Loans

under Companies Act 1956/2013

P C Agrawal
B.Com., LL.B., CAIIB, FCS

[email protected]

20/2/2014 Download Source- www.taxguru.in

 Contents
MCA notification notifying 98 new sections under CA 2013

Sections relating to loans

Loans to directors & related parties

Inter-corporate loans & investments

Borrowings

Practical questions
 MCA Notification dated 12.9.2013
In exercise of the powers conferred by sub-section (3) of
section 1 of the Companies Act 2013 (18 of 2013), the Central
Government hereby appoints the 12th day of September 2013
as the date on which the following provisions of the said Act
shall come into force, namely:
…..
….

Sd/-
RENUKA KUMAR
Joint Secretary to the Government of India
 MCA circular dated 18.9.2013
on notification of 98 new sections

This Ministry had issued a notification on 12.09.2013 bringing into

force to 98 sections or part thereof of the Companies Act 2013. The
said notification is available on Ministry’s website. This Ministry
has been receiving requests for clarification as to whether the
provisions of the Companies Act 1956 corresponding to such 98
sections would continue to apply or not.

It is hereby clarified that with effect from 12.09.2013, the relevant

provisions of the Companies Act 1956, which correspond to
provisions of 98 sections of the Companies Act 2013 brought into
force on 12.09.2013 cease to have effect from that date.

This issues with the approval of the competent authority.

 Sections relating to loans
CA 1956 CA 2013 Date of
notification
Loans to directors etc. 295, 296 185 12/9/2013
Definitions
a) Body corporate 2(7), 2(11) --do—
b) Relatives 2(41) 2(77) --do--

Restrictions on powers 293 180 --do--

of Board
Powers of Board 292 179 Yet to be notified
Inter-corporate loans & 372A 186 --do--
investments
Acceptance of deposits 58A 2(31), 73, 74 --do--
 Loans to directors & related parties
Sections 295/296 of CA 1956 Sec. 185 of CA
(upto 11.9.2013) 2013
Specified 1. Any director of the lending co. or of a co. which No change.
related is its holding co.
parties 2. Any partner or relative of any such director
(SRPs) 3. Any firm in which any such director or relative is
a partner
4. Any private company of which any such director
is a director or member
5. Any body corporate at a general meeting of
which not less than 25% of total voting power
may be exercised or controlled by any such
director or by 2 or more such directors together
6. Any body corporate, the Board, MD or Manager
whereof is accustomed to act in accordance with
the directors or instructions of the Board or of
any director(s) of lending company
 Loans to directors & related parties
Sections 295/296 of CA 1956 Sec. 185 of CA 2013
(upto 11.9.2013)

Applicability 1. Direct or indirect loans (including Nos. 1 and 2 are

loans represented by book debts) to same. But No.3
specified related parties (SRPs) deleted.
2. Guarantee/security in connection with
loan made by any other person to SRPs
3. Guarantee/security in connection with
loan to any other person by SRPs
Procedure Approval of Central Govt. required. a) If covered in
E-Form 24-AB to be filed. exemptions:
Board resolution.
Sec.292: Power to make loan can be 2) If not covered in
exercised only at Board meeting (and not exemptions:
by circulation) Strictly prohibited.
No provision for CG
approval.
 Loans to directors & related parties
Sections 295/296 of CA 1956 Sec. 185 of CA 2013
(upto 11.9.2013)

Exemption a) Loan made or a) Loan to MD or WTD

guarantee/security given: i. As a part of conditions of service
extended by co. to all its
i. By Private companies employees, or
(unless subsidiary of public co.)
ii. Pursuant to any scheme approved
ii. By banking companies by members by special resolution
b) Loan by holding co. to
subsidiary b) A company which in the
c) Guarantee/security by holding ordinary course of business
co. for loan to subsidiary co. provides loans or gives
guarantee/ security for due
[As per Notification No.GSR 729 dated repayment of loan and interest
24.5.1978 not applicable to Govt companies
if approval of concerned Ministry is is charged at not less than
obtained.] bank rate declared by RBI.
 Loans to directors & related parties
Sections 295/296 of CA 1956 Sec. 185 of CA 2013
(upto 11.9.2013)

