Introduction — why CSR under the Companies Act matters

The Corporate Social Responsibility (CSR) in India has come a long way from being a social or voluntary corporate practice to becoming a statutory mandate under Act 135 of the 2013 Companies Act and the "Companies (Corporate Social Responsibility Policy) Rules, 2014." This move had the specific intent to leverage corporate resources for the betterment of society in an efficient manner with the engagement of the board through the process of corporate societal spending. At present, the practice of CSR has become a part of the corporate governance debate in India – with all stakeholders in the corporate world – entities, the board of the corporate body, investors, the social world, and the corporate regulator – recognizing CSR as appropriate corporate spending as much about charity as it is with the compliance reporting and enforceable corporate practice. This paper describes the legislative parameters of the importance of CSR under the Companies Act and provides a case to explain the law. The paper discusses the judicial precedents on the matter and concludes with a brief note on important takeaways.

Definition / Relevant Section — statutory meaning and key obligations

The first and foremost legal provision related to CSR is Section 135 of the Companies Act, 2013 and Schedule VII to the said Act. Section 135 recognizes and assigns CSR responsibilities to such entities with specified financial thresholds – namely, entities with a net worth of ₹500 crore or more and turnover of ₹1,000 crore or more and a net profit of ₹5 crore or more during the preceding financial year. These companies must constitute a Corporate Social Responsibility Committee (CSR Committee) of the Board, formulate a CSR Policy, recommend the quantum of expenditure, and ensure that the company spends, in each financial year, at least 2% of the average net profit of the three immediately preceding financial years on CSR activities.

Important regulatory details are supplied by the Companies (Corporate Social Responsibility Policy) Rules, 2014, which elaborate on matters such as: (a) the content of the CSR Policy; (b) rules for implementing CSR projects either directly, through registered trusts/section 8 companies, or in partnership with government agencies; (c) disclosure requirements in the Board’s report; and (d) limits on administrative overheads for CSR implementation (administrative overheads are not to exceed 5% of total CSR expenditure). Schedule VII sets out illustrative activities (for example: eradicating hunger, promoting education and health, rural development, environmental sustainability, and contributions to specified funds) that may be undertaken as CSR.

A few statutory points worth highlighting:

Applicability triggers are financial (net worth/turnover/net profit thresholds). Once covered, the obligations are mandatory for the company concerned.

Quantum: the statutory floor is 2% of the average net profits of the three preceding financial years.

The permissible activities are essentially those specified under Schedule VII, though clarifications and FAQs have been issued by the Ministry of Corporate Affairs, MCA, on this behalf.

Illustration / Example — a simple hypothetical

ABC Pvt. Ltd. is a mid-sized manufacturing company. In the financial year 2023-24, the company’s average net profit (calculated at the average PAT of the financial year 2020-21, 2021-22, and 2022-23) is ₹10 crore. Thus, the company is covered under Section 135 because its net profit is above the threshold of ₹5 crore. Under the act, the company is required to

1. Form a CSR Committee of the Board (minimum three directors).

2. Prepare a CSR Policy identifying activities (for instance: a skill-training programme for local youth under Schedule VII).

3. Set aside at least 2% of ₹10 crores, which is approximately ₹20 lakhs, every year for CSR. If ABC proposes to undertake an activity requiring ₹30 lakhs over 2 years, the company could either plan, through CSR Rules, to spend the amount over multiple years with necessary approvals, or unspent amount of CSR needs to be dealt with according to the mechanism prescribed for unspent amount of CSR (transfer to allotted funds, if any, or otherwise based on CSR Rules and subsequent amendments thereto).

This example illustrates the manner in which the statutory duty translates the board consideration into a measurable yearly responsibility.

Case Law — judicial treatment and key takeaways

Judicial and quasi-judicial bodies have increasingly been called upon to interpret and enforce CSR obligations. Below are two significant decisions (or orders) that cast light on how courts and tribunals view CSR duties and compliance.

1. NCLAT / Appellate decisions on CSR compliance (Company Appeal (AT) No.335 of 2018 and related orders)

There have been instances before NCLT and NCLAT involving non-establishment of CSR committees, non-existent CSR policies, and non-expenditure of CSR funds. In various appeals and orders, it has been made clear that the provision of CSR is mandatory for companies within certain thresholds and that their boards and key managerial personnel are responsible for compliance with this provision.Where companies either failed to prepare/approve a CSR Policy or did not disclose CSR particulars correctly in their Board’s report, regulatory action and penalties have followed. These steps reaffirm that CSR is not just an exhortative provision, as legal obligations also receive regulatory attention and scrutiny.

