Income Tax Provisions related to loan from relatives, friends and others

CA AYUSH AGRAWAL (SHARP & ASS) , Last updated: 27 October 2023
Share

Introduction: Transaction of unsecured/secured loan from non-government & banking companies are generally traced & monitored by income tax departments. so it is important to know what are the sections that affect your daily transactions and how these transactions are dealt with in Assessment proceedings. Hence it is very important to have some elementary knowledge of such Tax Provisions.

1. Restriction as per Income Tax Act 1961:

Restriction on acceptance and repayment of loan in cash:

Sections 269SS and 269T have been discussed in this article and this deals with cash payment and repayment of loans and deposits. Both the sections were introduced to curb the black money. Tax evasion is one of the serious problems in India causing economic disparities. False cash transactions give birth to unaccounted money which in turn increases tax evasion.

Section 269SS:

A person cannot accept loan or deposit or any other specified sum (specified sum here refers to an advance or otherwise, in relation to the transfer of any immovable property) from another person otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, if -

Amount of loan or deposit or specified sum is Rs. 20,000 or more, or
Sum total amount of loan, deposit and the specified sum is Rs. 20,000 or more. For example - Vikas wants to take a loan of Rs. 10,000, a deposit of Rs. 5,000 and advance of Rs. 7,000 from Ajay, he cannot accept it in cash because the total sum is 22,000.
In a case where a person had already received a loan, deposit or specified sum from the depositor (person giving the loan, deposit or specified sum) but the loan or deposit or specified sum hasn’t been paid back in such case, if the unpaid loan or deposit or-specified sum is Rs. 20,000 or more, or
Sum total amount of (1), (2) and (3) is Rs. 20,000 or more.

Therefore, in nutshell, a person cannot accept cash loan or deposit of Rs. 20,000 or more from another person.

Exceptions to 269SS

1. Any loan or deposit or specified sum "taken or accepted from" or "taken or accepted by" the following entities:

a. The Government
b. Any banking company, post office savings bank or co-operative bank
c. Any corporation established by a Central, State or Provincial Act
d. Any Government company as defined in clause (45) of section 2 of the Companies Act, 2013 (18 of 2013)
e. Any institution, association or body or class of institutions, associations or bodies notified in Official Gazette

Thus, if any person accepts any loan or deposit or specified sum from the above-mentioned entities, or the entities accept any loan or deposit or specified sum from any person, provisions of 269SS will not apply.

A person earning only agriculture income accepts loan or deposit from another person also earning only agriculture income
Receiving cash from relative during emergencies. Here intention should not be to evade the taxes.
Partners contributing cash capital into partnership firm

Penalty on contravention of Section 269SS

100% of the loan or deposit amount will be the quantum of penalty that can be levied by the assessing officer.

Section 269T

Section 269T prohibits any person to repay the loan or deposit or specified sum otherwise than by an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account, if :

a. Amount of loan or deposit, including interest amount, is Rs. 20,000 or more, or
b. The aggregate amount of loans or deposits, including the interest amount, held by such person in his own name, or jointly with any person, is Rs. 20,000 or more.

In nutshell, a person cannot repay the loan or deposit in cash, if the amount is Rs. 20,000 or more.

Exceptions to Section 269T

A person paying Rs. 20,000 or more towards repayment of loan or deposit does not have to comply with 269T if he pays to the following parties -

a. The government,
b. Any banking company, post office savings bank or co-operative bank,
c. Any corporation established by a Central, State or Provincial Act,
d. Any Government company as defined in section 617 of the Companies Act, 1956,
e. Other notified institutions

Income Tax Provisions related to loan from relatives, friends

Penalty on contravention of Section 269T

100% of the loan or deposit amount will be the penalty leviable by the assessing officer.

Reporting of 269SS & 269T Transactions

In clause 31 of Form 3CD, the tax auditor has to report the transactions that have been hit by the provisions of Sections 269SS and 269T . Both the parties (payer and receiver) have to report the transactions. Clause 31 of Form 3CD is where these need to be reported.

