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Deduction of interest on business loan

07 December 2016

I took loan for business purpose but out of full amount transfer some portion of loan to friend as loan & advance, can i get full amount of interest as expense for income tax computation.

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15 Replies

CMA Poornima Madhava (CMA) (13112 Points)
Replied 07 December 2016

If you are able to establish that such loan/advance is in connection with your business, then you may claim entire interest as deduction.

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chandra sekar (Manager-Accounts) (387 Points)
Replied 07 December 2016

is there anything in the law, that, suppose the entire loan amount repaid within short period( 3-6 mths), no interest has to be booked in books of accounts.

shubham Pahuja (Chartered Accountant) (236 Points)
Replied 07 December 2016

Dear Amit,

You can claim interest amount as deduction only if loan has been used only for Business purpose..Practically many assesses claim full amount as deduction and later if AO found it then he impose penalties/disalowances on that.

Regards,

Shubham Pahuja

CA Neha Agrawal (CA) (830 Points)
Replied 07 December 2016

You can show interest paid on entire loan as business expense. Loan given to your friend can be shown as loan advanced in normal course of business and interest you reeive from friend on this loan can be shown as interest income in business

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shubham Pahuja (Chartered Accountant) (236 Points)
Replied 07 December 2016

agreed wih Neha too

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CA Rizwan Saifi (Founder @ CharteredHelp) (117 Points)
Replied 07 December 2016

If you want to be safe side than do not claim interest expnenses on loan/advance given to your friend unless such loan/advance is given in connection with your business.

?�?h? M�?h?� (2 Points)
Replied 08 December 2016

Enter comment here

CA Ashish Barthwal (Practising Chartered Accountant) (104 Points)
Replied 08 December 2016

Loan to friend given on interest or on zero interest?

AMIT PATEL (20 Points)
Replied 08 December 2016

loan given on interest.

CA Ashish Barthwal (Practising Chartered Accountant) (104 Points)
Replied 09 December 2016

In that case, 1) the interest you received will be your income under the head other sources of income. 2) But you have given the loan to friend from the amount of loan you taken from bank. Hence the interest on amount of loan taken from bank equivalent to the amount of loan given to friend can be taken as deduction while computing income under the head other sources. (For e.g: Loan Taken from bank Rs 100000 @ 5%, and out of Rs 40000 loan given to friend @ 8%. Interest From friend 40000*8% = 3200, Interest paid to bank for the same 40000 loan is 40000*5% = 2000. Hence deduction u/s 57 is 2000. Total other sources income 3200-2000 = 1200. 3) Under the business total deduction of interest will be total interest 5000 (100000*5%) - 2000 = 3000 only. 4) Last but not least, that loan to friend should not be cash, unless it is less than RS 20000 otherwise it will attract penal provisions.

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RAJA P M ("Do the Right Thing...!!!") (128096 Points)
Replied 10 December 2016

Dear All,

If a individual purchased a CAR on Car Loan. This loan interest amount will be shown in Expenses (Interest Paid).

Its's available or not

Sanjay S (Chartered Accountant) (1375 Points)
Replied 11 December 2016

This issue can be clarified if one reads Section 36(1)(iii) of Income Tax Act, 1961 along with various Judicial decisions.

Interest on borrowed capital is allowable as deduction only if its for the purpose of Business or profession.

East India Pharmaceuticals Works Ltd. (1997) Supreme Court : Interest on loans taken for personal purposes (say paying income tax liability) shall not be allowable as deduction in computation of Tax since the same is not for business purposes. (Also Court held that payment of Income tax was a personal liability)

Judicial Precedence:

I. If you have advanced zero interest loan to Friend: Then entire interest shall have to disallowed since there is no corresponding increase in the return and no increase in the performance of company or business.

II. If you have advanced loan to friend at Concessional rates: The concession in interest rate shall have to be disallowed. For instance, where the company has borrowed at 12% and the loan advanced to friend is @ 2%. Then in such case, the interest paid to bank @ 10% shall have to disallowed on such amount advanced.

III. If the loan is advanced at market rate (ie. Bank lending rates): Then one may argue that the business has received bonafide returns on such loan advancements to friends or any other person for that matter and that entire interest expense may be allowable as deduction. However, the Assessing officer may raise questions depending on the amount involved and may keep you on your toes.

Hope this clarifies the issue.

RAJA P M ("Do the Right Thing...!!!") (128096 Points)
Replied 12 December 2016

Dear Sanjay.,

A person having income from small finance. How to following his accounts. Bcoz,

He paid Loan Amount Rs. 50000/- (50000-1500=48500) to X (Cheque Payment), After receiving daily basis Rs. 500 in 100 days. This way is possible or not..? How to receive the Loan Amount

Amit Kumar (MBA finance) (37 Points)
Replied 08 August 2017

These are necessary and ordinary expenses that are beneficial for businesses to generate income. The deductible expenditures may be subtracted from the revenues before arriving at the tax liability. In other words, these expenses may be reduced from the gross revenue to lower the taxable income. The interest paid on the loan availed for the business is deductible, which helps lower the taxes for the company. Knowing the interest rates, processing fees and other terms and conditions before availing the loan are important. No there are business loan Apps from Lendingkart at play store for giving you all the information on business loan like proceesing fee, principle ammount, interest & much more