Interest free loan

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This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

21 February 2011 Dear Experts,

Can any person pay or receive interest free loan under income tax?

Secondly if an HUF receives interest free loan and makes investment, is it allowed?

Thnx in advance

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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21 February 2011 Income Tax Act does not prescribe that
interest on loan is compulsorily paid or to be received.

It is decided from the facts of each case.

If a person who is having his own funds and lends to some body as interest free loan, the department may only ask about the motive behind extending such loan as interest free.

If proper explanation is given then there is no problem.

Relationship between the borrower and lender is also an important point of consideration.

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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21 February 2011 Secondly if an HUF receives interest free loan and makes investment, is it allowed?

It is objected only in such circumstances, when the member extending loan to the HUF is lending out of his interest bearing borrowed funds. But there is no bar to HUF for investing such funds

Hence it can be said that HUF can invest.

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