AI Drafter 
TaxTMI 
TaxTMI 
2021 (8) TMI 520
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....est accrued and payable to financial institutions. By an order dated 29th October, 1998, the Assessing Officer rejected the Appellant's contention by holding that the issuance of debentures was not as per the original terms and conditions on which the loans were granted, and that interest was payable, holding that a subsequent change in the terms of the agreement, as they then stood, would be contrary to Section 43B(d), and would render such amount ineligible for deduction. The Commissioner of Income Tax (Appeals) ["CIT"] allowed the appeal and held, on facts, as follows: "3.2. .... It was clarified by the Ld. Counsel that the original agreements with the financial institutions provided for conversion of 20% of the amount in default into equity capital of the appellant at the option of the lenders. The agreements also provided for the repayment of the principal and the interest, in default as per the revised terms and conditions stipulated by the lendor at the time of default. As the appellant was not in position to pay the interest and liquidated damages. It approached the lead Financial Institutions which on behalf of all the institutions approved the Rehabilitation Plan....
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....Act. As interest had been actually paid during the year and the payment was in accordance with the terms and conditions of the borrowings, interest of Rs. 2,84,71,384/- is directed to be allowed u/s 43B of the I.T. Act." 5. This order was upheld in appeal by the Income Tax Appellate Tribunal ["ITAT"]. The ITAT held: "9. ... The Section was introduced to curb the mischief of withholding tax payment by the assessee, while at the same time claiming deduction thereof in the income-tax assessments. But when both the parties creditor and debtor agree that the conversion of the outstanding interest liability into fully paid debentures would be accepted by them as discharge of the liability then to hold that notwithstanding the contract between the two, it is open to the income tax authorities to say that the interest liability has not been discharged would not only be opposed to the contextual perspective of section 43B, but would also do violence to the language used. In Subhra Motel Pvt. Ltd. (supra), the Delhi Bench of the Tribunal referred to the fact that the expression "actually paid" appearing in Section 43B is not qualified by words to the effect that the payment shoul....
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....stillery Co. Ltd. (No. 1) (268 ITR 305) before the Rajasthan High Court in that case there was a statutory liability to pay the duty to the Govt., and it was held that a bank guarantee would not meet the requirements of the section, and money has to actually flow into the illegible. In the case before us, it is a contractual liability where both the parties agree that the outstanding interest liability would be discharged by the assessee in a particular mode and that mode is followed. The assessee has not claimed the interest as a deduction again in the year in which the debentures were redeemed and evidence to this effect has already been adverted to. The interest which is now allowed as a deduction in the assessee's assessment is reflected in the assessment of ICICI as its business income. Nobody is put to any loss. To invoke the provisions of section 43B, on the imaginary ground that there is no actual payment of the interest, would be wholly misplaced and would amount to a strained interpretation of the section." 7. Against the aforesaid judgment of the ITAT, the Revenue filed an appeal before the High Court, in which the question raised before the High Court for determi....
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....amount payable towards interest liability would qualify for deduction; however Explanation 3C acts to insist on a rider: "Explanation 3C for the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause(d) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing shall not be deemed to have been actually paid." Quite possibly the assessee's arguments would have been convincing and the court might have been persuaded that actual payment of amounts is inessential and a composition of the kind involved in this case, would have sufficed - but for Explanation 3C. Now, this provision was inserted with retrospective effect and clearly operated for the period in question. The assessee does not dispute that. Furthermore, this court's judgment cited the rulings of other courts- Andhra Pradesh & Telangana and the Madhya Pradesh High Courts- which held that actual payment is the sine qua non for applicability of Section 43-B. In the circumstances, the decisions in Standard Chartered [2006 (6) SCC 94] and Sunrise ....
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....based on a mercantile system of accounting as actual payment would have to be made. He also relied upon a judgment of this Court as to the correct meaning of "debentures" and then referred to and relied upon CIT v. Gujarat Cypromet Ltd., (2020) 15 SCC 460, which referred to the impugned judgment in the present case with approval. He also argued that it being clear that a debenture is nothing but a loan, interest had, in fact, been converted into a loan on the facts of this case and squarely attracted the latter part of Explanation 3C. 16. At this juncture, it is important to set out Section 43B. The relevant provisions of the said Section read as follows: 43B. Certain deductions to be only on actual payment - Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of- xxx xxx xxx (d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or ....
