Scheduled Bank interest not paid by the return due date is disallowable under the actual-payment rule, reversing the earlier deletion.

Whether interest payable to a bank included in the Second Schedule to the Reserve Bank of India Act qualifies as interest to a scheduled bank for the purposes of disallowance under Section 43B is answered by applying Explanation 4 and the Explanation to clause (iii) of Section 11(5): a bank included in the Second Schedule for the assessment year qualifies as a scheduled bank, and interest payable to it is allowable only when actually paid on or before the due date of filing the return; accordingly, unpaid interest by that date is disallowable and the appellate deletion is set aside.

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Issues: Whether interest payable to a bank that is included in the Second Schedule to the Reserve Bank of India Act, 1934 (Punjab and Maharashtra Co-operative Bank) for Assessment Year 2017-18 is disallowable under Section 43B of the Income-tax Act, 1961 when not paid on or before the due date of filing the return of income.

Analysis: The statutory text of clause (e) of Section 43B provides that interest payable to a scheduled bank shall be allowed only when actually paid for computing income under section 28. Explanation 4 to Section 43B refers to the meaning of "scheduled bank" as given in the Explanation to clause (iii) of sub-section (5) of Section 11, which includes banks listed in the Second Schedule to the Reserve Bank of India Act, 1934. For AY 2017-18, the bank in question was included in the Second Schedule and therefore qualified as a scheduled bank for that year. The amendment by Finance Act, 2017 that expressly added cooperative banks into clause (e) w.e.f. 01-04-2018 does not exclude banks already qualifying as scheduled banks by inclusion in the Second Schedule for earlier years. Where interest was not paid on or before the due date of filing the return, and the bank qualified as a scheduled bank for the year under consideration, clause (e) applies and disallowance under Section 43B is attracted regardless of later amendments specifically addressing cooperative banks.

Conclusion: Interest payable to the bank which was included in the Second Schedule to the Reserve Bank of India Act, 1934 for the year under consideration is disallowable under Section 43B of the Income-tax Act, 1961 if not paid on or before the due date of filing the return; the appellate order deleting the disallowance is set aside and the revenue appeal is allowed.

Ratio Decidendi: For an assessment year, clause (e) of Section 43B applies to interest payable to any bank that qualifies as a scheduled bank by being included in the Second Schedule to the Reserve Bank of India Act, 1934, and such interest is deductible only when actually paid on or before the due date of filing the return of income.

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