Payment of interest on release of encumbrance of a business asset -- Allowability

Facts:

Assessee leased a property from Indore Development Authority and was running a hotel. Due to financial difficulties arising out of unprecedented borrowings it approached a real estate player and borrowed money to repay its loans and in the process of the borrowing a portion of the leasehold property was pledged as encumbrance as security for the loans. This was in violation of the original lease with Indore development authority. Accordingly a repurchase was made of the said encumbered/pledged property from the real estate player on which interest was to be payable every year for the next 10 years. This interest was disallowed by AO citing that it was a penal payment and thus not allowable under Section 37 of the Act. On appeal CIT(A) allowed the same citing that there was no infringement of law and the interest payment arose out of financial difficulties of the assessee. On higher appeal by the revenue -

Held in favour of the assessee that the payment over and above the borrowing was an allowable expenditure. Order of CIT(A) required no interference.

Case: DCIT v. Sayaji Hotels Ltd. 2023 TaxPub(DT) 1926 (Ahd-Trib)