Section 297

NO SUCH SPECIFICATION

Hi,

There is no exemption as such to the Holding and subsidiary company's transactions except the exemptions available under sub-section 2 of Section 297 of the Companies Act, 1956. Also exemption is available in case of transaction between two Public Limited Companies.

Regards

CS Ashwini Kumar (csashwini1970 @ gmail.com)

Income Tax

A disclosure that a related party transaction was made during the year serves little purpose, unless one is apprised of the terms of the transaction and tax implication.  Section 40 A (2) of the Income tax Act disallows the expenditure incurred in respect of specified  persons (Related Parties) if it is the opinion of the Assessing officer that the expenditure is excessive and unreasonable. These expenditures are (a) the fair market value of goods, services or facilities for which the payment is made or persons (Related Parties) or (b) legitimate needs of business or profession of the assessee or (c) the benefit derived by or accruing to the assessee from the payment.

After having discussion on the various provisions, we move our discussion on who will be consider as related party? For this different law gives different meaning.

Companies Act

Section 297 of the Companies Act 1956, describes the transaction with the following persons as related party transaction.

•  a director of the company
•  relative of the director
•  a firm in which such a director or relative is a partner
•  any other partner in such a firm
•  a private company of which the director is a member or director

Accounting Standard

As per Accounting Standard 18-’Related Party Disclosures’ issued by the ICAI, Related party means “Parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions” andRelated Party transaction means “a transfer of resources or obligations between related parties, regardless of whether or not a price is charged. The following are the related parties as per AS-18

•  Holding companies, subsidiaries and fellow subsidiaries
•  Associates and joint ventures
•  Individuals (incl. their relatives) – having voting power giving them control or significant influence
•  Key management personnel including their relatives
•  Enterprises where controlling individual or key managerial personnel has significant influence

However, disclosure is mandatory for the following categories of companies.

•  Companies which are listed or are in process of listing
•  Banks, financial institutions and insurance companies
•  Enterprises having turnover > Rs. 50 cr.
•  Enterprises having borrowings > Rs. 10 cr.
•  Holding / subsidiary company of any of the above

If any company does not fall in any of these categories, after having been applicable earlier, then it shall continue to apply unless it is not covered in any category for 2 consecutive years.

Further, Auditing and Assurance Standard 23- Related Parties impose duty on auditor to identify and disclose the related party transaction in the financial statements.

If we make comparison between these two definitions, we will come to know that AS-18 is wider than Companies Act. The Companies Act requires approval only when a director and his/her relatives involve in the transaction. However it if the key management personnel, who is not a director involved in any transaction, the approvals are not required, even though interest is involved. However, AS 18 makes it mandatory to disclose the transaction with the key managementpersonnel also.

Section 297 is applicable for transactions between a holding company and a subsidiary company.  There is no exemption.

However transactions between two public companies are outside the scope of Section 297. So if the holding company is a public company, then as per section 3(i)(iv)(c) of the Companies Act, the subsidiary will also become a public company and consequently Section 297 will not apply.