Contractual interest deduction allowed where capital bond agreement created an enforceable obligation matching taxable interest income.

Contractual interest payable under a capital bond arrangement was held to be deductible as business expenditure where the agreement expressly required the assessee to pay interest to the counterparty on funds placed in the capital bond account. The liability was treated as enforceable under the contract and coextensive with the interest income earned from those deposits, which was taxable in the assessee's hands. On a fresh reading of clause 5, the earlier view that no obligation existed was not accepted, and the corresponding interest expenditure was allowed as a deduction. The disallowance was deleted and the deduction claim succeeded.

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Issues: Whether interest payable to the counterparty under the capital bond agreement was deductible as business expenditure from the interest income earned on the capital bond account.

Analysis: The agreement specifically provided that interest accruing on the capital bond was to be paid by the assessee to the counterparty. The liability to pay arose from the contractual terms and was coextensive with the interest income earned on the deposits maintained in the capital bond account. The earlier view that no obligation existed was not accepted on a fresh reading of the agreement. Since the funds placed in the capital bond account originated from the counterparty and the interest income was taxable in the assessee's hands, the corresponding interest liability was held to be an allowable deduction.

Conclusion: The interest paid under clause 5 of the capital bond agreement was deductible, and the disallowance was deleted.

Final Conclusion: The appeals were decided in favour of the assessee to the extent of allowing deduction of the interest expenditure arising under the capital bond arrangement.

Ratio Decidendi: Where a contractual clause creates an enforceable obligation to pay interest on funds held in a capital bond account, the corresponding interest payment is allowable as business expenditure when it is incurred in relation to taxable interest income earned from those funds.

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