ROC & INCOME TAX

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03 January 2025 A Private Ltd Co has Leased one of its Land to a Proprietorship firm for 30 years with lease rentals of Rs 50K per month, the proprietor is one of the Director in the Pvt Ltd Co. Now the Company has taken Loan keeping that land on Mortgage.Is ther any violation of Section 185 from ROC point of view & Can the Company take loan keeping that land on Mortgage from income tax point of view (269UA states that Lease for more than 12 years is considered as deemed sale) so whether there is any violation?

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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12 August 2025 Let's break down your query step-by-step, covering both ROC (Company Law) and Income Tax perspectives:

1. Lease of Land by Private Ltd Company to Proprietorship Firm (where Proprietor is Director)
The company has leased land to a related party (proprietor who is also a director).

Lease term: 30 years with rent Rs 50,000/month.

2. Section 185 of Companies Act, 2013 (Loans to Directors)
Section 185 restricts companies from giving loans to directors or entities in which directors are interested.

However, leasing land to a related party is not considered a loan under Section 185.

So, leasing land is not a violation of Section 185.

The company can lease land to the proprietorship firm (even if the director is involved) as long as it's on arm's length terms and properly documented.

3. Company taking Loan by Mortgaging the Leased Land
The company owns the land, so it can mortgage the land as collateral for a loan.

No direct restriction under Companies Act or Section 185 on mortgaging own assets.

However, mortgage/loan should be disclosed in financial statements and comply with board/shareholder approvals if required.

4. Income Tax Perspective: Deemed Sale under Section 269UA
Section 269UA states: Any lease or tenancy agreement of land/building for more than 12 years, or any renewal, is treated as deemed sale of capital asset.

This means the lease of 30 years will be treated as a sale for Income Tax purposes.

Implication: The company will be considered to have transferred the land, triggering capital gains tax liability.

Lease rentals may not be treated as income from lease but as sale consideration.

So, although legally it’s a lease, tax-wise it’s treated as sale.

5. Does this cause violation or issue for company taking loan?
From ROC (Company Law) perspective: No violation in leasing or mortgaging land.

From Income Tax perspective: The lease will attract capital gains tax as deemed sale.

Taking loan on mortgaged land is independent of the lease issue but the company needs to be aware of the tax implications on lease.

Summary:
Aspect Conclusion
Lease to Proprietor/Director Not a violation of Section 185 (not a loan).
Mortgage of leased land Allowed; no ROC violation.
Income Tax on 30-year lease Treated as deemed sale; capital gains triggered.
Loan on mortgaged land Allowed; tax implications on lease remain separate.

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