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Giving loan to related party

Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 asked

There is a partnership firm in which almost all the directors are partners.The company has given loan to them in 2014-2015 and it was reversed in the same financial year.Now the auditor has raised a query so what can be the possible reason be given for transfer of funds and is it possible to say that money was an advance for some services to be rendered, but later the contract or agreement was revoked.

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 answered

Giving loan to related party under this section 184 and 188 both applicable here there is no prohibition on such related party transactions u/s 188 though it gives in rules certain limit for which one has to take approval in borad meeting , Special / ordinary resolution . Whereas as per 184 loans to dir . and other specified persons are prohibited strictly . Though if it was given as advance in salary its not violation of law .

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 answered

It will come under related party transactions under section 188, if the company gives money for services to be received for such partnership firm, requisite section has to be followed for this and if the company doesn’t follow then you may use the option as you told above. Also legal provisions have to be complied throughout the year and not just at the end of the year.

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