Penal 1. Fine upto Rs.50,000 or simple Imprisonment upto 6 months

provisions imprisonment upto 6 months or fine not less than Rs.5 lacs
[Sec.295(4)]. Exemption from but may extend to Rs.25 lacs or
imprisonment in case loan has with both.
been repaid.
No provision for exemption
2. Office of the director from imprisonment even if loan
concerned will become vacant u/s has been repaid.
283(1)(h).
 Meaning of ‘in the ordinary course of business’
in Section 185 of CA 2013

Mere inclusion in the Objects Clause of Memorandum is not sufficient

Lending by a banking company or an NBFC could be in the ordinary course

of business (but not in case of purely an investment company)

If the company lends not only to SRPs but also to unrelated parties on arms’
length basis, this could be considered as ‘in the regular course of business’.

Regularity and frequency of transactions could be an important criteria

 Meaning of ‘Save as otherwise provided in this Act’
in Section 185 of CA 2013

Only other Section dealing with loans in CA 2013 is Section 186 which is yet
to be notified. Its corresponding Section 372A in CA 1956 is in force.

Both Sections 372A of CA 1956 and 186 of CA 2013 do not deal with specified
related parties and hence conflict of interest may or may not be there.

Since Section 185 deals with cases where conflict of interest is there, it will
prevail over provisions of Sec.372A of CA 1956.

Hence it may be said that there is no impact of the term ‘Save as otherwise
provided in this Act’ in Section 185 of CA 2013.
 Definition of ‘body corporate’
Section 2(7) of 1956 Act: Section 2(11) of 2013 Act:

“body corporate” or ‘corporation’ Same

includes a company incorporated
outside India but does not include— [except that (a) – a corporation sole
a) A corporation sole; deleted]
b) A cooperative society registered
under any law relating to General characteristics:
cooperative societies; and
c) Any other body corporate (not  Incorporated under some law
being a company as defined in this  Perpetual succession
Act) which the Central Govt. may  Common seal
by notification in the Official  Legal entity apart from the
Gazette, specify in that behalf. members
 Definition of ‘body corporate’
Examples of ‘body corporates’: These are not bodies
corporates:
1. All companies registered under
Indian Companies Act
2. All companies registered under any 1. Proprietorship concerns
Act outside India
3. Any Corporation registered under 2. Partnership firms (other
any special law in India or abroad than LLPs)
4. Public financial institutions u/s 4A 3. HUFs
of Companies Act 1956
5. Nationalised banks incorporated 4. Societies registered under
under Banking Companies Societies Registration Act
(Acquisition & Transfer of
Undertakings) Act 1970 5. Mutual funds managed by
6. LLPs trustees (except UTI)
 Definition of ‘relatives’
under CA 1956
Section 2(41): Schedule 1A [See Section 6(c)]
LIST OF RELATIVES
“relative” means, with reference to any
person, any one who is related to such 1. Father
2. Mother (including step-mother)
person in any of the ways specified in 3. Son (including step son)
4. Son’s wife
section 6, and no others. 5. Daughter (including step daughter)
6. Father’s father
7. Father’s mother

Section 6: 8. Mother’s mother

9. Mother’s father
A person shall be deemed to be a 10. Son’s son
11. Son’s son’s wife
relative of another if, land only if, -- 12. Son’s daughter
13. Son’s daughter’s husband
a)They are members of a Hindu 14. Daughter’s husband

undivided family; or 15. Daughter’s son

16. Daughter’s sons’s wife
b)They are husband and wife; or 17. Daughter’s daughter
18. Daughter’s daughter’s husband
c) The one is related to the other in the 19. Brother (including step-brother)
20. Brother’s wife
manner indicated in Schedule 1A. 21. Sister (ioncluding step sister)
22. Sister’s husband
 Definition of ‘relatives’
under CA 2013
Section 2(77): Draft Rule 1.4 (yet to be notified)
LIST OF RELATIVES
For the purpose of sub-clause (iii) of sub-section (77) of Section
“relative” with reference to any person, means any 2, a person shall be deemed to be the relative of another, if he or
one who is related to another, if— she is related to another in the following manner:

a)They are members of a Hindu undivided family; 1. Spouse

2. Father (including step father)
or
3. Father’s father
b)They are husband and wife; or 4. Father’s mother
c) One person is related to the other in such 5. Mother (including step-mother)
manner as may be prescribed. 6. Mother’s mother
7. Mother’s father
Thus it will be noticed that the following are proposed to be omitted from list of
relatives: 8. Son (including step-son)
9. Son’s wife
1. Son’s son’s wife 10. Son’s son
2. Son’s daughter’s husband
11. Son’s daughter
3. Daughter’s son
4. Daughter’s son’s wife 12. Daughter (including step daughter)
5. Daughter’s daughter 13. Daughter’s husband
6. Daughter’s daughter’s husband 14. Brother (including step brother)
7. Brother’s wife
15. Sister (including step sister)
8. Sister’s husband
 Meaning of ‘control’
Section 2(27) of Companies Act 2013:

“control” shall include the right to appoint majority of the

directors or to control the management or policy
decisions exercisable by a person or persons acting
individually or in concert, directly or indirectly, including
by virtue of their shareholding or management rights or
shareholders agreement or voting agreements or in any
other manner.”
 Meaning of ‘Loans’
Loans vs. Deposits:

Loan is lending of money with absolute promise to repay. There is a difference between loan and deposit. However, courts have held that for the
purposes of Sec.295 of CA 1956 the difference is immaterial and the Section cannot be evaded by describing monies of a company advanced to a
director as deposits. Sec.372A of CA 1956 specifically provides that loan includes deposits. However, there is no such mention in CA 2013.

Loans vs. advance:

There is a difference between loan and advance also. Loan is repayable whereas advance is to be adjusted
against supply of goods or services. Salary advance is an example. Advance is not covered under restrictive
provisions of Companies Act.

Whether subscription of debentures is a loan?

Subscription of debentures is not a loan u/s 185 of CA 2013. However, Sec.372A of CA 1956 specifically provides that loan
includes debentures.

Whether book debts could be loans?

If book debt is prolonged beyond usual credit period, it could be considered as a loan.
 Bank rate declared by RBI
From To Rate From To Rate
Upto 28.02.1979 6% 22.7.2000 16.2.2001 8%
1.3.1979 11.7.1981 9% 17.2.2001 28.2.2001 7.5%
12.7.1981 3.7.1991 10% 1.3.2001 22.10.2001 7%
4.7.1991 7.10.1991 11% 23.10.2001 29.10.2002 6.5%
8.10.1991 30.12.1992 12% 30.10.2002 29.4.2003 6.25%
1.1.1993 15.4.1997 12% 30.4.2003 13.2.2012 6%
16.4.1997 25.6.1997 11% 14.2.2012 18.4.2012 9.5%
26.6.1997 21.10.1997 10% 19.4.2012 19.3.2013 9%
22.10.1997 16.1.1998 9% 20.3.2013 2.5.2013 8.5%
17.1.1998 18.3.1998 11% 3.5.2013 14.7.2013 8.25%
19.3.1998 2.4.1998 10.5% 15.7.2013 19.9.2013 10.25%
3.4.1998 28.4.1998 10% 20.9.2013 6.10.2013 9.5%
29.4.1998 28.2.1999 9% 7.10.2013 28.10.2013 9%
1.3.1999 31.3.2000 8% 29.10.2013 27.1.2014 8.75%
1.4.2000 21.7.2000 7% 28.1.2014 Till date 9%

Source: http://www.dicgc.org.in/English/FB_BankRate.html
 Section 462 of CA 2013
Power to exempt class or classes of companies from provisions of this Act.

(1) The Central Government may in the public interest, by notification direct that
any of the provisions of this Act, --

(a) Shall not apply to such class or classes of companies; or

(b) Shall apply to the class or classes of companies with such exceptions,
modifications and adaptations as may be specified in the notification.

(2) …..”

