The Applicability Threshold
Section 135 applies to a company with: net worth of ₹500 crore or more; turnover of ₹1,000 crore or more; or net profit of ₹5 crore or more during the immediately preceding financial year. The Corporate Laws (Amendment) Bill, 2026 proposes to raise the net-profit threshold to ₹10 crore, which will reduce the population of companies subject to the obligation when notified. Until the amendment is brought into force, the ₹5 crore threshold governs.
The Section 198 Computation
The “net profit” for CSR is computed under Section 198, which starts from profit before tax and permits specified deductions and additions. The computation excludes capital receipts and capital payments, income tax, and specified non-operating income. The average of the net profits for the three immediately preceding financial years is the base for the two per cent obligation.
The Exclusions That Matter
The Section 198 adjustments are not cosmetic. Capital receipts—such as proceeds from the sale of an undertaking—are excluded. Dividend income and income from other non-operating sources may be excluded or adjusted depending on their character. A CSR computation that starts from the profit after tax in the financial statements without applying the Section 198 adjustments will typically overstate or understate the obligation.
The Board’s Role
The board must constitute a CSR committee, approve the CSR policy, and ensure that the company spends two per cent of the average net profit. The board’s report must disclose the composition of the committee, the policy, and the reasons for any unspent amount. The CSR committee should meet at least once a year and review the annual action plan.
The Annual Action Plan
The CSR committee must approve an annual action plan identifying the projects, the implementation agencies, the timelines, and the budgets. The plan should be consistent with the CSR policy and the Schedule VII activities. A plan that lists projects without the implementing agency details or the monitoring framework is an incomplete plan.
Documentation for the CSR File
The file should contain: the Section 198 computation with the workings; the board resolution constituting the CSR committee; the CSR policy; the annual action plan; the project-wise utilisation certificates; the impact assessment report where applicable; and the Form CSR-1 for the implementing agency. A CSR file that contains only the board resolution and the cheque payment is not a compliance file.
Call to Action: For CSR net-profit computation, annual action plan review, or Section 135 compliance audit, contact office@anujdesaiassociates.com or 9619456656. Website: https://anujdesaiassociates.com. LinkedIn: linkedin.com/in/ca-anuj-desai-122547230.