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TMI Blog2021 (8) TMI 520X X X X Extracts X X X X X X X X Extracts X X X X ..... d by means of issuance of debentures, which extinguished the liability to pay interest. Explanation 3C, which was introduced for the removal of doubts , only made it clear that interest that remained unpaid and has been converted into a loan or borrowing shall not be deemed to have been actually paid. As has been seen by us hereinabove, particularly with regard to the Circular explaining Explanation 3C, at the heart of the introduction of Explanation 3C is misuse of the provisions of Section 43B by not actually paying interest, but converting such interest into a fresh loan. On the facts found in the present case, the issue of debentures by the assessee was, under a rehabilitation plan, to extinguish the liability of interest altogether. No misuse of the provision of Section 43B was found as a matter of fact by either the CIT or the ITAT. Explanation 3C, which was meant to plug a loophole, cannot therefore be brought to the aid of Revenue on the facts of this case. Indeed, if there be any ambiguity in the retrospectively added Explanation 3C, at least three well established canons of interpretation come to the rescue of the assessee in this case. First, since Explanation 3C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the option of the lenders. The agreements also provided for the repayment of the principal and the interest, in default as per the revised terms and conditions stipulated by the lendor at the time of default. As the appellant was not in position to pay the interest and liquidated damages. It approached the lead Financial Institutions which on behalf of all the institutions approved the Rehabilitation Plan According to the Rehabilitation Plan, the appellant issued 300149 convertible debentures of 100 each amounting to ₹ 3,00,14,900/ in lieu of outstanding interest and other charges. As a result of these debentures in favour of the Financial institutions, interest of ₹ 2,84,71,384/- was effectively paid. It was argued by the Ld. Counsel that liquidation of the outstanding interest by issue of debentures was tantamount to actual payment of interest as envisaged u/s 43B of the I.T. Act. It was emphasized by the Ld. Counsel that section 43B of the I.T. Act, cash or cheque is the prescribed mode of payment of P.F. and ESI while there is no prescribed mode of payment of interest. The mode of payment of interest can therefore be other than cash or cheque/draft. The issue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome tax authorities to say that the interest liability has not been discharged would not only be opposed to the contextual perspective of section 43B, but would also do violence to the language used. In Subhra Motel Pvt. Ltd. (supra), the Delhi Bench of the Tribunal referred to the fact that the expression actually paid appearing in Section 43B is not qualified by words to the effect that the payment should be by cash or by cheque or draft or by any other mode as has been prescribed in the Second Proviso, with reference to clause (b) of the section which refers to the sum payable by the assessee as contribution to provident fund, superannuation fund, gratuity fund etc. 6. It then arrived at the important finding based on facts as follows: 11. At page 197, the copy of the statement of taxable income of the assessee for the AY 2001-02 has been filed, which shows that in the year in which the debentures were redeemed, the assessee did not claim any deduction for the interest. It has thus been proved in the present case that the payment of interest by conversion of the outstanding liability into convertible debentures, is a real substantial and effective payment, meeting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. Nobody is put to any loss. To invoke the provisions of section 43B, on the imaginary ground that there is no actual payment of the interest, would be wholly misplaced and would amount to a strained interpretation of the section. 7. Against the aforesaid judgment of the ITAT, the Revenue filed an appeal before the High Court, in which the question raised before the High Court for determination was set out as follows: Whether the funding of the interest amount by way of a term loan amounts to actual payment as contemplated by Section 43B of the Income-tax Act, 1961? 8. After correctly recording the facts that the assessee was unable to discharge this interest liability due to its financial hardship. On 30/03/1994, the ICICI, by a letter waived a part of the compound interest together with the commitment charges and agreed to accept 3,00,149 convertible debentures of 100 each, amounting to 3,00,14,900/- in lieu of the outstanding amount , the Delhi High Court set out the reasoning of the ITAT in some detail and then the arguments of counsel for the Appellant and Respondent. In para 8, the judgment then set out Section 43B with Explanation 3C, which was inserted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the period in question. The assessee does not dispute that. Furthermore, this court's judgment cited the rulings of other courts- Andhra Pradesh Telangana and the Madhya Pradesh High Courts- which held that actual payment is the sine qua non for applicability of Section 43-B. In the circumstances, the decisions in Standard Chartered [2006 (6) SCC 94] and Sunrise Associates [2006 (5) SCC 603], which declared the nature and character of debentures, are of little avail. 11. Shri Biswajit Bhattacharya, learned Senior Advocate appearing on behalf of the Appellant, first drew this Court s attention to an order dated 20th April, 2005 by which the question of law framed for consideration in the appeal before the High Court was as follows: Whether the funding of the interest amount by way of a term 'debenture' amounts to actual payment as contemplated by Section 43B of the Income Tax Act, 1961? 12. This question was then wrongly recorded as follows: Whether the funding of the interest amount by way of a term loan amounts to actual payment as contemplated by Section 43B of the Income-tax Act, 1961? 13. Since the High Court asked itself the wrong quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowable under this Act in respect of- xxx xxx xxx (d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or xxx xxx xxx shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him: Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return. xxx xxx xxx Explanation 3C.