

Consumers get a durable container, scan it at a nearby kiosk or van, pay for only what they need, and earn rewards for each refill. The result?

• Zero-waste packaging

• Reduced costs per unit

• Increased consumer engagement

• Brand-level traceability and ESG metrics

It’s sustainability without sacrifice.

Why This Model Is a Game-Changer for India

India’s market is uniquely suited to adopt and scale Algramo-like systems.

✅ High sachet dependency in rural and low-income urban areas
✅ Cost-sensitive consumers seeking value for money
✅ Strong kirana and community retail network for last-mile delivery
✅ Rising EPR compliance pressure on FMCG brands
✅ Expanding digital payment and loyalty tech stack

In other words, India has the problem, the infrastructure, and the urgency. What’s missing is coordinated industry action.

Strategic Opportunities for Indian Businesses

Here’s how this model can be a win across verticals:

🔹 For FMCG Brands

Deploy branded refill kiosks or mobile dispensers in urban clusters and rural blocks. Reduce packaging costs, meet EPR goals, and improve price access for low-income customers.

🔹 For Retail Networks

Integrate refill models at kirana stores, SHGs, and cooperative societies—embedding circular practices into local commerce.

🔹 For ESG and Sustainability Leaders

Refill models offer traceable data—perfect for ESG reporting, carbon reduction metrics, and BRSR disclosures.

🔹 For CSR and Family-Owned Businesses

Sponsor refill systems in underserved communities. You reduce waste, enhance brand goodwill, and support inclusive livelihoods.

🔹 For Startups and Tech Innovators

Build India-specific container tracking, app-based loyalty platforms, and rural route optimization software—enabling smart delivery.

Circularity Meets Business Logic

Algramo shows us that circular packaging isn’t just about reducing waste—it’s about redesigning consumption.

In fact, the model offers triple value:

• Economic: Lowers packaging cost and distribution inefficiency

• Environmental: Removes single-use plastics from the system

• Emotional: Builds consumer loyalty via purpose-driven rewards

For Indian businesses, this is not just an idea to admire—it’s a blueprint to localize, fund, and lead.

Global Movement, Local Relevance

Algramo’s model is now being replicated in:

• Indonesia, via smart refill stations on scooters

• UK supermarkets, for home cleaning products

• New York, through partnerships with circular packaging brands

But India remains the biggest opportunity—where consumption, regulation, and waste converge.

Consultant’s Perspective

As advisors to businesses navigating ESG, EPR, and CSR mandates, we believe refill and reuse models represent a powerful next step in India’s circular transition.

Smart packaging and localized refilling infrastructure aren’t “green” extras anymore. They’re operational imperatives that deliver cost savings, compliance ease, and long-term consumer loyalty.

Whether you’re a listed conglomerate, a family-led enterprise, or a rising startup—this is a model you can adapt, invest in, or champion.

Final Word

India doesn’t just need less waste. It needs better systems.

Algramo reminds us that the future of consumption isn’t about buying more—it’s about buying better. And in doing so, we can turn plastic from a pollutant into a platform—one refill at a time.

From Waste to Wealth: What Indian Businesses Can Learn from Bill Gates’ Sanitation Revolution

The Wake-Up Call: Why a Billion-Dollar Mind is Obsessed with Toilets

When Bill Gates stood on a stage in Beijing in 2018 holding a beaker of human waste, the world was stunned.

But that moment wasn’t a gimmick—it was a global alarm.
It signaled a future where sanitation is not a cost, but an economic multiplier.
Not a charity project, but human infrastructure.
Not a burden, but a billion-dollar business waiting to be built.

India’s Trilemma: Business Growth, Human Capital Loss, and the Sanitation Gap

India dreams of becoming a $5 trillion economy. Yet:

• ₹2 lakh crore is lost annually due to poor sanitation-related health and productivity.

• Over 1.5 million children die each year due to diarrheal diseases.

• School dropout rates among girls skyrocket after puberty due to lack of toilets.

This is not a health issue.
It is a human capital crisis.
And that means—it’s a business issue.

Dharma + CSR + ESG: A Trident Approach for Indian Business Families

India’s spiritual traditions always placed ‘Shauch’ (cleanliness) next to ‘Satya’ (truth) in the hierarchy of Dharma.
In the modern boardroom, that Dharma takes form through:

• Section 135 of the Companies Act, 2013 – CSR mandates

• BRSR and ESG compliance – for listed and global-facing companies

• Legacy consciousness – for family businesses carrying generational values

But the real question is:
Can we see toilets not as expenses—but as enablers of dignity, productivity, and prosperity?

What Bill Gates Got Right (And India Can Do Better)

Bill Gates did not fund toilets.
He funded R&D, new materials, AI-enabled diagnostics, waste-to-energy startups, decentralized off-grid systems.
He created an ecosystem—where science meets sanitation, and entrepreneurship meets empathy.

This is the model Indian business can and must replicate—with contextual intelligence.

