Under mercantile system of accounting interest payable would be treated as “paid” – ITAT

Under mercantile system of accounting interest payable is equal to paid. ITAT deleted disallowance on the ground that interest was not paid during the year

ABCAUS Case Law Citation:
ABCAUS 3218 (2019) (01) ITAT

Important case law relied upon by the parties:
Taparia Tools Ltd. vs. JCIT Nasik

In the instant case the appeal was filed by the assessee against the order passed by the Commissioner of Income Tax (Appeals).

The question was as to whether the interest expenses can be disallowed on the ground that interest was not paid during the year when the mercantile system of accounting being consistently followed by the assessee.

The assessee strong relied upon the judgment of the Hon’ble Supreme Court and the Coordinate Bench where addition on similar disallowance was deleted.

The Tribunal observed that the Assessing Officer (AO) disallowed the expenditure on the ground that interest was not paid during the year under consideration which was confirmed by the CIT(A) holding the said expenditure is nothing but a provision only.

The Tribunal stated that it is a settled principle of law that even if an amount is not actually paid but ‘incurred’ according to the method of accounting, the same would be treated as ‘paid’. Since in the instant case, the assessee was followed mercantile system of accounting, the amount of interest could be claimed as deduction even if it was not actually paid but simply incurred.

Further, the Tribunal noted that the Co-ordinate Bench had observed that as per the mercantile system of accounting interest expenses are to be debited to the Profit and Loss Account irrespective of the fact that whether the same has been ‘paid’ or not.

The Tribunal opined that since the assessee was following the mercantile system of accounting the outstanding interest expenses was shown as interest payable which was not taken into consideration by the authorities below which was not sustainable in the eye of law.

The Tribunal deleted the impugned addition and allowed the Assessee’s appeal.

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