Interest on loan from director

This query is : Resolved

Gaurav (Querist)
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15 May 2012 Is it necessary to pay interest on loan taken by private limited company from its directors. If so, at what rate should the interest be provided.

Amol Gopal Kabra (CA,CS,DISA)

Amol Gopal Kabra (CA,CS,DISA) (Expert)
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15 May 2012 It is not mandatory to pay interest. However, it can pay interest at rates not more than the rates prevailing in the market for similar loans.

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Gaurav

Gaurav (Querist)
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15 May 2012 Under which section it is mentioned that it is not necessary to pay interest. Can the AO add deemed interest on such loan in the income of director during the assessment.

Amol Gopal Kabra (CA,CS,DISA)

Amol Gopal Kabra (CA,CS,DISA) (Expert)
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15 May 2012 No. He cannot add deemed interest. After all it is the directors will whether to advance money to the company or not. An exception to this is if the director has borrowed money on interest and then granted interest free loan, then there can be chances of deemed interest to on the amount which is in excess of the directors own funds.

Gaurav

Gaurav (Querist)
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15 May 2012 But the AO might say that if you would have kept the money with you then you would have earned interest and that would be taxable. But instead of this who have given loan to company and that too interest free.

Amol Gopal Kabra (CA,CS,DISA)

Amol Gopal Kabra (CA,CS,DISA) (Expert)
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15 May 2012 The AO cannot make such weird judgement. The money is of the director. It is his will whether to keep it in hand or bank or advance it interest free or with interest. AO cannot have any objections on the same.

If this is so, the the AO should also add deemed interest on cash in hand balance on the assumption that had this amount been invested in fixed deposit, there could have been so much of interest. So, this does not happen. The AO cannot add deemed interest to the director.

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