Interest Free Loans from Non Relatives

INTEREST-FREE LOANS TO LOSE TAX BURDEN ITAT Ruling On Loans From Non-Relatives IN A first-of-its- kind judgement, the Income-Tax Appellate Tribunal (ITAT) recently ruled that a recipient of an interest-free loan from a non-relative is not liable to pay tax. The judgement will come as a major relief for people who borrow money from friends and colleagues and latter grapple with notices from tax authorities. Section 56 (2)(v) of the Income Tax Act provides for taxing any sum of money in excess of Rs 25,000 received without consideration by an individual or a Hindu Undivided Family (HUF) from any source other than a relative. Occasions where the recipient is exempted from tax are during a marriage, or in cases where the amount is received under a will, or by way of inheritance or in contemplation of death of the payer. Applying this section, an income-tax assessing officer treated interest-free loans amounting to Rs 54.7 lakh received by one Chandrakant Shah from nonrelatives as a sum without consideration and taxed it. New section came into force in 2004 THE assessee approached the Commissioner of I-T (Appeals), but was not granted relief. He then appealed before the Mumbai ITAT, where his legal counsel said that the lower authorities had "misinterpreted" the new section, which came into effect on September 1, 2004. Furthermore, Mr Shah's counsel said the sum of interest-free loans taken by him even before that date (September 1, 2004) did not fall within the ambit of the amended section. Bhupendra Shah, Mr Shah's counsel, argued before a division bench comprising Madhavi Devi and VK Gupta that an interest-free loan could not be taxed under Section 56 (2)(v), as the repayment of a loan itself is treated as consideration between two parties and not a sum without consideration. The counsel said the amounts were shown in the balance sheet by the assessee as unsecured loan liabilities, and, hence, could not be treated as an addition to capital as in the case of a gift. The counsel contended that the term "loan" meant delivery by one party to and receipt by another party of a sum of money upon agreement expressed or implied condition, to repay it with or without interest. He maintained that it was inessential for an interest component to make a transaction of lending of money a loan transaction, by referring to a decision of the Court of Appeal of State of California. The US court had observed that a loan of money was a contract by which one delivered a sum of money to another, and the latter agreed to return at a future time without interest that sum which he borrowed. The bench upheld the counsel's argument, saying: "We hold that a transaction of loan can be without interest and a transaction of loan implies an agreement to repay the money that is borrowed, which also gives reply to the revenue's query regarding the existence of the obligation to repay the money at the time of taking such loan." Section 56 (2)(v) was introduced to fill up the vacuum created by the abolition of the Gift Tax Act in 1997, which was donor-based, meaning the giver of a gift was taxed.

Subsequent Sale u/s 6(2) of CST Act while goods are in Transit

Subsequent sale while goods in transit

Court : Supreme Court

Brief : : If Subsequent sales contracts were in place prior to the commencement of the inter-state movement of goods, such subsequent sales could not sales u/s 3(b) of the CST Act and accordingly they would not qualify for the exemption for In Transit Sales u/s 6(2) of the CST Act.

Thus, it becomes imperative to ensure that the sales contracts relating to the second and subsequent sales are made effective only after and not before the commencement of the inter-state movement of goods as per the first sale.


Citation : A & G Projects & Technologies vs State of Karnataka [(2008) VIL 40 SC]

Judgment :

The appellant were engaged in the execution of the works contracts in Karnataka and were registered under the Karnataka Sales tax laws and CST Act. They entered into three separate contracts with the ultimate customer for supply of equipment, execution of civil works at site and erection and commissioning of the above equipment at site. Pursuant to these contracts, the appellants appointed a sub-contractor located outside Karnataka state for procurement of the equipment in question.

Consequently, there were three contracts relating to the procurement and supply of equipment. These were the contract for supply of equipment between the appellants and the ultimate customer, the contract between the appellants and the sub contractor and, finally, the contract between the sub contractor and the manufacturer of the equipment.

The appellants argued before the assessing authorities that there were three different sales transactions. The first one was the sale of equipment by the manufacturer of the equipment to the sub contractor and the second and third sales were sales of the equipment by the sub contractor to the appellant and thereafter by the appellants to the ultimate customer.


The appellants argued that the first sale was an inter-State sale and the subsequent two sales were eligible for exemption from tax for subsequent or in transit sales under the relevant Section 6(2) of the Act.



The assessing authorities in Karnataka rejected this claim for exemption for the subsequent sales under the Act and held that all three sales were sales under Section 3(a) of the Act and not under Section 3(b) of the Act and hence the exemption from tax for in transit sales under Section 6(2) (supra) was not applicable.



