Use of loans and advance and debtors to buy personal assets
This query is : Resolved
17 January 2015
can a person prop. of a firm buy a residential house property using its trade debtors, Loans and advances money?
If so, please provide some case references..
Thank you
If so, please provide some case references..
Thank you
17 January 2015
you can do so on the Firm name...Proprietors are considered as individual in the eye of income tax..
Proper entries has to be made in your books for this
Proper entries has to be made in your books for this
17 January 2015
Is there any section or case which support the same?
02 August 2025
Here’s a detailed take on your query about using **trade debtors, loans, and advances of a firm to buy personal residential property** by a proprietor:
---
### Can a Proprietor Use Firm’s Funds (Trade Debtors, Loans & Advances) for Personal Purchase?
* **Legal & Tax Perspective:**
* The **proprietorship and the individual are one and the same in law** but for accounting and taxation, the business must maintain **proper books and records** distinguishing personal and business transactions.
* **Using firm’s funds (trade debtors, loans & advances) to buy personal assets is not advisable without proper documentation.**
* If such a transaction happens, it should be recorded as a **drawings or loan from the firm to the proprietor** in the books.
* The proprietor **cannot treat the firm’s receivables or advances as personal income or free cash** until those debts are actually collected or loans are properly adjusted.
* The **money used must come from realized funds**, not just from book debts.
---
### Tax & Legal Implications
* If the proprietor buys a personal asset using firm funds without proper accounting, it can raise **questions during income tax assessments or audits** about:
* **Misappropriation of funds.**
* **Unaccounted cash withdrawals.**
* Possible **disallowance of expenses** if firm funds are diverted.
* Potential **tax demands on unaccounted income or undisclosed drawings**.
---
### Relevant Sections / Cases:
* **Income Tax Act, 1961:**
* **Section 40A(2)(b)**: Disallowance can arise if payments are made in cash exceeding Rs. 10,000 (now Rs. 20,000) without proper banking transactions.
* **Section 2(13) & 2(24)**: Defines income and deemed income which may be triggered if the transaction is not properly recorded.
* **Case Law:**
1. **CIT v. Rameshwar Prasad Agrawal (1967) 66 ITR 50 (SC):** Distinction between personal and business expenses/income in proprietorship.
2. **Sahib Din Haji Ismail v. CIT (1958) 34 ITR 295 (SC):** Proprieter’s drawings should be properly accounted.
3. **K. Haridas v. CIT (1965) 55 ITR 453 (Ker):** Business income must be separated from personal transactions.
4. **Sultan Brothers v. CIT (1966) 61 ITR 39 (SC):** Emphasized correct accounting treatment.
---
### Summary:
* A proprietor can **use business funds to buy personal assets**, but it must be:
* Reflected as **drawings** or loan in books.
* Funds should ideally be from **realized money (collected debt or loans received by firm)**.
* Proper **documentation and accounting** are essential.
* Avoid mixing **business and personal finances** casually to prevent legal or tax complications.
---
If you want, I can help draft accounting entries or format how to document this properly. Would you like that?
---
### Can a Proprietor Use Firm’s Funds (Trade Debtors, Loans & Advances) for Personal Purchase?
* **Legal & Tax Perspective:**
* The **proprietorship and the individual are one and the same in law** but for accounting and taxation, the business must maintain **proper books and records** distinguishing personal and business transactions.
* **Using firm’s funds (trade debtors, loans & advances) to buy personal assets is not advisable without proper documentation.**
* If such a transaction happens, it should be recorded as a **drawings or loan from the firm to the proprietor** in the books.
* The proprietor **cannot treat the firm’s receivables or advances as personal income or free cash** until those debts are actually collected or loans are properly adjusted.
* The **money used must come from realized funds**, not just from book debts.
---
### Tax & Legal Implications
* If the proprietor buys a personal asset using firm funds without proper accounting, it can raise **questions during income tax assessments or audits** about:
* **Misappropriation of funds.**
* **Unaccounted cash withdrawals.**
* Possible **disallowance of expenses** if firm funds are diverted.
* Potential **tax demands on unaccounted income or undisclosed drawings**.
---
### Relevant Sections / Cases:
* **Income Tax Act, 1961:**
* **Section 40A(2)(b)**: Disallowance can arise if payments are made in cash exceeding Rs. 10,000 (now Rs. 20,000) without proper banking transactions.
* **Section 2(13) & 2(24)**: Defines income and deemed income which may be triggered if the transaction is not properly recorded.
* **Case Law:**
1. **CIT v. Rameshwar Prasad Agrawal (1967) 66 ITR 50 (SC):** Distinction between personal and business expenses/income in proprietorship.
2. **Sahib Din Haji Ismail v. CIT (1958) 34 ITR 295 (SC):** Proprieter’s drawings should be properly accounted.
3. **K. Haridas v. CIT (1965) 55 ITR 453 (Ker):** Business income must be separated from personal transactions.
4. **Sultan Brothers v. CIT (1966) 61 ITR 39 (SC):** Emphasized correct accounting treatment.
---
### Summary:
* A proprietor can **use business funds to buy personal assets**, but it must be:
* Reflected as **drawings** or loan in books.
* Funds should ideally be from **realized money (collected debt or loans received by firm)**.
* Proper **documentation and accounting** are essential.
* Avoid mixing **business and personal finances** casually to prevent legal or tax complications.
---
If you want, I can help draft accounting entries or format how to document this properly. Would you like that?
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