Corporate Social Responsibility — Company Law Notes :: Medha Academy

India did something the world had never done: in 2013 it made corporate charity compulsory. Big, profitable companies must now spend 2% of their profits on social good — schools, health, environment — or explain why not. CSR moved from a nice gesture to a statutory duty.

What CSR is (s.135)

Corporate Social Responsibility (CSR) is a company’s statutory obligation to contribute to social and environmental welfare. Section 135 applies to a company that in the immediately preceding financial year has any of:

net worth ≥ ₹500 crore, or
turnover ≥ ₹1000 crore, or
net profit ≥ ₹5 crore.

Such a company must:

constitute a CSR Committee of the Board (with an independent director where applicable);
formulate a CSR Policy and disclose it;
spend at least 2% of the average net profits of the three preceding financial years on CSR activities listed in Schedule VII (eradicating hunger, education, health, gender equality, environment, etc.).

The “comply or explain” → now “comply or transfer”. Originally a company that failed to spend only had to explain in its Board report. After the 2019/2021 amendments the duty hardened: unspent amounts (for ongoing projects) must be transferred to a special Unspent CSR Account, and otherwise to a Schedule VII fund, with penalties for default. CSR is now genuinely mandatory, not merely aspirational.

Section 135(5): the Board “shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years… in pursuance of its Corporate Social Responsibility Policy.”

In Simple Terms: If a company is big enough (₹500 cr net worth / ₹1000 cr turnover / ₹5 cr profit), it must spend 2% of its average profits on listed social activities through a CSR Committee — and if it doesn’t spend, it must park the money in a special account or a government fund, or face penalties.

flowchart TD
    ROOT["CSR (s.135)"]:::root
    ROOT --> T["Triggers: NW >=500cr OR turnover >=1000cr OR profit >=5cr"]:::mid
    ROOT --> C["CSR Committee + Policy"]:::leaf
    ROOT --> S["Spend >=2% of 3-yr avg net profit"]:::leaf
    ROOT --> U["Unspent -> Unspent CSR A/c or Sch VII fund + penalty"]:::mid2
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    classDef mid fill:#FDE8D0,stroke:#92400E,color:#000;
    classDef mid2 fill:#FDE2E2,stroke:#991B1B,color:#000;
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🧩 WORKED EXAMPLE — does CSR apply, and how much?

Facts. A company’s net profit last year was ₹8 crore; its average net profit over three years is ₹6 crore.

Rule. CSR applies if net profit ≥ ₹5 cr (among other triggers); spend = 2% of 3-year average net profit (s.135(5)).

Apply. ₹8 cr > ₹5 cr, so CSR applies. 2% of ₹6 cr = ₹12 lakh.

Conclusion. The company must spend ₹12 lakh on Schedule VII activities, or transfer the unspent amount as the Act directs.

Case Laws

(CSR is primarily statutory; there is little leading case law — cite s.135 and Schedule VII and the 2021 mandatory-spend amendment.)

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