Background
Section 314 of the Companies Act, 1956 (‘the Act’) deals with situations where either the director or any of his relative or any person mentioned in section 314 holds ‘office or place of profit’.
Meaning
As per s.s (3) of section 314, any office or place shall be deemed to be an ‘office or place of profit’:
In case of director
If the director obtains from the company anything by way of remuneration over and above remuneration to which he is entitled as such director, whether as salary, fees, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise.
In case of any other individual or body corporate
If the individual or that body corporate obtains from the company anything by way of remuneration whether as salary, fees, commission, perquisite, the right to occupy free of rent any premises as a place of residence, or otherwise.
Conditions
As per s.s (1) of section 314, except with the consent of the company accorded by a special resolution:
(a) No director of a company shall hold office or place of profit, and
(b) (i) No partner or relative of such direc tor,
(ii) no firm in which such director, or a relative of such director is a partner
(iii) no private company of which such director is a director or member, and
(iv) no director or manager of such a private company shall hold office or place of profit carrying a total monthly remuneration as prescribed (Rs. 250,000 per month).
One may interpret that because of the word ‘such’ used above, the relative or partner or firm or private company as mentioned above would attract the provisions of section 314(1) only when the concerned director is already holding office or place of profit. Where the director himself does not fall within the ambit of section 314, the relative/firm/private company as mentioned above need not satisfy the condition of special resolution even though he/it may be holding office or place of profit.
However, s.s 314(1B) starts with a non-obstante clause which states that notwithstanding anything contained in s.s (1), where the relative/partner/firm/ private company holds any office or place of profit carrying monthly remuneration more than the sum prescribed (Rs.250,000 p.m. from April 2011), then the company shall be required to obtain prior approval of the Central Government and pass a special resolution for such an appointment.
Hence, it deduces that where the remuneration exceeds the prescribed limit i.e., Rs.250,000 per month, the approval of the Central Government and special resolution will be required even when the concerned director does not hold place of profit.
The above requirement applies to private limited companies also. This implies that even small private limited companies which are nothing but family-managed businesses would be required to comply with this section. This article attempts to bring out the unfairness in applying section 314 particularly the condition of obtaining the Central Government approval in case of private limited companies.
The underlying object of this section is to prohibit a director from misusing its influential position in the company. Hence, section 314 puts certain checks like special resolution by the company and approval of the Central Government. Naturally, it follows that such checks particularly, getting approval of the Central Government would be more apt when interest of public at large is involved.
However, there are many small private limited companies with family members as shareholders and occupying important positions. Normally, these companies do not have outside persons as shareholders. Hence, their internal affairs would not affect the interest of general public. In such scenario, applying to the Central Government does not make much of sense. Again, getting the Central Government approval would prove to be a task in itself in terms of time and efforts involved.
Moreover, many of these small private limited companies are not liable to furnish Compliance Certificate to the Registrar of Companies. They do not have a dedicated company secretary to point out company law compliances. There is every possibility that requirements of section 314 may go unnoticed. Again the threshold limit of Rs.250,000 has been raised in April 2011 only. Previously, the limit was only Rs.50,000. This steep rise in the limit itself implies how irrational the earlier limit was.
Further, it is pertinent to note that section 40A(2) of the Income-tax Act, 1961 already seeks to provide some control over excessive or unreasonable remuneration. However, in case of this provision also, there is an element of unfairness in its implementation. Interestingly, there are decisions to say that where the payment is actually made and where the payee has incorporated such payment in its/ his income and paid taxes thereon, disallowance u/s.40A(2) cannot be made [see CIT v. Udaipur Distillery Company Ltd., (Raj.) (316 ITR 426) and Modi Revlon (P) Ltd. v. ACIT, (Del.) {2 ITR (Trib.) 632}].
Suggestions
In all fairness, it would be in interest of all the parties involved to exempt private limited companies from rigours of section 314. Seeking of prior Central Government approval may be made mandatory only for public companies and private companies which are subsidiaries of public companies.
