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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 ..... arificatory amendments to section 43B through 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 amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 31-03-2005 : Rs.35,90,000/- In the restructuring arrangement entered into 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/-, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e quarter April June, 2004. In this case, the original principal of Rs.14.95 crores was given under a deferred plan, repayment of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction in the computation of income on account of actual payment of interest will be worked out in the following manner: 20x33 = 4.962 Cr. 133 Out of the repayment of Rs.20 crores in the first 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 36(1)(iii) and in no way does it represent repayment of the principal. 5. In cases of waiver of interest as seen at II above, no deduction is admissible under the Income-tax Act, 1961 as waiver does not represent actual payment. 6. According to Banks and financial institutions, there may be innumerable 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 nomen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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