Interest on government loans must be recorded under mercantile accounting despite non-payment without proof of waiver

The ITAT Dehradun allowed the assessee's appeal regarding disallowance of interest on government loans. The tribunal held that under mercantile accounting system, the assessee was bound to record interest payable on loans from UP Government. The AO disallowed the interest claiming it was never actually paid, but failed to demonstrate any change in loan nature, interest waiver, or conversion to non-interest bearing loan by the government. The tribunal found no material supporting the AO's disallowance and ruled that CIT(A) was unjustified in sustaining it, deciding in favor of the assessee based on accounting consistency principles.

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The case involved an appeal before the Appellate Tribunal regarding the disallowance of interest paid on Government loans claimed as expenditure by the assessee for the Assessment Years 2016-17 & 2017-18. The core issue was whether the disallowance of interest payable on Government loans as claimed by the assessee was allowable expenditure.The Assessing Officer noted that the assessee had claimed interest expenditure on a loan from the State Government, although no interest was actually paid on the loan. The loan was used partly for the assessee's subsidiaries and partly in its own business. The AO disallowed the interest expenditure as the loan was not used to earn interest and no interest was paid to the State Government or received from the subsidiaries.The CIT(A) upheld the disallowance, leading to the appeal before the Tribunal. The assessee argued that the interest claimed was on an accrual basis and consistent with its accounting method. It was contended that the nature of the loan had not changed, and the interest was still payable. The assessee highlighted the principle of consistency in accounting and pointed out that no audit objections were raised in previous years.The Tribunal considered the arguments and found merit in the assessee's contention. It noted that the assessee followed a mercantile system of accounting and was obligated to record the interest payable on the loans from the State Government. The Tribunal observed that there was no evidence to show that the nature of the loan had changed or that the interest was waived. It criticized the AO for not questioning the accounting method and acting against the principle of consistency.Ultimately, the Tribunal set aside the CIT(A)'s decision and deleted the disallowance of interest expenditure in both years, ruling in favor of the assessee.In conclusion, the Tribunal allowed both appeals of the assessee, emphasizing the importance of following accounting principles and the lack of evidence to support the disallowance of interest expenditure on Government loans.

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