a company has borrowed loan of 10 lakhs . out of the total amount he has transferred Rs. 5 lacs to one of the group company. the group company has utilised that amount for payment of income tax liability. what is the consequences to be faced by both the companies? Pls quote section / circulars/ notification. Whether interest amount should be disallowed?
24 July 2009
The company who had borrowed Rs. 10L. The interest on Rs. 5L will be disallowed as the same is given to group company & not used for the purpose of business.
And for company who has taken Rs. 5L loan to pay the tax liability. The interest paid to parent company or other group company will be disallowed because the income tax liability is non deductible expenditure so interest paid on loan is also not deductible.
But one can anytime take advantage of sec 37 as general expenses, and can claim the interest paid on such loan as business expenditure.
24 July 2009
I do not agree with Chetan on this. The Tax authorities can not disallow the interest on the loan given to subco. They can only assess a notional income from loan given to Subco at the prevailing market rate if the loan given at lower interest rate then the prevailing market rate.
IN the case of Sub co, the interest paid can not be disallow the interest paid by subco to Holdco unless he can prove that the interest paid is unreasonable.
Interest paid for mitigating the tax liability is not a penal interest, but part of working capital interest, hence can not be disallowed straightway for this reason.
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