Dear Ajay,

Thanks for your help!!

Sorry, just one last query:

In ITR 4, if we want to show in Person A ITR that he has given interest free unsecured loan of 1 lac to blood relative, then should it come under:

Loans and advances:

1 Advances recoverable in cash or in kind or for value to be received?

2. Deposits, loans, and advances to corporates and others?

Thanks again, you have resolved my most of the doubts!!

Thanks,

Raj

Dear Raj

Sorry I couldn't reply yesterday. In case of mistakes, you can revise your return.

No, don't show it under Loans & Advances in Balance Sheet as it is meant for Business related Loan and Advances. As discussed earlier, you can show it only as drawings by debiting your Capital or Current A/c. Again, I remind you, it should be shown as per your audited balance sheet. I guess your books are not yet closed for the last financial year. Do make necessary entries in the books.

One more thing I left out, when you make personal loans (interest free or not), make sure that you have enough own funds or profits to cover the same so that in effect, there is no diversion of interest bearing funds meant for business purposes. Hope you get the point.

 

Regards

Ajay

Dear Ajay, Thanks for your response!! If we show interest free loan as drawings in giver (Person A) ITR then How will we adjust same amount at the time of repayment from receiver (Person B) ? Bcoz, at that time it will be income of Person A as we already reduced that amount from capital of Person A as drawings, right? Thanks, Raj

Dear Raj

This year you will debit the Capital/Drawings A/c and make the loan to person B. And you can keep a note or sub-schedule showing the break up details of the drawings which will include the above interest free loan. Later, when person B repays the loan to you, you can either re introduce the capital by crediting your Capital/Current A/c if the same is needed in your business capital or you can choose to keep it in your personal bank account (which is not used for business pruposes).

If you choose to reintroduce the capital, then your explanation for the source will be repayment from the person B towards the loan advanced in earlier year evidence of which will be the said note or sub-schedule you have prepared in the year of advancing the loan.

Or , if you choose to keep it in your personal bank a/c, say your savings a/c, it will reflect in the cash flow prepared for your personal return, evidence of which again will be the said note or sub-schedule you have prepared in the year of advancing the loan.

At the time of repayment of the loan, it is not an income for you. It is not a gift to you from person B, neither any "income" is earned by you being the repayment of the principal portion of the interest free loan. If you had advanced a interest bearing loan, then you would have had offered the interest for taxation.

The basic thing is the balance sheet in the ITR 4 is for the Balance Sheet of your business. 

Regards

Ajay

Thanks for your help, Ajay!!