Key takeaways:

Courts and tribunals have enforced the procedures (committee, policy, disclosure) rigorously.

If non-compliance occurs, there are consequences under the Companies Act, in addition to disciplinary measures for the erring officers.

2. Judicial scrutiny of fund diversion and accountability (selected NCLT/NCLAT orders and MCA enforcement)

Beyond procedural defaults, adjudicating bodies have also examined allegations of diversion or misuse of CSR funds (for instance, where corporate donations were routed through intermediaries without adequate checks). Regulators and courts have signalled that misuse or diversion can attract civil and criminal consequences (including inquiries by income-tax and investigative agencies), and have stressed transparency in selection of implementing agencies and monitoring mechanisms.Clarifications on regulations and government-provided FAQs have further narrowed down the compliance environment

Key Takeaways: Boards have to exercise due diligence in choosing the implementation partners (NGOs, Trusts, Section-8 Companies). Documenting, beneficiary authentication, and periodic impact statements are critical in this process.

Note: CSR case law in India is evolving. Many important disputes are decided at the tribunal or High Court level; national appellate or Supreme Court pronouncements specifically focused on CSR remain limited. Practitioners therefore watch both tribunal orders (NCLT/NCLAT) and regulator advisories for practical guidance.

Practical Application — how CSR works on the ground

Translating statutory requirements into effective outcomes requires governance, program design, implementation discipline, monitoring and disclosure. Below are the main practical facets:

1. Board and committee processes

Eligible companies set up a CSR Committee (or expand an existing committee) which drafts the CSR Policy, recommends annual budgets, selects projects, and monitors implementation. The Board has to endorse the policy and ensure that the requirements for compliance and disclosure appear in the report of the Board. Having sound KPIs, risk assessments among partners, and audit trails for the company would be good practice.

2. Project selection and implementation channels

It is possible that companies practice CSR activities in the following ways:

Directly, by running their own programmes.

Through trusts/section-8 companies or a registered charitable body.

In collaboration with central/state government agencies, or

Through collaborative trusts/NGOs that are credible and have track records.

MCA clarifications and the CSR Rules permit multi-year projects subject to Board approvals and monitoring. Administrative overheads (for management, monitoring, capacity building) are capped (generally up to 5% of CSR spend).

3. Budgeting and accounting

Companies compute the 2% threshold against the average net profits of the prior three years and budget accordingly.The expenditure under CSR needs to be accounted for and disclosed in the financial statements and report of the board. The unspent CSR funds need special attention; there are clarifications and changes brought forth in regulations to handle this issue concerning unspent CSR funds (time frames to spend the money, transfer to prescribed funds mentioned in Schedule VII, and carrying it forward with reason).

4. Monitoring, impact measurement and disclosure

Regulatory expectations go beyond mere cheque-writing. Boards are expected to ensure monitoring systems, periodic audits, performance measurements, and proper disclosures on the company website and in the annual report. Best practice includes third-party impact assessments for large programmes and public reporting of outcomes (beneficiaries reached, durable impacts, sustainability of interventions).

5. Tax and accounting interactions

From an income-tax perspective, CSR spending is generally not an allowable business deduction under Section 37(1) of the Income-tax Act; however, where contributions are made to funds or institutions that are eligible under Section 80G, tax treatment may differ. As a result, businesses must integrate corporate law obligations with tax planning.

6. Risks and enforcement

Practical risks include improper selection of implementing agencies, diversion of funds, poor monitoring, or inadequate disclosure — and these can trigger regulatory notices, penalties, or investigative scrutiny (including from tax authorities).Therefore, compliance has become an imperative from the perspective of governance as well as reputation. This is reflected through recent enforcement actions as well as FAQs issued by regulators on the importance of accountability.

Conclusion / Summary — key points

The CSR in India is no longer a matter of discretion where financial threshold requirements are satisfied by Section 135. For India, it has now become a statutory requirement with specific board responsibilities.

Mandatory legal requirements: The companies are required to establish the CSR Committee, draft the CSR Policy in accordance with Schedule VII, and allocate not less than 2% of the average net profits for the three previous years.

Guidelines and safeguards: Guidelines/Safeguards in the form of the Companies (CSR) Rules, 2014, and their later clarifications/amendments, indicated the manner of implementation, administrative cost limits (not exceeding 5%), and disclosure requirements, along with other safeguards in case

Legal and enforcement systems: The courts have made it clear that CSR is mandatory.Lack of diligence in the process, wrong reporting, and misuse of finances lead to negative repercussions. Professionals must develop efficient systems.

Application - CSR reporting is effectively done if there is an efficient blend of legal requirements and strategic social investments, as this helps in fulfilling the law and creating societal impact.

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