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 Drawings by Directors of Private Limited Company
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tanver1
Unregistered Trainee

1 Posts

Posted - Jul 27 2009 :  2:41:04 PM  Show Profile
Please anyone let me know whether a Director of a Private Limited company make drawings ? if so what is the treatment ? how it is taxed?

faisal_desperado
Senior

Pakistan
330 Posts

Posted - Jul 27 2009 :  3:35:55 PM  Show Profile
quote:
Originally posted by tanver1

Please anyone let me know whether a Director of a Private Limited company make drawings ? if so what is the treatment ? how it is taxed?



Dear,
Please restructure your question, there is no concept of drawings by director,this is seems to be an illogical question, even a director can not apply for loan, except in some cases with restrictions, which are specified in the ordinance.

Best Regards,
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anna7787
Unregistered Trainee

2 Posts

Posted - Aug 07 2009 :  1:20:00 PM  Show Profile
quote:
Originally posted by faisal_desperado

quote:
Originally posted by tanver1

Please anyone let me know whether a Director of a Private Limited company make drawings ? if so what is the treatment ? how it is taxed?



Dear,
Please restructure your question, there is no concept of drawings by director,this is seems to be an illogical question, even a director can not apply for loan, except in some cases with restrictions, which are specified in the ordinance.

Best Regards,






Why a director can not withdraw money from s business? When someone sets up a limited company, that person is already a director. It is not necessary to have any other employees at all.

The entry is;

Dr: Drawings
Cr: Bank




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farazkpmg
Unregistered Trainee

Pakistan
10 Posts

Posted - Aug 07 2009 :  5:41:36 PM  Show Profile  Send farazkpmg a Yahoo! Message
Drawing is in the private owend business

director only takes the remmunirations.... which is set in the AGM.....
according to our ordinance... there is a limit to the load to director!
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anna7787
Unregistered Trainee

2 Posts

Posted - Aug 08 2009 :  01:31:01 AM  Show Profile
quote:
Originally posted by farazkpmg

Drawing is in the private owend business

director only takes the remmunirations.... which is set in the AGM.....
according to our ordinance... there is a limit to the load to director!



Right...It can then be withdrawn in the form of salary, expenses or dividends I imagine.
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awaisaftab
Partner

Pakistan
1109 Posts

Posted - Aug 08 2009 :  10:05:28 AM  Show Profile  Send awaisaftab a Yahoo! Message
Unfortunately the concept of separate entity is very bitterly overlooked private limited companies. 90% private limited companies are family owned companies. Directors of these companies withdraw cash frequently. I am witnes of drawings of millions of rupees by the directors of private companies. These companies are just like sole proprietors businesses.

Now I come to your question. According to ITO,2001 any withdrawal of cash by way of advance and loan will be considered as dividens and hence WHT shall be deducted on these loans and advances. If the law does not permit grant of loans and advances to directors then how we can assume that huge withdrawals of cash are allowed to directors.

Sub section 19 of section 2 of Income Tax Ordinance defines dividend clause (e)of sub section 19 of section 2 includes the loans and advances issued to directors of a private company as dividend.

Clause (e)of sub section (19) of section (2) lays down

(e) any payment by a private company 3[as defined in the
Companies Ordinance, 1984 (XLVII of 1984)] or trust of any
sum (whether as representing a part of the assets of the
company or trust, or otherwise) by way of advance or loan to a
shareholder or any payment by any such company or trust on
behalf, or for the individual benefit, of any such shareholder, to
the extent to which the company or trust, in either case,
possesses accumulated profits.

