Section 43B disallowance limits clarified for routed interest and electricity duty collected as agent

Section 43B applies only to the specified statutory liabilities and to interest on loans or borrowings from the institutions covered by the provision. Unpaid interest routed through the State Government, even where the underlying funds originated from the World Bank, was not treated as a covered liability, and the related disallowance was deleted. Section 43B(a) also covers tax, duty, cess or fee only where the liability is the assessee's own charge. Electricity duty under the Rajasthan Electricity Duty Act was held to be a levy on consumers, with the assessee acting only as collecting agent; the amount adjusted against subsidy was therefore not disallowable. The assessee succeeded on both substantive issues.

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Issues: (i) Whether unpaid interest on a loan routed through the State Government and linked to World Bank funding was disallowable under section 43B of the Income-tax Act, 1961. (ii) Whether electricity duty collected from consumers and adjusted against State subsidy was disallowable under section 43B of the Income-tax Act, 1961.

Issue (i): Whether unpaid interest on a loan routed through the State Government and linked to World Bank funding was disallowable under section 43B of the Income-tax Act, 1961.

Analysis: Section 43B applies only to specified sums payable by way of interest on loans or borrowings from the classes of institutions named in clauses (d), (da) and (e), read with the Explanation defining the covered institutions. The liability in question was found to be interest paid to the State Government on a loan advanced through governmental routing, and not a payment falling within those specified categories. The fact that the underlying funds originated from the World Bank did not alter the statutory character of the payment. The contention based on interest subsidy was also rejected as the subsidy and the interest payment were treated as separate transactions.

Conclusion: The disallowance of unpaid interest under section 43B was not sustainable and was deleted in favour of the assessee.

Issue (ii): Whether electricity duty collected from consumers and adjusted against State subsidy was disallowable under section 43B of the Income-tax Act, 1961.

Analysis: Section 43B(a) covers sums payable by the assessee by way of tax, duty, cess or fee where the liability is a charge on the assessee. On the facts found, electricity duty under sections 3 and 5 of the Rajasthan Electricity Duty Act, 1962 was a levy on the consumer, while the assessee acted only as a collecting agency and remitted the amount to the State. The adjustment against electricity subsidy also supported the absence of an actual liability of the kind contemplated by section 43B(a).

Conclusion: The addition on account of electricity duty was not sustainable and was deleted, in favour of the assessee and against the Revenue.

Final Conclusion: The assessee succeeded on the substantive disallowance issues, the Revenue's challenge failed, and the reopening ground was left undecided as academic.

Ratio Decidendi: Section 43B applies only to the specific statutory liabilities and specified lender categories enumerated in the provision, and it does not extend to amounts merely routed through the State Government or to duty collected by the assessee as a collecting agent for the State.

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