Loan at a nominal rate of interest

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

18 February 2013 If "X" company, borrows loan @ 2% p.a. and gives loan @ 2.5% p.a. to another company, company "X" gains 0.5% p.a. and pays tax on it. Is there anything wrong on the part of company "X" for providing loan at such a nominal rate which is less than the bank's rate of interest on FD. Can there be any problem during the income tax assessment of the company ? Expert opinion required urgently.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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19 February 2013 Assessing Officers have the tendency to make additions to income or to make disallowance on the interest paid in such cases.

Since in your case interest cost is less than interest income, it is better defendable.

However, there may still be an issue raised that the company is routing ill-gotten funds (as low cost advances are often used as a cover-up for channeling black money).

Querist : Anonymous

Querist : Anonymous (Querist)

19 February 2013 Thanks a lot Sir. But going through this route is defendable or not and is there any case law regarding the same?

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Nikhil Kaushik

Nikhil Kaushik (Expert)
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19 February 2013 well I have never succeeded in my personal practice to defend similar transactions atleast till CIT(A) level.

And honestly, even in commercial sense i find it difficult to believe such low rates. It is a general agreement that such loans are given primarily to route back money or that certain portion of interest is received in cash (and is accordingly not shown in the books)

Therefore, it would be very hard to justify such a transaction.

Querist : Anonymous

Querist : Anonymous (Querist)

20 February 2013 Thanks a lot Sir for such a nice opinion. Could you please quote any case law in such a matter. Secondly if the lender is NBFC, does it makes any difference?

Nikhil Kaushik

Nikhil Kaushik (Expert)
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20 February 2013 well i will get back to you on the case laws, but i seriously doubt any NBFC lends on 2.5% pa!

Anand

Anand (Expert)
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20 February 2013 Is the borrowing made from a related party?
Has it been further advanced to another related party?

Querist : Anonymous

Querist : Anonymous (Querist)

21 February 2013 The borrowing is not made from from a related party. The directors are different, no relative of the either directors are associated with each other. Also it is not advanced to a related party. The NBFC has managed to get the loan @ 2% and had advanced @ 2.5%. Though the rate is very low but NBFC has done this to maintain its business activities. Please advise in this context that whether assessing officer can add anything to the income of NBFC?

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Nikhil Kaushik

Nikhil Kaushik (Expert)
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21 February 2013 If you won;t mind, I would like to have the name of the NBFC....you can PM me. I have many client in dire need of low interest loans.

As far as ur query is concerned:

1. RBI may raise concerns regarding loans at such a low rate. In past RBI has looked at loans even at 8% with suspicion.

2. There will always be a doubt regarding the source of funds raised. Even borrowing from outside India rarely comes at rates as low as this.

3. As long as you are able to justify the commercial viability of lending at 2.5%, there is little an AO can do in terms of adding notional incomes.