Notional interest

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Aakash (CA FINAL) (Querist)
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23 April 2010 plz. ans. this

1 of our client had provided a interest free loan of 50L to a non relative.

now in his assessment proceedings the ITO is asking why should he not charge a notional interest of 12% as income of assessee?

plz. provide me any section or case law for answering him..

Aditya Maheshwari

Aditya Maheshwari (Expert)
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23 April 2010 You must be able to prove to the A. O. that the funds paid as loan was not out of borrowed funds. If the same can be proved then addition should not be made.

CA Shiv

CA Shiv (Expert)
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23 April 2010 agreeee.....
you should convince AO and the amount of loan if taken is not given as loan... The problem is ur client is taking loan and chargin interest and taking deduction... on the other hand givng the same loan...

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Aakash (CA FINAL)

Aakash (CA FINAL) (Querist)
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24 April 2010 thanks sir. but how can i prove dat funds raised by loan is not given as loan and the same is used in business.

it is very difficult sir.

is there any case law upon which i can manupilate the AO

CA Shiv

CA Shiv (Expert)
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24 April 2010 There cannot be any type of case law regarding to prove this.. You have present your bank statements and from the inflow and outflow of the fund from account, it will be convinced to him..

Aditya Maheshwari

Aditya Maheshwari (Expert)
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24 April 2010 You can also show that the capital account of the assessee has enogh balance to pay interest free funds or in case of company the company has enough share capital + reserves to fund the loan.