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2015 (5) TMI 623 - DELHI HIGH COURT

2015 (5) TMI 623 - DELHI HIGH COURT - [2015] 376 ITR 498 (Del) - Restriction on deduction on Interest u/s 43B - Funding of the interest amount by way of a term loan - whether amounts to actual payment as contemplated by Section 43B? - Held that:- From the AO's order, it is evident that the loans, in respect of which the assessee claims deduction of interest under Section 43B, were taken from ICICI, IDBI and IFCI. These entities are included within the definition of "public financial institution" .....

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sary to discuss the precedents relied upon by the assessee delivered prior to the enactment of Finance Act, 2006. As regards the decision in Shakti Spring Industries (2013 (1) TMI 398 - JHARKHAND HIGH COURT ), the interest due in that case was offset against a subsidy which the assessee was entitled to, and it did not involve an instance where it was “converted into a loan or borrowing” within the meaning of Explanation 3C. It is perhaps for this reason that Explanation 3C was not discussed.

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s appeal: 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? 2. The brief facts are that the assessee was heavily indebted to its institutional creditors. ICICI was the lead manager of those creditors. The accumulated interest on the overdue principal had mounted to ₹ 3,00,14,900. The assessee was unable to discharge this interest liability due to its financial hardship. On 30-03-1994, the I .....

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h the debentures issued amounted to ₹ 3,00,14,900, the interest claimed as deduction is a little less (Rs. 2,84,71,384) - the difference was explained to be as a result of the fact that a part of the interest was capitalized in the assessee's books as pre-production expenditure. The assessee's stand (of having actually paid, by issuing the debentures) was rejected by the Assessing Officer (AO) on the premise that the debenture issue resulted only in postponement of the interest lia .....

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to the amount of outstanding interest amounted to actual payment of the interest liability and, therefore, it has to be allowed as a deduction. Based on the judgment of the Supreme Court in the case of J.B. Boda Co. (P.) Ltd. v. Central Board of Direct Taxes, 223 ITR 271, it was contended that in a case involving receipt as well as payment, a single entry for the net effect would suffice instead of a two way traffic of separate entries of receipt and payment. It was urged therefore, that issue o .....

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tax Orissa, 30 ITR 801 which too was concerned with the term actually paid . In that case, maintenance allowance actually paid to certain members of the proprietor's family owning the impartible estate to the extent it did not exceed 1/5th of the net income from the estate, was allowed as a deduction Section 3(2) of the Orissa Agricultural Income-tax Rules, 1948. The assessee claimed amounts as deduction on account of maintenance allowance of the widow of the previous proprietor. The actual .....

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nt is that the assessee is not entitled to deduction of this amount as the amount was not "actually paid" as used in the rule itself. In our opinion, the construction proposed by the department is too narrow to be accepted. The term "actually paid" will also include the money actually spent on behalf of the widow for her benefit towards her maintenance expenses. If we accept the construction proposed by Mr. Dhall appearing on behalf of the department, if the widow without act .....

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r the widow, but not actually spent." 5. After discussing Mahindra Nissan (supra), the ITAT ruled that actual payment could not be given a narrow literal meaning, and held as follows: "In our opinion, this word has been used in the section only to emphasize that the payment should be real and a payment in point of fact and not something which is a pretence or a fiction. In the present case, ICICI has written a letter dated 11-8-1998 to the assessee on the subject. The letter is at page .....

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of the company. By another letter dated 8-7-1999, a copy of which is placed at page 186 of the paper book, the ICICI has written to the assessee "that the funded interest up to March 31, 1995 aggregating to ₹ 3,00,14,900 was recognized as business income in our accounts". At page 197, the copy of the statement of taxable income of the assessee for the assessment year 2001-02 has been filed which shows that in the year in which the debentures were redeemed, the assessee did not cl .....

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is in accord with the factual position. 12. In addition to the above, we may also refer to Circular No. 674 dated 20-12-1993 issued by the CBDT. No doubt, this circular refers only to the sales-tax deferral scheme announced by the State Governments and says that section 43B is to be applied with reference to them. Nevertheless, it gives a clue to the intention behind the section. In para, 3, it has been stated that the Board have considered the matter and are of the opinion that such deferral sc .....

