2012 (9) TMI 485 - AT - Income Tax

Addition u/s 43B - Conversion of interest payable in equity shares - interest was neither paid during the financial year nor within the due date - CIT(A) deleted the addition - Held that - As decided in CIT v. Reinz Talbros Pvt. Ltd 2001 (3) TMI 26 - DELHI HIGH COURT the liability was discharged by way of issuance of shares & when the assessee issues shares the assessee does not incur any expenditure as the assessee is not to make any payment legally towards shares issued. The shares cannot be equated with debentures, which is purely by way of loan and the same are required to be repaid on maturity. However, in respect of shares the company is under no obligation to make any payment in respect of such shares where share holders accept payment of pro rata dividend when such dividend is declared. Thus by issuance of shares the assessee cannot be said to have incurred any expenditure and hence issuance of shares in lieu of interest liability cannot be considered to have been payment towards expenditure. Accordingly the interest liability discharged is not an allowable expenditure. As liability can be discharged in a number of ways, it does emphasize the fundamental principle that unless actual payment is made, the restriction placed in section 43B will hold good and deduction cannot be allowed. In view of these discussions, as also bearing in mind entirety of the case, the grievance of the Assessing Officer is upheld and restore the disallowance of ₹ 68,18,318/- - against assessee.

Summary

Issues Involved:
Appeal challenging correctness of Commissioner of Income Tax (Appeals)'s order regarding assessment u/s. 143(3) of the Income Tax Act, 1961 for the assessment year 2005-06, focusing on the deletion of addition u/s. 43B of the I.T. Act and the treatment of conversion of interest payable in equity shares as actual payment u/s. 43B.

Analysis:

Issue 1: Deletion of Addition u/s. 43B
The Assessing Officer raised concerns about the deduction claimed for interest paid to IDBI without actual payment, as the interest dues were converted into equity shares. CIT(Appeals) allowed the deduction, citing section 43B and the retrospective effect of Explanation 3D introduced by the Finance Act, 2006. The CIT(Appeals) reasoned that conversion of interest payable into equity shares signifies actual payment, as it represents a part of the ownership of the company given to the lender. This decision was based on the premise that the conversion into shares reduces the interest receivable from the assessee, thus qualifying for deduction u/s. 43B. The issue revolved around whether such conversion could be considered as actual payment of interest.

Issue 2: Treatment of Conversion of Interest Payable in Equity Shares
The Assessing Officer contended that conversion of interest payable into equity is not a valid mode of payment, referencing judicial precedents and the distinction between discharging debt by transferring securities and issuing own capital. The Assessing Officer relied on a coordinate bench decision in the case of SRF Ltd., which held that issuance of shares does not constitute expenditure and cannot be considered as payment towards expenditure. The Assessing Officer argued that there is a fundamental difference between discharging a debt by giving away an asset and issuing capital, with the latter not amounting to payment. Despite the appellant's reliance on CBDT Circular No. 7, emphasizing various ways of discharging liabilities, the Assessing Officer maintained that unless actual payment is made, the restriction under section 43B stands, disallowing the deduction.

Judgment
The ITAT Kolkata upheld the Assessing Officer's grievance and restored the disallowance of the claimed deduction for interest payment converted into equity shares. The decision was based on the precedent set by the coordinate bench in the SRF Ltd. case, which highlighted that issuance of shares does not involve expenditure and cannot be equated with payment towards expenditure. The ITAT Kolkata concurred with the view that there is a significant difference between discharging a debt by transferring securities and issuing capital, with the former constituting payment. Despite the appellant's arguments and reliance on CBDT Circular No. 7, the ITAT Kolkata emphasized the requirement of actual payment for deduction under section 43B, ultimately ruling in favor of the Assessing Officer and allowing the appeal filed by the Revenue.