LOANS AND ADVANCES

GIVEN & ACCEPTED

AND
CORPORATE SOCIAL
RESPONSIBILITY(CSR)
At
Bandra Kurla CPE Study Circle
WIRC
By:

CA Divyesh V Mehta

Loans and Advances by Company.

GIVEN

Loans / Advances to
Directors
OR
Company in which
director are interested
Sec. 185
(w.e.f. 12.09.2013)

ACCEPTANCE
(Sec 73 -76)
(w.e.f.
01.04.14)

Any Other
Company
Sec. 186
(w.e.f.
01.04.2014)

Loans to Directors
OR
Persons in which Director is
Interested
(Sec 185)
(W.E.F. 12.09.2013)

Restriction on Loan,Security,Guarantee to Director/Director Interested

(Sec 185)

Loans

Prohibition on
Lending
Company to
give LOANS

Direct
Loan
Borrower are
Director / Individual
a) Director of
lending Co.
b) Director of
holding Co.
c) Partner of
director
d) Relative of
director
FIRM
:a) Director is
partner
b) Relative of
director is
partner

Guarante
es
Indirect
Loan

Borrowers are
:
Any other
persons
whom
directors
interested
Pvt Ltd. Co.
a) Common
Director
b) Director is
shareholder

CO. can not give

loan to director
through one or
more
intermediaries

Relative Of
Director are
not Covered.

Unlisted Public
Ltd.(
Body Corporate )
More than 25%
voting by
common directors

Exceptions to Section 185

Loan to M.D. &
Whole Time
Director if it is
a)Part of Service
b)Special
Resolution
Passed by
Member
Loan
Outstanding AS
ON 12th
September
a) Sec. 185 not
Applicable
b) It should not
be renewed.
c) It should be
repaid on due
date.

a)Co. in ordinary
course of
Business
b)Amount lend
at arms length
rate of interest

a)Loan Given by
holding
company to
subsidiary
b)Amount is
used for
principal
business of
subsidiary.
Loan Given After 12th
September for following
Purpose
are NOT covered if it is
TOWARDS

Share
Applicatio
n Money

Advance
for
Purchase
of Property

Purchase
of Goods

Purchase
of Services

By Passing Section 185

Convert Lender
& Borrower to
LLP

Convert
Borrower
Company to
Limited
Company
(If Common
Directors hold
Less Than 25%
of Borrowing
company)

Change in
Directorship/
Shareholding

1) Appoint New i.e Uncommon Director

2) Resign Common Director from either Company (in which Director is not
share holder)
3) Change the Shareholding in such a way that no Director of Borrower / Lender
are shareholder of other company.(i.e. Director Should hold the share in which
they are director.)

4)Share Held by Relatives of the Directors Should not be considered.

PENALTY FOR CONTRAVENTION OF

SECTION 185

BORROWER
COMPANY
LENDER
COMPANY
FINE OF RS.5
LACS TO 25
LACS

IMPRISONME
NT
OF 6
MONTH
FINE 5 LACS
TO 25 LACS
OR BOTH

Various Situation
of
Section 185

Example 1
Company A has two Directors Mr. X and Mr. Y. Both 50% share
each of company. Various situations are as follows :
Loan To
Director X

Whether Co. Can

Give Loan

Reason

NO

Loans to Director is
included in definition.

A Relative of Director Y

NO

Loans to relative of
Director is included in
definition.

Director of company D
which is the holding
company of A.

NO

It is included in
definition

A partner of Director of
Holding Company

YES

A partner of Director of
Holding Co. is not
included.

A partner of Director of

NO

Partner of Director is

Example 1
Loan To

Whether Co. Can Give

Loan

Reason

To a firm in which Mr.

X is a partner

NO

It is included in
definition

To a firm in which
relative of Mr. Y is a
partner.

NO

It is included in
definition.

Example 2
Particulars

Company A (Pvt Ltd

or Ltd )

Director Cum
Shareholder

A(Shareholding 60 %)
B (Shareholding 40 %)

B (Shareholding 75
%)
D (Shareholding 25
%)

Nil

Nil

Only Shareholder

Company B (Pvt
Ltd)

A and B are Husband and Wife . D is their Son.

Company B wish to avail loan from Company A .
Whether Possible ?
Solution :
Company A cannot give loan to company B as it would be in
contravention of Section 185 and would attract penalty.

Planning to Example 2

Example 3
Particulars

Company A Pvt Ltd

or Ltd

Company B (Ltd)

Directors Cum
Sharholder

A(Shareholding 60%) B(Shareholding 10 %)

B(Shareholding 20 %) A (Shareholding 10 %)
C (Shareholding 15 %) C(Shareholding 5%)

Only Shareholder

D (Shareholding 15
%)

Other (Shareholding
75%)

Company B wish to avail loan from Company A , Whether Possible ?

