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Conversion from unsecured loan to partners capital account by passing journal entry

Question BankCategory: Income TaxConversion from unsecured loan to partners capital account by passing journal entry
Dinesh asked 3 months ago

Hi , i am a partner in a firm
In which we have UNSECURED LOANs Taken from our family members , but last year my uncle died suddenly by heart failure , the firm had 26 laks rs as an unsecured loan taken from him , now I wanted to know that how can I repay that loan beacuse he is no more and can’t accept and transfer money via his bank account ,
but as per his last will the loan on his name in firm was to be repaid off to his nephew who is also a partner in that firm ,
So can we repay or transfer the loan amount to his nephew’s capital account by passing a journal entry in our books and can we also pay interest to his nephew on that amount
Or will we have to pay the loan by first transferring full amount to his nephews bank account and then again taking that amount back via cheque
And if it is possible that we can transfer that amount via journal entry in our books itself than will that attract any violation of sec 269SS Or sec 269T Because amount of this is just going via journal entries and nothing is paid or taken back in cash form and what should an auditor write in its finding at the time of audit report
he did not had any child from his wife , and plus his wife had also left him 20-25 years back , so he doesnot have any legal heir , and has written a will for his nephew to receive that money back , he was single and very ill from last 4-5 years ,
So can it be done by transferring the amount by passing journal entries or do I need to pay back the loan to successor by giving him a cheque and than again take a cheque back from him…
Plus is their any time frame under which this has to be done , like within one month or any stipulated time ??

1 Answers
Sunil answered 3 months ago

Accepting/ repaying loans/ advances via journal entries contravenes Section 269SS & 269T but Penalty cannot be levied under section 271D and Section 271E of the Income Tax Act,1961 if transactions are bona fide & genuine (Lodha Builders Pvt Ltd Vs ACIT (ITAT Mumbai)

  1. Repaying the Loan through Journal Entries:If you are ready to prove the genuineness of the transaction when required if required then you can pass journal entries by transferring the amount to the nephew’s capital account through a journal entry in your books, given that the loan was made with proper documentation and can be accounted for accurately. This should be supported by the last will and testament of your uncle, which designates the nephew as the beneficiary.
    But for peace of mind, you may transfer using the mode allowed under 269T i.e. E-banking, account payee cheque etc. This is your choice.
  2. Paying Interest: If there was an agreement for interest on the loan, you can include the accrued interest in the repayment through the journal entry. Ensure that the interest rate and terms are documented.
  3. Compliance with Legal Requirements: a. Sec 269SS and Sec 269T: These sections of the Income Tax Act relate to the acceptance of loans and deposits. If the loan was accepted following the rules and regulations, there should be no violation when repaying it through the journal entry ((Lodha Builders Pvt Ltd Vs ACIT (ITAT Mumbai).
  4. Stamp Duty: Check if there are any stamp duty requirements for loan documents or repayment in your state.
  5. Legal Heir Certificate: Given that your uncle didn’t have any legal heirs, you may need to obtain a legal heir certificate from the local authorities. Consult a legal expert for guidance on this process.
  6. Documentation: Keep thorough records of the transaction, including the journal entry, a copy of the will, any loan agreement, and communication with the nephew. This documentation is essential for audits or legal purposes.
  7. Time Frame: While there may not be a specific time frame mandated by law for repayment, it is advisable to complete this process as soon as possible after your uncle’s passing to avoid any complications or disputes


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