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Section 297 (2) a & b

Kamal Jain (FCA) (200 Points)

25 January 2011

What is the difference between 'Goods' u/s 297(2)a and 'Goods' u/s 297(2)b

Kindly advice.

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6 Replies

cs ashwini kumar (Company Secretary in Practice) (173 Points)
Replied 26 January 2011

There is no difference between 'Goods' u/s 297(2)a and 'Goods' u/s 297(2)b. Further, there is no definition of "Goods" under the Companies Act, 1956 so the word "Goods" defined in section 2(7) of the Sale of Goods Act, 1930 shall be taken into consideration.

Regards

CS Ashwini Kumar (csashwini1970 @ gmail.com)

Jayashree S Iyer (Company Secretary) (3224 Points)
Replied 27 January 2011

Fully agree with Mr. Ashwini Kumar.

Jaideep (Service) (1368 Points)
Replied 27 January 2011

Agreed with expert...No difference...If you have any different idea plz share

Kamal Jain (FCA) (200 Points)
Replied 27 January 2011

If a Public Limited company does transactions of purchase and sale with a Pvt Limited co in which one director is common, how will section 297(2)a and 297(2)b will affect these transaction:

In case Public limited co. is buying some goods from Pvt Ltd co., i.e. goods which pvt co regularly deals in, for cash at prevailing market price, can this transaction be undertaken for more than Rs.5000/- without approval of Central Govt.?

cs ashwini kumar (Company Secretary in Practice) (173 Points)
Replied 27 January 2011

Query: (1) If a Public Limited company does transactions of purchase and sale with a Pvt Limited co in which one director is common, how will section 297(2)a and 297(2)b will affect these transaction:

(2) In case Public limited co. is buying some goods from Pvt Ltd co., i.e. goods which pvt co regularly deals in, for cash at prevailing market price, can this transaction be undertaken for more than Rs.5000/- without approval of Central Govt.?

Reply to Queries (1) and (2)

Provisions of Section297

Sub Section (2) Nothing contained in clause (a) of sub-section (1) shall affect

(a)	the purchase of goods and materials from the company, or the sale of goods and materials to the company, by any director, relative, firm, partner or private company as aforesaid for cash at prevailing market prices; or
(b)	any contract or contracts between the company on one side and any such director, relative, firm, partner or private company on the other for sale, purchase or supply of any goods, materials and services in which either the company or the director, relative, firm, partner or private company, as the case may be, regularly trades or does business:

Provided that such contract or contracts do not relate to goods and materials the value of which, or services the cost of which, exceeds five thousand rupees in the aggregate in any year comprised in the period of the contract or contracts; or

(c)	in the case of a banking or insurance company any transaction in the ordinary course of business of such company with any director, relative, firm, partner or private company as aforesaid.

Contracts eligible for exemption:

Sub-section (2) of section 297 provides in its three clauses (a), (b) and (c) for three exemptions. Any contract falling within the purview of any of these three exemptions shall require neither the consent of the Board of Directors nor the previous approval of the Central Government, if it is a contract coming within the ambit of clause (a) of sub-section (1) namely, any contract for the sale, purchase or supply of goods, materials or services. In other words, the regulatory provisions contained in sub-section (1) and its proviso shall not apply to these exempted contracts.

First exemption:

Clause (a) of sub-section (2) exempts from sub-section (1) any contract for -

(i)	the purchase of the goods and materials from the company; and
(ii)	the sale of goods and materials to the company,

by any of the parties specified in sub-section (1) if such purchase or sale transaction is for cash and at prevailing market price.

The exemption under this clause is not available to the contracts of service irrespective of any value involved. Moreover, it is also not available in the case of contracts for supply of goods and materials. Thus, it is available only to the contracts for purchase or sale of goods or materials.

A cheque is to be treated as the equivalent of a cash payment for the purpose of this provision.

The expression at prevailing market prices seems to suggest that the price charged ought to be the ruling market price of the seller and no extra favour vis-a-vis the other buyers should be shown as to the prices. Any extra-commercial consideration entering into the dealing thereby distorting the price would disentitle the company to this exemption.

Second exemption:

According to clause (b) of sub-section (2), any contract or contracts between the company on one side and any director, relative, firm, partner or private company on the other for sale, purchase or supply of any goods, materials or services in which either the company or the director, relative, firm, partner or private company as the case may be, regularly trades or does business, shall not attract the provisions of sub-section (1), including the proviso, if the value of the goods/materials or the cost of the services does not exceed Rs. 5,000 in the aggregate in any year comprised in the period of the contract or contracts. It should be noted that this exemption is available within the monetary ceiling of Rs. 5,000, and, further, subject to the condition that either the company or the other party to the contract, being the supplier of goods, materials or services, regularly trades or does business. The word regularly in this expression is of significance. If it is not the regular business activity of the party concerned to deal, trade or do business in the goods, materials, or to provide services, in question, then, the exemption would not be available.

Third exemption:

The third exemption as laid down in clause (c) of sub-section (2) applies to the provision of banking services, or insurance services. It provides that in the case of a banking company or an insurance company 'any transaction' in the ordinary course of business of such company with any director, relative, firm, partner or private company shall not be affected by the provisions of sub-section (1).

Hopefully the above will clarify the positions.

Regards

CS Ashwini Kumar (csashwini1970 @ gmail.com)

Jayashree S Iyer (Company Secretary) (3224 Points)
Replied 27 January 2011

Sale or purchase by a public company to or from a private company with common directors will very much attract Section 297.

However exemption to this rule is available under Section 297(2):

As per Section 297(2)(a) if the sale or purchase of goods and materials (not service) is for cash at prevailing market prices. then the provisions of Section 297 are not applicable.

Similarly as per Section 297(2)(b) if the contract or contracts is for sale, purchase or supply of any goods, materials and services in which the private company regularly trades or does business and the value of such transaction does not exceed Rs.5000/- in a year, then the provisions of Section 297 are not applicable.

Answer to your second query is If the paid up capital of the public company exceeds 1 crore then CG approval is required as the transaction amont exceeds Rs.5000/-.