Note: No exemption notification has been issued by MCA so far under Section 462
of CA 2013.
Section 2(22)(e) of Income Tax Act relating
to deemed dividend
Loan given to shareholder holding more than 10% of voting power could be deemed to be
dividend. Section 2(22)(e) of IT Act reads as under:

2. “In this Act, unless the context otherwise requires—

3. (22) ‘dividend’ includes:
 (e) any payment by a company, not being a company in which the public are substantially
interested, of any sum (whether as representing a part of the assets of the company or
otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a
shareholder, being a person who is the beneficial owner of shares (not being shares entitled
to a fixed rate of dividend whether with or without a right to participate in profits) holding
not less than ten per cent of the voting power, or to any concern in which such shareholder
is a member or a partner and in which he has a substantial interest (hereafter in this clause
referred to as the said concern)] or any payment by any such company on behalf, or for the
individual benefit, of any such shareholder, to the extent to which the company in either
case possesses accumulated profits ;
Section 2(22)(e) of Income Tax Act relating
to deemed dividend
but "dividend" does not include—
 (i)  a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued
for full cash consideration, where the holder of the share is not entitled in the event of liquidation to
participate in the surplus assets ;
(ia)  a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution
is attributable to the capitalised profits of the company representing bonus shares allotted to its equity
shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965 ;
(ii)  any advance or loan made to a shareholder or the said concern by a company in the ordinary course of
its business, where the lending of money is a substantial part of the business of the company ;
(iii)  any dividend paid by a company which is set off by the company against the whole or any part of any
sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to
which it is so set off;
[(iv)  any payment made by a company on purchase of its own shares from a shareholder in accordance
with the provisions of section 77A5 of the Companies Act, 1956 (1 of 1956);
(v)  any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the
demerged company (whether or not there is a reduction of capital in the demerged company).
Section 2(22)(e) of Income Tax Act relating
to deemed dividend
Explanation 1.—The expression "accumulated profits", wherever it occurs in this clause, shall
not include capital gains arising before the 1st day of April, 1946, or after the 31st day of
March, 1948, and before the 1st day of April, 1956.
Explanation 2.—The expression "accumulated profits" in sub-clauses (a), (b), (d) and (e), shall
include all profits of the company up to the date of distribution or payment referred to in those
sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of
liquidation, 6[but shall not, where the liquidation is consequent on the compulsory acquisition
of its undertaking by the Government or a corporation owned or controlled by the
Government under any law for the time being in force, include any profits of the company
prior to three successive previous years immediately preceding the previous year in which such
acquisition took place.
Explanation 3.—For the purposes of this clause,—
 (a)  "concern" means a Hindu undivided family, or a firm or an association of persons or a
body of individuals or a company ;
 (b)  a person shall be deemed to have a substantial interest in a concern, other than a
company, if he is, at any time during the previous year, beneficially entitled to not less than
twenty per cent of the income of such concern ;
Extracts from RBI Act relating to NBFC
Section 45-I:
(c) ‘financial institution’ means any non-banking institution which carries on as its business
or part of its business any of the following activities, namely ---
(i) the financing, whether by way of making loans or advances or otherwise, of any activity
other than its own;
(ii) the acquisition of shares, stocks, bonds, debentures or securities issued by a Government
or local authority or other marketable securities of a like nature;
(iii) …..
……..
but does not include any institution, which carries on as its principal business, ----
……
(b) Industrial activity, or
……
(f) ‘non-banking financial company’ means ---
(iv) a financial institution which is a company; or
(v) ……
Extracts from RBI Act relating to NBFC
RBI Press Release dated 8.4.1999
The Reserve Bank of India on 8.4.1999 announced that in order to identify a particular
company as a NBFC, it will consider both, the assets and the income pattern as evidenced by
the last audited balance sheet of the company to decide its principal business. The company
will be treated as NBFC if its financial assets are more than 50 percent of its total
assets (netted off by intangible assets) and income from financial assets should be
more than 50 percent of the gross income. Both these tests are required to be
satisfied as the determinant factor for principal business of a company.
Section 45-IA:
(1) Notwithstanding anything contained in this Chapter or in any other law for the time
being in force, no non-banking financial company shall commence or carry on any business
of a non-banking financial institution without ---
a) Obtaining a certificate of registration issued under this Chapter; and
b) Having the net owned fund of twenty-five lakh rupees or such other amount, not
exceeding two hundred lakh rupees, as the Bank may, by notification in the official
gazette, specify.
Other points relating to loans/ guarantees