 What That Looks Like:

Area	Gates Foundation	What Indian Companies Can Do
Vision	Reinvent the toilet	Reimagine sanitation as health, dignity & skilling
Strategy	Tech, not just toilets	Fund sanitation startups via CSR/ESG
Talent	Engineers & social scientists	Engage IITs, polytechnics, SHGs
Impact	Global R&D breakthroughs	India-specific models: rural, peri-urban, tribal
Returns	Disease reduction, innovation	Healthier workers, skilling women, ESG value

Five Ways Indian Businesses Can Lead the Sanitation Economy

1. Invest in Innovation, Not Just Infrastructure
   Fund R&D labs, social ventures, and scalable toilet tech—bio-toilets, AI for sanitation mapping, greywater recycling.

2. Adopt Districts, Not Just Villages
   Use CSR to create replicable sanitation ecosystems—toilets, water, awareness, menstrual hygiene, waste management.

3. Make Sanitation Part of HR Strategy
   Toilets are not just for guests. Worker welfare includes hygiene, clean drinking water, and preventive health—this boosts retention and output.

4. Women-Led Sanitation Enterprises
   Empower SHGs and women entrepreneurs to maintain facilities and deliver hygiene products—CSR meets livelihood.

5. Sanitation in ESG Reports
   Highlight measurable impact—ODF zones, school girl retention, disease reduction, behavioral change—in global ESG disclosures.

Sanitation is Not a Toilet Problem. It’s a Human Potential Problem.

Every time a girl skips school because there’s no toilet, we lose a future scientist.
Every time a factory worker misses work due to cholera, we lose GDP.
Every time we treat sanitation as a side issue, we weaken our nation’s foundation.

And every time we elevate it to a core strategic investment, we unlock India’s real wealth—its people.

Final Word:

Toilets, Dharma, and the Business of Legacy

Sanitation is not “CSR for the poor.”
It is capital investment in India’s most undervalued asset—human dignity.
It is where Dharma, innovation, and business intersect.
And for Indian family businesses, it is the perfect arena to demonstrate legacy leadership.

“Dharma does not reside in rituals alone—it shines when we clean what others won’t even see.”
— Adapted from Indian scriptures

Let’s stop thinking of toilets as the end of the pipeline.
They are the starting point of every sustainable transformation.

Corporate Social Responsibility (CSR) in India — The Ultimate Legal & Compliance Guide for FY 2024–25 & FY 2025–26

 Updated as on July 2025 | Law ⬩ Rules ⬩ Circulars ⬩ FAQs ⬩ Legal Interpretation

Legal Framework – Section 135 of the Companies Act, 2013

CSR is applicable if, during the immediately preceding financial year, the company satisfies any one of the thresholds under Section 135(1):

Criteria	Threshold
Net Worth	₹500 Crore or more
Turnover	₹1,000 Crore or more
Net Profit (Sec. 198)	₹5 Crore or more

CSR applicability is assessed afresh every year. It is not presumed or carried forward based on past status.

Amendments (2021–2025): Shift to Annual Trigger-Based CSR

Date	Amendment/Event	Impact
Jan 2021	Rule 3(2) introduced via GSR 40(E)	Allowed CSR exit after 3 consecutive ineligible years
Sept 2022	Rule 3(2) deleted via GSR 700(E)	✅ CSR is now triggered purely based on preceding year financials
Feb 2022	CSR-2 made mandatory	CSR digital compliance reporting initiated
Jan 2024	Rule 12(1B) amended	CSR-2 to be filed separately by 31 December each year
Jan 2024	Impact Assessment mandated (> ₹1 Cr projects)	Enhances project accountability via 3rd-party review
Nov 2023	MCA FAQs updated	Clarified deemed CSR fulfillment for eligible Section 8 companies

CSR Applicability 

Financial Year	CSR Applicability Based On	CSR Obligation?
FY 2024–25	FY 2023–24	If any threshold met in FY 2023–24
FY 2025–26	FY 2024–25	Fresh test required

 Applicability is rolling and real-time. CSR applies if any one condition is met in the immediately preceding FY.

Legal Interpretation – What the Law Now Requires

• Trigger Point: CSR becomes applicable in the next FY if any threshold is met in the preceding FY.

• Non-Applicability: If all criteria are missed in a given FY, CSR obligation does not arise in the following year.

• Exit Logic Abolished: Rule 3(2), which allowed continuation/exits over 3 years, was deleted in 2022.

• Re-Trigger: CSR re-applies whenever a company again satisfies any eligibility criteria under Section 135(1), even after a break.

CSR Spending Framework

Component	Requirement
Spend Requirement	Minimum 2% of average net profits (Sec. 198) over 3 preceding FYs
Eligible Activities	Must be aligned with items listed in Schedule VII
Net Profit Basis	As per Section 198 – excludes capital profits, revaluation reserves, etc.
Board Disclosure	Must be reported in the Board’s Report under Section 134(3)(o)

Mandatory Impact Assessment

When Required	Condition	Capped Cost Allowance
For any project spending > ₹1 Crore	Third-party Impact Assessment is mandatory	Max 2% of CSR obligation or ₹50 Lakhs, whichever is higher

Management of Unspent CSR Funds

Category	Action Required	Timeline
Ongoing Projects	Transfer to Unspent CSR Account	Within 30 days of FY end
Non-Ongoing Projects	Transfer to PM CARES / Govt. Fund	Within 6 months of FY end
Unused for 3 Years	Transfer to separate designated CSR Fund	After 3 years of inaction

