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Loan to director?

Jayesh (Proprietor) (141 Points)

18 January 2016

I have excess reserves in my Pvt Limited Company. Can I simply loan it to myself or my wife (relative of director) to invest in shares, FDs etc.?? The gains will become my or het income. Is this allowed?

Thanks.

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10 Replies

CA Sachin Gupta (Practicing Chartered Accountant) (28 Points)
Replied 19 January 2016

As per new Companies Act, a company cannot give any loan to its directors or their relatives..

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Jayesh (Proprietor) (141 Points)
Replied 19 January 2016

Dear Sachin,

Thanks for the reply. Please look at attached link - in point "3. Loans to Directors and Interested Entities".

https://www.nish*thdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/companies-act-2013-amended-private-company-exemptions-reinstated.H T M L?no_cache=1&cHash=689be6318f964317396b94d7c23199db?utm_source=Mondaq&utm_medium=syndication&utm_campaign=LinkedIn-integration

It appears that there was a new ammended to this in June 2015 and if the three conditions as stated are are met, a Private Limited can give loans to it directors and family member of directior.

Thanks.

Jayesh (Proprietor) (141 Points)
Replied 19 January 2016

I think the link posted by me is broken:

Please do google search for "Companies Act 2013 Amended: Private Company Exemptions Reinstated".

Thanks.

CS Divesh Goyal (Practicing Compnay Secretary) (50530 Points)
Replied 19 January 2016

In case of private Comapny, Company can give loan to its director if satisfy the following exemptions:

In whose share capital no other body corporate has invested any money;
If the borrowings of such a company from banks or financial institutions or any body corporate is less than [lower of (i) Two times of paid up share capital or (ii) Rs. 50 Crore]; and
Such a company has no default in repaymnt of such borrowings subsisting at the time of making transactions under this section.

Jayesh (Proprietor) (141 Points)
Replied 19 January 2016

Thanks Divyesh.

Any idea if the Company is required to justify the loan to Income Tax and ROC? Since I have excess reserves, I simply want to give an interest-free loan to myself (or my wife) and invest it - the gains would accru in personal account and taxed accordingly.

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CS Divesh Goyal (Practicing Compnay Secretary) (50530 Points)
Replied 19 January 2016

There is no need for the Company to justify the Loan to ROC as per Companies Act, 2013. But company may be requried to justify the same to Incometax in future if they ask for the same.

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Jayesh (Proprietor) (141 Points)
Replied 19 January 2016

Thanks Divyesh.

Jayesh (Proprietor) (141 Points)
Replied 20 January 2016

Sorry, just to clarrify - based on your understading, as long as the three conditions are met, the purpose of the loan is irrelevant and I will not be in violation of any Income Tax Iaw or regulation (or any other deparment for that matter) - is that correct? Of course, I.T. department can ask for justification on any transaction and a Company would have to provide the same.

Thanks.

Kamal vashist (Accountant) (183 Points)
Replied 21 January 2016

As per Section 185 prohibits any company from giving loans, guarantees and securities in favor of its directors or to any other person in whom the director is interested in.

Kamal vashist (Accountant) (183 Points)
Replied 21 January 2016

As per Section 185 prohibits any company from giving loans, guarantees and securities in favor of its directors or to any other person in whom the director is interested in.