05 August 2011
Can HUF of a Director,be treated as relative of Director in Income Tax. And Can Advance be taken from Director's HUF, in the Private Limited Company
21 July 2024
In the context of a Private Limited Company (Pvt Ltd Co.), the treatment of advances from a Director’s Hindu Undivided Family (HUF) involves considerations under the Income Tax Act, 1961, and corporate governance norms. Here’s how it typically works:
1. **HUF as Relative of Director:** - Under the Income Tax Act, 1961, the term "relative" is defined to include the spouse, brother or sister, lineal ascendant or descendant of the individual. It specifically includes the HUF of which the individual is a member. Therefore, a Director's HUF is considered a relative of the Director for income tax purposes.
2. **Advances from Director's HUF:** - According to Section 185 of the Companies Act, 2013, a company cannot advance any loan, including an advance, to its directors or to any other person in whom the director is interested (directly or indirectly). This is to ensure transparency and prevent potential misuse of funds.
3. **Exceptions and Special Cases:** - However, there are exceptions provided under Section 185 where loans and advances can be given to directors, subject to certain conditions: - **Loan by HUF:** If the advance is from the Director's HUF, it can be considered as coming from the relative of the Director (as defined under the Income Tax Act). In such cases, if the advance is within the permissible limits under the Income Tax Act and if it meets the criteria of being a loan from a relative, it may not violate the provisions of Section 185 of the Companies Act. - **Approval Requirements:** Even if the advance is from the Director's HUF and considered a loan from a relative, it's advisable to follow the company's internal approval procedures. This typically involves approval by the Board of Directors or shareholders, depending on the quantum and nature of the advance.
4. **Corporate Governance and Compliance:** - It's crucial for Pvt Ltd Cos. to maintain transparency and comply with both the Companies Act and Income Tax Act provisions regarding loans and advances to directors and related parties. - Any transaction involving an advance from a Director's HUF should be well-documented, approved as per company policies, and should not violate the restrictions under Section 185 of the Companies Act.
5. **Professional Advice:** - Given the complexities and potential legal implications, it’s recommended to consult with a qualified company secretary or a legal advisor who can provide specific guidance based on the company's circumstances and ensure compliance with all applicable laws and regulations.
In conclusion, while a Director's HUF is considered a relative for income tax purposes, advances from the HUF to the Director in a Pvt Ltd Co. should be carefully structured to comply with company law provisions, especially Section 185 of the Companies Act, 2013, and also adhere to the conditions under the Income Tax Act regarding loans from relatives.
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