2011 (6) TMI 49 - HC - Income Tax

Interest - Whether the Tribunal was right in holding that conversion of overdue interest into funded interest by the financial institutions would constitute actual payment of interest u/s 43B - As per the decision of this Court s reported in 2001 -TMI - 12801 - MADRAS High Court (Kalpana Lamps and Components Ltd. V. Deputy Commissioner of Income-Tax), held that the assessee had made as regards the claim was only by way of a provision in the profit and loss account and no actual payment was made by the assessee in respect of the interest payable - Hence, set aside the order of the Tribunal - Decided in favour of the Revenue.

Summary

Issues:
1. Interpretation of Section 43B of the Income Tax Act regarding the actual payment of interest by financial institutions.
2. Application of Board's circular exempting certain payments.
3. Assessment of deduction under Section 43B based on provision in profit and loss account.
4. Comparison with previous court decisions on similar claims.
5. Consideration of Supreme Court rulings on actual payment requirement under Section 43B.
6. Analysis of the term "actually paid" in Section 43B.

Analysis:
The High Court of Madras addressed a Tax Case Appeal concerning the assessment year 1995-96, focusing on the interpretation of Section 43B of the Income Tax Act regarding the actual payment of interest. The appellant, a financial institution, converted overdue interest into funded interest, claiming it as a deduction under Section 43B. The appellant followed the mercantile system of accounting and relied on a Board's circular exempting certain payments. However, the Assessing Authority and the Commissioner of Income Tax (Appeals) rejected the claim, emphasizing that deduction could only be granted on the actual payment of interest.

The Income Tax Appellate Tribunal allowed the appellant's appeal, citing a previous decision and the absence of actual payment of interest. The High Court noted that the appellant had only made a provision in the profit and loss account, without any actual payment towards the interest payable. Referring to the Supreme Court ruling in CIT v. McDowell and Co., the High Court emphasized that Section 43B requires actual payment, not deemed payment, for deduction. The court also considered the Gujarat High Court's interpretation of "actually paid" as requiring real payment, not speculative or constructive.

Based on the legal precedents and the lack of actual payment by the appellant, the High Court set aside the Tribunal's order and ruled in favor of the Revenue. The judgment highlighted the importance of actual payment under Section 43B and clarified that mere provisions in accounts do not suffice for claiming deductions. The decision underscored the need for real payments to meet the statutory requirements, aligning with the established legal principles outlined in previous court judgments and statutory provisions.