Section 43B treatment of deferred sales tax and converted interest: loan conversion helped one claim, but not the other.

Under section 43B, unpaid sales tax covered by the West Bengal deferment scheme was not disallowed because the liability was converted into a deferred loan under the State scheme and CBDT circulars recognised such conversion as discharge; the claim was allowed. Unpaid interest to IDBI converted into a loan, however, was hit by Explanation 3C to section 43B, which deems interest so converted not to have been actually paid; the disallowance was upheld. The result was partial relief for the assessee, succeeding only on deferred sales tax and failing on converted interest.

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Issues: (i) Whether disallowance under section 43B of the Income-tax Act, 1961 was justified in respect of unpaid sales tax covered by the West Bengal sales tax deferment scheme. (ii) Whether disallowance under section 43B of the Income-tax Act, 1961 was justified in respect of unpaid interest to IDBI that was converted into a loan.

Issue (i): Whether disallowance under section 43B of the Income-tax Act, 1961 was justified in respect of unpaid sales tax covered by the West Bengal sales tax deferment scheme.

Analysis: The assessee had obtained eligibility for deferment of sales tax under section 8H of the West Bengal Sales Tax Act, 1954. The liability stood converted into a deferred loan under the State scheme, and the relevant CBDT circulars recognised that where State law or Government orders treat deferred sales tax as discharged by such conversion, section 43B does not require actual remittance in the ordinary sense.

Conclusion: The disallowance was not justified and the claim was allowed in favour of the assessee.

Issue (ii): Whether disallowance under section 43B of the Income-tax Act, 1961 was justified in respect of unpaid interest to IDBI that was converted into a loan.

Analysis: Explanation 3C to section 43B specifically declares that interest converted into a loan or borrowing shall not be deemed to have been actually paid. Since the unpaid interest was only rescheduled and converted into a loan, the statutory condition of actual payment was not satisfied.

Conclusion: The disallowance was justified and was upheld against the assessee.

Final Conclusion: The appeal succeeded only on the issue of deferred sales tax and failed on the issue of converted interest, leaving the assessee with partial relief.

Ratio Decidendi: Under section 43B, deferred sales tax can be allowed where the State scheme and binding CBDT circulars treat the liability as discharged by conversion into loan, but interest converted into a loan is not deemed to have been actually paid because of Explanation 3C.

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