CSR Penalty Under Section 135(7): What Companies Need to Know

Professional Knowledge Series | MCA & CSR Compliance

I. Executive Summary

Section 135(7) of the Companies Act, 2013 sets a civil penalty for companies and any officers in default if the company fails to comply with Section 135(5) or 135(6). In practice, this usually happens when a required CSR amount is not transferred to the Schedule VII Fund or the Unspent Corporate Social Responsibility Account within the deadline. The penalty for the company is twice the amount that should have been transferred, or Rs. 1 crore, whichever is lower. For each officer in default, the penalty is one-tenth of that amount, or Rs. 2 lakh, whichever is lower, unless some statutory relief applies.

The provision is narrower in scope than is often assumed. It is not a general-purpose penalty for every CSR-related lapse. A delayed or omitted Form CSR-2 filing does not, by itself, trigger Section 135(7); however, non-compliance with Rule 12(1B) of the Companies (Accounts) Rules, 2014 may attract the general penalty under Section 450, as reflected in recent adjudication orders, apart from applicable filing consequences. CSR disclosure failures in the Board's Report and other procedural defaults must similarly be tested under the provision actually breached rather than being automatically classified under Section 135(7).

This article explains the legal background of Section 135(7), how the penalty is calculated, and how to identify an officer in default under Section 2(60). It also looks at common situations that lead to penalties, such as missed or late transfers, sending funds to the wrong place, problems with implementing agencies, and calculation errors. The article covers the 27 May 2026 amendments that allow a limited CSR route through zero-coupon, zero-principal instruments on the Social Stock Exchange, and gives an update on the pending Corporate Laws (Amendment) Bill, 2026.

II. Legal and Regulatory Background

Section 135(5) requires the Board of every CSR-eligible company to ensure that the company spends, in each financial year, at least 2% of the average net profits computed in accordance with Section 198 for the three immediately preceding financial years. Where the full amount is not spent, the proviso to Section 135(5) requires the Board to disclose the reasons in its report under Section 134(3)(o) and, unless the unspent amount relates to an ongoing project, transfer the unspent amount to a Fund specified in Schedule VII within six months of the expiry of the financial year. Section 135(6) governs an unspent amount relating to an ongoing project: it must be transferred within 30 days from the end of the financial year to a special account called the Unspent Corporate Social Responsibility Account, and must then be spent in pursuance of the ongoing project within three financial years from the date of transfer, failing which the balance must be transferred to a Fund specified in Schedule VII within 30 days from completion of the third financial year.

The dedicated civil penalty in Section 135(7) took effect on 22 January 2021. The Companies (Amendment) Act, 2019 had originally contemplated criminal consequences for the relevant CSR default. However, before that formulation took effect, the Companies (Amendment) Act, 2020 substituted the present civil-penalty framework. The default is therefore adjudicated through the statutory penalty mechanism under Section 454. The legal position should nevertheless be assessed separately from later procedural CSR defaults, because the Act and the rules prescribe different consequences for different forms of non-compliance.

III. Key Provisions of Section 135(7) — Professional Analysis

3.1 When Section 135(7) Applies — and When It Does Not

Section 135(7) applies when a company fails to follow the rules in sub-section (5) or (6). The penalty is based on the amount that should have been transferred to a Fund listed in Schedule VII or to the Unspent Corporate Social Responsibility Account. This means Section 135(7) is not meant for every CSR mistake. If a CSR amount is unspent, the company needs to check if it is for an ongoing project and make sure the transfer is done to the right place within the legal deadline.

Other CSR-related defaults fall to be examined under the provision or rule actually breached. For example, a failure concerning the CSR disclosures in the Board's Report may attract the consequences applicable to the reporting requirement. At the same time, a delayed or omitted Form CSR-2 filing is not itself a Section 135(7) default. Recent 2026 ROC adjudication orders have treated belated CSR-2 filing under Rule 12(1B) of the Companies (Accounts) Rules, 2014 as attracting Section 450. The distinction matters because the statutory basis, computation and caps can differ materially from Section 135(7).

3.2 How the Penalty Is Computed

The computation under Section 135(7) is a statutory formula rather than a discretionary range. For the company, the penalty is twice the amount required to be transferred to a Fund specified in Schedule VII or to the Unspent Corporate Social Responsibility Account, or Rs. 1 crore, whichever is less. For every officer of the company who is in default, the penalty is one-tenth of the amount required to be transferred, or Rs. 2 lakh, whichever is less. The officer-level cap applies separately to each person who is properly identified as an officer in default under Section 2(60). Section 446B should also be checked independently where the company falls within an eligible category.

For example, if three people are found to be officers in default under Section 2(60), the total penalty for the company and all three officers would be Rs. 86,00,000 for a transfer default of Rs. 40,00,000. This example shows how the penalty is calculated. It does not mean that every Managing Director, CFO, Company Secretary, or director is always liable in every CSR default.

