CSR Compliance under Section 135: Unspent CSR Account, Action Plan & Form CSR-2 Filing Rules

Corporate Social Responsibility (CSR) in India has transformed from voluntary philanthropic activity into a strictly enforced statutory compliance regime under Section 135 of the Companies Act, 2013, read with the Companies (Corporate Social Responsibility Policy) Rules, 2014. For corporate entities operating across Chhattisgarh and Odisha—ranging from steel rerolling mills in Urla and Bhanpuri (Raipur), sponge iron units in Durg-Bhilai, to mining and power conglomerates in Korba, Jharsuguda, and Lanjigarh—CSR compliance is no longer a mere footnote in the Director’s Report.

With the introduction of strict statutory timelines for transferring unspent CSR funds, mandatory registration of implementation partners via Form CSR-1, independent impact assessment requirements, and standalone reporting through Form CSR-2, non-compliance carries severe financial penalties and criminal exposure for officers in default.

In our practice at Rabi Agrawal & Associates, assisting both corporate spenders and grassroots non-governmental organizations (NGOs) across Raipur and Kalahandi, we routinely observe boardrooms struggling to reconcile technical financial calculations with ground-level project execution. This comprehensive practitioner guide breaks down every operational and legal aspect of Section 135 compliance.

---

1. Statutory Thresholds & Applicability under Section 135(1)

The mandate to comply with CSR provisions applies to every company (including its Indian branch or project office of a foreign company) that satisfies any one of the following financial criteria during the immediately preceding financial year:

Crucial Compliance Note: Applicability is tested annually based on the financial performance of the immediately preceding financial year. Once triggered, the company must constitute a CSR Committee, formulate an Annual Action Plan, and spend the mandated 2% amount during the current financial year. If a company fails to meet all three criteria for three consecutive financial years, it is exempted from forming a CSR Committee and spending funds until it re-triggers any threshold.

CSR Committee vs. Board Responsibility (The ₹50 Lakh Rule)

• Standard Requirement: A company meeting the threshold must constitute a CSR Committee consisting of 3 or more directors, with at least 1 independent director (if the company is required to appoint independent directors).
• Small Obligation Exemption u/s 135(9): Where the statutory CSR expenditure obligation of a company does not exceed ₹50 Lakhs for the financial year, the requirement for constituting a CSR Committee is waived. In such cases, all statutory functions of the CSR Committee are discharged directly by the Board of Directors.

---

2. Calculation of 2% Net Profit under Section 198

Section 135(5) mandates that qualifying companies must spend at least 2% of the average net profits made during the three immediately preceding financial years (or where the company has not completed three years since incorporation, during such preceding financial years).

Net profit for CSR calculation is not the profit before tax (PBT) reported in financial statements, nor is it taxable income under the Income Tax Act. It must be computed strictly in accordance with Section 198 of the Companies Act, 2013.

  Gross Revenue / Income (As per P&L)
                │
                ▼
  [ Add Statutory Inclusions u/s 198 ]
  • Bounty / Subsidies received from Government
                │
                ▼
  [ Deduct Statutory Exclusions u/s 198 ]
  • Dividend received from other Indian companies complying with Sec 135
  • Profits from overseas branches / operations
  • Capital gains / profits on sale of capital assets
  • Premium on shares or debentures
  • Unrealized gains / Fair value changes under Ind AS
                │
                ▼
  [ Deduct Permissible Operating Expenses u/s 198 ]
  • Standard managerial remuneration, working expenses, interest, repair, taxes
                │
                ▼
  = Adjusted Net Profit u/s 198 (Calculate 3-Year Average × 2%)

Statutory Exclusions to Remember:

1. Any profit generated by the company from any overseas branch or branches, whether operated as a separate company or otherwise.
2. Any dividend received from other companies in India which are covered under and complying with the provisions of Section 135.
3. Premium realized on the issue of shares or debentures held by the company.

---

3. Approved Schedule VII Activities vs. Explicit Exclusions

CSR funds must be deployed exclusively toward activities specified in Schedule VII of the Companies Act, 2013. In regional hubs such as Kalahandi, Koraput, Bastar, and Surguja, high-impact focus areas include rural development, eradication of hunger and malnutrition, vocational skill training, environmental sustainability, and healthcare infrastructure.

