Clarification regarding deduction on payment of interest only on actual payment
Section 43B of the Act provides for certain deductions to be allowed only on actual payment. Explanation 3C, 3CA and 3D of this section provides that a deduction of any sum, being interest payable on loan or borrowing from specified financial institution/NBFC/scheduled bank or a co-operative bank under clause (d), clause (da), and clause (e) of this section respectively, shall be allowed if such interest has been actually paid and any interest referred to in these clauses which has been converted into a loan or borrowing or advance shall not be deemed to have been actually paid.
2. However, certain taxpayers are claiming deduction under section 43B on account of conversion of interest payable on an existing loan into a debenture on the ground that such conversion is a constructive discharge of interest liability and, therefore, amounted to actual payment which has been upheld by several Courts.
3. Such interpretation is against the intent of legislation. The section was introduced to curb the mischief of claiming deduction by the assessee, without paying interest to financial institutions/NBFC/scheduled bank or a co-operative bank. Section 43B makes a departure from other sections in the Act, as indicated by its non-obstante clause. Under the provisions of this section conversion of the outstanding interest liability into debentures is not an actual payment and cannot be claimed as deduction. In other words, a mercantile system of accounting cannot be looked at when a deduction is claimed under this section, as actual payment would have to be made.
4. In view of the above, it is proposed to amend Explanation 3C, Explanation 3CA and Explanation 3D of section 43B to provide that conversion of interest payable under clause (d), clause (da), and clause (e) of section 43B, into debenture or any other instrument by which liability to pay is deferred to a future date, shall also not be deemed to have been actually paid.
5. This amendment will take effect from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years.
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Note on Clause 14 of Finance Bill 2022
Clause 14 seeks to amend section 43B of the Income-tax Act relating to certain deductions to be allowed only on actual payment.
Explanations 3C, 3CA and 3D of the said section provide that a deduction of any sum, being interest payable under clauses (d), (da), and (e) of the said section, shall be allowed if such interest has been actually paid and any interest referred to in the said clauses which has been converted into a loan or borrowing or advance shall not be deemed to have been actually paid.
It is proposed to amend the said Explanations 3C, 3CA and 3D of the said section to provide that conversion of interest payable under clauses (d), (da), and (e) of the said section, into debenture or any other instrument by which liability to pay is deferred to a future date, shall also not be deemed to have been actually paid.
These amendments will take effect from 1st April, 2023 and will, accordingly, apply in relation to the assessment year 2023-2024 and subsequent assessment years.
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Extract of Clause 14 of Finance Bill 2022
14. Amendment of section 43B.
In section 43B of the Income-tax Act, with effect from the section 43B. 1st day of April, 2023,––
(i) in Explanation 3C, after the words “loan or borrowing”, the words “or debenture or any other instrument by which the liability to pay is deferred to a future date” shall be inserted;
(ii) in Explanation 3CA, after the words “loan or borrowing”, the words “or debenture or any other instrument by which the liability to pay is deferred to a future date” shall be inserted;
(iii) in Explanation 3D, after the words “loan or advance”, the words “or debenture or any other instrument by which the liability to pay is deferred to a future date” shall be inserted.
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