MCA clarification on section 185 of the Companies Act 2013

Ministry of Corporate Affairs (MCA) had notified 98 sections of Companies Act 2013 in September 2013. These 98 sections included Section 185 of the Act also. The Section 372A of Companies Act 1956 is still to be repealed and Section 186 of Companies Act 2013 is pending to be notified.

Under Companies Act 1956, the section 372A deals with the Inter-Corporate Loans and Investments by Public companies. The section 186 under Companies Act 2013, regulates Inter-Corporate Loans and Investments and since this section of the new act is pending to be notified, its corresponding provision, Section 372A of the 1956 Act, continues to be in force.

Section 185 of Companies Act 2013 (replaces the old section 295 of the Companies Act, 1956) provides for loans to directors, and is applicable to private and public companies, while the old section 295 was not applicable to private companies, unless such private company was the subsidiary of a public company.

Section 372A of the Companies Act, 1956, specifically exempts any loans made, guarantee given or security provided or any investment made by a holding company to its wholly owned subsidiary.

As against section 372A, the new section 185 of Companies Act 2013, prohibits guarantee given or security provided by a holding company in respect of loans taken by its subsidiary company except in ordinary course of business.

The above situation of contradiction between provisions of Sec 185 and Sec 372A lead to the confusion. In light of this, MCA has vide its circular dated February 14, 2014 issued a clarification regarding the applicability of Sec 372A till it is repealed and notified. MCA has clarified that any guarantee given or security provided by a holding company in respect of loans made by a bank or financial institution to its wholly owned subsidiary company, exemption as provided in clause (d) of sub-section (8) of Section 372A of the Companies Act, 1956 shall be applicable. MCA has specifically added that this clarification will, however, be applicable to cases where loans so obtained are exclusively utilized by the subsidiary for its principal business activities.

The MCA circular on clarification is available at :

http://www.mca.gov.in/Ministry/pdf/General_Circular_3_2014.pdf

Issue of applicability of TDS in Bills Discounting

 

 

Recently, I read about the Income Tax Appellate Tribunal giving ruling regarding issue of applicability of deduction of tax at source (TDS) in bills discounting facility.

 

A ‘Bill’ is a written, unconditional order by one party (the drawer) to another (the drawee) to pay a certain sum, either immediately (a sight bill) or on a fixed date (a term bill), for payment of goods and/or services received. The drawee accepts the bill by signing it, thus converting it into a post-dated cheque and a binding contract.

Under bill discounting facility offered by financiers, the financier takes the bill drawn by Supplier/borrower on his (borrower's) customer and pay him immediately deducting some amount as discount/commission. The financier then presents the bill to the borrower's customer on the due date of the bill and collects the total amount.

In the given case at Income Tax Appellate Tribunal, party ‘X’ appointed ‘Y’ as its agent. Y sells the products manufactured by the X to the customers and also provides guarantee to X for payment from customers. X generates sales bills on customers with a mention that payment is guaranteed by Y. Y gets the bills discounted from financiers. The tax authorities made a case that such discounting charges are interest as per Indian Tax Laws (ITL) and attracts deduction of tax at source. Since, Y did not withheld TDS therefore the discounting charges were not allowed as expenses while calculating the business income of Y.

As per Y, when receivables are sold to financier, the ownership of the same is also passed on to the financier. Therefore there is no advance made by the financier to Y and hence there is no debtor-credit relationship between Y and financier. In case of non payment by customer, the financier will have lien over the goods sold but not on the moneys paid to Y. Y relied on Central Board of Direct Taxes (CBDT) circular which mentions that the amount paid by the banks, after deducting the bill discounting charges from the bill amount, is in the nature of price paid for the bills.

The Appellate Tribunal while taking decision in the case referred to the definition of ‘Interest’ as defined under the Interest Tax Act 1974 and also the ‘Interest’ as defined under the Indian Tax Law.

Under ITL, interest is defined to mean interest payable in any manner in respect of any moneys borrowed or debt incurred and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.

Under the Interest Tax Act, 1974 interest is defined to mean interest on loans and advances made in India and includes commitment charges, discount on promissory notes and bills of exchange made in India.

The Appellate Tribunal noted that while the Interest Tax Act mentions discounting charges as ‘interest’ despite that ITL has consciously not included the same in its definition. Appellate Tribunal ruled in favour of Y to allow it recognizing discounting charges as expense without deduction of tax on the same.