Permitted Focus Areas (Schedule VII):

• Eradicating hunger, poverty, and malnutrition; promoting health care and sanitation.
• Promoting education, vocational skills, and livelihood enhancement projects.
• Environmental sustainability, ecological balance, conservation of natural resources, and agroforestry.
• Protection of national heritage, art, and culture.
• Measures for the benefit of armed forces veterans, war widows, and their dependents.
• Training to promote rural sports, nationally recognized sports, and Paralympic sports.
• Contribution to prime minister's national relief fund, PM CARES fund, or any other fund set up by Central Government for socio-economic development.
• Rural development projects and slum area development.

+-------------------------------------------------------------------------------+
|                      CSR SPENDING EXCLUSION MATRIX                            |
+-------------------------------------------------------------------------------+
| EXCLUDED: Activities undertaken in normal course of business                  |
| EXCLUDED: Direct or indirect political contributions (u/s 182)                |
| EXCLUDED: Activities benefiting employees exclusively (Rule 2(1)(d))          |
| EXCLUDED: Pure sponsorship activities to gain marketing / brand visibility    |
| EXCLUDED: One-off events (marathons, award functions, festive sponsorships)   |
| EXCLUDED: Statutory obligations under other laws (e.g. mandatory tree planting |
|           or pollution control equipment required for factory license)        |
+-------------------------------------------------------------------------------+

---

4. End-to-End CSR Fund Transfer & Compliance Architecture

The Companies (CSR Policy) Amendment Rules introduced rigid mechanisms to prevent companies from retaining unspent CSR funds on their balance sheets. The statutory routing of funds depends entirely on whether an unspent amount relates to an "Ongoing Project" or an "Other-Than-Ongoing Project".

Defining an "Ongoing Project"

An Ongoing Project means a multi-year project undertaken by a company in fulfillment of its CSR obligation, having timelines not exceeding three years (excluding the financial year in which it was commenced). It includes projects that were initially not approved as multi-year projects but whose duration was extended beyond one year by the Board based on reasonable justification.

                    [ End of Financial Year (31st March) ]
                                      │
                                      ▼
                        Is there an Unspent CSR Obligation?
                                      │
                   ┌──────────────────┴──────────────────┐
                   ▼                                     ▼
       [ ONGOING CSR PROJECT ]                [ OTHER THAN ONGOING PROJECT ]
       (Multi-year up to 3 FYs)                  (Single-year / Unallocated)
                   │                                     │
                   ▼                                     ▼
  Transfer to Special Scheduled Bank Account:   Transfer to Schedule VII Fund
  "Unspent CSR Account"                         (e.g., PM CARES, Clean Ganga)
                   │                                     │
    [ Within 30 Days (By 30th April) ]           [ Within 6 Months (By 30th Sept) ]
                   │                                     │
                   ▼                                     ▼
  Must be spent within 3 Financial Years          Statutory Transfer Complete
                   │
         Is amount still unspent 
           after 3 FYs?
          ┌────────┴────────┐
          YES               NO
          │                 │
          ▼                 ▼
   Transfer to      Project Completed
   Schedule VII     Successfully
   Fund within
   30 Days

---

5. Timeline, Unspent CSR Account & Schedule VII Transfers

Understanding the precise deadlines is critical to avoiding penalty proceedings under Section 135(7).

Scenario A: Unspent Funds for Ongoing Projects

1. Action Required: Open a separate, designated bank account with a scheduled bank called the "Unspent Corporate Social Responsibility Account".
2. Transfer Timeline: Transfer the unspent CSR amount into this account within 30 days from the close of the financial year (i.e., on or before 30th April).
3. Utilization Period: The money transferred must be spent on the designated ongoing project within three financial years from the date of transfer.
4. Default Treatment: If the company fails to utilize the amount at the end of the third financial year, the remaining unspent balance must be transferred to a fund specified under Schedule VII within 30 days from the completion of the third financial year.

Scenario B: Unspent Funds for Other-Than-Ongoing Projects

1. Action Required: Transfer the entire unspent CSR amount directly to any fund specified under Schedule VII (such as the PM CARES Fund, Swachh Bharat Kosh, Clean Ganga Fund, or Prime Minister's National Relief Fund).
2. Transfer Timeline: Transfer must be executed within six months from the expiry of the financial year (i.e., on or before 30th September).

Excess CSR Spend Set-Off u/s 135(5)

If a company spends an amount in excess of the mandatory 2% requirement, the Board may pass a resolution allowing the excess amount to be set off against the CSR obligation for up to the immediate succeeding three financial years, provided:

• The excess amount available for set-off excludes any overhead expenses.
• A board resolution is passed authorizing the set-off.

