interest on borrowed capital

Querist : Anonymous (Querist) 09 May 2010 This query is : Resolved
Is there is any restriction in rate of interest on borrowed capital. further any effect on of SC decision on MUNJAL SALES CORP. V/S CIT 2008 215 CTR SC 105

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soumitra basu (Expert) 12 May 2010
The rate of interest on borrowed capital should be reasonable compared to the market rate and purpose of borrowing.

Vineet (Expert) 13 May 2010
The decision quoted by you is on the issue whether provisions of section 40 are standalone or they are to be read with provisions of section 30 to 38. The specific question of law in that case is regarding interest paid to partners and whther the same can be disallowed on account of interest free advances to sister concernes.

As far as Income Tax Act is concerned, there is no restriction on rate of interest on borrowed capital except interest paid by firm to its partners. However for funds borrowed from persons referred in section 40A(2)(b), the reasonability of interest rate can be examined by AO and disallowances can be made.

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