Gautam Patel (CA and CWA) (146 Points)
04 July 2009An 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).
Ramakrishna
(Financial Executive)
(438 Points)
Replied 04 July 2009
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!
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VIPUL BUBNA
(MANAGER TAXATION)
(119 Points)
Replied 05 July 2009
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.
CA Kingsley
(Audit Manager)
(470 Points)
Replied 05 July 2009
I also go with Mr. Ramakrishna. Interest on capital borrowed is specific section. So it is preferrable to show it under that head.
Landmark Judgments: Important Provisions of the EPF & ESI Act interpreted by the Honorable Supreme Court of India
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