Section 297

This query is : Resolved

Shyam Gupta (Querist)
Follow

30 May 2012 Please let me know the applicability of Section 297 in this particular case as mentioned below:

X,Y & Z are director in XYZ PVT Ltd as well as in ABC PVT ltd.

(1)If XYZ PVT Ltd purchase some goods from ABC PVT Ltd on credit on regular basis & make payment through cash & cheque.

(2)If XYZ PVT Ltd purchase some goods from ABC PVT Ltd on credit on regular basis & make payment through cash & cheque at the prevalling market rates.

(3)If XYZ PVT Ltd purchase some goods from ABC PVT Ltd on credit on regular basis & make payment through cash & cheque at the prevalling market prices. The amount of contract is of Rs. 3 crores approx.

Waiting for your early response.

Thanx
Regards
Shyam Gupta

Ajay Mishra

Ajay Mishra (Expert)
Follow

30 May 2012 Hi

Section 297 does not apply to:

1. Giving or taking loans.
2.Contract in respect of immovable property (as it is not 'good' ).{Letter No. 9/4190-CL-X dated 27.03.1990}.
3.Contract between two public Companies.
4.Contract of employment of director or managing or whole time director.[ Circuler No.8/11/75-CL-V dated 27.03.1975]
5.Contract for employment of relative of director.
6.Contract entered into by the company with the dealer on principle to principle basis. [Circuler No. FM 8/297/56-PR dated 02-08-1956]
7. Professional services of the nature given by firms of solicitors and advocates, etc.[circuler No. 8/11/75-CL-V dated 05.06.1975]
8.hiring of office premises on rent as the transaction is in immovable property. [Department Clarification dated 10-09-1990]

Shyam Gupta

Shyam Gupta (Querist)
Follow

31 May 2012 Sir not clear answer to the query

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)
Follow

23 July 2025 The scenario you described involves inter-company transactions between two private limited companies where common directors (X, Y, Z) exist in both. Here's how Section 297 of the Companies Act, 1956 applies:

✅ Applicability of Section 297
Section 297 applies to contracts entered into by a company with certain related parties, which include:

Directors,

Relatives of directors,

Firms where directors/relatives are partners,

Other companies where the company's director is also a director or member (as in your case).

✅ Answer to Each Point
(1) & (2) – XYZ Pvt. Ltd. purchases goods from ABC Pvt. Ltd. (common directors), with payment made through cash or cheque, at prevailing market rates:
👉 Yes, Section 297 applies — because this is a contract for sale/purchase of goods with a related party (ABC Pvt. Ltd. has common directors).

Even though it’s at market rate, approval of the Board is mandatory before entering into the contract.

If the paid-up share capital of XYZ Pvt. Ltd. exceeds ₹1 crore, then prior approval of the Central Government was also required under the law in force at that time (pre-Companies Act 2013).

✅ Mode of payment (cash or cheque) is not relevant for the applicability of Section 297 — the key factor is the related party relationship and the nature of the contract.

(3) – Same transaction, but contract value is ₹3 crores:
👉 Yes, Section 297 applies, and since the contract value is significant, it highlights the need for:

Board approval (mandatory), and

If paid-up capital > ₹1 crore, Central Government approval is also mandatory, irrespective of the contract value.

⚠️ Important Notes:
Section 297 did not differentiate based on value of contract for CG approval — it was based only on paid-up capital.

Failure to comply with Section 297 could result in the contract being voidable and penalties for officers in default.

✅ Summary:
Condition Section 297 Applicable? Board Approval CG Approval (if PUC > ₹1 Cr)
Same directors in both companies ✅ Yes ✅ Required ✅ Required
At market price, on credit/cash/cheque ✅ Yes ✅ Required ✅ Required
Value ₹3 crore ✅ Yes ✅ Required ✅ Required

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now