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TMI Blog2024 (12) TMI 1278X X X X Extracts X X X X X X X X Extracts X X X X ..... im of interest converted to equity in a sum of Rs.75,75,000/- on a proper interpretation of Section 43B of the Income Tax Act, 1961?" 5. Facts giving rise to filing of this appeal briefly stated are that the assessee is a company and is a developer of software. The assessee filed the return of income on 29.12.1999 declaring the loss of Rs.1,00,64,340/-. The return filed by the assessee was processed under Section 143(1)(a) of the Act. The assessee in the return of income during the financial year 1998-99 had converted the interest due of Rs.75,75,000/- to Andhra Pradesh Industrial Development Corporation Limited (for short 'APIDC') into equity shares by issuing 5,05,000 shares of Rs.10/- each totaling to a sum of Rs.50,50,000/-. Interest of Rs.39,94,429/- had accrued to the assessee and was due to Andhra Pradesh State Financial Corporation (for short 'APSFC'). The case of the assessee was selected for scrutiny and notices under Sections 143(2) and 142(1) of the Act were issued. The assessee was asked to file objections, if any, to disallowance of unpaid interest of Rs.75.75 lakhs and Rs.39.94 lakhs under Section 43B of the Act. 6. The assessee thereupon filed objections in which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent that in order to attract the applicability of the aforesaid provision, actual payment should be made which admittedly has not been paid in the instant case. It is therefore contended that with regard to disallowance of claim, the Tribunal has properly interpreted Section 43B of the Act and the orders passed by the authorities under the Act, do not call for any interference. 11. We have considered the rival submissions made by the learned counsel for the parties and perused the record. 12. In the instant case, the assessee had converted the liability to pay interest by issuing equity shares in favour of APIDC. The issue which arises for consideration in this appeal is whether the same would amount to "actual payment" within the meaning of Section 43B of the Act. The authorities under the Act inter alia found that the interest payable by the assessee was converted into equity shares. However, the same was constructive payment and not an actual payment and therefore, the claim of the assessee for deduction under Section 43B of the Act was negatived. 13. Section 43B of the Act has been inserted by the Finance Act, 1983 with effect from 01.04.1984. Clause (d) to Section 43B was i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o have been actually paid." 14. The scope and ambit of Section 43B of the Act was considered by the Supreme Court in M.M.Aqua Technologies Limited (supra). The assessee in the aforesaid decision claimed deduction under Section 43B of the Act on the issue of debentures in lieu of interest accrued and payable to financial institutions. The Supreme Court in paragraphs 17 to 21 and 23 and 24 held as under: "17. Section 43-B was originally inserted by the Finance Act, 1983 w.e.f. 1-4-1984. The scope and effect of the newly inserted provision, at that point, was explained by the Central Board of Direct Taxes ("the Board") in Circular No. 372/1983 dated 8-12-1983 as follows: "35.2. Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer's contribution to provident fund, Employees State Insurance Scheme, etc., for long periods of time, extending sometimes to several years. For the purposes of their income tax assessments, they claim the liability as deduction on the ground that they maintain accounts on mercantile or accrual basis. On the other hand, they dispute the liability and do not discharge th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rify that if any sum payable by the assessee as interest on any loan or borrowing, referred to in clause (d) of Section 43-B, is converted into a loan or borrowing, the interest so converted, shall not be deemed to be actual payment. 16.3. This amendment takes effect retrospectively from 1-4-1989 i.e. the date from which clause (d) was inserted in Section 43-B and applies in relation to Assessment Year 1989-90 and subsequent years." 19. The object of Section 43-B, as originally enacted, is to allow certain deductions only on actual payment. This is made clear by the non obstante clause contained in the beginning of the provision, coupled with the deduction being allowed irrespective of the previous years in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by it. In short, a mercantile system of accounting cannot be looked at when a deduction is claimed under this section, making it clear that incurring of liability cannot allow for a deduction, but only "actual payment", as contrasted with incurring of a liability, can allow for a deduction. Interestingly, the "sum payable" referred to in Section 43-B(d), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Revenue on the facts of this case. Indeed, if there be any ambiguity in the retrospectively added Explanation 3-C, at least three well-established canons of interpretation come to the rescue of the assessee in this case. First, since Explanation 3-C was added in 2006 with the object of plugging a loophole - i.e. misusing Section 43-B by not actually paying interest but converting interest into a fresh loan, bona fide transactions of actual payments are not meant to be affected. In similar circumstances, in K.P. Varghese v. ITO [K.P. Varghese v. ITO, (1981) 4 SCC 173 : 1981 SCC (Tax) 293] , this Court construed Section 52 of the Income Tax Act as applying only to cases where "understatement" is to be found - an "understatement" is not to be found in the literal language of Section 52, but was introduced by this Court to streamline the provision in the light of the object sought to be achieved by the said provision. This Court, therefore, held : (SCC pp. 189 & 191-92, paras 13 & 15) "13. Thus it is not enough to attract the applicability of sub-section (2) that the fair market value of the capital asset transferred by the assessee as on the date of the transfer exceeds the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n but is a computation section. It has to be read along with Section 48 which provides the mode of computation and under which the starting point of computation is 'the full value of the consideration received or accruing'. What in fact never accrued or was never received cannot be computed as capital gains under Section 48. Therefore sub-section (2) cannot be construed as bringing within the computation of capital gains an amount which, by no stretch of imagination, can be said to have accrued to the assessee or been received by him and it must be confined to cases where the actual consideration received for the transfer is understated and since in such cases it is very difficult, if not impossible, to determine and prove the exact quantum of the suppressed consideration, sub-section (2) provides the statutory measure for determining the consideration actually received by the assessee and permits the Revenue to take the fair market value of the capital asset as the full value of the consideration received in respect of the transfer." ... ... ... 23. This being the case, Explanation 3-C is clarificatory - it explains Section 43-B(d) as it originally stood and does not pu ..... 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