CSR Under Section 135: Common Errors in Utilisation Certification and How to Avoid Them

2.1 The statutory architecture

Section 135 of the Companies Act, 2013 applies, subject to the statutory conditions, to companies meeting the prescribed net worth, turnover, or net profit thresholds. The framework requires qualifying companies to spend at least 2% of the average net profits of the immediately preceding three financial years, computed in accordance with the Act, towards eligible CSR activities.

The Board mainly leads CSR compliance. If a CSR Committee is needed, it suggests the CSR policy and yearly action plan, while the Board approves and monitors them. If there is no CSR Committee, the Board handles these tasks directly. MCA's guidance also makes it clear that the company and its Board are responsible for planning, carrying out, and monitoring CSR.

Rule 5(2) says the annual action plan should cover the list of approved CSR projects, how they will be carried out, how funds will be used, timelines, ways to monitor and report progress, and details about need and impact assessments if needed.

2.2 Rule 4(5) — the link between disbursement and utilisation

Within this framework, Rule 4(5) connects the release of funds to how they are actually used. The Board must make sure the funds are used as approved, and the CFO or finance head must certify this.

This rule is especially important when CSR activities are carried out by a Section 8 company, a registered public trust, a registered society, or another approved implementing agency under Rule 4(1).

The rules should also be read along with Rule 7, which covers CSR spending, how to handle administrative costs, surplus from CSR activities, capital assets, and what to do with unspent CSR amounts and ongoing projects.

2.3 Two certifications, two different responsibilities

Since these two documents are often mixed up, it helps to compare them directly.

2.4 A significant 2026 development — the ZCZP / Social Stock Exchange route

Starting 27 May 2026, the MCA added a new way to carry out CSR by allowing companies to subscribe to qualifying Zero Coupon Zero Principal (ZCZP) instruments from Not for Profit Organisations listed on the Social Stock Exchange. This was done by adding Rule 4A, and Schedule VII was also updated to include these subscriptions as eligible CSR activities.

The principal features are:

• Cap: expenditure through this route must not exceed 10% of the company's total CSR expenditure for that financial year — Rule 4A(1).
• Impact assessment: a subscribing company is exempt from undertaking impact assessment of any project funded by such an instrument — Rule 4A(2).
• Issuer obligations: the issuing Not for Profit Organisation must undertake a project with a duration not more than three succeeding financial years from the issue of the instrument, and on termination of listing must transfer the unspent amount to a fund included in Schedule VII and submit a compliance report to SEBI — Rule 4A(3).
• Disapplication: Rule 4A(4) provides that the provisions of Rule 4 apply, except sub-rules (5) and (6). The conventional CFO utilisation-certification mechanism discussed in this article therefore does not apply to the ZCZP route.

Error 1 — Treating transfer to the implementing agency as utilisation

This is one of the most common mistakes. A company might send its whole CSR budget to an implementing agency before the year ends, but just transferring the money does not mean the company has met its CSR spending requirement. The MCA makes it clear that the implementing agency acts for the company, and spending only counts when the agency actually uses the full amount.

The MCA also advises that companies should give CSR funds to implementing agencies in a way that lets them use the money within the financial year. This means companies need to plan ahead, not just report what they have done.

How to avoid this: At year-end, clearly show the funds the implementing agency received, what was actually used for approved purposes, and what remains unused. The company's reported CSR spending should match this breakdown, not just the bank transfers.

Error 2 — Treating the implementing agency's CA certificate as the statutory Rule 4(5) certificate

Many CSR agreements ask implementing agencies to get utilisation certificates from Chartered Accountants. These reports are useful for controls, but Rule 4(5) says the CFO or finance head of the company must give the official certificate. The Board also has its own duty to check, which cannot be met just by getting an outside certificate.

How to avoid this: Keep two separate sets of documents for clarity.

• Supporting evidence should include the utilisation statement, records from the implementing agency, any independent practitioner's report, bank records, invoices, payroll records, proof from beneficiaries or projects, and reconciliations.
• For statutory governance, the CFO or finance head should certify under Rule 4(5), and the Board should review and record this properly.

Error 3 — Issuing a generic certificate without reference to the approved project and utilisation criteria

A certificate that only says “₹X has been used for CSR activities” does not give enough assurance if it does not explain what counts as proper use. Rule 4(5) requires that funds are used for the purposes and in the way the Board approved. So, the approved project, budget, action plan, grant agreement, and how the funds should be used are all key references.

ICAI's professional framework for special-purpose certificates similarly emphasises properly identified criteria and appropriate reporting. ICAI continues to recognise the Guidance Note on Reports or Certificates for Special Purposes (Revised 2016), and the Handbook on Certificates by Chartered Accountants: Comprehensive Checklist & Formats, issued in October 2025 by the Centre for Audit Quality, converts that framework into checklists for applicability, procedures, and completion.

