Interest allowable as expenses or not ?

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

15 March 2010 • Mr A, partner in a Firm M/s Xyz
• Mr A taken an Unsecured Loan in his
personal file and given to the firm Xyz

Whether Interest Paid on Unsecured Loan taken by Mr. A can be allowed as expenses in his personal file

1)If he is not charging interest from the firm Xyz

2)If he is charging interest from the firm Xyz

Aditya Maheshwari

Aditya Maheshwari (Expert)
Follow

15 March 2010 1. If he is not charging interest then no income accrues in the hands of A and therefore interest will not be allowed.

2. Since he is charging interest he is receiveing interest income and paying interest to earn that income so expenses allowable.

Querist : Anonymous

Querist : Anonymous (Querist)

15 March 2010 Thanks Mr. Aditya

Upgrade to CAclubindia Pro. Subscribe Now!

Querist : Anonymous

Querist : Anonymous (Querist)

15 March 2010 What if Mr. A has interest income from other source but, not from the firm Xyz in which he is partner?

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
Follow

01 August 2024 Here’s a detailed look at how interest on an unsecured loan taken by Mr. A can be treated for tax purposes, considering the different scenarios you’ve mentioned:

### **Interest Expense on Personal Loan**

1. **If Mr. A is Not Charging Interest from the Firm Xyz**

- **Personal Tax Treatment**: If Mr. A has taken a personal loan and provided the funds to the firm without charging interest, the interest paid on this personal loan cannot be claimed as an expense in his personal tax return.
- **Reason**: The expense incurred on the personal loan is related to financing, which does not have a direct connection to generating taxable income if not charged to the firm. Therefore, it does not qualify for any deduction in Mr. A's personal income tax return.

2. **If Mr. A is Charging Interest from the Firm Xyz**

- **Personal Tax Treatment**: If Mr. A charges interest on the loan provided to the firm, the interest paid on the personal loan can potentially be claimed as a deduction. This is because Mr. A’s personal income tax return will reflect the interest earned from the firm (as income), and the interest paid on the loan will be deductible as an expense to the extent it is used to generate income.
- **Reason**: In this case, the interest paid on the loan is directly linked to the income generated from the firm, making it a legitimate expense. Mr. A must ensure that he is charging interest from the firm and that the amount of interest claimed is accurately reflected in his books and tax return.

### **Interest Income from Other Sources**

- **Interest Income from Other Sources**: If Mr. A has interest income from other sources (such as fixed deposits or savings accounts), this interest income is taxable under "Income from Other Sources" and is separate from the interest related to the loan provided to the firm.

- **Adjustment**: The interest paid on the personal loan can be claimed as a deduction against the interest earned from the firm if it’s charged. However, it cannot be set off against other interest income from sources other than the firm Xyz.

### **Summary**

- **Not Charging Interest**: Interest paid on a personal loan cannot be claimed as a deduction in Mr. A's personal tax return if no interest is charged to the firm.
- **Charging Interest**: If Mr. A charges interest on the loan provided to the firm, he can claim the interest paid on the personal loan as a deduction in his personal tax return, provided it is used to earn interest income from the firm.
- **Interest from Other Sources**: Interest income from other sources cannot offset the interest paid on the personal loan. They are treated separately for tax purposes.

### **Example Calculation**

**Scenario 1**: No Interest Charged
- Loan Amount: ₹1L
- Interest Paid on Loan: ₹10K
- Interest Charged to Firm: ₹0
- Interest Deductible: ₹0 (No interest expense deduction allowed)

**Scenario 2**: Interest Charged
- Loan Amount: ₹1L
- Interest Paid on Loan: ₹10K
- Interest Charged to Firm: ₹10K
- Interest Deductible: ₹10K (Interest paid on the loan can be claimed as a deduction, as it is used to earn the interest income)

Always ensure that the interest rates and terms are documented and consistent with what is charged to the firm. Proper documentation and adherence to tax regulations are crucial for claiming deductions.