2015 (4) TMI 267 - HC - Income Tax

Conversion of interest into a term loan - whether the Tribunal was justified in holding that conversion of interest into a term loan can be taken as a deemed payment for the purpose of Section 43B of the Act? - Held that - As from reading of Explanation 3C, in our opinion, the question as raised in the present appeals stands answered without further discussion. This provision was inserted for removal of doubts and it was declared that deduction of any sum, being interest payable under clause (d) of Section 43B of the Act, shall be allowed if such interest has been actually paid and any interest referred to in that clause, which has been converted into a loan or borrowing, shall not be deemed to have been actually paid. Thus, the doubt stands removed in view of Explanation 3C. This provision was considered by the Madhya Pradesh High Court in Eicher Motors Limited Vs. Commissioner of Income Tax (1996 (8) TMI 517 - MADHYA PRADESH HIGH COURT) to hold that in view of the Explanation 3C appended to Section 43B with retrospective effect from 01.04.1989, conversion of interest amount into loan would not be deemed to be regarded as actually paid amount within the meaning of Section 43B of the Act. It is not in dispute that the assessment years with which we are concerned in the present appeals are covered by Explanation 3C, which was inserted by the Finance Act, 2006 with retrospective effect from 01.04.1989. In this view of the matter, the appeals filed by the Revenue deserve to be allowed. - Decided in favour of the Revenue

Issues:
1. Interpretation of Section 43B of the Income Tax Act, 1961 regarding deduction of interest liability converted into a term loan.
2. Application of Explanation 3C to Section 43B inserted by the Finance Act, 2006 with retrospective effect from 01.04.1989.

Issue 1: Interpretation of Section 43B of the Income Tax Act
The case involved an appeal by the Revenue against the order of the Income Tax Appellate Tribunal regarding the deduction of interest liability converted into a term loan by the assessee. The Tribunal had disposed of two appeals, one by the assessee and the other by the Revenue, against the order of the Commissioner of Income Tax (Appeals) partly allowing the appeal filed by the assessee against the assessment order disallowing the claim of deduction of interest liability. The main question raised was whether the conversion of interest into a term loan could be considered as a deemed payment for the purpose of Section 43B of the Income Tax Act.

Issue 2: Application of Explanation 3C to Section 43B
The Revenue contended that, as per the provisions of Section 43B of the Act, unless the interest amount has been actually paid, it cannot be allowed to be deducted, especially after the insertion of Explanation 3C by the Finance Act, 2006. Explanation 3C clarified that any interest referred to in Section 43B(d) that has been converted into a loan or borrowing shall not be deemed to have been actually paid. The High Court analyzed the relevant legal provisions and case laws to determine the applicability of Explanation 3C in the present case.

The High Court referred to the judgment in Commissioner of Income Tax Vs. Mahindra Nissan Allywin Limited and the judgment of the Karnataka High Court in Vinir Engineering Private Limited Vs. Deputy Commissioner of Income Tax to understand the interpretation of Section 43B in similar cases. The Court noted that the Karnataka High Court had allowed the appeal of the assessee by holding that funded interest could not be considered as non-payment of interest under Section 43B. However, the High Court observed that the provision of Explanation 3C, inserted in 2006, was not considered in these judgments.

Upon perusing Explanation 3C, the High Court concluded that the provision clarified that any interest converted into a loan would not be deemed as actually paid under Section 43B. The Court cited the decision of the Madhya Pradesh High Court in Eicher Motors Limited Vs. Commissioner of Income Tax, which supported this interpretation. As the assessment years in question were covered by Explanation 3C inserted with retrospective effect, the High Court held in favor of the Revenue, allowing the appeals and answering the substantial question of law in favor of the Revenue.

In conclusion, the High Court's judgment emphasized the importance of Explanation 3C in determining the deduction of interest liability converted into a term loan under Section 43B of the Income Tax Act, ultimately ruling in favor of the Revenue based on the retrospective application of the provision.

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