2019 (2) TMI 1599 - SC - Income Tax

Supreme Court overturns decisions on interest deduction, emphasizes Explanation 3C

THE COMMISSIONER OF INCOME TAX, AHMEDABAD Versus M/s GUJARAT CYPROMET LTD.

The Supreme Court allowed the appeal, overturning the decisions of the Appellate Authority, ITAT, and High Court. It held that the Assessing Officer was ... Addition u/s 43B - conversion of unpaid interest into a funded interest loan treating the same as interest payment - HELD THAT:- The provision of Section 43B covers a host of different situations. The statutory Explanation 3C inserted by the Finance Act, 2006 is squarely applicable in the facts of the present case. It appears that the attention of the High Court was not invited to Explanation 3C, we are, thus, of the view that the Assessing Officer has rightly disallowed the deduction as claimed by the assessee. The Appellate Authority, ITAT and the High Court erred in reversing the said disallowance. - Decided against assessee. Issues:1. Interpretation of Section 43B of the Income Tax Act, 1961.2. Applicability of Explanation 3C to Section 43B.3. Treatment of interest payment converted into a loan.4. Disallowance of deduction claimed by the assessee.Interpretation of Section 43B of the Income Tax Act, 1961:The case involved an appeal against the High Court's decision dismissing a Tax Appeal filed by the appellant. The primary question revolved around the interpretation of Section 43B of the Income Tax Act, 1961. The Assessing Officer disallowed the deduction claimed by the assessee concerning the payment of interest to the IDBI Bank. The dispute centered on whether the conversion of unpaid interest into a funded interest loan could be treated as an interest payment under Section 43B.Applicability of Explanation 3C to Section 43B:The appellant contended that the High Court failed to consider Explanation 3C to Section 43B, inserted by the Finance Act of 2006, which clarified the treatment of interest payments converted into loans. The appellant argued that in the present case, the interest liability was adjusted in a new loan obtained from the IDBI Bank, which fell within the purview of Explanation 3C. The appellant cited relevant judgments to support this interpretation, emphasizing the retrospective effect of Explanation 3C from 01.04.1989.Treatment of Interest Payment Converted into a Loan:The appellant highlighted that the interest liability accrued during the assessment year was not actually paid by the assessee but was adjusted in a subsequent loan obtained from the IDBI Bank. The appellant relied on judgments that emphasized the non-recognition of interest converted into a loan as an actual payment under Section 43B. The Delhi High Court's decision was particularly cited to support the appellant's argument regarding the applicability of Explanation 3C in such cases.Disallowance of Deduction Claimed by the Assessee:The Supreme Court, after considering the submissions and perusing the record, concluded that the Assessing Officer was justified in disallowing the deduction claimed by the assessee. The Court noted that the attention of the High Court was not drawn to Explanation 3C, which was crucial in determining the treatment of interest payments converted into loans. Consequently, the appeal was allowed, and the question of law was answered in favor of the Revenue, overturning the decisions of the Appellate Authority, ITAT, and the High Court.In summary, the judgment delved into the interpretation of Section 43B of the Income Tax Act, 1961, the applicability of Explanation 3C, the treatment of interest payments converted into loans, and the disallowance of deductions claimed by the assessee. The Court's decision underscored the significance of Explanation 3C in addressing such scenarios and upheld the Assessing Officer's decision to disallow the deduction, ultimately ruling in favor of the Revenue.