2026 (5) TMI 47

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....d restored back to the Tribunal by the Hon'ble Karnataka High Court by its order dated 31.08.2020 in ITA No. 219/Bang/2012 to decide the issue whether the Assessee is entitled to deduction of interest paid to M/s. Prestige Holiday Resorts Company Limited in terms of terms and conditions of the Capital Bond agreement entered into by the Assessee. 2. The briefly stated facts of the case shows that the Assessee is engaged in providing services to Holiday Resort Company, for which the Assessee receives service charges besides the other income. Such income is offered for taxation by the Assessee. 3. The Assessee entered into an agreement with M/s. Prestige Holiday Resorts Company Pvt. Ltd., which is engaged in the business of property deve....

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....ayable to M/s. Prestige Holiday Resorts Company Ltd., was not allowed as a deduction from the above income. The reason being that the revenue authorities held that the Assessee had no obligation to make payment to M/s. Prestige Holiday Resorts Company Limited. 8. The Assessing Authority, the First Appellate Authority categorically held that there is no stipulation for payment of interest to Prestige in the agreement and there is no liability accrued by the Assessee for which deduction can be allowed. The matter reached the Coordinate Bench wherein the orders of the Ld. lower authorities were upheld. 9. Against this, the Assessee approached the Hon'ble Karnataka High Court wherein it is challenged that Tribunal failed to consider the t....

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....s warranted by any business arrangement or legal obligation between them. Therefore the Coordinate Bench did not accept the claim of the Assessee but agreed with the revewas that the claim that the interest paid is out of interest earned is not acceptable as the Assessee did not have any liability or obligation to pay the same to Prestige nor could the latter legally enforces payment of the same by the Assessee and therefore the interest paid by the Assessee to Prestige were not incurred wholly and exclusively for the purposes of business u/s. 37(1) of the Act and therefore the claim of the Assessee was dismissed. 14. The Ld. Authorized Representative submitted that the capital bond agreement was entered into on 04.07.1997, which clearly....

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....ain with the Assessee. 18. Though admittedly, the Assessee has offered the income in the hands of the Assessee but corresponding liability to pay interest by Assessee to Prestige also arises on the Assessee as soon as interest accrues on such capital bond. 19. Thus, on the careful perusal of the capital bond agreement, the interest income paid by the Assessee to Prestige is an expenditure incurred by the Assessee of interest which is paid by the Assessee to Prestige. There is no other purpose of the above interest income chargeable to tax arising on such capital bond in the hands of the Assessee. Thus, the interest income earned by the Assessee on capital bond account from ANZ Grindlays Bank which is chargeable to tax in the hands of ....