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INTEREST ON BORROWINGS

Krishna (Advocate) (88 Points)

29 November 2009

Mr. X borrowed Rs. 4,00,000 from his friends and relatives and agree to pay interest and he invested the money in a Firm as capital contribution. He has paid Rs.48,000.00 as interest during FY: 2008-2009, and has not received any interest on capital from the firm, but Rs. 90,000.00 as share of profit. As the share of profit is exempted from tax, Is the interest of Rs.48,000.00 can be set off against the business profit of his other businesses (from proprietorship concern)

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5 Replies

Krishna (Advocate) (88 Points)
Replied 29 November 2009

Originally posted by :Murali
"	Mr. X borrowed Rs. 4,00,000 from his friends and relatives and agree to pay interest and he invested the money in a Firm as capital contribution. He has paid Rs.48,000.00 as interest during FY: 2008-2009, and has not received any interest on capital from the firm, but Rs. 90,000.00 as share of profit. As the share of profit is exempted from tax, Is the interest of Rs.48,000.00 can be set off against the business profit of his other businesses (from proprietorship concern)	"

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Ashish M (Chartered Accountant) (2731 Points)
Replied 29 November 2009

The assessee took loan and invested as a partner's contribution in a firm. He is also paying interest on such loan. He also has his proprietory business. The share of profit is not taxable in his hands. But the partner should also be getting salary from firm. If he is not getting salary,then he can show such interest as loss from the firm business and can subsequently set it off u/s 70 from the proprietary business as set off of loss under same head of income.!!!!!

Krutesh Patel (ACA) (727 Points)
Replied 29 November 2009

Hello Ashish,

I would like to draw your attention towards Sec 14 of Income Tax Act 1961 whick says that No expense incurred for earning income whose source is exempt can be set off against any taxable income.

Now, Mr X has borrowed money and invested in partnership firm. The purpose of such borrowing is earning Profit, Interest and Remuneration from Partnership firm. Hence, it can only be setoff against such income.

The share of profit is exempt. Hence you can only set off against interest or salary of partner but not against any another income.

Sunil (Trader) (2611 Points)
Replied 29 November 2009

Agreed with Krutesh. The Partnership Firm should pay you Interest on Capital to allowable limits and you set of the interest against that. However, the payment of interest and salaries HAS TO BE authorised in the Partnership deed.