2022 (5) TMI 173 - HC - Income Tax

Disallowance u/s 43B - issuance of shares as against the outstanding liability of interest of the assessee company for the year under consideration - HELD THAT - The Supreme Court in the case of M.M. Aqua Technologies Ltd. 2021 (8) TMI 520 - SUPREME COURT had an occasion to deal with Section 43B more particularly, Explanation 3C of the Act and found that Explanation 3C was squarely attracted against the outstanding interest had not actually being paid, but instead a new credit entry of loan appeared, bringing the case within the express language of Explanation 3C. The Court further held that what is required to be considered is the extinguishment of liability to pay the interest in the facts of each case. We agree with the view taken by the CIT(A) as confirmed by the ITAT that it is not a case of conversion of outstanding interest into the loan so that the same could be allowed only on the actual payment, more particularly, when as acknowledge by ICICI Ltd. the defaulted interest stands extinguished having realized the fully paid up shares. Consequently, there is no further outstanding interest to be paid by the assessee company in future as it stands extinguished in the year under consideration Section 43B is hereby held to be attracted in the facts of the case. In view of the above, concurrent findings recorded by the CIT(Appeals) and by the ITAT, the question of law raised by the department does not deserve any further consideration. The said question also being no more res-integra, it could not be said that the present appeal involves any question much less substantial question of law.

Summary

Issues Involved:

1. Whether the issuance of equity shares in lieu of outstanding interest qualifies as "actual payment" under Section 43B of the Income Tax Act, 1961.
2. The validity of reopening the assessment under Section 148 of the Act.

Issue-Wise Detailed Analysis:

1. Issuance of Equity Shares as "Actual Payment" under Section 43B:

The core issue in this appeal is whether the issuance of equity shares by the assessee company to ICICI Ltd. in lieu of outstanding interest can be considered as "actual payment" for the purposes of deduction under Section 43B of the Income Tax Act, 1961. The assessee had claimed a deduction of Rs. 2.70 Crores as interest payable to ICICI Ltd. The Assessing Officer disallowed this deduction on the grounds that no actual payment was made in cash or cheque, and the issuance of shares does not qualify as actual payment under Section 43B.

The Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) both found that the issuance of fully paid-up shares to ICICI Ltd. extinguished the liability to pay the outstanding interest, thus qualifying as actual payment. The ITAT agreed with the CIT(A) that the shares issued in lieu of the outstanding liability constituted a payment that discharged the liability in the year under consideration.

The Supreme Court's decision in the case of M.M. Aqua Technologies Ltd. was cited, which held that the issuance of debentures in lieu of outstanding interest qualifies as actual payment when it extinguishes the liability to pay interest. The High Court found that the facts of the present case were similar, where the issuance of equity shares extinguished the liability to pay the outstanding interest, thereby qualifying for deduction under Section 43B.

2. Validity of Reopening the Assessment under Section 148:

The Revenue Department argued that the reopening of the assessment under Section 148 was justified as the original assessment did not consider the applicability of Explanation 3C to Section 43B, which clarifies that conversion of interest into a loan or borrowing does not qualify as actual payment. The Assessing Officer, therefore, assumed jurisdiction for reopening the assessment.

The assessee countered that Explanation 3C to Section 43B, introduced retrospectively from 01.04.1989, deals with the conversion of interest into loans or borrowings and does not apply to the conversion of interest into equity shares. The High Court agreed with the assessee, noting that the conversion of interest into fully paid-up shares extinguished the liability, and thus, Explanation 3C was not applicable.

The High Court concluded that the CIT(A) and ITAT's concurrent findings were correct, and the issuance of equity shares constituted actual payment under Section 43B. Therefore, the reopening of the assessment under Section 148 was not justified.

Conclusion:

The High Court dismissed the appeal, upholding the CIT(A) and ITAT's decisions. The issuance of equity shares by the assessee company to ICICI Ltd. in lieu of outstanding interest was held to qualify as actual payment under Section 43B, and the reopening of the assessment under Section 148 was found to be unwarranted. The appeal did not involve any substantial question of law, and the High Court affirmed the lower authorities' findings.