CSR Compliance Calendar – FY 2024–25 & FY 2025–26

Compliance Task	Timeline	Relevant Law / Rule
Check CSR applicability (Sec. 135(1))	Post-audit every FY	Section 135(1)
Form CSR Committee (if spend > ₹50L)	At start of FY	Section 135(1), Rule 5
Draft/Revise CSR Policy	Within 6 months of applicability	Rule 6
Identify Schedule VII causes	Before allocation/spending	Rule 4
Transfer Unspent Funds (Ongoing)	Within 30 days of FY end	Rule 10
Transfer Unspent Funds (Other)	Within 6 months of FY end	Rule 10
File Form CSR-2	By 31 December	Rule 12(1B)
Conduct Impact Assessment (> ₹1 Cr)	Before next cycle begins	Rule 8(3)
Disclosure in Board Report	Along with financial statements	Section 134(3)(o), Rule 8

FAQs – Clarified with Law & Reasoning

Question	Answer	Law / Guidance
If only one criterion is met, does CSR apply?	✅ Yes. Any one of net worth, turnover, or profit	Section 135(1)
Can CSR continue if criteria aren’t met for one year?	❌ No. Rule 3(2) deleted – annual re-testing only	GSR 700(E), Sept 2022
Can CSR re-apply after previous inapplicability?	✅ Yes. Once any threshold is met again	Section 135(1)
Are Section 8 companies exempt from CSR?	⚠️ No. But deemed fulfilled if 100% spent on Schedule VII	MCA FAQ, Nov 2023
What is the profit base for CSR spend calculation?	Net Profit as per Section 198	Section 135(5) + Sec. 198
Can a new company be tested for CSR applicability?	❌ No. No preceding FY data available	MCA FAQ
Deadline for CSR-2 filing?	📌 31 December following FY (after AOC-4)	Rule 12(1B)

Legal Position Matrix – At a Glance

Scenario	CSR Applicable?	Legal Reasoning
Any one Section 135(1) trigger met	✅ Yes	Law requires only one criterion
All triggers missed in one FY	❌ No	No obligation for following year
Triggers missed for 3 consecutive years	❌ No	Irrelevant now – Rule 3(2) repealed
Trigger met again after break	✅ Yes	Re-triggered by fresh satisfaction of Sec. 135(1)
Newly incorporated company	❌ No	No previous year data for testing
Section 8 Company using all income on CSR	✅ Deemed fulfilled	Per MCA FAQ (Nov 2023)

CSR Is a Responsibility, Not a Ritual

“CSR is not a legacy — it is a live test of governance, impact, and intention.”

• CSR is dynamic, not frozen.

• Compliance must follow real-time financials — not legacy assumptions.

• Annual testing, transparent disclosure, and impact-driven outcomes are now the legal and ethical expectations.

• Boardrooms must institutionalize CSR into strategy, policy, compliance, and reputation management.

Corporate Social Responsibility (CSR) in India: Applicability, Amendments, and Management of Unspent Funds

Corporate Social Responsibility (CSR) has evolved into a critical component of corporate governance in India. It serves as an avenue for companies to contribute to the welfare of society, while also ensuring transparency and accountability in their operations. The Companies Act, 2013 mandates CSR activities for certain categories of companies. Over time, the Ministry of Corporate Affairs (MCA) has refined the regulations surrounding CSR, addressing ambiguities and introducing amendments to streamline the process. In this article, we explore the key provisions, recent amendments, and the management of unspent CSR funds, while ensuring compliance with the latest rules.

Applicability of CSR: Understanding the Criteria

As per Section 135 of the Companies Act, 2013, CSR provisions apply to companies that meet any of the following criteria during the immediately preceding financial year:

1. Net Worth: ₹500 Crores or more
2. Turnover: ₹1000 Crores or more
3. Net Profit: ₹5 Crores or more

Key Considerations:

• Annual Assessment: The applicability of CSR is determined annually based on the financials of the immediately preceding year. If a company fulfills any of the aforementioned criteria in that year, CSR provisions become applicable for the current year.

• Three-Year Rolling Average: The CSR obligations are typically assessed using the three-year average net profit, ensuring that companies consistently meeting the thresholds over multiple years continue their CSR activities.

• Exemption: Companies failing to meet any of the criteria in a given year are not required to fulfill CSR obligations for that year, but they must reassess their status in subsequent years.

Recent Amendments (2023-2024)

Several significant amendments were introduced to CSR rules in 2023-2024 to enhance clarity, efficiency, and transparency. These amendments address various issues, including the filing of CSR forms, impact assessments, and eligibility of implementing agencies.

1. Extension of CSR-2 Filing Deadline (2024):

• The MCA extended the deadline for filing Form CSR-2 to December 31, 2024, allowing companies more time to comply with CSR reporting requirements. This extension ensures that companies can present accurate disclosures without compromising on compliance standards.

2. Rule 12(1B) Amendment (2024):

• A new amendment mandates that companies submit Form CSR-2 separately, with a deadline of December 31, 2024, after filing their annual financial statements. This update helps in streamlining the process and avoids discrepancies between financial reporting and CSR compliance.

