Section 135 — Applicability, Accounting, Taxation, Exceptions & Clarifications (Finin2min Pro)
CSR today is not narrative-driven.
It is rule-driven, accounting-sensitive, and disclosure-heavy.
This version integrates statutory law + MCA guidance + audit practice.
1️⃣ Applicability Recap
CSR applies if ANY ONE condition is met in the preceding financial year:
| Parameter | Threshold |
|---|---|
| Net Worth | ≥ ₹500 crore |
| Turnover | ≥ ₹1,000 crore |
| Net Profit | ≥ ₹5 crore |
✔ Applies to private, public & foreign companies
✔ Applies even if company has not completed 3 years
2️⃣ Computation Anchors
- Net Worth → Section 2(57)
- Turnover → Section 2(91)
- Net Profit for CSR → Section 198
❌ Excludes:
- Revaluation reserves
- Depreciation write-back
- Amalgamation reserves
3️⃣ CSR Spending Rule
Minimum CSR obligation:
2% of average net profits of last 3 financial years
CSR is a year-wise obligation, not cumulative.
4️⃣ Provisioning of CSR Obligation
When provision is required:
✔ CSR amount is determinable, and
✔ Amount is unspent at year-end
➡️ Provision to be created under “Other Provisions” (Schedule III)
When provision is NOT required:
❌ Amount transferred to Unspent CSR Account (ongoing projects)
5️⃣ Accounting Treatment — Clarified & Tightened
(A) Direct CSR Spend
- Revenue expenditure → Expense in P&L
- Employee cost for CSR → At actual cost
(B) CSR Assets —
| Situation | Accounting Treatment |
|---|---|
| Asset transferred to beneficiary | Expense (no capitalisation) |
| Asset retained by company | Not capitalised unless: |
| 1️⃣ Asset is used for company’s business, and | |
| 2️⃣ Complies with CSR Rules, and | |
| 3️⃣ Future economic benefits accrue |
📌 Practical note (Audit reality):
In most CSR cases, assets retained by the company do not meet business-use criteria. Hence, capitalisation is rare and normally avoided.
(C) Supply of Goods / Services
- Goods → Valued at cost (AS-2)
- Services → Valued at cost incurred
❌ No notional margin allowed.
6️⃣ Unspent CSR Amount — Two Buckets
🔹 Ongoing Projects
- Transfer to Unspent CSR Account within 30 days
- Spend within 3 financial years
- Failing which → transfer to Schedule VII fund
🔹 Other Than Ongoing Projects
- Transfer to Schedule VII fund within 6 months
7️⃣ Excess CSR Spending
✔ Excess spend can be set off against next 3 financial years
✔ Requires:
- Board approval
- Disclosure in CSR report
❌ Cannot be set off against:
- Administrative overheads
- Political contributions
8️⃣ Surplus from CSR Activities
Surplus is NOT business income.
Examples:
- Interest on CSR funds
- Revenue from CSR-created assets
- Project savings
✔ Must be:
- Reinvested in CSR projects, or
- Transferred to Unspent CSR Account, or
- Donated to Schedule VII fund (within 6 months)
9️⃣ Taxation — Absolutely Clear Position
❌ Section 37(1)
CSR expenditure:
- Not deductible as business expense
- Disallowed by Explanation 2
✅ Section 80G (Limited)
- Allowed only for monetary donations
- Only to specified funds
- Donation in kind → ❌ Not eligible
🔟 Impact Assessment
Mandatory only if:
- Average CSR obligation (last 3 years) ≥ ₹10 crore
❌ Not required for:
- Contributions to Schedule VII funds (e.g. PM CARES)
1️⃣1️⃣ CSR Committee — Exceptions
| Scenario | Committee Needed |
|---|---|
| CSR spend ≤ ₹50 lakh | ❌ No |
| Private company (2 directors) | ✔ Yes (2 directors) |
| No ID requirement | ✔ Committee without ID |
1️⃣2️⃣ Non-Qualifying CSR Items (Refined)
❌ NOT CSR:
- Normal business activities
- Activities benefiting employees exclusively
- Political contributions
- Statutory obligations under other laws
CSR projects must use "registered implementing agencies":
• Section 8 cos, registered trusts/societies with *CSR‑1 registration*
• Govt entities/universities
• Entities established by govt
📌 CSR‑1 generates *unique CSR Reg No* (MCA portal)
❌ Unregistered agency = CSR spend disqualified
Covid-Related CSR
✔ MCA issued specific Covid-19 circulars clarifying that pandemic-related spending qualifies as CSR,
provided it falls under Schedule VII, such as:
- Healthcare & sanitation
- Disaster management
- Preventive health infrastructure
📌 Key point:
The circulars did not override Schedule VII — they only clarified coverage within it.
1️⃣3️⃣ Foreign Companies
- CSR applies if Indian thresholds met
- CSR report to be annexed with accounts under Section 381
1️⃣4️⃣ Disclosure Checklist (Audit-Ready)
✔ CSR Policy & Committee
✔ Project-wise CSR spend
✔ Unspent amount tracking
✔ Excess set-off disclosure
✔ Impact assessment (if applicable)
✔ Form CSR-2 mandatory
🧠 Finin2min Expert Summary
CSR compliance today demands:
- Legal precision
- Accounting discipline
- Tax clarity
- Board accountability
❌ Not charity
❌ Not tax planning
✅ Statutory responsibility with financial consequences
This content is for general information and educational purposes only. It does not constitute legal, tax, accounting, or professional advice. Views expressed are based on prevailing laws and interpretations at the time of publication. Readers should consult their professional advisors before taking any action.
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