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CS Professional · Advanced Direct Tax Laws and Practice · Computation of Total Income, Tax Liability and Filing of Returns of various Entities excluding Companies

Under the Income-tax Act, 2025, Meera Traders (a partnership firm) owes interest to a scheduled bank on a term loan as per the loan agreement. At year-end the firm gets the bank to convert the unpaid interest into a fresh loan. How is the interest treated for deduction under section 37?

The interest is not deemed to have been actually paid, so no deduction arises on conversion. Section 37(4) provides that converting interest into a loan, advance, debenture or similar instrument that defers the liability does not count as payment. The deduction must wait for actual payment.

  1. ADeemed paid on conversion, so allowed in that tax year
  2. BAllowed in the next year automatically
  3. CNot deemed to have been actually paid, so not allowed on conversionCorrect
  4. DAllowed if the firm files its return before the due date

Explanation

Section 37(4) states that where interest on borrowings from specified financial entities is converted into a loan, advance, debenture or other instrument deferring the liability, it is not deemed to have been actually paid. So conversion does not give a deduction. The late-filing relaxation in sub-section (3) requires actual payment, not conversion.

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