Solution 3 :
No it is not possible to advance loan to company B as Director A, B and
C collectively are holding 25 % of share of Company B . And hence get
covered under the clause 4 of interested party to director.

Planning to Example 3

Conversion of a Company into a LLP

As per Section 47 (xiiib) of Income Tax Act, for tax neutrality of
such conversion, turnover of Private Limited Company in any of
last 3 years must not exceeds 60 Lakhs. So, if turnover exceeds
60 Lakhs than such conversion will be subject to income tax.
Any Capital Gain arising in transfer of capital asset would be
taxable in hands of company.
Any Gain arising to shareholder on surrendering of shares would
be taxable in hands of Shareholders.

Loans And Investment By

Company
(Sec 186)
(W.E.F. 01.04.2014)

Co. cannot make

investments
through more
than two layers
of Investment Co.

LOANS &
INVESTMENTS
BY COMPANIES
Section 186

Co. Cannot
:-

1.Give loan to any person OR body

corporate
2. Give guarantee or provide security in
connection
with loan
3. Purchase subscription, purchase
securities
If the same
exceeds:O
R

60% of
100% of free
capital
reserves
(+) Free
(+) Security
Reserves
Premium
(+)
SecurityRoute : If Loan Exceeds, then Special
Alternate
Premium
Resolution passed at General
meeting is a

MUST

Acceptance of Deposits /
Loans By
Company
(Sec 73 76 )
(W.E.F. 01.04.2014)

ACCEPTANCE OF DEPOSIT / LOAN BY

COMPANY
AS PER COMPANIES ACT , 2013

AS PER COMPANIES ACT, 1956

1. Company can accept Deposit /

Loan from other Company.

1. Company can accept Deposit /

Loan from other company.

2. Company can accept from

Director at the same time of
Accepting.

2. Company can accept from

Director at the time of Accepting.

3. Loan from Share Holder not

Permitted.

3. Loan from Shareholder by Private

Limited Company Permitted.

4. Loan from Relative of Shareholder 4. Loan from Relative of Share

/ Director not Permitted.
Holder / Director permitted in case
of Private Limited Companies.

Exclusion from the Definition of Deposit

Any amount received against subscription to any securities
including share application money provided the securities are
allotted within 60 days from the date of receipt of the
application money or advance.
If the securities are not allotted within 60 days then the same
should be refunded within 15 days else the same shall be treated as
deposit after completion of 15 days.
Any amount received from Director of the company provided the
Director furnishes a declaration that the amount given is not out
of borrowed funds.

Any amount received from an employee of the company not exceeding

his annual salary in the nature of non interest bearing security.
Any amount received in the course of or the purpose of the business for
the following :i. As advance for the supply of goods or provision of services provided
such advance is appropriated against supply of goods or provision of
service within 365 days from the receipt of such amount,
ii. As advance received in connection with consideration for property
under an agreement or arrangement,
iii. As security deposit for the performance of the contract for supply of
goods or provision of services.
iv. As advance received under long term projects for supply of capital
goods.

 If any amount received under clause (i),(ii) and (iv) becomes refundable
due to the reasons that the company accepting money does not have
necessary permission or approval to deal with the goods or services then
the amount received shall be deemed to be a deposit after the expiry of
15 days from the date they become due for refund.
Any amount brought in by the promoters of the company by way of
unsecured loan in pursuance of the stipulation of any lending financial
institution or a bank subject to fulfillment of the following conditions,
namely: the loan is brought in pursuance of the stipulation imposed by the
lending institutions on the promoters to contribute such finance;
the loan is provided by the promoters themselves or by their relatives
or by both; and
the exemption under this sub-clause shall be available only till the
loans of financial institution or bank are repaid and not thereafter

SEC 74: Repayment of deposits,

commencement of this Act

etc. accepted before

(New Provision)

1) If deposit or any interest remains unpaid on

commencement of this Act, co. shall file, within 3 months,
with ROC a statement (Form DPT-4) of all deposits
accepted & sums remaining unpaid and repay the dues
within 1 year or due date, whichever is earlier.
2) Format for List of Depositors.
3) Tribunal may, on application made by co., allow further
time to repay the deposit.(Not yet Notified)

SEC 74: Repayment of deposits, etc. accepted

before commencement of this Act (New Provision)

Penalty (Not yet Notified)

A) Company shall pay deposit and interest along with
fine Rs. 1 crore to Rs. 10 crores &
B) Officer in default - Imprisonment upto 7 years or fine
Rs. 25 Lakhs to Rs. 2 Crores, or both

Various Situations For

Section 73 to Section 76

As per Companies Act 1956

O/S as on 01.04.2014
(As Per CA,2013)

Fresh
(As per CA,2013)

1. Loan From Director

The loans from Director are

not considered as deposits as
per this act

Any amount received from a

director is not a Deposit hence
it need not be reported on 30th
June,2014 and can continue to
stay in books.

