2015 (8) TMI 376 - HC - Income Tax

Reopening of assessment - conversion of a portion of the interest into shares - Deduction claimed under section 43B - Held that - When pursuant to a settlement the creditor agrees to convert a portion of interest into shares, it must be treated as an extinguishment of liability to pay interest to that extent. In essence there will be no further outstanding interest to that extent. Consequently, the situation where an interest payable on a loan is converted into shares in the name of the lender/creditor is different from the situation envisaged in Explanation 3C to Section 43B of the Act viz., conversion of interest into a loan or borrowing . In the latter instance, the liability continues, although in a different form. However, where the interest or a part thereof is converted into equity shares, the said interest amount for which the conversion is taking place is no longer a liability. The Court is of the view that the plea of the Assessee, which was accepted by the CIT (A) and the ITAT, that the said conversion of a portion of interest into shares should be taken to be actual payment within the meaning of Section 43B of the Act, merits acceptance. In any event, on the facts of the case discussed above, there was no justification in seeking to reopen the assessment under Section 147 of the Act on a mere change of opinion. - Decided in favour of assessee.

Issues:
- Validity of deduction claimed by the Assessee for allotment of shares in lieu of interest liability.
- Re-opening of the case under Section 147 of the Income Tax Act.
- Interpretation of Section 43B of the Act regarding actual payment basis for deductions.
- Merits of the Assessee's plea for conversion of interest into shares as actual payment.
- Justification for seeking to reopen the assessment on a change of opinion.

Analysis:

1. The case involved an appeal by the Revenue against an order passed by the Income Tax Appellate Tribunal (ITAT) regarding the deduction claimed by the Assessee for allotment of shares in lieu of interest liability for the Assessment Year 2002-03.

2. The Assessee had filed a return declaring a loss and claimed a deduction for interest paid to IDBI in the form of shares. The dispute arose when the Assessing Officer disallowed the deduction, stating that the conversion of interest into shares did not qualify as actual payment under Section 43B of the Act.

3. The re-opening of the case under Section 147 was based on the contention that the deduction was not allowable during the relevant assessment year due to the sanctioning of the rehabilitation scheme by the BIFR.

4. The Assessee argued that the conversion of interest into shares should be considered as actual payment under Section 43B, and that the original assessment proceedings had satisfactorily addressed the issue raised by the AO.

5. The ITAT held that the re-opening of the case was a change of opinion rather than a change in the statement of income, as the AO had already raised queries regarding the conversion of interest into shares during the original assessment.

6. The Court agreed with the Assessee's argument that the conversion of interest into shares should be treated as actual payment, extinguishing the liability to pay interest to that extent. It distinguished this situation from the one described in Explanation 3C to Section 43B regarding conversion into a loan or borrowing.

7. Ultimately, the Court found no legal infirmity in the ITAT's order and dismissed the appeals, declining to frame questions of law as requested by the Revenue.

This detailed analysis covers the issues involved in the judgment, providing a comprehensive overview of the legal arguments and conclusions reached by the Court.

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