Case Law Details
Issue is:- “Whether the funding of the interest amount by way of a term loan amounts to actual payment as contemplated by Section 43B of the Income-tax Act, 1961?”
Fact of the case:-
1. Assessee was heavily indebted to its institutional creditors and ICICI was the lead manager of those creditors.
2. The accumulated interest on the overdue principal had mounted to Rs. 3,00,14,900 and The assessee was unable to discharge this interest liability due to its financial hardship.
3. the ICICI, by a letter waived a part of the compound interest together with the commitment charges and agreed to accept 3,00,149 convertible debentures of Rs 100 each, amounting to Rs. 3,00,14,900 in lieu of the outstanding interest.
Contention of Department
1. impugned order of ITAT is contrary to the decision of the Madras High Court in Kalpana Lamps and Components Ltd. v. DCIT, (2001) 255 ITR 491. In that case, it was held in the context of a claim under Section 43B that a mere postponement of the liability to pay interest does not amount to discharge.
2. It was further argued that impugned order of ITAT to the extent it relied on Circular No. 674 dated 20-12-1993 issued by the CBDT, was misplaced and untenable. it was also argued that structure of sales tax enactments, schemes made, whereby the sales-tax liabilities were converted into loans by the State Governments, were allowed as a deduction in the assessment for the previous year in which such conversion was allowed.
3. The schemes were statutory and the application of the Circular was limited to the instance it catered to. The ITAT could not have carried the analogy beyond the instance mentioned in the circular, to dilute the rigors of Section 43B which mandated actual payment.
4. Amendments made to Section 43B by virtue of Finance Act, 2006 with retrospective effect from 01.04.1989 by insertion of Explanation 3C and Explanation 3D meant that actual payment had to necessarily be made to qualify for deduction.
Contention of the assesee
1. That debentures are securities within the meaning of the expression understood in Section 2 (ac) and (h) of the Securities Contract Regulation Act, 1956 and freely tradable. The moment the debentures were issued to ICICI, the latter could realize the money value thereof.
2. AR relied on the Constitution Bench decision in Standard Chartered Bank v Andhra Bank, 2006 (6) SCC 94 and also relied on Vinir Engineering (P) Ltd. v Deputy Commissioner of Income Tax 313 ITR 154 and the Jharkhand High Court decision in Commissioner of Income Tax v Shakti Spring Industries (P) Ltd, [2013] 219 Taxman 124 to say that not all payments need to be in cash and that debenture payouts as part of arrangements with banks and financial institutions are deemed sufficient under Section 43B.
High Court held as under:
1. Loan taken is from ICICI, IDBI and IFCI. These entities are included within the definition of “public financial institution” set out in Section 4A of the Companies Act, 1956 (applicable for the purposes of the instant case as it relates to AY 1996-97).
2. Explanation 3C, having retrospective effect with effect from 01.04.1989, would be applicable to the present case, as it relates to AY 1996-97.Explanation 3C squarely covers the issue raised in this appeal, as it negates the assessee’s contention that interest which has been converted into a loan is deemed to be actually paid.
3. Hence, department appeal is allowed.
Analysed by CA Rahul Sureka
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