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

Under section 37 of the Income-tax Act, 2025, Bharat Metals Ltd owes interest to a scheduled bank on a term loan, as per the loan agreement. The interest for the tax year was not paid by the return due date, and the company instead converted the unpaid interest into a new loan from the bank. Which statement is correct?

The conversion is not deemed actual payment, so no deduction arises merely on conversion. Section 37(4) of the Income-tax Act, 2025 provides that interest converted into a loan, advance, debenture or similar instrument deferring payment is not treated as actually paid.

  1. AThe conversion counts as actual payment, so the deduction is allowed in the year of liability
  2. BThe conversion counts as actual payment, so the deduction is allowed in the year of conversion only
  3. CThe conversion is not deemed actual payment, so no deduction arises merely on conversionCorrect
  4. DThe deduction is allowed in the year of liability because a scheduled bank is a specified financial entity

Explanation

Interest to a scheduled bank is covered by section 37(2)(e), allowed on actual payment. Section 37(4) says that if the interest is converted into a loan, advance, debenture or other instrument deferring payment, it is not deemed actually paid. The option citing the scheduled bank status is wrong because that only brings the interest within the section; it does not make conversion a payment.

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