Interest on Loan - Professionals - Taxation - TIK Share
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Interest on Loan


Kamaldeep Singh

2014-09-20

This one has confused me alot. A person has approached me for audit who is basically a transporter. He last year decided to enter sale/purchase business of land and construction of flats. He took a term loan of 1 crore and a limit of 50 lks from private n nationalised bank. All this was done in 2012-13. There was no purchase of such land or any construction work started. The person however utilised the money in getting into agreements of land purchase. He kept paying the term loan back regularly and limit amount also. I checked his last year statements for this purpose. This year too the things have been done in same fashion. He is paying loans back regulary and is entering into buying agreements. No land deal is yet finalised and is only giving advances to sellers using the loans. I am confused regarding the handsome interest portion. Last year auditor showed it in loans and advances. Probably, he would have thought of adding it to acquisition cost of land at later stage when such stock would actually be bought.

 

What is to be done with interest portion? Probably not allowed under income tax act. Then where to show it finally. Also he uses the land loan cc limit for his normal truck business as well and thus interest bifurcation is not possible between land and truck business. How to bifurcate it?

Pls. help.

Regards.

CA Pulkit Sharma

2014-09-20

The same case i have. Here is the case i had and how i grouped it in financials statements:

The client formed a LLP for the purpose of purchasing land and developing it later. However for last 3 years, no development on land was done but land was purchased worth of 10 crore.

He took loan of 8 crore and also paid interest on it.

Now the question arised, whether the interest expense can be claimed in income tax. If we refer income tax act, only expenses incurred to generate revenue can be claimed. However LLP didnot do any business, so expenses cannot be claimed.

What i did:

If we refer accounting standard or generally acceptted accounting policies, interest incurred should be added to cost of asset/inventory if these assets or inventory are not generating any revenue(layman language).

I treated the interest as cost of land and every year added the interest expenses to cost of land.

In  your case i believe, you should add the interest expenses to cost of land (capitalise the interest expenses).

Ofcourse interest has to be capitalised and added to cost of land. But in your case, person has not yet purchased any land. You can capitalise the interest as Pre-Operation cost and once lands are purchased, spread the interest in proportion to cost of land. You cannot reflect interest as expense incurred for purpose of income tax.

Coming to your second question regarding bifurcation of CC limit charges. Again, income tax act only allows expenses incurred for building the asset or operating the business (again layman language), even if you dont apportion the interest IT department will do if scrutiny comes.

The best solution is to arrange a formulla or if possible spread the interet expenses between truck operations and land operations.

If the land business is done using a different entity (LLP or Company) treatment would be different.

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Kamaldeep Singh

2014-09-21

Thanks for the prompt reply Pulkit. I had a meeting with him today and he cleared the issue that he plans to buy and sell lands rather than develop them. He is actually blocking the lands will purchase and sell them. So basically he is going to be a trader not a builder. Now what has to be done.

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CA Pulkit Sharma

2014-09-21

Great, you clear on what he intends to do. Consider it under WIP cost. WIP finaly turns into inventory. For him land is going to be inventory.

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Kamaldeep Singh

2014-09-22

Thanks bro! Actually I was confused as many seniors suggest to claim it in PL considering business already started and client paying a handsome amount intends the same.

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