2013 (1) TMI 398 - HC - Income Tax

Addition u/s 43B - Payment of Statutory liability of interest to State Finance Corporation claimed to have been made by book adjustment and not by actual payment - Tribunal deleted the addition - Held that - Effective payment of interest on the loan taken from Bihar State Financial Corporation by the assessee cannot be denied because the interests were adjusted against the subsidy and the term loan due to assessee. Also that instead of withdrawing the subsidy and the term loans and getting it deposited in the assessee s bank account and again making the payment either by cash or by crossed cheque or bank draft, the payment has been effected by book adjustment, therefore, there is effective payment of the interest on loan to Bihar State Financial Corporation. Hence, disallowance under Section 43B in all the three accounting years were not correct. For making actual payment it is always not necessary that one should, if having a credit entry, also have a debit entry, then he should receive the actual payment in cash or through cheque or demand draft in his bank account so as to take physical delivery of the currency and then deliver it again to the same creditor who is also debtor of the receiving person. So, actual payment means actual payment and not actual receipt and delivery of the currency by the two parties transacting when they are creditor and debtor both - thus if the interest is paid not by actually receiving amount from the loan advancing person or institution but is paid out of fund lying in any another account of the assessee with such creditor, then that is the actual payment - against revenue.

Summary

Issues:
1. Interpretation of Section 43B of the Income Tax Act regarding the payment of statutory liability of interest by book adjustment.
2. Justification for deleting an addition made under Section 43B for a specific assessment year.

Analysis:
1. The primary issue in this case revolves around the interpretation of Section 43B of the Income Tax Act concerning the payment of statutory liability of interest by book adjustment rather than actual payment. The appellant questioned whether the Tribunal was correct in holding that Section 43B would not be attracted if the payment of interest to the State Finance Corporation was claimed to have been made by book adjustment. The Tribunal's decision was based on the understanding that the adjustment of interest against subsidy and term loans effectively constituted payment, even though no physical cash transaction occurred. The Tribunal emphasized that the essence of "actual payment" should not be limited to physical receipt and delivery of currency, as misconstrued by the revenue. Ultimately, the High Court concurred with the Tribunal's interpretation, stating that payment made out of funds lying in another account with the creditor qualifies as "actual payment" under Section 43B(d).

2. The second issue pertained to the deletion of an addition under Section 43B for a specific assessment year. The Tribunal had deleted the addition of Rs.3,98,370 made under Section 43B for the assessment year 1991-92 based on the reasoning that the interest payment on the loan from the State Financial Corporation was effectively made through book adjustment. The Tribunal rejected the revenue's argument that actual payment in cash or through a bank account was necessary for claiming the deduction under Section 43B. The High Court upheld the Tribunal's decision, emphasizing that the method of payment through book adjustment was valid and constituted "actual payment" within the ambit of the Income Tax Act.

In conclusion, the High Court dismissed the appeal, affirming the Tribunal's decision that the adjustment of interest against subsidy and term loans through book entry constituted "actual payment" under Section 43B(d) of the Income Tax Act. The judgment clarified that the concept of "actual payment" should not be narrowly construed to require physical cash transactions, thereby providing clarity on the interpretation of statutory provisions related to interest payments in tax matters.