Loan to director
This query is : Resolved
Nikita Gupta
(Querist)
15 July 2013
Can a Private Ltd. Co. give loan to its Directors or any relatives of the directors?
15 July 2013
Loan to Directors and the Provisions of the Companies Act
Loans to the direcotors of the company given by the company are governed by section 295 of the companies act, 1956. Section 295 put restrictions on a public company or a private company being a subsidiary of a public company intending to make any type of transaction with a director of the company or partner or relative of a director, etc. whether, directly or indirectly to make any loan, or to give any guarantee, or to provide any security in connection with a loan made by any other person to, or to any other person by, and it calls for obtaining the previous approval of the Central Government. This section is applicable to a public company or a private company, which is a subsidiary of a public company.
So Pvt Ltd Co. can extend the loan.
Loans to the direcotors of the company given by the company are governed by section 295 of the companies act, 1956. Section 295 put restrictions on a public company or a private company being a subsidiary of a public company intending to make any type of transaction with a director of the company or partner or relative of a director, etc. whether, directly or indirectly to make any loan, or to give any guarantee, or to provide any security in connection with a loan made by any other person to, or to any other person by, and it calls for obtaining the previous approval of the Central Government. This section is applicable to a public company or a private company, which is a subsidiary of a public company.
So Pvt Ltd Co. can extend the loan.
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15 July 2013
Having said that one should be aware of the provisions of Section 2(22)(e).
If such director or relative to whom loan has been given by the Private Limited Company, hold 10% or more share in the company than provisions of section 2(22)(e) will be attracted and such loan will be treated as deemed dividend covered under section 2(22)(e) and will be taxable in the hands of shareholders.
If such director or relative to whom loan has been given by the Private Limited Company, hold 10% or more share in the company than provisions of section 2(22)(e) will be attracted and such loan will be treated as deemed dividend covered under section 2(22)(e) and will be taxable in the hands of shareholders.
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Nikita Gupta
(Querist)
15 July 2013
In this case the director or the relative has not repaid the loan since the date of obtaining the loan.
15 July 2013
Are they paying interest on the said loan?
What is their shareholding in the Company? Is it 10% or more?
What is their shareholding in the Company? Is it 10% or more?
Nikita Gupta
(Querist)
15 July 2013
No they have not paid any interest on the said loan. the shareholding is less than 10%.
15 July 2013
Then no issues. But it will be better if at least the interest amount is paid regularly.
Nikita Gupta
(Querist)
15 July 2013
Thank you.
Ajay Mishra
(Expert)
15 July 2013
Firstly check your company loan agreement, what it says on interest and loan payment and consequences thereof.
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15 July 2013
Ajay Ji this is unsecured loan so there will not be any Loan Agreement. It is a common thing in private limited companies taking loan and giving loan to directors and their relatives. In most cases you will not find any agreement.
In companies act their is no issue. But main issue may arise at the time of Income Tax Assessment.
In companies act their is no issue. But main issue may arise at the time of Income Tax Assessment.
Ajay Mishra
(Expert)
15 July 2013
As per my understanding, any loan will not be considered as loan and the same will be ont considered as by any authority, unless they have any MOU/agreement that the company has given or taken loan.
Whether it is director or there relative.
How you can justified with Tax authority that it is loan.
So as per my understanding kind of agreement should be with both parties.
Suggest Ankur Sir, if I am wrong.
Whether it is director or there relative.
How you can justified with Tax authority that it is loan.
So as per my understanding kind of agreement should be with both parties.
Suggest Ankur Sir, if I am wrong.
Aditya Maheshwari
(Expert)
15 July 2013
It is common for private companies to take and grant loans to directors and relatives. Complaince u/s 292 of companies act should be seen i. e. at the time of granting loan. Further loans are mostly given without any agreement or MOU between the parties to transaction i. e. what is seen in balance sheets in the revised schedule VI as loans repayable on demand under short term borrowings are mostly loans without any agreements or MOU.
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