Interest on unsecured loan

Rate of interest can me mutually decided by giver & accepter of loan or deposit or any other specified sum (specified sum here refers to an advance or otherwise, in relation to the transfer of any immovable property) . It can also be Interest free ( No notional interest can be added in hands of giver & accepter of loan or deposit or any other specified sum by Assessing officer in case of interest free loan)

Exception

1. The loan from employer to employee may be interest-free or at a concessional rate. If the aggregate amount disbursed as a loan is more than Rs.20,000. is taxable as a ‘perquisite’ in the hand of employee.

2. Interest payable to partners by partnership firm shall not exceed 12% per annum . Any amount in excess of 12 % will be disallowed.

TDS on interest

PERSONS REQUIRED TO DEDUCT TDS UNDER SECTION 194A

Following persons are required to deduct TDS:-

Individual and HUF who are liable to audit under audit under section 44AB in the preceding year. However only individual and huf who are liable for audit due to point (a) and (b) in section 44AB are required to deduct TDS.
All other assessees i.e. Partnership Firm, Company, AOP, BOI

When does TDS under Section 194A need to be deducted?

The Payer/Deductor shall deduct TDS if the amount of such interest paid or credited OR is likely to be paid or credited in a financial year, exceed

40,000 where the payer is

Banking company or any bank or a banking institution
Co-operative society engaged in the business of banking
Post office (on deposit under scheme framed and notified by Central Government).
5,000 in any other case
From FY 2018-19 onwards no TDS will be deducted on interest earned upto INR 50,000 by senior citizens. The interest amount should be earned from the following:
- Deposits with banks;
- Deposits with post offices
- Fixed deposit schemes
- Recurring deposit schemes

What is the rate of TDS?

Following are the applicable rates of taxes:

10% when the PAN is furnished;
20% if the PAN is not provided.
No surcharge, education cess or SHEC shall be added to the above rates. Hence, tax will be deducted at source at the basic rate.

So payment or credit of interest on unsecured loan taken from relatives , Friends or other non banking institutions exceeds Rs 5000 are liable to deduct TDS u/s 194A .

Practical issues in transaction of unsecured/ secured loan from relatives, friends & others (except from banking companies & government institutions etc)

Assessing officers may raise questions on gentility of loan transaction even transaction is done through electronic mode.

What is "Unregulated Deposit Scheme"?

This term is defined in the Ordinance u/s 2(17) which provides that Unregulated Deposit Scheme means a scheme or an arrangement under which deposits are accepted or solicited by any deposit taker by way of business and which is not regulated deposit schemes as specified in First Schedule of the Ordinance

The regulated schemes are such which are regulated by following regulators, namely

IRDA
State Governments
National Housing Bank
Pension fund regulatory and development authority (PFRDA)
Employees Provident Fund Organization (EPFO)
Central Registrar Multi-state Co-operative Societies
Ministry of Corporate Affairs (MCA)

This Ordinance only covers the Deposit Schemes which are unregulated and which are accepted by any deposit taker by way of business such as illicit deposit / ponzi schemes / unregulated chit funds that hurt small investors.

Now question arise, whether amount received by an Individual as a loan from his friends or relative is covered under this Ordinance? The answer is NO.

This Ordinance is applicable in case of unregulated deposit schemes. Any acceptance of deposit or advance from friends, whether for personal or business purposes, are out of the ambit of this Ordinance. In a series of tweets, the Department of Financial Services has also clarified that this Ordinance exempts Individual, Firm, companies & LLP etc. from taking any loan and deposit for their course of business as well as definition is also clear. So here, it is noteworthy to understand the difference between "Deposits for Business" and "Business of Accepting Deposits" and according to this Ordinance, later one i.e. "Business of Accepting Deposits" which is Unregulated, is Banned.

3. Restriction as per Companies Act 2013- Refer section 185(1)(2)(3), 186(2)(3) , 73 & 76 for details

Sec 185 (Subsection 1) A Company (Private & Public whether small, OPC, Start-ups etc.) shall not directly or indirectly, advance any loan (including loan represented by a Book debt) OR give any guarantee OR provide any security in connection with any loan take by:

a) Any director of the company; or
b) Any director of its holding company; or
c) Any partner of any such director; or
d) Relative of any such director;
e) Any firm in which any such director is a partner; or
f) Any firm in which the relative of any such director is a partner;

Subsection 2 states that a Company can advance any loan (including Book debt) or give any guarantee or provide any security in connection with any loan taken by

(a) any private company of which any such director is a director or member;
(b) any body corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by

a. any such director, or
b. by two or more such directors, together; or

(c) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the

a. Board; or of
b. any director or directors, of the lending company.

