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Whether a private company can accept

deposits from HUF?
May 6, 2022 / 1 Comment / in Companies Act 2013, Corporate Laws / by Staff

Vinita Nair | corplaw@vinodkothari.com

Provisions of Law
According to Section 2(31) of the Companies Act, 2013 ‘Deposit’
includes any receipt of money by way of deposit or loan or in any
other form by a company, but does not include such categories of
amount as may be prescribed in consultation with the Reserve
Bank of India. The exclusions are cited in Rule 2 (1) (c) of
Companies (Acceptance of Deposits) Rules, 2014 which are
applicable to public and private companies.

Rule 2 (1) (c) (viii) of Deposit rules excludes amounts received from
a person who, at the time of the receipt of the amount, was a
director of the company or a relative of the director of the private
company, provided that the person declares that the amount is
his own fund and not borrowed. The private company is required
to disclose the details of money so accepted in the Board’s report.

‘Relative’ as defined under Section 2 (77) of Act, 2013 with

reference to any person, includes anyone who is related to
another, if they are members of a Hindu Undivided Family (HUF).

Further, Section 73 (2) permits acceptance of deposits from

members subject to fulfillment of conditions specified under (a) to
(e). MCA vide exemption notification dated 5th June, 2015 granted
exemption to private companies that accepted monies from
members not exceeding 100% of aggregate of paid-up share
capital and free reserves, from complying with the requirements
specified under (a) to (e) provided such company shall file the
details of monies so accepted to the Registrar.

Concept of HUF

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As explained on income tax website[1] [#_ftn1] , an HUF is a family

which consists of all persons lineally descended from a common
ancestor and includes their wives and unmarried daughters. An
HUF cannot be created under a contract, it is created
automatically in a Hindu Family. HUF is treated as a ‘person’ under
Section 2 (31) of the Income Tax Act, 1961 (IT Act). HUF is a
separate entity for the purpose of assessment under IT Act.

In Dasharatharao v. Ramchandrarao[2] [#_ftn2] , the meaning to

be given to the expression ‘Hindu Joint family’ was explained as
follows:

“A joint family consists of persons who are lineally descended

from a common ancestor. Such family includes the wives of male
members as well as unmarried daughters. As soon as the
daughter marries she leaves the family of her father and becomes
a member of the husband’s family. It is quite true that every
member of a Hindu Joint family is not a coparcener. Where a
member of an undivided family is a coparcener or not would
depend on whether he is entitled to demand partition and that
would in its turn, depend on the question whether he has a right
in the property of the coparcenery by his birth.”

Is the HUF different from its members?

It is important to understand meaning of the term ‘members of
HUF’. The obvious intent of treating members of an HUF as
relatives is that they have common economic interest, such that
the HUF forms a single economic unit, the same way as a
husband-wife couple does. If a family is living together and has
jointly-owned properties and resources, the family must be
regarded as a single economic unit.

The essence of existence of a Hindu Undivided Family is the

presence of a sufficiently strong nucleus which is shared by all the
members of the family. Normally, an HUF is also characterized by
common food and worship. Where two members are residing in
different residential units, each of them enjoy their own privacy
and have their own separate economic interests much larger in
dimension than the inherited property

There is an elaborate discussion on the features of an HUF in V

Srisailam vs. Krishna Murty and others[3] [#_ftn3] , which has
reviewed several rulings of the Supreme Court and Privy Council.
Joint food, worship and property are the common characteristics
of existence of an HUF – Kamalakant Gopalji vs Madhavji Vaghji,
AIR 1935 Bom 343.

In case of Vickers Systems International Limited v. Mahesh P.

Keshwani[4] [#_ftn4] , Company Law Board explained as under:

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“19. In some of the decisions in the context of the Income-tax Act,

it has been held that the Hindu undivided family is not a juristic
person for all purposes although it is a person for the purposes
of the provisions of the Income-tax Act or that for certain
purposes it is a legal entity although acting through the karta.
In the case of transfer of shares by a shareholder to another, the
only question to be examined is whether the transfer deed has
been validly executed in accordance with the provisions of Section
108 of the Companies Act and submitted to the company for
registration of transfer as provided in Section 110 of the said Act.
Section 108 enables execution of a transfer deed by or on behalf
of the transferor or the transferee. In the case of a Hindu
undivided family, it is represented by its karta and in the present
case, the transfer deed has been signed by the respondent as
karta of Mahesh P. Keswani, Hindu undivided family. Under
Section 153 of the Act, a company cannot take notice of any trust
on its register of members. In the case of a Hindu undivided
family, if the shares are held in the name of the karta of the Hindu
undivided family it cannot be equated with trust property held by
a trustee. A Hindu undivided family means persons constituting
the family and all such persons are owners of Hindu undivided
family property. The karta is one of the coparceners. There is no
legal bar on a Hindu undivided family investing its monies in
shares and securities and the Companies Act does not prohibit
membership of Hindu undivided family. We have also noted that
in respect of shares held by a minor, it has been held in a number
of cases that there is nothing objectionable if the shares are
registered in the name of the minor represented by his guardian.
Similar is the position in the case of a Hindu undivided family and
the shares can be registered in the name of “A” as karta of the
Hindu undivided family.”

