TaxTMI 
TaxTMI 
Partnership firm has presently unsecured loan from friends taken prior to 01.04.2004. But no interest has been provided on these loans for the financial year 2006-07.A.O. wants to tax these outstanding loans.Is he right?
Interest unpaid on unsecured loan
12 Nov 2009 
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Taxation of outstanding unsecured loans: absence of interest provision does not convert the debt into taxable income.
Unsecured loans taken before 01.04.2004 remain liabilities despite no interest being provided in a later year; non-provision of interest does not extinguish the debt or make the outstanding amount taxable. Loan waiver, if it occurs, is generally treated as a capital receipt rather than revenue. Assessing officers are limited to making adjustments in the assessment year in which the transaction occurred and may not tax prior borrowings in a subsequent year solely because interest was not provided. (AI Summary)
Unsecured loans taken before 01.04.2004 remain liabilities despite no interest being provided in a later year; non-provision of interest does not extinguish the debt or make the outstanding amount taxable. Loan waiver, if it occurs, is generally treated as a capital receipt rather than revenue. Assessing officers are limited to making adjustments in the assessment year in which the transaction occurred and may not tax prior borrowings in a subsequent year solely because interest was not provided. (AI Summary)