Chapter 9: Accounts of Companies and CSR - Test 4: answer key

Question 1 · 2 marks · Chapter 9: Accounts of Companies and CSR · hard

Scenario. Anekta Garments Ltd. (AGL), an unlisted public company, is reviewing its CSR obligations for FY 2026-27. Its financial particulars for FY 2025-26 are as follows: Particulars | Amount Net worth | ₹490 crore Turnover | ₹960 crore Net profit under Section 198 | ₹5.20 crore AGL is required to appoint independent directors under Section 149(4). Its CSR Committee presently consists of only two directors, including one independent director. The Board believes this composition is sufficient because the independent director has extensive experience in social-development projects. For calculating the CSR expenditure requirement, the finance department has provided these details: Financial Year | Section 198 Net Profit | Overseas Branch Profit | Eligible Dividend Received FY 2023-24 | ₹36 crore | ₹2 crore | ₹2 crore FY 2024-25 | ₹39 crore | ₹3 crore | ₹2 crore FY 2025-26 | ₹43 crore | ₹4 crore | ₹3 crore The dividends were received from Indian companies covered under Section 135 and complying with its provisions. The finance department has not excluded these amounts or overseas branch profits while calculating the average net profits. AGL also has a privately held subsidiary, Anekta Packaging Pvt. Ltd., which independently satisfies one of the Section 135(1) thresholds. Its calculated CSR spending obligation for the current year is ₹48 lakh. The subsidiary has only two directors, and its management believes that private companies are automatically exempt from forming CSR Committees. The parent company's Company Secretary has been asked to advise both entities regarding CSR applicability, calculation of expenditure, constitution of committees and the small-obligation exception.

Determine whether Anekta Garments Ltd. is covered by Section 135 for FY 2026-27, considering its financial particulars for FY 2025-26. Its net worth and turnover are below their respective statutory limits, whereas its Section 198 net profit is ₹5.20 crore.

1. AGL is not covered because it has failed to satisfy the net worth and turnover thresholds simultaneously.
2. AGL is covered because its immediately preceding year's net profit exceeds ₹5 crore. (correct answer)
3. AGL is not covered because net profit must exceed ₹5 crore in all three preceding financial years.
4. AGL is covered only if its net worth and turnover jointly exceed their statutory limits.

Answer: B — AGL is covered because its immediately preceding year's net profit exceeds ₹5 crore.

Explanation. Section 135(1) applies if, during the immediately preceding financial year, a company satisfies any one of three limits: net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more. AGL satisfies the net profit criterion because its profit is ₹5.20 crore. The three conditions are alternatives, not cumulative requirements. The three-year average is relevant to calculating expenditure, not determining initial applicability.

Where it goes wrong. Treating the three applicability thresholds as cumulative conditions instead of independent alternative conditions.

Authority. Section 135(1), Companies Act, 2013; Rule 2(h), Companies (Corporate Social Responsibility Policy) Rules, 2014

Question 2 · 2 marks · Chapter 9: Accounts of Companies and CSR · medium

Calculate AGL's minimum CSR expenditure for FY 2026-27 after applying the exclusions prescribed under the CSR Rules. Assume that overseas branch profits and dividends from companies covered under and complying with Section 135 are to be excluded from the relevant net profits.

1. ₹72 lakh, being 2% of the average unadjusted net profits.
2. ₹64 lakh, being 2% of the average adjusted net profits.
3. ₹70 lakh, being 2% of the adjusted profit of the latest financial year.
4. ₹68 lakh, being 2% of the average adjusted net profits. (correct answer)

Answer: D — ₹68 lakh, being 2% of the average adjusted net profits.

Explanation. The adjusted profits are ₹36 crore − ₹2 crore − ₹2 crore = ₹32 crore; ₹39 crore − ₹3 crore − ₹2 crore = ₹34 crore; and ₹43 crore − ₹4 crore − ₹3 crore = ₹36 crore. Their average is ₹34 crore. The minimum expenditure is 2% of ₹34 crore, namely ₹68 lakh. Rule 2(h) requires exclusion of overseas branch profits and dividends received from Indian companies covered by and complying with Section 135.

Where it goes wrong. Including overseas branch profits or eligible dividends when computing the three-year average.

Authority. Section 135(5), Companies Act, 2013; Rule 2(h), Companies (Corporate Social Responsibility Policy) Rules, 2014

Question 3 · 2 marks · Chapter 9: Accounts of Companies and CSR · hard

AGL is required to appoint independent directors under Section 149(4). Its existing CSR Committee consists of two directors, one of whom is an independent director. Is this composition sufficient under Section 135?

1. Yes, because the presence of one independent director makes a two-member committee sufficient.
2. Yes, because every unlisted public company may constitute its CSR Committee with two directors.
3. No, the committee must consist of three or more directors, including at least one independent director. (correct answer)
4. No, because the committee must consist of at least four directors, including two independent directors.

Answer: C — No, the committee must consist of three or more directors, including at least one independent director.

Explanation. The ordinary composition requirement under Section 135(1), read with Rule 5(1), is a CSR Committee consisting of three or more directors, of whom at least one must be an independent director. AGL is required to appoint independent directors under Section 149(4), so the special exception for companies not required to appoint independent directors is unavailable. Having one independent director does not eliminate the minimum three-member requirement.

Where it goes wrong. Confusing the requirement of one independent director with the separate minimum requirement of three committee members.