In case of Chhotey Lal And Ors. vs Jhandey Lal And Anr[5]

[#_ftn5] , Allahabad High Court discussed following:

“11. It is thus clear that the members of the joint family collectively
own the coparcenary property. Each member has an interest in
such property, though his interest becomes definite on partition.
Till then, it is an undivided interest. The view expressed in
Mahabir Singh’s case, 14 AH LJ 278 = (AIR 1916 All 111) and the
other cases mentioned above, that the members were not the
tenants of the holding because they had no interest in it, is, with
respect, falfacious. In law, the members of the joint Hindu family
together become the tenant of the holding. The coparcenary body
as such, and as an entity apart from its members, does not own
property. The property does not vest in the coparcenary but in its
members, though collectively. This view finds support in Maha-
virprasad Badridas v. M. S. Yagnik, AIR 1960 Bom 191. Shah, J. (as
he then was) held that “the property belonging to a Hindu

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undivided family is the ownership of the coparceners in that

family and that such a family is not a corporation. It is not a
judicial entity distinct from the members who constitute it. It
cannot sue or be sued in the joint family name and cannot convey
the property held by it in its joint character. The coparceners who
are members of the Hindu undivided family are undoubtedly
owners of the property; but a Hindu undivided family has up
independent existence apart from the individuals who constitute
the same. Statements sometimes made in decided cases and text
books that a Hindu joint family is a “sort of corporation” in dealing
with questions relating to enjoyment of the property of the family
(see for instance Apaji Narhar Kulkarni v. Ramchandra Ravji
Kulkarni, ((1892) ILR 16 Bom 29 at pp. 39 and 78) and Mayne’s
Hindu Law 11th Edition, Article 243, at page 305) do not justify the
view that a Hindu undivided family is a corporation”. His Lordship
emphasised that the property is the property of the coparceners
who for the time being constitute the Hindu undivided family.
12. Hindu Law does not recognise a joint Hindu family or
coparcenary as a juristic personality capable of holding property,
as an entity separate from the members of the family. When it is
popularly said that a property is joint family or coparcenary
property, the true position in law is that the members collectively
own it, each having an interest. One of the distinctive features of
such “coparcenary property” is in its passing on death of a
member. According to Hindu Law, the interest of a dead member
passes by survivorship to other existing members of the family. It
does not devolve on his personal heirs.”

Hon’ble Supreme Court in case of Gopal and Sons (HUF) v/s CIT
Kolkata-XI [6] [#_ftn6] while answering the contention “Whether in
view of the settled principle that HUF cannot be a registered
shareholder in a company and hence could not have been both
registered and beneficial shareholder, loan/advances received by
HUF could be deemed as dividend within the meaning of Section
2(22)(e) of the Income Tax Act, 1961 especially in view of the term
“concern” as defined in the Section itself?” explained following:

“17) It is also found as a fact, from the audited annual return of

the Company filed with ROC that the money towards share
holding in the Company was given by the assessee/HUF. Though,
the share certificates were issued in the name of the Karta, Shri
Gopal Kumar Sanei, but in the annual returns, it is the HUF which
was shown as registered and beneficial shareholder. In any case,
it cannot be doubted that it is the beneficial shareholder. Even if
we presume that it is not a registered shareholder, as per the
provisions of Section 2(22)(e) of the Act, once the payment is
received by the HUF and shareholder (Mr. Sanei, karta, in this
case) is a member of the said HUF and he has substantial interest
in the HUF, the payment made to the HUF shall constitute
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deemed dividend within the meaning of clause (e) of Section 2(22)

of the Act. This is the effect of Explanation 3 to the said Section, as
noticed above. Therefore, it is no gainsaying that since HUF itself
is not the registered shareholder, the provisions of deemed
dividend are not attracted. “
Hon’ble Supreme Court in P. N. Krishna Iyer v. CIT [1969] 73 ITR
539[7] [#_ftn7] , held as under:

“16. Income received by a member of a Hindu undivided family

from a firm or company in which the funds of the Hindu undivided
family are invested, even though the income may be partially
traceable to personal exertion of the member, is taxable as the
income of the Hindu undivided family if it is earned by determined
to the family funds or with the aid or assistance of those funds;
otherwise it is taxable as the member’s separate income”.
Hon’ble Gujarat High Court while deciding the matter in case of
Shah Rajendrabhai Jayantilal v. D. Pranjivandas & Sons[8] [#_ftn8]
referred to Hon’ble Supreme Court’s discussion in the matter of
Ramanlal Bhailal Patel and concluded following:

“44. Thus, I have reached to the conclusion that although the

H.U.F. in the case at hand may be engaged in a business and is
running a firm in the name of M.S. Traders and may be having a
common purpose, yet what is missing is the element of
free will and volition. A mere combination of individuals
will not constitute an “association of individuals”. To make it
as an “association of individuals”, in terms of Section 141 of
the N.I. Act, it is absolutely necessary that the
combination of individuals must be on their own free will and
volition. Secondly, it is also necessary that such combination of
individuals must be with a common purpose. There may be a
common purpose to be carried forward by an H.U.F., but an
individual becomes a member of the H.U.F., not on his own free
will and volition, but by status and birth.”
In a nutshell, identity of HUF has been interpreted differently by
different legislations. It depends on the objective of the legislation
and definition of ‘person’ under the said legislation. The purpose
of taxation laws is to tax the HUF on its income; the purpose of
Hindu law is to define and delineate the property and income of
the family as opposed to separate property and incomes.

For the purpose of prosecution, it has been held that A H.U.F. is

not a legal entity distinct and separate from that of the members
who constitute it. However,for the purpose of IT Act, HUF is
regarded as a separate juristic entity and the income of HUF is
assessed separately. For the purpose of Companies Act as well, it
would be fair to assume that HUF is no different from its

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constituents and that the money that flows from any coparcener
is money given by HUF.

Acceptance of deposits from HUF/

members of HUF
With the aforesaid assumption, we list down the requirements
with respect to acceptance of deposits by a private company.

Case 1: 1 coparcener of the HUF is director of the private

company.

Position: In that case, all other members of HUF will be regarded

as director’s relatives and therefore, any amount received from
them will be equivalent to amount received from the HUF. The
Company shall disclose the details of money so accepted in the
Board’s report.

Case 2: 1 coparcener is the shareholder of the private company

but does not hold directorship.

Position: In that case, amounts accepted from the coparcener will

be assumed to be amount contributed by HUF and requirements
of Section 73 (2) (a) to (e) shall not apply to private companies
accepting monies from members not exceeding 100% of
aggregate of paid-up share capital and free reserves, provided the
companies file the details with the Registrar in form DPT-3. In case
the same exceeds the limit, compliance of Section 73 (2) (a) to (e)
shall be ensured and the amounts of such deposits together with
the amount of other deposits outstanding as on the date of
acceptance or renewal of such deposits shall not exceed 35% of
the aggregate paid-up share capital, free reserves and securities
premium account of the Company.

Case 3: HUF is the shareholder of the private company through

the Karta and no coparcener holds directorship.

Position: In that case, requirements of Section 73 (2) (a) to (e) shall

not apply to private companies accepting monies from the HUF if
the amounts raised from members do not exceed 100% of
aggregate of paid-up share capital and free reserves. The
company shall file the details with the Registrar in form DPT-3. In
case the same exceeds the limit, compliance of Section 73 (2) (a)
to (e) shall be ensured and the amounts of such deposits together
with the amount of other deposits outstanding as on the date of
acceptance or renewal of such deposits shall not exceed 35% of
the aggregate paid-up share capital, free reserves and securities
premium account of the Company.

Case 4: Neither the HUF or the coparcener holds shares of the

company nor any of the coparceners hold directorship in the
company
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3/13/24, 6:57 PM Whether a private company can accept deposits from HUF? – Vinod Kothari Consultants

Position: Amounts cannot be accepted from the HUF/ coparcener

unless the same specifically falls under any of the exemptions
specified under Rule 2 (1) (c) of Deposit Rules.

[1] [#_ftnref1] http://www.incometaxindia.gov.in/Pages/i-

am/huf.aspx [http://www.incometaxindia.gov.in/Pages/i-
am/huf.aspx]

[2] [#_ftnref2] AIR 1951 Bom 141 at p. 142

[3] [#_ftnref3] http://indiankanoon.org/doc/469010/

[http://indiankanoon.org/doc/469010/]

[4] [#_ftnref4] (1992) 73 Com Cases 317 (CLB)

[5] [#_ftnref5] AIR 1972 All 424

[6] [#_ftnref6] http://judis.nic.in/supremecourt/imgs1.aspx?

filename=44459

[7] [#_ftnref7] https://indiankanoon.org/doc/1601247/

[https://indiankanoon.org/doc/1601247/]

[8] [#_ftnref8] http://barandbench.com/wp-

content/uploads/2017/02/R_SCR.A_1970_2015_j_4.pdf
[http://barandbench.com/wp-
content/uploads/2017/02/R_SCR.A_1970_2015_j_4.pdf]
Tags: deposits, HUF, Private company

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1
REPLY

Abbas
September 9, 2022 at 1:21 am

Can a private limited company accept from

huf of director

What will be as on date position

Reply

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