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Section 25 Companies in the Companies Act, 1956



Section 25 Companies in The Companies Act, 1956Company is a form of business organizations in which the individuals contribute some amount of capital. Companies are distinct legal entity and are separate from its members. Profit and risk taking are the main elements of a company. Higher the risk more is the profit of any concern. Various companies have been incorporated under the Companies Act, 1956. Similarly, another type of Company incorporated under the Companies Act, 1956 is Section 25 Companies. A detailed view about Section 25 Company has been illustrated as under –

Introduction

Section 25 Companies are –

  • Formed for solely promoting art, commerce, science, literature, charity, religion; and other useful objects.
  • To be granted a license by the Central government recognized for such purpose.
  • Required to apply its profits only for promoting its objects and for other purposes.
  • Not required to pay dividend out of its profits to its members.

Eligibility Criteria

  • Sec 25 Companies can be either Private / Public Company having a limited liability.
  • A license is required to be obtained from Central Government for this purpose.
  • Deletion of words “private limited” or “limited” from its name.

Before taking any decision in respect of incorporating a Company for carrying any business, it is necessary to analyze the benefits and drawbacks of the Company, which are outlined below:

  • Advantages of Sec 25 Company
  • Disadvantages of Sec 25 Company

Privileges & Advantages of Sec 25 Companies

  • A partnership firm is allowed to be its members.
  • Minimum requirement of share capital in comparison to other Companies.
  • Publication of name is not necessary.
  • Required to maintain books of accounts only for 4 years.
  • Can increase the no. of directors without obtaining prior permission from Central Government.
  • Free to determine & hold the time, place & date of Annual General Meeting.
  • Notice for AGM to be given for short period of 14 days only.
  • If articles of Sec 25 Companies provide for election of directors by ballot then provisions of Sec 257 does not apply to them.
  • Board meetings to be held only once in every 6 months but should held 4 meetings in a year.
  • Exempt from maintenance of registers of contracts to an extent.
  • Exempt from applicability of CARO (Companies Auditor’s Report Order).
  • Low fees are required to be paid in comparison to other Companies for registration. At present Rs. 50 is required to be paid.
  • Not require to stamp their Memorandum & Articles of Association.
  • Can appoint any person as Secretary as they thinks fit.

Disadvantages or Obligations of Sec 25 Companies

  • Ensure that the profits or other incomes are applied for promoting the objects only.
  • Cannot alter its objects clause in the Memorandum without taking prior written approval of central Government.
  • Ensure that profits are not distributed as dividends to its members.
  • Section 25 Company is regarded as a ‘company’ within the meaning of the Income Tax Act, 1961 and as such its income is taxable according to the applicable rates similar to those applying to other companies.
  • If an existing company obtains a license under section 25 it has to ensure that its objects are confined to those mentioned in section 25 itself and if not make proper alteration to its memorandum and articles.
  • In comparison to other business forms, it is costly to incorporate and run a Company. Moreover heavy fines and penalties have been prescribed for the non compliance.

Revocation of license

The Central Government after giving reasonable opportunity of hearing can revoke the license by passing a speaking order.

Winding up of Section 25 Companies

The winding up procedure of these Companies are too long and cumbersome. It is generally not easy to close the company & the procedure involves compliance of various formalities. Sometimes it even takes 1-2 years to completely wind-up the company. Moreover in certain cases, it is necessary to take the permission of the High Court to close the Company. So winding up or closing of Sec 25 Companies is not an easy process as various compliances have to be adhered to.

About: 

Alok Patnia founded Taxmantra.com, an expert in tax advisory & compliance. He is a Chartered Accountant having prior exposure with Ernst & Young & KPMG.

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