Income Tax Act Unaffected by Violation of Companies Act Section 185: ITAT (Mumbai)

Income Tax Act Unaffected by Violation of Companies Act Section 185: ITAT (Mumbai)

The Mumbai bench of the Income Tax Appellate Tribunal has recently determined that the breach of Section 185 of the Companies Act, which relates to the granting of loans to directors, does not carry any implications under the Income Tax Act.

The Revenue's appeal focused solely on the removal of interest added to loans extended to directors and sister concern/related parties.

The Revenue argued that the assessee had provided interest-free loans to directors, namely Vipul Shah and Dhaval Shah, as well as a group company called M/s. Parnee Homes Pvt. Ltd., without substantial evidence of business necessity. The loans to directors were alleged to violate Section 185 of the Companies Act.

Upon reviewing the balance sheet, the bench consisting of Vikas Awasthy (Judicial) and Om Prakash Kant (Accountant) noted that the assessee had an ample amount of interest-free funds to support the loans granted to related parties. The Revenue did not contest the availability of interest-free funds for covering the loans extended to the said related parties.

The bench concluded that as the assessee successfully demonstrated the presence of adequate interest-free funds, there was no justification for imposing notional interest on the advances made to related parties.

“Insofar as the violation of the Companies Act in advancing loans to the Directors under Section 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.