2001 (9) TMI 45 - HC - Income Tax

Summary

Issues involved: Interpretation of Section 43B of the Income-tax Act regarding deduction of interest on borrowings from public financial institutions and applicability of circular issued by the Central Board of Direct Taxes.

Interpretation of Section 43B:
The judgment clarifies that a mere postponement of liability to pay interest does not discharge the liability, whether actual or constructive. Deductions under Section 43B, specifically clause (d) for interest on borrowings from public financial institutions, are allowed only in the year when the amount is actually paid. Postponement does not equate to payment; deduction can only be claimed in the year of actual payment.

Applicability of Circular No. 674:
The circular issued by the Central Board of Direct Taxes regarding the applicability of Section 43B to amounts covered under sales tax deferral schemes of State Governments does not extend to interest payable to public financial institutions. The circular, based on Section 43B(a) and Explanation 2, aids assessees benefiting from deferral schemes related to sales tax, but does not apply to Section 43B(d) concerning interest on borrowings.

Conclusion:
The Tribunal's decision to reject the claim that converting outstanding interest into a term loan liability, to be paid in future instalments with the lender's consent, amounts to constructive discharge of interest liability is upheld. The judgment affirms that the principles in the circular do not extend to interest payable to public financial institutions under Section 43B(d). The appeal is dismissed, affirming the correctness of the Tribunal's view.