2026 (2) TMI 1243 - AT - Income Tax

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 ... Disallowance u/s. 43B - outstanding interest payment on loan overdraft facility taken by the assessee from Punjab and Maharashtra Co-operative Bank - definition of the “Scheduled bank” and the “Co-operative bank” HELD THAT:- Clause (e) to section 43B of the Act was introduced by the Finance Act No. 2, 1996 w.e.f. 01-04-1997 and which was amended to include interest payable to Co-operative Banks by the Finance Act, 2017 w.e.f. 01-04-2018. Therefore, for the impugned assessment year i.e., A.Y. 2017-18, wherein the assessee qualifies as a scheduled bank it would be covered by clause (e) of Section 43B, where, however, the assessee qualifies as a Co-operative bank alone (and not a scheduled bank), then given that the said amendment has been made effective from 01-04-2018, the same would not be applicable for the impugned assessment year 2017-18. For the purposes, it is necessary to examine the definition of the “Scheduled bank” and the “Co-operative bank” which are provided in explanation-4 to section 43B of the Act. Even though the Co-operative Banks were specifically included in terms of clause (e) to section 43B for the first time by the Finance Act, 2017 w.e.f. 01-04-2018, the scheduled banks and the assessee which has been notified as a scheduled bank is covered by the provisions of section 43B of the Act even prior to amendment by the Finance Act, 2017 w.e.f. 01-04-2018. We, therefore, find force in the contentions advanced by the Ld. DR that since the assessee has not paid the interest due to Punjab and Maharashtra Co-operative Bank on or before the due date of filing of the return of income u/s. 139(1) of the Act, the same shall be liable to be disallowed u/s. 43B of the Act. Decision in the case of Vipin Madanlal Thapar [2023 (1) TMI 818 - ITAT MUMBAI] relied upon by the assessee observed that since the assessee has not claimed these expenses as revenue expenses during the year under consideration and the same were capitalized as work-in-progress, any disallowance if it is to be made will be made to reduce the work-in-progress since the expenses were capitalized in work-in-progress and accordingly, the additions made by the AO were deleted. We find that in the instant case, the said decision rather support the case of the Revenue rather than the assessee as the AO has not made any separate addition in the hands of the assessee and has only reduced the amount on account of disallowances u/s 43B from the capital work-in-progress. Decided in favour of revenue. 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.