The Ahmedabad Bench of Income Tax Appellate Tribunal (ITAT) has held that the payment of interest made towards compromise agreement pursuant to court order would be allowable under Section 37 of the Income Tax Act, 1961.
The assessee, Sayaji Hotels Ltd is a company engaged in the business of hotels and restaurant during the year under consideration, the assessee had debited Nakoda developers on the amount remaining to be paid for the repurchase of party plot named Vatika belonging the assessee which was sold to Nakoda developers about 9 years earlier.
The assessee company had acquired land from Indore Development Authority (IDA) on leasehold basis. The assessee constructed a hotel, a party plot Vatika was developed the assessee company came under financial duress. Since the assessee company was under financial stress, it approached Director of Nakoda developers for financial assistance, to secure repayment of the loan,insisted that the portion of the company’s leasehold land be made available and earmarked as security in favour of Nakoda developers and his name be added is a joint lessee in the lease deed.
The arrangement was such that the assessee entered into a sale deed with Nakoda developers for the party plot called Vatika. The assessee entered into a lease deed separately with the purchaser Nakoda developers as a result of which the possession of the plot remained with the assessee company for using it for its business purposes.
Thereafter, the assessee received notice contending that theVikraya Lakhs (Sale Deeds) and Lease Deeds between assessee and Nakoda Developers amounted to contravention of the terms of the original lease. For this purpose, the assessee filed a civil suit in the court of law for compromise and got the repurchase of the Vatika party done through a Court’s order in February 2011 on a compromise basis. The assessee was required to pay the repurchase price of the said party plot of ₹ 22 crores to Nakoda Developers and interest on the balance amount of ₹ 20 crores.
According to Section 37, any expenditure that is intended or spent entirely and solely for the purposes of the company or profession (as opposed to capital expenditures or the assessee’s personal expenses) shall be allowed in determining the income that must be paid under the “profits and gains of business or profession.”
D.K. Parikh, appearing for the assessee submitted that the “compromise agreement” was done purely to protect the business interests of the assessee and Satish Solanki, appeared for the revenue.
The Division Bench of Waseem Ahmed, (Accountant Member) and Siddhartha Nautiyal, (Judicial Member) observed that, payment of interest has not been on account of any violation or infraction of law which was committed by the assessee. The Bench dismissed the appeal filed by revenue holding that CIT(Appeals) had correctly observed that the payment of interest was not made towards any infraction of law and therefore, the same was allowable under Section 37 of the Income Tax Act, 1961.
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