Company can receive only if

Director gives undertaking that
the loan given is from own
funds and not from borrowed
funds.

2. From Shareholders

The loans from shareholders

are not considered as deposits
as per this act .

Amount
received
from
shareholders
is
deposit
(w.e.f.01.04.14) and hence
need to be reported on 30th Fresh Borrowing NOT
June 2014.
permissible.
It cannot be renewed and has
to be repaid back on expiry of
term or before 31st March
2015.

As per Companies Act

1956

O/S as on 01.04.2014
(As Per CA,2013)

Fresh
(As per CA,2013)

3.From relative of Director / Promoter

As per this Act Loans

from Relatives of
Director were out of the
ambit of definition of
deposits .

Amount received from

relatives of the director
were
deposits
(w.e.f.
01.04.2014) and so need to
be reported by 30th June
2014.
It cannot be renewed and
has to be repaid back on
expiry of term or before
31st March 2015.

NOT PERMISSIBLE , With Exception

Any amount brought in by the
promoters of the company by way of
unsecured loan in pursuance of the
stipulation of any lending financial
institution or a bank subject to
fulfillment of the following conditions,
namely:a. The loan is brought in pursuance of
the stipulation imposed by the
lending institutions on the promoters
to contribute such finance;
b. The loan is provided by the
promoters themselves or by their
relatives or by both; and
c. The exemption under this sub-clause
shall be available only till the loans
of financial institution or bank are
repaid and not thereafter.

As per Companies Act 1956

O/S as on 01.04.2014
(As Per CA,2013)

Fresh
(As per CA,2013)

4. As a Business Advance

Business Advance are not

considered as deposit under
this act.

Business
Advance
are
excluded from the definition
of deposit and therefore no If Fresh then should be
need for reporting .
adjusted with 365 days from
The amount can continue to the date of receipt of advance.
remain in books of accounts .
The 365 days condition are not
applicable.

5. Advance against property

Advance against property are

not considered as deposit
under this act.

Advance against property are If fresh then such amount can

excluded from deposits and be raised but should be
therefore no need for reporting adjusted against property.
on 30th June 2014.

As per Companies Act 1956

O/S as on 01.04.2014
(As Per CA,2013)

Fresh
(As per CA,2013)

6. Share Application Money

Share Application Money is

not considered as Deposit
under this Act.

If O/S then it is not considered

as deposit and all the pending
application should either be
allotted or refunded back to
the subscriber.

If Fresh Share Application

money then
a. Section 42 Compliance i.e.
Private
Placement.
b. Allotment of share within
60 days of receipt of
amount.
c. If not allotted then termed
as deposit.

7. Inter- Corporate Deposits (ICD)

ICD are not covered in the

There is no need for
Inter- Corporate Deposits were
definition of deposits and
repayment as there are not
not considered as Deposit
hence company can use for it
covered in definition of
under the Act.
for means of finance.
deposits.

As per Companies Act

1956

O/S as on 01.04.2014
(As Per CA,2013)

Fresh
(As per CA,2013)

8. From Employees
They were considered as
deposits as per this Act.

Company can keep the

deposits in the books of
accounts provided they do
not exceed the total salary.

Company can accept loan or

deposit from employees provided
it does not exceed the total annual
salary.

9.From issue of bonds & debentures

Company can raise by way of
bonds and debentures provided
a. Amount is secured by a first
They are not considered as
They were not considered as
charge against property OR
Deposits and hence they can
deposit under this Act.
b. Such bonds and debentures
continue till the tenure .
should be
compulsorily
convertible in to shares within
5 years.
10. Security Deposits
Security Deposits are
not considered as
Security Deposits are not
deposits and hence
considered as deposits under
they can continue to
this Act.
remain in Books of
accounts.

Security deposits are out of the

ambit of deposits .However it is
advised to accept security deposit
under a specific agreements

SEC 76: Acceptance of deposits from

public by certain Companies

This new clause provides that a public company

having specified net worth or turnover may accept
deposits from persons other than its members
subject to compliance with Sec 73(2), rules and
credit rating.

