2015 (5) TMI 623 - HC - Income Tax

Court rules interest converted to loan not considered 'actual payment' under Income-tax Act.

Commissioner of Income Tax, Delhi Versus M.M. Aqua Technologies Ltd.

The court ruled against the assessee, holding that converting interest into a loan does not constitute 'actual payment' as required by Section 43B of the ... Restriction on deduction on Interest u/s 43B - Funding of the interest amount by way of a term loan - 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 (applicable for the purposes of the instant case as it relates to AY 1996-97). Consequently, by virtue of Explanation 4(a) to Section 43B, these entities would also constitute public financial institutions for the purposes of Section 43B and the interest on loan taken by the assessee from these entities would fall within the purview of Section 43B(d) of the Act. In light of the introduction of Explanation 3C, this Court does not consider it necessary to discuss the precedents relied upon by the assessee delivered prior to the enactment of Finance Act, 2006. As regards the decision in Shakti Spring Industries (2013 (1) TMI 398 - JHARKHAND HIGH COURT ), the interest due in that case was offset against a subsidy which the assessee was entitled to, and it did not involve an instance where it was “converted into a loan or borrowing” within the meaning of Explanation 3C. It is perhaps for this reason that Explanation 3C was not discussed. For the above reasons, the question of law framed is answered in the negative, in favour of the revenue. Issues Involved:1. Whether the funding of the interest amount by way of a term loan amounts to actual payment as contemplated by Section 43B of the Income-tax Act, 1961Rs.Issue-wise Detailed Analysis:1. Background and Assessing Officer's Decision:The assessee was indebted to institutional creditors, with ICICI as the lead manager. The accumulated interest on the overdue principal amounted to Rs. 3,00,14,900. Due to financial hardship, the assessee could not discharge this liability. On 30-03-1994, ICICI agreed to accept 3,00,149 convertible debentures of Rs. 100 each in lieu of the outstanding interest. The assessee issued these debentures on 15-03-1996 and claimed the interest as deductible in its income-tax return. The Assessing Officer (AO) rejected this claim, stating that issuing debentures resulted only in the postponement of the interest liability and did not constitute 'actual payment' as required by Section 43B of the Income Tax Act, 1961.2. CIT (A) and ITAT Decisions:The assessee appealed to CIT (A), relying on the judgment of the Andhra Pradesh High Court in CIT v. Mahindra Nissan Allywin Ltd., and the Delhi Bench of the ITAT in Subhra Motel (P.) Ltd. The assessee argued that issuing debentures equivalent to the outstanding interest amounted to actual payment. CIT (A) accepted this contention and directed the AO to allow the deduction. The revenue then appealed to the ITAT, which upheld the CIT (A)'s decision, citing similar precedents and emphasizing that actual payment should not be given a narrow literal meaning.3. Revenue's Argument:The revenue argued that the ITAT's decision was contrary to the Madras High Court's ruling in Kalpana Lamps and Components Ltd. v. DCIT, which held that mere postponement of liability does not amount to discharge and thus cannot be considered actual payment. The revenue highlighted the amendments to Section 43B by the Finance Act, 2006, which introduced Explanation 3C and Explanation 3D, mandating actual payment for deduction.4. Assessee's Argument:The assessee's counsel argued that debentures are securities and freely tradable. Once issued, ICICI could realize their money value, constituting actual payment. The counsel cited the Supreme Court's decision in Standard Chartered Bank v. Andhra Bank and other cases to support the argument that debenture payouts are deemed sufficient under Section 43B.5. Legal Provisions and Retrospective Amendments:Section 43B requires actual payment for certain deductions. Explanation 3C, introduced by the Finance Act, 2006, with retrospective effect from 01.04.1989, clarifies that converting interest into a loan does not constitute actual payment. This explanation was not present when the impugned order was passed but applies to the present case.6. Court's Conclusion:The court concluded that Explanation 3C, having retrospective effect, negates the assessee's contention that converting interest into a loan is deemed actual payment. The court supported its conclusion with decisions from the Madhya Pradesh High Court in Eicher Motors Ltd. v. Commissioner of Income Tax and the High Court of Telangana and Andhra Pradesh in Commissioner of Income Tax v. Pennar Profiles Limited. These decisions affirmed that conversion of interest into a loan does not meet the requirement of actual payment under Section 43B.7. Final Judgment:The court answered the question of law in the negative, in favor of the revenue, and allowed the appeal. There was no order as to costs.