Deduction for interest on loan u/s 37(1) taken by the promoter of the company in individual capacity

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Please provide a clarification whether a company can claim deduction of interest payment if the OD is availed by the director in individual capacity and transfer to the company for business purpose.

The director of a company holds mutual funds in his individual name.  He can only avail overdraft in his individual capacity against the mutual fund holdings (Overdraft cannot be sanctioned in the name of the company against the security of mutual fund units of the director).

The lender suggested to avail the OD by the director in his individual capacity and transfer the fund to the company account for the renovation of the hotel in order to avail deduction of interest on loan.

Your thoughts please.

Replies (1)

A company can claim a deduction for interest payments on an overdraft (OD) facility availed by a director in their individual capacity and transferred to the company for business purposes, subject to certain conditions: 1. The interest payment should be made by the company. 2. The loan should be used solely for business purposes. 3. The company should maintain proper documentation, such as: - A resolution or agreement authorizing the director to avail the OD facility. - A resolution or agreement authorizing the transfer of funds to the company. - Records of the loan amount, interest paid, and its utilization for business purposes. 4. The interest payment should be reasonable and not excessive. However, it's crucial to consider the following: - The director may be subject to personal tax on the interest income. - The company may need to obtain prior approval from the Reserve Bank of India (RBI) or other relevant authorities. - The transaction should be conducted at arm's length to avoid any potential tax implications or disputes.

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