Interest income of huf

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This query is : Resolved

Sonex (Querist)

27 July 2015 A HUF has borrowed an amount of Rs. 1.12 Crores @ 10 % interest p.a. and landing the same amount to Private Company @ 12 % interest p.a.

Now, Net interest Income of 2% (i.e. 12-10) will be treated as Business Income or Income from other Sources ?

Kindly confirm the applicability of Tax Audit in the above transaction.

CS Advocate Abhishek Goyal

CS Advocate Abhishek Goyal (Expert)

27 July 2015 If money lending is not business of HUF than it should be taxable as income from other sources. As far as tax audit is concerned it is applicable if gross turnover or receipts is more than Rs. 1 crore.

Sonex

Sonex (Querist)

27 July 2015 As far as ours (HUF) is conserned, Transaction (Loan lending and borrowing) is exeeding Rs. 1 Crores.

Therefore, please confirm the same, whether this entire things will be convered under 44AB ?

Please clarify the meaning of Turnover for the purpose of Section 44AB, if possible.

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)

01 August 2024 Here's a detailed explanation of how to treat interest income of a Hindu Undivided Family (HUF), the applicability of tax audit under Section 44AB, and the definition of turnover:

### **1. Treatment of Interest Income**

**Interest Income Classification:**

- **Interest Earned from Lending**: In your case, the HUF has borrowed money at 10% interest and lent it at 12% interest, earning a net interest income of 2%. This income is derived from financial transactions rather than from a business activity.

- **Nature of Income**: Given that the activity involves lending and borrowing rather than running a business, the net interest income (i.e., the difference between the borrowing and lending rates) is generally classified as **"Income from Other Sources"**. It is not treated as business income unless the HUF's primary activity is lending and this activity is systematic and regular.

**Example for Clarity:**
- **Borrowing Rate**: 10%
- **Lending Rate**: 12%
- **Net Interest Income**: 2% of Rs. 1.12 Crores = Rs. 2.24 Lakhs.

### **2. Applicability of Tax Audit under Section 44AB**

**Tax Audit Applicability:**

- **Section 44AB**: This section mandates a tax audit if the gross receipts (turnover) exceed Rs. 1 crore in a financial year. The turnover includes all receipts from business or profession.

- **For HUF**: Even if the primary business of the HUF is not lending, if the HUF has total receipts exceeding Rs. 1 crore in the financial year, the audit requirement under Section 44AB applies.

**In Your Case:**
- **Loan Transactions**: If the total transactions (including borrowing and lending) exceed Rs. 1 crore, it triggers the tax audit requirement.
- **Income Sources**: Whether the income is from other sources or business, if the total receipts exceed Rs. 1 crore, the tax audit requirement applies.

### **3. Meaning of Turnover under Section 44AB**

**Definition of Turnover:**

- **Turnover**: In the context of Section 44AB, turnover refers to the total amount of business receipts, including sales of goods or services. For a lending business, turnover would include the total amount of loans given.

**For Your Situation:**

- **Lending Activity**: If the HUF's lending activities are systematic and form a part of its regular business operations, then the total receipts from these lending activities should be considered as turnover.
- **Non-Business Receipts**: For non-business receipts like interest from lending if it is not part of regular business operations, this would not be included in turnover for tax audit purposes.

### **Summary and Recommendations:**

1. **Interest Income Classification**:
- Treat the net interest income (2%) as "Income from Other Sources" unless the HUF's primary business involves lending regularly.

2. **Tax Audit Applicability**:
- Check if total receipts, including both lending and borrowing transactions, exceed Rs. 1 crore. If so, a tax audit under Section 44AB is applicable.

3. **Turnover Definition**:
- For tax audit purposes, turnover includes the total business receipts. For a regular business, this would include all sales or services. For an HUF involved in lending, if lending is considered business activity, all receipts from lending should be considered.

**Consultation with a Tax Professional**: Given the complexity of tax laws and the specifics of your situation, it's advisable to consult a tax professional to ensure accurate reporting and compliance with the applicable tax regulations.

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