Authority. Section 135(1), Companies Act, 2013; Rule 5(1), Companies (Corporate Social Responsibility Policy) Rules, 2014

Question 4 · 2 marks · Chapter 9: Accounts of Companies and CSR · medium

Anekta Packaging Pvt. Ltd. independently satisfies a Section 135(1) threshold, but its amount required to be spent under Section 135(5) is ₹48 lakh. Which statement correctly determines whether it must constitute a CSR Committee?

1. It need not constitute a CSR Committee because the amount to be spent does not exceed ₹50 lakh, and the Board shall discharge its functions. (correct answer)
2. It must constitute a CSR Committee because every company covered under Section 135(1) requires three directors.
3. It must constitute a CSR Committee because the ₹50 lakh exception is available only to listed companies.
4. It need not constitute a CSR Committee only if its shareholders pass a special resolution approving exemption.

Answer: A — It need not constitute a CSR Committee because the amount to be spent does not exceed ₹50 lakh, and the Board shall discharge its functions.

Explanation. Section 135(9) provides that where the amount required to be spent by a company under Section 135(5) does not exceed ₹50 lakh, the requirement to constitute a CSR Committee does not apply. In such cases, the functions that would otherwise be discharged by the Committee are discharged by the Board of Directors. Since ₹48 lakh is below the statutory ceiling, Anekta Packaging need not constitute a separate committee. Its private-company status is not the reason for the exemption.

Where it goes wrong. Assuming that private-company status itself creates a general exemption from the CSR Committee requirement.

Authority. Section 135(9), Companies Act, 2013

Question 5 · 2 marks · Chapter 9: Accounts of Companies and CSR · medium

Scenario. Zenith Agro Tech Ltd. is covered under Section 135 and is preparing its CSR expenditure plan for FY 2026-27. Its net profits, calculated in accordance with Section 198, for the three immediately preceding financial years were ₹20 crore, ₹25 crore and ₹30 crore respectively. The Board has adopted a CSR budget of ₹80 lakh for the current year, inclusive of a proposed subscription to a zero coupon zero principal instrument issued by an eligible Not for Profit Organisation registered with the Social Stock Exchange. During FY 2025-26, Zenith's minimum statutory CSR obligation was ₹50 lakh. It incurred qualifying CSR expenditure of ₹65 lakh, within which ₹3 lakh represented surplus arising from its CSR activities. The finance department proposes carrying forward the entire ₹15 lakh excess against future CSR obligations. However, the Board has not yet passed a resolution authorising any set-off. The company is considering subscribing ₹10 lakh to the above zero coupon zero principal instrument. Its CFO believes that no statutory ceiling applies because the instrument is now included in Schedule VII. Zenith also has a recently incorporated subsidiary, Darpan Solar Pvt. Ltd., incorporated on 1 April 2024. Darpan independently satisfies the Section 135 applicability threshold. Its Section 198 net profits were ₹8 crore during FY 2024-25 and ₹10 crore during FY 2025-26. Since incorporation, it has completed only two financial years. Its directors argue that the company cannot have a CSR obligation until it completes three financial years. The group finance head has requested a legal assessment of Zenith's minimum spending requirement, set-off entitlement, the new Social Stock Exchange instrument facility and Darpan's spending obligation.

Calculate Zenith Agro Tech Ltd.'s minimum CSR expenditure for FY 2026-27, assuming its net profits for FY 2023-24, FY 2024-25 and FY 2025-26 were ₹20 crore, ₹25 crore and ₹30 crore respectively.

1. ₹75 lakh, being 2% of the highest preceding year's net profit.
2. ₹40 lakh, being 2% of the lowest preceding year's net profit.
3. ₹50 lakh, being 2% of the average net profit of ₹25 crore. (correct answer)
4. ₹60 lakh, being 2% of the latest preceding year's net profit.

Answer: C — ₹50 lakh, being 2% of the average net profit of ₹25 crore.

Explanation. Section 135(5) requires expenditure of at least 2% of the average net profits made during the three immediately preceding financial years. The average of ₹20 crore, ₹25 crore and ₹30 crore is ₹25 crore. Two per cent of ₹25 crore is ₹50 lakh. Selecting only the latest or highest year's profit would incorrectly replace the statutory three-year averaging method.

Where it goes wrong. Using the latest financial year's profit instead of calculating the average of the three immediately preceding financial years.

Authority. Section 135(5), Companies Act, 2013; Rule 2(h), Companies (Corporate Social Responsibility Policy) Rules, 2014

Question 6 · 2 marks · Chapter 9: Accounts of Companies and CSR · hard

Zenith spent ₹65 lakh against a minimum CSR obligation of ₹50 lakh in FY 2025-26. The expenditure included ₹3 lakh surplus arising from CSR activities. The company wants to set off the excess against future obligations but has not passed a Board resolution. Which conclusion is correct?

1. Only ₹12 lakh may be set off, subject to a Board resolution, against obligations for up to the immediate succeeding three financial years. (correct answer)
2. The entire ₹15 lakh may be set off indefinitely because the company has already incurred the expenditure.
3. Only ₹3 lakh may be set off because surplus arising from CSR activities is specifically eligible for carry-forward.
4. The ₹12 lakh may be set off automatically for the next three years without any Board resolution.

Answer: A — Only ₹12 lakh may be set off, subject to a Board resolution, against obligations for up to the immediate succeeding three financial years.

Explanation. The excess expenditure is ₹15 lakh, but ₹3 lakh representing surplus arising from CSR activities must be excluded. Accordingly, the eligible excess is ₹12 lakh. Under the second proviso to Section 135(5), read with Rule 7(1), excess CSR expenditure may be set off against the immediate succeeding three financial years, provided a Board resolution is passed. The surplus from CSR activities cannot form part of the eligible set-off amount.

