🔹 1️⃣ Related Party (RP)
Who are they?
Parties that have control, common ownership, or significant influence over each other.
📌 Examples
- Parent & subsidiary companies
- Sister companies under same owner
- Company & shareholder
- Company & director
- Company & close family of owner
👉 Rule:
Transactions must be at arm’s length (market price)
✔ Expense allowed only to the extent of market value
🔹 2️⃣ Connected Person (CP)
Who are they?
Individuals connected to the business who can influence decisions.
📌 Examples
- Owner / shareholder
- Director
- Manager
- Close relatives (spouse, parents, siblings, children)
👉 Rule:
Expense is allowed ONLY IF:
- It is wholly & exclusively for business AND
- It is at market value
❌ Otherwise → fully or partially disallowed
🧠 KEY EXAM DIFFERENCE (Must Remember)
| Point | Related Party | Connected Person |
|---|---|---|
| Applies to | Companies & persons | Only individuals |
| Main test | Arm’s length | Business purpose + market value |
| Excess amount | Disallowed | Disallowed |
| Common exam trick | Overpriced rent | Personal salary/fees |
✍️ SUPER COMMON
Rent paid to owner’s brother at above market rate is…?
✔ Related party transaction
✔ Excess over market value disallowed
Salary paid to owner’s wife without proof of work is…?
✔ Connected person expense
✔ Fully disallowed
🔥 One-Line Memory Trick
“RP = Price test | CP = Purpose + Price test”
If you remember this line, you’ll nail 90% of questions.