3.3 Who Is an "Officer in Default" for This Purpose

Section 2(60) defines an "officer who is in default" through specified statutory categories. Relevant categories include a whole-time director; key managerial personnel; and, where there is no key managerial personnel, the director or directors specified by the Board who have given written consent to such specification, or all directors if no director is so specified. The definition also extends, in the circumstances stated in Section 2(60), to persons charged with responsibility for compliance who authorise, actively participate in, knowingly permit, or knowingly fail to prevent the default, and to a director who is aware of a contravention through Board proceedings and does not object, or where the contravention occurred with that director's consent or connivance.

Officer-in-default liability does not automatically apply to the entire Board just because Section 135 gives the Board certain duties. The adjudicating authority must look at the facts and identify who fits the definition in Section 2(60). A Board resolution that assigns CSR monitoring or transfer duties is helpful for governance, but it does not automatically protect others who also meet the Section 2(60) criteria. Likewise, if there is no such resolution, it does not mean every director is liable without checking the legal test.

3.4 Escalation Risk: Repeated Defaults and Non-Compliance with Adjudication Orders

Section 454A applies only if a company, officer, or other person has already been penalized for a default and then repeats the same default within three years of the first penalty order. In that case, the penalty for the repeat default is double the usual amount. If there are defaults from different financial years, they should not be called 'repeated defaults' under Section 454A just because they are found or decided together. The timing of the first penalty and the repeat default is what matters.

Section 454(8) separately addresses failure to comply with an adjudicating or appellate order within 90 days from receipt. In the case of a company, such non-compliance can lead to a fine of not less than Rs. 25,000 and up to Rs. 5 lakh. An officer in default, or any other person who fails to comply, may face imprisonment for a term that may extend to six months, or a fine of not less than Rs. 25,000 and up to Rs. 1 lakh, or both. The 90 days following receipt of an adverse order should therefore be treated as a distinct compliance deadline.

3.5 Section 446B — Check Eligibility Before Computing the Final Penalty

Section 446B provides a lesser-penalty regime for a One Person Company, small company, start-up company or Producer Company, and for its officer in default or other person, where the section applies. The penalty is not to exceed one-half of the penalty specified for the relevant non-compliance, subject to a maximum of Rs. 2 lakh for the company and Rs. 1 lakh for an officer in default or other person. With effect from 1 December 2025, Rule 2(1)(t) of the Companies (Specification of Definitions Details) Rules, 2014 prescribes the small-company thresholds at paid-up share capital not exceeding Rs. 10 crore and turnover not exceeding Rs. 100 crore, subject to the exclusions in Section 2(85). Because CSR applicability can arise based on net profit, a CSR-applicable private company is not necessarily disqualified from small-company status. Section 446B eligibility should therefore be tested company by company rather than assumed to be unavailable.

3.6 2026 Regulatory Update — ZCZP Instruments and Legislative Watch

On 27 May 2026, the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2026 (G.S.R. 415(E)) inserted Rule 4A, permitting a company to carry out CSR activities through a zero coupon zero principal instrument issued by an eligible Not for Profit Organization registered with the Social Stock Exchange, subject to a cap of 10% of the company's total CSR expenditure for that financial year. The amendment also provides an impact-assessment exemption for projects funded through such an instrument and prescribes conditions for the issuing organisation. A companion notification, G.S.R. 416(E), inserted item (xiii) in Schedule VII for subscription to zero-coupon, zero-principal instruments on the Social Stock Exchange. This is a distinct CSR implementation route and should not be confused with the separate statutory transfer of an unspent amount under Section 135(5) or (6).

Legislative watch: as of 18 August 2026, the Corporate Laws (Amendment) Bill, 2026 remains pending after the Joint Parliamentary Committee report was presented on 3 August 2026. Among other proposals, the Bill would alter the CSR applicability framework, including the net-profit threshold. Those proposals are not part of the presently enacted law and have therefore not been used to modify the operative Section 135 analysis in this article.

IV. Real-World Trigger Scenarios

4.1 Missed or Delayed Transfers

Missed or delayed transfer of an unspent CSR amount remains the most direct Section 135(7) risk. The issue arises when the company does not spend the full CSR obligation and then fails to transfer the resulting unspent amount to the legally required destination within six months for non-ongoing amounts or within 30 days for amounts relating to ongoing projects.

Pace Digitek Limited (ROC Bengaluru adjudication order dated 17 October 2025): the order illustrates direct application of the Section 135(7) formula. For the relevant default considered in the order, a penalty of Rs. 17,91,196 was imposed on the company and Rs. 89,560 on the concerned director, reflecting twice and one-tenth of the amount required to be transferred, respectively (this figure reflects the FY 2021-22 component of a multi-year adjudication against the company; related orders for other financial years carried separate penalties). The case is useful primarily for the arithmetic and for the proposition that subsequent corrective action does not necessarily erase an already-completed transfer default.

