TMI Blog2021 (8) TMI 1404X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 43B(d), with which we are concerned, does not refer to the mode of payment, unlike Proviso 2 to the said Section, which was omitted by the Finance Act, 2003 w.e.f. 1st April, 2004. This being the case, it is important to advert to the facts found in the present case. Both the CIT and the ITAT found, as a matter of fact, that as per a rehabilitation plan agreed to between the lender and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The question decided in this case is far removed from the question to be decided in the facts of the present case and has no application to these facts whatsoever. The question in the present case does not depend upon what can, in law, be stated to be a debenture and/or whether it is convertible or non-convertible or payable immediately or in the future. The question in the present case is only whether interest can be said to have been actually paid by the mode of issuing debentures. The impugned judgments of the High Court are set aside and the judgment and order of the ITAT is restored. These appeals are allowed in the aforesaid terms. - ROHINTON FALI NARIMAN And B.R. GAVAI , JJ. For the Petitioner : Sahil Tagotra For the Respondent : Anil Katiyar JUDGMENT R. F. Nariman, J 1. Leave granted. 2. The question raised in these appeals is with particular reference to Section 43B Explanation 3C of the Income Tax Act, 1961 [the Act ]. The brief facts neces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unted to payment which had been acknowledged by the lead institutions. Since the lendor had admitted receipt of interest, there was no dispute about the payment. . However, the original terms and conditions of the borrowings not only provided for conversion of 20% of the amount in default into appellant's equity but also revision of terms and conditions of payment at the time of each default. The partial conversion into equity was at the option of the lendor which the lendor did not exercise. On the appellant's request, the lead institution acting as trustee of all the lenders agreed to the Rehabilitation Plan and accepted 300149 debentures of ₹ 100 each aggregating to ₹ 3,00,14,900/- in discharge of the outstanding interest. The discharge of the liability of interest through issue of debentures as mutually agreed between the appellant and the lenders was therefore in accordance with the terms and conditions governing the borrowings. 4. On these facts, the conclusion drawn by the learned CIT was: 3.6. It would not be correct to say that a debenture is a piece of paper and the issue of debentures in lieu of interest merely postponed the payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. xxx xxx xxx 12. In the present case, the parties have agreed between themselves that the interest would be funded and convertible debentures would be issued in an amount identical to the funded interest and that this arrangement would be accepted by both of them as actual discharge of the liability to pay interest. In our opinion, nobody has the right to intervene and rewrite the arrangement for the parties and say that the parties cannot agree between themselves that this will be taken as actual discharge of the liability to pay interest. The apprehension expressed by the legislature while introducing the provisions of section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 1.4.1989. The High Court concluded, based on Explanation 3C, as follows: 10. Now, Explanation 3C, having retrospective effect with effect from 01.04.1989, would be applicable to the present case, as it relates to AY1996-97. Explanation 3C squarely covers the issue raised in this appeal, as it negates the assessee s contention that interest which has been converted into loan is deemed to be actually paid . In light of the insertion of this explanation, which, as mentioned earlier, was not present at the time the impugned order was passed, the assessee cannot claim deduction under Section 43B of the Act. 9. It then concluded, after referring to the judgments of the High Court of Madhya Pradesh and the High Court of Telangana and Andhra Pradesh, as follows: 12. In light of the introduction of Explanation 3C, this Court does not consider it necessary to discuss the precedents relied upon by the assesse delivered prior to the enactment of Finance Act, 2006. As regards the decision in Shakti Spring Industries [(2013) 219 Taxman 124], 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 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... key word debenture was missing in the question framed in the impugned judgment dated 18th May, 2015. He then took us through the facts that were found by the CIT and the ITAT and argued that, on facts, a finding was rendered in his favour that the debentures that were issued were not towards any future payment of liability, but towards actual payment of interest that was due and owed to the financial institution in question. He was at pains to point out that Explanation 3C, which was introduced with retrospective effect after these judgments, would have no application in the facts of this case as interest had not been converted into any loan or borrowing. Thus, both High Court judgments based exclusively on Explanation 3C are