3. Impact Assessment for Large CSR Projects:

• The MCA has made it compulsory for companies spending over ₹1 Crore on a CSR project to conduct an impact assessment by an independent third-party agency. The cost of the assessment may be included as part of the CSR expenditure, subject to a cap of 2% of total CSR obligations or ₹50 Lakhs, whichever is higher.

4. Widening the Scope of Eligible Implementing Agencies:

• The eligibility criteria for implementing agencies have been expanded to include Section 8 Companies, public trusts, and societies with at least three years of experience in similar CSR activities. This expansion increases the avenues available to companies for collaboration on CSR initiatives.

Impact of Rule 3(2) Deletion (2022)

A significant change introduced in September 2022 was the deletion of Rule 3(2), which previously created ambiguity in CSR applicability.

Before the Amendment:

• Rule 3(2) previously stated that companies failing to meet CSR criteria for three consecutive years could discontinue CSR activities. However, this rule conflicted with Section 135(1), which determines CSR applicability on an annual basis, creating confusion on whether CSR obligations should continue after a temporary dip in profits or turnover.

Post-Amendment (September 2022):

• The deletion of Rule 3(2) clarified that CSR provisions now depend solely on the financials of the immediately preceding year. If a company fails to meet the CSR criteria in a given year, it is exempt from CSR obligations for that year.
• This ensures that CSR applicability is assessed annually based on the financials of the immediately preceding year, making CSR compliance more fluid and responsive to changing business conditions.

Example:

• Company XYZ, which had a net profit of ₹6 Crores in FY 2021-22, would be required to fulfill CSR obligations for FY 2022-23. If its net profit drops to ₹4 Crores in FY 2022-23, the company would be exempt from CSR requirements in FY 2023-24. However, if the company’s net profit increases to ₹5 Crores in FY 2023-24, CSR provisions would apply again for FY 2024-25.

Management of Unspent CSR Funds

Proper management of unspent CSR funds is crucial for maintaining compliance and ensuring that CSR objectives are achieved. The key guidelines for managing unspent CSR funds are as follows:

1. Unspent CSR Funds Account:

   • If a company has unspent CSR funds at the end of the financial year, these funds must be transferred to an Unspent CSR Account within six months of the financial year’s conclusion.

2. Utilization of Unspent Funds:

   • Funds in the Unspent CSR Account should be utilized for CSR activities in the subsequent year. However, if these funds remain unspent after three years, they must be transferred to a Separate Unspent CSR Fund or to approved government funds like the Prime Minister’s National Relief Fund.

3. Provision for Ongoing Projects:

   • For ongoing CSR projects, funds allocated in previous years can be utilized for the project’s completion, even if they span multiple financial years. There is no requirement to transfer funds to the Unspent CSR Account in such cases.

4. Impact Assessment:

   • For CSR projects with a budget exceeding ₹1 Crore, companies must conduct an impact assessment by an independent third-party agency. The cost of conducting this assessment can be included in the CSR expenditure, subject to a cap of 2% of total CSR obligations or ₹50 Lakhs, whichever is higher.

Conclusion: Best Practices for CSR Compliance

The amendments introduced in 2023 and 2024 provide clearer guidelines for companies to manage their CSR obligations and activities. By focusing on impact assessments, transparent reporting, and proper management of unspent funds, companies can ensure they meet their CSR obligations effectively.

To avoid any defaults, companies should:

• Reassess their CSR obligations annually based on the preceding year's financials.
• Ensure all unspent CSR funds are transferred to the Unspent CSR Account within six months.
• Prioritize projects that align with the company’s CSR strategy and ensure compliance with the new guidelines on impact assessments.

By staying proactive and compliant with the latest rules, companies not only fulfill their legal obligations but also contribute meaningfully to society, making CSR an integral part of their corporate ethos.

Treatment of Investment Income in Bonus and CSR Calculations

 Corporations often invest their surplus funds in financial instruments such as Futures & Options (F&O), shares, and debt mutual funds to generate additional income. However, when calculating employee bonus obligations and Corporate Social Responsibility (CSR) contributions, it is crucial to determine whether such investment income should be considered.

This guidance note provides a detailed analysis, including definitions, formulas, examples, and case studies, to clarify the treatment of investment income for bonus calculations under the Payment of Bonus Act, 1965, and CSR obligations under the Companies Act, 2013.

1. Definition of Futures & Options (F&O)

Futures & Options (F&O) are derivative instruments traded on stock exchanges:

• Futures: A legally binding contract to buy/sell an asset at a predetermined price on a future date.

• Options: A contract that grants the right (but not the obligation) to buy/sell an asset at a specific price before a set expiry date.

Tax Treatment:

• F&O trading income is classified as Business Income under the Income Tax Act, 1961.

• Income from shares and mutual funds can be classified as either business income or capital gains, depending on the frequency and intent of transactions.

2. Bonus Calculation Under the Payment of Bonus Act, 1965

Legal Provisions:

• The allocable surplus for bonus computation is derived from gross profits under Sections 4, 5, and 6 of the Payment of Bonus Act, 1965.

• Investment income is not considered part of business profits for bonus calculation since it does not arise from core business operations.

Formula for Bonus Calculation:

Example Calculation:

Case Study 1: Bonus Calculation for Zenith Consulting Pvt. Ltd.