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inent to observe that in the present case, we are concerned with a contractual liability as opposed to statutory liability. Parties are free to enter into contracts in relation to their business and there is no prohibition in law against such freedom, provided the contracts are not opposed to public policy or order or morality or are not violative of any other provisions of law. In the present case, the parties have agreed between themselves that the interest would be funded and convertible debe .....

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n 43B was that the assessee were not discharging their income-tax liabilities by paying them and in fact, some of them were even obtaining a stay from the Courts and at the same time claiming such liability as deductions in their income-tax assessments. This apprehension, which was the rationale behind section 43B when it was introduced in 1984, appears to us to be misplaced in the present case… " 6. Learned counsel for the revenue argued that the impugned order is contrary to the de .....

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itted that the impugned order to the extent it relied on Circular No. 674 dated 20-12-1993 issued by the CBDT, was misplaced and untenable. It was highlighted that in view of the structure of sales tax enactments, schemes made, whereby the sales-tax liabilities were converted into loans by the State Governments, were allowed as a deduction in the assessment for the previous year in which such conversion was allowed. The schemes were statutory and the application of the Circular was limited to th .....

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jit Bhattacharya, relied on J.B. Boda & Co and further argued that debentures are securities within the meaning of the expression understood in Section 2 (ac) and (h) of the Securities Contract Regulation Act, 1956 and freely tradable. Thus, the moment the debentures were issued to ICICI, the latter could realize the money value thereof. It was submitted that the AO's inability to understand the nature of debentures, which, unlike shares, were transferrable without any prescribed mode, l .....

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mode of transfer of property under the TP Act." Counsel also relied on Vinir Engineering (P) Ltd. v Deputy Commissioner of Income Tax 313 ITR 154 and the Jharkhand High Court decision in Commissioner of Income Tax v Shakti Spring Industries (P) Ltd, [2013] 219 Taxman 124 to say that not all payments need to be in cash and that debenture payouts as part of arrangements with banks and financial institutions are deemed sufficient under Section 43B. 8. Section 43B, to the extent relevant for th .....

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f the agreement governing such loan or borrowing, or (e) any sum payable by the assessee as interest on any loan or advances from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advances, or *************** ********************** Explanation 3C.- For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (d) of this section, shall be allowed if such interest has been actually paid and any .....

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or the purposes of this section,- (a) " public financial institution" shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956 ) Explanations 3C and 3D quoted above, were introduced by Finance Act, 2006 with retrospective effect, from 01.04.1989 and 01.04.1997 respectively. Thus, these two explanations were not present at the time the impugned order was passed. 9. From the AO‟s order, it is evident that the loans, in respect of which the assessee .....

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assessee from these entities would fall within the purview of Section 43B(d) of the Act. 10. Now, Explanation 3C, having retrospective effect with effect from 01.04.1989, would be applicable to the present case, as it relates to AY 1996-97. Explanation 3C squarely covers the issue raised in this appeal, as it negates the assessee‟s contention that interest which has been converted into a loan is deemed to be actually paid‟. In light of the insertion of this explanation, which, as men .....

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rs, the Court noted: 7. As observed supra, the Expln. 3C has now in clear terms provided that such conversion of interest amount into loan shall not be deemed to be regarded as "actually paid" amount within the meaning of Section 43B. In view of clear legislative mandate removing this doubt and making the intention of legislature clear in relation to such transaction, it is not now necessary for this Court to interpret the unamended Section 43B in detail, nor it is necessary for this C .....

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Explanation 3C thereof, which was inserted by the Finance Act, 2006 with retrospective effect from 01.04.1989. This provision was inserted in 2006 and hence, this Court in Mahindra Nissans case, had no occasion to deal with the case in the light of this provision. Insofar as the Karnataka High Court is concerned, though this provision was existing on the date of judgment, it appears that it was not brought to the notice of learned Judges and hence, the Division Bench proceeded to consider and d .....

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