Where it goes wrong. Including CSR-activity surplus in eligible excess expenditure or overlooking the mandatory Board resolution.

Authority. Second proviso to Section 135(5), Companies Act, 2013; Rule 7(1), Companies (Corporate Social Responsibility Policy) Rules, 2014

Question 7 · 2 marks · Chapter 9: Accounts of Companies and CSR · hard

Zenith's total CSR expenditure budget for FY 2026-27 is ₹80 lakh, inclusive of a proposed subscription to a zero coupon zero principal instrument issued by an eligible Not for Profit Organisation registered with the Social Stock Exchange. What is the maximum expenditure that Zenith may incur through this instrument under the CSR amendment effective in May 2026?

1. ₹80 lakh, because the instrument is included in Schedule VII.
2. ₹40 lakh, because the instrument cannot exceed half of total CSR expenditure.
3. ₹10 lakh, because the statutory ceiling is a fixed amount for every company.
4. ₹8 lakh, being 10% of the company's total CSR expenditure for that financial year. (correct answer)

Answer: D — ₹8 lakh, being 10% of the company's total CSR expenditure for that financial year.

Explanation. The Companies (CSR Policy) Amendment Rules, 2026 inserted Rule 4A, permitting CSR implementation through zero coupon zero principal instruments. Expenditure incurred through such instruments cannot exceed 10% of the company's total CSR expenditure for the relevant financial year. The additional Schedule VII item recognises subscriptions to these instruments on the Social Stock Exchange as an eligible CSR activity. Ten per cent of ₹80 lakh is ₹8 lakh; inclusion in Schedule VII does not remove the specific ceiling.

Where it goes wrong. Assuming that inclusion in Schedule VII removes the separate 10% expenditure ceiling introduced by Rule 4A.

Authority. Rule 4A, Companies (Corporate Social Responsibility Policy) Rules, 2014; Companies (Corporate Social Responsibility Policy) Amendment Rules, 2026, G.S.R. 415(E); Schedule VII, item (xiii), Companies Act, 2013, as amended by G.S.R. 416(E)

Question 8 · 2 marks · Chapter 9: Accounts of Companies and CSR · medium

Darpan Solar Pvt. Ltd. was incorporated on 1 April 2024 and independently satisfies the Section 135 applicability threshold for FY 2026-27. Its net profits for the only two completed preceding financial years were ₹8 crore and ₹10 crore. What is its minimum CSR expenditure for FY 2026-27?

1. Nil, because the company has not completed three financial years since incorporation.
2. ₹18 lakh, being 2% of the average net profits of the two completed preceding financial years. (correct answer)
3. ₹20 lakh, being 2% of the latest preceding financial year's net profit.
4. ₹8 lakh, being 2% of the lowest preceding financial year's net profit.

Answer: B — ₹18 lakh, being 2% of the average net profits of the two completed preceding financial years.

Explanation. Where a company has not completed three financial years since incorporation, Section 135(5) requires expenditure of at least 2% of the average net profits made during the immediately preceding financial years available since incorporation. Darpan's average is (₹8 crore + ₹10 crore) ÷ 2 = ₹9 crore. Two per cent of ₹9 crore is ₹18 lakh. Completion of three financial years is not a precondition to the CSR spending obligation.

Where it goes wrong. Assuming that a company incorporated less than three years earlier has no CSR spending obligation.

Authority. Section 135(5), Companies Act, 2013

Question 9 · 2 marks · Chapter 9: Accounts of Companies and CSR · medium

Scenario. Sahaj Health Ltd. is required to spend ₹1.10 crore towards CSR for FY 2025-26. It incurred eligible CSR expenditure of ₹78 lakh during the year, leaving ₹32 lakh unspent. This amount relates to two separate projects. The first project involved establishing a mobile diagnostic facility in rural districts. It commenced on 1 July 2025 and was originally approved for completion by 31 May 2026, within approximately eleven months. Due to unforeseen infrastructure delays, the Board, through a resolution dated 20 March 2026, extended its duration until 31 October 2026, recording reasonable justification for the extension. An amount of ₹20 lakh remains unspent on this project. The remaining ₹12 lakh relates to a completed one-time sanitation initiative that was not approved or extended as a multi-year project. The CFO proposes transferring the entire ₹32 lakh to a Schedule VII fund within six months after the end of FY 2025-26 because both amounts remained unspent on 31 March 2026. The Company Secretary disagrees and explains that the treatment depends on whether the project is classified as an ongoing project or another project. The Board is also considering whether the amount transferred to an Unspent CSR Account can remain there indefinitely. The finance team has requested clarification regarding the classification of the mobile diagnostic facility, the respective statutory destinations and deadlines, the permitted spending period after transfer to the Unspent CSR Account and the reporting obligations associated with the unspent amount.

Sahaj Health Ltd. has ₹20 lakh unspent against a project whose duration was initially approved for less than one year but was extended beyond one year by the Board on reasonable justification. How must this amount be dealt with?

1. Transfer ₹20 lakh to the Unspent CSR Account within thirty days from the end of the financial year. (correct answer)
2. Transfer ₹20 lakh to a Schedule VII fund within six months from the end of the financial year.
3. Retain ₹20 lakh with the company until the Board decides to restart the project.
4. Transfer ₹20 lakh to the Unspent CSR Account within six months from the end of the financial year.

Answer: A — Transfer ₹20 lakh to the Unspent CSR Account within thirty days from the end of the financial year.

