CARE REQUIRED IN MAKING DECLARATION UNDER SECTION 58A OF THE COMPANIES ACT, 1956 TO AVOID ADDITION UNDER SECTION 68 OF THE INCOME TAX ACT.

[DEV KUMAR KOTHARI]

Declaration under section 58A of the Companies Act, 1956:

Section 58A of the Companies Act, 1956 governs acceptance of deposits by companies. Some deposits are exempted, subject to declaration as to own funds. In this write-up we are concerned with declaration made by a depositor who is in case of private company

a) Any Director of private company,

b) Any relative of a Director of private company, (recently added)

c) Any member of the company, ('member' substituted for 'shareholder')

And in case of a limited company is a Director of the company at the time of making the deposit with the company.

The deposits of money made by such persons with the company are not considered as a public deposit, if it is out of own funds and not from borrowing. This is vide exemption granted vide Rule 2 (b) (ix) of the Companies (Acceptance of Deposits) Amendment Rules, 2004 which was recently amended vide Notification dated 12.3.2004 (2004) 120 Company Cases 79 (St.). Vide this amendment; the scope of eligible persons has been extended to a relative of Director of private limited companies. And restriction has been made so as to entitle only 'members', as against any 'shareholder' to be an eligible person in case of private company who can make deposit out of own funds without attracting restrictions applicable to public deposits.

DECLARATION NECESSARY FOR EXEMPTION:

The condition for exemption from being treated is that the eligible person being the director, relative of the director or a member, as the case may be, give declaration in writing, at the time of making deposit to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting (loan or deposit of money) from others.

The restriction is on accepting or borrowing money from others, therefore, money withdrawn from capital account of proprietary concern or partnership firm will not be money received from others hence can be given to the company with a declaration. However, suppose the proprietary concern or partnership firm has already used capital contributions for business purposes, and on the day of withdrawal by the proprietor or the partner the concern borrow money from others, then inference may be drawn that the money deposited by the director, relative of director or member is out of borrowed funds and the proprietary concern or the firm has been used as a tool or conduit to give impression that the money belongs to the depositor.

Similarly money withdrawn from bank account on overdraft facility against fixed deposit made by   director, relative of director or member as the case may be cannot be considered as own money as it has been borrowed from the bank against over draft facility. The transaction of making fixed deposit and obtaining loan by way of over draft facility being two different transactions.

Section 68 of the Income-tax Act, 1961:

As per section 68, any sum found credited in the books of account of the assessee can be deemed to be income if the assessee is unable to explain the source and nature of the same satisfactorily. Being well known popular provision, an elaborate discussion is not made for sake of brevity. To establish that any sum found credited in the books of account and credited, as a loan, advance, deposit, or gift from any person is not income, the assessee is required to establish the source and nature of the sum so found credited. For that purpose not only the identity but also capability of the person who made such loan, deposit, advance, or gift is also required to be established to the satisfaction of the Assessing Officer.

A WRONG DECLARATION MAY ATTRACT SECTION 68 OF I.T.ACT:

Suppose, by mistake a declaration as to own fund has been made by the director, relative of director or member, as the case may be then such declaration may go against the assessee and the borrowing may be deemed as income- For instance in case the Assessing Officer of the director, relative or member as the case may be, comes to know that a declaration as to  'own fund' has been given to the company or the company has not treated the amount as public deposit, leading to an inference of own fund, or he obtain copy of declaration and then on scrutiny of books of account he find that the money has been given out of borrowed funds by the director, relative or member. The A.O. may draw the conclusion that the amount of deposit is out of undisclosed income of the declarant and therefore the borrowings shown in his books of account are bogus or the lenders are just name lenders and therefore he may treat the amount of those borrowings as undisclosed cash credit and treat the same as income under Section 68 of the Income Tax Act, 1961 because the assessee himself has admitted or declared that he made deposit out of  'own fund.

Besides such addition under section 68 of the Income-tax Act, 1961 the exempted deposit shall no longer be an exempted one, but will be treated as public deposit. Therefore, the purpose of declaration will fail, and may lead to violation of deposit Rules and the declarant, the company, and any officer including director may be liable to penalty and prosecution under The Companies Act, read with relevant rules for making false declaration, violating deposit rules etc.

CONCLUSION

Care should be taken while giving declaration as to own fund and it should not be taken in a mechanical and routine manner without verifying the exact position in the books of accounts of the declarant. As the case of deposits received by company will be generally in house transaction related with director, relative or member, it would always be advisable to reconfirm from the director, relative or member  (in practice from their accountant) to recheck the personal cash book and ensure that the declaration is correct.

Discussions to this article

[MARDA YATIRAJ]

Dear Kothari sahab, Thanx for providing clarifications on the provisions of Companies acceptance of deposits rules. However sir i wish to know, whether a director provide loans to the company aou of his borrowed funds. If so what compliances are to be made. Pl. guide Regards

[Gaurav]

Dear Mr. Kothari, I would like to seek your advice in a matter which may be indirectly related to your article.. I want to ask what are the conditions under which a body (company, firm or individual) is required by law to form an NBFC? If I become an arranger of loans such that I bring together a borrower (needing a loan of say Rs.50,000) and lenders (say 10 people ready to contribute 5000 each) who are ready to fund the borrower's loan, am I required to hold some kind of license?? In my example I can be an individual or a partnership firm or a company. Please throw some light on this matter.. Thanks & Regards, Gaurav

[Anand]

Tata has calling for booking of its Nano Car of about 95,000 as an advance. Is this violation of section 58A of Companies Act? If so how?

[DEV KUMAR KOTHARI]

For Mr. Marda- director giving loan to company out of borrowed funds, will be treated as 'public deposit'. Requiring applicable compliance. For Mr. Gaurav- to channelise small savings NBFCs are formed. However, in small scale, firm or AOP can also work. State law to be looked into for local statutory rewquirements relating to licence, money lenders licence etc. besiides requirements of RBI to be compliedwith. For Mr. Anand- Tata Motors is receiving advance from customers, these are trade advances or deposits so they will not be considered as public deposit.

[jaswinder singh]

can limited Companiy Take Unsecured Loans from Indivduals other than the Directors If not whats The remedy avalable to the individuals

[sudhir mishra]

company fixed deposit are effecetd by sec 58-A of the companies act 1956