Mercantile accounting and consistent interest liability treatment justified allowance of interest on Government loans.

Interest expenditure on Government loans was held allowable where the assessee followed the mercantile system and had consistently accrued the liability in its books. The Revenue failed to show that the loan had ceased to bear interest, that the interest was waived, or that the advance had been converted into a grant-in-aid or non-interest-bearing loan. In the absence of material to disturb the settled accounting treatment followed in earlier years, the disallowance was deleted.

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Issues: Whether the disallowance of interest expenditure claimed on Government loans was justified where the assessee followed the mercantile system of accounting and the liability had been consistently reflected in the books.

Analysis: The assessee maintained its accounts on mercantile basis and had consistently debited the interest payable on the Government loan. The Revenue did not show that the loan had ceased to be interest-bearing, that the Government had waived the interest, or that the loan had been converted into a grant-in-aid or non-interest-bearing advance. No material was brought on record to displace the long-standing accounting treatment or to justify departure from the settled practice followed in earlier years.

Conclusion: The disallowance of interest expenditure was not justified and was deleted in favour of the assessee.

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