• Business Activity: IT Consulting & Solutions

• Revenue from Core Business: ₹75 Cr

• Net Profit from Core Business: ₹7 Cr

• Investment in F&O, Shares, and Debt Mutual Funds: ₹10 Cr

• Returns Earned (Profit): ₹2 Cr

• Total Net Profit (Core + Investment Income): ₹9 Cr

Scenario Analysis:

Particulars	Core Business Income	Investment Income
Net Profit	₹7 Cr	₹2 Cr
Allocable Surplus for Bonus	₹7 Cr (✅ Included)	₹2 Cr (❌ Excluded)

Conclusion:

✅ The ₹2 crore investment income should be excluded from the allocable surplus for bonus calculation, and no bonus is payable on these profits.

3. CSR Calculation Under the Companies Act, 2013

Legal Provisions:

Under Section 135 of the Companies Act, 2013, companies meeting the prescribed financial threshold must spend at least 2% of their average net profit (before tax) of the last three financial years on CSR activities.

• Unlike the Bonus Act, investment income is included in CSR calculations, unless specifically exempt under Section 198 of the Act.

Formula for CSR Contribution:

Example Calculation:

Case Study 2: CSR Calculation for Zenith Consulting Pvt. Ltd.

• Net Profit from Core Business (Last 3 Years Avg.): ₹6 Cr

• Profit from F&O, Shares, Debt Mutual Funds (Last 3 Years Avg.): ₹1.5 Cr

• Total Net Profit Considered for CSR: ₹7.5 Cr

Scenario Analysis:

Particulars	Without Investment Income	With Investment Income
Average Net Profit	₹6 Cr	₹7.5 Cr
CSR Contribution (2%)	₹12 Lakhs (✅)	₹15 Lakhs (✅)

Conclusion:

✅ Investment profit of ₹1.5 crore is included in net profit for CSR purposes, increasing CSR obligations.

4. Summary Table

Particulars	Bonus Calculation	CSR Calculation
Core Business Profit (₹7 Cr)	✅ Included	✅ Included
Investment Profit (₹2 Cr)	❌ Excluded	✅ Included
Impact	No Bonus Payable on ₹2 Cr	CSR obligation increases by ₹3 Lakhs

5. Final Professional Opinion

Based on legal provisions and financial best practices:

• For Bonus Calculation: The ₹2 Cr investment profit is not included in allocable surplus, and no bonus is payable on it.

• For CSR Compliance: The ₹2 Cr investment profit must be included in net profits, increasing the CSR obligation by ₹3 Lakhs.

Companies should ensure accurate financial reporting and consult professionals to avoid compliance risks.

Accounting Treatment and Disclosure of Unspent CSR Obligations

This article outlines the accounting treatment, journal entries, and disclosure requirements for Corporate Social Responsibility (CSR) obligations in mid-segment private companies, as mandated under Section 135 of the Companies Act, 2013, in accordance with the ICAI Guidance Note on CSR Accounting and Ind AS 37.

Overview of CSR Compliance for Mid-Segment Private Companies

Applicability Criteria:

CSR provisions apply to private companies meeting any of the following thresholds in the preceding financial year:

• Net worth: ₹500 crore or more.
• Turnover: ₹1,000 crore or more.
• Net profit: ₹5 crore or more.

Such companies must allocate 2% of the average net profit of the last three financial years toward CSR activities as per Schedule VII of the Act.

Accounting Treatment: CSR Obligations and Unspent Amounts

Case Example:

For FY 2023-24, consider ABC Pvt. Ltd., a mid-segment private company:

• CSR Obligation: ₹50 lakhs.
• Actual CSR Expenditure: ₹35 lakhs.
• Unspent CSR Amount: ₹15 lakhs (ongoing projects).

The unspent amount must be transferred to a dedicated bank account (Unspent CSR Account) and utilized within 3 financial years.

Accounting Entries for CSR Obligations

Date	Particulars	Debit (₹)	Credit (₹)	Explanation
1. Obligation Recognition
01/04/2023	Profit and Loss A/c (CSR Expense)	50,00,000	CSR Obligation A/c	CSR obligation for FY 2023-24 recognized in line with Section 135 of the Companies Act.
2. Transfer to Unspent CSR Account
31/03/2024	CSR Obligation A/c	15,00,000	Bank A/c	₹15 lakhs transferred to a designated Unspent CSR Account for ongoing projects.
3. Expenditure Incurred
Various Dates	CSR Expense A/c	35,00,000	Bank A/c	₹35 lakhs spent on approved CSR activities.
4. Closing Liability for Ongoing Projects
31/03/2024	Unspent CSR A/c	15,00,000	Current Liabilities	Unspent CSR amount disclosed under liabilities for ongoing projects to be utilized in future years.

Disclosure Requirements for CSR Compliance

Mid-segment private companies must ensure transparent reporting in their financial statements. The following table summarizes the disclosure requirements as per the ICAI Guidance Note and Schedule III of the Companies Act, 2013:

Particulars	Amount (₹ Lakhs)	Disclosure Treatment
CSR Obligation for FY 2023-24	50	Mentioned under Notes to Accounts with details of activities and timelines.
Actual CSR Expenditure	35	Classified as Other Expenses in the Profit and Loss Account.
Unspent CSR Amount (Ongoing Projects)	15	Shown under Other Current Liabilities in the Balance Sheet.
Bank Balance in Unspent CSR Account	15	Separate disclosure under Cash and Bank Balances.
Nature of CSR Activities	-	Details of projects, sector-wise allocation, and progress must be disclosed.

