Interest converted into loan – deduction - CBDT clarifies
As per the explanations to Section 43B of the Income-tax Act, inserted by the Finance Act 2006, any sum payable by the assessee as interest on any loan or borrowing or advance shall be allowed as deduction if such interest has been actually paid and any interest which has been converted into a loan or borrowing or advance but has not been actually paid shall not be allowed as deduction in the computation of income.
The explanations only reiterate the rationale that conversion of interest into a loan or borrowing or advance does not amount to actual payment.
Now Board has issued a clarification on how to claim this deduction.
The interest converted into loan or borrowing or advance shall be allowed if such interest has been actually paid and any interest which has been converted into a loan or borrowing or advance, shall not be deemed to have been actually paid on account of its conversion into loan, etc. The unpaid interest whenever actually paid to the bank or financial institution will be in the nature of revenue expenditure deserving deduction in the computation of income. Therefore, the converted interest, by whatever name called, in the wake of its conversion into a loan or borrowing or advance, will be eligible for deduction in the computation of income of the previous year in which the converted interest is actually paid. In other words, nomenclature of the sum of converted interest will make no difference as the sum of converted interest whenever is actually paid will not represent repayment of the principal.
CBDT CIRCULAR NO 7/2006, Dated : July 17, 2006