Explanation. Rule 2(i) recognises as an ongoing project a project initially not approved as a multi-year project but whose duration is extended beyond one year by the Board on reasonable justification. The unspent amount relating to an ongoing CSR project must be transferred to the Unspent CSR Account within thirty days from the end of the financial year under Section 135(6). The six-month deadline applies to projects other than ongoing projects.

Where it goes wrong. Classifying the project by its original completion estimate and overlooking the Board's justified extension.

Authority. Section 135(6), Companies Act, 2013; Rule 2(i), Companies (Corporate Social Responsibility Policy) Rules, 2014

Question 10 · 2 marks · Chapter 9: Accounts of Companies and CSR · hard

The remaining ₹12 lakh unspent by Sahaj Health Ltd. relates to a completed one-time sanitation initiative that is not an ongoing project. Which statutory transfer requirement applies?

1. The amount must be transferred to the Unspent CSR Account within thirty days after financial year-end.
2. The amount may be retained by the company for three financial years before any transfer is required.
3. The amount must be transferred to a scheduled bank account within ninety days after year-end.
4. The amount must be transferred to a fund specified in Schedule VII within six months of expiry of the financial year. (correct answer)

Answer: D — The amount must be transferred to a fund specified in Schedule VII within six months of expiry of the financial year.

Explanation. Where the unspent CSR amount relates to projects other than ongoing projects, Section 135(6) requires transfer to a fund specified in Schedule VII within six months of expiry of the financial year. For FY 2025-26, ending on 31 March 2026, the six-month deadline is 30 September 2026. The thirty-day transfer deadline to the Unspent CSR Account applies specifically to unspent amounts relating to ongoing projects.

Where it goes wrong. Applying the thirty-day deadline for ongoing projects to unspent amounts relating to completed or other non-ongoing projects.

Authority. Section 135(5) and Section 135(6), Companies Act, 2013

Question 11 · 2 marks · Chapter 9: Accounts of Companies and CSR · hard

Sahaj transfers the ₹20 lakh relating to its ongoing project into the Unspent CSR Account within the prescribed thirty-day period. However, the company does not utilise the amount within the statutory spending period. What must happen after completion of the third financial year from the date of transfer?

1. The company may retain the amount permanently if the Board records reasons for non-utilisation.
2. The company must transfer the balance to the General Reserve within six months of financial year-end.
3. The company must transfer the unspent balance to a Schedule VII fund within thirty days from completion of the third financial year. (correct answer)
4. The company must transfer the amount immediately to the company's ordinary bank account after three years.

Answer: C — The company must transfer the unspent balance to a Schedule VII fund within thirty days from completion of the third financial year.

Explanation. An amount transferred to the Unspent CSR Account must be spent by the company in pursuance of its CSR Policy within three financial years from the date of transfer. If it remains unspent, the company must transfer that amount to a fund specified in Schedule VII within thirty days from completion of the third financial year. The company cannot retain the amount indefinitely merely by recording reasons in its Board's Report.

Where it goes wrong. Treating the three-year period as permission for permanent retention or confusing the subsequent thirty-day transfer deadline with the original transfer deadline.

Authority. Section 135(6), Companies Act, 2013; Rule 10, Companies (Corporate Social Responsibility Policy) Rules, 2014

Question 12 · 2 marks · Chapter 9: Accounts of Companies and CSR · medium

The mobile diagnostic facility was initially scheduled for completion within approximately eleven months. Before the financial year ended, the Board extended its duration beyond one year and recorded reasonable justification. Which classification is appropriate under the CSR Rules?

1. It remains a non-ongoing project because its original approval mentioned a period below one year.
2. It qualifies as an ongoing project because the Board extended its duration beyond one year on reasonable justification. (correct answer)
3. It qualifies as an ongoing project only if the Central Government approves the extension.
4. It cannot qualify as an ongoing project unless its duration exceeds five financial years.

Answer: B — It qualifies as an ongoing project because the Board extended its duration beyond one year on reasonable justification.

Explanation. Rule 2(i) specifically includes a project initially not approved as a multi-year project but subsequently extended beyond one year by the Board on reasonable justification. Such a project may be treated as an ongoing project. There is no requirement in this limb for separate approval from the Central Government. The decisive facts are the extension beyond one year and the Board's reasonable justification.

Where it goes wrong. Assuming that only projects originally approved as multi-year projects can qualify as ongoing projects.

Authority. Rule 2(i), Companies (Corporate Social Responsibility Policy) Rules, 2014

Question 13 · 2 marks · Chapter 9: Accounts of Companies and CSR · hard

Scenario. Rudra Infrastructure Ltd. has a minimum CSR spending obligation of ₹70 lakh for FY 2025-26. It has failed to spend this amount, which relates entirely to completed projects that are not ongoing projects. Despite expiry of the applicable statutory transfer deadline, the company has not transferred the unspent amount to a fund specified in Schedule VII. The Registrar has initiated proceedings for default under Section 135(6). The company's officers argue that the maximum company penalty is ₹70 lakh and that the amount payable by an officer cannot exceed ₹1 lakh. The Company Secretary points out that Section 135(7) prescribes separate limits for the company and every officer in default. The Board is simultaneously reviewing the committee requirements of three other companies in its group. Prakriti Metals Ltd., an unlisted public company that is not required to appoint independent directors under Section 149(4), has a Board consisting of four directors and a CSR spending obligation of ₹62 lakh. Navya Textiles Pvt. Ltd. is covered under Section 135, has only two directors on its Board and has a CSR spending obligation of ₹72 lakh. Narmada Digital Ltd. has a CSR spending obligation of exactly ₹50 lakh for FY 2026-27. The management of Narmada believes that the company must appoint a CSR Committee because it satisfies the applicability threshold under Section 135(1). The group Company Secretary must determine the applicable committee exceptions and composition rules, and calculate the penalties applicable to Rudra Infrastructure Ltd. and its officers.

