2015 (2) TMI 251 - AT - Income Tax

Interest payable u/s 43B disallowed - whether the conversion of interest payable into share capital under the restricting of loan would be treated as payment of interest for the purpose of section 43B(d) or not - Held that - Interest expenditure which is otherwise allowable deduction u/s 36(1)(iii) but deffered as per the provisions of section 43B cannot be disallowed because of the reason that the payment is not in cash but by issuance of share capital. The amount of 8.82 crore was incorrectly assumed by the CIT(A) because the Assessing Officer has disallowed a sum of ₹ 8.82 crore on account of write back off restructured settlement amount which was already disallowed by the assessee in the computation of income. Apart from the said disallowance, the Assessing Officer has also disallowed a sum of ₹ 14 crore u/s 43B on account of conversion of interest payable into shares issued to IDBI. We find that these two amounts of disallowance are separate and distinct and there is no confusion or ambiguity in the order of Assessing Officer. The Assessing Officer took the business income as loss of ₹ 8.04 crore prior to the deduction of ₹ 14 crore. Therefore, the said amount was not allowed in the computation of total income by the Assessing Officer. Hence, we find that the CIT(A) has misunderstood the computation of total income in the assessment order. Accordingly, we set aside the direction given by the CIT(A) directing AO to make the disallowances of the sum of ₹ 14 crores as the same is factually incorrect. In view of the above finding we set aside the orders of authorities below on this issue and allow the claim of the assessee regarding the interest payable of ₹ 14 crore u/s 43 B. - Decided in favour of assessee.

Summary

Issues Involved:

1. Whether the restructuring package with IDBI Bank, which converted interest into equity shares, constitutes actual payment under Section 43B of the Income Tax Act.
2. Whether the conversion of unpaid interest into equity shares is allowable as a deduction under Section 43B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Restructuring Package and Interest Component:

The assessee argued that the restructuring package with IDBI Bank converted the interest component of the loan into equity shares, which should be considered as actual payment under Section 43B of the Income Tax Act. The CIT(A) held that the restructuring package did not specifically state that the interest component was restructured; instead, it restructured the loan itself. The CIT(A) did not appreciate the evidence provided by the assessee, which substantiated that the funded interest term loan represented only the interest component and not the principal loan.

2. Conversion of Unpaid Interest into Equity Shares:

The assessee claimed a deduction of Rs. 14 crore under Section 43B, arguing that the conversion of unpaid interest into equity shares amounted to payment of the said amount. The Assessing Officer disallowed this claim based on Explanation 3C to Section 43B, which states that interest converted into a loan or borrowing shall not be deemed to have been actually paid. The CIT(A) confirmed this disallowance, following the Tribunal's decision in SRF Ltd. v. DCIT, which held that such conversion does not constitute actual payment.

Assessee's Arguments:

The assessee contended that the conversion of interest into equity shares discharged the interest liability payable to IDBI. They argued that Explanation 3C to Section 43B only applies to the conversion of interest into loans or borrowings, not equity. The assessee cited the Tribunal's decision in Suryalakshmi Cotton Mills Ltd. v. ACIT, which accepted the issuance of shares as a discharge of liability by a mode other than cash. They also referred to CBDT Circular No. 7 of 2006, which clarified that unpaid interest, when actually paid, is deductible. The assessee argued that the conversion of interest into equity should be considered as actual payment and not hit by Explanation 3C.

Revenue's Arguments:

The Revenue argued that Explanation 3C was included to prevent the mischief of claiming deductions without actual payment. They contended that the conversion of interest into equity does not constitute actual payment and should not be deemed as such. The Revenue also referred to the RBI Master Circular, which treats funded interest on loans or equity instruments created by conversion of unpaid interest as the same asset classification category as the restructured advances.

Tribunal's Findings:

The Tribunal analyzed Section 43B and Explanation 3C, noting that the section requires actual payment for deductions. They found that converting interest into loans or borrowings defers the liability, but converting it into equity discharges the liability, ceasing its existence. The Tribunal held that the conversion of interest into equity is not covered by Explanation 3C, as it does not merely defer the liability but discharges it. They relied on the decisions in Suryalakshmi Cotton Mills Ltd. v. ACIT and JSW Steel Ltd. v. ACIT, which supported the view that conversion into equity constitutes actual payment.

Conclusion:

The Tribunal concluded that the interest expenditure, which is otherwise allowable under Section 36(1)(iii), cannot be disallowed under Section 43B merely because it was paid by issuing equity shares. They set aside the orders of the lower authorities and allowed the assessee's claim for the deduction of Rs. 14 crore under Section 43B. The Tribunal also corrected the CIT(A)'s factual error regarding the disallowance amount. The appeal of the assessee was allowed.