In ITA No.560/MUM/2023 -ITAT- Violation of Section 185 of the Companies Act does not have implications under the Income Tax Act, rules ITAT (Mumbai)
Members Vikas Awasthy (Judicial) & Om Prakash Kant (Accountant) [23-06-2023]

Read Order: Deputy Commissioner of Income Tax Central Circle-2(4) v. Parinee Housing Private Limited

Chahat Varma

New Delhi, June 26, 2023:  The Mumbai bench of the Income Tax Appellate Tribunal has ruled that the violation of Section 185 of the Companies Act, pertaining to the advance of loans to directors, does not have implications under the Income Tax Act.

The solitary issue raised by the Revenue in appeal was regarding the deletion of addition of interest on the loans advanced to the directors and sister concern/related parties. The Revenue contended that the assessee had advanced interest free loans to the directors, i.e., Shri Vipul Shah and Shri Dhaval Shah and a group company M/s. Parnee Homes Pvt. Ltd., without sufficient evidence of business exigency. The loans to directors were alleged to be in violation of Section 185 of the Companies Act.

The bench comprising of Vikas Awasthy (Judicial) and Om Prakash Kant (Accountant) observed that upon examining the balance sheet, it was evident that the assessee had sufficient interest-free funds to finance the loans provided to related parties and the Revenue did not dispute the availability of interest-free funds to cover the loans given to related parties.

The bench held that since the assessee was able to demonstrate the availability of sufficient interest-free funds, there was no valid reason to add notional interest on advances made to related parties.

“Insofar as the violation of the Companies Act in advancing loans to the Directors u/s 185 of the Companies Act is concerned, infringement of said section, if any has no implication under this Act. The assessee is liable for the consequences for infraction of any provisions under the relevant Act,” remarked the bench.