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Rent to Director

Sunil (Trader) (2611 Points)

10 December 2009

Can a private limited company pay a rent to the director (also a promoter / shareholder) for taking on rent office premises belonging to director? Can the company also give a deposit and make a leave and license agreement with the director at same rates as other offices in the complex having same carpet area?

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9 Replies

Mohammed Dalal (Chartered Accountant) (163 Points)
Replied 10 December 2009

Yes the Company can make a leave and license agreement with the Director.

It will have to be reported under AS 18-Related Party and should be a arm's lenght transaction

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sanjeev (Manager- Accounts/Tax/Finance) (229 Points)
Replied 10 December 2009

Dear,

This can be done.

However if the payment exceeds Rs 1,20,000 TDS u/s 194 I is required to be deducted and furhter as per AS-18, Related Party Disclosures should also be made.

Best

Sanjeev

Sunil (Trader) (2611 Points)
Replied 10 December 2009

Thanks. The transaction will be arms length as we are checking at the society office the agreements lodged there for similar area offices and we can always keep the same rate as it has to be arms length for both company as well as director.

The only question is about how much deposit. Normally the deposits in the building are 10 times the rent. I had read somewhere a long time back that department charges tax on notional interest in case more than 6 months rent is received as advance. Is it mandatory in any law (state law) to take a deposit or just a simpleleave and licence agreement can be made for a monthly rent without deposit.

Amol Gopal Kabra (CA,CS,DISA) (Practicing CA) (8539 Points)
Replied 10 December 2009

Apart from the provisions mentioned above regarding the TDS, arms lenght price, AS-18, etc.. the provisions of company law are also to be complied with, like disclosure of interest by the directed in the transaction, permission or prior permission of CLB / Central govt. wherever applicable, etc. It shall depend upon the facts and circumstances of each case.

NARENDER PAWAR (CA final Student) (337 Points)
Replied 11 December 2009

mr. sanjeev is right

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VIRAG GUPTA (Audit Incharge) (65 Points)
Replied 11 December 2009

Originally posted by :Sunil
"	Can a private limited company pay a rent to the director (also a promoter / shareholder) for taking on rent office premises belonging to director? Can the company also give a deposit and make a leave and license agreement with the director at same rates as other offices in the complex having same carpet area?	"

VIRAG GUPTA (Audit Incharge) (65 Points)
Replied 11 December 2009

Yes certainly a Pvt Ltd co. can pay rent to director however it should be reasonable and not excessive,

VIRAG GUPTA (Audit Incharge) (65 Points)
Replied 11 December 2009

However if it is not reasonable A.O. may disallow such exp under section 40A(2)(b)

kabirsen (student) (251 Points)
Replied 11 December 2009

plz do not give advane rent or deposit of rent to director.

because if u give advance to director holding more than 10% eq shares, then 2(22)e will be attracted and the director have to bear tax on the advance rent received.