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Section 297

Anchal talwar (Company Secretary) (113 Points)

26 April 2012

Dear Members

Kindly provide your valuable inputs on the following query:

ABC Pvt. Ltd is entering into the contract with XYZ (firm) for supply of Processed Ready Mix concrete(RMC).Does Section 297 of the companies Act, 1956 is applicable to it?

Others facts:

Company is having paid up of more than 1cr and none of the director is partner or the member in the firm but company itself is partner in the firm(XYZ).

Please Help

Anchal

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6 Replies

Ankur Garg (Company Secretary and Compliance Officer) (114773 Points)
Replied 26 April 2012

As per my understanding section 297 is not applicable in your case. Reason being none of the director is partner or the member in the firm which is one of the criteria for applicability of section 297.

Company itself is partner is not covered in section 297. Wait for other opinions.

Thanks

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Anshu Shrivastava (company secretary) (143 Points)
Replied 26 April 2012

Going by section 297 it doesnt specifically prescribe the condition applicable in your case.

Thus i too am of the opinion that section 297 is not applicable in this case.

Pratul (FINANCE MANAGER) (105 Points)
Replied 26 April 2012

Dear anchal..

as said by other members of CCI, i am also of the opinion that Sec 297 would not apply to ur case.. Sec 297, 299 & Subsequently 301, basically deal with

directors of a company or

its relatives or

a Firm in which such Director or his relative is a partner or

any partner of such firm or

any other Private Company is which such Director is a member.

The above persons can enter into any contracts/ agreements with the Company only after complying with the Prov of Sec. 297.

as per Sec 299, such interested directors are required to disclose their interest, failing which there are certain penalties/ consequences.

as per Sec 301, any contract/ arrangement entered into by the company with any of the persons mentioned in sec.297 & 299 shall have to be disclosed under a register maintained under this section.

The reporting of proper disclosure of this register u/s 301 is required to be given in CARO. (Clause v)

In ur case, since none of the directors or his relatives are a member of the firm, the prov of Sec 297 are not applicable. Subsequently 299 & 301 are also not applicable. (Since the Company in itself is a partner of the Firm). Hence also the reporting of CARO wouldnt be applicable.

Here the provisions of related party as contained in AS-18 comes into picture and not of the parties as required by Sec 301 of the Companies Act, 1956

As per AS-18 (if applicable to ur Company), the firm can be a related party by virtue of "Control" or "Significant Influence" depending upon ur specific case. if so then disclosures are required in "Notes on Accounts" of the Company for such transaction along with name, relation, etc.

1 more place to be wary of is the disallowance of expenditure under Sec 40A(2) of the Income Tax Act, which deals with transactions entered into with realted parties and whether such transactions are as per the prevailing market rates or not, Thus if the Company sold RMC at above the market rates such disallowance shall be attracted in the hands of the Firm.

lastly, u have not mentioned the position of the relatives of the directors in the Firm/ Company. so kindly check their applicablity before reaching your conclusions.

Hope the aplicability of various provisions in different acts as applicable in ur case would be helpful to u.

also i would request my peers to rectify me if any of my understanding of any of the above sections are not correct.

Regards

Pratul

CA Mukta Aggarwal (delhi) (102 Points)
Replied 27 April 2012

Sec 297 applicable on both pvt & public co but 2 following conditions are satisfied :-

contract with specified person &

specifeied contract.

In your case director is not partner or not member in the firm so xyz (firm) is not specified person.

ABC pvt co. itself partner in xyz (firm) i.e xyz (firm) is not called as specified person.

Hence sec 297 is not applicable on ABC pvt co.

prakash (Company Secretary) (1352 Points)
Replied 27 April 2012

Dear Anchal,

Section 297 of Companies Act not applicable in your case. the purspose section 297 is that being in place of office, Directors should not enter into contracts with Associated persons, firms companies at price prejudise to company and members of company.

In your case Company is partner, the section 297 is not attracted.