An assessee being a firm  had taken loan from bank for business purposes but subsequently the partners  withdrew the amount to be used for other purposes resulting in debit balance in the partners account in the firm B/S. Now the interest paid on loan is disalllowed to the extent of Dr balance in partners account. Now whether such interest is disallowed in Form CD under expenses for personal purposes or disallowed as Interest under section 36(i)(iii).

Dear Gautam J patel!

Such disallowace of interest paid on borrowed capital diverted for non business purposes have to be made under Section 36(1)(iii) which is specific provision which address this issue.

Do post your response!

Good Bye! Cheers!!

definately it is not a bussiness expense and should not be debited as interest expense in the profit and loss account but instead should be debited to capital account.

Question of disallowance under section 36 comes only if it is wrongly claimed as interest expense.

Again if the books are subject to audit and tax audit, the auditor should report the same in tax audit report as well as the notes to accounts.

 I also go with Mr. Ramakrishna. Interest on capital borrowed is specific section. So it is preferrable to show it under that head.