Other published adjudication orders: comparatively modest transfer shortfalls can produce penalties materially higher than the original shortfall once the company-level multiple and separate officer-level penalties are applied. The amount of the underlying shortfall therefore affects the quantum, but not the need to identify and respond to a statutory transfer default.

4.2 Wrong Fund Routing

Another risk is when a company thinks it has met its obligation but sends the money to a place that does not meet the legal transfer requirement, or counts spending as CSR without checking the rules. These issues need separate analysis because 'eligible CSR activity,' 'eligible implementing route,' and 'Fund specified in Schedule VII' are related but different legal terms.

Transferring to the wrong place: For non-ongoing unspent amounts under Section 135(5), and for any balance left after three years under Section 135(6), the law requires the money to go to a Fund listed in Schedule VII. Giving money to a charity or project just because it fits within Schedule VII does not always count as a transfer to a 'Fund specified in Schedule VII.' The destination must be checked carefully against the legal requirement for the unspent amount.

Implementing-agency compliance: When Rule 4 applies and CSR is done through an outside organization, the company must check that the organization meets the eligibility and CSR-1 registration rules before counting the spending as CSR. If the organization needed to be registered but was not, the spending may not count as CSR, which could lead to a shortfall. The new Rule 4A route for zero coupon zero principal instruments (from May 2026) should be reviewed under its own rules.

4.3 Delayed Filings Versus Delayed Transfers

It is important to clearly separate filing defaults from transfer defaults. A late or missing Form CSR-2 filing does not trigger the Section 135(7) penalty, since that section only applies to defaults under Section 135(5) or (6). However, Form CSR-2 is a required report under Rule 12(1B), and recent ROC Cuttack orders (July 2026) have given penalties under Section 450 for late filings. So, reporting defaults and transfer defaults are separate issues and can happen at the same time.

4.4 Calculation Errors Producing an Undetected Shortfall

A further risk arises where a company spends what it believes to be its full CSR obligation but later discovers that an error in computing average net profit under Section 198 understated the true 2% requirement. If the resulting shortfall is identified only after the applicable transfer deadline, a prompt corrective transfer may stop the position from remaining unrectified but does not necessarily prevent the earlier statutory default from having occurred. The computation should therefore be independently reconciled before the transfer deadline rather than corrected only when CSR reporting is prepared.

V. Business Implications

5.1 For CFOs and Compliance Teams

The 30-day deadline for ongoing-project amounts and the six-month deadline for other unspent amounts should be tracked as separate, hard compliance dates, independently of the Form CSR-2 filing cycle. Before closure, teams should verify the Section 198 computation, the ongoing-project classification, the Unspent CSR Account (where applicable), the precise Fund specified in Schedule VII for statutory transfers, Rule 4 implementing-agency eligibility, and, where used, the separate Rule 4A conditions for zero coupon zero principal instruments.

5.2 For Boards and CSR Committees

Boards should formally allocate CSR monitoring, computation, documentation and transfer responsibilities and require evidence of completion. Such governance allocation can materially improve control and accountability, but it should not be presented as determinative of statutory liability: identification of an officer in default remains governed by Section 2(60), and a person who independently falls within that definition is not immunised merely because responsibility was allocated elsewhere.

5.3 For Practising Professionals and Advisory Firms

Each year, do a full CSR compliance check that covers everything: Section 198 average net profit calculation, the 2% requirement, eligible spending, ongoing project status, implementing-agency and CSR-1 compliance, Rule 4A use (if any), unspent transfer dates and destinations, Board and CSR Committee records, CSR-2 and AOC-4 consistency, and Section 446B classification if relevant. Checking all these together is better than looking at each filing or payment separately.

VII. Conclusion

Section 135(7) is a focused but important rule. It mainly applies when companies do not handle unspent CSR amounts correctly under Section 135(5) and (6), and the penalty is set by a fixed formula. This means it is more important to classify and transfer amounts on time than to try to fix problems later during reporting. Not every CSR mistake falls under Section 135(7); issues like Form CSR-2 defaults, disclosure failures, and implementing-agency problems need their own legal review.

For good governance, companies should manage deadlines and assign responsibilities clearly and legally. The Board should get proof of CSR calculations, spending, how the CSR was carried out, and any required transfers. Officer-in-default risk should be checked using Section 2(60), not just assumed for the whole Board. Before finalizing compliance, check Section 446B eligibility, the 2026 ZCZP rules, and any new laws. If a shortfall or late transfer is found, fix it quickly and document the legal and factual reasons, instead of assuming that a late transfer alone solves the problem.