Hutchinson & Co. (India) Pvt. Ltd. Vs ITO (ITAT Bangalore)
Interest Paid = Deductible When Obligation Exists – ITAT Allows Claim on Capital Bond Arrangement
In Hutchinson & Co. (India) Pvt. Ltd., the Bangalore ITAT dealt with allowability of interest paid to Prestige Holiday Resorts Co. Ltd. under a capital bond arrangement, after the matter was remanded by the Karnataka High Court.
The Revenue had disallowed the claim on the ground that:
- There was no obligation to pay interest, and
- Hence, the payment was not incurred wholly and exclusively for business.
However, on detailed examination of the capital bond agreement, the ITAT found:
- Prestige had parked funds with the assessee for a specific business purpose.
- The agreement clearly provided that interest accruing on such funds must be paid to Prestige.
- Thus, a legal and enforceable obligation existed.
The Tribunal observed:
- The assessee had already offered interest income earned on deposits to tax.
- Correspondingly, the liability to pay interest to Prestige arises simultaneously.
- Therefore, the payment is not voluntary, but a business-linked obligation.
Accordingly, ITAT held:
- Interest paid is allowable deduction u/s 36(1)(iii) (and in substance also satisfies Section 37(1) principles).
- Disallowance by lower authorities was incorrect.
Where income and liability are two sides of the same transaction, taxation cannot be one-sided. If interest income is taxed, matching interest obligation must be allowed.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
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