Rudra Infrastructure Ltd. has failed to transfer ₹70 lakh of unspent CSR amount relating to non-ongoing projects to a Schedule VII fund. Calculate the penalty prescribed for the company and every officer in default under Section 135(7).

1. Company: ₹70 lakh; officer: ₹7 lakh.
2. Company: ₹1.40 crore; officer: ₹7 lakh.
3. Company: ₹1 crore; officer: ₹2 lakh. (correct answer)
4. Company: ₹50 lakh; officer: ₹1 lakh.

Answer: C — Company: ₹1 crore; officer: ₹2 lakh.

Explanation. Section 135(7) prescribes a company penalty of twice the amount required to be transferred or ₹1 crore, whichever is less. Twice ₹70 lakh is ₹1.40 crore, so the company penalty is restricted to ₹1 crore. The officer penalty is one-tenth of the amount required to be transferred or ₹2 lakh, whichever is less. One-tenth of ₹70 lakh is ₹7 lakh; therefore, the officer penalty is ₹2 lakh.

Where it goes wrong. Failing to apply the separate statutory caps of ₹1 crore for the company and ₹2 lakh for the officer in default.

Authority. Section 135(7), Companies Act, 2013

Question 14 · 2 marks · Chapter 9: Accounts of Companies and CSR · medium

Narmada Digital Ltd. satisfies a Section 135(1) applicability threshold. However, its amount required to be spent under Section 135(5) for FY 2026-27 is exactly ₹50 lakh. The directors argue that the company must still constitute a CSR Committee because it is covered under Section 135(1). Which conclusion is correct?

1. The company need not constitute a CSR Committee, and the Board shall discharge its functions. (correct answer)
2. The company must constitute a CSR Committee consisting of three independent directors.
3. The company must constitute a CSR Committee consisting of at least two independent directors.
4. The company must obtain a special resolution before claiming exemption from constituting a CSR Committee.

Answer: A — The company need not constitute a CSR Committee, and the Board shall discharge its functions.

Explanation. Section 135(9) applies where the amount required to be spent under Section 135(5) does not exceed ₹50 lakh. Since Narmada's obligation is exactly ₹50 lakh, it falls within the exemption. The CSR Committee need not be constituted, and its functions are discharged by the Board. The threshold is not restricted to amounts below ₹50 lakh; an amount equal to ₹50 lakh also qualifies.

Where it goes wrong. Interpreting 'does not exceed ₹50 lakh' as meaning strictly less than ₹50 lakh.

Authority. Section 135(9), Companies Act, 2013

Question 15 · 2 marks · Chapter 9: Accounts of Companies and CSR · hard

Prakriti Metals Ltd. is an unlisted public company covered under Section 135(1), but it is not required to appoint independent directors under Section 149(4). Its Board consists of four directors, and its CSR spending obligation exceeds ₹50 lakh. Which CSR Committee composition is permitted?

1. Three or more directors, including at least one independent director, are compulsory in every case.
2. One director may constitute the CSR Committee if the Board authorises that director.
3. Two or more directors, including at least one independent director, must constitute the committee.
4. Two or more directors may constitute the committee without requiring an independent director. (correct answer)

Answer: D — Two or more directors may constitute the committee without requiring an independent director.

Explanation. The proviso to Section 135(1), read with Rule 5(1), provides a special composition for a covered company that is not required to appoint an independent director under Section 149(4). Such a company must have a CSR Committee consisting of two or more directors without requiring an independent director. The ordinary three-member committee rule with at least one independent director applies where this special exception is unavailable.

Where it goes wrong. Applying the ordinary committee composition requirement without considering the exemption for companies not required to appoint independent directors.

Authority. Proviso to Section 135(1), Companies Act, 2013; Rule 5(1), Companies (Corporate Social Responsibility Policy) Rules, 2014

Question 16 · 2 marks · Chapter 9: Accounts of Companies and CSR · medium

Navya Textiles Pvt. Ltd. is covered under Section 135, has only two directors on its Board and has a CSR spending obligation of ₹72 lakh. It is not required to appoint an independent director. Which composition rule governs its CSR Committee?

1. The company must appoint three or more directors, including one independent director.
2. The CSR Committee shall comprise the two directors on its Board. (correct answer)
3. The company must appoint at least two independent directors from outside its Board.
4. The company need not constitute a CSR Committee because it is a private company.

Answer: B — The CSR Committee shall comprise the two directors on its Board.

Explanation. Rule 5(1) provides that a private company having only two directors on its Board shall constitute its CSR Committee with those two directors. The general three-member requirement is subject to this specific composition provision. Since Navya's CSR obligation exceeds ₹50 lakh, the exemption under Section 135(9) is unavailable; however, the private-company two-director composition rule applies.

Where it goes wrong. Assuming that every covered private company requires three CSR Committee members or that a private company is automatically exempt from constituting a committee.

Authority. Proviso to Section 135(1), Companies Act, 2013; Rule 5(1), Companies (Corporate Social Responsibility Policy) Rules, 2014

Question 17 · 2 marks · Chapter 9: Accounts of Companies and CSR · medium

Scenario. Pragati Motors Ltd. is assessing its CSR applicability for FY 2026-27. Its net worth is ₹480 crore, net profit is ₹3 crore and turnover is ₹1,020 crore during FY 2025-26. During FY 2026-27, its turnover is expected to fall considerably because of a temporary shutdown. The directors argue that CSR will not apply because the current financial year's turnover is below ₹1,000 crore. Which conclusion is correct?

