TaxTMI 
TaxTMI 
Assessment proceedings- enquiry and reply in connection with mutual financial accommodation accounts.
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....ssessment proceedings- enquiry and reply in connection with mutual financial accommodation accounts.<br>By: - DEVKUMAR KOTHARI<br>Income Tax<br>Dated:- 6-9-2008<br><br>Mutual financial accommodation accounts: It is usual practice to maintain mutual financial accommodation accounts amongst family members, close relatives, sister concerns and associates. These are not in nature of loan or deposit a....
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....ccount, as is generally understood in commercial world. However, under specific provisions the amount may be considered as loan or deposit. Some times it is also ground reality that a common cash box is maintained or there is common cashier. As per requirement payments in cash are made on account of any related person if there is cash in the common cash box. After recording of transactions, some t....
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....imes it is found that cash payment made from common cash box, on account of X was made though X had no cash balance in his books. This means that cash balance available in common cash box was used and Y or Z has extended a financial accommodation in cash to X whi9le paying from common cash box. In such circumstances, financial accommodation extended from Y and or Z to X while paying from common ca....
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....sh box of X,Y, and Z cannot be considered as loan or deposit. Common cash box, common cashier or common fund manager ( who may be a member of family looking after funds position of all) is a ground reality in fund administration. Enquiry from A.O. The assessing officers may enquire about such accounts with view to the following: * Examining the nature of credit found and source of the same -....
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.... in case the nature and source are not satisfactorily explained an addition can be made u/s 68. * Try to make addition of interest in case financial accommodation is extended free of interest or lower interest. * Try to disallow interest if any borrowed and interest bearing funds have been used in extending interest free or lower interest rate bearing financial accommodation. * Try to mak....
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....e addition in account of accommodation provider, if he has not disclosed his investment in his books of account. * General confirmation and reconciliation of account of his assessee with concerned parties as a routine enquiry. * To enquire to detect violation of provisions in case of cash transactions - S. 40A(3), 269 SS, s269 T etc. An assessee who has maintained current account can give e....
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....xplanation on the following lines with suitable modification, as per particular facts prevailing in any case: Explanation about mutual accommodation accounts: We have maintained mutual financial accommodation accounts amongst our relatives and associates. In such account transactions for mutual financial accommodation received or extended are recorded. In case funds are required in our account a....
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....nd funds are not available, then funds available with other relative or associate is availed as mutual financial accommodation. Similarly, in case other relative or associate require funds and we have funds available, then we may extend financial accommodation to other relative or associate. Considering the mutual nature of transactions any interest is not charged or paid on such current account.....
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.... Usually mutual financial accommodation is extended out of funds available with the accommodator from his capital and other cash generation in business operations. Any borrowed funds are not used by any one to extend interest free financial accommodation to any other barring exceptional and unforeseen circumstances. During the previous year we have not used any interest bearing borrowed funds to ....
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....extend interest free financial accommodation on any such current account, therefore any part of interest expenses is not disallowable . We have extended financial accommodation, with a view to maintain accommodation relationship so that in case of need we can also obtain funds on such accounts. Therefore, there is commercial expediency in maintaining such accounts. As per mutual understanding, no....
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.... interest is chargeable by us on any financial accommodation extended by us, therefore, any notional interest cannot be included in our income. Copy of current accounts duly confirmed by parties have been submitted along with return/ are being enclosed. Enquiry by A.O. from concerned parties: The A.O. may issue notices to other parties who can submit reply on the following lines: From To ....
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....ITO Dear Sir, Reg: Your notice u/s 133 (6) in relation to your assessee Shri . With reference to the above I enclose herewith a copy of account of your assessee in my books of account. I have maintained a mutual financial accommodation in nature of current account with your assessee. Considering mutuality of transactions and understanding any interest is not charged by me or paid to your assess....
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....ee on such mutual current account. The source of funds extended by me are explained below: Date Funds extended by Ch. no. / Bank Amount Rs. Source and explanation I hope you will find the above information as complete and sufficient in relation to your enquiry about assessment of your assessee. Books of account and bank statement shall be produced, if required. I am assessed to tax an....
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....d my PAN is …. Shri ______________ , CA/ Advocate shall provide you further evidence and explanations if required. Thanking you, Yours faithfully,<br> Scholarly articles for knowledge sharing by authors, experts, professionals ....