INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Interest - Capital Bond -

Assessee-company was engaged in providing services to holiday resort companies. It entered into a capital bond agreement with a company 'P', wherein it was agreed that the 'P', which was in process of constructing the resorts, was to provide funds to the assessee to enable it to provide guarantee to shareholders in respect of pre-construction of units of accommodation and accordingly, the 'P' agreed to park the funds with the assessee, which were to be kept in deposit by way of capital bond and interest accrued on capital bond was to be paid by the assessee to the 'P'. Assessee made deposits out of the funds given to it and offered the income derived from deposits. Further, it also claimed deduction for the same amount of interest payable to the 'P'. AO concluded the assessment by bringing to tax interest on deposits offered as income but declined to allow interest payable and held that assessee had no obligation to make payment to the 'P'. CIT (A) upheld the order of the AO and further, Tribunal also sustained the order passed by CIT(A). Held: It was contention of the assessee that under the relevant clauses of the capital bond agreement, the interest earned on capital bond was required to be paid to the 'P'. However, Tribunal while passing its order, failed to consider the terms and conditions of the agreement. Accordingly, the order passed by the Tribunal was set aside and the matter was remitted to the Tribunal for decision afresh in accordance with law.

REFERRED :

FAVOUR : Matter remanded

A.Y. : 1997-98 to 2004-05

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