How to avoid this: The utilisation report should clearly state the project, time period, amount received, relevant agreement or approval, what spending is counted as used, what remains unused, and the criteria used to check utilisation.

Error 4 — Ignoring the financial-year cut-off

CSR utilisation needs extra care around 31 March. Money sent just before year-end may not be fully used by the implementing agency, so reporting the whole transfer as CSR spending can overstate what was actually spent. The same problem can happen with advances, deposits, commitments, purchase orders, or expenses recorded without enough proof that goods or services were delivered.

How to avoid this: Set up a special year-end closing process for CSR. Review all major advances and outstanding balances one by one. If you use accrual accounting, make sure there is enough proof that the goods or services were actually received. This adheres to the accounting rules and the approved project.

Error 5 — Failing to reconcile unutilised funds with the statutory “unspent CSR” position

Money left with an implementing agency is still the company's responsibility under Section 135. If the required CSR amount has not been used, the company must check if it is for an ongoing project or not, and follow the right legal process for transferring it.

For ongoing projects, any unspent amount must go into the company's Unspent CSR Account within the set time and be used within the legal deadline. Other unspent CSR money must be moved to a Schedule VII fund within the required period. The company should open one Unspent CSR Account per financial year, not one for each project.

The following reconciliation shows why looking only at transfers can be very different from looking at actual utilisation.

How to avoid this: The utilisation reconciliation should be directly linked to the company's Section 135(5) and 135(6) compliance work, not done separately.

Error 6 — Certifying expenditure without testing CSR eligibility

Just spending money does not make it eligible CSR expenditure. The spending must be for activities allowed under Section 135, Schedule VII, and the CSR Rules. Rule 2(1)(d) excludes the following categories:

• activities undertaken in pursuance of the normal course of business of the company;
• activities undertaken outside India, other than training of Indian sports personnel representing a State or Union territory at national level or India at international level;
• contribution of any amount, directly or indirectly, to any political party under Section 182 of the Act;
• activities benefitting employees of the company as defined in the Code on Wages, 2019;
• activities supported on a sponsorship basis for deriving marketing benefits for products or services; and
• activities carried out for fulfilment of any other statutory obligations.

How to avoid this: The certification process should map each expense to the Board-approved CSR projects listed in Schedule VII. Any unusual or mixed-purpose expenses should be checked separately, not just grouped under a general project.

Error 7 — Incorrect treatment of administrative and project-management expenses

A common mistake is to treat all management, staff, monitoring, or professional costs as administrative overheads. Rule 2(1)(b) separates general management and administration of the company's CSR function from costs that are directly linked to a specific CSR project. The law limits administrative overheads to 5% of the company's total CSR spending for the year. The MCA also says that administrative overheads are only the costs the company incurs to manage its CSR function.

How to avoid this: Classify expenses based on what they really are and how they relate to specific projects, instead of just using general ledger terms like “administration,” “consultancy,” or “project management.”

Error 8 — Ignoring interest, refunds, recoveries and CSR-generated surplus

A CSR project might earn interest on parked funds, get money from selling assets, or have other types of surplus. Rule 7 and MCA guidance say that any surplus from CSR activities is not part of the company's business profits and must be handled only in the allowed way. The MCA specifically says that interest from CSR funds counts as CSR surplus.

How to avoid this: When reporting utilisation, show the opening balance, funds received, spending, interest or other project income, refunds or recoveries, and the closing balance—not just the spending.

Error 9 — Relying only on management representation from the implementing agency

A signed utilisation statement is helpful, but its value depends on the records behind it. Depending on the project's size and risk, useful evidence can include bank statements, ledgers, invoices, contracts, payroll records, procurement documents, tax deductions, asset records, beneficiary details, progress reports, and confirmations of key balances.

ICAI has published professional guides on how third parties should account for CSR funds and how CSR activities should be audited. This indicates the need for well-documented financial and control processes.

How to avoid this: Use a risk-based approach to checking records. Transactions that are high-value, unusual, involve related parties, or use a lot of cash should be examined more closely than routine, low-risk spending.

Error 10 — Issuing an absolute report where the evidence supports only a limited conclusion

A utilisation certificate is a professional document, and its wording should match the work done and the evidence reviewed. A Chartered Accountant for an implementing agency should avoid language that suggests they checked more than what was agreed or what records they actually examined.

The Guidance Note on Reports or Certificates for Special Purposes remains part of ICAI's professional guidance and treats certificates as assurance engagements instead of administrative attestations. The source of information, applicable criteria, management responsibility, practitioner's responsibility, scope of examination and any relevant restriction on use should each be appropriately addressed.

How to avoid this: Write the report based on the actual work done. If records are missing, spending cannot be checked, or there are big limitations, it is better to mention these in the report instead of giving a blanket approval.