TMI Blog2015 (5) TMI 623X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. For the above reasons, the question of law framed is answered in the negative, in favour of the revenue. - ITA 110/2005 - - - Dated:- 18-5-2015 - Hon'ble Mr. Justice S. Ravindra Bhat And Hon'ble Mr. Justice R. K. Gauba,JJ. For the Appellant : Sh. Rohit Madan, Sr. Standing Counsel For the Respondent : Sh. Bishwajit Bhattacharyya, Sr. Advocate with Sh. Chandrachur Bhattacharyya, Advocate ORDER Mr. Justice S. Ravindra Bhat 1. The following question of law arises for determination in this 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 credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the AO to allow the deduction as claimed. The revenue appealed to the ITAT. 4. The ITAT relied on Mahindra Nissan (supra) as well as the decision in J.B. Boda Co (supra). It also took note of the decision of the Patna High Court in Salendra Narain Bhanj Dev v. Asstt. Agricultural Income-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 monthly payment to the widow was ₹ 500 and the balance was towards expenses incurred by the assessee on behalf of the widow on items such as doctor's fees, medicines, religious ceremonies etc. The authorities allowed a deduction of ₹ 6,000 representing the amount actually paid for the year to the widow, but disallowed the other expenses on the ground that they were not actually paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 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 the requirement of the word actual and is not a fictional or illusory payment. The parties have understood it as an effective discharge by the assessee of the interest liability. The treatment given in the accounts as well as in their income-tax assessments 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 scheme notified by the State Govt. through Govt. orders me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st liability. It was submitted 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 the instance it catered to. The ITAT could not have carried the analogy beyond the instance mentioned in the circular, to dilute the rigors of Section 43B which mandated actual payment. Learned counsel relied on the amendments made to Section 43B by virtue of Finance Act, 2006 with retrospective effect from 01.04.1989 by insertion of Explanation 3C and Explanation 3D meant that actual payment had to necessarily be made to qualify for deduction. 7. Learned senior counsel for the assessee, Mr. Biswajit 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a loan or borrowing shall not be deemed to have been actually paid. Explanation 3D.- For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (e) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or advance shall not be deemed to have been actually paid. Explanation 4.- For 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 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‟ set out in Section 4A of the Companies Act, 1956 (applicable for the purposes of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 decide the appeal of the assessee without referring to Explanation 3C appended to Section 43B of the Act. 9. As a matter of fact, from reading of Explanation 3C, in our opinion, the question as raised in the present appeals stands answered without further discussion. This provision was inserted for removal of doubts and it was declared that deduction of any sum, being interest payable under clause (d) of Section 43B of the Act, shall be allowed if such interest has been actually 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. Thus, the doubt stands removed in view of Explanation 3C. This provision was considered by the Madhya Pradesh High Court in Eicher Motors Limited v. Commissioner of Income Tax to hold that in view of the Explanati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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