Pragati Motors Ltd. is assessing its CSR applicability for FY 2026-27. Its net worth is ₹480 crore, net profit is ₹3 crore and turnover is ₹1,020 crore during FY 2025-26. During FY 2026-27, its turnover is expected to fall considerably because of a temporary shutdown. The directors argue that CSR will not apply because the current financial year's turnover is below ₹1,000 crore. Which conclusion is correct?

1. CSR applies only if the company crosses all three thresholds in FY 2026-27.
2. CSR applies only if its average turnover over the preceding three years exceeds ₹1,000 crore.
3. CSR applicability for FY 2026-27 is determined using the immediately preceding financial year, and the turnover threshold is satisfied. (correct answer)
4. CSR does not apply because net worth and net profit are both below their respective thresholds.

Answer: C — CSR applicability for FY 2026-27 is determined using the immediately preceding financial year, and the turnover threshold is satisfied.

Explanation. Section 135(1) examines the company's net worth, turnover or net profit during the immediately preceding financial year. Pragati's turnover for FY 2025-26 is ₹1,020 crore, exceeding the ₹1,000 crore threshold. Therefore, CSR applies for FY 2026-27 notwithstanding the expected decline in the current year's turnover. The test is based on any one threshold, not all three or a three-year turnover average.

Where it goes wrong. Using current-year projections instead of the immediately preceding financial year's actual particulars.

Authority. Section 135(1), Companies Act, 2013

Question 18 · 2 marks · Chapter 9: Accounts of Companies and CSR · hard

Scenario. An Indian holding company meets the turnover threshold under Section 135. Its wholly owned Indian subsidiary does not independently satisfy any of the three prescribed financial thresholds. The holding company also has a foreign subsidiary with a branch office in India. The foreign subsidiary does not meet the thresholds when its relevant financial particulars are computed under the applicable provisions. Which statement correctly explains the coverage of these entities under Rule 3(1)?

An Indian holding company meets the turnover threshold under Section 135. Its wholly owned Indian subsidiary does not independently satisfy any of the three prescribed financial thresholds. The holding company also has a foreign subsidiary with a branch office in India. The foreign subsidiary does not meet the thresholds when its relevant financial particulars are computed under the applicable provisions. Which statement correctly explains the coverage of these entities under Rule 3(1)?

1. Every subsidiary automatically becomes covered whenever its holding company meets a Section 135 threshold.
2. Only the Indian holding company can be covered; foreign companies are never included under the CSR Rules.
3. The foreign subsidiary is covered merely because it has an Indian branch, irrespective of its financial particulars.
4. Each relevant company or foreign company must fulfil the prescribed criteria; the relationship or branch presence alone does not automatically establish CSR applicability. (correct answer)

Answer: D — Each relevant company or foreign company must fulfil the prescribed criteria; the relationship or branch presence alone does not automatically establish CSR applicability.

Explanation. Rule 3(1) extends the CSR framework to every company, including its holding or subsidiary companies, and to a foreign company having a branch office or project office in India, provided the relevant entity fulfils the criteria specified in Section 135(1). Mere subsidiary status does not automatically make an otherwise non-qualifying subsidiary liable. Similarly, a foreign branch or project office is relevant to coverage but does not replace the financial threshold test applicable to the foreign company.

Where it goes wrong. Assuming that CSR applicability automatically flows from a holding-subsidiary relationship or merely from the existence of a foreign branch.

Authority. Rule 3(1), Companies (Corporate Social Responsibility Policy) Rules, 2014; Section 135(1), Companies Act, 2013

Question 19 · 2 marks · Chapter 9: Accounts of Companies and CSR · hard

Scenario. Sudarshan Exports Ltd. satisfied the CSR threshold three years ago but no longer satisfies any Section 135(1) threshold during the immediately preceding financial year. However, ₹14 lakh remains in its Unspent CSR Account under Section 135(6), relating to an earlier ongoing project. The company proposes dissolving its CSR Committee because its current financial particulars are below the statutory thresholds. What is the correct position under the CSR Rules?

Sudarshan Exports Ltd. satisfied the CSR threshold three years ago but no longer satisfies any Section 135(1) threshold during the immediately preceding financial year. However, ₹14 lakh remains in its Unspent CSR Account under Section 135(6), relating to an earlier ongoing project. The company proposes dissolving its CSR Committee because its current financial particulars are below the statutory thresholds. What is the correct position under the CSR Rules?

1. The company must constitute a CSR Committee because it has a balance in its Unspent CSR Account. (correct answer)
2. The company may dissolve the CSR Committee immediately because current thresholds are not satisfied.
3. The company must retain the committee only if the Unspent CSR Account balance exceeds ₹50 lakh.
4. The company may dissolve the committee if its statutory auditor approves the proposal.

Answer: A — The company must constitute a CSR Committee because it has a balance in its Unspent CSR Account.

Explanation. The proviso to Rule 3(1) specifically provides that a company having any amount or balance in its Unspent CSR Account under Section 135(6) must constitute a CSR Committee and comply with the provisions contained in Section 135(2) to (6). The requirement is not subject to the ₹50 lakh committee exception based on the current year's expenditure. The existence of the unspent account balance therefore prevents the company from relying solely on its present below-threshold financial particulars.

Where it goes wrong. Ignoring the separate Rule 3(1) requirement triggered by an existing Unspent CSR Account balance.

