Circular No. 7/2006 dated 17th July 2006 clarifies that the unpaid interest, whenever actually paid to the bank or financial institution, will be in the nature of revenue expenditure deserving deduction in the computation of income. Therefore, the converted interest, by whatever name called, in the wake of its conversion into a loan or borrowing or advance, will be eligible for deduction in the computation of income of the previous year in which the converted interest is ‘actually paid’.
In other words, the nomenclature of the sum of converted interest will make no difference as the payment of converted interest will not represent the repayment of the principal. The circular clarifies that the fundamental principle remains that once an amount has been determined as interest payable to the banks or financial institutions, any subsequent change of nomenclature of interest will not affect its allowability, and deduction in terms of Section 43B will have to be allowed on its actual payment. The Assessing Officer, however, can ask for a certificate from the assessee to be obtained from the lender bank or financial institution, etc., as evidence of ‘actual payment’ of interest to banks or financial institutions.