Loans may or may not carry interest

Excess remuneration paid could be treated as a loan
Sale on credit is not loan [Bombay High Court in Fredie Ardeshir Mehta v.
Union of India (1991)]
Whether letter of comfort is a guarantee?
Letter of comfort may involve moral obligation but not contractual
obligation and is not a guarantee and hence not covered under restrictive
provisions of the Act.
Government had issued guidelines on 12.11.1976 for loans
to directors for house building without approval of CG.
Inter-corporate loans &
investments
(Sec.372A of CA 1956)
 Inter-corporate loans & investments
(Sec.372A)
Applicability 1. Loan to any other body corporate
2. Guarantee/security in connection with loan made by
any other person to any body corporate
3. Guarantee/security in connection with loan made to
any other person by any body corporate
4. Acquisition by way of subscription, purchase or
otherwise the securities of any other body corporate
Pre-condition No default u/s 58A
Ceiling Without approval of members:
applicable Upto 60% of paid-up share capital and free reserves of lending
company, or 100% of free reserves, whichever is more.
With approval of members:
Such limit as may be specified in the special resolution.
Restriction Co. cannot give loan for purchase of its own shares [Sec.77(2)]
Inter-corporate loans & investments
(Sec.372A) Contd…
Procedure a) Unanimous resolution of Board members present
b) Special resolution of shareholders (if applicable)
c) Prior approval of public financial institution u/s 4A
(if term loan is subsisting and there is default in
repayment of loan or payment of interest)
d) Entry in register of loans & investments within 7 days
Rate of interest Not lower than prevailing Bank rate prescribed by RBI
Exemption 1. Banking/insurance/housing finance co. in ordinary course
of business or a co. established with the object of financing
industrial enterprises, or of providing infrastructural
facilities
2. Co., whose principal business is acquisition of shares,
stock, debentures or other securities
3. Private co., unless it is subsidiary of a public co.
4. Investment made in pursuance of shares allotted u/s 81(1)
(a) Contd…
Inter-corporate loans & investments
(Sec.372A) Contd…

Exemption 5. Loan by a holding co. to its wholly owned subsidiary

co.
6. Guarantee/security by holding co. in respect of loan
to its wholly owned subsidiary
7. Acquisition by holding co. the securities of its wholly
owned subsidiary

Penal provisions Imprisonment upto 2 years or fine upto Rs.50,000/-

(Rs.5,000 in case of default in connection with register of loans & investments +
Rs.5,000 per day in case of continuing default).
 MCA circular dated 19.11.2013 on
Sec.372A
This Ministry has received number of representations
consequent upon notifying Section 185 of the Companies Act
2013 dealing with loans to directors which is corresponding to
Section 295 of the Companies Act 1956. Section 186 of the
Companies Act 2013 is yet to be notified.

It is clarified that Section 372A of the Companies Act 1956

dealing with inter-corporate loans continue to remain in force
till section 186 of the Companies Act 2013 is notified.

This issues with the approval of competent authority.

 MCA Valentine Day circular
dated 14.2.2014 on Sec.185 of CA 2013

This Ministry has received number of representations on the applicability of Section 185 of the
Companies Act 2013 with reference to loans made, guarantee given or security provided under
Section 372A of the Companies Act 1956. The issue has been examined with reference to
applicability of Section 372A of the Companies Act 1956 vis-à-vis Section 185 of the Companies
Act 2013. Section 372A of the Companies Act 1956 specifically exempts any loans made, any
guarantee given or security provided or any investment made by a holding company to its
wholly owned subsidiary. Whereas, Section 185 of the Companies Act 2013 prohibits guarantee
given or any security provided by a holding company in respect of any loan taken by its
subsidiary company except in the ordinary course of business.

