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2022 (3) TMI 39 - HC - Income TaxDeduction of interest on accrual or actual payment basis - interest payable under clause (d) of section 43B - interest on loan borrowed from the Tamil Nadu Government and Infrastructure and Leasing Financial Services Ltd - whether IL FS is a public interest institution. though the liability to pay interest cannot be stated to have accrued until after 5 years and that too, is payable half yearly instalments along with principal amount beginning from 1st May 2013 and ending with 1st November 2022 - Contention of Revenue is that the Tamil Nadu Government may not be a Public Financial Institution but M/s.Infrastructure Leasing and Financial Services limited is a Public Financial Institution and therefore, the interest payment not paid by the assessee company to the promoters is hit by explanation 3C to Section 43B (d)? - HELD 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. It is not in dispute that the interest payable to the Government of Tamil Nadu is not hit by the provisions of section 43B of the Act. However, in the present case, the assessee was provided with loan not only by the Government of Tamil Nadu, but also by M/s.Infrastructure Leasing and Financial Services Limited, and the interest liability, which accrued during the relevant assessment years, was not actually paid by the assessee, was sought to be deducted. In such circumstances, it has to be examined as to whether IL FS is a public interest institution. Without verifying the same, the Tribunal simply held that the promoters were not covered under the definition of Public Financial Institution as per Explanation 4 to section 43B r/w section 4A of the Companies Act and hence, the provisions of section 43B(d) r/w Explanation 3C would not be applicable to the case of the assessee. As decided in Tamil Nadu Small Industries Corporation 2020 (12) TMI 1315 - MADRAS HIGH COURT Tribunal remanded the matter to the assessing officer to examine as to whether the assessee paid the interest to the Government of Tamil Nadu or to any other financial institution, after having held that interest paid to Government of Tamil Nadu is not hit by the provisions of section 43B of the Act. Thus the orders of the Tribunal are set aside and the matters are remanded to the Assessing Officer to examine, whether M/s.Infrastructure Leasing and Financial Services Limited (IL FS) is a public financial institution; and if it is in affirmative, then, section 43B(d) r/w explanation 3C will be applicable; and pass orders afresh, after providing due opportunity of hearing to all the parties, within a period of eight weeks from the date of receipt of a copy of this judgment.
Issues Involved:
1. Accrual of interest on loans during the moratorium period. 2. Applicability of Section 43B(d) and Explanation 3C to Section 43B of the Income Tax Act. 3. Definition and classification of Public Financial Institution under Explanation 4 to Section 43B read with Section 4A of the Companies Act, 1956. Issue-wise Detailed Analysis: 1. Accrual of Interest on Loans During the Moratorium Period: The primary issue revolved around whether the interest on loans borrowed from the Tamil Nadu Government and Infrastructure Leasing and Financial Services Ltd (IL&FS) accrued during the moratorium period of five years. The Assessing Officer (AO) disallowed the interest claims for the assessment years 2003-04 to 2011-12, reasoning that the liability to pay interest arose only after the moratorium period, i.e., from 1st May 2013. The Tribunal, however, held that the interest had accrued during the previous years despite the moratorium, leading to the Revenue's appeal. 2. Applicability of Section 43B(d) and Explanation 3C to Section 43B of the Income Tax Act: Section 43B(d) allows deductions for interest payable on loans from public financial institutions only when the interest is actually paid. Explanation 3C clarifies that interest converted into a loan cannot be deemed as actually paid. The Tribunal ruled that the provisions of Section 43B(d) and Explanation 3C were not applicable, as the promoters (Tamil Nadu Government and IL&FS) were not classified as public financial institutions. The Revenue contested this, arguing that IL&FS is a public financial institution, thus making the interest payments subject to Section 43B(d) and Explanation 3C. 3. Definition and Classification of Public Financial Institution: The Tribunal's decision was based on the interpretation that neither the Tamil Nadu Government nor IL&FS fell under the definition of a public financial institution as per Explanation 4 to Section 43B read with Section 4A of the Companies Act, 1956. The Revenue's counsel argued that IL&FS qualifies as a public financial institution, citing the Supreme Court's decision in CIT v. Gujarat Cypromet Ltd, which supported the retrospective applicability of Explanation 3C to Section 43B. Judgment Analysis: The High Court examined the relevant provisions of Section 43B and Explanation 3C, emphasizing that deductions for interest are allowed only if the interest has been actually paid. The court referenced the Supreme Court's ruling in Gujarat Cypromet Ltd, which affirmed the retrospective effect of Explanation 3C from 01.04.1989, thereby impacting the assessment years in question. The High Court noted that the Tribunal had failed to verify whether IL&FS is a public financial institution, which is crucial for determining the applicability of Section 43B(d) and Explanation 3C. The court highlighted a precedent where a similar issue was remanded to the AO for verification (CIT v. Tamil Nadu Small Industries Corporation Ltd). Conclusion: The High Court set aside the Tribunal's orders and remanded the matters to the AO to determine if IL&FS qualifies as a public financial institution. If affirmed, Section 43B(d) and Explanation 3C would apply, necessitating the reassessment of interest deductions. The AO was directed to provide an opportunity for hearing to all parties and to conclude the reassessment within eight weeks from the receipt of the judgment. Disposition: All tax case appeals were disposed of in the terms stated above, with no costs awarded.
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