Case Law Details
Brief of the Case: In the case of CIT vs Rathi Graphics Technologies Ltd. Delhi High Court inter-alia held that the conversion of a portion of interest into shares should be taken to be “actual payment” within the meaning of Section 43B of the IT Act.
Facts of the Case: In respect of the Assessee, a rehabilitation scheme was sanctioned by the Board for Industrial and Financial Reconstruction (BIFR) on 1st November 2002. The scheme that was sanctioned was in fact prepared by the Industrial Development Bank of India (IDBI), one of the major lenders of the Respondent. On the loans borrowed by the Assessee from IDBI, there was outstanding interest as on 31st March 2001. It was decided in a series of meetings that the IDBI could be allotted 14,30,000 equity shares of Rs.10 each valued at Rs.1.43 crore and the interest to the extent would be taken as having been paid as on 31st March 2002. During the AY 2002-03, the Assessee filed a return declaring a loss of Rs.2,04,58,365.
In computing the returned loss, the unpaid interest to the IDBI of Rs.3,45,09,854 was added back to the net loss as per the Profit & Loss Account. Thereafter, deduction of interest paid to IDBI to the extent of Rs.1.43 crores was claimed. The basis for this claim was the allotment of shares in the above manner to the IDBI. During the course of the original assessment proceedings, the AO by an order dated 4th November 2004 raised a specific query regarding the shares issued to the IDBI. By a letter dated 22nd November 2004, the Assessee explained, inter alia, that pursuant to the settlement reached with the IDBI which was confirmed by IDBI by letter dated 22nd January 2002, the shares as aforementioned were allotted. After the assessment was completed under Section 143 (3) of the IT Act, the case of the Assessee was re-opened under Section 147 of the IT Act with the reasons that the Assessee had claimed and was allowed a deduction of Rs.1.43 crore towards the allotment of shares to the IDBI on conversion of 30% of the simple interest in equity share capital.
The AO did not accept the contention of the Assessee that the IDBI had already approved the proposal for conversion of a part of the interest into shares by a letter dated 22nd January 2002. The AO was of the view that in terms of Section 43B of the Act, deduction is allowable on actual payment basis and allotment of equity shares in lieu of interest liability cannot be construed as actually paid as required under Section 43 B of the Act. Further the Form No.2 filed by the Assessee showed the date of allotment as 30th March 2002 which was “not clearly legible”. Since the return of allotment in Form No.2 was filed with the Registrar of Companies only on 29th April 2002, and was lying with the Assessee till that date, that by itself was not sufficient to prove that the shares were in fact allotted to IDBI on 30th March 2002. Consequently, the deduction of Rs.1.43 crores was disallowed and added back to the income of the Assessee.
On aggrieved, Assessee filed appeal before the CIT (A), who held that the re-opening of the case under Section 147 of the IT Act was valid. However, on merits deleted the addition.
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