Interest free loan from shareholders

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Dhiraj Bagri (Querist)
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22 April 2011 Dear Experts,
A company "ABC Ltd" is shareholder (having 10% shareholding) of company "XYZ Pvt Ltd". Can "ABC" give interest free loan to company "XYZ".
As far as I think from income tax point of view we can not give. If yes we can given then is there any section or case which I can refer to.
Need clarification.
Thanking you

CA MANOJ GUPTA

CA MANOJ GUPTA (Expert)
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22 April 2011 THE AMOUNT OF LOAN WILL BE TREATED AS DEEMED DIVIDEND UNDER SECTION 2(22)(e)

CA MANOJ GUPTA
JODHPUR
09828510543

Dhiraj Bagri

Dhiraj Bagri (Querist)
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25 April 2011 Manoj Ji,

In this case shareholder has given loan to company hence deemed dividend provision is not applicable.

Thanking you

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RANGA SRINIVAS

RANGA SRINIVAS (Expert)
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25 April 2011 Dear

ABC can give loan to XYZ. IT IS NOT HIT BY SECTION 2(22)(e).

regards

CA MANOJ GUPTA

CA MANOJ GUPTA (Expert)
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25 April 2011 the only piont u have to keep in mind is that if ABC Ltd is having any borrowed money at its B/s than interest paid on such capital may be disallowed

CA MANOJ GUPTA
JODHPUR
09828510543

Dhiraj Bagri

Dhiraj Bagri (Querist)
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25 April 2011 Manoj Ji,

Thanks for the reply.

I need some clarification further, is there any section or case law which says that loan given by shareholder (interest free) is allowable from income tax point of view.

Further, is there any shareholding limit for giving interest free loan.

Thanks and regards

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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01 August 2024 When it comes to interest-free loans given by shareholders to a company, there are no specific provisions under the Income Tax Act, 1961, that disallow such loans or that mandate a particular treatment strictly because they are interest-free. However, several considerations and guidelines should be noted:

### Income Tax Act, 1961

1. **Section 56(2)(vii)**:
- This section deals with the taxation of gifts and deemed income. However, it primarily pertains to individuals and Hindu Undivided Families (HUFs) receiving money or property without consideration. It does not apply to transactions between a company and its shareholders regarding loans.

2. **Section 68 - Cash Credits**:
- Any sum credited to the books of accounts of an assessee for which the assessee does not provide a satisfactory explanation about the nature and source is treated as income. However, if a loan is properly documented and substantiated, it should not be an issue.

3. **Transfer Pricing Regulations**:
- If the shareholder is a non-resident, transfer pricing provisions under Sections 92 to 92F might apply. The tax authorities may scrutinize whether the transaction is at arm's length, especially if the company and the shareholder are associated enterprises.

### Corporate Law Considerations

- **Companies Act, 2013**:
- No specific provision restricts a shareholder from giving an interest-free loan to the company. However, such transactions should comply with related party transaction provisions and be adequately documented and disclosed.

### Shareholding Limit

There is no specific shareholding limit for a shareholder to give an interest-free loan to the company. Both minor and major shareholders can provide interest-free loans, subject to the approval and documentation requirements.

### Case Laws and Judgements

While there may not be specific case laws directly addressing the allowance of interest-free loans from shareholders from an income tax point of view, here are some related principles:

1. **CIT vs. G. S. Homes & Hotels (P) Ltd. (2016) 387 ITR 126 (Kar)**:
- In this case, the Karnataka High Court held that interest-free loans from shareholders to a company cannot be regarded as deemed income under Section 2(22)(e) of the Income Tax Act.

2. **S.A. Builders Ltd. vs. CIT (Appeals) (2007) 288 ITR 1 (SC)**:
- The Supreme Court held that interest-free loans between related parties (like a holding and subsidiary company) were justified if the loan was given for commercial expediency. While this was specific to the context of related parties, the principle may apply to shareholder loans.

### Documentation and Best Practices

1. **Board Resolution**:
- The acceptance of the loan must be approved by the Board of Directors, and the terms should be clearly documented in the board resolution.

2. **Loan Agreement**:
- A loan agreement should be executed between the shareholder and the company detailing the terms, even if it is interest-free.

3. **Disclosure**:
- Proper disclosure in the financial statements and annual return is mandatory, as per the Companies Act, 2013.

4. **Maintain Records**:
- Proper records and documentation should be maintained to substantiate the nature and source of the loan.

### Conclusion

- **Interest-free loans from shareholders to a company are generally permissible and do not attract specific disallowance under the Income Tax Act, 1961, provided they are well-documented and disclosed.**
- **There is no shareholding limit for a shareholder to give an interest-free loan to the company.**
- **It is crucial to ensure compliance with the Companies Act, proper documentation, board approval, and adequate disclosure to avoid any potential issues with tax authorities.**

For precise application and compliance, especially in complex scenarios or where the shareholder is a non-resident, consulting with a tax advisor or legal expert is recommended.