1998 (8) TMI 131 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of Rs. 2,89,61,025 under Section 43B.
2. Determination of the effective date of the rupee term loan granted by financial institutions.
3. Whether the conversion of outstanding 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 LIC. The AO disallowed this deduction, arguing that the interest was not actually paid by the due date for filing the return. The assessee contended that the interest was converted into a loan, which should be considered as constructive payment. However, the AO rejected this argument, stating that Section 43B requires actual payment, not constructive payment. The CIT(A) upheld the AO's decision, noting that the rescheduling of the loan was formalized much after the due date for filing the return. The Tribunal affirmed the disallowance, emphasizing that Section 43B mandates actual payment and does not recognize constructive payment.

2. Determination of the Effective Date of the Rupee Term Loan:

The assessee argued that the loan agreement dated 16th July 1990 should be considered effective from 25th October 1989, the date of the ICICI's letter of intent. The AO and CIT(A) disagreed, stating that the formal agreement was executed on 16th July 1990, and therefore, the loan conversion took effect on that date. The Tribunal concurred, noting that the agreement explicitly stated it became effective and binding on 16th July 1990. The Tribunal rejected the argument that the agreement related back to 25th October 1989, emphasizing that the significant events, including the acceptance of the financial assistance and execution of the loan agreement, occurred after the due date for filing the return.

3. Whether the Conversion of Outstanding Interest into a Loan Amounts to Actual Payment under Section 43B:

The assessee claimed that the conversion of interest into a loan constituted constructive payment, which should satisfy the requirements of Section 43B. The AO, CIT(A), and Tribunal all disagreed, stating that Section 43B requires actual payment, not constructive payment. The Tribunal noted that the legislative intent behind Section 43B was to ensure actual payment to improve the liquidity of financial institutions and prevent misuse of funds. The Tribunal emphasized that the term "actually paid" implies a physical transfer of funds, which did not occur in this case. The Tribunal also highlighted that there was no deeming provision or circular from the Board that allowed for the conversion of interest into a loan to be considered as actual payment under Section 43B.

Conclusion:

The Tribunal upheld the disallowance of Rs. 2,89,61,025 under Section 43B, affirming that the conversion of interest into a loan did not meet the requirement of actual payment. The Tribunal emphasized that the effective date of the loan agreement was 16th July 1990, and the significant events related to the loan conversion occurred after the due date for filing the return. The Tribunal dismissed the appeal, concluding that the assessee's arguments and cited decisions did not support their claim under the specific facts and legal provisions of the case.