2014 (11) TMI 1232 - HC - Income Tax

Deduction under Section 43B - interest amount paid from the Over Draft or Cash Credit Account towards the liability of term loan - Explanation 3C and 3D to Section 43B specifically deems that the interest paid from loan or borrowing and loan or advance as not to have been actually paid - HELD THAT - The department declined to grant the benefit of deduction on interest paid primarily on the plea that the amount has not been actually paid and transfer of amount from one account to another account cannot be treated as paid. However, the Tribunal repelled the said plea by interpreting Section 43B of the Act and held that overdraft/cash credit accounts are not similar to loan accounts. The Tribunal further observed that the interest amount has been actually paid by the assessee through Overdraft/Cash Credit account and, therefore, set aside the disallowance made under Section 43B of the Act. A bare reading of Explanations 3C and 3D to Section 43B of the Act provides an answer to the problem by making it clear that where interest amount has not been converted into loan or borrowing (or) loan or advance, as the case may be, there is no question of denying the benefit of deduction. In the case on hand, the interest amount has been actually paid by the assessee through Overdraft/Cash Credit account and the same has not been converted into loan or borrowing (or) loan or advance, as the case may be. Decided in favour of the assessee.

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal regarding deduction under Section 43B of Income Tax Act for interest paid from Over Draft or Cash Credit Account towards term loan liability.

Analysis:
The appeals were filed by the Revenue challenging the Income Tax Appellate Tribunal's order regarding the eligibility of the assessee for deduction under Section 43B of the Income Tax Act for interest paid from Over Draft or Cash Credit Account towards term loan liability. The main question of law raised was whether the assessee is eligible for the deduction, considering the specific deeming provisions in Explanation 3C and 3D to Section 43B.

The facts presented were that the assessee maintained a Cash Credit/Over Draft account with the bank, where interest was credited for the assessment years in question. The Assessing Officer disallowed the interest amount under Section 43B, stating that mere transfer of amount from one account to another does not qualify as 'paid.' The Commissioner of Income Tax (Appeals) upheld this decision, leading the assessee to appeal to the Tribunal, which ruled in favor of the assessee, stating that the interest amount was actually 'paid' through the Over Draft/Cash Credit account and not converted into a loan or advance.

The Tribunal's decision was based on the interpretation of Section 43B, distinguishing between Over Draft/Cash Credit accounts and loan accounts. The Tribunal emphasized that if the interest amount is not converted into a loan or advance, the benefit of deduction should not be denied. The Explanations 3C and 3D to Section 43B clarified that where interest amount is actually paid and not converted into a loan or advance, the deduction should be allowed. In this case, as the interest amount was paid through the Overdraft/Cash Credit account and not converted, the disallowance under Section 43B was set aside.

After considering the arguments and the provisions of the Act, the High Court dismissed the appeals, ruling against the Revenue and in favor of the assessee. The decision was based on the understanding that the interest amount was actually paid through the Overdraft/Cash Credit account and did not fall under the provisions where the benefit of deduction could be denied.