- For the removal of doubts, it is hereby declared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the tax or duty or in respect of any sum payable as contribution to any fund for the assessment year 1983-84, or any earlier year in which the liability to pay was incurred, cannot, in respect of that liability, be allowed a deduction in the assessment year 198485, or any subsequent year on the ground that he has actually made a payment towards such liability in that year. 18. As has been pointed out hereinabove, the Finance Act, 2006 inserted Explanation 3C w.e.f. 1st April, 1989. The scope and effect of this provision was explained by the Board in Circular No.14/2006 dated 23 rd December, 2006, as follows: 16.2 It has come to notice that certain assessees were claiming deduction under section 43B on account of conversion of interest payable on an existing loan into a fresh loan on the ground that such conversion was a constructive discharge of interest liability and, therefore, amounted to actual payment. Claim of deduction against conversion of interest into a fresh loan is a case of misuse of the provisions of section 43B. A new Explanation 3C has, therefore, been inserted to clarify that if any sum payable by the assessee as interest on any loan or borrowing, re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accounts of the bank reflect the amount received by way of debentures as its business income. This being the fact-situation in the present case, it is clear that interest was actually paid by means of issuance of debentures, which extinguished the liability to pay interest. 21. Explanation 3C, which was introduced for the removal of doubts , only made it clear that interest that remained unpaid and has been converted into a loan or borrowing shall not be deemed to have been actually paid. As has been seen by us hereinabove, particularly with regard to the Circular explaining Explanation 3C, at the heart of the introduction of Explanation 3C is misuse of the provisions of Section 43B by not actually paying interest, but converting such interest into a fresh loan. On the facts found in the present case, the issue of debentures by the assessee was, under a rehabilitation plan, to extinguish the liability of interest altogether. No misuse of the provision of Section 43B was found as a matter of fact by either the CIT or the ITAT. Explanation 3C, which was meant to plug a loophole, cannot therefore be brought to the aid of Revenue on the facts of this case. Indeed, if there be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the Revenue is then not required to show what is the precise extent of the understatement or in other words, what is the consideration actually received by the assessee. That would in most cases be difficult, if not impossible, to show and hence sub-section (2) relieves the Revenue of all burden of proof regarding the extent of understatement or concealment and provides a statutory measure of the consideration received in respect of the transfer. It does not create any fictional receipt. It does not deem as receipt something which is not in fact received. It merely provides a statutory best judgment assessment of the consideration actually received by the assessee and brings to tax capital gains on the footing that the fair market value of the capital asset represents the actual consideration received by the assessee as against the consideration untruly declared or disclosed by him. This approach in construction of sub-section (2) falls in line with the scheme of the provisions relating to tax on capital gains. It may be noted that Section 52 is not a charging section but is a computation section. It has to be read along with Section 48 which provides the mode of computation a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 9(1)(ii). It includes salaries in the total income of an assessee if the assessee has earned it in India. The word earned had been judicially defined in S.G. Pgnatale [(1980) 124 ITR 391 (Guj)] by the High Court of Gujarat, in our view, correctly, to mean as income arising or accruing in India . The amendment to the section by way of an Explanation in 1983 effected a change in the scope of that judicial definition so as to include with effect from 1979, income payable for service rendered in India . 19. When the Explanation seeks to give an artificial meaning to earned in India and brings about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively. 23. This being the case, Explanation 3C is clarificatory it explains Section 43B(d) as it originally stood and does not purport to add a new condition retrospectively, as has wrongly been held by the High Court. 24. Third, any ambiguity in the language of Explanation 3C shall be resolved in favour of the assessee as per Cape Brandy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of CIT v. Peico Electronics Electricals [(1987) 166 ITR 299 (Cal)] the Calcutta High Court held that the Debenture Redemption Reserve will have to be treated as a reserve and not provision because, none of the debentures became redeemable during the accounting period. The liability to redeem the debenture was a future liability. The debentures had been separately shown in the balance sheet as a liability. The reserve had been created by appropriation of profits and not by way of a charge on revenue. 12. We are of the view that this approach is erroneous and overlooks the definitions of provision and reserve given in the Companies Act. The debentures were nothing but secured loans. Merely because the debentures were not redeemable during the accounting period, the liability to redeem the debentures did not cease to exist. It was redeemable or repayable at a future date. But it was a known liability. In the form of balance sheet prescribed by the Act in Schedule VI, the secured loans have to be shown under the heading liabilities . Secured loans include (1) debentures, (2) loans and advances from banks, (3) loans and advances from subsidiaries and (4) oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan had been disbursed in 2 parts - one to meet the interest outstanding and the balance for financial assistance still the entries in the books of account would have remain the same and the outstanding interest would have been NIL. Having regard to the above facts and also the case laws cited by the appellant's representative, I am inclined to hold that the disallowance made by the assessing officer is contrary to the substance of the transaction and the provisions of Section 43-B of the Income Tax Act and the same cannot be sustained and therefore directed to be deleted. 29. It is on these facts that Explanation 3C was pressed into service in favour of Revenue and paras 11 and 12 of the impugned judgment in the present case were referred to, in passing, in para 13. Ultimately, this Court concluded: 16. In the impugned judgment [ CIT v. Gujarat Cypromet Ltd., 2006 SCC OnLine Guj 560 ], the Gujarat High Court has relied upon CIT v. Bhagwati Autocast Ltd., 2002 SCC OnLine Guj 381 which was not a case covered by Section 43-B(d) rather was a case of Section 43-B(a). The provision of Section 43B covers a host of different situations. The statutory Explanation 3-C inser ..... 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