Treatment of interest paid on unsecured loan

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Rohit Kalani

Rohit Kalani (Querist)

25 June 2013 Is interest paid on unsecured loan to related parties allowable expense ?

CA PARAS BAFNA

CA PARAS BAFNA (Expert)

25 June 2013 Interest paid to relatives is an allowable expense. It should be within the normal limits. Unreasonable or higher interest payments can be disallowed to the extent which is not reasonable

Rohit Kalani

Rohit Kalani (Querist)

26 June 2013 What is the definition of Unreasonable ?

CA PARAS BAFNA

CA PARAS BAFNA (Expert)

26 June 2013 Unreasonable means for which reasons given may not be proved as sufficient.
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If you pay interest to Mr. X, an outsider, @ 12% whereas you pay interest to related party @ 18%, then you are paying 6% extra, though party is a related party.
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Whereas while dealing with relatives we expect that they will charge lesser than the price prevalent in the market, or at least we can hope that they will not charge higher than the others.
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So, the excessive payment is considered towards reducing the tax burden by the payer and from revenue point of view, this becomes an unreasonable aspect.
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