Business Expenditure – Swap charges paid to convert a floating rate loan to a fixed rate loan are allowable as deduction – Since interest was allowed when loan carried floating rate the character of transaction does not change by swapping from floating to fixed rate

FACTS
The assessee company availed a loan from a US bank on floating rate of interest. During the previous year relevant to the assessment year under consideration, the assessee chose to convert the said loan carrying floating rate of interest into fixed rate of interest. The assessee was asked to pay certain swap charges for the said conversion from floating to fixed rate. The swap charges liability had been duly incurred by the assessee during the year. The assessee characterised the swap charges as being in the nature of interest.

But the A.O. while assessing the total income disallowed the swap charges claimed on the ground that the said expenditure is capital in nature.

Aggrieved, the assessee preferred an appeal to the CIT(A) who held that the assessee converting the loan from floating rate of interest to fixed rate of interest has derived enduring benefit and hence the expenditure incurred by the assessee falls in the capital field warranting capitalisation thereon and hence cannot be allowed u/s 37(1).

HELD
The Tribunal noted the calculation of swap charges and observed that the swap charges incurred by the assessee for conversion from floating to fixed rate of interest would necessarily partake the character of interest. The interest paid by the assessee when the loan was in floating rate was duly allowed by the A.O. Hence, the character of the transaction does not change pursuant to this swap from floating to fixed rate. The utilisation of the loan for the purposes of business has not been disputed, hence there is no question of disallowance of any interest whatever the nomenclature, interest or swap charges. The nomenclature of the transaction is absolutely irrelevant to the substance of the transaction.

The Tribunal, following the decision of the Jurisdictional High Court in the case of CIT vs. D. Chetan & Co. 390 ITR 36 (Bom) held that the assessee is entitled to deduction of swap charges. This ground of appeal filed by the assessee was allowed.