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....e welfare of employees shall irrespective of the previous year in which the liability to pay such sum was incurred, be allowed only in computing the income of that previous year in which such sum is actually paid by the assessee. 35.4 The section also contains an Explanation for the removal of doubts. The Explanation provides that where a deduction in respect of any sum aforesaid is allowed in computing the income of any previous year, being a previous year relevant to the assessment year 1983-84, or any earlier assessment year, in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under section 43B in respect of such sum on the ground that the sum has been actually paid by him in that year. In other words, an assessee who has already been allowed deduction of a liability on account of the tax or duty or in respect of any sum payable as contribution to any fund for the assessment year 1983-84, or any earlier year in which the liability to pay was incurred, cannot, in respect of that liability, be allowed a deduction in the assessment year 198485, or any subsequent year on the ground that he has actually mad....
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.... or by any other mode on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36, and where such payment has been made otherwise than in cash, the sum has been realised within fifteen days from the due date." 20. This being the case, it is important to advert to the facts found in the present case. Both the CIT and the ITAT found, as a matter of fact, that as per a rehabilitation plan agreed to between the lender and the borrower, debentures were accepted by the financial institution in discharge of the debt on account of outstanding interest. This is also clear from the expression "in lieu of" used in the judgment of the learned CIT. That this is so is clear not only from the accounts produced by the assessee, but equally clear from the fact that in the assessment of ICICI Bank, for the assessment year in question, the accounts of the bank reflect the amount received by way of debentures as its business income. This being the fact-situation in the present case, it is clear that interest was "actually paid" by means of issuance of debentures, which extinguished the liability to pay interest. 21. Explanation 3C, which was introdu....
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.... correctly declared or disclosed by the assessee, even if the condition of 15 per cent difference between the fair market value of the capital asset as on the date of the transfer and the full value of the consideration declared by the assessee is satisfied. .... xxx xxx xxx 15. It is therefore clear that sub-section (2) cannot be invoked by the Revenue unless there is understatement of the consideration in respect of the transfer and the burden of showing that there is such understatement is on the Revenue. Once it is established by the Revenue that the consideration for the transfer has been understated or, to put it differently, the consideration actually received by the assessee is more than what is declared or disclosed by him, sub-section (2) is immediately attracted, subject of course to the fulfilment of the condition of 15 per cent or more difference, and the Revenue is then not required to show what is the precise extent of the understatement or in other words, what is the consideration actually received by the assessee. That would in most cases be difficult, if not impossible, to show and hence sub-section (2) relieves the Revenue of all burden of proof....
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....lication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of U.P., (1981) 2 SCC 585, 598]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v. Podar Cement (P) Ltd., (1997) 5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are "it is declared" or "for the removal of doubts". 18. There was and is no ambiguity in the main provision of Section 9(1)(ii). It includes salaries in the total income of an assessee if the assessee has earned it in India. The word "earned" had been judicially defined in S.G. Pgnatale [(1980) 124 ITR 391 (Guj)] by the High Court of Gujarat, in our view, correctly, to mean as income "arising or accruing in India". The....
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.... repayable immediately or in future. The date of repayment of loan may be deferred by agreement but the obligation or the liability to repay will not cease on that account. The obligation is a present obligation; debitum in praesenti, solvendum in futuro. This aspect of the matter was explained in the judgment of this Court in Kesoram Industries and Cotton Mills Ltd. v. CWT [AIR 1966 SC 1370 : (1966) 59 ITR 767]. 10. By issuing the debentures, the Company had taken a loan against the security of its assets. This loan may not be repayable in the year of account. But the obligation to pay the loan is a present obligation. Any money set apart in the accounts of the Company to redeem the debentures must be treated as moneys set apart to meet a known liability. The debentures will have to be shown in the Company's balance sheet of the year as "liability". 11. In the case of CIT v. Peico Electronics & Electricals [(1987) 166 ITR 299 (Cal)] the Calcutta High Court held that the Debenture Redemption Reserve will have to be treated as a "reserve" and not "provision" because, none of the debentures became redeemable during the accounting period. The liability to redeem ....
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.... perused Schedule 3 of the balance sheet as on 31-3-2001 and find that the above loan appears as on 31-3-2001 and is part of the total secured loans of Rs. 75,26,10,769. The fact that the entry pertaining to the interest element outstanding to financial institutions referred at page 2 of the order by the assessing officer has been reversed after receipt of funds of Rs. 8 crores from IDBI substantiates the contention of the appellant company that the entries relating to interest outstanding with reference the above institutions have been squared up and its place a new credit entry of loan of IDBI is now appearing in the balance sheet as on 31-3-2001. The plea of the appellant's counsel Shri Tanna that since no interest payment is outstanding now and the amount is paid off, the expenditure of interest is allowable under Section 43-B. It is further added that in case the loan had been disbursed in 2 parts - one to meet the interest outstanding and the balance for financial assistance still the entries in the books of account would have remain the same and the outstanding interest would have been NIL. Having regard to the above facts and also the case laws cited by the appellant....