14 November 2013
Companies Act Section 297 of the Companies Act 1956, describes the transaction with the following persons as related party transaction.
• a director of the company • relative of the director • a firm in which such a director or relative is a partner • any other partner in such a firm • a private company of which the director is a member or director
Accounting Standard As per Accounting Standard 18-’Related Party Disclosures’ issued by the ICAI, Related party means “Parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions” and Related Party transaction means “a transfer of resources or obligations between related parties, regardless of whether or not a price is charged. The following are the related parties as per AS-18 • Holding companies, subsidiaries and fellow subsidiaries • Associates and joint ventures • Individuals (incl. their relatives) – having voting power giving them control or significant influence • Key management personnel including their relatives • Enterprises where controlling individual or key managerial personnel has significant influence However, disclosure is mandatory for the following categories of companies. • Companies which are listed or are in process of listing • Banks, financial institutions and insurance companies • Enterprises having turnover > Rs. 50 cr. • Enterprises having borrowings > Rs. 10 cr. • Holding / subsidiary company of any of the above If any company does not fall in any of these categories, after having been applicable earlier, then it shall continue to apply unless it is not covered in any category for 2 consecutive years. Further, Auditing and Assurance Standard 23- Related Parties impose duty on auditor to identify and disclose the related party transaction in the financial statements. If we make comparison between these two definitions, we will come to know that AS-18 is wider than Companies Act. The Companies Act requires approval only when a director and his/her relatives involve in the transaction. However it if the key management personnel, who is not a director involved in any transaction, the approvals are not required, even though interest is involved. However, AS 18 makes it mandatory to disclose the transaction with the key management personnel also.
14 November 2013
Income Tax The scope of word related party under The Income Tax Act is included the following. (i) Where the assessee is an any relative of the assessee; individual(ii) Where the asse ssee is a any director of the company, company, firm, association partner of the firm, or member of persons or Hindu undivided the association or family, or any family relative of such director, partner or member;(iii) Any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual; (iv) A company, firm, association of persons or Hindu undivided family having substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member; (v) A company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member; (vi) Any person who carries on a business or profession, - (A) Where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or The word relative in relation to individuals includes different persons under various laws. Schedule 1A of the companies Act 1956 gives list of 22 persons as relatives. As per the AS-18, relative means spouse, son, daughter, brother, sister, father and mother. If we compare these two acts Companies Act is wider term. The Income tax Act defines the word relative as spouse, son, and daughter, brother, sister or any lineal ascendant or descendent. Clearly, there are more reasons than one to go through the section in the company’s annual report which details related party disclosures. It will provide a better understanding of the company’s operations.
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