Taxation Effect On Not Getting Interest On Money Borrowed On Interest And Advanced To Firm Without Any Interest!
January 28, 2009 By Leave a Comment
Mr. A is having income from business amounting Rs. 4.00 laksh for the year 2007-08. He has taken a loan of Rs. 50.00 lakhs during the year 2007-08 from a bank and invested that amount as his capital contribution in the firm XYZ & Co. The firm has not paid any interest on the capitals of the partners for the year 2007-08, since it has incurred loss. The Bank has charges Rs. 5.00 lakhs towards interest on loan taken by him for the year 2007-08. Can Mr. A adjust the interest on Bank loan amounting to Rs. 5.00 lakhs against his business income of Rs. 4.00 lakhs. The firm has not paid any remuneration to the partners during the year 07-08. Prasad V , Hyderabad
The interest is allowable under section 36(1)(iii) which states that for computing income under the head “business or profession” interest paid in respect of capital borrowed for the purpose of the business or profession.
The income in form of interest on the capital invested in a partnership firm or remuneration from firm are taxed in the hands of partner as “ income from business” as such the amount invested in capital of firm can be considered to be used for the purpose of the business. Therefore , even if the interest or remuneration was not paid by the firm on account of loss by firm, principally , the interest paid by the partner on the loan borrowed should be allowed
However, keep in mind that if there is no provision in the partnership that interest on capital shall not be paid by the firm to the partner if no profit is earned, the assessing officer may even add the income not accounted for by the partner. The Assessing Officer may also question the intention of the partner about giving interest free loan. Be prepared to fight a legal case regarding the allowance of interest in such case as there are over bearing reasons for A.O to go into the fact finding mission that interest free loan is not colourful device to evade tax.
In my opinion, the interest is allowable expense from other business because the partner used the amount for earning business income .It is another matter , the firm incurred loss.