2. In order to maintain harmony with regard to applicability of Section 372A of the Companies
Act 1956 till the same is repealed and Section 185 of the Companies Act 2013 is notified, it is
hereby clarified that any guarantee given or security provided by a holding company in respect
of loans made by a bank or financial institution to its subsidiary company, exemption as
provided in clause (d) of sub-section (8) of Section 372A of the Companies Act 1956 shall be
applicable till Section 186 of the Companies Act 2013 is notified. This clarification will, however,
be applicable to cases where loans so obtained are exclusively utilised by the subsidiary for its
principal business activities.
 MCA circular dated 4.6.1999 on
section 372A
The provisions in the Companies Act, 1956, relating to inter-corporate investments, loans and
guarantees have been recently liberalised by the Government through Companies (Amendment) Act,
1999. However, apprehensions have been expressed in some quarters with regard to possible misuse
of these provisions by companies. I shall, therefore, be grateful if the chambers could draw the
attention of their constituents to the following:
(i) The companies are expected to obtain the approval for making investments into securities or
grant of loan to other companies of amounts which are linked with company’s available financial
resources and the resolution, for investment much beyond the networth should not be passed by the
companies.
(ii) The companies should specifically indicate in the explanatory statement to the resolution, the
specific securities in which it is proposed to invest the amount. En bloc approval should normally be
avoided (except in the case of guarantee where the resolution can indicate an amount on annual
basis).
2. If the above broad parameters are not complied with, the Government will be constrained to take
suitable action against those who contravene these.

Circular : No. 8 of 1999, dated 4-6-1999.

Borrowing
 Borrowing
Ceiling on Without members approval:
borrowing Aggregate of paid-up capital and free reserves (apart from
temporary loans from bankers in ordinary course of business)

With members approval:

As specified in members resolution
[Ordinary resolution u/s 292(1)(c) of CA 1956 upto 11.9.2013 and special
resolution u/s 180(1)(c) of CA 2013 w.e.f. 12.9.2013 – applicable to private co.
also]

Care to be taken 1. Board resolution at Board meeting only (& not by circulation)
[Sec.292(1)(c) of CA 1956]
2. Check applicability of Section 58A read with Companies
(Acceptance of Deposits) Rules 1975 --
3. Co. cannot give loan for purchase of its own shares
4. Check applicability of Sec.14A of IT Act – disallowance of
interest on loan
5. Check Object clause of Memorandum
6. Check applicability of provisions of RBI Act for NBFC
7. Check RBI regulations in case of borrowing from foreign
company
8. Check position of current ratio & net worth
 CBDT circular dated 11.2.2014
on disallowance u/s 14A of IT Act
Section 14A of the Income-tax Act 1961 (‘Act’) provides for disallowance of expenditure in relation to
income not ‘includible’ in total income.

2. A controversy has arisen in certain cases as to whether disallowance can be made by invoking
section 14A of the Act even in those cases where no income has been earned by an assessee which
has been claimed as exempt during the financial year.

3. The matter has been examined in the Board. It is pertinent to mention that section 14A of the Act
was introduced by the Finance Act 2001 with retrospective effect from 01.04.1962. The purpose for
introduction of section 14A with retrospective effect since inception of the Act was clarified vide
Circular No.14 of 2001 as under:

“Certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act.
There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tas
incentive given by way of exemptions to certain categories of income is being used to reduce aslo the tax payable on the non-exempt
income by debiting the exepenses incurred to earn the exempt income against taxable income. This is against the basic principles of
taxation whereby only the net income, i.e. gross income minus the expenditure, is taxed. On the same analogy, the exemption is
also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of such
taxable income”.
Thus, legislative intent is to allow only that expenditure which is relatable to earning of
income and it therefore follows that the expenses which are relatable to earning of exempt
income have to be considered for disallowance, irrespective of the fact whether any such
income has been earned during the financial year or not.

4. The above position is further clarified by the usage of term ‘includible’ in the Heading to
section 14A of the Act and also the Heading to Rule 8D of I.T. Rules, 1962 which
indicates that it is not necessary that exempt income should necessarily be included in a
particular year’s income, for disallowance to be triggered. Also, section 14A of the Act
does not use the word ‘income of the year’ but ‘income under the Act’. This also
indicates that for invoking disallowance under section 14A, it is not material that
assessee should have earned such exempt income during the financial year under
consideration.
5. The above position is further substantiated by the language used in Rule 8D(2)(ii) &
8D(2)(iii) of I.T. Rules which are extracted below:

“(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly
attributable to any particular income or receipt an amount computed in accordance with the following formula, namely:

A*B/C
Where….
B= the average of value of investment, ;income from which does not or shallnot form part of the
total income as appearing the in the balance sheet of the assessee, on the first day and the last day
of the previous year;
……
(iii) An amount equal to one-half percent of the average of the value of investment, ;income from
which does not or shalll not form part of the total income, as appearing in the balance-sheet of
the assessee, on the first day and the last day of the previous year.”
(Emphasis added)

6. Thus in light of above, Central Board of Direct Taxes, in exercise of its

powers under section 119 of the Act hereby clarifies that Rule 8D read
with section 14A of the Act provides for disallowance of the
expenditure even where taxpayer in a particular year has not earned
any exempt income.

