Interest on state "soft loan" under repayment agreement-whether accrued interest is deductible u/s37; deduction allowed.

Dispute concerned whether interest accrued on a concessional ("soft") loan from a State Government was an unascertained liability disallowable under s. 37. The ITAT held that the loan was validly obtained under an agreement stipulating interest and repayment terms, and non-commencement of repayment due to short drawal from the sanctioned amount did not negate accrual. Under the mercantile system, the interest obligation crystallised with time and was therefore an ascertained liability. Relying on HC authority affirmed by the SC, the ITAT directed allowance of deduction for the interest provision, and the appeal was allowed.

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ISSUES PRESENTED AND CONSIDERED

1. Whether the interest of Rs. 2,42,00,000 provided in the books on a State Government soft loan, though not yet paid and with repayment not having commenced due to agreed conditions, constituted an ascertained liability allowable as deduction, or an unascertained liability liable to be disallowed under section 37.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Allowability under section 37 of provision for interest on State Government soft loan as "ascertained liability"

Legal framework (as discussed by the Court): The Court examined the disallowance made under section 37 on the footing that a "provision for unascertained liability" is not allowable. The Court also proceeded on the basis that the assessee maintained accounts under the mercantile system of accounting, under which accrued liabilities are required to be provided in the books.

Interpretation and reasoning: The Court found that (i) the loan from the State Government was admittedly obtained under agreed terms and conditions; (ii) interest is ordinarily chargeable on such loan and the liability to interest arises under the agreement; and (iii) the fact that repayment had not started because the assessee had not received a stipulated percentage of the sanctioned amount did not render the interest liability non-existent or "unascertained". The Court accepted the assessee's contention that the liability could not be treated as wiped out on any unilateral premise and that provisioning of interest was consistent with mercantile accounting. The Court held that the interest liability, being grounded in the agreed loan terms, could not be characterized as a mere contingent or unascertained liability merely because it remained unpaid and repayment had not commenced.

Conclusions: The Court conclusively held that the interest of Rs. 2,42,00,000 provided in the books was an ascertained liability and therefore could not be disallowed under section 37. The Assessing Officer was directed to allow the deduction of the said interest.

Consequential determination: Since deduction of the impugned interest was allowed, the remaining grounds were treated as academic and were not adjudicated.

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