Corporate Social Responsibility And Section 8 Companies: Resolving The Social Purpose Paradox

Introduction

The introduction of mandatory Corporate Social Responsibility (“CSR”) under Section 135 of the Companies Act, 2013 (“CA, 2013”) represented a significant departure from the voluntary model that had previously governed social spending by Indian corporations. The underlying rationale was straightforward that is commercial enterprises in the course of generating profit from economic activity conducted within society ought to contribute a defined minimum toward the welfare of that society. While the application of this mandate to profit-oriented companies presents few conceptual difficulties, a more complex question arises in respect of companies incorporated under Section 8 of the CA, 2013. These are entities that by the terms of their own incorporation exist to promote commerce, art, science, sports, education, research, social welfare, religion, or charity and are prohibited from distributing their profits or surplus to their members. The question of whether the CSR mandate under Section 135 applies to such companies has generated sustained debate.

Statutory Framework

Section 135 of the CA, 2013 sets out the threshold criteria for the mandatory CSR obligation. Every company having a net worth of rupees five hundred crore or more, or a turnover of rupees one thousand crore or more, or a net profit of rupees five crore or more during the immediately preceding financial year is required to constitute a CSR Committee of the Board and ensure that the company spends at least two per cent of its average net profits of the three immediately preceding financial years on activities specified in Schedule VII.

The provision applies to “every company” satisfying the relevant thresholds, without any classification based on the nature of corporate objects or profit-orientation of the entity. Section 8 companies, being incorporated under the CA, 2013, fall within the definition of “company” under Section 2(20) without qualification. There is no provision in the CA, 2013 that expressly exempts Section 8 companies from the operation of Section 135 and the Ministry of Corporate Affairs (“MCA”) has confirmed through its Frequently Asked Questions on CSR that the use of the phrase “every company” in Section 135(1) encompasses Section 8 companies. The starting point is therefore unambiguous that is Section 8 companies are not automatically excluded from the mandate¹.

Regulatory Design

It is important to observe that the core difficulty in applying the CSR framework to Section 8 companies is not primarily a question of legal interpretation. Rather, it is a question of regulatory design. The CSR regime was architected around a specific assumption that the company subject to the mandate is a commercial enterprise whose primary activity generates private profit and that the CSR obligation requires it to direct a portion of that profit towards activities external to its business model. The Schedule VII activities represent in this framework a category of spending distinct from and additional to the company's ordinary commercial operations.

This assumption does not hold in the case of a Section 8 company whose main objects are themselves Schedule VII activities. Rule 2(1)(d) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 (“CSR Rules”) explicitly excludes activities undertaken in the normal course of business from qualifying as CSR activity. Applied literally to a company incorporated to provide primary healthcare or education to underserved populations, this exclusion would render it legally impossible to comply with the spending obligation under Section 135(5) since any amount spent on Schedule VII-listed activities would simultaneously be an expenditure in the company's normal course of business and therefore ineligible as CSR expenditure. It is pertinent to note that this compliance impossibility arises not from any ambiguity in the law but from the structural mismatch between the CSR framework's design assumptions and the nature of the entity being regulated.

In this context, it is necessary to distinguish among the various types of Section 8 companies. The first category comprises genuinely charitable entities whose activities are entirely aligned with Schedule VII and whose beneficiaries are drawn from marginalised or underserved segments of the population. The second comprises Section 8 companies engaged in nominally Schedule VII activities such as healthcare or education but whose services are priced in a manner that primarily serves the privileged segment of society. The third category comprises Section 8 companies whose objects bear little or no relationship to Schedule VII such as industry associations, trade bodies and microfinance institutions structured under Section 8 primarily to avail of the prohibition on profit distribution. The compliance implications of the CSR mandate differ materially across these three categories and a uniform regulatory approach that treats them identically is both over-inclusive and under-inclusive².

Regulatory History

The question of whether Section 8 companies ought to be exempted from the CSR mandate has been the subject of deliberation by multiple high-level bodies constituted by the MCA. It is pertinent to trace this regulatory history as it illuminates both the direction of the current policy position and its limitations.

The High-Level Committee on CSR constituted in 2015 under the Chairmanship of Shri Anil Baijal (“HLC 2015”) recommended exemption. The Committee observed that Section 8 companies are not-for-profit entities whose involvement in charitable and philanthropic activities is already one hundred percent, that they prepare income and expenditure statements reflecting a surplus or deficit rather than conventional profit and loss accounts, and that any surplus generated is ploughed back into the company's social activities rather than distributed to members. On this basis, the HLC 2015 concluded that it was not necessary for Section 8 companies to undertake CSR activities outside their normal course of business³.

