Interest on advance

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This query is : Open

Querist : Anonymous

Querist : Anonymous (Querist)

06 March 2012 Dear Experts

A proprietorship concern (TRADING FIRM) has taken mortgage loan 80 Lacs @ 12.75 % from a Pvt. Financing Company (RELIANCE)& out of 80 Lacs, Rs 50 Lacs being lend to other Proprietorship firm (MANUF. FIRM) in which his wife is prop.. The said amount is shown in books as "advance against purchase".

The said amount is actually used by other firm for purchasing P&M to enhance the prodn. capacity.

The amount of advance shown being reduced by showing sales & no interest being provided on it.

My Query regarding the matter is:
1. does showing Rs 50 Lacs as advance
against purchase if proper? If not
how it is to be shown?

2. does not providing any interest on 50
Lacs is proper? If not suggest the
correct treatment.

3. does there any income tax implication
in the matter?

4. does the loan taking firm need to
deduct T.D.S on intt. being paid to the
company from which loan taken. Since
the lending Company is a PVT. FIN.
COMPANY (RELIANCE)?

Please suggest & solve the query. Earliest reply is thankful.

CA PARTH SHAH

CA PARTH SHAH (Expert)
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03 January 2016 1) It is correct to show as such advance given by trading firm as "Advance against purchase"
2) Not providing for interest on 50 lacs is a proper as these money are advanced for business purpose i.e for purchase of goods. However during the scrutiny, Assessing officer may question regarding Interest expense on mortgage loan and may disallow the the interest on mortgage loan as the borrowed amount is lent interest free and that too to a related party. Hence it is advisable to charge interest on 50 lacs.

3) As i said above problem may arise during scrutiny. u/s 143(2) of the Income tax Act

4) Yes TDS on int u/s 194A has to be deducted @ 10% as t ia private finance company i.e NBFC which are not exempt from TDS

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