Allowability of Interest paid under Incometax Act, 1961:
Presently, interest paid by the Government to an assessee is chargeable to tax. However, interest paid by the assessee to the Government under various sections is not allowed as deduction while computing the total income. Interest paid by the assessee is for the use of money by him and is compensatory in nature.
Interest paid by the assessees to the Government under various sections of the Income Tax Act should be allowed as deduction in computing total
income. If the assessee does not have business income, interest should be allowed under the head `Income from other Sources’. Alternatively, the interest received by the assessee on refund should be exempt from tax.
Source- Pre-budget Memorandum 2014 on direct taxes by ICAI