Subcontact to a Company (Same Pramoters case)

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

03 July 2011 Dear All
Plz claify the following issue
i.e.A company's paid up capital is > 1 Crore, with Directors/pramoters of Mr.X & Y

and B company is a company, pramoters are same MR. X&Y

Can "A" company give subcontract to "B" company directly or any CENTRAL GOVT or ROC permission has to take (Land Development,Construction etc.....)

Kindly explain me with sections/Case Laws/Circulars

C A S.S.Agarwal, M.Com.,LL.B,

C A S.S.Agarwal, M.Com.,LL.B, (Expert)
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03 July 2011 Yes but the provisions of companies act Section 297 and 301 formalities to be completed. Other Section are 290, 299,300. Kindly go through the provisions and undergo the formalities for giving contract to the company in which the directors are interested.

As per income Tax Act Section 40A(2) will attract.

Querist : Anonymous

Querist : Anonymous (Querist)

03 July 2011 Is there any exemptions for this

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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25 July 2025 Here’s a detailed response to your query about subcontracting between companies having the same promoters/directors:

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### Can Company A subcontract to Company B where both have same promoters/directors?

**Yes, it is possible, but certain legal and procedural compliances must be strictly followed.**

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### Relevant Provisions and Compliance:

1. **Companies Act, 2013 (earlier 1956 provisions apply similarly):**

* **Section 188 (Related Party Transactions):**
Any contract or arrangement with a related party (including a company in which directors/promoters are interested) requires:

* Approval of the Board of Directors with interested directors abstaining.
* Approval of shareholders by special resolution if the transaction exceeds prescribed thresholds.
* Disclosure in Board’s report.

* **Section 185 (Loans to Directors/Companies in which directors are interested):**
Although more relevant for loans, this is important to consider for overall governance.

* **Section 297 (Companies Act, 1956)/Section 188 (Companies Act, 2013):**
Prior approval of the Board of Directors is required for contracts with interested parties.

2. **Section 301 (Companies Act, 1956):**
Approval of shareholders may be required if the transaction exceeds limits.

3. **Income Tax Act, Section 40A(2):**
Any payment to related parties must be at arm’s length; otherwise, such expenses can be disallowed for tax purposes.

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### Steps to Follow:

* **Board Meeting:**
Call a board meeting of Company A where Mr. X and Mr. Y (promoters/directors interested in the contract) **must abstain** from voting.

* **Disclosure:**
Disclose the nature of the contract and related party interest.

* **Approval:**
Obtain approval from the independent directors and possibly shareholders depending on the contract value.

* **Documentation:**
Maintain full records of approvals, agreements, and minutes.

* **Tax Compliance:**
Ensure the contract price is at arm’s length to avoid disallowance under Income Tax.

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### Are Government or ROC permissions required?

* **No specific Central Government or ROC permission is generally required** just because the promoters are common, but full compliance with related party transaction provisions of Companies Act is mandatory.

* However, **if the contract value exceeds certain thresholds or the nature of business is regulated** (like land development or construction with licenses/permissions), separate approvals or licenses may be needed from regulatory authorities (like municipal authorities or land development authorities), which is unrelated to the company promoter issue.

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### Exemptions?

* **Small value contracts or contracts below prescribed limits** may not require shareholder approval, but board approval is still mandatory.

* Related party transaction provisions must always be complied with to avoid penalties.

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### Summary:

| Issue | Requirement |
| ----------------------------- | --------------------------------------------------- |
| Contract with related company | Board approval with interested directors abstaining |
| Large contracts | Shareholder approval needed |
| Tax compliance | Arm’s length pricing essential |
| Government/ROC permission | Generally no, unless sector-specific |

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If you want, I can help draft a checklist or draft Board resolutions for this purpose. Would that help?

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