7. This may be brought to the notice of all concerned.

8. Hindi version to follow.

 Rule 2(b)(ix)
of Companies (Acceptance of Deposits) Rules 1975
2. “In these rules, unless the context otherwise requires, ----
(a)….
(b) “deposit” means any deposit of money with, and includes any amount
borrowed by, a company, but does not include ----

……
(ix) Any amount received from a person who, at the time of receipt of the amount,
was a director of the company or any amount received from a relative of a director
or its member by a private company ----

Provided that the director, relative of a director or a member, as the case may be,
from whom money is received, furnishes to the company at the time of giving the
money, a declaration in writing to the effect that the amount is not being given
out of funds acquired by him by borrowing or accepting from others;”
Practical Questions
 Q.1
Can ABC Ltd accept loan from:

a) Mr A, Director of the company

b) Mr B, Shareholder of the company
c) Mr C, Director & shareholder of the company
d) Mr E, son of MD of the company
 Q.2

ABC Pvt Ltd granted loan to its employee Mr A on 1.10.2013 .

Subsequently, Mr A was appointed as a director of the
company. Is there any contravention?
 Q.3

ABC Ltd gives loan to XYX Ltd. Mr A is a director in

both companies. Subsequently, XYZ Ltd is
converted into private limited company. Is there any
contravention of company law?
 Q.4

Can ABC Ltd give corporate guarantee to bank for

giving loans to its wholly owned subsidiary abroad?
 Q.5

ABC Private Ltd proposes to give loan to Mr A who is

sister’s husband of a director of the company. Is it
permitted u/s 185 of CA 2013?
 Q.6

ABC Ltd proposes to give loan to a private limited company

incorporated in Germany. Mr A is a director in both
companies, but no director of ABC Ltd is holding any shares
of Germany company. Is it permitted u/s 185 of CA 2013?
 Q.7

Mr A is a member of ABC Pvt Ltd and XYZ Pvt Ltd.

XYZ Pvt Ltd gives loan to Mr X. Can ABC Pvt Ltd
give guarantee for the loan?
 Q.8

Mr A, who is director of ABC Ltd, is also a trustee of a public

charitable trust. The Trust requests the company to give
some loan. Can the company give loan to the Trust?
 Q.9

Paid-up capital & free reserves of ABC Ltd are to the extent
of Rs.10 crores. However, ordinary resolution u/s 293(1)(d)
of CA 1956 has been passed permitting borrowing upto
Rs.15 crores. Accordingly, company borrowed by way of
term loan of Rs.12 crores on 1.9.2013. Repayment of term
loan will start from 1.4.2014. Is there any contravention?
 Q.10:

In the above case, the company took a second term loan

of Rs.3 crores on 1.10.2013 by just passing Board
resolution. Is there any contravention?
 Q.11

Paid-up capital and free reserves of ABC Ltd as on 31.3.2013

were to the tune of Rs.10 crores. Profit after tax of the
company for 9 months period ended 31.12.2013 was Rs.2
crores. Company wants to take term loan of Rs.12 crores in
February 2014. Can it do so by passing Board resolution?
 Q.12

In the above example, can the company take Cash Credit

limit of Rs.12 crores from SBI instead of term loan of
Rs.12 crores by passing Board resolution?
 Q.13

Paid-up capital and free reserves of ABC Ltd as on

31.3.2013 were to the tune of Rs.10 crores. Company had
taken term loan of Rs.10 crores in the year 2010 and
outstanding as on 31.3.2013 was Rs.2 crores. Now the
company wants to take new term loan of Rs.8 crores and
cash credit limit of Rs.5 crores in February 2014. Can it
do so by passing Board resolution?
 Q.14:

Paid-up capital and free reserve of ABC

Ltd is Rs.10 crores. It has invested
Rs.10 crores in Reliance Mutual Fund.
Is there any contravention?
54
P C Agrawal
[email protected]