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TMI BlogClarification regarding deduction of interest under section 43B in view of clarificatory amendments to section 43B through the Finance Act, 2006X X X X Extracts X X X X X X X X Extracts X X X X ..... h the Finance Act, 2006. Section 43B of the Income-tax Act, 1961 was amended by the Finance Act, 2006 inserting therein two clarificatory Explanations, namely; Explanation 3C and Explanation 3D. Both the Explanations clarify that any sum payable by the assessee as interest on any loan or borrowing or advance shall be allowed as deduction if such interest has been actually paid and any interest which has been converted into a loan or borrowing or advance but has not been actually paid shall not be allowed as deduction in the computation of income. The clarificatory explanations only reiterate the rationale that conversion of interest into a loan or borrowing or advance does not amount to actual payment. 2. Clarifications have been sought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to in this case, the unpaid interest of the above amount of Rs.35,90,000 has been converted into a Funded Interest Term Loan (FITL) which has been shown separately from the original loan and no interest is chargeable on FITL. This converted interest (i.e. FITL) is to be paid in eleven instalments from 01-04-2010. Each instalment worked out to an amount of Rs.3,26,364/-. In this case, deduction to the extent of the amount actually paid against the payment of instalment of FITL of Rs.3,26,364/- under section 43B shall be allowed in the relevant assessment year when it is actually paid. Needless to add that the interest on the original principal of Rs.2,37,81,000/-, if any, actually paid will be independently allowable under section 43B. II. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was to begin from 01-04-2008. The interest for the quarter April June, 2004 when not paid was converted into an FITL. Interest on FITL is charged at the rate of 10.25%. The accounting practice followed by the Term Lending Institution is that, for every quarter, interest receivable is converted into a principal loan outstanding and the interest receivable amount is booked as income. Such interest receivable by the Term Lending Institution in every quarter is required to be paid by the assessee and has two components (i) payment of Funded Interest Term Loan (FITL) and (ii) interest on FITL. Both the components i.e. FITL for the quarter and interest on FITL in every quarter will be allowed as deduction on actual payment under section 43B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year, deduction of Rs.4.962 crores will be admissible in terms of the provisions of section 43B as deduction, as Rs.4.962 crores out of Rs.20 crores actually paid represents interest component. Balance Rs.15.039 crores representing repayment of the principal shall not be admissible as deduction in the computation of income. In a restructuring arrangement in which the amount of interest of Rs.33 crores is not merged with the original principal of Rs.100 crores and is separately payable from the repayment instalments out of the principal of Rs.100 crores, deduction on account of actual payment of interest shall be allowed as under: Repayment out of the loan amount of Rs.133 Cr. will have the following three components (a) Repayment of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e variations in repayment arrangements/schedules entered into between the lenders and borrowers. It may, therefore, not be possible to visualize all kinds of arrangements which may be entered into between the borrowers and the lenders in this regard. The fundamental principle, however, remains that once an amount has been determined as interest payable to the banks or financial institutions, any subsequent change of nomenclature of interest will not affect its allowability and deduction in terms of section 43B will have to be allowed on its actual payment. The Assessing Officers would, therefore, be justified in seeking a certificate from the assessee to be obtained by assessees from the lender bank or financial institution, etc. as evidenc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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