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What is the treatment of interest on loan being reversed

01 July 2011

A company has a CC loan with a bank which is declared NPA consequently the bank reversed the interest charged and credited the interest to its loan a/c. Now plz help me how the company will give the treatment of interest reversal in accounts and in income tax. Whether it will increase its income by deducting the interest reversal from its interest expenses in accounts OR not giving any treatment of interest reversal at all?

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2 Replies

Keshav (chartered accountant) (286 Points)
Replied 02 July 2011

According to me .....For accounting purposes following entry to b passed Interest A/c............dr .................. To loan A/c......cr(assuming no interst entry passed earlier)............... if interest entry hav been passed earlier entry wud b.........interest payable a/c ...dr...........to loan a/c(i.e transferring the interest payable to loan a/c) ......... for income tax purpose interest converted into loan should b reduced from total interst expense since for IT purpose it is not considered as actually paid.

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Keshav (chartered accountant) (286 Points)
Replied 02 July 2011

In a nutt shell......for accounting purpose, no need to reduce interest just transfer interest payable(i.e account which has been credited while charging interest on due basis) to loan a/c.And for IT purpose dont consider above converted interest in total interest expense while computing tax payable.