erroneous as they have ignored the vital facts found by the authorities below, which authorities are final on facts. To buttress his arguments, he also relied upon judgments showing that debentures are actionable claims and can be sold in the market as such. 14. Shri Bhattacharya also relied upon Cape Brandy Syndicate v. Inland Revenue Commissioner [1921 (1) KB 64] to submit that fiscal and tax statutes have to be strictly construed and that since the wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (d) 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 borrowing shall not be deemed to have been actually paid. 17. Section 43B was originally inserted by the Finance Act, 1983 w.e.f. 1st April, 1984. The scope and effect of the newly inserted provision, at that point, was explained by the Central Board of Direct Taxes [ Board ] in Circular No.372/1983 dated 8th December, 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 the same. For some reasons or the other, undisputed liabilities also are not paid. 35.3 To curb this practice, the Finance Act has inserted a new section 43B to prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a loan or borrowing, the interest so converted, shall not be deemed to be actual payment. 16.3 This amendment takes effect retrospectively from 1st April, 1989 i.e. the date from which clause (d) was inserted in section 43B and applies in relation to the assessment year 1989-90 and subsequent years. 19. The object of Section 43B, 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 43B(d), with which we are concerned, does not refer to the mode of payment, unlike Proviso 2 to the said Section, which was omitted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3C, at least three well established canons of interpretation come to the rescue of the assessee in this case. First, since Explanation 3C was added in 2006 with the object of plugging a loophole i.e. misusing Section 43B 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, (1981) 4 SCC 173, this Court construed Section 52 of the Income Tax Act as applying only to cases where understatement is 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: 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 full value of the consideration declared in respect of the transfer by not less than 15 per cent of the value so declared, but it is furthermore necessary that the full value of the consideration in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll 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. 22. Second, a retrospective provision in a tax act which is for the removal of doubts cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. This was stated in Sedco Forex International Drill. Inc. v. CIT, (2005) 12 SCC 717 as follows: 17. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts of this Court See Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 at paras 60 to 70 per Kapadia, C.J. and para 333, 334 per Radhakrishnan, J. 25. The High Court judgment dated 18th May, 2015, is clearly in error in concluding that interest , on the facts of this case, has been converted into a loan. There is no basis for this finding - as a matter of fact, it is directly contrary to the finding on facts of the authorities below. 26. The learned ASG s reliance on National Rayon Corpn. Ltd. v. CIT, (1997) 7 SCC 56 is disingenuous. That was a decision which turned on whether a sum of ₹ 79 lakhs represents Debenture Redemption Reserve and was includible in computing the capital of the assessee company for the purpose of the Companies (Profits) Surtax Act, 1964. The High Court took the view that the amount set apart to redeem debentures had to be treated as a provision and not as a reserve . While discussing this question, this Court held : 8. Mr Ramachandran advanced another argument that there was no present liability to pay any amount to the debenture-holders. That liability will arise only when the amount falls due for payment. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the liability to repay these loans was an existing liability and has to be shown in the Company's balance sheet for the relevant year of account as a liability. Amounts set apart to pay these loans cannot be reserve . The interpretation clause of the balance sheet in Schedule VI of the Companies Act specifically lays down that reserves shall not include any amount written off or retained by way of providing for a known liability. 27. The question decided in this case is far removed from the question to be decided in the facts of the present case and has no application to these facts whatsoever. The question in the present case does not depend upon what can, in law, be stated to be a debenture and/or whether it is convertible or non-convertible or payable immediately or in the future. The question in the present case is only whether interest can be said to have been actually paid by the mode of issuing debentures. To answer this question, this judgment has no relevance. 28. The learned ASG then relied upon a recent judgment of this Court in CIT v. Gujarat Cypromet Ltd. (supra). In the said case, a Division Bench of this Court, while dealing with Section 43B Explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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