Case Law Details
Brief of the Case
In the present facts of the Case the Hon’ble High Court held that Explanation 3C to section 43B is having retrospective effect from 01/04/1989. Therefore, conversion of interest amount into loan would not be actually deemed to be actual payment.
Facts of the Case
The assessee is engaged in the business of manufacturing Aluminium Extrusions. They had filed returns of income, showing loss of Rs.3,25,34,484/-, on 29.11.1994. A notice under Section 143(2) of the Act was issued. The assessee had debited the funded interest of Rs.85,42,788/- in its profit and loss account. In addition thereto, in the statement of computation of income, funded interest of Rs.1,18,16,471/-, pertaining to the assessment years 1992-93 and 1993-94 was also claimed as deduction. Thus, the assessee had debited the funded interest of Rs.2,03,59,250/- being the interest due to the financial institutions relating to the assessment years 1992-93 and 1993-94 on account of availing of loans from them. The assessee claimed that the interest amount payable was converted into a principal amount/term loan and, therefore, it deemed to have paid the interest as contemplated by Section 43B of the Act and therefore, entitled for deduction by the Assessing Officer for the assessment year 1994-95 disallowing the claim of the assessee, seeking deduction of interest liability, that was converted/merged, by the financial institution, into a term loan under Section 43B of the Act.
Contentions of the Revenue
The ld.Counsel for the Revenue contended that that under any circumstances, in view of the Explanation 3C to Section 43B, inserted by the Finance Act, 2006 with retrospective effect from 01.04.1989, unless the amount of interest has been actually paid, cannot be allowed to be deducted as claimed by the assessee. Any sum payable as interest, referred to in Clause(d) of Section 43B of the Act, which has been converted into a loan or borrowing, cannot be allowed to be deducted or deemed to have been actually paid.
Held by the Hon’ble Tribunal
The Hon’ble Tribunal while relying on the Judgment of Commissioner of Income Tax Vs. Mahindra Nissan Allywin Limited held that the assessee is entitled to claim deduction of the interest liability to the financial institution which had been converted into a term loan.
Contention of the Assessee
Learned counsel for the assessee placed reliance upon the judgment of the Karnataka High Court in Vinir Engineering Private Limited Vs. Deputy Commissioner of Income Tax.
In that case, deduction sought, as claimed in the present case, by the assessee, was disallowed by the Assessing Officer, applying the proviso to Section 43B of the Act. The assessee, thereafter, had filed an application under Section 154 of the Act explaining the reasons for claiming deduction. The application was, however, rejected holding that re-schedule of interest payment by means of a fresh loan cannot be treated as interest payment deductible under Section 43B of the specific repayment schedule. The Commissioner upheld the order of the Assessing Officer. The Tribunal held that disallowance was proper and permissible under Section 143(1)(a) of the Act and dismissed the appeal. Against that order, the assessee had filed appeal under Section 260A of the Act before the Karnataka High Court, wherein, the High Court while allowing the appeal observed that the Tribunal was not justified in law in concluding that the funded interest could be said to be non-payment of interest in the relevant year to invoke the proviso to Section 43B of the Act to disallow the deduction of interest as claimed by the appellant. The Assessing Officer was not justified in law to make a prima facie adjustment in a proceeding under Section 143 (1)(a) of the Act by holding that there was no deemed payment of interest in the relevant year without appreciating the interest outstanding for the earlier years 1994-95 and 1995-96 had been funded by K.S.F.C. during the relevant year by a fresh loan and that the proviso to Section 43B of the Act was not applicable.
Held by the Hon’ble High Court
The Hon’ble High Court observed that Explanation 3C of section 43 which was inserted by the Finance Act, 2006 with retrospective effect from 01.04.1989. This provision was inserted in 2006 and as far as the Judgment of the Karnataka High Court is concerned, this provision was existing on the date of judgment and it is quite possible that it was not brought to the notice of learned Judges and hence, the Division Bench proceeded to consider and decide the appeal of the assessee without referring to Explanation 3C appended to Section 43B of the Act. This provision was inserted for removal of doubts and it was declared that deduction of any sum, being interest payable under clause (d) of Section 43B of the Act, 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. Thus, the doubt stands removed in view of Explanation 3C. The Hon’ble High Court further relied on the Judgment of the Madhya Pradesh High Court in Eicher Motors Limited Vs. Commissioner of Income Tax to hold that in view of the Explanation 3C appended to Section 43B with retrospective effect from 01.04.1989, conversion of interest amount into loan would not be deemed to be regarded as actually paid amount within the meaning of Section 43B of the Act. Accodingly, the Appeals of the revenue were allowed.