Companies Ordinance,1984 also put restriction on grant of loans and advances to directors.
Sub section 1 of section 195 of the ordinance lays down

Loans to directors, etc.- (l) Save as otherwise provided in sub-section
(2), no company, hereafter in this section referred to as "the lending company'', shall,
directly or indirectly, make any loan to, or give any guarantee or provide any security in
connection with a loan made by any other person to, or to any other person by.—
(a) any director of the lending company or of a company which is its holding
company or any partner or relative of any such director;
(b) any firm in which any such director or relative is a partner;
(c) any private company of which any such director is a director or member;
(d) any body corporate at a general meeting of which not less than twenty
five per cent of the total voting power may be exercised or controlled by
any such director or his relative, or by two or more such directors
together or by their relatives; or
(e) any body corporate, the directors or chief executive whereof are or is
accustomed to act in accordance with the directions or instructions of the
chief executive, or of any director or directors, of the lending company:
Provided that a company may, with the approval of the
Commission, make a loan or give any guarantee or provide any security in
connection with a loan made by any other person to a director who is in
Companies Ordinance, 1984
133
the whole-time employment of the company for the purpose of acquisition
or construction of a dwelling house or land therefor or for defraying the
cost of any conveyance for personal use or household effects or for
defraying any expense on his medical treatment or the medical treatment
of any relative as are ordinarily made or provided by the company to its
employees.


Regards,

Awais Aftab
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masifjamil
Unregistered Trainee

1 Posts

Posted - Aug 21 2009 :  2:22:53 PM  Show Profile
Awais has done some good work but unfortunately he gorgot to mention here the Explanation to section 195 which states that Sub-section (1) shall not apply to—
(a) any loan made, guarantee given or security provided—
(i) by a private company, unless it is a subsidiary of a public
company; or
(ii) by a banking company;

The nutshell is that a director of a private limited company can withdraw / borrow form the company any amount he likes and that amount would be considered as dividend unless and ultill he refunds the same to the company.

Regards

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awaisaftab
Partner

Pakistan
1109 Posts

Posted - Aug 22 2009 :  08:27:50 AM  Show Profile  Send awaisaftab a Yahoo! Message
Dear masifjamil

I accerpt my mistake relating to sec-195 of the CO,1984 in understanding and overlooking sub section 2 of section 195 of CO,1984 but what you would say abour clause e of sub section 19 of ITO,2001. I have heard the view of one qualified charted accountants who explains clause 19 in the same way as I have done

Now, it is your turn to accept your mistake.


Regards,

Awais Aftab
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awaisaftab
Partner

Pakistan
1109 Posts

Posted - Aug 27 2009 :  11:18:01 AM  Show Profile  Send awaisaftab a Yahoo! Message
I am repasting clause e of section 19 of section 2

any payment by a private company 3[as defined in the
Companies Ordinance, 1984 (XLVII of 1984)] or trust of any
sum (whether as representing a part of the assets of the
company or trust, or otherwise) by way of advance or loan to a
shareholder or any payment by any such company or trust on
behalf, or for the individual benefit, of any such shareholder, to
the extent to which the company or trust, in either case,
possesses accumulated profits; 4[or]

It is very clear that the above clause is relating to shareholder so it is not applicable only on executive director of a Private Ltd Company, who are directors by the virtue of their employment. But this clause will be applicable to the director of Private Company who is also the shareholder of the companay. In Pakistan majority of Private Ltd Companies are Family Ovned Companies. For instance, I hold 50% share of XYZ Pvt Ltd Co and remaining 50% shares are hold by my younger brother and we are both directors as well as shereholder so clause (e) will be applicable on both of us.

To clarify further I am qouting definition of Private Company as per CO,1984

"private company" means a company which, by its articles,—
(i) restricts the right to transfer its shares, if any;
(ii) limits the number of its members to fifty not including persons
who are in the employment of the company; and
(iii) prohibits any invitation to the public to subscribe for the shares,if any, or debentures of the company:

Section 174 of CO,1984 lays down that a private company should have at least 2 directors and I think you are confusing with the word used in clause (e) that is SHAREHOLDER. The persons who hold shares in private limited company are also called shareholders. As per my limited knowledge there are only two types of directors are found in all types of companies 1. Directors (Hold shares of Pvt or public company ) and 2. Executive Directors (Directors by the virtue of their employment). Executive directors cannot make drawings so clause (e) of sub section 19 of section 2 of ITO,2001will be applicable to directors who fall under catagory 1.

For any clarification please feel free to ask any question

Regards,

Awais Aftab

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