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CS Executive · Tax Laws and Practice · Computation of Total Income and Tax Liability of various Entities

Kaveri Industries Ltd. owes interest of Rs 2,00,000 on a term loan from a scheduled bank for tax year 2026-27 and follows the mercantile system. Before the return due date, the company converts the unpaid interest into a new loan from the same bank. How is the interest treated for 2026-27?

The conversion does not count as payment. Section 37(4) provides that interest converted into a new loan or other instrument deferring the liability is not deemed actually paid, so no deduction is allowed until the company actually pays the interest.

  1. ADeductible in 2026-27 because it is converted into a loan
  2. BDeductible in 2026-27 because the liability was incurred in that year
  3. CDeductible in 2027-28 when the bank is repaid in cash
  4. DNot deemed actually paid on conversion, so no deduction until it is actually paidCorrect

Explanation

Under section 37(4), if interest on borrowings from specified financial entities is converted into a loan, advance, debenture or other instrument deferring the liability, it is not deemed actually paid. So no deduction arises on conversion. The deduction is available only when the amount is actually paid in cash, which is why the options that allow it on conversion or by accrual are wrong. The option for 2027-28 is incomplete because the deduction depends on actual payment, not on a particular year.

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