Skip to content

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

Meera Textiles Ltd, following the mercantile system, owes interest of Rs 2,00,000 to a scheduled bank on a term loan for tax year 2026-27. On 31 March 2027 the bank, by agreement, converts the unpaid interest into a new term loan. Under section 37 of the Income-tax Act, 2025, what is the position?

No deduction arises on conversion. Interest owed to a scheduled bank is allowed only when actually paid, and section 37(4) says converting unpaid interest into a new loan or similar instrument deferring payment is not treated as payment, whatever accounting method the company follows.

  1. AThe interest is deemed actually paid, so Rs 2,00,000 is deductible in 2026-27
  2. BRs 1,00,000 is deductible, being half on a reasonable basis
  3. CThe interest is not deemed actually paid on conversion, so no deduction arises on that conversionCorrect
  4. DThe interest is deductible in 2026-27 because the company follows the mercantile system

Explanation

Section 37(2)(e) covers interest on borrowings from specified financial entities, including scheduled banks, on actual payment basis. Under section 37(4), conversion of the interest into a loan, advance, debenture or other instrument deferring the liability is not deemed actual payment. The mercantile method does not override section 37(1)(b).

Did you get it right without looking?

One question tells you little. A timed set on Computation of Total Income and Tax Liability of various Entities shows your real accuracy, how long you take and where you lose marks.

Practise Computation of Total Income and Tax Liability of various EntitiesFree diagnostic mock

More Computation of Total Income and Tax Liability of various Entities questions