2015 (5) TMI 618 - HC - Income Tax

High Court rules interest conversion not payment under Income Tax Act

The Commissioner of Income Tax Versus M/s. Eicher Ltd.

The High Court ruled in favor of the Revenue, stating that the conversion of interest into a loan did not qualify as actual payment under Section 43B of ... Allowability of Interest amount which was not paid - whether amounts to actual payment as contemplated by Section 43B? - Held that:- From the AO's order, it is evident that the loans, in respect of which the assessee claims deduction of interest under Section 43B, were taken from ICICI, IDBI and IFCI. These entities are included within the definition of 'public financial institution' set out in Section 4A of the Companies Act, 1956 . As from reading of Explanation 3C, in our opinion, the question as raised in the present appeals stands answered without further discussion. This provision was inserted for removal of doubts and it was declared that deduction of any sum, being interest payable under clause (d) of Section 43B of the Act, shall be allowed if such interest has been actually paid and any interest referred to in that clause, which has been converted into a loan or borrowing, shall not be deemed to have been actually paid. Thus, the doubt stands removed in view of Explanation 3C. Thus in view of the Explanation 3C appended to Section 43B with retrospective effect from 01.04.1989, conversion of interest amount into loan would not be deemed to be regarded as actually paid amount within the meaning of Section 43B of the Act. - Decided in favor of revenue. Issues:Interpretation of Section 43B of the Income Tax Act, 1961 regarding funding of interest amount by way of a term loan.Analysis:The case involved the interpretation of Section 43B of the Income Tax Act, 1961 regarding the funding of interest amount by way of a term loan. The assessee had claimed the benefit of Section 43B in relation to the conversion of interest liability before Financial Institutions, arguing that it did not amount to 'payment' under the Act. The Assessing Officer disallowed the claimed amount, but the CIT (Appeals) reversed this decision. The Income Tax Appellate Tribunal (ITAT) upheld the CIT (Appeals)'s decision, stating that the constructive payment was included in the definition of payment under Section 43B.The relevant provision added by the Finance Act, 2006, introduced Explanation 3D to Section 43B, clarifying that interest converted into a loan or advance shall not be deemed to have been actually paid. This provision aimed to remove doubts regarding the treatment of such conversions as actual payments for tax purposes.In a similar case before the Telangana and Andhra Pradesh High Court, the court discussed the insertion of Explanation 3C to Section 43B by the Finance Act, 2006. The court held that conversion of interest into a loan would not be considered as actually paid under Section 43B. The court emphasized that this provision was applicable retrospectively from 01.04.1989, settling the doubts regarding the treatment of such transactions.Considering the above legal developments, the High Court in the present case ruled in favor of the Revenue, stating that the question of law framed had to be answered in favor of the Revenue. The court instructed the Assessing Officer to determine whether the interest payments were actually made during the relevant Assessment Year. If such payments were confirmed, the assessee would be entitled to the benefit of Section 43B. Consequently, the appeal was partly allowed based on the remittance of the specific issue to the Assessing Officer for further examination and decision.