Definition of Eligible Company : Chapter

V Rule
eligible company means a public company as referred to in
sub-section (1) of section 76, having a

net worth of not less than 100 crore rupees or

a turnover of not less than 500 crore rupees
and
which has obtained the prior consent of the company in general
meeting by means of a special resolution and also filed the said
resolution with the Registrar of Companies before making any
invitation to the Public for acceptance of deposits:

Provided that an eligible company, which is accepting deposits

within the limits specified under clause (c) of sub-section (1) of
section 180, may accept deposits by means of an ordinary
resolution;

Deposit Rules, 2014

No company referred to in sub-section (2) of section 73 and
no eligible company shall accept or renew any deposit,
which is repayable on demand or upon receiving a notice
within a period of less than six months or more than thirtysix months from the date of acceptance or renewal of such
deposit

Corporate Social
Responsibility
(CSR)
(Sec 135)

Applicability
Following Companies should form a CSR Committee of
board if any of the following conditions are fulfilled during
any financial year :

Net Worth

It means the aggregate value of the paid-up share capital and all
reserves created out of the profits and securities premium account,
after deducting the aggregate value of the accumulated losses,
deferred expenditure and miscellaneous expenditure not written off,
as per the audited balance sheet, but does not include reserves
created out of revaluation of assets, write-back of depreciation and
amalgamation.

NET WORTH= Paid-up Share Capital + Free

Reserves (Excl. Revaluation Reserve) +
Securities Premium Accumulated Losses
deferred expenditure Misc. Exp.

Turnover

As per section 2(91) of the Companies Act,2013 turnover is

defined as follows:
Turnover means the aggregate value of the realization of amount
made from the sale, supply or distribution of goods or on account of
services rendered, or both, by the company during the financial
year;
Interpretation :
The word realization of amount from the sales etc means Gross
Turnover, which includes value of goods or/ and Services and taxes
thereon.

TURN OVER = NET SALES + TAXES AS

APPLICABLE

Net Profit

As per Rule 2(f) :

Net Profit means the net profit of a company as per its financial
statement prepared in accordance with the applicable provisions of
the Act, but shall not include the following, namely:
1. any profit from any overseas branch or branches of the company,
whether operated as a separate company or otherwise and
2.any dividend received from other company in India, which are
covered under and complying with the provisions of Section 135
of the Act.

NET PROFIT = PROFIT AS PER BOOKS

PROFIT FROM OVERSEAS BRANCH
DIVIDEND FROM INDIAN CO

Constitution of a CSR
Committee
The committee should consist of
Three or more Directors

and
Out of which at least one director shall be an independent
director.

Note : In case of a private company having two directors on it

board shall constitute its CSR committee with Two
such Directors.

CSR Activities under Schedule VII of the

Act
Activities relating to :
a.

eradicating extreme hunger and poverty;

b.

promotion of education;

c.

promoting gender equality and empowering women;

d.

reducing child mortality and improving maternal health;

e.

combating human immunodeficiency virus, acquired immune deficiency syndrome,

malaria and other diseases;

f.

ensuring environmental sustainability;

g.

employment enhancing vocational skills;

h.

social business projects;

i.

contribution to the Prime Minister's National Relief Fund or any other fund set up by
the Central Government or the State Governments for socio-economic development
and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes,
other backward classes, minorities and women; and

j.

such other matters as may be prescribed.

Compliances For CSR

Reporting Shall be done on Annual basis commencing from
F.Y. 2014-15.
Tax treatment of CSR spend will be in accordance with the
IT Act as may be notified by the Central Board of Direct
Taxes (CBDT).
CSR activities may generally be conducted as projects or
programmes (either new or ongoing ) excluding activities
undertaken in pursuance of the normal course of business of
a company.

Concern Regarding CSR

CSR which has largely been a voluntary contribution by corporates has now
been included in law
There is a debate as to whether any penal consequences will emanate on failure to
spend, or an explanation in the directors report on the reasons therefore are only
warranted
There may be reluctance in compliance, especially in case of companies which are
not profitable, but fall under the designated category due to triggering net worth or
turnover criteria
It is not clear what all constitutes CSR activities as the list specified under
Schedule VII of the Act seems like an inclusive list and not exhaustive

 CA Divyesh V. Mehta
Vinod K. Mehta & Co.,
(Chartered Accountants)

# B-5, Satyam Shopping Centre,

2nd Floor,M.G. Road,
Ghatkopar (East),
Mumbai-400077
Email id: dvsmehta@gmail.com;
Contact Nos:+91 9819238681
+ 91 22 21024280:+91 22 67255633
www.vkmehta.com