1998 (8) TMI 128 - AT - Income Tax

Business Disallowance, Actual Payment, Previous Year, Term Loan, Loan Agreement, Due Date Of Filing Of Return

Summary

Issues Involved:
1. Disallowance of Rs. 2,89,61,025 under Section 43B.
2. Determination of the date of granting rupee term loan by financial institutions.
3. Whether the conversion of interest into a loan amounts to actual payment under Section 43B.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 2,89,61,025 under Section 43B:
The assessee, a public limited company, claimed a deduction of Rs. 2,89,67,325 as interest accrued and payable to financial institutions and L.I.C. for the assessment year 1989-90. The Assessing Officer (AO) disallowed this deduction, stating that the interest was not actually paid before the due date of filing the return. The AO emphasized that Section 43B requires actual payment, not constructive payment, and noted that the Tax Audit Report dated 22-12-1989 confirmed the interest was unpaid by that date. The CIT(A) upheld this disallowance, concluding that the formal agreement to convert the interest into a loan was completed much later, on 16-7-1990, beyond the due date of filing the return.

2. Determination of the Date of Granting Rupee Term Loan by Financial Institutions:
The assessee argued that the loan agreement dated 16-7-1990 was effective from 25-10-1989, the date of ICICI's letter of intent. However, the AO and CIT(A) held that the actual agreement and conversion of interest into a loan occurred on 16-7-1990, not 25-10-1989. The AO noted that the letter dated 25-10-1989 was merely a proposal, not a binding agreement, and the formalities were only completed in July 1990.

3. Whether the Conversion of Interest into a Loan Amounts to Actual Payment under Section 43B:
The assessee contended that the conversion of interest into a loan constituted constructive payment, thus satisfying Section 43B. They cited several tribunal decisions supporting this view. However, the AO and CIT(A) rejected this argument, stating that Section 43B explicitly requires actual payment. The tribunal agreed, emphasizing that the term "actually paid" in Section 43B necessitates a physical transfer of funds, not a mere conversion of liability. The tribunal also noted that the legislative intent behind Section 43B was to ensure actual payment to improve the liquidity of financial institutions.

Conclusion:
The tribunal upheld the disallowance of Rs. 2,89,61,025 under Section 43B, confirming that the conversion of interest into a loan did not meet the requirement of actual payment. The tribunal dismissed the appeal, stating that the decisions cited by the assessee did not apply to the specific facts of this case.