Illustrative Notes to Accounts

1. Corporate Social Responsibility (CSR):

CSR Obligation for FY 2023-24:

• Total obligation for FY 2023-24: ₹50 lakhs.
• CSR expenditure incurred: ₹35 lakhs (details below).
• Balance unspent amount (₹15 lakhs) transferred to Unspent CSR Account for ongoing projects, to be utilized by March 2027.

Details of CSR Activities Undertaken:

• Healthcare Initiatives: ₹20 lakhs.
• Education Programs: ₹15 lakhs.

2. Movement in Unspent CSR Account:

Particulars	₹ Lakhs
Opening Balance	0
Amount Transferred in FY 2023-24	15
Amount Utilized in FY 2023-24	0
Closing Balance as of 31/03/2024	15

Key Compliance Considerations for Mid-Segment Companies

1. Timely Transfer:

   • Transfer unspent amounts for ongoing projects to the Unspent CSR Account within 30 days of the financial year-end.

2. Utilization Deadline:

   • Ensure utilization of unspent funds within 3 financial years. In case of failure, transfer the remaining amount to a Schedule VII Fund within 30 days after the third financial year.

3. ICAI Guidance Note Compliance:

   • Recognize CSR obligations as expenses when incurred.
   • Do not treat unspent amounts as provisions unless a legal or constructive obligation exists.

4. Adequate Disclosures:

   • Clearly disclose the nature of CSR projects, sectoral allocations, and timelines.
   • Disclose reasons for shortfalls, if any, along with plans for utilization.

Conclusion

For mid-segment private companies, compliance with CSR obligations requires precise accounting treatment, timely actions, and transparent disclosures. By adhering to the ICAI Guidance Note and aligning with the Companies Act, 2013, companies can ensure:

• No adverse impact on financial reporting.
• Regulatory compliance without penalties or defaults.
• Enhanced stakeholder confidence through clear and accurate reporting.

Recommendation: Companies should maintain a robust monitoring system for CSR projects and ensure alignment with statutory timelines to avoid any financial or reputational risks.

Corporate Social Responsibility (CSR) in India: Legal Obligations, Compliance, and Strategic Planning

Corporate Social Responsibility (CSR) has become an essential component of corporate governance in India, mandating certain companies to allocate a portion of their profits to social, environmental, and economic initiatives. Under the Companies Act, 2013, CSR aims to integrate businesses with societal development, ensuring that they contribute positively to the welfare of the nation. This comprehensive article outlines the key provisions of CSR, the necessary filings with the Ministry of Corporate Affairs (MCA), compliance requirements for expenditure through trusts, and an audit checklist for CSR expenditure before the year-end.

1. Applicability of CSR Provisions

CSR regulations apply to companies meeting any of the following criteria in the immediately preceding financial year:

• Net Worth: ₹500 Crores or more
• Turnover: ₹1,000 Crores or more
• Net Profit: ₹5 Crores or more

These companies must allocate at least 2% of their average net profit from the last three years to CSR projects. It is imperative for such companies to comply with the CSR obligations under Section 135 of the Companies Act, 2013.

2. CSR Contribution Requirement

A company that falls under the CSR eligibility criteria is required to contribute at least 2% of its average net profit from the preceding three years towards CSR activities. This expenditure must be directed towards projects that align with the objectives laid out in Schedule VII of the Companies Act, such as education, healthcare, rural development, and environmental sustainability.

3. CSR Committee Composition

Companies meeting the CSR thresholds must form a CSR Committee, which must include at least one Independent Director. If the company is not required to have an Independent Director, the committee should consist of two or more directors. For companies with CSR obligations under ₹50 Lakhs, the committee is not mandatory, unless unspent CSR funds are carried forward, in which case the committee must be constituted.

4. CSR Policy

A company must formulate a CSR policy, approved by its Board of Directors, based on recommendations from the CSR Committee. This policy outlines the company’s approach to CSR, including the selection, implementation, and monitoring of CSR activities, and includes an Annual Action Plan for the use of funds.

5. Unspent CSR Account

A company must maintain an Unspent CSR Account in a scheduled bank, where unspent CSR funds should be deposited by April 30 of the following year. These funds must be used within the next three years; if unspent at the end of this period, they must be transferred to a designated fund under Schedule VII.

6. Timeline for CSR Expenditure

• Ongoing Projects: If the company has ongoing CSR projects, it must ensure the funds are spent within the financial year. Any unspent amount must be transferred to the Unspent CSR Account within 30 days after the financial year ends (i.e., by April 30). The company has a maximum of three years to utilize these funds.

• Non-Ongoing Projects: For non-ongoing projects, CSR funds must be spent within the same financial year. Any unspent funds must be transferred to a designated fund under Schedule VII within six months (by September 30 of the next financial year). The company must also disclose the reasons for not spending CSR funds in its Board Report.

7. CSR Activities

CSR contributions must be directed toward activities listed in Schedule VII, including:

• Education
• Health and wellness
• Environmental sustainability
• Rural development

The company must ensure that the projects align with these objectives to comply with the legal framework.

