Non refundable rental advance by managing director

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

01 September 2014 I am the managing director of xyz pvt. ltd. company. I have a piece of land which I have rented to xyz pvt. ltd company. My query is
1. Can I take non refundable advance from xyz pvt. ltd. against my rented land.
2. Can I as the Managing Director take advance/loan from xyz pvt. ltd.

Querist : Anonymous

Querist : Anonymous (Querist)

04 September 2014 I am the managing director of xyz pvt. ltd. company. I have a piece of land which I have rented to xyz pvt. ltd company. My query is 1. Can I take non refundable advance from xyz pvt. ltd. against my rented land. 2. Can I as the Managing Director take advance/loan from xyz pvt. ltd.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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03 August 2024 As the Managing Director of XYZ Pvt. Ltd., you need to navigate both company law and tax regulations when dealing with non-refundable advances and loans from the company. Here’s a detailed guide on both aspects:

### **1. **Non-Refundable Rental Advance**

**a) **Legality and Compliance**

1. **Legal Framework:**
- **Companies Act, 2013:** The Companies Act does not explicitly prohibit taking non-refundable advances from the company, but it must be done in compliance with company laws and should be in the best interest of the company. Ensure that such transactions are documented properly and are approved by the Board of Directors.

2. **Board Approval:**
- **Board Resolution:** Obtain approval from the Board of Directors for the non-refundable advance. This resolution should detail the terms of the advance, including the reason for it and how it benefits the company.

3. **Lease Agreement:**
- **Documentation:** Ensure that there is a formal lease agreement outlining the terms of the rental, including the non-refundable advance. This agreement should be legally binding and clearly state the terms and conditions.

4. **Compliance with Income Tax Act:**
- **Tax Implications:** Non-refundable advances can be treated as income by the lessor (you), and therefore, it should be reported as such in your personal income tax returns. The company may also need to treat it according to accounting standards and income tax rules.

**b) **Documentation:**

1. **Lease Agreement:** Draft a detailed lease agreement specifying the non-refundable nature of the advance.
2. **Board Resolution:** Keep a record of the Board’s approval for the advance.

### **2. **Advances/Loans from the Company**

**a) **Legal and Compliance Issues**

1. **Companies Act, 2013:**
- **Section 185:** Prohibits companies from giving loans or advances to their directors or any person connected with them. However, exceptions exist if the loan or advance is given in accordance with certain conditions.
- **Section 186:** Provides guidelines for giving loans and guarantees by the company, but it is subject to restrictions, including the need for Board approval and disclosures in financial statements.

2. **Exceptions:**
- **In the Ordinary Course of Business:** Loans or advances may be permissible if they are provided in the ordinary course of business and are for the benefit of the company. For example, loans for business purposes with proper approval and interest payments.
- **Proper Disclosures:** Any such transaction must be properly disclosed in the financial statements and requires Board approval.

**b) **Procedure and Documentation**

1. **Board Approval:** Obtain a resolution from the Board of Directors approving the loan or advance. The resolution should specify the amount, terms, interest rate (if applicable), and repayment schedule.

2. **Loan Agreement:** Draft a formal loan agreement specifying all the terms and conditions of the loan, including interest rates, repayment terms, and security (if any).

3. **Compliance with Tax Laws:** Ensure that any loan provided is reported in compliance with tax regulations. The company must also comply with transfer pricing regulations if applicable.

4. **Disclosure in Financial Statements:** Properly disclose the loan or advance in the company’s financial statements, including any interest income or expense.

### **3. **Summary**

- **Non-Refundable Advance:** It is generally permissible but must be approved by the Board, documented in a lease agreement, and reported in tax filings.
- **Loan/Advance from the Company:** Subject to stringent regulations under the Companies Act, 2013. Obtain Board approval, document the transaction formally, and ensure compliance with tax laws and financial disclosures.

### **4. **Consultation**

Given the complexities involved, especially with transactions involving directors, it’s prudent to consult with a legal advisor or company secretary to ensure full compliance with all applicable laws and regulations.

By following these guidelines, you can manage rental advances and loans in a manner that is compliant with legal and regulatory requirements, minimizing risks for both you and the company.

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