However, the above provisions are subject to following conditions that:

a) A special resolution is passed by the Company in general meeting; and
b) The loans are utilised by the borrowing company for its principal business activities.

Subsection 2 allows companies to provide loan/guarantee/security to other Companies / body corporates subject to conditions. This was earlier prohibited and now relaxed.

As per Subsection 3, the following entities and individuals are exempted from complying with subsection 1 & 2 as explained above, subject to certain conditions:

a) giving of any loan to a managing or whole-time director - (i) as a part of the conditions of service extended by the company to all its employees; or (ii) pursuant to any scheme approved by way of special resolution;

b) Company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan e.g Banking Companies and Loan NBFCs. (In respect of such loans an interest shall be charged at a rate not less than the rate of prevailing yield of 1 year, 3 years, 5 years or 10 years Government security closest to the tenor of the loan);

c) any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; (in case of WOS complete relaxation from Sec. 185).

d) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company. (Unlike class ‘C’ (i.e WOS) only Guarantee & Securities provided for loan made by any bank or financial institution are allowed for subsidiary company).

Provided that the loans made under clauses (c) and (d) are utilized by the subsidiary company for its principal business activities.

(In order to ensure that the companies do not take advantage of the relief, the provision ensure that there is no siphoning of funds received by the companies, as the amount received under this section should be utilised by the borrower for its principal business activities and not for further investment or grant of loan.)

(Even though ‘principal business activity’ has not been defined under the Act, generally the activities provided in the main objects of the MOA will qualify as the principal business activity of that company)

Limits for Loan/Guarantee/Security/Investments (Sec-186(2)) :-

According to the provisions of sec-186(2) of the Companies Act 2013, No company shall directly or indirectly, give any loan, guarantee, provide any security to a person or other body corporate or make any investment in the securities of any other body corporate, exceeding-

√ 60% of its Paid-up Share Capital + Free reserves + Securities Premium Account; OR
√ 100% of its Free reserves + Securities Premium Account;

Whichever is more.

The Board of directors of the company can give loan, guarantee, or provide security and make investment within the limits specified u/s 186(2), by passing a board resolution at the meeting of Board of Directors of the company.

Note: Section 186(2) shall not apply on Specified IFSC public and private company if a company passes a resolution either at a meeting of the Board of Directors or by circulation.

Approval from Members (Sec-186(3)):-

According to the provisions of sec - 186(3) of the Companies Act 2013, a Company can give loan, guarantee or provide any security or make any investment beyond the limits specified u/s 186(2), subject to prior approval of members by a special resolution passed at a general meeting.

Prohibition on Acceptance of Deposits from Public Section 73 & 76

73. (1) On and after the commencement of this Act, no company shall invite, accept or renew deposits under this Act from the public except in a manner provided under this Chapter:

Provided that nothing in this sub-section shall apply to a banking company and non-banking financial company as defined in the Reserve Bank of India Act, 1934 (2 of 1934) and to such other company as the Central Government may, after consultation with the Reserve Bank of India, specify in this behalf.

(2) A company may, subject to the passing of a resolution in general meeting and subject to such rules as may be prescribed in consultation with the Reserve Bank of India, accept deposits from its members on such terms and conditions, including the provision of security, if any, or for the repayment of such deposits with interest, as may be agreed upon between the company and its members, subject to the fulfilment of the following conditions, namely:-

(a) issuance of a circular to its members including therein a statement showing the financial position of the company, the credit rating obtained, the total number of depositors and the amount due towards deposits in respect of any previous deposits accepted by the company and such other particulars in such form and in such manner as may be prescribed;

(b) filing a copy of the circular along with such statement with the Registrar within thirty days before the date of issue of the circular;

(c) depositing, on or before the thirtieth day of April each year, such sum which shall not be less than twenty per cent. of the amount of its deposits maturing during the following financial year and kept in a scheduled bank in a separate bank account to be called deposit repayment reserve account;]

(d) [Omitted]

(e) certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on [such deposits and where a default had occurred, the company made good the default and a period of five years had lapsed since the date of making good the default] and

(f) providing security, if any for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the property or assets of the company:

Provided that in case where a company does not secure the deposits or secures such deposits partially, then, the deposits shall be termed as "unsecured deposits" and shall be so quoted in every circular, form, advertisement or in any document related to invitation or acceptance of deposits.

