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.
penal interest allowed as expenditure as per income tax act
Incorrect reply posted inadvertently. Inconvenience caused is regretted. 
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 .........
Perfect interpretation
CAclubindia