Authority. Rule 3(1), Companies (Corporate Social Responsibility Policy) Rules, 2014; Section 135(6), Companies Act, 2013

Question 20 · 2 marks · Chapter 9: Accounts of Companies and CSR · hard

Scenario. A company undertook a CSR project during FY 2025-26 and generated a surplus of ₹6 lakh from activities carried out under that project. The CFO proposes adding this amount to ordinary business profits and distributing it as a dividend. The Board instead wishes to retain it for future eligible CSR activities. Which treatment is permitted under Rule 7(2) of the CSR Rules?

A company undertook a CSR project during FY 2025-26 and generated a surplus of ₹6 lakh from activities carried out under that project. The CFO proposes adding this amount to ordinary business profits and distributing it as a dividend. The Board instead wishes to retain it for future eligible CSR activities. Which treatment is permitted under Rule 7(2) of the CSR Rules?

1. The surplus may be treated as business profit if the CSR Committee recommends distribution.
2. The surplus must not form part of business profits and may be ploughed back, retained through the Unspent CSR Account for CSR spending, or transferred to a Schedule VII fund within the prescribed period. (correct answer)
3. The surplus must immediately be transferred to the company's general reserve and cannot be used again for CSR.
4. The surplus may be retained indefinitely in any ordinary bank account without reference to the CSR Policy.

Answer: B — The surplus must not form part of business profits and may be ploughed back, retained through the Unspent CSR Account for CSR spending, or transferred to a Schedule VII fund within the prescribed period.

Explanation. Rule 7(2) provides that surplus arising out of CSR activities shall not form part of the business profits of the company. Such surplus may be ploughed back into the same project, transferred to the Unspent CSR Account and spent in accordance with the CSR Policy and annual action plan, or transferred to a fund specified in Schedule VII within six months of expiry of the financial year. Distribution as ordinary business profit is therefore impermissible.

Where it goes wrong. Treating surplus generated by CSR activities as ordinary business income or assuming that it can be retained without complying with the prescribed CSR routes.

Authority. Rule 7(2), Companies (Corporate Social Responsibility Policy) Rules, 2014

Question 21 · 2 marks · Chapter 9: Accounts of Companies and CSR · hard

Scenario. Shakti Cement Ltd. operates manufacturing facilities in Madhya Pradesh and Rajasthan. Its CSR Committee recommends spending the entire annual CSR allocation in a different State because the projects there offer better measurable outcomes. The Board proposes retaining only a small project in the local area. The directors are concerned that Section 135 requires the company to spend its entire CSR allocation exclusively in the area surrounding its registered office. Which interpretation is appropriate?

Shakti Cement Ltd. operates manufacturing facilities in Madhya Pradesh and Rajasthan. Its CSR Committee recommends spending the entire annual CSR allocation in a different State because the projects there offer better measurable outcomes. The Board proposes retaining only a small project in the local area. The directors are concerned that Section 135 requires the company to spend its entire CSR allocation exclusively in the area surrounding its registered office. Which interpretation is appropriate?

1. The company must spend at least 75% of its CSR allocation in the registered-office locality.
2. The company must spend its entire CSR allocation in the State where its registered office is located.
3. The company may spend anywhere without considering the areas in which it operates.
4. The company must give preference to local areas and areas around where it operates, but the provision does not impose an exclusive-spending requirement. (correct answer)

Answer: D — The company must give preference to local areas and areas around where it operates, but the provision does not impose an exclusive-spending requirement.

Explanation. Section 135(5) requires the company to give preference to the local area and areas around it where it operates while spending the amount earmarked for CSR activities. The statutory language requires preference, not exclusive allocation of the entire CSR amount to the registered-office locality. Therefore, spending in other areas is not automatically prohibited, although the Board must genuinely consider and give the required local-area preference.

Where it goes wrong. Converting the statutory requirement to give local-area preference into an absolute requirement of exclusive local spending.

Authority. Section 135(5), Companies Act, 2013

Question 22 · 2 marks · Chapter 9: Accounts of Companies and CSR · hard

Scenario. Nirmal Industries Ltd. incurs total CSR expenditure of ₹2 crore during FY 2026-27. General management and administration expenses of its CSR function amount to ₹13 lakh. It also incurs ₹6 lakh directly for designing, monitoring and evaluating a specific CSR project. The CFO proposes treating the entire ₹19 lakh as administrative overheads. What is the correct position under the CSR Rules?

Nirmal Industries Ltd. incurs total CSR expenditure of ₹2 crore during FY 2026-27. General management and administration expenses of its CSR function amount to ₹13 lakh. It also incurs ₹6 lakh directly for designing, monitoring and evaluating a specific CSR project. The CFO proposes treating the entire ₹19 lakh as administrative overheads. What is the correct position under the CSR Rules?

1. The administrative overhead ceiling is ₹5 lakh, and all project-related expenses must be included.
2. The administrative overhead ceiling is ₹13 lakh because only general management costs are counted.
3. The ceiling is ₹10 lakh, and direct project-specific expenses are excluded from administrative overheads. (correct answer)
4. The company may treat ₹19 lakh as administrative overheads because the Board approved the project.

Answer: C — The ceiling is ₹10 lakh, and direct project-specific expenses are excluded from administrative overheads.

Explanation. Rule 7(1) restricts administrative overheads to 5% of total CSR expenditure. Five per cent of ₹2 crore is ₹10 lakh. Under Rule 2(b), expenses directly incurred for designing, implementation, monitoring and evaluation of a particular CSR project are excluded from administrative overheads. Therefore, the ₹6 lakh project-specific expenditure is excluded, but the ₹13 lakh general administrative expenditure exceeds the ₹10 lakh ceiling by ₹3 lakh.