The Company Law Committee, constituted in 2016, did not accept this recommendation. It took the view that differential treatment for Section 8 companies in the matter of CSR compliance was not appropriate, noting that there are areas such as the microfinance sector where Section 8 and other companies co-exist and that there should be no practical difficulty in Section 8 companies applying a prescribed percentage of their surplus toward CSR activities⁴. A further High-Level Committee constituted in 2018 under the Chairmanship of Shri Injeti Srinivas (“HLC 2018”) reinforced this position, observing that not all Section 8 companies are formed with charitable objects and that a Section 8 company is, in most respects, like any other company defined under the CA 2013⁵.

Reading the regulatory history as a whole, it is evident that successive committees have considered and rejected the case for exemption. It is worth noting, however, that the arguments advanced in favour of exemption particularly those articulated by the HLC 2015 have not been substantively refuted. The rejection of the exemption recommendation has been grounded primarily in considerations of administrative uniformity rather than in a conceptual engagement with the design mismatch that the HLC 2015 correctly identified. The policy record thus reflects a deliberate administrative choice that has left the underlying regulatory design problem unresolved.

Compliance Obligations and Unresolved Grey Areas

Notwithstanding the philosophical difficulties discussed above, the legal position as it currently stands requires Section 8 companies crossing the Section 135(1) thresholds to discharge all compliance obligations in the same manner as any other qualifying company. These include constituting a CSR Committee of the Board, formulating and disclosing a CSR Policy, approving an Annual Action Plan, spending at least 2% of average net profits on Schedule VII activities, transferring unspent amounts to designated accounts or Schedule VII funds within prescribed timelines, and filing Form CSR-2 annually with the MCA. Where a Section 8 company also acts as an implementing agency for another company's CSR funds, it must additionally register through Form CSR-1 and hold valid Section 12A and Section 80G registrations under the Income Tax Act, 1961.

It is pertinent to note that several categories of Section 8 companies present compliance questions that the current framework does not adequately address. Corpus donations that is amounts received on the condition that the principal be maintained intact, are treated as capital receipts on the balance sheet and do not pass through the income and expenditure account. The question of whether such amounts should be included in the computation of turnover or net profit for the purposes of Section 135 is of considerable practical significance, particularly for entities with large endowments and no authoritative guidance has been issued on the point. Similarly, government grants and other restricted funds that are technically returnable if specified conditions are not met may not constitute income in the ordinary sense yet their treatment for the purposes of Section 135 remains unresolved.

Furthermore, Section 8 companies do not maintain profit and loss accounts in the conventional sense but instead prepare income and expenditure accounts recording a surplus or deficit. The term “net profit” as used in Section 135, computed in accordance with Section 198 of the CA 2013, contemplates a framework designed for commercial companies. The methodology for applying Section 198 to an income and expenditure account and the consequent computation of the 2% obligation, is a question on which no regulatory clarification currently exists.

Conclusion

As a matter of the current legal position, Section 8 companies that satisfy the thresholds under Section 135(1) of the CA 2013 are subject to the CSR mandate. This position is supported by the plain language of the provision, by the successive recommendations of the Company Law Committee and the HLC 2018, and by the MCA's clarification through its FAQs. There is no express statutory exemption and it would not be appropriate to take the position that the obligation does not arise simply by reason of a company's incorporation under Section 8.

It is worth noting, however, that the application of the CSR framework to genuinely charitable Section 8 companies whose ordinary operations are entirely aligned with Schedule VII produces a compliance outcome that is both economically irrational and contrary to the spirit of the legislation. A more defensible approach, grounded in a purposive reading of the relevant provisions would be to allow such companies to earmark a defined portion of their ordinary programme expenditure as CSR expenditure, document it through the required compliance structures and treat that as substantive compliance with Section 135. This does not amount to an exemption rather it is an interpretation that recognises the economic reality of the entity and aligns compliance with the legislative intent behind the mandate.

Footnotes

1. The Institute Of Company Secretaries Of India. (2021, April). FAQs On Corporate Social Responsibility

2. Clear Tax. (2026, May 6). Corporate Social Responsibility Under Section 135 of Companies Act 2013

3. Ministry of Corporate Affairs. (2015, September). The Report of the High Level Committee

4. Ministry of Corporate Affairs. (2016, February). Report of The Companies Law Committee

5. Ministry Of Corporate Affairs. (2018, September 28). High Level Committee Constituted On Corporate Social Responsibility

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