(3) Every deposit accepted by a company under sub-section (2) shall be repaid with interest in accordance with the terms and conditions of the agreement referred to in that sub-section.

(4) Where a company fails to repay the deposit or part thereof or any interest thereon under sub-section (3), the depositor concerned may apply to the Tribunal for an order directing the company to pay the sum due or for any loss or damage incurred by him as a result of such non-payment and for such other orders as the Tribunal may deem fit.

(5) The deposit repayment reserve account referred to in clause (c) of sub-section (2) shall not be used by the company for any purpose other than repayment of deposits.

Amendment

4. Substituted by the Companies (Amendment) Act, 2017 - Amendment Effective from 5th July 2018

In section (73),sub section (2),clause (c)

"(c) depositing such sum which shall not be less than fifteen per cent of the amount of its deposits maturing during a financial year and the financial year next following, and kept in a scheduled bank in a separate bank account to be called as deposit repayment reserve account".

The following Clause shall be substituted, namely :-

"(c) depositing, on or before the thirtieth day of April each year, such sum which shall not be less than twenty per cent. of the amount of its deposits maturing during the following financial year and kept in a scheduled bank in a separate bank account to be called deposit repayment reserve account;"

5.Omitted by the Companies (Amendment) Act, 2017 - Amendment Effective from 5th July 2018

Original Content Omitted- providing such deposit insurance in such manner and to such extent as may be prescribed;

6.Substituted by the Companies (Amendment) Act, 2017 - Amendment Effective from 5th July 2018

In section (73),sub section (2), clause (e) for the words:- "such deposits"

The following words shall be substituted, namely :-

"such deposits and where a default had occurred, the company made good the default and a period of five years had lapsed since the date of making good the default"

Exceptions/ Modifications/ Adaptations

1. In case of private company - Clause (a) to (e) of Sub-section 2 of Section 73 shall not apply to private Companies which accepts from its members monies not exceeding one hundred per cent, of aggregate of the paid up share capital and free reserves, and such company shall file the details of monies so accepted to the Registrar in such manner as may be specified. - Notification dated 5th June, 2015.

2. In case of Specified IFSC Public Company - Clauses (a) to (e) of subsection (2) of section 73 Shall not apply to a Specified IFSC public company which accepts from its members, monies not exceeding one hundred per cent. of aggregate of the paid up share capital and free reserves, and such company shall file the details of monies so accepted to the Registrar in such manner as may be specified. - Notification Date 4th January, 2017.

3. In case of private company - Clause (a) to (e) of Sub-section 2 of Section 73 shall not apply to private Companies - Notification Dated 13th June, 2017

For Entry no. 6 of Exceptions/ Modifications/ Adaptations Dated 5th June, 2015 (Clause (a) to (e) of Sub-section 2 of Section 73 shall not apply to private Companies which accepts from its members monies not exceeding one hundred per cent, of aggregate of the paid up share capital and free reserves, and such company shall file the details of monies so accepted to the Registrar in such manner as may be specified) the following entry shall be substituted -

(A) which accepts from its members monies not exceeding one hundred per cent. of aggregate of the paid up share capital, free reserves and securities premium account; or

(B) which is a start-up, for five years from the date of its incorporation; or

(a) which is not an associate or a subsidiary company of any other company;

(b) if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and

(c) such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under this section:

Provided that the company referred to in clauses (A), (B) or (C) shall file the details of monies accepted to the Registrar in such manner as may be specified." - Notification Dated 13th June, 2017

The author is the member of ICAI. He can be reached at raipur.casharp@gmail.com

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor publisher and its affiliates accept any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.

Published by

CA AYUSH AGRAWAL (SHARP & ASS)
(CA IN PRACTICE (EXPERT & AUTHOR) )
Category Income Tax Report