8. Carrying Forward Excess CSR Expenditure

If a company spends more than the required 2% of its net profits on CSR activities, it may carry forward the excess expenditure to offset its CSR obligations for the next three financial years.

9. Website Disclosures

To ensure transparency, companies must disclose the following on their official websites:

• Composition of the CSR Committee
• CSR Policy
• CSR Projects approved by the Board

10. Penalties for Non-Compliance

Companies failing to comply with CSR provisions, such as not transferring unspent CSR funds to the Unspent CSR Account or a designated fund, are liable to penalties:

• Company’s Liability: A penalty of twice the amount required to be transferred, or ₹1 Crore, whichever is less.
• Officers' Liability: A penalty of ₹2 Lakhs or one-tenth of the amount required to be transferred, whichever is less.

Forms for CSR Compliance with MCA

To ensure proper reporting, companies must file the following forms with the Ministry of Corporate Affairs (MCA):

1. Form CSR-1: Registration of entities receiving CSR funds (required for NGOs and trusts).
2. Form CSR-2: Annual CSR report submitted as part of the company’s annual financial filings.
3. Form AOC-4: Financial statements, including CSR contributions.
4. Form MGT-9: Extract of annual return, which includes CSR compliance details.
5. Form CSR-3: Annual statement of CSR activities for companies involved in CSR projects.

CSR Expenditure Directed to Trusts: Compliance Requirements

When CSR funds are directed towards trusts, societies, or non-governmental organizations (NGOs), additional compliance requirements must be met:

1. Entity Registration: Trusts and NGOs must register under Form CSR-1 to receive CSR funds.
2. Verification of Activities: Ensure that the trust's activities align with the objectives set out in Schedule VII of the Companies Act, 2013.
3. Monitoring Fund Utilization: Companies must establish proper monitoring mechanisms to track the use of CSR funds by trusts.
4. Agreement with Trust: Formal agreements or memoranda of understanding (MoUs) should outline the terms and conditions for fund usage.
5. Due Diligence: Conduct thorough due diligence on the trust’s financial health and CSR track record.
6. Impact Assessment: For projects exceeding ₹10 Crores, companies must carry out an impact assessment to measure the effectiveness of CSR activities.
7. Penalties: If CSR funds are misused, the company faces penalties for non-compliance, and unspent funds must be transferred to a designated fund under Schedule VII.

Audit Checklist for CSR Expenditure Before Year-End

To ensure compliance with CSR regulations and avoid penalties, companies should follow an audit checklist before the financial year-end. Below is a comprehensive CSR expenditure audit checklist:

1. Verify CSR Eligibility: Confirm if the company meets the CSR thresholds (Net Worth, Turnover, Net Profit) for the current financial year.
2. Ensure CSR Contribution: Ensure that 2% of average net profit is earmarked for CSR activities, based on the last three years' profits.
3. Review CSR Committee: Check whether the CSR Committee is formed and properly constituted with the required number of directors (including an Independent Director if applicable).
4. Monitor CSR Projects: Ensure that CSR activities are being implemented as per the CSR Policy and Annual Action Plan.
5. Check Fund Transfer to Unspent CSR Account: Ensure that any unspent CSR funds are transferred to the Unspent CSR Account within 30 days from the end of the financial year (by April 30).
6. Track Expenditure Against Commitments: Ensure CSR funds are utilized for the approved projects and meet the legal requirements under Schedule VII.
7. Impact Assessment: For CSR projects exceeding ₹10 Crores, verify that an impact assessment is conducted.
8. Ensure Timely Filings: Confirm that all necessary CSR forms (CSR-1, CSR-2, CSR-3) are filed with the MCA before deadlines.
9. Ensure Transparency: Check that all CSR-related disclosures (Committee composition, Policy, Projects) are available on the company's website.
10. Penalties: Ensure there are no penalties or compliance issues pending from previous years and that unspent funds are properly allocated as per Schedule VII.

Conclusion

CSR is a vital part of corporate governance, and it is imperative for companies to adhere to the legal framework to meet their obligations while contributing to social good. By aligning CSR activities with Schedule VII, maintaining proper documentation, and complying with the stipulated timelines, companies can not only avoid penalties but also make a meaningful impact on society. Strategic planning, particularly in the final months of the financial year, will help ensure that CSR funds are used effectively, that projects are completed on time, and that all forms and disclosures are submitted as required by the Ministry of Corporate Affairs (MCA). 

Embracing Corporate Social Responsibility: A Guide for Businesses

"Companies must embrace the noble cause of serving society. It's not just about making profits; it's about making a difference." - Ratan Tata

Corporate Social Responsibility (CSR) is about companies doing good things for society. Section 135 of the Companies Act, 2013, explains how companies should spend money to help the community.

1. Meaning

CSR means businesses help society and the environment through their strategies and actions. For example, a company might reduce its carbon footprint by using renewable energy, or support education by funding scholarships for underprivileged students. This demonstrates a commitment to ethical behavior and social improvement.

2. Voluntary Contribution

Companies can choose to give money to CSR activities even if they are not required by law. For example, a tech company might build a school in a rural area or fund a healthcare project. However, some companies must give money because the government mandates it. This helps both the company and society grow.

