2024 (12) TMI 1278 - HC - Income Tax

Disallowance of the claim of interest converted to equity u/s 43B - conversion of outstanding interest liability into loan i.e., funding interest or into equity does - HELD THAT - In M.M.Aqua Technologies Limited 2021 (8) TMI 520 - SUPREME COURT and held that the liability of the assessee to pay interest had ceased on account of issue of equity shares. The assessee was held entitled to benefit of Section 43B of the Act. It is not the case of the Revenue that liability of the assessee to pay interest has not ceased to exist on issuance of equity shares. The claim of the assessee for deduction u/s 43B of the Act has been denied on the ground that the actual payment has not been made. In view of the interpretation put forth by the Supreme Court on Section 43B of the Act, as the liability of the assessee to pay interest ceased to exist on issue of shares in favour of APIDC, the same would tantamount to actual payment within the meaning of Section 43B of the Act. The assessee, therefore, is entitled to benefit of Section 43B of the Act. Substantial question of law is answered in favour of the assessee.

Summary

Issues Involved:

1. Whether the conversion of interest liability into equity shares amounts to "actual payment" under Section 43B of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Conversion of Interest into Equity Shares as "Actual Payment" under Section 43B:

The primary issue in this case was whether the conversion of interest liability into equity shares could be considered "actual payment" under Section 43B of the Income Tax Act, 1961. The assessee, a software development company, had converted unpaid interest of Rs.75,75,000/- to Andhra Pradesh Industrial Development Corporation Limited (APIDC) into equity shares. The Assessing Officer disallowed this conversion under Section 43B, which mandates actual payment for deduction eligibility. The assessee argued that constructive payment amounted to actual payment, citing precedents from the Supreme Court and High Courts.

The court examined the provisions of Section 43B, which was introduced to curb practices where liabilities were claimed as deductions without actual payment. Explanation 3C, inserted by the Finance Act, 2006, clarifies that conversion of interest into a loan or other instruments does not constitute actual payment. The Supreme Court in M.M. Aqua Technologies Limited had previously ruled that the actual payment requirement is met if the liability to pay interest is extinguished, as was the case when debentures were issued to discharge the interest liability.

The High Court noted that the Revenue did not dispute the cessation of the liability to pay interest upon the issuance of equity shares. Referring to the Supreme Court's interpretation, the court concluded that the liability's cessation due to share issuance equated to actual payment under Section 43B. Consequently, the assessee was entitled to the deduction benefit.

Conclusion:

The High Court ruled in favor of the assessee, determining that the conversion of interest into equity shares constituted actual payment under Section 43B. The court set aside the Tribunal's order, allowing the assessee to claim the deduction. The appeal was allowed, with no order as to costs.