Penal interest on bank overdraft

One of our clients is availing the Bank Overdraft facility with bank amounting Rs. 25lacs, however on several occassions during the year the client has withdwrawn in excess of Rs. 25lacs and the bank has charged the Penal Interest on the overdrawn amount.

 

Now my query is whether the Penal Interest (charged on overdrawn amount) is disallowed under the Income Tax.

 

 

Replies (8)

penal interest allowed as expenditure as per income tax act 

Incorrect reply posted inadvertently. Inconvenience caused is regretted.  sad

Dear Akram

As per Sec 36(1)(iii) Interest on Borrowed Capital, Any amount of interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business or profession for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use shall not be allowed as deduction.

So in your case nothing of the above category is attracted so the interest paid on ad-hoc limit of overdraft facility will be allowed as deduction as it's not within the purview of the above said section and it's also a normal business expendtiure and also comes under the purview of Sec 37(1) General Clause for Deductions.

Thanks & Regards

Amber Jain

Penalty for infraction of law is disallowed, here there is no infraction of law, so d same wld be allowed.

Its penal interest from the view of bank & borrower .. but not under any other act & hence under income tax act its allowed .........

There is noinfraction of law and hence allowed.

"Penal Interest" is the nomenclature of the entry but actually it is of Compensatory in nature ....hence would be allowed.

Perfect interpretation

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