Interest free loan by karta and clubbing provisions

[sujittalukder]

I have a query whether HUF can take an interest free loan from Karta / members and how income from the same in the hands of HUF will be treated? Will such income be clubbed in the hands of the Karta/ member from whom loan has been taken?

In my view, the income from loan will be taxed in the hands of the HUF and cannot be clubbed in the hands of the Karta/Member. Section 64(2) will be applicable only when the asset is transferred or converted into joint property of the HUF. In case of Loan, the same is not converted into common property of HUF so 64(2) will not operate. Is this correct? Its my interpretation only and if correct, can this be substantiated with judicial precedents on the matter if any available to any esteemed members?

Inversely, it is also opined that this amounts to tax evasion by the Karta/member by diverting the income that could have been generated from the amount given as loan by the individual in his individual capacity. The fact that same individual is working as karta/member of the HUF which is generating the income then why not the same amount was used by the individual in his individual capacity to earn the same income. For eg, Mr x is an individual and also Karta of HUF. He earns income from Salary as an employee of a company (not associated with HUF in any manner). He is in 20% tax bracket. He has Rs 10,00,000 to invest which can generate income to the tune of Rs 3,00,000/- p.a. If this income is included in his individual file, he will move upwards to 30% tax bracket. So he decided to give loan to HUF. As he is the karta of the HUF, he himself will invest the loan amount for Rs 10 Lac and monitor the investment. The income of Rs 3,00,000 if taxed in the hands of the HUF, he will get the benefit-

1. He will continue to be taxed at 20% (so saving of 10% tax)
2. Further, HUF will also get basic exemption limit and also various Deduction say u/s 80C etc and thus reduced tax burden on HUF.

Which one of the contention is correct position of law?
Thanks and regards
Sujit Talukder

[JB]

boradly i am in agreement with you. However, section 64 somewhere takes care of a situation where income is transferred to any one without transferring the asset. I doubt that the same may be taxed there as money will continue to belong to individual but income is transferred to HUF. Learned friends on this forum may throw light on this aspect.

[amrit singh]

Dear Sujit/JB - you'll both seem experts. Could you also comment on

HUF funding - can mother loan money to son's huf? http://www.itatonline.org/forum/index.php?topic=956.0