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VT Venkatesh (Director)     28 December 2016

Tax treatment on return of loan/investment

A person ( who no connection with the company except being an acquaintance of the  MD)invests a lakh of rupees in a private limited by himself transferring money through NEFT (with out any preconditions ) to promote some socila werlfare activies of the company

Later on he starts troubling the managing director of the company by saying that he had given only a loan & he wants the money back from teh director

The Managing director is ready to give the money from his personal funds since the company is not making any profit(though he is not ibligated to give the money back in his personal capacity).He only wants the invetsor to sign an agreement that he has invested the money & the money is being retuned back due to his request & he will no have any further claim on the company

The investor is not ready to sign the agreement & has sent a legal notice asking for reyrun of his so called loan

 

The following may be kindly clarified

-Does the  MD have any legal obligation to return the money invested by the investor on a company since he and the company are distinct entities& he has not committed any fraud

-Can the investor file a case against the individula or he has to file a case against the company

-What offense is being committed by the investor by calling his investment as a loan since no private limited company can take a loan f rom the public

-If the MD returns the money f rom his personal savings  will it be treated as benami transaction

-Is the investor liable to pay IT on the amount if the MD returns the money from his personal capacity

 

 

 



 4 Replies

ANUP KUMAR (AVP-LEGAL)     29 December 2016

First of all the transaction is invalid as the Private Company is debarred from accepting deposit from public. Still the money is accepted. You have not mentioned the date when this money was accepted. It is important to know how the company is dealing with this money and in which account this money was shown in the balance sheet (whether loan or in some othe head).

The transaction ultra vires the company and is violation of Companies Act, 2003. Since the transaction was done at the behest of MD, he cannot escape his liability.

The money has been accepted by the Company and retained by it, hence the Investor has right to claim his money back alongwith interest from the company. 

Now pointwise answer to your queries:

Does the  MD have any legal obligation to return the money invested by the investor on a company since he and the company are distinct entities& he has not committed any fraud -Can the investor file a case against the individula or he has to file a case against the company

The money has to be refunded by the Company to cancel out the transaction. However, MD is personally responsible for effecting an ultra vires transaction and violating the provisions of Companies Act w.r.t. to public deposit. The consequences of violation of this clause is very stringent.

-What offense is being committed by the investor by calling his investment as a loan since no private limited company can take a loan f rom the public?

Though investor is ought to know the law relating to Deposit but he may plead that he was misrepresented by MD. The very fact that company accepted the deposit, he has right to call it a deposit and can also claim interest.

-If the MD returns the money f rom his personal savings  will it be treated as benami transaction -Is the investor liable to pay IT on the amount if the MD returns the money from his personal capacity  

I fail to understand why MD intends to return the money from his personal savings when the money has actually received by the company. It appears he has guilty conscious and knows that he has done the transaction which ultra vires the company. Even if he makes payment, the company will continue to be liable to pay to investor. Hence MD should arrange this payment from company only. In fact it is mandatory to pay investor back immediately from company to make good the default committed by the company.

-Is the investor liable to pay IT on the amount if the MD returns the money from his personal capacity  
 
No. It is not his income. Only amount received by him over and above the loan granted shall be subject to tax that too has to be included him voluntarily in his Income Tax Return.

Practical solutions to your queries are as under:

1. Immediately repay the amount received from Investor by the Company and thus cancel the transaction in the company's books of account.

2. If investor insists on interest, the same may be paid by MD from his personal savings preferably in cash.

3. After payment as aforesaid, take No Dues Certificate from him.

 

VT Venkatesh (Director)     29 December 2016

Mr Auo Kumar Thanks for your answer.

No loan  was asked nor taken by the MD for himself or for the company.The investor on his own invested the money by transferring money fron  his account to the  company's account.

How ever he is calling it as a loan later on for probably some nefarious reasons

The MD had even sent a mail to the investor thanking him for his investment  afte trhe investment was done & the investor did not object to that

The money was also taken into the company's account as income only & necessary taxes were also paid  & no where the amount was shown as a loan

No where did the MD mention it as a loan & neither the inevstor called it as a loan when he invested

The MD was ready to return the money from his personal account since the company was not having any income(trhe money invbested by the investor was used for buying some equipment with full knowledge of the investor & he even made use of the  equipment)

 

 

VT Venkatesh (Director)     29 December 2016

Mr Anup Kumar.Sorry for mispelling your name in my previous message

ANUP KUMAR (AVP-LEGAL)     29 December 2016

Dear Querist,

The facts stated by you make the whole transaction more confusing.  It appears that there is no correlation between the facts and transaction. You have not stated how the money is transferred by the investor in the company’s account. You have also not mentioned the amount involved to understand the gravity of the transaction. For example how can investor transfer funds in company’s account without a request made on behalf of the Company.  For electronic transfer the investor must have company’s account and IFSC code which can be provided by the company only.  

Another confusing aspect is that the money has not been taken as loan but has been shown as income in the books of account of the Company on which TDS has also been deducted. It defies all logic and against any accounting standard dealing with recognition of income (The company has not sold any goods or services to the Investor, then why his making payment). It appears that certain facts were not disclosed to you.  By no stretch of imagination, uncalled money from a stranger can be treated as income on which TDS has also been deducted by the Company.  Please make enquiries to know the correct facts.

The entire transaction as stated by you is so perplexing that even Investor will not be able to drag you to court for his claim as there is no documentation of transaction to substantiate his claim. But the debatable question is on what account the money was transferred by Investor to the Company, if it is not a loan. Your action lies on unearthing of this fact.

However, based on the facts given by you and considering the compulsion of your company to make payment and to buy peace, I want to give you a simple workable solution: 

The investor be paid back his money by MD from his personal savings through Banker’s DD and simultaneously take No Dues Certificate from him and close the chapter. If he insists on interest the same may be paid in cash. 


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