TaxTMI 
TaxTMI 
Whether amount of sales tax liability converted into loans may be allowed as deduction in assessment for previous year in which such conversion has been permitted by or under Government orders
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....nment Orders notifying schemes under which sales tax is deemed to have been actually collected and disbursed as loans. Such Government Orders also provide that entries shall be made in the Government accounts giving effect to deemed collections by crediting the appropriate receipt-heads relating to sales-tax collections and debiting the heads relating to disbursal of loans. It has, therefore, been represented that, as such conversion of the sales tax liability into loans have similar statutory effect as can be achieved through amendments of the Sales-tax Act, the amounts covered under the scheme should be allowed as deduction for the previous year in which the conversion has been permitted by the State Governments. 3.The Board have considered the matter and are of the opinion that such deferral schemes notified by the State Governments through Government Orders meet the requirements of the Board's Circular No. 496, dated 25-9-1987 in effect though in a different form. Accordingly, the Board have decided that the amount of sales tax liability converted into loans may be allowed as deduction in the assessment for the previous year in which such conversion has been permitted by or ....
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....e Income-tax Act, 1961 was amended by the Finance Act, 2006 inserting therein two clarificatory Explanations, namely; Explanation 3C and Explanation 3D. Both the Explanations clarify that any sum payable by the assessee as interest on any loan or borrowing or advance shall be allowed as deduction if such interest has been 'actually paid' and any interest which has been converted into a loan or borrowing or advance but has not been actually paid shall not be allowed as deduction in the computation of income. The clarificatory Explanations only reiterate the rationale that conversion of interest into a loan or borrowing or advance does not amount to 'actual payment'. 2. Clarifications have been sought from certain quarters regarding the manner in which the converted interest will be allowed as deduction. 3. As clarified in the Memorandum explaining the Provisions in the Finance Bill, 2006 (page 3 thereof), the interest converted into loan or borrowing or advance shall be allowed if such interest has been 'actually paid' and any interest which has been converted into a loan or borrowing or advance, shall not be deemed to have been 'actually paid' on account of its conversion int....
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....al of Rs. 34.21 lakhs is converted into a Running Cash Credit Account with a limit of Rs. 21.21 lakhs and a Working Capital Term Loan of Rs. 13 lakhs, each carrying interest at the rate of 10.25%. The balance of unpaid interest (Rs. 8 lakhs remaining after waiver of Rs. 2.93 lakhs) is converted into a Funded Interest Term Loan (FITL) (which is separate from the original loan of Rs.34.21 lakhs). The FITL of Rs. 8 lakhs does not carry any interest and is payable in four instalments from 1-4-2005. The amount to the extent actually paid towards the instalment of FITL of Rs. 2 lakhs will be eligible for deduction under section 43B in the relevant assessment year. The interest paid on Running Cash Credit Account and Working Capital Term Loan will also be allowable only on actual payment in the relevant assessment year. III. Name of the assessee : M/s. PQR Loan taken by the assessee from a Term Lending Institution in May, 2002 : Rs. 14.95 crores Interest paid up to April, 2004 but default in payment of interest started in the quarter April - June, 20....
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....uction in the computation of income on account of actual payment of interest will be worked out in the following manner : 20 × 33 133 = 4.962 Cr. Out of the repayment of Rs. 20 crores in the first year, deduction of Rs. 4.962 crores will be admissible in terms of the provisions of section 43B as deduction, as Rs. 4.962 crores out of Rs. 20 crores actually paid represents interest component. Balance Rs. 15.039 crores representing repayment of the principal shall not be admissible as deduction in the computation of income. In a restructuring arrangement in which the amount of interest of Rs. 33 crores is not merged with the original principal of Rs. 100 crores and is separately payable from the 'repayment instalments' out of the principal of Rs. 100 crores, deduction on account of actual payment of interest shall be allowed as under : Repayment out of the loan amount of Rs.133 Cr. will have the following three components - (a) Repayment of the principal of Rs. 100 Cr. … X (b) ....