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Investment of loan amount

Sunder (Business) (165 Points)

14 June 2013

Proprietory Firm A has taken loan from person B.

- Can part of the loan amount be invested in another Proprietory Firm C?

- Can part of the loan amount be invested in financial instruments (Deposits, Mutual Funds, Stocks) in the name of the Proprietor of A?

- What are the implications on the income tax for A in both cases? Will there be any rebate for the interest paid to B?

- Should the income generated from investment in C & financial instruments be treated as other income?

- If A does only the above activities, what kind of firm is A?

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3 Replies

P C Agrawal (Registered independent director Past Chairman of Aurangabad Chapter of ICSI Practicing Company Secretary at Aurangabad) (8229 Points)
Replied 18 June 2013

My answers:

Q.1: Yes

Q.2: Yes

Q.3: Interest paid will be allowed as expense only if the amount of loan is invested for genuine business purpose. Further, Sec.14A of IT Act has to be kept in mind which disallows interest on loan if the relevant income by way of dividend is exempt from income tax.

Q.4: Yes, if the the investment activity is not the business of the proprietor.

Q.5: Income tax return is filed for the proprietor for all his proprietorship concerns and not for one particular proprietorship concern. I am not aware of activity of Firm A and hence cannot comment.

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Sunder (Business) (165 Points)
Replied 04 July 2013

Originally posted by : P C Agrawal
	My answers: Q.1: Yes Q.2: Yes Q.3: Interest paid will be allowed as expense only if the amount of loan is invested for genuine business purpose. Further, Sec.14A of IT Act has to be kept in mind which disallows interest on loan if the relevant income by way of dividend is exempt from income tax. Q.4: Yes, if the the investment activity is not the business of the proprietor. Q.5: Income tax return is filed for the proprietor for all his proprietorship concerns and not for one particular proprietorship concern. I am not aware of activity of Firm A and hence cannot comment.

Q5: Are you saying that if A is the Proprietor of firms B & C, Income tax is filed in the name of A which includes income from B, C & any other personal income of A even though B & C may be engaged in totally unrelated businesses?

P C Agrawal (Registered independent director Past Chairman of Aurangabad Chapter of ICSI Practicing Company Secretary at Aurangabad) (8229 Points)
Replied 06 July 2013

Definitely yes, because IT return is filed for each PAN separately and PAN is allotted only in the name of the proprietor himself and not for each proprietorship concerns.