---

6. Form CSR-1: Mandatory NGO Registration for Implementation

Companies are permitted to execute CSR projects directly or through implementing agencies. However, under Rule 4 of the Companies (CSR Policy) Rules, every entity intending to act as a CSR implementation partner must register with the Ministry of Corporate Affairs (MCA) by filing Form CSR-1 electronically.

Eligible Implementation Partners:

1. A company established under Section 8 of the Act, or a registered public trust, or a registered society, registered under Section 12A and 80G of the Income Tax Act, 1961, established by the company, either singly or along with any other company.
2. A Section 8 company, registered trust, or registered society established by the Central Government or State Government.
3. Any entity established under an Act of Parliament or a State legislature.
4. A Section 8 company, registered public trust, or registered society registered under Section 12A and 80G, having an established track record of at least 3 years in undertaking similar activities.

               [ NGO / Trust / Section 8 Company ]
                               │
                               ▼
        Obtains Valid Section 12A & 80G Registrations
                               │
                               ▼
            Has 3+ Years Track Record in Social Work
                               │
                               ▼
            Files Form CSR-1 on MCA V3 Portal
     (Attaches PAN, Trustee Details, 12A/80G Certificates)
                               │
                               ▼
          System Generates Unique CSR Registration Number
                      (e.g., CSR00012345)
                               │
                               ▼
        Eligible to Receive Corporate CSR Grants Legally

Mandatory Rule for Corporate Boards: Corporate boards across Chhattisgarh and Odisha cannot disburse CSR funds to any local NGO or Trust unless the entity possesses a valid CSR Registration Number (CRN) issued by the MCA after Form CSR-1 filing. Disbursing funds to non-registered entities constitutes a direct statutory violation by the company.

---

7. Form CSR-2 Filing Rules: Standalone Addendum to MCA Returns

Form CSR-2 (Report on Corporate Social Responsibility) was introduced as a comprehensive annual report on CSR activities. It functions as a standalone web-based form to be submitted on the MCA portal.

Filing Mechanics & Key Timelines:

• Filing Manner: Form CSR-2 is filed as an addendum to Form AOC-4, AOC-4 XBRL, or AOC-4 NBFC (Ind AS).
• Stand-alone Filing Due Date: The MCA periodically extends Form CSR-2 timelines. For preceding financial years, it is required to be filed after filing Form AOC-4 or as a standalone report within prescribed cut-off dates (typically by 31st May of the subsequent financial year or as notified by MCA).
• Key Information Demanded in Form CSR-2:
  1. Net Profit calculation u/s 198 for preceding 3 financial years.
  2. Composition of CSR Committee and number of meetings held.
  3. Web link where CSR Policy, Committee composition, and approved projects are displayed on the company's website.
  4. Details of amount spent on Ongoing and Other-Than-Ongoing projects.
  5. Details of transfer to Unspent CSR Account or Schedule VII Funds.
  6. Details of CSR registration numbers (CRN) of implementing agencies.
  7. Impact assessment report summary (where applicable).
  8. Details of capital assets created or acquired through CSR spend.

---

8. Mandatory Impact Assessment & Administrative Overheads

Impact Assessment Rules (Rule 8(3))

Companies with an average CSR obligation of ₹10 Crore or more in the three immediately preceding financial years are mandated to undertake an independent impact assessment for all CSR projects that meet both of the following conditions:

1. Outlay of ₹1 Crore or more, and
2. Completed not less than one year before undertaking the impact study.

Cost Cap on Impact Assessment: The expenditure incurred on impact assessment can be booked as CSR expenditure, capped at 2% of the total CSR expenditure for that financial year or ₹50 Lakhs, whichever is higher.

Administrative Overheads Cap (Rule 2(1)(d))

Administrative overheads mean expenses incurred by the company for general management and administration of CSR functions. They explicitly exclude direct expenses incurred for designing, implementing, monitoring, and evaluating a specific CSR project.

• Statutory Cap: Administrative overheads shall not exceed 5% of total CSR expenditure of the company for the financial year.

