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TMI BlogWhether amount of sales tax liability converted into loans may be allowed as deduction in assessment for previous year in which such conversion has been permitted by or under Government ordersX X X X Extracts X X X X X X X X Extracts X X X X ..... ded that, where the State Governments make an amendment in the Sales-tax Act to the effect that the sales tax deferred under the scheme shall be treated as actually paid, the statutory liability shall be treated as discharged for the purposes of section 43B. 2. It has since been brought to the notice of the Board that some State Governments, instead of amending the Sales-tax Act, have issued Government Orders notifying schemes under which sales tax is deemed to have been actually collected and disbursed as loans. Such Government Orders also provide that entries shall be made in the Government accounts giving effect to deemed collections by crediting the appropriate receipt-heads relating to sales-tax collections and debiting the heads rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee by way of tax or duty under any law for the time being in force shall be allowed from the income of the previous year in which such sum is actually paid irrespective of the previous year in which the liability to pay such sum was incurred. Since the introduction of this provision, the assessees who collect sales tax, but do not pay the amounts to the Government during the previous year, under the deferral schemes provided by the State Governments are not entitled to the benefit of deduction from their income. 3. Representations have been received from various State Governments and others that cases of deferred sales tax payments should be excluded from the purview of section 43B as the operation of this provision has the effect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 from certain quarters regarding the manner in which the converted interest will be allowed as deduction. 3. As clarified in the Memorandum explaining the Provisions in the Finance Bill, 2006 (page 3 thereof), the interest converted into loan or borrowing or advance shall be allowed if such interest has been 'actually paid' and any interest which has been converted into a loan or borrowing or advance, shall not be deemed to have been 'actually paid' on account of its conversion into loan, etc. The unpaid interest whenever actually paid to the bank or financial in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Name of the assessee : M/s. XYZ Loan taken from Bank in February, 2003 : Rs. 34.21 lakhs Interest unpaid up to 31-3-2005 : Rs. 10.93 lakhs In this case, out of the sum of unpaid interest of Rs. 10.93 lakhs, Rs. 2.93 lakhs is waived by the Bank against which no deduction is to be allowed under section 43B. The original principal of Rs. 34.21 lakhs is converted into a Running Cash Credit Account with a limit of Rs. 21.21 lakhs and a Working Capital Term Loan of Rs. 13 lakhs, each carrying interest at the rate of 10.25%. The balance of unpaid interest (Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest 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 in the relevant assessment year. Needless to add that interest to be paid on original principal which is under a deferred plan is allowable on actual payment in the respective assessment years. IV. Name of the assessee : M/s. XYZ Loan taken by the assessee from a Term Lending Institution : Rs.100 crores Rate of interest : 11% Interest unpaid for three years, i.e., up to 31-3-2006 : Rs. 33 crores Certain banks and financial institutions during interaction with them clarified that restructuring arrangements do not generally provide for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the principal of Rs. 100 Cr. … X (b) Interest on the principal of Rs. 100 Cr. …. Y (c) Repayment of interest of Rs. 33 Cr. … Z (converted into Funded Interest Term Loan) In the above arrangement, the amount of Y & Z will be admissible as deduction under section 43B if these amounts of interest are actually paid. The amount of X, representing repayment of the principal, will not qualify for deduction in the computation of income. A restructuring arrangement may even provide for payment of interest first, until ..... X X X X Extracts X X X X X X X X Extracts X X X X
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