3. Classes of Companies

Certain companies must follow CSR rules. These include:

Criteria	Example
Net worth of ₹500 crore or more	A large manufacturing company
Turnover of ₹1000 crore or more	A national retail chain
Net profit of ₹5 crore or more	A successful IT services firm

Illustrative Example:

• ABC Manufacturing Ltd. has a net worth of ₹600 crore, a turnover of ₹1500 crore, and a net profit of ₹8 crore in the last financial year. This company must comply with CSR regulations.

4. Prescribed Contribution

Companies that meet the criteria above must spend at least 2% of their average net profits from the last three years on CSR. For instance, if a company made an average profit of ₹10 crore over the past three years, it must spend ₹20 lakh on CSR.

Illustrative Example:

• XYZ Tech Ltd. has an average net profit of ₹10 crore over the last three years. It must contribute ₹20 lakh (2% of ₹10 crore) to CSR activities.

5. CSR Committee

Qualified companies must have a CSR committee with at least three directors, including one independent director. For example, a company's CSR committee might plan initiatives like setting up free health camps. Companies with a CSR contribution of ₹50 lakh or less don't need a separate committee; the Board of Directors can manage CSR activities.

Illustrative Example:

• LMN Enterprises forms a CSR committee with three directors, including one independent director, to oversee its CSR projects.

6. CSR Policy

The CSR committee or the Board must have a CSR policy that outlines the company's goals, actions, committee roles, implementation, and monitoring. For instance, a policy might include plans to improve local education facilities or enhance healthcare services.

Illustrative Example:

• DEF Corp. drafts a CSR policy focusing on sustainable agricultural practices and educational scholarships for underprivileged children.

7. Computation of Average Net Profit

The average net profit is calculated before tax based on audited financial statements. This ensures clarity on how much should be spent on CSR. For example, if a company’s net profit before tax for the past three years is ₹10 crore, ₹12 crore, and ₹8 crore, the average is ₹10 crore.

Illustrative Example:

• PQR Ltd. calculates its average net profit as ₹10 crore over three years (₹10 crore in 2020, ₹12 crore in 2021, and ₹8 crore in 2022).

8. Recurring Applicability

Once a company qualifies for CSR, it must continue contributing every year unless it falls below the criteria for three continuous years. For instance, if a company meets the criteria in 2020 but not in 2021, 2022, and 2023, it can stop contributing after 2023.

Illustrative Example:

• GHI Pvt. Ltd. qualifies for CSR in 2020 but not in 2021, 2022, and 2023. It can stop its CSR contributions in 2024.

9. Payment of CSR Amount

CSR money must be spent directly from the company's account. No third-party payments are allowed. For instance, if a company supports a local NGO, the payment should come directly from the company’s account.

Illustrative Example:

• STU Industries directly transfers funds to a local NGO’s bank account for setting up a community library.

10. Disclosure of Expenditure

Companies must report their CSR spending in their financial returns using FORM AOC-4. For example, if a company spends ₹1 crore on CSR activities, it must disclose this in its annual financial report.

Illustrative Example:

• VWX Ltd. reports its ₹1 crore CSR expenditure in its financial returns for the year using FORM AOC-4.

Summary Table

Point	Description	Example
Meaning	Businesses help society through their actions.	Using renewable energy, funding scholarships
Voluntary Contribution	Companies can give money voluntarily; some must by law.	Building a rural school
Classes of Companies	Must follow if net worth ≥ ₹500 crore, turnover ≥ ₹1000 crore, or net profit ≥ ₹5 crore.	A large manufacturing company
Prescribed Contribution	Spend at least 2% of average net profits from the last three years on CSR.	₹20 lakh for a company with ₹10 crore average profit
CSR Committee	Must have a committee with three directors; exceptions for contributions ≤ ₹50 lakh.	Planning health camps
CSR Policy	Policy must outline goals, actions, committee roles, implementation, and monitoring.	Improving local education facilities
Computation of Net Profit	Calculate net profit before tax based on audited statements.	Average of ₹10 crore over three years
Recurring Applicability	Continue CSR unless criteria not met for three years.	Stopping CSR after not qualifying for three years
Payment of CSR Amount	Spend directly from company's account, no third-party payments.	Direct payment to a local NGO
Disclosure of Expenditure	Report CSR spending in financial returns using FORM AOC-4.	Reporting ₹1 crore spending in financial report

Compliance Requirements

• Forming a CSR Committee: Companies that meet the criteria must form a CSR committee with three directors, including an independent director.
• Creating a CSR Policy: Draft and approve a CSR policy that outlines the company’s CSR goals and strategies.
• Spending Requirement: Spend at least 2% of average net profits from the last three years on CSR activities.
• Direct Payments: Ensure CSR funds are spent directly from the company’s account.
• Annual Reporting: Disclose CSR expenditures in the company’s annual financial returns using FORM AOC-4.

Conclusion

Section 135 of the Companies Act, 2013, ensures companies contribute to social welfare. Understanding these rules helps companies align their CSR efforts with legal and societal expectations. By engaging in CSR, companies not only comply with regulations but also build a better community and enhance their own reputation. This commitment to CSR can lead to long-term benefits, including improved public image, customer loyalty, and employee satisfaction.