---

9. Comprehensive Comparison Table: CSR Rules, Deadlines & Penalties

---

10. Audit Checklist & CARO 2020 Reporting for Statutory Auditors

Statutory Auditors of corporate entities are required to strictly audit CSR compliance. Under Clause (xx) of Paragraph 3 of the Companies (Auditor's Report) Order, 2020 (CARO 2020), auditors must specifically comment on unspent CSR amounts:

+-------------------------------------------------------------------------------+
|                      CARO 2020 CLAUSE (xx) AUDIT AUDIT CHECKS                 |
+-------------------------------------------------------------------------------+
| Clause 3(xx)(a): Whether in respect of other than ongoing projects, the      |
| company has transferred unspent amount to a Fund specified in Schedule VII    |
| within six months of the expiry of the financial year (by 30th Sept)?          |
|                                                                               |
| Clause 3(xx)(b): Whether any amount remaining unspent under sub-section (6)   |
| of section 135 (ongoing projects) has been transferred to special account    |
| ('Unspent CSR Account') within 30 days of the end of the financial year?      |
+-------------------------------------------------------------------------------+

If an auditor issues an adverse remark under Clause 3(xx), it alerts the Registrar of Companies (RoC) and financial regulators, automatically triggering scrutiny notices.

---

Practical Case Studies from Chhattisgarh & Odisha

Case Study 1: Steel Rerolling Unit in Bhanpuri, Raipur

• Context: A manufacturing steel unit registered net profits exceeding ₹8 Crore in FY 2024-25. The company approved an ongoing rural sanitation project costing ₹18 Lakhs spanning two years in rural Raipur.
• Compliance Challenge: As of 31st March 2026, only ₹10 Lakhs had been disbursed to the vendor. The management assumed the remaining ₹8 Lakhs could stay in the company's regular current account since the project was ongoing.
• Corrective Action by CA Firm: We advised the management that leaving ₹8 Lakhs in the regular operational account violates Section 135(6). The company was required to open an "Unspent CSR Account" with a scheduled bank and transfer ₹8 Lakhs on or before 30th April 2026. Failing to do so would attract a corporate penalty of ₹16 Lakhs (2× unspent amount) plus officer penalties.

Case Study 2: Mining Subcontractor & Implementation Partner in Kalahandi

• Context: A registered charitable trust in Bhawanipatna, Kalahandi, was selected by a mining corporate to execute a ₹45 Lakh vocational skills program for tribal youth.
• Compliance Challenge: The trust had valid 12A and 80G registrations and 5 years of field experience, but had not registered on the MCA portal.
• Corrective Action by CA Firm: We facilitated the filing of Form CSR-1 on the MCA V3 portal by attaching the trust deed, PAN, 12A/80G certificates, and trustee details. Within 24 hours, the system issued a unique CSR Registration Number (CRN), enabling the corporate donor to release the project grant without violating MCA rules.

---

How Rabi Agrawal & Associates Assists Corporate Boards & NGOs

Navigating Section 135 requires seamless synergy between statutory financial audit, corporate secretarial law, and tax planning. At Rabi Agrawal & Associates, our dedicated Corporate Compliance & NGO Advisory Practice provides end-to-end support across Chhattisgarh and Odisha:

1. Net Profit Computation u/s 198 & CSR Audit: Precise statutory calculation of 2% CSR obligation, verification of overhead caps, and pre-audit certification.
2. CSR Policy & Action Plan Drafting: Designing Annual Action Plans in alignment with Schedule VII and Board governance norms.
3. Unspent CSR Account Management: Guiding finance teams on escrow bank account transfers, ongoing project documentation, and statutory timelines.
4. Form CSR-1 & CSR-2 Filing: Seamless electronic filing of Form CSR-1 for NGOs/Trusts and Form CSR-2 web filing for corporate clients.
5. Impact Assessment & CARO Reporting: Structuring independent impact evaluation frameworks to satisfy CARO 2020 audit scrutiny.

---

Need Expert Guidance on CSR Audit & MCA Compliance?

Whether you are a corporate boardroom ensuring Section 135 audit readiness or a non-profit organization seeking CSR-1 registration and funding eligibility, our experienced team of Chartered Accountants and Tax Advocates is at your service.

• Main Office (Chhattisgarh): Rabi Agrawal & Associates, Near Steel Market, Urla Industrial Area / Bhanpuri, Raipur, CG.
• Branch Office (Odisha): Main Road, Bhawanipatna, Kalahandi, Odisha.
• Email: contact@carabiagrawal.com | Phone: +91-98271-XXXXX
• Website: www.carabiagrawal.com