Interest paid on borrowed funds

Querist : Anonymous (Querist) 26 August 2010 This query is : Resolved
During the AIR scrutiny of an Individual Advocate,

the show cause was issued that to explain

why interest debited to income and expenditure account of professional firm not be dissallowed.

Your expert review is requested.

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A V Vishal (Expert) 26 August 2010
There may be three reasons:
1. The Case selected may be a tax audit case wherein the professional receipts are more than Rs.10.00 Lacs and the assessee has not deducted tax at source.
2. The assessee may have taken the loan and not used for the business.
Or
3. The rate of interest may be unreasonable viz.30% or 36% or higher.

In the above circumstances reasonable explanations must be furnished

Querist : Anonymous (Querist) 26 August 2010
At any level this is not the case

1.There is no tax audit. The receipt is below 10 lakhs

2. Assessee has taken the loan befor 2 years and is used exclusively for the purpose of profession.

3. The rate of interest is 12% pa.

A V Vishal (Expert) 26 August 2010
If so is the case you may submit and prove that the interest paid on the loan was expended exclusively towards profession and is thus allowable u/s.36(1)(iii) of the Income Tax Act,1961, if the same is utilized towards capital expenditure or extension of the existing profession or u/s.37 if the expenditure is revenue in nature.

s.subramanian (Expert) 27 August 2010
I fully endorse the view of Mr.Vishal.

soumitra basu (Expert) 27 August 2010
I do agree.

sanjeev kumar goel (Expert) 29 August 2010
if you can prove that the loan was taken exclusively for the use in profession and was also used in profession then interest paid on such loan can not be disallowed.

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