At the outset, the apex Court held that its decision was based on the understanding that all three sales were sales which occasioned the movement of goods from one State to another and were hence all covered under Section 3(a) of the Act and not under Section 3(b) of the Act. This understanding is key to the matter since it has the effect of holding that since the equipment in question was the subject matter of three separate but related contracts of sale, the subject equipment already stood appropriated by the manufacturer in favour of the final consumer through the intervening transactions of sales to the sub-contractor and to the appellants.



The Supreme Court hence proceeded on the ground that if the subsequent sales agreements were in place at the time that the first sales agreement was executed, the provisions of Section 3(b) relating to in transit sales would not apply and hence the benefit of exemption from central sales tax to such subsequent sales under Section 6(2) of the Act would also not apply. The Supreme Court held that the dividing line between sales under Section 3(a) and those under Section 3(b) was that in the former case the inter State movement of goods happened because of the contract of sale whereas the sales under Section 3(b) were those where the contracts came into existence after the commencement of movement of goods.



The Court held that while the movement of goods did not determine the levy of tax, it did determine whether the sales were inter-State sales or were intra-State ones. The Court also held that the nomenclature given to a transaction by the contracting parties could not determine the nature of the transaction. The apex Court held that Section 6(2) relating to exemption from tax for in transit sales was only applicable to those sales which qualified under as such Section 3(b), as sales effected by a transfer of documents of title.

Track the Status of your PAN Card Application

You can track the status of your PAN Card Application on following links. You will have to enter your Acknowledgement Number in case of NSDL Application and Coupon Number in case of UTI Application.

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How to Apply for a New PAN Card

You can fill the following form (Form 49A) and deposit it either with NSDL or UTI offices along with necessary "ID Proof" and "Address Proof". You will get the printed PAN card delivered at your home.

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List of Specified Documents for (Permanent Account Number ) PAN Application

On following link you can findout the Specified documents for "Identity Proof" and "Address Proof" for New PAN Application with Income Tax Department of India.

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How to Start "Partnership Firm" in India

"Partnership Firms" in India

A partnership is a business entity having two or more owners. Earnings are distributed according to the partnership agreement and are treated as personal income for tax purposes. Thus, like the sole proprietorship, the partnership is simply a conduit for directing income to its partners.

Steps to form Partnership Firm in India

• In India, a partnership firm can a maximum number of 20 partners.
• Partnership Firm is formed by formally written Partnership Deed which is signed by all the partners with witnesses. Usually, Partnership Deed is written on Rs. 500/- stamp paper.
• A Partnership Deed can be altered (for admission of new partner, retirement of existing partner) any number of times only by written instrument on Rs. 500/- stamp paper.
• Partnerships are governed by "Indian Partnership Act, 1932" in India.
• It is not mandatory to register partnership firm with "Registrar of Firms". The disadvantage of non registering is that an unregistered partnership firm cannot sue anybody in its own name.
• Registration formalities are quite simple with basic documentation required like certified copy of partnership deed, ID & Address Proofs of partners, Address Proof of Principle Place of business of the Firm etc.
• Unlike Sole Proprietorship, the Partnership is separately assessed in the Income Tax. You will have to apply for a separate PAN number for a Partnership Firm in addition to the existing PAN numbers of all the partners.

Partnership has a unique liability situation. Each partner is jointly and severally liable. Thus, a damaged party can sue a single partner or any number of partners- and that claim may or may not be proportional to the invested capital of the partners or the distribution of the earnings. This means that if the one partner did something to damage acustomer, that customer could sue all the partners even though other partner played no part in the problem.

Organizing a partnership is not as effortless as with a sole proprietorship. The partners must determine, and should set down in writing, their agreement on a number of issues:The amount and nature of their respective capital contributions (e.g., one partner might contribute cash, another a patent, and a third property and cash)

• How the business’s profits and losses will be allocated
• Salaries and draws against profits
• Management responsibilities
• The consequences of withdrawal, retirement, disability, or the death of a partner
• The means of dissolution and liquidation of the partnership

Advantages of a Partnership

Partnerships have many of the same advantages of the sole proprietorship, along with others:

• It is the simplest form for two or more persons to enter into a business together.
• Except for the time and the legal cost of crafting a partnership agreement, it is easy to establish.
• Because there is more than one owner, the entity has more than one pool of capital to tap in financing the business and its operations.
• Profits from the business flow directly to the partners personal tax returns; they are not subject to a second level of taxation.
• The entity can draw on the judgment and management of more than one person. In the best cases, the partners will have complementary skills.

Disadvantages of a Partnership

As mentioned earlier, partners are jointly and severally liable for the actions of the other partners. Thus, one partner can put other partners at risk without their knowledge or consent. Other disadvantages include the following:

• Profits must be shared among the partners.
• With two or more partners being privy to decisions, decision making may de slower and more difficult than in a sole proprietorship. Disputes can tie the partnership in knots.
• As with a sole proprietorship, the cost of some employee benefits may not be deductible from income taxation.
• In India partnership firms are taxed at a higher rate than proprietorship firms.