Interest Exp. Can’t be Disallowed If Co. Didn’t Recognize Interest Income as Recovering Loans Becomes Impossible

Case Details: DCIT vs. M/s. Safari Biotech Pvt. Ltd. - [2023] 156 taxmann.com 571 (Ahmedabad-ITAT)

Judiciary and Counsel Details

• • T.R. Senthil Kumar, Judicial Member & Mrs Annapurna Gupta, Accountant Member
  • P.D. Shah, AR for the Appellant.
  • Sudhendu Das, CIT-DR for the Respondent.

Facts of the Case

During the course of business, the assessee had taken a huge amount of unsecured loans. The assessee advanced loans out of such amount to parties to earn interest income. Due to certain circumstances, recovery of interest on loans given by the assessee had become virtually impossible since parties were not paying back the principal amount for a very long time. Following the accounting treatment as per AS-9, the assessee decided not to charge interest income in the books of accounts.

During the assessment proceedings, the Assessing Officer (AO) made disallowance of interest expenses incurred by the assessee under Section 36(1)(iii). AO stated that while the assessee had taken a huge amount of unsecured loans and claimed interest expenditure, it had advanced loans to parties, either charging no interest or a nominal interest rate.

On appeal, CIT(A) deleted the disallowance made by AO. The matter reached the Mumbai Tribunal.

ITAT Held

The Tribunal held that the principle for recognition of revenue laid down by the Accounting Standard-9 issued by the Institute of Chartered Accountants of India prescribes the manner of revenue recognition. It says that revenue shall be treated as accrued only when it is measurable and collectable with certainty.

As per the Mercantile System of Accounting, which follows the accrual method of accounting, where there is no certainty of revenue collection, income cannot be recognized. AS-9 is to account for income on a mercantile basis only. Since the advances given by the assessee had become virtually impossible as the said parties were not paying back the principal amount for a very long time, and there was no dispute with the interpretation of AS-9, the revenue was to be recognized only when there was certainty of collection. The short charging of interest on certain loans given by the assessee and also the non-charging of interest on certain other loans was as per the Mercantile System of Accounting.

Therefore, there was no case for making any disallowance under Section 36(1)(iii) and accordingly, the appeal filed by revenue was to be dismissed.