Where it goes wrong. Including direct project-specific expenditure in administrative overheads or calculating the 5% ceiling on the amount of individual projects.

Authority. Rule 2(b), Companies (Corporate Social Responsibility Policy) Rules, 2014; Rule 7(1), Companies (Corporate Social Responsibility Policy) Rules, 2014

Question 23 · 2 marks · Chapter 9: Accounts of Companies and CSR · hard

Scenario. A company proposes undertaking a multi-year rural education project to fulfil its CSR obligation. The project is scheduled to continue for three years after excluding the financial year in which it commenced. Another project was originally approved for less than one year but has subsequently been extended beyond one year by the Board on reasonable justification. Which statement correctly applies the definition of ongoing project under Rule 2(i)?

A company proposes undertaking a multi-year rural education project to fulfil its CSR obligation. The project is scheduled to continue for three years after excluding the financial year in which it commenced. Another project was originally approved for less than one year but has subsequently been extended beyond one year by the Board on reasonable justification. Which statement correctly applies the definition of ongoing project under Rule 2(i)?

1. Neither project can qualify because every ongoing project must originally have been approved for exactly three financial years.
2. The first project may qualify under the three-year limb, and the second may qualify under the Board-extension limb. (correct answer)
3. Only the second project may qualify because every ongoing project must originally have been approved for less than one year.
4. Both projects qualify only after obtaining separate approval from the Central Government.

Answer: B — The first project may qualify under the three-year limb, and the second may qualify under the Board-extension limb.

Explanation. Rule 2(i) includes a multi-year CSR project whose timeline does not exceed three years, excluding the financial year in which it commenced. It also independently includes a project initially not approved as a multi-year project but whose duration is extended beyond one year by the Board on reasonable justification. Both projects can therefore satisfy the definition through different statutory limbs. Separate Central Government approval is not prescribed for these classifications.

Where it goes wrong. Ignoring the two alternative limbs in the definition of ongoing project and treating them as cumulative requirements.

Authority. Rule 2(i), Companies (Corporate Social Responsibility Policy) Rules, 2014

Question 24 · 2 marks · Chapter 9: Accounts of Companies and CSR · medium

Scenario. Anika Consumer Ltd. has transferred ₹35 lakh relating to an ongoing CSR project into its Unspent CSR Account within the thirty-day deadline. The finance head proposes keeping this amount in an ordinary savings account maintained with a small private financial institution because the account provides a higher interest rate. The Board wishes to verify the prescribed banking requirement before accepting the proposal. Which arrangement is appropriate under the CSR provisions?

Anika Consumer Ltd. has transferred ₹35 lakh relating to an ongoing CSR project into its Unspent CSR Account within the thirty-day deadline. The finance head proposes keeping this amount in an ordinary savings account maintained with a small private financial institution because the account provides a higher interest rate. The Board wishes to verify the prescribed banking requirement before accepting the proposal. Which arrangement is appropriate under the CSR provisions?

1. The Unspent CSR Account must be operated with a scheduled bank. (correct answer)
2. The Unspent CSR Account may be operated with any registered financial institution.
3. The Unspent CSR Account must necessarily be maintained with the Reserve Bank of India.
4. The Unspent CSR Account may be maintained in the company's ordinary cash balance.

Answer: A — The Unspent CSR Account must be operated with a scheduled bank.

Explanation. The provisions concerning unspent CSR amounts require the Unspent CSR Account to be operated with a scheduled bank. The company cannot substitute an ordinary internal cash balance or any institution chosen merely because it offers better interest. The account is a statutory mechanism for holding unspent amounts relating to ongoing CSR projects and must be maintained in the prescribed banking arrangement.

Where it goes wrong. Confusing the statutory Unspent CSR Account with an ordinary company bank account.

Authority. Section 135(6), Companies Act, 2013

Question 25 · 2 marks · Chapter 9: Accounts of Companies and CSR · hard

Scenario. A company fails to transfer ₹18 lakh of unspent CSR amount relating to a non-ongoing project to a Schedule VII fund within the prescribed period. Assume that the company is in default under Section 135(6), and one officer is identified as an officer in default. Calculate the penalties under Section 135(7), applying the relevant statutory caps.

A company fails to transfer ₹18 lakh of unspent CSR amount relating to a non-ongoing project to a Schedule VII fund within the prescribed period. Assume that the company is in default under Section 135(6), and one officer is identified as an officer in default. Calculate the penalties under Section 135(7), applying the relevant statutory caps.

1. Company: ₹18 lakh; officer: ₹1.80 lakh.
2. Company: ₹36 lakh; officer: ₹2 lakh.
3. Company: ₹36 lakh; officer: ₹1.80 lakh. (correct answer)
4. Company: ₹1 crore; officer: ₹2 lakh.

Answer: C — Company: ₹36 lakh; officer: ₹1.80 lakh.

Explanation. The company's penalty is twice the amount required to be transferred or ₹1 crore, whichever is less. Twice ₹18 lakh equals ₹36 lakh, which is below the company cap. The officer's penalty is one-tenth of the required transfer amount or ₹2 lakh, whichever is less. One-tenth of ₹18 lakh equals ₹1.80 lakh, which is below the officer cap. Therefore, the respective penalties are ₹36 lakh and ₹1.80 lakh.

Where it goes wrong. Applying the ₹1 crore company ceiling or ₹2 lakh officer ceiling automatically without first calculating the percentage-based amounts.

Authority. Section 135(7), Companies Act, 2013