This is a composite, illustrative scenario, not an account of a named client. A payment of roughly ₹22 lakh had been booked under CSR expenditure and counted toward the company's section 135 spending requirement, described in the ledger as a community sports sponsorship. Reading the actual sponsorship agreement showed the payment funded a corporate-branded sports tournament aimed primarily at client and employee engagement — promotional in substance — which does not fall within any of the activities listed in Schedule VII of the Companies Act, meaning it could not legitimately be counted toward the CSR spend at all.
Why it had been booked as CSR in the first place
The sponsorship had genuine community-facing elements — local schoolchildren were invited to one event day — and the marketing team that proposed it described it internally as a CSR initiative because of that element. The finance team booked it to the CSR expenditure head on that description without independently checking it against Schedule VII, and the CSR committee's own approval minutes, when read closely, approved it as a 'brand and community engagement' activity rather than citing any specific Schedule VII clause — which should have been the first flag.
What the review checked
- 01Read the CSR committee's approval minutes against Schedule VII clause referencesEvery other approved CSR activity for the year cited a specific Schedule VII item (education, healthcare, environmental sustainability); this one cited none.
- 02Obtained the sponsorship agreement and read what was actually fundedThe bulk of the spend was venue hire, branding, and corporate hospitality for the tournament, with the community element a minor add-on rather than the primary purpose.
- 03Checked section 135's explicit exclusionsActivities that benefit employees of the company and activities undertaken in the normal course of business are expressly excluded from qualifying CSR expenditure — this sponsorship sat close to both exclusions.
- 04Quantified the impact on the 2% requirementRemoving this amount from qualifying CSR spend created a shortfall against the mandated 2% of average net profit, which had to be addressed before the board's report was finalised.
What happened once it was flagged
Management agreed the sponsorship did not qualify and reclassified it as a marketing expense. That created an unspent CSR shortfall for the year, which was then dealt with under the specific CARO and Companies Act mechanism for unspent amounts — transfer to a specified fund or an Unspent CSR Account, depending on whether the obligation related to an ongoing project — rather than simply being left unaddressed in the disclosure.
| Before | After | |
|---|---|---|
| Classification | CSR expenditure | Marketing and sponsorship expense |
| CSR spend against 2% requirement | Appeared to meet the requirement | Shortfall identified, requiring transfer to the specified fund |
| Board's report disclosure | No shortfall disclosed | Shortfall and the remedial transfer disclosed |
Regulatory requirement
Schedule VII to the Companies Act, 2013 lists the specific categories of activity that qualify as CSR expenditure, and section 135(2) expressly excludes activities undertaken in the normal course of business and those benefiting only the company's own employees. A payment with a genuine community element is not automatically CSR spend if its primary purpose and substance fall outside Schedule VII and within an exclusion.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- CARO & Companies ActHow to test CSR expenditure classification against permitted Schedule VII activitiesConfirm each activity genuinely falls within Schedule VII, exclude anything that is really business expenditure in disguise, and recompute the mandated spend and the unspent transfer.
- CARO & Companies ActSection 135 CSR compliance audit: applicability to spendingThe full section 135 CSR compliance picture: applicability, the two percent spending obligation, committee requirements, and unspent amount transfer.
- CARO & Companies ActCARO clause 3(xx): unspent CSR amount and its transferHow to test whether unspent CSR amounts were correctly transferred to a specified fund or the unspent CSR account, for CARO clause 3(xx) reporting.
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