Interest on unsecured loans

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ANSHU JAIN (Querist)
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19 August 2014 The assessee is liable for tax audit U/s 44AB and has given several unsecured loans from related parties. Is he required to charge Interest on such unsecured loans? Is it mandatory? If so, at what rate?

CS,CA F,Numrologi TusharSampat

CS,CA F,Numrologi TusharSampat (Expert)
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19 August 2014 then sec 40A(2) shall be made applicable.

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ANSHU JAIN

ANSHU JAIN (Querist)
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19 August 2014 40 A(2) will be applicable in both the cases but whether the person should charge interest or not?

CS,CA F,Numrologi TusharSampat

CS,CA F,Numrologi TusharSampat (Expert)
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19 August 2014 in case if int is charged then this section is operative when ao is of the opinion that rate is not as per market rate benefitting party to contract so ur case is totally diff as u havent charged only

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ANSHU JAIN

ANSHU JAIN (Querist)
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19 August 2014 Is it mandatory to charge interest on unsecured loan?

CS,CA F,Numrologi TusharSampat

CS,CA F,Numrologi TusharSampat (Expert)
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19 August 2014 who can give a int free loan ? always it will question the transaction and the source of the lendor as all black income can be converted to white

Nikhil Kaushik

Nikhil Kaushik (Expert)
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19 August 2014 no addition can be made to your taxable income in form of notional/deemed interest on account of interest free loans given unless following conditions are met:

1. The assessee has taken interest bearing loans and has given interest free loans; and

2. the AO is able to establish clear nexus between the interest bearing funds and interest free advances.

You can refer to judgments in the case of Ravindra Kumar Sharma v. ITO (ITA No. 905/Jp/2005)

CIT v. Shoorji Vallabhdas & Co., 46 ITR 144 (SC)

Having said the above, you might still be required to furnish KYC details of the borrowers, sources of your funds etc. Otherwise, money laundering implications may arise as Tushar has suggested

ANSHU JAIN

ANSHU JAIN (Querist)
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19 August 2014 Thank You for your assistance.

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