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TMI Blog2021 (8) TMI 1404X X X X Extracts X X X X X X X X Extracts X X X X ..... d conditions on which the loans were granted, and that interest was payable, holding that a subsequent change in the terms of the agreement, as they then stood, would be contrary to Section 43B(d), and would render such amount ineligible for deduction. The Commissioner of Income Tax (Appeals) ["CIT"] allowed the appeal and held, on facts, as follows: "3.2. .... It was clarified by the Ld. Counsel that the original agreements with the financial institutions provided for conversion of 20% of the amount in default into equity capital of the appellant 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 Rs. 3,00,14,900/ in lieu of outstanding interest and other charges. As a result of these debentures in favour of the F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Income Tax Appellate Tribunal ["ITAT"]. The ITAT held: "9. ... The Section was introduced to curb the mischief of withholding tax payment by the assessee, while at the same time claiming deduction thereof in the income-tax assessments. But when both the parties creditor and debtor agree that the conversion of the outstanding interest liability into fully paid debentures would be accepted by them as discharge of the liability then to hold that notwithstanding the contract between the two, it is open to the income 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case before us, it is a contractual liability where both the parties agree that the outstanding interest liability would be discharged by the assessee in a particular mode and that mode is followed. The assessee has not claimed the interest as a deduction again in the year in which the debentures were redeemed and evidence to this effect has already been adverted to. The interest which is now allowed as a deduction in the assessee's assessment is reflected in the assessment of ICICI as its business income. 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 liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly paid and any interest referred to in that clause which has been converted into a loan or borrowing shall not be deemed to have been actually paid." Quite possibly the assessee's arguments would have been convincing and the court might have been persuaded that actual payment of amounts is inessential and a composition of the kind involved in this case, would have sufficed - but for Explanation 3C. Now, this provision was inserted with retrospective effect and clearly operated for 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng clear that a debenture is nothing but a loan, interest had, in fact, been converted into a loan on the facts of this case and squarely attracted the latter part of Explanation 3C. 16. At this juncture, it is important to set out Section 43B. The relevant provisions of the said Section read as follows: 43B. Certain deductions to be only on actual payment - Notwithstanding anything contained in any other provision of this Act, a deduction otherwise 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear, being a previous year relevant to the assessment year 1983-84, or any earlier assessment year, in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under section 43B in respect of such sum on the ground that the sum has been actually paid by him in that year. In other words, an assessee who has already been allowed deduction of a liability on account 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 1984-85, 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 23rd 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 existin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the borrower, debentures were accepted by the financial institution in discharge of the debt on account of outstanding interest. This is also clear from the expression "in lieu of" used in the judgment of the learned CIT. That this is so is clear not only from the accounts produced by the assessee, but equally clear from the fact that in the assessment of ICICI Bank, for the assessment year in question, 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 fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such understatement is on the Revenue. Once it is established by the Revenue that the consideration for the transfer has been understated or, to put it differently, the consideration actually received by the assessee is more than what is declared or disclosed by him, sub-section (2) is immediately attracted, subject of course to the fulfilment of the condition of 15 per cent or more difference, 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 conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v. Podar Cement (P) Ltd., (1997) 5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are "it is declared" or "for the removal of doubts". 18. There was and is no ambiguity in the main provision 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 Explanati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be repayable in the year of account. But the obligation to pay the loan is a present obligation. Any money set apart in the accounts of the Company to redeem the debentures must be treated as moneys set apart to meet a known liability. The debentures will have to be shown in the Company's balance sheet of the year as "liability". 11. In 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ace a new credit entry of loan of IDBI is now appearing in the balance sheet as on 31-3-2001. The plea of the appellant's counsel Shri Tanna that since no interest payment is outstanding now and the amount is paid off, the expenditure of interest is allowable under Section 43-B. It is further added that in case the 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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