Income tax

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Leena Jajoo (Querist)
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10 August 2011 1)My client is procuring finance from market and transferring the same to the Ltd. Co. in which he's Director & to Firm in which he's Partner.
The AO is holding that assesee is doing business of Financing & hence the Interest receipt is assessable under the Head Business Income.
However, my perception is,
a)My client is just providing finance & making an Investment in a Co. belonging to his family members & in which he's a Director (since the Co. is engaged in Construction Business thereby get loans @ a costly rate plus involving other complicatons too). Thus this activity should not be regarded as a Business Activity.
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2)My Client is charging Interest just to the extent payable to the lenders. NO PROFIT element is there in the Interest amount & even NO MOTIVE to earn profit through the activity.
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3)Further he doesn't hold any Money Lending License nor has advanced money outside.
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The AO is also helding that since Interest Paid or received exceeded 40Lakhs, the assessee should have deducted TDS.
However, my assessee (being an Individual, TDS provision not appliable), had no tax audit either for Asstt.Year 2005-06 or 2006-07, & also the Business Receipt during the concerned year i.e. 2007-08 doesnot exceed 40Lakhs.
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In my opinion,the under mentioned Cases are supportive to my assessee:
* J.K.Holdings vs ITO(2001)70 TTJ (Mum.)649
* Belagode Traders vs. ITO(1996)54 TTJ (Bang.)449
* Ghanshyamdas Gangadhar vs. CIT(1954)25 ITR 318 (Pat.)
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Please provide me your opinions on the above instant as early as possible.
Thank You.

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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10 August 2011 1. A.O's view will sustain.
2. If in the immediately preceeding year interest income crossed40 lakhs, TDS provisions attracts for the concerned year.
3. Disallownace will sustain.

N.B :- Borrowed money is lend to LTD company. Prima facie section 58A of the Companies Act,1956 attracts and seems a violation of the said act.

Leena Jajoo

Leena Jajoo (Querist)
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11 August 2011 sir i have modified my question and have put in more clear details.....
Please now Guide me for the same at your earliest.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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31 July 2024 Your query revolves around the classification of income derived from providing finance and the applicability of tax provisions in that context. Here’s a breakdown of the key issues and considerations:

### 1. **Classification of Income**

- **Business vs. Investment Activity:**
- **Business Income:** Generally, if someone is engaged in the activity of financing with the intention of earning profits, it is considered a business. However, if the financing is more of an investment to support family-owned entities without any profit motive, it might not be categorized as business income.
- **Investment Income:** If the activity is merely supporting family-owned businesses and no profit motive is present, the income could potentially be classified under "Income from Other Sources." This classification assumes that the primary intent is not to conduct a business but to provide support.

- **Supporting Cases:**
- **J.K. Holdings vs ITO (2001) 70 TTJ (Mum) 649:** This case dealt with the distinction between business and investment income. The court held that mere provision of funds to a company, without the intention of engaging in financing as a business, could be treated as investment activity.
- **Belagode Traders vs. ITO (1996) 54 TTJ (Bang) 449:** This case also supports the view that mere provision of funds to a company or a firm, without a profit motive, is not necessarily a business activity.
- **Ghanshyamdas Gangadhar vs. CIT (1954) 25 ITR 318 (Pat):** This case discusses the nature of income from investments and how it should be treated if the primary intent is not business.

### 2. **TDS Requirements**

- **Threshold Limits:**
- According to Section 194A, if the total interest payment exceeds ₹40 lakhs in a financial year, TDS should be deducted. However, this provision applies to cases where the payer is a company or a firm and not necessarily to individuals.

- **Applicability of TDS:**
- Since your client is an individual and does not exceed the business receipt limit of ₹40 lakhs, the TDS provision may not be applicable. The critical factor is whether the interest payments exceed the specified threshold and whether the payer falls under the purview of TDS provisions.

### 3. **Compliance and Documentation**

- **Licenses and Tax Audits:**
- The absence of a money-lending license and the lack of tax audit might further support that your client is not engaged in financing as a business. However, proper documentation and legal compliance should be maintained.

### **Conclusion:**

Based on the provided information and supporting cases, if your client's activities are primarily supportive and not intended as a business, it is reasonable to classify the interest income under "Income from Other Sources" rather than business income. Additionally, if TDS provisions do not apply due to the nature of the payer (individual) and the total receipts, this should be considered while responding to the AO.

**Recommendation:**
- Prepare a detailed submission explaining the nature of the transactions, supporting documentation, and relevant case laws.
- Ensure all arguments align with the legal provisions and case precedents.
- Consult a tax professional or legal expert for further assistance in preparing your response to the AO.

If you need more specific guidance or additional case laws, feel free to ask!

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