2025 (3) TMI 33 - AT - Income Tax

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 ... Disallowance of interest paid on Government loans - such interest was never paid in any year since such loan was taken from the State Government - HELD THAT:- Assessee is bound to record the interest payable on loans taken from the UP Government as the assessee has followed mercantile system of accounting. The appropriation of the loan here will not determine the allowability of interest expenditure as the AO has not commented on the fact that the appellant assessee’s balance-sheet has not have non-interest bearing fund/surplus. Revenue (AO/CIT(A)/Sr. DR) has not brought anything on the record to demonstrate that either the nature of the said interest-bearing loan has been changed by the lender; UP Government or the appellant assessee is not required to pay any interest on the said loan. As not brought on the record by the Revenue (AO/CIT(A)/Sr. DR) that either the UP Government has waived the interest on the said loan or the UP Government has converted the said loan into non-interest-bearing loan/grant-in- aid, etc. Here, we not find any material on the record which supports the AO’s stand on the disallowance of interest when the AO, without questioning the accounting method of the appellant assessee followed over the years, has acted against the principle of consistency. We are of the considered view that the Ld. CIT(A) is not justified in sustaining the disallowance - Decided in favour of assessee. 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.