CSR Audit: A Note Under the Companies Act, 2013
CS RICHA KUMAR & ASSOCIATES
CSR Audit: A Note Under the Companies Act, 2013
Applicability, methodology, and current developments as of August 2026
Background
Corporate Social Responsibility in India moved from voluntary guideline to statutory obligation with the Companies Act, 2013. Section 135, read with the Companies (Corporate Social Responsibility Policy) Rules, 2014, made CSR a mandatory spending requirement for eligible companies — and unlike most corporate obligations, its underlying logic isn't disclosure alone, it's actual expenditure, tracked, reported, and increasingly audited.
1. Applicability — Section 135(1)
A company must comply with CSR provisions if it meets any one of the following thresholds during the immediately preceding financial year:
Net worth of ₹500 crore or more, or
Turnover of ₹1,000 crore or more, or
Net profit of ₹5 crore or more
This covers all company types — private limited, public limited, One Person Companies, Section 8 companies, and Indian subsidiaries or branches of foreign companies. LLPs, partnership firms, and sole proprietorships fall outside Section 135 entirely.
⚠ The trigger is always based on the immediately preceding financial year. If a company crosses any one threshold in FY 2025-26, CSR provisions apply for FY 2026-27 — the company must constitute a CSR Committee, adopt a policy, and begin spending from that year.
2. The 2% Obligation — Section 135(5)
An eligible company must spend, in every financial year, at least 2% of its average net profits — computed over the three immediately preceding financial years, in accordance with Section 198 — on activities specified in Schedule VII of the Act.
3. CSR Committee and Policy
Eligible companies must constitute a CSR Committee of the Board consisting of three or more directors, at least one of whom is an independent director. Where a company is not otherwise required to appoint an independent director under Section 149(4), its CSR Committee may instead consist of two or more directors.
The Committee must adopt a CSR Policy setting out a sustainable CSR roadmap aligned with both legal compliance and social relevance.
4. Objective of a CSR Audit
A CSR audit measures actual social performance against the social objectives a company has set for itself — and checks how far the company's decision-making, mission statement, and business conduct actually align with those stated responsibilities, meeting stakeholder expectations around social and environmental responsibility.
5. Purpose of a CSR Audit
Confirm compliance with Section 135 — Committee constitution, policy adoption, and appropriate spending toward CSR activities
Provide a transparent monitoring mechanism for CSR activities and policy implementation
Evaluate the internal control and governance framework around CSR
Assess the CSR project life cycle
Conduct a financial review of projects, confirming budgets were actually utilised toward the intended outcomes
6. Methodology for a CSR Audit
Review of structure and strategy — the CSR policy, CSR committee, governance structure, overall CSR strategy, projects undertaken, and the process for identifying and selecting implementation partners
Stakeholder interaction — engaging with beneficiaries, the project team, management, and other stakeholders directly
Review of project execution — beneficiary identification and selection process, budget allocation, and how outcomes are monitored and reported
Review of expenditure — CSR spend, direct project expenditure, overheads and administrative costs, traceability and genuineness of expenditure, per-beneficiary cost, and the stated reasons for any shortfall against the 2% obligation
7. Conducting the Audit
A CSR audit may be conducted internally by the company, or by engaging an external agency with expertise in CSR projects — separate from, and in addition to, the mandatory third-party Impact Assessment described below. Companies are, in any case, required to annex a report on their CSR activities to the Board's Report under the Companies Act, 2013.
8. Coverage of a CSR Audit
A CSR audit covers activities relating to human rights, freedom of association and collective bargaining, non-discrimination, forced and child labour, health and safety, career development and training, environmental issues, and community development and social wellbeing. Schedule VII of the Act sets out the specific categories of eligible CSR activity — spanning poverty and healthcare, education, gender equality, environmental sustainability, heritage protection, armed forces veteran welfare, sports promotion, disaster relief funds, scientific research contributions, rural development, slum development, and disaster management.
9. What Gets Audited or Reported, Formally
Beyond the CSR audit itself, three formal compliance touchpoints apply:
Statutory auditor reporting under CARO 2020 — where CARO applies, auditors must report on unspent CSR amounts under clause (xx) of Paragraph 3, specifically whether unspent amounts were transferred to the Unspent CSR Account or a Schedule VII fund within the prescribed timelines.
Board's Report disclosure — the Board's Report for a CSR-eligible company must include an annual CSR report containing particulars specified in Annexure I or Annexure II of the CSR Rules, as applicable.
Independent Impact Assessment — companies with an average CSR obligation of ₹10 crore or more over the three preceding financial years must commission an impact assessment, via an independent agency, for CSR projects with outlays of ₹1 crore or more completed at least one year prior. The report must be annexed to the Board's Report. Its cost may be booked as CSR expenditure, capped at 2% of total CSR expenditure for the year, or ₹50 lakh, whichever is higher.
10. Non-Compliance Consequences — Section 135(7)
The Companies (Amendment) Act, 2020 converted CSR from a "comply or explain" regime into a genuine "comply or pay" regime:
Unspent amounts (other than those earmarked for ongoing projects) must be transferred to a Schedule VII fund within six months of the financial year-end
Amounts for ongoing projects must be transferred to a separate Unspent CSR Account within 30 days, and spent within three financial years, failing which the balance moves to a Schedule VII fund
Non-compliance attracts monetary penalties on the company and every officer in default
Implementing agencies must be registered via Form CSR-1
Administrative overheads, including CSR capacity-building of the company's own personnel, are capped at 5% of total CSR expenditure for the year
CS Richa Kumar & Associates
www.csrichakumar.com · richakumar86@gmail.com · Lajpat Nagar-IV, New Delhi
This post is for general informational purposes and does not constitute legal advice. For guidance specific to your situation, consult a qualified professional.
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