2012 (9) TMI 351 - AT - Income Tax

Interest on government loan - Government company - dis-allowance on ground that the government order sanctioning the loan did not specify any terms and conditions with regard to payment of interest or penal interest - assessee has not paid even a single instalment of either the principal amount or the interest - no action initiated by the government to recover the amount - Held that - In the absence of any action initiated by the government to recover the amount, claim of deduction of the accrued interest on such loan may not be justified. Even though the assessee was maintaining mercantile system of accounting when the assessee defaulted in payment of the principal amount continuously for long time no interest would accrue on such loan even on principles of mercantile system of accounting. Dis-allowance upheld Addition of prior period income - Held that - Admittedly, the assessee is maintaining books of account on mercantile system. Therefore, the income relatable to earlier year cannot be added to the income of this year. Addition is deleted. Addition of interest on government loan outstanding as on 31-03-2004 - Held that - The loan was outstanding from the year 1996. The interest accrued was already converted into share capital. When a portion of the principal alongwith the interest and penal interest was converted into share capital there is no question of any further charging of interest. Therefore, the CIT (A) has rightly confirmed the addition

Summary

Issues:
1. Disallowance of interest on government loan
2. Addition of prior period income
3. Addition of interest on government loan outstanding
4. Addition of interest on government loan with unspecified interest rate

1. Disallowance of interest on government loan:
The appellant, a government company, claimed deduction for interest on a government loan. The assessing officer disallowed the claim citing absence of specified terms for interest payment. The appellant argued that the loan was sanctioned by the government and provided relevant documents. The Tribunal noted that while the government specified repayment terms, the appellant had not made any payments. As no action was taken by the government to recover the amount, the Tribunal ruled that claiming deduction for accrued interest was not justified. It was held that in the absence of actual payments, accrued interest cannot be claimed as a deduction, even under the mercantile system of accounting. The order disallowing the deduction was confirmed.

2. Addition of prior period income:
The issue involved the addition of prior period income to the appellant's total income. The appellant maintained books on the mercantile system, and the Commissioner found that prior period income was not added back in the computation. The Tribunal emphasized that each assessment year is distinct, and income accrued in prior periods cannot be included in the current year's income. As there was no evidence of crystallized or accrued income during the year under consideration, the Tribunal set aside the lower authority's order and deleted the addition of prior period income.

3. Addition of interest on government loan outstanding:
The appellant contested the addition of interest on a government loan outstanding since 1996, which had been converted into share capital. The appellant argued that as the interest was not written back due to lack of government approval, the addition was unjustified. However, the Tribunal upheld the lower authority's decision, stating that conversion to share capital negated further interest charges. The Tribunal confirmed the addition, finding no error in the lower authority's order.

4. Addition of interest on government loan with unspecified interest rate:
The dispute involved the addition of interest on a government loan with an unspecified interest rate. The assessing officer disallowed a provision for interest, leading to a potential double addition. The appellant argued against unilaterally writing back the interest, emphasizing the absence of interest waiver by the government. The Tribunal upheld the Commissioner's direction to verify potential double additions. If the amount in question was not previously included, the addition made by the assessing officer would stand. The Tribunal confirmed the lower authority's decision, addressing the concern of double addition.

In conclusion, the appeal was partly allowed, with different outcomes for each issue raised in the case.