RECEIPT OF INTEREST ON DEBENTURES

[S.C. WADHWA]

A company made an investment in debentures on which interest is received after deduction of tds.

Interest is received for period from 01/01/12 to 31/03/12 but same is received on 05/06/12.

Now, I want to know whether same should be accounted on receipt basis in financial year 2012-13 or same should be booked first on mercantile basis in financial year 2011-12 and then book receipt of interest recoverable in financial year 2012-13.

[Naresh Rinwa]

It has to be booked as per mercantile basis and it should be shown as interest receivable. and compute the income tax accordingly.

AI Summary

Accrual accounting for interest: interest on debentures must be recognised when earned, not when received. Interest on debentures must be accounted for on the mercantile basis and accrued in the period to which it relates. The accrued interest should be shown as interest receivable in the earlier financial year and included in that year's taxable income; the subsequent cash receipt serves to extinguish the receivable rather than create fresh income in the year of receipt.