Interest, tds & disclosure

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

10 March 2012 Dear Experts

A proprietorship concern (TRADING FIRM) has taken mortgage loan 80 Lacs @ 12.75 % from a Pvt. Financing Company (RELIANCE)& out of 80 Lacs, Rs 50 Lacs being lend to other Proprietorship firm (MANUF. FIRM) in which his wife is prop.. The said amount is shown in books as "advance against purchase".

The said amount is actually used by other firm for purchasing P&M to enhance the prodn. capacity.

The amount of advance shown being reduced by showing sales & no interest being provided on it.

My Query regarding the matter is:
1. does showing Rs 50 Lacs as advance
against purchase if proper? If not
what is the correct presentation?

NOTE:
Out of Rs 50 Lacs, 18 Lacs being spent for installation of P&M.

2. does not providing any interest on 50
Lacs is proper? If not suggest the
correct treatment.

3. does there any income tax implication
in the matter?

4. does the loan taking firm need to
deduct T.D.S on intt. being paid to the
company from which loan taken. Since
the lending Company is a PVT. FIN.
COMPANY (RELIANCE)?

Please suggest & solve the query. Earliest reply is thankful.

Hitender Gaur

Hitender Gaur (Expert)
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10 March 2012 1. Any one can give advance to any one against the purchases. Bur for safe side revers the entry on of before 31 st March and on or after 1st april again show the advance.
For 18 Lacs you can show purchases from Manufacturing firm (if Possible) Note: TO of both firm is also a factor for proper or improper.

2. There is no need to allow any interest, it the matter of both firms. Please Note that Any Loan/Advance or Investment of Manufacturing Unit in Trading firm also not allow/charging any interest during the same period.

3. Depends on overall profit/loss of Trading firm.

4.TDS will be applicable (check whether they have Certificate u/s. 197 or not)

Querist : Anonymous

Querist : Anonymous (Querist)

10 March 2012 Dear Hitender Guar

Please note that you have considered the matter reverse. The loan is given by the trading firm to manuf. firm.

Also note that i my view since the interest is being paid by the trading firm to reliance, is it correct to give it the same amount to other at interest free???

I think the A.O will make the addition of interest to the trading firm.

Pls resolve

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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01 August 2024 Given your situation, where a trading firm has taken a mortgage loan and lent part of it to another firm, several accounting and tax issues need to be addressed. Here’s a breakdown of each query:

### **1. Advance Against Purchase:**

**Presentation:**
- **Advance Against Purchase:** It is not proper to classify the ₹50 lakh lent to the manufacturing firm as "advance against purchase" if it’s effectively a loan or investment. The correct treatment depends on the nature of the transaction and should be disclosed in the books of accounts appropriately.

**Correct Presentation:**
- **Loan Account:** If the ₹50 lakh is a loan to the manufacturing firm, it should be recorded as a loan receivable in the books of the trading firm.
- **Investment Account:** If it's intended as an investment, it should be disclosed as an investment in the manufacturing firm.

### **2. Interest on Loan:**

**Interest Provision:**
- **Proper Accounting:** Not providing interest on the ₹50 lakh, when interest is being paid by the trading firm on the mortgage loan, is not proper. This could be viewed as a loss of potential income and may have tax implications.

**Correct Treatment:**
- **Interest Income:** The trading firm should ideally charge interest on the ₹50 lakh loaned to the manufacturing firm. This interest should be at least equal to or greater than the interest rate the trading firm is paying on the mortgage loan, to avoid tax implications.

### **3. Income Tax Implications:**

**Interest Income:**
- **Tax Implications:** If the trading firm does not charge interest on the loan to the manufacturing firm, it might face issues with tax authorities. The income tax department may consider the interest that should have been charged as a potential income and could make adjustments accordingly.
- **Deductions:** The trading firm is not making a legitimate profit on the ₹50 lakh loan, which could lead to disallowance of expenses (interest payments) in the books of the trading firm.

**Tax Adjustment:**
- The interest that the trading firm should have charged would need to be added back to the income of the trading firm if it’s not properly accounted for.

### **4. TDS on Interest Paid:**

**TDS Requirements:**
- **Loan from Private Financing Company:** TDS is required on interest paid to the financing company (Reliance) as per applicable sections of the Income Tax Act. For loans from private companies, the TDS rate on interest is generally 10% under Section 194A if the interest exceeds ₹5,000 in a financial year.

**TDS on Interest Paid:**
- **Deduct TDS:** The trading firm must deduct TDS on the interest payment to Reliance (private financing company) and deposit it with the government.

### **Summary:**

1. **Advance Against Purchase:** Record it as a loan receivable or investment, not as an advance against purchase.
2. **Interest Provision:** Charge interest on the ₹50 lakh loan to the manufacturing firm to match or exceed the interest rate on the mortgage loan.
3. **Tax Implications:** Ensure proper accounting and interest income recognition to avoid tax issues.
4. **TDS on Interest Paid:** Deduct TDS on interest paid to the private financing company as per the applicable provisions.

### **Recommendation:**

- **Consult a Tax Professional:** Given the complexity of the transactions and potential tax implications, it’s advisable to consult with a tax professional or accountant to ensure proper treatment and compliance with all applicable tax laws.