Filing Income Tax Made Easy

"under section 68 of the Income Tax Act, a company needs to prove authenticity of the transaction, identity of investor and his capability and capacity to invest"

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I run business of manufacturing chemical through A1 Pvt Ltd where I am holding 60% of the entire shareholding. The balance 40% are held by my other family members. A1 Pvt Ltd has surplus liquidity. Can I use this surplus funds by way of loan to B1 Pvt Ltd in which again my shareholding is more than 20% ? Is there any tax implications under the Income Tax Act both in the hands of A1 Pvt Ltd or in the hands B1 Pvt Ltd ? 

Yes, there will be tax implications in the hands of shareholder i.e. you in the present case. Under section 2(22)(e) of the Income Tax Act, if A1 Pvt Ltd give advance or loan to B1 Pvt Ltd in which shareholders are common having more than 10% holding in A1 Pvt Ltd and more than 20% in B1 Pvt Ltd, then the entire advance would be taxed in the hands of shareholder as deemed dividend. Since in the present case, you are having substantial shareholding in the both the companies, the entire advance would be taxed in your hands as deemed dividend. Besides the Income Tax Act provisions, A1 Pvt Ltd is also likely to violate provisions of section 185 of the Companies Act which prohibits loans or advance to a company which has common directors.